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2024 (9) TMI 1731 - AT - Income TaxTDS u/s 194LBC - amount of excess interest spread paid by the Appellant to the originator - HELD THAT - As per relevant provisions of Section 194LBC it is observed that the section casts an obligation for deduction of tax at source if the following twin conditions are satisfied firstly the income is payable to an investor and secondly the income is in respect of investment in the Securitization Trust. Further the section states that the definition of the term investor shall have the meaning assigned to it in Clause (d) of Explanation to Section 115 TCA which in turn defines investor and securities debt instrument . As the cash flow received was to be utilized in the manner provided in the waterfall mechanism of the trustee the EIS is the residual amount that flows to the originator and is not pursuant to any investment in the securitization trust or return of investment so made. Thus even when the originator is as an investor there still is no requirement for tax was to be deducted u/s. 194LBC on the EIS as the said payment was not in respect of investment made by the originator in the PTCs issued by the assessee. The surplus here especially represents a reward earned by the originator for its effort of creating an assignable pool of loan receivables. MRR requirement was introduced by RBI for the first time in the year 2012 and prior to such there was no requirement for the originator to comply with MRR and even for such bills prior to 2012 EIS was paid to the originator. This further corroborates the position that EIS cannot be regarded as income in respect of investment. Hence the second condition is not fulfilled in the case herein; accordingly we hold that the TDS liability u/s. 194LBC is not applicable on EIS. The liability to deduct TDS arises only where any income is payable to an investor in respect of the investor s investment in a secularisation trust. The investor has been defined to mean a person who is a holder of any securitised debt instrument or securities or security receipts issued by the securitization trust. Once it seen that the Assessee is an investor but that the income in the hands of the originator is not in respect of investment in the securitization trust and that the EIS is the residual amount that flows to the originator and is not pursuant to any investment in the securitization trust or return of investment so made therefore the twin conditions mentioned in Section 194LBC have not been met and hence the liability to deduct TDS does not trigger. Before us without prejudice it has been stated that since the payee has discharged its liability to deduct tax in respect of EIS then assessee cannot be regarded as assessee in default . Appeal filed by the assessee is allowed.
The core legal questions considered by the Tribunal in this appeal are as follows:
1. Whether the appellant, a securitization trust, can be treated as an 'assessee in default' under sections 201(1) and 201(1A) of the Income Tax Act, 1961, for non-deduction of tax at source (TDS) on the payment of Excess Interest Spread (EIS) to the originator. 2. Whether section 194LBC of the Income Tax Act applies to the payment of EIS made by the securitization trust to the originator, thereby mandating deduction of TDS. 3. Whether the learned Commissioner of Income Tax (Appeals) erred in refusing an adjournment sought by the appellant on the ground of technical glitches in generating Form 26A, which was relevant to the appellant's alternate claim. 4. Whether interest under section 201(1A) of the Act was rightly levied on the appellant for the alleged delay in deduction and payment of TDS. Issue-wise Detailed Analysis: 1. Treatment of the appellant as 'assessee in default' under sections 201(1) and 201(1A) Legal Framework and Precedents: Section 201(1) of the Income Tax Act renders the person responsible for deducting TDS liable to be treated as an 'assessee in default' if tax is not deducted or paid as required. Section 201(1A) imposes interest on such defaults. Section 191 clarifies that the primary liability to pay tax is on the recipient if TDS is not deducted, but the payer can be treated as 'assessee in default' to the extent the recipient has not paid tax. Court's Interpretation and Reasoning: The AO initiated proceedings against the appellant for non-deduction of TDS on EIS paid to the originator, treating the appellant as an 'assessee in default'. The AO rejected the appellant's contention that no TDS was required on EIS and held that the appellant was liable for default. The CIT(A) upheld the AO's findings. However, the Tribunal analyzed whether the appellant was indeed liable to deduct TDS on EIS under section 194LBC. Since the Tribunal concluded that section 194LBC does not apply to EIS payments, the appellant could not be treated as an 'assessee in default' for non-deduction of TDS on such payments. Key Evidence and Findings: The appellant is a securitization trust that paid EIS to the originator without deducting TDS. The originator had filed its income tax return and paid tax on the income. The appellant had faced technical issues in filing Form 26A but had submitted it subsequently. The Tribunal found that since the originator had discharged its tax liability, the appellant could not be held liable as 'assessee in default'. Application of Law to Facts: The Tribunal applied the statutory provisions and judicial precedents to hold that the appellant's failure to deduct TDS on EIS does not amount to default when no TDS was legally required to be deducted. The originator's compliance with tax payment further negated the appellant's default status. Treatment of Competing Arguments: The Revenue contended that the appellant was liable to deduct TDS under section 194LBC and hence was an 'assessee in default'. The appellant argued that EIS is not income in respect of investment and thus not liable for TDS under section 194LBC. The Tribunal sided with the appellant, relying on statutory interpretation and prior Tribunal rulings. Conclusion: The appellant cannot be treated as an 'assessee in default' under sections 201(1) and 201(1A) for non-deduction of TDS on EIS payments. 