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 ... Deduction of tax at source under Section 194LBC - Investor in securitisation trust - Income in respect of investment in securitisation trust - Securitised debt instrument - Minimum Retention Requirement (MRR) - Proviso to section 201(1) - certificate in Form 26A - Assessee in default under section 201 - Deeming provision under section 115TCA(3) - Strict construction of taxing statutesDeduction of tax at source under Section 194LBC - Investor in securitisation trust - Income in respect of investment in securitisation trust - Securitised debt instrument - Minimum Retention Requirement (MRR) - Liability to deduct tax under Section 194LBC on Excess Interest Spread (EIS) paid to the originator (AMPL). - HELD THAT: - The tribunal analysed Section 194LBC and identified two cumulative conditions for TDS liability: (i) the amount must be income payable to an 'investor' and (ii) the income must be in respect of an investment in the securitisation trust. Definitions in Section 115TCA and the SEBI/regulatory framework show that an 'investor' is a holder of securitised debt instruments/PTCs issued by the trust. In the present case the Minimum Retention Requirement (MRR) was met by cash collateral and over-collateralisation rather than by subscription to PTCs by the originator. Consequently AMPL did not hold PTCs or other securitised debt instruments and therefore could not be treated as an 'investor' within the statutory meaning. Further, the EIS was held to be a residual surplus flowing to the originator under the waterfall and not a payment in respect of any investment in the trust. On these two independent bases the conditions of Section 194LBC were not satisfied and no obligation to deduct TDS on EIS arose. The tribunal therefore rejected the Revenue's reliance on the deeming language and regulatory materials to treat EIS as income in respect of investment for the purposes of Section 194LBC. [Paras 15, 16, 17, 18, 19]TDS under Section 194LBC is not applicable to the EIS paid to the originator; accordingly no TDS liability arose in respect of the payments under challenge.Proviso to section 201(1) - certificate in Form 26A - Assessee in default under section 201 - Whether the assessee was properly held to be an 'assessee in default' under section 201 where Form 26A had not been filed before the AO but was later produced before the Tribunal and where the payee had discharged tax liability. - HELD THAT: - The tribunal noted the assessee's explanation about technical difficulties in generating Form 26A on the portal and that the form was ultimately filed before the Tribunal. More fundamentally, having held that no TDS liability arose under Section 194LBC on the EIS, the question whether Form 26A had been filed before the AO became academic. In view of the primary conclusion that the statutory conditions for deduction were not satisfied, the assessee could not be treated as an 'assessee in default' and the consequential interest and demand could not be sustained. [Paras 20, 21]Assessee is not an 'assessee in default'; the tax demand and interest levied by the AO are deleted.Final Conclusion: The appeal is allowed: the Tribunal holds that TDS under Section 194LBC was not attracted on the Excess Interest Spread paid to the originator for A.Y. 2018-19, and consequently the assessee is not an 'assessee in default' under section 201; the tax demand and interest are deleted. 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.