TaxTMI 
TaxTMI 
2026 (7) TMI 796
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.... tax at source from the discounting charges, which was considered by the AO to be in the nature of interest liable for deduction of tax at source u/s. 194A of the Act. 2. The brief facts of the case emanating from the records are that the assessee is a domestic company engaged in the business of Asset Life Cycle Management (ALCM), i.e., it deals in the residuary interest in movable assets, which are rented out to its customers. The assessee was subjected to survey operations u/s. 133A of the Act on 07.02.2024, wherein it was noticed that the assessee was liable to deduct tax at source u/s. 194A of the Act on 'discounting charges', which are akin to interest expenses. However, the assessee had not deducted TDS on the discounting charges. Consequent thereto, the AO passed the impugned orders treating the assessee as 'assessee in default' for non-deduction of tax at source on 'discounting charges' as detailed below: Sl. No. Asst.Year Date of Assessment Order Section Demand (Rs.) 1. 2018-19 12.03.2025 Sec.201(1) /201(1A) 2,39,45,534 2. 2019-20 13.03.2025 Sec.201(1) /201(1A) 2,77,57,952 3. 2020-21 14.03.2025 Sec.201(1) /201(1A)....
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.... the profit or loss of the lessor would be determined. Under this model, the lessor will be paying interest on the loans taken by him and hence, he would be liable to deduct TDS thereon u/s 194A of the Act. (B) Appellant's Business Model The business model followed by the Appellant is explained below: (i) The Appellant first identifies the customers who require any movable assets on rental basis. (ii) The customer then identifies the suppliers. Then the cost of those movable assets are finalized. (iii) Once the cost of movable assets were ascertained, then both the parties negotiate about the terms and conditions of renting, inter alia, the period of rental, amount of rentals payable during the renting period. A Master Rental Agreement (MRA) is entered between the Appellant and customer. (iv) Simultaneously, the Appellant approaches either a bank or NBFC (financier) for generating funds by way of assigning/selling the "right to collect rentals" as per MRA. The Appellant and the financier negotiate and finalize the "sale value" of the above said assignment/sale of receivables. Generally, the sale consideration is determined on the basis of v....
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.... (i) Since the rent receivable from the renters/customers as per the Master Rent Agreement have been sold/assigned to the financiers, the Appellant does not recognize the rentals as its income, since the business of the Appellant is dealing in residuary interest. (ii) The funds received by the assessee from the financier on sale/assignment of rent receivables are on "non-recourse basis". Hence, it is a sale and not the case of borrowing funds. Hence, no liability is fastened upon the assessee to repay the amount so given by the financier. As stated earlier, the financier will recover the same from the collection of rentals from the customer and it cannot ask the Appellant to repay the amount, in case of default by the customer. Hence, the amount received from the financier on assigning/selling the rent receivables is reduced from the cost of assets, since there is no liability to repay the same. In effect, the amount received from the financiers is not loan, but it represents consideration received on sale of 'right to receive rentals' / receivables. (iii) All these facts would show that the assessee has not borrowed any amount as loan, as presumed by the AO....
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....income and the amount received on assignment/sale is not treated as liability. (vii) The assessee was incorporated on 13.06.2005 and this method of accounting has been consistently followed since the date of incorporation. Further, this method of accounting has been accepted by the AO in the scrutiny proceedings completed and order passed u/s. 143(3) of the Act for the A.Y. 2020-21 and 2022-23. (vii) The assessee has been applying and getting NIL/lower deduction certificates u/s. 197 of the Act from the beginning. In A.Y.2008-09, there was detailed scrutiny made by the AO, wherein the business model of the assessee was explained. At that time, the name of the assessee was "One Point Contact Services Pvt Ltd". After satisfying with the replies given by the assessee, the certificate was issued by the AO. 6. The ld.AR explained the case of the AO. Referring to the example given above, the ld.AR submitted that the amount funded by the financier is lesser than the aggregate amount of rent receivables. In the above example, the financier has funded Rs. 90/- as against the aggregate amount of rent receivables of Rs. 150/-. The difference between the two amounting to R....
