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2025 (5) TMI 19 - AT - Income TaxTDS u/s 194LBC - amount of Excess Interest Spread ( EIS ) paid by the assessee - assessee was created to secure the pool of loan receivables from the originator i.e. Sundaram Finance Ltd. As a Securitisation Trust the main function of the assessee was to raise money to acquire the loan portfolio of the originator. HELD THAT - We find that while deciding a similar issue in the case of a Securitisation Trust acting and controlling under the trusteeship of M/s. IDBI Trusteeship Services Ltd in Venus Trust March 2015 2024 (9) TMI 1731 - ITAT MUMBAI held that for the applicability of provisions of section 194LBC of the Act two conditions are required to be fulfilled i.e. the originator should be an investor as per the provisions of section 194LBC r.w. section 115TCA of the Act and secondly the income in the hands of the originator should be in respect of the investment in the Securitisation Trust. The Co-ordinate Bench held that even if the originator is considered to be an investor the payment of EIS to the originator cannot be said to be pursuant to an investment in the Securitisation Trust or return of investment so made as the said payment was merely surplus which was shared with the originator as a reward for its effort for creating an assignable pool of loan receivable. Accordingly the Co-ordinate Bench held that the liability to deduct TDS u/s 194LBC of the Act is not applicable on payment of EIS to the originator. In the present case we find that the payment of EIS by the assessee was not in respect of investment by the originator towards meeting the MRR and the same was merely a distribution of surplus as per the waterfall mechanism. We are of the considered view that the assessee being a Securitisation Trust was not required to deduct TDS under section 194LBC on the payment of EIS to the originator. As a result the tax liability and interest levied under section 201(1) and 201(1A) of the Act by AO-TDS are deleted. Assessee s appeal are allowed.
The core legal questions considered by the Tribunal in this appeal are as follows:
1. Whether the delay in filing the appeal before the Tribunal should be condoned given the non-communication of the CIT(A) order to the assessee in accordance with section 250(7) of the Income Tax Act, 1961. 2. Whether the CIT(A) order was validly communicated to the assessee, considering the order was only uploaded on the department's portal and not sent to the registered email or physically delivered. 3. Whether the assessee, a Securitisation Trust, was rightly treated as an 'assessee in default' under sections 201(1)/201(1A) of the Act for non-deduction of tax at source (TDS) under section 194LBC on the payment of Excess Interest Spread (EIS) to the originator. 4. Whether section 194LBC of the Act applies to the payment of EIS made by the Securitisation Trust to the originator, considering the nature of the payment and the status of the originator as an investor. 5. Whether the levy of interest under section 201(1A) of the Act on the assessee was justified. Issue-wise Detailed Analysis: 1. Condonation of Delay in Filing Appeal and Validity of Communication of CIT(A) Order Legal Framework and Precedents: Section 250(7) of the Income Tax Act mandates that the order of the Commissioner of Income Tax (Appeals) must be communicated to the assessee. The limitation period for filing an appeal before the Tribunal begins from the date of receipt of the order. Delay in filing an appeal can be condoned if sufficient cause is shown. Court's Interpretation and Reasoning: The assessee contended non-receipt of the CIT(A) order on the registered email or by physical delivery. The order was only uploaded on the department's e-portal. The assessee became aware of the order only upon routine browsing of the income tax portal several months later and filed the appeal thereafter with a delay of 48 days. The Tribunal accepted the explanation that the order was not communicated as required under section 250(7), and hence the limitation period had not commenced. The delay in filing the appeal was condoned on the ground of sufficient cause. Key Findings: The Tribunal emphasized the importance of proper communication of appellate orders and held that mere uploading on the portal does not amount to valid communication. The appeal was allowed to be heard on merits. 2. Applicability of Section 194LBC on Payment of Excess Interest Spread (EIS) Legal Framework: Section 194LBC of the Income Tax Act, introduced by the Finance Act, 2016, requires deduction of tax at source on income payable to an investor in a securitisation trust out of investment made in such trust. Section 115TCA defines 'investor' as a person holding securitised debt instruments or securities issued by the trust. Facts and Background: The assessee is a Securitisation Trust created to acquire loan receivables from the originator. The trust issued Pass Through Certificates (PTCs) carrying fixed yields, on which TDS was deducted under section 194LBC. However, the assessee paid EIS, which is the surplus interest spread over the fixed yield, to the originator without deducting TDS. The AO treated the assessee as 'assessee in default' for non-deduction of TDS under section 194LBC on EIS payments. Court's Interpretation and Reasoning: The Tribunal relied heavily on the interpretation of the statutory provisions and prior coordinate bench decisions. It was held that two conditions must be satisfied for applicability of section 194LBC:
