2023 (12) TMI 806 - AT - Income Tax

Excess interest spread payments in securitisation trusts: originator not an 'investor' u/s194LBC, so no TDS; s.201 demand deleted

A securitisation trust was treated as an assessee in default under s. 201 for failure to deduct TDS under s. 194LBC on payment of Excess Interest Spread ... Assessee in default u/s 201 - TDS u/s 194LBC - Income in respect of investment in securitisation trust - assessee trust has paid sum under the head ‘Excess Interest Spread’ (EIS) to originator without deducting TDS thereon - as per AO assessee trust was liable to deduct TDS on the payment of yield to PTC holders (pass through certificates) u/s. 194LBC of the Act. - HELD THAT:- Once the originator, (AMPL) is not holding any PTC / SDI, it cannot be regarded as ‘investor’ as per the terms defined in the aforesaid provisions elaborated above. It is only in a situation where the originator has subscribed to the PTCs of the securitization trust and then only it can be regarded as an investor. In case where minimum retention requirement commitment has met via any other permissible alternator, the originator does not have hold in instrument in the securitization trust and therefore, cannot be reckoned as investor. Once the originator has not subscribed in PTCs, but the MRR is maintained via cash collateral and in the form of ccollateralizing of excess receivables, then the first condition provided in Section 194LBC is not fulfilled and therefore, in our opinion there cannot be any obligation to deduct tax in terms of said Section. Cash flow received was to be utilized in the manner provided in the water flow mechanism of the trustee, the Excess Interest Spread (EIS) is the residual amount that flows to the originator and is not pursuant to any investment in the securitization trust or return of investment so made. Even assuming AMPL is to be treated as an investor, then also no tax was required to be deducted u/s. 194LBC on the EIS as the said payment was not in respect of investment made by AMPL in the PTCs issued by the assessee. The surplus here especially represents a reward earned by AMPL that its effort of creating pool of loan receivables which is capable of assigning. The MRR requirement was introduced by RBI for the first time in the year 2012 and prior to such there was no requirement for the originator to comply with MRR and even for such bills prior to 2012 EIS was paid to the originator. This further corroborates that EIS cannot be regarded as income in respect of investment. Thus, here in this case second condition is also not fulfilled and accordingly we hold that the TDS liability u/s. 194LBC is not applicable on EIS. The ‘investor’ has been defined to mean a person who is a holder of any securitised debt instrument or securities or security receipts issued by the securitization trust. Once AMPL is not an investor and the conditions mentioned in Section 194LBC has not met, then the liability to deduct TDS does not trigger. As assessee had furnished form 26A however, it has been stated that when the process to generate form 26A was initiated there was technical glitches on the income tax portal and when income tax portal was migrated to new format in June 2021 and form 26A functionally was enable on the portal only in April / May 2022, therefore, the assessee was not able to file form 26A before the lower authorities, therefore, the same is being filed before the Tribunal in the form of additional evidences. Once, the form 26A has been filed and AMPL has discharged its liability for tax in respect of EIS, ostensibly in terms of proviso to section 201(1), assessee cannot be treated as ‘assessee in default’. As already held that there is no liability to deduct TDS in the present case, then whether form 26A was filed before the AO or not or has been filed before us due to the reasons as stated above is purely academic. Accordingly, we hold that assessee is not ‘assessee in default’ and therefore, the entire payment and interest levied by AO is deleted. Assessee appeal allowed. Issues Involved:1. Assessee being treated as 'assessee in default'.2. Non-applicability of section 194LBC of the Act.3. Non-grant of adjournment as requested.4. Levy of interest under section 201(1A) of the Act.Summary:Issue 1: Assessee being treated as 'assessee in default'The assessee challenged the Commissioner of Income-tax (Appeals) [CIT(A)] decision, which upheld the Income-tax Officer (TDS)-2(3)(3) [AO]'s order treating the appellant as 'assessee in default' under section 201 of the Income-tax Act, 1961, for failing to deduct TDS on the payment of Excess Interest Spread (EIS) to the originator. The AO argued that the EIS is an income arising from securitization of underlying assets, requiring TDS deduction under section 194LBC. The CIT(A) confirmed the AO's order, stating that the assessee failed to comply with TDS deduction requirements and did not furnish Form 26A in the prescribed format.Issue 2: Non-applicability of section 194LBC of the ActThe main contention was whether tax was required to be deducted under section 194LBC on EIS. The Tribunal analyzed section 194LBC, which mandates TDS if income is payable to an investor in respect of an investment in a securitization trust. The Tribunal concluded that the originator (AMPL) was not an 'investor' as defined under section 115TCA since it did not hold any Pass Through Certificates (PTCs) or securitized debt instruments. Therefore, the first condition for TDS under section 194LBC was not met. Additionally, the EIS was not income in respect of an investment in the securitization trust but a residual amount flowing to the originator, thus not fulfilling the second condition for TDS deduction.Issue 3: Non-grant of adjournment as requestedThe CIT(A) denied the appellant's request for sine die adjournments, stating that the appellant chose not to respond during the final opportunity given. The Tribunal did not find merit in this ground as it was not pivotal to the primary issue of TDS applicability.Issue 4: Levy of interest under section 201(1A) of the ActThe AO computed interest under section 201(1A) due to the non-deduction of TDS on EIS payments. However, since the Tribunal held that there was no liability to deduct TDS under section 194LBC, the interest levied under section 201(1A) was also deleted.Conclusion:The Tribunal allowed the assessee's appeal, holding that there was no obligation to deduct TDS under section 194LBC on EIS payments to the originator. Consequently, the assessee was not treated as 'assessee in default', and the interest levied under section 201(1A) was deleted. The Tribunal also acknowledged the submission of Form 26A, which further supported the assessee's compliance with tax liability.