Supreme Court confirms, sale certificates from confirmed auction sales do not require mandatory registration

/1 Comment/in , , , , /by

Barsha Dikshit and Neha Malu | resolution@vinodkothari.com

In the context of an auction sale conducted during liquidation or by a secured creditor, the sale certificate serves as a critical document, evidencing the transfer of title to the purchaser upon confirmation of the sale. Its legal nature and the procedural requirements such as registration and the payment of stamp duty have often been a subject of scrutiny and debate. 

The Hon’ble Supreme Court in the matter of State of Punjab & Anr. v Ferrous Alloy Forgings P. Ltd. & Ors. reaffirmed the principle that a sale certificate issued by the authorised officer is not compulsorily registrable under section 17(1) of the Registration Act, 1908. The Court further clarified that compliance with Section 89(4) of the Registration Act, which provides for forwarding of a copy of the sale certificate by the authorised officer to the registering authority, is sufficient to satisfy the statutory requirements. However, in instances where the purchaser voluntarily presents the original sale certificate for registration or uses the same for some other purpose, the document is liable to attract stamp duty as prescribed under the Indian Stamp Act, 1899, or the relevant state enactments governing stamp duty. 

This article examines the legal framework governing sale certificates in auction sales, analyzing the procedural and practical nuances associated with their registration and the evolving interpretations rendered by courts in the context of SARFAESI Act and Insolvency and Bankruptcy Code, 2016. 

Read more →

Interest Imbalance: Will the disproportionate interest Split in Loan Transfers be liable to withholding tax?

/0 Comments/in , , , , /by

ITAT Ruling Clarifies Taxation on Disproportionate Interest share in Loan Transfers

– Dayita Kanodia | Finserv@vinodkothari.com

Direct Assignment of a loan or transfer of loan exposures refers to the process where financial institutions, such as banks, purchase a pool of loans or assets from other entities, typically NBFCs, without the involvement of a third-party intermediary. In this arrangement, the buying institution directly acquires the ownership of the loans or assets and the associated rights, including the right to receive future payments from the borrowers. This method allows the selling NBFC to offload its loans, thereby freeing up capital, while the purchasing institution gains the opportunity to enhance its loan portfolio and earn interest income from the acquired loans. This Direct Assignment is essentially what is popularly known as the transfer of loan exposure.

The RBI issued the transfer of loan exposures directions in 2021 regulating all transactions among regulated entities involving transfer of loan exposures.

Interest sharing and servicing after the transfer

Pursuant to a transfer of loan, it is not necessary that the future interest income arising from the loans would be shared in the same proportion as that of the transfer. For instance, if an NBFC assigns 90% of the loan portfolio to a bank, there is no mandate that all interest income received in the future would be shared in the same proportion of 90:10. Generally, the borrower is not made aware of the transfer and therefore it is important that the NBFC continues to service the loan. In such cases it is only fair that the NBFC gets a higher proportion of interest. Accordingly, it is quite common in direct assignment transactions to have a disproportionate interest share. 

The question which now arises is whether this excess interest income retained by the NBFC would be taxable under the provisions of the income tax act. 

ITAT Ruling and taxation on disproportionate interest share in loan transfers

A recent ITAT ruling of May 7, 2024 clarifies the taxation treatment for disproportionate interest share in case of loan transfers. In this case, NBFC assigned 90% of the loan portfolio to a bank via the direct assignment route. However, the bank was not receiving the entire interest on the 90% loan assigned but was only entitled to a fixed percentage of share while the NBFC retained the excess interest. Accordingly, the revenue department was of the view that the assessee was responsible to deduct TDS on the excess interest allowed to be retained by the NBFC under section 194A of the Income Tax Act. 

The revenue department further raised the question on deduction of TDS under SEction 194J and 194H of the Income Tax Act. 

Interest Retained not a result of money borrowed or debt incurred by the transferee

For the deciding the fate of the NBFC under section 194A of the Income Tax Act, the following was observed by the ITAT:

  1. For TDS to be deducted under section 194A of the Income Tax Act, the crucial aspect to be satisfied was whether the part interest allowed to be retained by the originating NBFC by the bank is payment in the nature of interest to the NBFC for any money borrowed or debt incurred by the bank.
  1. It was acknowledged that the 90% of the loan portfolio was assigned to the bank and consequently any default among the assigned loans would result in loss to the bank. 
  1. Any amount collected from the borrowers was initially getting deposited in an escrow account and was subsequently distributed between the NBFC and the bank in accordance with the agreement entered into by the entities. 
  1. It could not be shown that the interest allowed to be retained with the NBFC was a result of any money borrowed or debt incurred by the bank from the NBFC. 
  2. Accordingly, the assessee was under no obligation to deduct TDS on the excess interest retained by the NBFC under section 194A. 

