Part-interest retained by seller in loan assignment is purchase consideration, not interest - no TDS under s.194A

ITAT MUMBAI - AT held that the part-interest retained by originating NBFCs on directly assigned loans constituted consideration for the purchase, not "interest" payable by the assignee, and therefore no TDS was deductible under s.194A. The payments were also not commission/brokerage under s.194H because NBFCs did not act as agent, nor were they professional/technical fees under s.194J. Consequently tax under s.201(1) and interest under s.201(1A) were not leviable on the assignee; the tribunal decided in favour of the assignee.

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Issues Involved:
1. Liability for tax deduction at source (TDS) u/s 194A, 194H, or 194J of the Income Tax Act, 1961.
2. Validity of the order passed u/s 201(1)/201(1A) by an officer without jurisdiction.

Summary:

Issue 1: Liability for TDS u/s 194A, 194H, or 194J
Facts and Background:
The assessee, a Public Sector Bank, engaged in purchasing loans from Non-Banking Financial Companies (NBFCs) via Direct Assignment, did not deduct TDS on the surplus interest retained by NBFCs. The Assessing Officer-TDS (AO-TDS) held the assessee liable for non-deduction of TDS u/s 194A, 194H, and 194J of the Act and computed liability under section 201(1) and interest under section 201(1A).

Arguments:
- Assessee: Claimed no obligation to deduct TDS as there was no borrowing or debt incurred from NBFCs. The surplus interest retained by NBFCs was part of the consideration for the purchase of loan pools.
- Revenue: Argued that the surplus interest retained by NBFCs should be treated as liable for TDS under sections 194A, 194H, or 194J.

Judgment:
- Section 194A: The Tribunal held that the part interest retained by NBFCs does not qualify as "interest" u/s 2(28A) since there was no borrowing or debt incurred by the assessee. Thus, no TDS obligation arises under section 194A.
- Section 194J: The Tribunal found that the separate tripartite service agreement between the assessee and NBFCs for services rendered was legitimate. The service fee paid was compliant with tax laws, and the surplus interest retained could not be considered as fees for technical/professional services.
- Section 194H: The Tribunal concluded that NBFCs did not act as agents of the assessee in advancing loans to borrowers. Therefore, the surplus interest retained does not fall under "commission or brokerage," and no TDS obligation arises under section 194H.

Issue 2: Validity of the Order Passed u/s 201(1)/201(1A) by an Officer Without Jurisdiction
Arguments:
- Assessee: Contended that the order passed by ITO - (2)(2)(1) was invalid as the jurisdiction over the assessee's TAN was with ITO - 2(2)(2).

Judgment:
- The Tribunal did not specifically address this issue in the final decision, as the primary grounds for the appeal were resolved in favor of the assessee.

Conclusion:
- The appeals by the assessee were allowed, and the appeals by the Revenue were partly allowed.
- The Tribunal concluded that there was no obligation on the assessee to deduct TDS under sections 194A, 194H, or 194J for the surplus interest retained by NBFCs.
- The levy of tax under section 201(1) and interest under section 201(1A) for non-deduction of TDS was found unsustainable.

Order pronounced in the open Court on 07/05/2024.

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