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TMI Blog2024 (9) TMI 1731X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;] and by treating the Appellant as 'assessee in default". Ground No 2: Non-applicability of section 194LBC of the Act The learned CIT (A) erred on facts and in law in upholding the order of the learned AO that tax was required to be deducted at source under section 194LBC of the Act on the amount of excess interest spread paid by the Appellant to the originator. Without prejudice to the above, the learned CIT (A) ought to have held that, since the payee had furnished its income-tax return ('ITR') under section 139 of the Act and had taken into account such sum for computing income in its ITR and had also paid the tax due on the income declared by them in such ITR, the Appellant could not be regarded as an assessee in default merely because a certificate to this effect in the prescribed form could not be furnished on account of technical glitches on the income-tax portal. Ground No 3: Non-grant of adjournment as requested The learned CIT (A) erred on facts and in law in rejecting the application for adjournment. The adjournment was being sought as the income tax utility for generation of Form 26A had technical glitches and the said form was not being gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tax is not deducted, the explanation to section 191, the payer can be regarded as an 'assessee in default' under section 201(1) of the Act only to the extent of tax that has not been paid by the payee directly. The AO did not find the submissions of the Assessee acceptable due to the following reasons, firstly, as per the deed of assignment, the seller unconditionally and irrevocably sells, transfers, assigns and conveys all the right, title, benefit and interest of the seller in receivables, underlying security, together with all, other rights, benefits, powers, risk and guarantee and indemnities in relation thereto as contained in the respective documents. Secondly, the AO on the calculation of EIS observed that EIS is an income arising on account of securitization of underlying assets; therefore, distribution of such income by the Assessee Trust does require deduction of TDS u/s. 194LBC of the Act. Thirdly, the AO observed that the EIS is the residual amount that flows to the originator of the loan without the said EIS income being in relation to the investment made by the originator in the Securitization Trust. 4. The AO further observed that the EIS income can flow to the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the yield committed to the investors the AO observed that section 194LBC of the Act creates liability on the payer to deduct TDS on any income payable to the investor, hence, the AO Observed that the EIS being equated to yield makes no difference to the TDS liability u/s. 194LBC of the Act, in the same vein it makes no difference if the EIS works as a credit enhancement facility. The AO also observed that section 115TCA (3) of the Act is a deeming provision which means that if any income arises or accrues to investors even if it is not paid or credited shall be deemed to have been credited to the account of the said person (investor) on the last day of the previous year. Lastly, the AO observed that the section 115 TCA (3) of the Act explicitly holds that whatever income is going out from the Securitization Trust will be income of the investor. Thus, the AO held that such income payout by the Securitization Trust is subject to TDS u/s. 194 LBC @30% and that the payment of the EIS by the Securitization Trust to the Originator is duly covered under the purview of section 194 LBC of the Act. Thus, the AO in light of his above observations held that the Assessee Trust has committed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ginally created the loan portfolio which it intended to sell to a Securitization trust. The process where a loan portfolio of the originator is converted into securities is known as securitization and for this purpose an independent third party known as a trustee company is created, the trustee company in the present case is IDBI Trusteeship Limited, thereafter securities are issued by the Securitization Trust to investors and money is raised, this money is then used by the Securitization Trust to acquire the loan portfolio from the originator. These Securities which are issued by the Securitization Trusts are known as Pass through Certificates (PTC). 10. Once the loan portfolio is assigned the Securitization Trust becomes the legal owner of the receivables and all the cash flows from the borrowers, which includes both the principal repayment and the interest. This cash received by the Securitization Trust is thereafter utilized in a pre-determined manner which is mentioned in the assignment deed and is known as the waterfall mechanism. The waterfall mechanism involves paying statutory dues, paying expenses incurred by the trust, paying arrears in the investor payouts to PTC inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to an investor, being a resident, in respect of an investment in a securitisation trust specified in clause (d) of the Explanation occurring after Section 115-TCA, the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon, at the rate of- (i) twenty-five per cent, if the payee is an individual or a Hindu undivided family; (ii) thirty per cent, if the payee is any other person. (2) Where any income is payable to an investor, being a non-resident (not being a company) or a foreign company, in respect of an investment in a securitisation trust specified in clause (d) of the Explanation occurring after Section 115-TCA, the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon, at the rates in force. Explanation- For the purposes of this section,- (a) "Investor" sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of India [; or] (iii) trust set-up by a securitisation company or a reconstruction company formed, for the purposes of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002), or in pursuance of any guidelines or directions issued for the said purposes by the Reserve Bank of India, Which fulfils such conditions, as may be prescribed.] (e) "security receipt" shall have the same meaning as assigned to it in clause (zg) of subsection (1) of Section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002). 15. The above definitions are elucidated as follows-: Securitised debt instrument in clause F2 (s) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) and the Securities Contracts (Regulation) Act, 1956 (42 of 1956)',Clause (s) of sub regulation (1) of regulation 2 of the Securities and Exchange Board of India (Public offer and listing of Securitised Debt Inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only in situations where the originator has subscribed to the PTCs of the securitization trust. Hence, the first condition laid down by Section 194 LBC stands fulfilled. The second condition which is required to be fulfilled under Section 194LBC of the Act is that the income in the hands of the originator should be in respect of investment in the securitization trust. As observed by us hereinabove, 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. The 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be treated as an investor, then also no tax was required to be deducted u/s. 194LBC on the EIS as the said payment was not in respect of investment made by AMPL in the PTCs issued by the assessee. The surplus here especially represents a reward earned by AMPL that its effort of creating pool of loan receivables which is capable of assigning. The 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 that EIS cannot be regarded as income in respect of investment. Thus, here in this case second condition is also not fulfilled and accordingly we hold that the TDS liability u/s. 194LBC is not applicable on EIS. 19. Our aforesaid finding is based on interpretation of the language provided in the statute where the liability to deduct TDS has been provided, only, where any income is payable to an investor in respect of investment in 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 issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue diligence is carried out in respect of the loans securitized. Reserve Bank of India permitted the originators to fulfil MRR by way of an investment in the securities special purpose distinct entity/ITA No. 341//Mum/2023 (Assessment Year 2017-18) securitization trust; or the providing required credit enhancement or by providing cash collaterals, balance sheet support etc. It has been urged that in the case before us the Appellant has made the MRR commitment by other permissible alternatives and had not subscribed to the PTCs issued by the securitization trust/appellant. The Revenue has not disputed the aforesaid position. On the other hand, it has been contended by the Revenue that the Assignment Deed constitutes securitized debt instrument. On perusal of the MRR Guidelines, we are of the view that in cases where the MRR commitment is met via any other permissible alternative, the originator cannot be regarded as an 'Investor' since the Originator does not hold any investment in the special purpose distinct vehicle/securitization trust. In our view, an originator can also be 'Investor' provided such originator makes investment in the special purpose distinct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility of Section 194LBC of the Act and the consequent obligation for deduction of tax at source, viz. (i) the entity to whom the payment is made is an investor of the securitization trust and (ii) the payment is towards income accruing or arising out of the investment made in securitization trust. In our view neither of these conditions are satisfied in the present case. The First Appellate Authority after perusal of the Assignment Deed dated 28.12.2017 has found on facts that the Originator in this case is neither a holder of any securitized debt instrument, securities or security receipts and thus, cannot be regarded as an investor." 20. Thus in light of the above judicial pronouncements and the language provided in the statute which clearly provides that 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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