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TMI Blog2024 (5) TMI 1176X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax deduction under section 194J. 4. The learned CIT(A) erred in not appreciating that there cannot be any TDS under section 194H as there is no principal agent relationship between the appellant and NBFCs. 5. The learned CIT(A) erred in holding that the ITO must charge interest under section 201(1A) in relation to non-deduction of tax at source on surplus retained by NBFCs. 6. The learned CIT(A) erred in confirming action of the ITO in passing the order under section 201(1)/201(1A) without having the charge of appellant s jurisdiction. The order dated 7 March 2019 issued under section 201(1)/201(1A) was passed by ITO - (2)(2)(1) and the officer having jurisdiction over appellant s TAN is ITO - 2(2)(2); therefore, the order passed by the ITO is bad in law and void-ab-initio. 4. While the Revenue has raised the following grounds in its appeal for the assessment year 2019-20:- 1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing no obligation of TDS deduction u/s. 194A as the RBI has laid down in its guidelines that the total interest (pool yield) pertaining to SBI's share first accrued to the SBI and thereafter the same, by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e issued to the NBFCs to obtain pool yield and interest kept back by the NBFCs. As per the replies received from some of the NBFCs, it was noticed that there is a difference between pool yield and coupon rate given to the assessee. Thus, it was noticed that the assessee is not receiving total interest attached to their share, and Direct Assignment agreements are executed to receive only a certain percentage of their share and any excess interest (difference between pool yield and coupon rate) on 95%/90% share of the assessee is retained by the NBFCs, which is in violation of RBI guidelines on Direct Assignment transactions. Accordingly, the assessee was asked to show cause as to why it should not treated as an assessee in default under section 201(1)/201(1A) of the Act in respect of interest pertaining to assets assigned to the assessee but allowed to be kept back with the NBFC. Vide order dated 07.03.2019 passed under section 201(1)/201(1A) of the Act, the Assessing Officer-TDS ( AO-TDS ) after considering the details available on record held that the assessee has committed default by not deducting TDS in respect of such interest pertaining to the assets assign to the assessee but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the NBFC. The learned CIT(A) further held that on the date of the receipt of 10% interest by the assessee, two transactions have actually taken place, i.e. 15% interest on the pool accrued to the assessee; and the assessee paid 5% interest on the pool to the NBFC. The learned CIT(A), vide impugned order, agreed with the submission of the assessee that it has neither borrowed any money nor has it incurred any debt in favour of the NBFCs, and therefore, the obligation to deduct tax at source under section 194A of the Act does not arise. However, the learned CIT(A) held that the NBFC is rendering many services to the assessee, i.e. maintaining the entire loan account; monitoring instalments; and issuance of letters to the defaulters in case of default. Accordingly, the learned CIT(A) came to the conclusion that the service fee of Rs. 1 lakh paid to the NBFC is not adequate to handle the total volume of transactions. Therefore, it was held that since the assessee is the owner of the entire amount of 90% of the pool, the assessee is giving a part of interest income in lieu of the services rendered by the NBFC to the assessee. Thus, the learned CIT(A) held that the tax must be deducted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count from which the principal and interest component is distributed to the assignor and assignee in the ratio mutually agreed and set out in the tripartite agreement. 10. The assessee has also entered into a tripartite service agreement between the NBFC (as servicer), the assessee (as assignee), and the Trusteeship Company (as Assignee s Representative). The role of the NBFC as a servicer is to, inter-alia, manage, collect, and receive payments of receivable and deposit the same in the Collection and Payout Account , which is the Escrow Account operated by the Assignee Representative. 11. As per the assessee, the NBFCs out of their total loan pool assets carve out a portfolio of good quality loans and offer the same to the Banks for a buy-out. The Bank carries out due diligence of the said portfolio for assessing the credit risk after analysing the repayment track record of the underlying borrowers and, thereafter, cherry picks the loans that meet the Bank s criteria/standard, and which have an established repayment track record, higher credit quality, better CIBIL scores, etc. Considering that the pool consists of cherry-picked loan assets, i.e. the best quality assets out of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt recovered in the ratio of 90:10 and out of the interest earned, it will distribute the assessee s share at 10% of 90% of pool and balance interest to the NBFC. 14. In the present case, the entire dispute amongst the parties is regarding the balance contracted interest from the borrowers, i.e. 5% interest on 90% of the pool purchased by the assessee, which has been kept back by the NBFCs. As per the Revenue, this 5% interest agreed to be paid to the NBFCs belongs to the assessee, and by allowing the NBFCs to retain the same, not only the RBI guidelines are violated but the assessee has also failed to deduct tax at source under section 194A of the