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....r form principle is misconstrued and based on a misplaced application of such principle, the deductor is justifying non-reporting of total turnover... Para 7 at page 6: ....Hence, as per substance over form principles, all inflows and outflows of moneys (notional or material) has to be recorded in accounts and declared in ITR. Our Response: This is the view of the AO that the assessee should account for all rentals also, which is against the surrounding facts and also the accounting policy followed by the assessee. In the answer to Question No.45 at page 4, the assessee has reiterated that the accounting policy followed by the assessee is in accordance with accounting standards. It is stated as under: "The accounting framework under IFRS allows company to follow an accounting model if such accounting model represents the business of the company more appropriately than a specific accounting standard based on substance over form. In substance the actual transaction contemplated by the company is basically to benefit from the residual value of assets rented to the renter and hence the business of the company is to deal with the residuary interest in the asse....
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.... right to sue the renter under NCLT or appropriate forums. These procedures are as good as procedures followed during the normal course of lending business, which is corroborated by the fact that our receipts from renter are also in EMI format..." (Pg. 346 of SPB) "Q.19 You submitted that the deed of hypothecation is to create security for Incred in the transaction of purchasing receivables from OPC. How can in a purchase of an asset (receivables) there can be an underlying security, any loss incurred by a purchaser from purchasing such asset cannot be recovered from security over another asset (the hypothecated asset)? Ans. ....We are lending to the borrower, in this case termed as renter in our agreements and whatever we receive from such borrower is payment towards the borrowed sum..." (Pg. 347 of SFPB) "Q. 20 What is the accounting treatment for your transaction with renter? Ans. 1. When we disburse the fund the loan account is debited in the name renter and the bank account is credited; 2. In the case of repayment by renters/borrowers, the payments are divided into interest and principal like a normal EMI payment. Principal portion ....
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....ly insist for the hypothecation of those assets in order to have control over them during the period of rent. This is usual trade practice in the financial circles and this requirement cannot change the actual nature of transaction. (vi) Para (v) at Page 10: The AO has taken the view that there is indirect recourse available to the funder from the Appellant. In this regard, the AO is referring to the clause under the heading "Assignee (funder) rights". However, on perusal of the said clause would clearly show that the Appellant is required to take certain steps in order to facilitate the financier in the recovery of the defaulted amounts. This clause, no where stipulates that the Appellant should compensate the financier for the default committed by the customer. Since the funds received by the assessee is in respect of assignment/sale of right to receive rentals, the short fall amount, being the difference between the aggregate amount of rent receivables and the consideration cannot be considered as 'discount charges' as held by the AO." 11. Accordingly, the ld.AR contended that the concept of 'discounting charges' is not applicable in the business model follo....
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.... cases: (a) OPC Asset Solutions Private Limited v. Hero Fincorp Limited [CS (COMM) 691/2023 and I.A.19211/2023] (Del. HC). (b) Rabo India finance Limited vs. OPC Asset Solutions Pvt Ltd & Another (Summary Suit No.700 of 2011)(Bom HC) dated 04.01.2017. Accordingly, the ld.AR submitted that the consideration received on sale / assignment of right to receive future rentals cannot be taken as borrowing, since there is no liability to repay the same to the financier. 14. Referring to section 36(1)(iii) and section 2(28A) of the Act, the ld.AR submitted that the definition of interest given in section 2(28A) makes it very clear that the same is payable in respect of "any moneys borrowed" or "debt incurred". Hence borrowing of money or incurring of debt is the primary condition to bring any payment within the meaning of interest defined in section 2(28A) of the Act. Consequently, if there is no borrowing, the question of interest expenditure will not arise at all. With regard to the view of the AO that the discount charges is in the nature of interest, the Ld.AR submitted that the said view is correct only if there is borrowing of money coupled with a liability to ....
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....tion only. Accordingly, the Ld.DR submitted that the discounting charges have been rightly treated by the tax authorities as interest. Since the assessee has failed to deduct TDS u/s. 194A of the Act, the tax demand and interest demand has been rightly raised upon the assessee u/s. 201(1) and 201(1A) of the Act in all these years, which have been confirmed by the ld.CIT(A). 16. In the rejoinder, the Ld.AR submitted that neither the statements given by NBFCs nor the accounting treatment followed by them are binding upon the assessee. He submitted that the financiers have stated in their statements they have clearly stated that they consider only customers/renters as "borrowers" and not the assessee. In one of the questions, it is also stated that the financiers are purchasing the right to receive rentals from the assessee and they have right to sue the customer/renter only for recovery of dues. Hence, they are treating the transactions with the customers/renters as loan transactions, while the transactions entered with the assessee are treated as 'purchase of right to receive rentals'. All these aspects make it clear that the assessee has not borrowed funds from the financiers. H....
