No TDS Deduction on Transaction of Assigning Loans by NBFC: ITAT rules in Favour of SBI [Read Order]

In a ruling in favour of the State Bank of India ( SBI ), the Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ) has held that no deduction of deduct tax at source (TDS) can be made on transactions related to the assignment of loans by non-banking financial companies ( NBFC ).

State Bank of India, the assessee is a public sector bank. During the survey and post-survey inquiry in the cases of Securitization Trust, it was noticed that the assessee is also engaged in the transactions of purchasing from various NBFCs under different sectors of loan via the direct assignment route.

The assessee has purchased 90% of the underlying assets under the direct assessment route but has not received the total reward or interest attached 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 assessee in respect of very few direct assignment deals, information about pool yield and details of interest kept back by the NBFCs were not available.

Therefore, notices under Section 133(6) of Income Tax Act, 1961 were 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 the pool yield and the coupon rate given to the assessee.

It was found 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 the 95% or 90% share of the assessee is retained by the NBFCs, which is in violation of RBI guidelines on direct assignment transactions.

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 assigned to the assessee but allowed to be kept back with the NBFC. The assessee who has purchased 95% or 90% of the underlying assets, as the case may be, as per Minimum Retention Requirement (MMR) guidelines, from the NBFC should also receive the total reward or interest attached to the 95% or 90% share.

The CIT(A) 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 default on a particular loan (for the 90% pool assigned to the assessee), the entire loss will come to the assessee.

The issue raised was whether the interest retained by the NBFCs on the pool of assets purchased by the assessee falls within the category of “interest” for the purpose of Section 194A, within the category of “fees for professional or technical services” for the purpose of Section 194J, or within the category of “commission/brokerage” for the purpose of Section 194H.

The two-member bench of Om Prakash Kant (Accountant Member) and Sandeep Singh Karhail (Judicial Member) has observed that since the NBFC is not acting as an agent of the assessee in respect of the loans advanced to the borrowers, therefore no question arises of deduction of tax at source under Section 194H of the Income Tax Act. While allowing the appeal, the ITAT set aside the findings of the CIT(A) and stated that the levy of tax under Section 201(1) and the levy of interest under Section 201(1A) for non-deduction of TDS under Sections 194J and 194H are not sustainable

To Read the full text of the Order CLICK HERE

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