SBI Not Liable To Deduct TDS On Transactions Related To Assignment Of Loans By NBFC: ITAT

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has held that the State Bank of India (SBI) is not liable to deduct tax at source (TDS) on transactions related to the assignment of loans by non-banking financial companies (NBFC).

The 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, we are of the considered view that no question arises of deduction of tax at source under Section 194H of the Income Tax Act, 1961, and the findings of the CIT(A) in this regard are set aside.

The bench 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.

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.

However, it was also noticed that 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 meager 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) 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.

Thus, it was noticed 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 assessee was asked to show cause as to why it should not be treated as an assessee in default under Section 201(1)/201(1A) in respect of interest pertaining to assets assigned to the assessee but allowed to be kept back with the NBFC.

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. Therefore, the learned CIT (A) held that there is no basis on which 5% of the interest should go to the NBFC. The CIT (A) held that on the date of the receipt of 10% interest by the assessee, two transactions had actually taken place, i.e., 15% interest on the pool accrued to the assessee. The assessee paid 5% interest on the pool to the NBFC.

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 tribunal held that the NBFCs have already offered to tax in their return of income the interest earned on loans sold to the assessee, and the requisite documents as per the first proviso to Section 201(1) were also furnished by the assessee before the CIT (A). Therefore, tax under Section 201(1) is, in any case, not leviable on the assessee. The levy of interest under Section 201(1A) is also not sustainable.

Counsel For Appellant: P. J. Pardiwala

Counsel For Respondent: Kishore Dhule

Case Title: State Bank of India Versus DCIT(TDS)

Case No.: ITA no.1928/Mum./2023

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