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....iscount charge is in the nature of interest only and hence the assessee should have deducted tax at source from it u/s. 194A of the Act. 18. According to the assessee, it's business model is different from the traditional model of lease financing. It was explained that, under the traditional model - (a) the lessor company would borrow money from banks & financial institutions on its own risk and responsibilities. (b) Hence, the liability to repay the said loan along with interest would be upon the lessor company only. (c) This liability shall not cease, even if the lessee commits default in paying the lease instalments, i.e., the risks associated with the default is also borne by the lessor only and hence, the lessor has to take steps for recovery of the defaulted amount. (d) The bank/financial institution would pursue the lessor only for recovery of amount lent by them in accordance with law. (e) The lessor will be paying interest on the loans so borrowed and hence the provisions of sec.194A would be attracted on such interest payments. However, we notice that the business model followed by the assessee differs from the above said....
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....nd it is not entitled to receive rental income after its assignment/sale, the ld.CIT(A) deleted the addition made by the AO. In the appeal filed by the revenue, the Tribunal confirmed the order of Ld.CIT(A) with the following observations, wherein this business model has also been explained: "09. We have carefully considered the rival contentions and perused the orders of the lower authorities. To reach at a conclusion, whether the assessee has offered correct income or not, it is necessary to understand business model of the assessee. Any customer who would like to have certain equipments will contact the assessee for purchase of those assets. Based on the requirement, lease of assets is entered into between Customer and assessee by a Master Rental Agreement fixing rental schedules. Assessee solicits the financier who can finance the purchase of the assets to be rented out. Such financier subsequently pays to the assessee and in turn assessee assigns the lease rentals receivable from the customer to the financier. From the financier, assessee receives discounted value of lease rentals. Based on this, assessee pays purchase price to the vendor from whom the equipments/asse....
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....spect of capital borrowed for the purposes of business or profession". 23. Section 194A of the Act imposes liability to deduct tax at source from the interest payments upon the payer of interest. It provides an obligation upon the payer of interest to deduct tax at source from the said interest payments. As per this section, any person who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities shall, at the time of credit of such income to the account of the payee or at the time of payment thereof, be required to deduct tax at source at the prescribed rates. Both sec. 36(1)(iii) and sec. 194A have application only in respect of 'interest' payments. The term "interest" is defined in sec.2(28A) of Income tax Act as under:- "28A. "interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised." 25. Thus, the definition of interest necessarily requi....
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....Thus, it is clear that an element of refund or repayment is inherent in the concept of borrowing. There is no provision in the Act which contemplates the repayment of the capital so provided under section 23 of the Act. ....Thus, the distinction has been made in the Act itself between the "capital provided" under section 23 and the "capital borrowed" under section 26. It is further clear from the provisions of section 39(2), which reads: ....There is no obligation to refund the capital provided by the Governments. In this view of the matter, the "capital provided" under section 23 of the Act by the two Governments, cannot be said to be "capital borrowed" as contemplated under section 36(1)(iii) of the Income-tax Act." [Underlined for emphasis] 27. This legal position was again explained by the Mumbai bench of Tribunal in the case of State Bank of India vs. DCIT (TDS)(2024)(163 taxmann.com 266)(Mumbai). In this case, the SBI had purchased on assignment basis a portion of loans given by NBFCs. The borrowers were paying interest, which was getting deposited in 'Collection and Payout Account', an escrow account. Ultimately, this interest was distributed am....
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....those moneys/debt, then there will not be any liability to pay any amount as "interest". In that case, those transactions will fall outside the scope of sec.36(1)(iii), sec.2(28A) and sec.194A of the Act. Hence, in the facts of the present case, it is required to be examined whether the assessee herein has borrowed any money or not. 29. In the instant case, it is explained that the future rental receivables have been assigned/sold to the financier by entering into an agreement titled as "Sale of Receivables Agreement". The following recital therein is relevant here: "The company and financier have agreed that the Company shall, on a non-recourse to the Company basis, offers to sell receivables under the said Rental Agreement and provide the Collateral securities to the Financier as per the Sanction letter of the Financier, duly accepted by the company...." 30. This clause makes it clear that the assessee is assigning/selling the rent receivables to the Financier on "non-recourse basis", i.e., when any renter / customer commits default in making payment of rentals, the financier can take steps to recover the same from the renter/customer only and it cannot ask the Com....
