STATE BANK OF INDIA,MUMBAI vs. ITO (TDS)-2(2)(1), MUMBAI

The learned CIT(A) erred in confirming action of the ITO in passing the order under section 201(1)/201(1A) without having the charge of appellant’s jurisdiction. The order dated 7 March 2019 issued under section 201(1)/201(1A) was passed by ITO - (2)(2)(1) and the officer having jurisdiction over appellant’s TAN is ITO - 2(2)(2); therefore, the order passed by the ITO is bad in law and void-ab-initio.”

While the Revenue has raised the following grounds in its appeal for the assessment year 2019-20:-

The only issue that arises for our consideration, in the present case, pertains to the liability of the assessee to withhold tax at source under section 194A, section 194H, or section 194J of the Act.

The learned CIT(A), vide impugned order, partially allowed the appeal of the assessee and held that as per the RBI guidelines, the entire risk and reward should have come to the assessee and the assessee should get an entire 15% of the interest, as if there is a default on a particular loan (for the 90% pool assigned to the assessee) the entire loss will come to the assessee. Therefore, the learned CIT(A) held that there is no basis that 5% of the interest should go to the NBFC. The learned CIT(A) further held that on the date of the receipt of 10% interest by the assessee, two transactions have actually taken place, i.e. 15% interest on the pool accrued to the assessee; and the assessee paid 5% interest on the pool to the NBFC. The learned CIT(A), vide impugned order, agreed with the submission of the assessee that it has neither borrowed any money nor has it incurred any debt in favour of the NBFCs, and therefore, the obligation to deduct tax at source under section 194A of the Act does not arise. However, the learned CIT(A) held that the NBFC is rendering many services to the assessee, i.e. maintaining the entire loan account; monitoring instalments; and issuance of letters to the defaulters in case of default. Accordingly, the learned CIT(A) came to the conclusion that the service fee of Rs.1 lakh paid to the NBFC is not adequate to handle the State Bank of India ITAs no. 1925 to 1932/Mum/2023 ITAs no. 1899 to 1903/Mum./2023 total volume of transactions. Therefore, it was held that since the assessee is the owner of the entire amount of 90% of the pool, the assessee is giving a part of interest income in lieu of the services rendered by the NBFC to the assessee. Thus, the learned CIT(A) held that the tax must be deducted under section 194J of the Act if the transaction is on a principal-to-principal basis, otherwise, under section 194H of the Act if it is on a principal-to-agent basis. Insofar as the findings of the learned CIT(A) that the assessee is liable to deduct tax at source under section 194J or in the alternative under section 194H of the Act, both the assessee and the Revenue are in appeal before us. In addition, the Revenue has also challenged the findings of the learned CIT(A) that the assessee is not liable to deduct tax at source under section 194A of the Act.

We have considered the submissions of both sides and perused the material available on record. The assessee is a bank established under the State Bank of India Act, 1955. In order to meet the liquidity needs, NBFCs have entered into transactions that involve the sale of loans to other lending entities/banks through Direct Assignment, or conversion of their loan assets into marketable securities, known as asset-based Securitisation. Financial sector entities enter into Securitisation and Direct Assignment transactions involving the sale of their loan portfolios. Direct Assignment practices involve the sale of loan portfolios without the involvement of the Special Purpose Vehicle, unlike Securitisation, where setting up of a Special Purpose Vehicle is mandatory. The regulatory framework governing Direct Assignment

On the other hand, to make good the shortfall of its lending obligation to the priority sector, the assessee enters into the transaction of purchasing loans from NBFCs through the Direct Assignment route. These loans are originally granted by NBFCs to borrowers and fall within the ambit of priority sector (agriculture, housing, etc.) lending as per the extant guidelines issued by the RBI. The assessee, in accordance with the RBI guidelines, entered into a tripartite agreement for the assignment of loans from NFBCs to an extent of 90%-95% of underlying assets under the Direct Assignment route. The balance 5%-10% is required to be retained by the NBFC as per MRR set out in the RBI guidelines. The aforesaid agreement is signed between the NBFC (Assignor), the assessee (Assignee), and the Trusteeship Company (Assignee Representative). The role of the Assignee Representative is to operate an Escrow Account from which the principal and interest component is distributed to the assignor and assignee in the ratio mutually agreed and set out in the tripartite agreement.

