The Income Tax Appellate Tribunal (ITAT) Mumbai Bench has ruled that the State Bank of India (SBI) is not obligated to withhold tax on Non-Banking Financial Companies’ (NBFC) loan assignment transactions. In a case involving the assignment of loans by NBFCs, the tribunal observed that since the NBFCs do not act as the taxpayer’s agents in relation to the loans extended to the borrowers, there is no requirement for tax deduction at the source under Section 194H of the Income Tax Act, 1961. The tribunal also overturned the findings of the Commissioner of Income Tax (Appeals) concerning the imposition of tax under Section 201(1) and interest under Section 201(1A) for non-deduction of TDS under Sections 194J and 194H.
During the assessment proceedings, it was noted that the SBI, as a public sector bank, engaged in purchasing loans from various NBFCs through the direct assignment route. However, the bank failed to provide comprehensive details about these direct assignment deals despite repeated requests. Consequently, notices were issued to the NBFCs to obtain information about the pool yield and interest retained by them. It was discovered that the SBI was not receiving the total interest associated with their share of the assets and that the direct assignment agreements allowed the NBFCs to retain excess interest, in violation of RBI guidelines on such transactions.
Subsequently, the Assessing Officer-TDS (AO-TDS) determined that the SBI had defaulted by not deducting TDS on the interest related to the assets assigned to them but retained by the NBFCs. The CIT(A) partially allowed the SBI’s appeal, emphasizing that as per RBI guidelines, the entire risk and reward should accrue to the SBI, and therefore, the bank should receive the full interest amount. The issue at hand was whether the interest retained by the NBFCs could be categorized as “interest” for the purpose of Section 194A, “fees for professional or technical services” under Section 194J, or “commission/brokerage” under Section 194H.
The tribunal noted that the NBFCs had already declared the interest earned on loans sold to the SBI in their income tax return and that the required documents were furnished by the SBI. Therefore, the tribunal concluded that tax under Section 201(1) is not leviable on the SBI, and the levy of interest under Section 201(1A) is also unsustainable.