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....s, but the assessee could not locate the goods since M/s.Subhiksha (Defendant No.2) did not co-operate. Hence, M/s.Rabo India Finance Ltd (Plaintiff) filed suit against the assessee (Defendant No.1) alleging that the assessee was negligent and hence it is liable to refund entire consideration to the plaintiff. However, Hon'ble Bombay High Court dismissed the petition of Plaintiff with the following observations: "...50. The purchase by the Plaintiff of the receivables was on a no recourse basis arising under the rental schedules. The Plaintiff is a huge financial institution. I cannot believe and or accept an international financial organisation like the plaintiff would be so naive as projected by the counsel. The Plaintiff, I am sure, would have done due diligence before it entered into the agreement with Defendant No.1. In any event, the Plaintiff would have done due diligence before it released the large amount in excess of Rs. 19 crores to Defendant No.1 more so when it was on 'no recourse' basis. The amount also was released in three tranches. The Plaintiff knew exactly what it was getting into when it entered into the agreement and when it released the Rs. 19....
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....s arising to the financier on account of default committed by the renter/customer in payment of rental amounts. It would mean that the consideration received by the assessee from the financier on assignment/sale of rent receivables cannot be termed as borrowing, since in the case of borrowing, there is a liability to repay the loans along with applicable interest. This feature is absent in the business model of the assessee, wherein (a) the assessee assigns/sells the right to receive rentals to the financier and receive consideration for the same. (b) In view of the non-recourse clause, the financiers cannot ask the assessee to pay the defaulted amount, if the customers commit default in payment of rentals. Thus, there is no liability to repay the amount received by the assessee from the financiers. Hence, the funds received from the financier, in the facts of the present case, represent the consideration received for assignment/sale of rent receivables. 33. We find that the AO has conducted enquiries with two financiers viz., M/s.Cholamandalam Investment and Finance Co Ltd and M/s.Incred Financial Services Ltd. The AO has also recorded statements from them.....
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....Another example is the case of borrowing money by discounting the "Rent receivables". Suppose Mr.X has rented a building to a reputed Corporate company on a monthly rent of Rs. 5.00 lakhs for a period of three years. Mr.X is expected to receive Rs. 1.80 crores over the three years period. In this case, Mr.X can borrow money from any bank/NBFC by discounting the rent receivable by it with the direction to the tenant to pay the rent directly to the bank/NBFC. The rental amount will cover the repayment of principal and also applicable interest. In this case, there will not be any non-recourse clause and hence, if the tenant commits default in paying rent, Mr.X will be liable to pay the money. In this case, the "discount charges" should be treated as interest, since Mr.X has actually borrowed money. (c) On the contrary, when an usance bill/hundi is discounted with the bank, the discount amount is not considered as interest. In this regard, we may refer to the Circular No.65 dated 02-09-1971, which has clarified this legal position as under: "I am directed to invite a reference to the Board's Circular No. 48 [F. No. 275/195/70-ITJ], dated 7-11-1970 [Clarification 2]. T....
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.... true nature of transactions has to be determined duly considering all surrounding factors. In the instant case, there is no obligation to repay the sums so received from the financier nor could the financier have recourse to the assessee. Hence, the difference between the aggregate amount of rent receivables and the consideration for assignment / sale, being negotiated price for assigning/selling the right to receive rentals, cannot be considered as "discount charges" at all in the facts of the present case. In the absence of any borrowing, the question of payment of interest also will not arise. Accordingly, we are of the view that the tax authorities are not correct in holding that the short fall amount is discounting charges and the same represents interest expense. 36. The AO has referred to the accounting treatment given by the financiers. There is no dispute that the financiers are parties to the agreement titled as "Sale of Receivables agreement", meaning thereby, the financiers have only purchased the right to receive rentals from the assessee. Further, this legal position has also been clarified by them in the statements recorded from the financiers. Further, they have....