The assessee has also entered into a tripartite service agreement between the NBFC (as servicer), the assessee (as assignee), and the Trusteeship Company (as Assignee’s Representative). The role of the NBFC as a servicer is to, inter-alia, manage, collect, and receive payments of receivable and deposit the same in the ‘Collection and Payout Account’, which is the Escrow Account operated by the Assignee Representative.

In the present case, as per the assessee, it has opted for the first method, i.e. the premium in the form of consideration gets deferred as the assessee agreed to retain a lower rate of interest on its portion of the assigned loans and the balance of the contracted interest from the borrowers goes to Page | 10

The actual delineation of the entire transaction under the Direct Assignment of loans between the assessee and NBFCs, in the present case, can be understood by way of the following illustration: -

In the present case, the entire dispute amongst the parties is regarding the balance contracted interest from the borrowers, i.e. 5% interest on 90% of Page | 11

Therefore, in the facts and circumstances as noted above, it needs to be examined whether the interest retained by the NBFCs on the pool of assets purchased by the assessee falls within the category of “interest” for the purpose of section 194A of the Act or within the category of “fees for professional/technical services” for the purpose of 194J of the Act or within the category of “commission/brokerage” for the purpose of 194H of the Act. Since neither it is the findings of the lower authorities nor it was contended by the Revenue that the assessee was liable to deduct tax at source under any other

In order to decide whether interest retained by the NBFCs on the pool of assets allotted to the assessee falls within the category of “interest” for the purpose of section 194A of the Act, it is firstly pertinent to note the relevant provisions of the Act. As per section 194A of the Act, any person, not being an individual or a HUF, who is responsible for paying to a resident any income by way of interest, shall at the time of credit of such income to the account of payee deduct income tax thereon at the rates in force. The term “interest” has been defined under section 2(28A) of the Act as under:-

Therefore, from the plain reading of the provisions of section 2(28A) of the Act, it is evident that interest means interest payable in respect of any money borrowed or debt incurred. As per the Revenue, since 90% of the pool of assets was purchased by the assessee, therefore the total interest pertaining to the assessee’s share first accrued to the assessee and thereafter the same, by virtue of the tripartite agreement, is allowed by the assessee to be retained back by the originating NBFCs. Therefore, in light of the provisions of section 194A read with section 2(28A) of the Act, it needs to be examined whether the part interest allowed to be retained back with the originating Page | 13

Before analysing whether the assessee was under an obligation to deduct tax at source under section 194H or section 194J of the Act, it is necessary to reiterate that both the assessee and the Revenue are aggrieved against the findings of the learned CIT(A) on this issue. As per the assessee, since both the parties agreed that the learned CIT(A) has erred in holding that the tax was required to be deducted under section 194J/194H and thus surplus interest should be considered as fees for technical/professional services or commission, therefore the order of the learned CIT(A) on this aspect should be State Bank of India ITAs no. 1925 to 1932/Mum/2023 ITAs no. 1899 to 1903/Mum./2023 reversed without specific adjudication as there is no dispute between the parties. In this regard, it is pertinent to note that both parties have raised specific grounds in their appeal challenging the findings of the learned CIT(A) pertaining to tax withholding under section 194J/194H of the Act. Since the order passed by the learned CIT(A) is the subject matter of the appeal before us and on the aforesaid findings specific grounds have also been raised by both parties, therefore these grounds need to be adjudicated and more particularly as per the provisions of section 254(1) of the Act.

