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2024 (5) TMI 1176 - AT - Income TaxTDS u/s 194A, 194H, or section 194J - surplus interest retained by Non-Banking Financial Companies (NBFCs - Levy of tax u/s 201(1) and interest u/s 201(1A) - assessee opted for the first method, i.e. the premium in the form of consideration gets deferred as the assessee agreed to retain a lower rate of interest on its portion of the assigned loans and the balance of the contracted interest from the borrowers goes to the NBFCs - assessee is a bank established under the State Bank of India Act, 1955. - Whether interest retained by the NBFCs on the pool of assets allotted to the assessee falls within the category of interest for the purpose of section 194A or within the category of fees for professional/technical services for the purpose of 194J of the Act or within the category of commission/brokerage for the purpose of 194H ? - HELD THAT - TDS u/s 194A - In the present case, it also cannot be disputed that the borrowers have taken the loans from the NBFCs, which were subsequently purchased by the assessee by way of Direct Assignment, and on these loans, the borrowers are paying interest, which is getting deposited in Collection and Payout Account , which is the Escrow Account operated by the Assignee Representative and ultimately this interest is distributed amongst the NBFC and the assessee as per the tripartite agreement. Therefore, from the aforesaid undisputed facts, it is sufficiently evident that the assessee has only purchased a part of the loan by making the upfront payment and allowing the originating NBFCs to retain part interest on such loan paid by the borrowers. In the present case, there is no material available on record to show that the assessee borrowed any funds or incurred any debt from the NBFC. Such being the facts of the present case, the question of payment or crediting of interest by the assessee in favour of NBFC does not arise. Therefore, in the absence of any funds borrowed or debt incurred by the assessee from the NBFC, we are of the considered view that the part interest allowed to be retained back with the originating NBFC cannot be said to be interest within the meaning of section 2(28A) of the Act. Further, it is pertinent to note that under section 194A of the Act, the payment must be in the nature of interest in order to make the payer responsible for deducting tax at the time of payment or credit of such income. Though the payment by the borrower of the loan, in the present case, is in the nature of interest, however, when the same is allowed to be retained with the originating NBFC by the assessee under the tripartite agreement, the nature of the same is converted to a consideration for the purchase of 90% of the pool of assets. The nature of income in the hands of the recipient and the nature of expenditure of said sum by that person may not always be the same. Therefore, it is not necessary that what is received as interest is also interest when paid, particularly in the absence of any money borrowed or debt incurred. Accordingly, we are of the considered view that there is no obligation on the assessee to deduct tax at source under section 194A. TDS u/s 194H - As per the aforesaid definition, for a payment to be considered as commission or brokerage , the same must be received by a person acting on behalf of another person for services rendered. In the present case, no material has been brought on record to show that the loans advanced by the NBFC to the borrowers were on behalf of the assessee. Further, from the perusal of the Deed of Assignment of Loans, it is sufficiently evident that the loans already granted to the borrowers by the NBFC were assigned to the assessee. Insofar as various services rendered by the NBFC to the assessee, both parties have separately entered into a tripartite service agreement, which provides for payment of separate service fees in lieu of such services. Thus, in the present case, neither the assessee nor the Revenue has claimed that the NBFC has acted on behalf of the assessee. Since the NBFC is not acting as an agent of the assessee in respect of the loans advanced to the borrowers, therefore, we are of the considered view that no question arises of deduction of tax at source under section 194H of the Act, and accordingly the findings of the learned CIT(A) in this regard are set aside. TDS u/s 194J - The principal amount of the loan given to the borrower is nothing but the direct cost to the NBFC, 90% of which was assigned to the assessee. Further, an independent commercial transaction between two independent parties cannot be on a cost-to-cost basis without any mark-up. Therefore, for selling the share of a loan, the consideration cannot be the same as the principal amount of the loan. Thus, we agree with the submissions of the assessee that in the present case, the assessee has opted to pay the consideration partially by way of an upfront payment equivalent to the principal amount of the loan assigned to it and partly by agreeing to earn a lower rate of interest on its portion of assigned loans and allowing the NBFC to retain the part interest received from the borrower. Accordingly, we find no merits in the findings of the learned CIT(A) that tax must be withheld under section 194J of the Act, and hence the same is set aside. Levy of tax u/s 201(1) and interest u/s 201(1A) - NBFCs have already offered to tax in its return of income the interest earned on loans sold to the assessee and requisite documents as per first proviso to section 201(1) of the Act were also furnished by the assessee before the learned CIT(A). Therefore, tax under section 201(1) of the Act is in any case not leviable on the assessee. Further, the levy of interest under section 201(1A) of the Act is also not sustainable in view of our aforesaid findings. Decided in favour of assessee.
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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