2. Applicability of section 194LBC on payment of Excess Interest Spread (EIS) Legal Framework and Precedents: Section 194LBC mandates deduction of tax at source on income payable to an investor in respect of investment in a securitization trust. The term 'investor' is defined under section 115TCA Explanation as a person holding securitized debt instruments issued by the securitization trust. Court's Interpretation and Reasoning: The Tribunal examined the nature of EIS and the relationship between the originator and the securitization trust. It noted that the originator is required by RBI guidelines to maintain a Minimum Retention Requirement (MRR), which may be fulfilled by subscribing to Pass Through Certificates (PTCs) or by other means such as cash collateral or over-collateralization. The Tribunal emphasized that section 194LBC applies only if the income is payable to an investor in respect of investment in the securitization trust. The Tribunal found that although the originator was an investor by virtue of subscribing to PTCs to fulfill MRR, the EIS payment is a residual amount paid to the originator as a reward for creating the loan pool and is not income arising from investment in the securitization trust. Hence, the second condition for applicability of section 194LBC was not met. Key Evidence and Findings: The assignment deed, RBI guidelines of 2006 and 2012, and the waterfall mechanism of cash flow distribution were considered. The Tribunal noted that EIS is not linked to the investment return but is a surplus amount flowing to the originator. It also relied on prior Tribunal decisions holding similar views. Application of Law to Facts: The Tribunal applied the statutory definition of 'investor' and the conditions under section 194LBC to the facts and found that EIS payments do not constitute income in respect of investment. Therefore, TDS under section 194LBC is not applicable on EIS payments. Treatment of Competing Arguments: The Revenue argued that EIS income arises from securitization and is subject to TDS under section 194LBC. The appellant contended that EIS is a reward unrelated to investment and hence outside the scope of section 194LBC. The Tribunal accepted the appellant's interpretation, supported by RBI guidelines and judicial precedents. Conclusion: Section 194LBC does not apply to EIS payments made by the securitization trust to the originator, and hence no TDS is required to be deducted on such payments. 3. Refusal of adjournment for generation of Form 26A Legal Framework: The appellant requested adjournment before the CIT(A) due to technical glitches in generating Form 26A, which was relevant to their alternate claim that the originator had declared and paid tax on EIS income. Court's Interpretation and Reasoning: The CIT(A) rejected the adjournment request, stating that the case could not be postponed indefinitely and the matter had to be decided on merits. The Tribunal observed that since it had held that no TDS was required to be deducted on EIS, the issue of filing Form 26A became academic. Application of Law to Facts: The Tribunal found no prejudice to the appellant in the refusal of adjournment given the ultimate legal conclusion on the non-applicability of TDS on EIS. Conclusion: The refusal of adjournment did not adversely affect the appellant's case and was justified. 4. Levy of interest under section 201(1A) Legal Framework: Section 201(1A) imposes interest on the person responsible for deducting TDS if tax is not deducted or paid within the prescribed time. Court's Interpretation and Reasoning: The AO levied interest on the appellant for non-deduction of TDS on EIS. The CIT(A) confirmed this levy. The Tribunal, however, having held that no TDS was required to be deducted on EIS, concluded that the interest levy under section 201(1A) was not sustainable. Application of Law to Facts: Since the appellant was not liable to deduct TDS on EIS, the levy of interest for non-deduction was unwarranted. Conclusion: Interest under section 201(1A) was wrongly levied and is deleted. Significant Holdings: "Section 194LBC of the Act creates liability on the payer to deduct TDS on any income payable to the investor in respect of investment in a securitisation trust. The 'investor' means a person holding securitised debt instruments issued by the securitisation trust. The Excess Interest Spread (EIS) is a residual amount that flows to the originator as a reward for creating an assignable loan pool and is not income in respect of investment. Therefore, the twin conditions of section 194LBC are not fulfilled and TDS liability does not arise on EIS payments." "Where the payee has duly declared and paid tax on the income received, the payer cannot be treated as an 'assessee in default' merely on account of non-furnishing of prescribed certificates due to technical glitches." "The levy of interest under section 201(1A) is contingent upon the existence of liability to deduct TDS. In absence of such liability, interest cannot be levied." "The Minimum Retention Requirement (MRR) introduced by RBI in 2012 requires originators to maintain a continuing stake in securitized assets, which may be fulfilled by subscribing to PTCs or other modes such as cash collateral. The mere maintenance of MRR by non-investment modes does not render the originator an investor under section 194LBC." "The refusal of adjournment for generation of Form 26A was justified as the matter could not be postponed indefinitely and the issue was ultimately academic given the Tribunal's findings." The Tribunal allowed the appeal, deleted the demand of TDS and interest, and held that the appellant was not liable to deduct TDS on EIS payments under section 194LBC of the Income Tax Act. Consequently, the appellant could not be treated as an 'assessee in default' under sections 201(1) and 201(1A).
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