Now coming to the issue of whether interest retained by the NBFCs on the pool of assets purchased by the assessee falls within the category of “fees for professional/technical services” for the purpose of 194J of the Act, it is pertinent to note the relevant provisions of the Act. As per section 194J of the Act, any person, not being an individual or HUF, who is responsible for paying to a resident any sum, inter alia, by way of fees for professional services or fees for technical services shall at the time of credit of such sum to the account of payee deduct tax at source. The term “professional services” has been defined in Explanation (a) to section 194J of the Act as under: -

Further, the “fees for technical services” has the same meaning as provided in Explanation-2 to section 9(1)(vii) of the Act and the same reads as under: -

In the present case, the learned CIT(A) held that since the NBFC is rendering many services to the assessee, such as maintaining the entire loan account of the pool loan account, monitoring instalments, issuing letters to the defaults, etc., therefore, the assessee is giving a part of interest income in view of the services rendered by the NBFC to the assessee and thus the tax must have been deducted under section 194J of the Act. On the other hand, it is the plea of the assessee that it has entered into a separate tripartite service agreement with the NBFC (as a servicer) the assessee (as an assignee), and Trusteeship Company (as Assignee Representative). From the perusal of sample copy of tripartite service agreement, forming part of the paper book from pages 127-147, we find that pursuant to the Deed of Assignment of pool loan, the assessee appointed the NBFC as a servicer, inter alia, for the purpose of managing, collecting and receiving payment of the receivable and depositing the same in the ‘Collection and Payout Account’ to enable the distribution of the payout therefrom and providing certain other services. Further, the NBFC, as a servicer, has agreed to administer and service the assets and to devote such time and exercise such skill, care, and diligence in respect of the assets assigned to the assessee as it would have exercised, had the entire right, title, and interest in the assets remained in the name of the NBFC. From the perusal of the aforesaid agreement, we find that for the aforesaid services one-time service fee of Rs.1 lakh was agreed to be payable to the servicer by the Page | 17

At the outset, it is pertinent to note that the transaction between the assessee and the NBFC is between two independent parties. Further, even though the assessee is the largest public sector bank in India, however, the transaction of assignment of priority sector loans to the assessee under the permissible Direct Assignment route is completely a commercial transaction between two independent parties, wherein the motive of the NBFC is to meet its liquidity needs by assigning its priority sector loans, while on the other hand, the assessee is entering into this transaction in order to make good the shortfall of its lending obligations to the priority sector. Neither the afore-noted facts are in dispute in the present case nor any material contrary to these facts being brought on record. Such being the facts of the present case, the learned CIT(A) though has held the service fee of Rs.1 lakh paid by the assessee to the NBFC under the tripartite service agreement to be inadequate vis-à-vis various services rendered by the NBFC, however, it is pertinent to note that, firstly, the issue is not the determination of arm’s length price of the service fees paid by the assessee to the NBFC, secondly, even otherwise no such comparative transaction, even though prevalent in the banking sector, has been referred by the learned CIT(A) to come to the aforesaid conclusion. Thus, in view of the above, when a specific tripartite agreement has been entered between the State Bank of India ITAs no. 1925 to 1932/Mum/2023 ITAs no. 1899 to 1903/Mum./2023 parties which require payment of service fees to the NBFC for the various services rendered by it, we are of the considered view that such an agreement cannot be simply brushed aside and the part interest allowed to be retained with the NBFC in respect of the pool of assets purchased by the assessee, vide separate agreement, cannot be considered as fees for rendering services by the NBFC. It is also pertinent to note that there is no allegation or material on record that the tripartite service agreement is sham or colourable. Therefore, there is no basis to disregard the tripartite service agreement entered for various services as referred to therein. Further, there is no dispute amongst the parties that the service fee paid by the assessee to the NBFC is after all the tax compliances. Therefore, even if the services rendered by the NBFC under the tripartite service agreement are considered to be in the nature of technical/professional services, the liability to deduct tax under section 194J of the Act is only qua the payment of service fees agreed under the tripartite service agreement and same cannot be extended to the consideration received in a separate agreement for a completely different transaction, i.e. sale of a pool of assets to the assessee.

