Non-Recourse Sale Of Future Rent Receivables Not Borrowing Or Interest For TDS Purposes: ITAT Chennai

The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) on 6 July held that discounting charges arising from the assignment of future rent receivables on a non-recourse basis cannot be treated as interest under the Income-tax Act, 1961, and therefore do not attract tax deduction at source (TDS) under Section 194A (which requires deduction of tax on interest other than interest on securities).

A Single Member Bench comprising Judicial Member R. Muralidhar allowed seven appeals filed by OPC Asset Solutions Pvt. Ltd. and set aside the orders passed by the Assessing Officer and the Commissioner of Income Tax (Appeals), which had treated the discount retained by financiers as interest liable for TDS deduction. He observed:

“The consideration received by the assessee from the financiers is a negotiated price in connection with assignment/sale of rent receivables. Since there is no liability to repay the same, the said receipts cannot be considered as borrowings at all.”

The appeals concerned transactions where OPC Asset Solutions assigned future rental receivables to financiers through "Sale of Receivables Agreements".

Under these agreements, the receivables were transferred on a non-recourse basis. This meant that if customers failed to pay rent, the financiers could recover the dues only from the customers and not from OPC Asset Solutions.

The Revenue treated the difference between the total future rentals and the amount received from financiers as interest. It alleged that the transactions were, in substance, borrowings and held that OPC Asset Solutions was required to deduct TDS under Section 194A on the amounts retained by the financiers.

Rejecting the Revenue's view, the Tribunal held that the transactions did not involve any borrowing of money or creation of any debt liability by OPC Asset Solutions. It observed that, in the absence of a borrowing relationship, the discounting charges could not fall within the definition of "interest" under Section 2(28A) of the Income-tax Act (which defines interest to include amounts payable in respect of money borrowed or debt incurred).

It held that the consideration received by OPC Asset Solutions represented the sale price of the receivables and not a loan amount. It further observed that the manner in which the financier accounted for the transaction could not change its true nature. The Bench noted:

“Even if financier has treated the transaction as a case of loan and accounted for interest income, the same will not alter the true nature of transactions.”

Accordingly, the ITAT held that the orders passed by the Assessing Officer and the Commissioner of Income Tax (Appeals) could not be sustained. It allowed all seven appeals and dismissed the connected stay applications as infructuous.

For Appellant: Shri. Yogesh A.Thar, CA

For Respondent: Ms. Swarnalatha V., Addl.CIT