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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 ..... ilar factual matrix, therefore, these appeals were heard together and are being decided by way of this consolidated order. Further, since the assessee and Revenue have raised similar grounds in their appeals, therefore, the grounds raised by the assessee and Revenue in the cross-appeal for the assessment year 2019-20 are reproduced hereunder for ready reference and with the consent of the parties the cross-appeal for the assessment year 2019-20 is taken up as a lead case. 3. In its appeal for the assessment year 2019-20, the assessee has raised the following grounds: - "1. The learned CIT(A) erred in confirming the action of the Income-tax Officer (TDS) [ITO] of considering the surplus interest retained by Non-Banking Financial Companies (NBFCs] as liable to tax deduction at source under the provisions of the Income-tax Act, 1961. 2. The learned CIT(A) erred in considering the excess interest retained by the NBFCs of Rs. 790,10,01,162 as service fee and holding that the TDS should have been deducted under section 194) (if on principal-to-principal basis) or alternatively under section 194H (if on principal to agent basis). 3. The learned CIT(A) erred in not appreciating that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. CIT(A) has erred in appreciating the findings made by AO in order u/s. s. 201(1/1A) with respect to TDS liability u/s. 194A in this case?' 5. The only issue that arises for our consideration, in the present case, pertains to the liability of the assessee to withhold tax at source under section 194A, section 194H, or section 194J of the Act. 6. The brief facts of the case, as emanating from the record, are: The assessee is a Public Sector bank. During the survey and post-survey enquiry in the cases of Securitisation Trust, it was noticed that the assessee is also engaged in the transactions of purchasing from various Non-Banking Financial Companies ("NBFCs"), under different sectors of loan via the Direct Assignment route. However, it was also noticed that the assessee has purchased 90% of underlying assets under the Direct Assessment route, but has not received the total reward/interest attachment to its 90% share. During the assessment proceedings, the assessee was asked to furnish specific details about the Direct Assignment deals done by them. However, despite regular follow-ups very meagre information was provided by the assessee. On the information provided by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduct TDS under section 194A of the Act. Since the assessee has not deducted the TDS under section 194A of the Act on the amount of interest kept by the NBFCs, in contravention of the RBI guidelines, the assessee has committed default under section 201(1)/201(1A) of the Act. Alternatively, it was held that the amount to be kept back by the originating NBFC, by virtue of agreement between the parties, is on account of a kind of services provided by the originating NBFC including maintenance/development of loan portfolio, even in that case the amount kept back by the NBFC (different between pool yield and coupon rate assigned to the assessee) are subjected to provisions of TDS under section 194J of the Act. Accordingly, vide aforesaid order dated 07.03.2019 liability under section 201(1) of the Act was computed at Rs. 790,10,01,162/- and interest under section 201(1A) of the Act was computed at Rs. 44,78,30,439/-. 7. The learned CIT(A), vide impugned order, partially allowed the appeal of the assessee and held that as per the RBI guidelines, the entire risk and reward should have come to the assessee and the assessee should get an entire 15% of the interest, as if there is a defaul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sation. Financial sector entities enter into Securitisation and Direct Assignment transactions involving the sale of their loan portfolios. Direct Assignment practices involve the sale of loan portfolios without the involvement of the Special Purpose Vehicle, unlike Securitisation, where setting up of a Special Purpose Vehicle is mandatory. The regulatory framework governing Direct Assignment transactions and Securitisation transactions is laid down by the Reserve Bank of India ("RBI"). 9. On the other hand, to make good the shortfall of its lending obligation to the priority sector, the assessee enters into the transaction of purchasing loans from NBFCs through the Direct Assignment route. These loans are originally granted by NBFCs to borrowers and fall within the ambit of priority sector (agriculture, housing, etc.) lending as per the extant guidelines issued by the RBI. The assessee, in accordance with the RBI guidelines, entered into a tripartite agreement for the assignment of loans from NFBCs to an extent of 90%-95% of underlying assets under the Direct Assignment route. The balance 5%-10% is required to be retained by the NBFC as per MRR set out in the RBI guidelines. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest on its portion of the assigned loans and the balance of the contracted interest from the borrowers goes to the NBFCs. As per the assessee, it has not opted for the second option, since the entire premium has to be paid upfront which exposes the bank to a higher risk as compared to the first option, where the premium gets spread over the tenure of the loan. 13. The actual delineation of the entire transaction under the Direct Assignment of loans between the assessee and NBFCs, in the present case, can be understood by way of the following illustration: - a) NBFC has a pool of assets of say Rs. 1 Cr under the priority sector. b) The rate of interest under the said pool is say 15% on a reducing balance basis. c) The assessee purchases the pool of assets upto 90% of the pool, i.e. say Rs. 90 lakh. d) The assessee purchases the pool of assets from NBFCs at an interest rate of say 10% on a reducing balance basis. e) Therefore, the assessee receives 90% of the principal repayment by the borrower, i.e. Rs. 90 lakh, and also earns interest @10% on 90% of the pool of assets purchased by it. f) On the other hand, the amount earned by the NBFC will be 10% of the principal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions as noted above, therefore we have confined our analysis and findings only qua the assessee's liability to deduct tax at source under section 194A, 194H, or 194J of the Act. 16. In order to decide 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 of the Act, it is firstly pertinent to note the relevant provisions of the Act. As per section 194A of the Act, any person, not being an individual or a HUF, who is responsible for paying to a resident any income by way of interest, shall at the time of credit of such income to the account of payee deduct income tax thereon at the rates in force. The term "interest" has been defined under section 2(28A) of the 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;" 17. Therefore, from the plain reading of the provisions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C 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. Therefore, 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 of the Act. Thus, levy of tax under section 201(1) and levy of interest under section 201(1A) of the Act for non-deduction of TDS under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees for technical services" has the same meaning as provided in Explanation-2 to section 9(1)(vii) of the Act and the same reads as under: - "Explanation 2.-For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries"." 21. In the present case, the learned CIT(A) held that since the NBFC is rendering many services to the assessee, such as maintaining the entire loan account of the pool loan account, monitoring instalments, issuing letters to the defaults, etc., therefore, the assessee is giving a part of interest income in view of the services rendered by the NBFC to the assessee and thus the tax must have been deducted under section 194J of the Act. On the other hand, it is the plea of the assessee that it has entered into a separate tripartite service agreement with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s rendered by the NBFC, however, it is pertinent to note that, firstly, the issue is not the determination of arm's length price of the service fees paid by the assessee to the NBFC, secondly, even otherwise no such comparative transaction, even though prevalent in the banking sector, has been referred by the learned CIT(A) to come to the aforesaid conclusion. Thus, in view of the above, when a specific tripartite agreement has been entered between the parties which require payment of service fees to the NBFC for the various services rendered by it, we are of the considered view that such an agreement cannot be simply brushed aside and the part interest allowed to be retained with the NBFC in respect of the pool of assets purchased by the assessee, vide separate agreement, cannot be considered as fees for rendering services by the NBFC. It is also pertinent to note that there is no allegation or material on record that the tripartite service agreement is sham or colourable. Therefore, there is no basis to disregard the tripartite service agreement entered for various services as referred to therein. Further, there is no dispute amongst the parties that the service fee paid by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, any income by way of commission or brokerage, shall at the time of credit of such income to the account of the payee deduct tax. The term "commission or brokerage" has been defined in Explanation (i) to section 194H of the Act as under:- "(i) "commission or brokerage" includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities;" 25. Therefore, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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