From the perusal of sample tripartite Deed of Assignment of receivables entered into by the assessee, forming part of the paper book from pages 8-34, we find that out of the total principal amount of receivables of Rs. 47,81,97,067/-, the assessee was assigned principal of Rs. 43,03,77,360/-, i.e. 90% of the entire pool. In respect of the aforesaid share of the pool, the assessee agreed to make an upfront payment of Rs. 43,03,77,360/-, which is the entire principal amount assigned to it. In this regard, it needs to be State Bank of India ITAs no. 1925 to 1932/Mum/2023 ITAs no. 1899 to 1903/Mum./2023 appreciated that the principal amount of the loan given to the borrower is nothing but the direct cost to the NBFC, 90% of which was assigned to the assessee. Further, an independent commercial transaction between two independent parties cannot be on a cost-to-cost basis without any mark-up. Therefore, for selling the share of a loan amounting to Rs. 43,03,77,360/-, the consideration cannot be the same as the principal amount of the loan. Thus, we agree with the submissions of the assessee that in the present case, the assessee has opted to pay the consideration partially by way of an upfront payment equivalent to the principal amount of the loan assigned to it and partly by agreeing to earn a lower rate of interest on its portion of assigned loans and allowing the NBFC to retain the part interest received from the borrower. Accordingly, we find no merits in the findings of the learned CIT(A) that tax must be withheld under section 194J of the Act, and hence the same is set aside.

The next aspect that needs our consideration is whether interest retained by the NBFCs on the pool of assets allotted to the assessee falls within the category of “commission/brokerage” for the purpose of 194H of the Act. As per section 194H of the Act, any person, not being an individual or HUF, who is responsible for paying to a resident, any income by way of commission or brokerage, shall at the time of credit of such income to the account of the payee deduct tax. The term “commission or brokerage” has been defined in Explanation (i) to section 194H of the Act as under:-

Therefore, as per the aforesaid definition, for a payment to be considered as “commission or brokerage”, the same must be received by a person acting on behalf of another person for services rendered. In the present case, no material has been brought on record to show that the loans advanced by the NBFC to the borrowers were on behalf of the assessee. Further, from the perusal of the Deed of Assignment of Loans, it is sufficiently evident that the loans already granted to the borrowers by the NBFC were assigned to the assessee. Insofar as various services rendered by the NBFC to the assessee, both parties have separately entered into a tripartite service agreement, which provides for payment of separate service fees in lieu of such services. Thus, in the present case, neither the assessee nor the Revenue has claimed that the NBFC has acted on behalf of the assessee. Since the NBFC is not acting as an agent of the assessee in respect of the loans advanced to the borrowers, therefore, we are of the considered view that no question arises of deduction of tax at source under section 194H of the Act, and accordingly the findings of the learned CIT(A) in this regard are set aside. Accordingly, levy of tax under section 201(1) and levy of interest under section 201(1A) of the Act for non- deduction of TDS under section 194J/section 194H of the Act is not sustainable.

Before concluding, for completeness of facts, it is pertinent to note that in the present case, it is undisputed that the NBFCs have already offered to tax in its return of income the interest earned on loans sold to the assessee and requisite documents as per first proviso to section 201(1) of the Act were also Page | 21

Accordingly, the grounds raised in the cross-appeals challenging the findings of the learned CIT(A) in respect of the deduction of tax at source under section 194J/section 194H of the Act are allowed. Ground No. 5 raised in assessee’s appeal pertaining to the levy of interest under section 201(1A) of the Act is allowed in view of our aforesaid findings. Ground No. 6 raised in assessee’s appeal was not pressed during the hearing. Accordingly, the same is dismissed as not pressed.

Since in other appeals, both the assessee as well as the Revenue have raised similar grounds, therefore, our aforesaid findings/conclusions shall apply mutatis mutandis to the other appeals. Accordingly, the appeals by the assessee are allowed, while the appeal by the Revenue is partly allowed.

In the result, in the present batch of appeals for the assessment years 2012-13 to 2019-20, the appeals by the assessee are allowed, while the appeals by the Revenue are partly allowed. Order pronounced in the open Court on 07/05/2024