The Tribunal found that although the originator may be an investor by subscribing to PTCs to meet the Minimum Retention Requirement (MRR), the payment of EIS is not income in respect of such investment. Rather, EIS represents a residual surplus amount paid to the originator as a reward for creating the pool of loan receivables, not a return on investment. The Tribunal referred to multiple precedents including Venus Trust, Vivriti Cibus, SME Pool Series, and Syamantaka IFMR Capital, where similar issues were decided in favour of the assessee. These decisions clarified that the originator's receipt of EIS does not constitute income from investment in the securitisation trust and thus, TDS under section 194LBC is not attracted. Application of Law to Facts: The assessee did deduct TDS on fixed yield payments to PTC holders but not on EIS paid to the originator. The originator's receipt of EIS was held to be a distribution of surplus and not income from investment. The MRR requirement was often met by other means such as cash collateral rather than subscription to PTCs by the originator, further negating the originator's status as an investor for the purpose of EIS. Treatment of Competing Arguments: The Revenue argued that EIS is income paid to the originator and thus liable for TDS under section 194LBC. The Tribunal rejected this, noting the statutory language and the nature of EIS as a surplus distribution rather than investment income. The Revenue's reliance on RBI guidelines was acknowledged but found insufficient to override the statutory interpretation and prior judicial findings. Conclusion: The liability to deduct TDS under section 194LBC does not arise on payment of EIS to the originator by the Securitisation Trust. 3. Treatment of Assessee as 'Assessee in Default' and Levy of Interest under Sections 201(1) and 201(1A) Legal Framework: Section 201(1) treats a person as 'assessee in default' if tax is not deducted at source as required. Section 201(1A) provides for levy of interest for delay in deduction or payment of TDS. Court's Interpretation and Reasoning: Since the Tribunal held that there was no obligation to deduct TDS on EIS payments under section 194LBC, the foundational basis for treating the assessee as 'assessee in default' fell away. Consequently, the levy of interest under section 201(1A) was also unwarranted. Key Findings: The Tribunal deleted the tax demand and interest levied by the AO-TDS, holding that the assessee was not liable to deduct TDS on EIS and thus cannot be treated as in default. 4. Other Grounds Raised by the Assessee The ground regarding invalid delivery of the CIT(A) order became academic following the Tribunal's condonation of delay and decision on merits. The grounds regarding filing of Form 26A and other procedural aspects were also rendered academic in light of the substantive findings on TDS liability. Significant Holdings: "The liability to deduct TDS under section 194LBC arises only where any income is payable to an investor in respect of the investment made in a securitisation trust. The term 'investor' means a person holding securitised debt instruments or securities issued by the trust. The payment of Excess Interest Spread (EIS) to the originator is a residual surplus amount and not income pursuant to investment made by the originator in the securitisation trust. Therefore, the twin conditions for applicability of section 194LBC are not fulfilled and no TDS liability arises on payment of EIS." "The assessee, being a Securitisation Trust, was not required to deduct TDS under section 194LBC on payment of EIS to the originator. Consequently, the tax demand and interest levied under sections 201(1) and 201(1A) are deleted." "Proper communication of appellate orders is mandatory under section 250(7) of the Act. Mere uploading of the order on the department's portal does not constitute valid communication. The appeal limitation period commences only upon valid communication." The Tribunal's final determination was to condone the delay in filing the appeal, hold that section 194LBC is not applicable on EIS payments to the originator, set aside the treatment of the assessee as 'assessee in default', and delete the tax and interest demand under sections 201(1) and 201(1A) of the Act. The other grounds were left open or rendered academic.
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