TaxTMI 
TaxTMI 
2022 (8) TMI 1012
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....n the circumstances of the case, and in law, the learned CIT(A) erred in upholding the addition of the present value of excess interest spread as appearing in the securitization agreement, in the year in which the loan receivables are securitized as against accruing it over the life of the underlying receivables. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding that the Appellant had transferred all the substantial risks and rewards in the receivables on signing the securitization agreement. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding that interest income accrues to the Appellant in the year of sale of receivables and in not appreciating the fact that the interest spread is pertaining to future years and its accrual and receipt was contingent on conditions which cannot be reasonably estimated on the date of agreement. On the facts and in the circumstances of the case, and in law, the learned CIT(A) has erred in ignoring the principle of real income and subjected the assessee to pay tax on amount for which the assessee has no right to receive Without prejudi....
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....ritization transactions have been offered over the tenure of loans as per consistent accounting policy of revenue recognition. The Ld. AR submitted that only real income was to be brought to tax. The Ld. CIT-DR, on the other hand, justified the additions as sustained in the impugned order. The Ld. CIT(A) submitted that there was outright sale of debts and therefore, the interest has accrued to the assessee in this year. Clarifications as sought by the bench were responded to by both the sides. Having heard rival submissions and after going through the orders of lower authorities, our adjudication would be as under. Assessment Proceedings 4.1 The assessee being resident corporate assessee is a non-banking finance company (NBFC). It is stated to be engaged in the business of financing and a non-deposit accepting entity. During assessment proceedings, it transpired that the assessee offered amount of Rs.205.34 Crores towards interest spread on assignment / securitization transactions. An amount of Rs.245.71 Crores was shown as 'remittances payable-derecognized assets' under the current liabilities. Accordingly, the assessee was directed by Ld. AO to furnish note on method of recogn....
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.... receivables other than to the extent of the credit enhancement made available. Any rescheduling or restructuring of the terms of the underlying documents after the transfer of assets to the trustee shall be binding only on the trust and not on the seller. The assessee as a service provider shall collect and receive payment of the receivable and provide certain other services at one time upfront fees of Rs.1000/-. It was the responsibility of the servicers to obtain and deposit post-dated cheques received from the obligors for and on behalf of the trust. 4.5 The trustees would open and maintain a 'collection and payout account'. The scheduled payouts have been arrived at on the basis of the expected collection from the receivables subject to pre-payments, foreclosures etc. The agreement also proposes a waterfall mechanism which priorities the payments which are to be made from the 'collection and payout account'. 4.6 The payment from 'Collection and Payout Account' would be made by the IDBI Trust as per the 'Waterfall Mechanism'. As per the waterfall mechanism, the proceeds deposited in the Collection and Payout Account' would be utilized in the following order of priorit....
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....on. (ii) Subsequent event is on the due date of the installment from the borrower/obligor and earning of EIS On the due date of installment, the appellant remits to the Trust the entire installment collected from the borrower in the designated 'Collection and Payout Account', operated by the Trust. Further, as per the terms of the agreement, the appellant receives the residual amount by way of EIS as per the waterfall mechanism from the Trust out of the installment collected and remitted to the trust. The EIS arises to the appellant due to the difference between the interest received on Loans and the Yield payable to the beneficiaries. The proportionate component of EIS becomes due to the appellant on the respective due date of the installment subject to the collection made from the borrower. 4.6 The rationale to undertake such transactions as stated by the assessee was to maintain liquidity and to reduce cost of borrowings. The immediate purchase consideration received is generally used to pay-off the borrowings of the company or used for fresh disbursements. This would ultimately reduce borrowing costs for the assessee and the assessee would earn EIS in future periods which i....
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....terations as per the provisions of the Deed. 4.9 Accordingly, the time at which the residual EIS as receivable by the assessee would become determinate only on the day when the Trust is aware of the amounts which are credited in the 'Collection and Payout Account' and the quantum of monies which have to be utilized for meeting any statutory dues of the Trust or the expenses due and payable by the Trust including fees and interest payable to the persons making available the External Credit Enhancement and also the quantum of monies which are required for meeting the overdue 'Pass Through certificate' (PTC) Yield, in respect of any shortfalls in Investor payouts in previous months, which could only be determined on each payout date. 4.10 However, Ld. AO opined that since the assets have absolutely been transferred on outright basis, balance interest spread (EIS) of Rs.58.60 Crores would also be taxable in the hands of the assessee in this year. This was despite that fact that part of such EIS was already offered to tax in preceding years as well as in succeeding years whenever it accrued to the assessee as per the terms of the agreement. The assessee has chosen to offer the excess ....
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....he assessee was following mercantile system of accounting, the entire profit arising out of the sale transaction has to be offered in the year of sale. In this case the excess interest spread is the profit earned by the assessee and the same has to be offered in the year of de-recognition of the assets. In the said background, Ld. AO proceeded to compute the present value of interest spread which would be taxable in the hands of the assessee. The position as summarized by Ld. AO was as under; - - As per the agreements, the transaction is an absolute sale transaction - All the significant risks and rewards of the asset is transferred to the buyer - Once the debt assets are transferred, there is no outstanding amount receivable by the assessee and hence there is no right to receive interest by the assessee. - Once there is no right to receive interest, there is no depth in submission of the assessee that the interest income accrues over the tenure of the loan and hence it can offer income only in the year in which the interest accrues. - The assessee, in the capacity of a "servicer" receives only Rs. 1000/- as service fee as per the contract. Hence the submission that the i....
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....nd hence, there is no right to receive the interest in future. Once there was no right to receive the interest, there was no weight in the argument of the assessee that the interest income accrues over the tenure of the loan and hence it can offer income only in the year in which the interest accrues. In such a case, the incidence of taxation could not be postponed due to future years by making entries in the books of accounts. If the year of accrual of income is identified then the income has to be assessed in the year of accrual and the same could not be deferred by the accounting entire. Accordingly, the additions were upheld. Aggrieved the assessee is in further appeal before us. Our findings and Adjudication 6. The undisputed facts that emerge are that the assessee has transferred certain pool of outstanding debts owned by it by way of absolute sale to SPV by receiving lump-sum purchase consideration which is equal to the book value of the pool of debts transferred by the assessee. The SPV funds the deal by issuing pass-through certificates to the beneficiaries which get return of approx. 7%. Thus, the assessee gets immediate recovery of the principal outstanding. These deb....
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....ilar practice is followed by the industry. Notably, if income is utilized as per the agreed waterfall mechanism, there would be situations where the residual EIS paid to assessee could be 'nil' or significantly lesser or even higher (if shortfalls in previous months are collected in a subsequent month at one go) than the amounts which are set out in the schedule, wherein scheduled amounts are based on ideal cash flows. Further, the agreement provides that the schedule of investor payouts forming part of the agreement may be revised from time to time in accordance with the Transaction Documents whether on account of pre-payments, part payments or otherwise. It also provides that the payout schedule is indicative in nature and may undergo alterations as per the provisions of the Deed. Accordingly, the time at which the residual EIS as receivable by the assessee would become determinate only on the day when the Trust is aware of the amounts which are credited in the 'Collection and Payout Account' and the quantum of monies which have to be utilized for meeting any statutory dues of the Trust or the expenses due and payable by the Trust including fees and interest payable to the person....