Act. On the other hand, it is the plea of the assessee that the assessee has neither borrowed any money nor incurred any debt in favour of the NBFCs, therefore, there is no obligation to deduct tax at source under section 194A of the Act on the assessee. The learned CIT(A) though granted relief to the assessee and held that the obligation to deduct tax at source under section 194A of the Act does not arise in the present case, however, proceeded to also conclude that part interest retained by the NBFCs on the 90% pool purchased by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee s share first accrued to the assessee and thereafter the same, by virtue of the tripartite agreement, is allowed by the assessee to be retained back by the originating NBFCs. Therefore, in light of the provisions of section 194A read with section 2(28A) of the Act, it needs to be examined whether the part interest allowed to be retained back with the originating NBFC by the assessee is payment in the nature of interest to the NBFC for any money borrowed or debt incurred by the assessee. In the present case, it has not been disputed that the assessee purchased a pool of loans from the NBFCs by way of Direct Assignment. It is also the claim of the Revenue that by purchasing the loan, the assessee, to the extent of its share, i.e. 90%, has stepped into the shoes of the NBFCs, and if there is a default on a particular loan (for the 90% pool assigned to the assessee) the entire loss will come to the assessee. 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 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act, it is necessary to reiterate that both the assessee and the Revenue are aggrieved against the findings of the learned CIT(A) on this issue. As per the assessee, since both the parties agreed that the learned CIT(A) has erred in holding that the tax was required to be deducted under section 194J/194H and thus surplus interest should be considered as fees for technical/professional services or commission, therefore the order of the learned CIT(A) on this aspect should be reversed without specific adjudication as there is no dispute between the parties. In this regard, it is pertinent to note that both parties have raised specific grounds in their appeal challenging the findings of the learned CIT(A) pertaining to tax withholding under section 194J/194H of the Act. Since the order passed by the learned CIT(A) is the subject matter of the appeal before us and on the aforesaid findings specific grounds have also been raised by both parties, therefore these grounds need to be adjudicated and more particularly as per the provisions of section 254(1) of the Act. 19. Now coming to the issue of whether interest retained by the NBFCs on the pool of assets purchased by the assessee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of pool loan, the assessee appointed the NBFC as a servicer, inter alia, for the purpose of managing, collecting and receiving payment of the receivable and depositing the same in the Collection and Payout Account to enable the distribution of the payout therefrom and providing certain other services. Further, the NBFC, as a servicer, has agreed to administer and service the assets and to devote such time and exercise such skill, care, and diligence in respect of the assets assigned to the assessee as it would have exercised, had the entire right, title, and interest in the assets remained in the name of the NBFC. From the perusal of the aforesaid agreement, we find that for the aforesaid services one-time service fee of Rs. 1 lakh was agreed to be payable to the servicer by the assessee. As per the learned CIT(A), the service fee of Rs. 1 lakh is not adequate to handle the total volume of transactions by the NBFC and the interest allowed to be retained with the NBFC is also towards the services rendered by the NBFC in respect of 90% of the pool of assets sold to the assessee. 22. At the outset, it is pertinent to note that the transaction between the assessee and the NBFC is betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... qua the payment of service fees agreed under the tripartite service agreement and same cannot be extended to the consideration received in a separate agreement for a completely different transaction, i.e. sale of a pool of assets to the assessee. 23. From the perusal of sample tripartite Deed of Assignment of receivables entered into by the assessee, forming part of the paper book from pages 8-34, we find that out of the total principal amount of receivables of Rs. 47,81,97,067/-, the assessee was assigned principal of Rs. 43,03,77,360/-, i.e. 90% of the entire pool. In respect of the aforesaid share of the pool, the assessee agreed to make an upfront payment of Rs. 43,03,77,360/-, which is the entire principal amount assigned to it. In this regard, it needs to be appreciated that 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 amounting to Rs. 43,03,77,360/-, the consideration cannot be the same as the principal a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. 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. Accordingly, levy of tax under section 201(1) and levy of interest under section 201(1A) of the Act for non-deduction of TDS under section 194J/section 194H of the Act is not sustainable. 26. Before concluding, for completeness of facts, it is pertinent to note that in the present case, it is undisputed that the 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. 27. Accordingly, the grounds raised in the cross-appeals challenging the findings of the learned CIT(A) in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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