Interest retained not in the nature of fees for any professional / technical services rendered by the transferor

The next issue which was adjudicated in the case was whether the interest allowed to be retained with the NBFC was a consideration for rendering professional / technical services by the transferor NBFC to the transferee bank. 

As per section 194J of the Act, any person, not being an individual or HUF, who is responsible for paying to a resident any sum, inter alia, by way of fees for professional services or fees for technical services shall at the time of credit of such sum to the account of payee deduct tax at source.

For this purpose the ITAT observed the following:

  1. The NBFC and the Bank entered into a tripartite service agreement pursuant to which the originating NBFC was appointed as servicer for the loans. The NBFC was therefore responsible for managing, collecting and receiving payment of the receivable and depositing the same in the ‘Collection and Payout Account’ to enable the distribution of the payout therefrom and providing certain other services.
  1. As per the service agreement, a one time service fee of Rs.1 Lakh was agreed to be payable by the bank to the NBFC as consideration for the services rendered.
  1. The ITAT brushed aside the contention of the revenue department that service fee of Rs 1L was inadequate and the excess interest allowed to be retained by the NBFC should in fact be considered as fee for rendering the services by the transferor NBFC. 
  1. There was a separate tripartite Deed of Assignment of receivables entered into by the parties according to which the bank paid the entire principal amount equivalent to 90% of the entire pool to the NBFC upfront. However, it was observed that the transfer being an independent commercial transaction cannot be on a cost to cost basis without there being any markup.
  1. Accordingly, the bank opted to pay the consideration for the loans assigned partially by way of an upfront payment equivalent to the principal amount of the loan assigned to it and partly by agreeing to earn a lower rate of interest on its portion of assigned loans and allowing the NBFC to retain the part interest received from the borrower.
  1. Therefore the liability under section 194J of the Income Tax Act was only for the service fee of Rs.1 L and cannot be extended to the excess interest share retained by the NBFC.
  1. Accordingly, the assessee was under no obligation to deduct TDS on the excess interest share retained by the NBFC under section 194J of the Income Tax Act. 

Interest retained not in the nature of commission / brokerage

The last issue in this case to be decided before the ITAT was whether the retained interest would fall in the category of commission or brokerage and was liable to TDS under section 194H of the Income Tax Act. 

As per section 194H of the Act, any person, not being an individual or HUF, who is responsible for paying to a resident, any income by way of commission or brokerage, shall at the time of credit of such income to the account of the payee deduct tax.

For determining the tax treatment under this section, the ITAT observed the following:

  1. It could not be said that the loans originated by the NBFC were on behalf of the bank.
  1. For the services rendered by the NBFC, it was observed that the same was pursuant to a separate service agreement which provides for payment of separate service fees in lieu of such services.
  1. Accordingly, it cannot be contended that the transferor NBFC was acting as an agent of the transferee bank.
  1. Accordingly, the liability to deduct TDS on the excess interest retained by the NBFC under section 194H of the Income Tax Act does not arise. 

Concluding Remarks 

In conclusion, the recent ITAT ruling has provided significant clarity on the taxation treatment of disproportionate interest shares in loan transfers, particularly in the context of Direct Assignment transactions. 

In this case, the ITAT emphasized that the interest retained by the NBFC was not a result of any money borrowed or debt incurred by the bank. Additionally, it was clarified that the interest retained did not constitute fees for professional or technical services rendered by the transferor NBFC, nor did it fall within the ambit of commission or brokerage.

As the financial landscape continues to evolve, such judicial pronouncements play a crucial role in fostering transparency, compliance, and fairness in taxation.

Relinquishment of source of profit in favour of an RP: also an RPT

/0 Comments/in , , , /by

– Mahak Agarwal | corplaw@vinodkothari.com

– Updated on December 13, 2025

The broad spectrum of the definition of Related Party Transactions (RPTs) under the Listing Regulation, continues to be an error prone area in terms of compliance. A recent SEBI ruling1 has further strengthens this aspect where the phrase ‘transfer of resources, services or obligations’ has been explained in an extremely new dimension with a commendable insight from the authorities which again shows that the regulators can no more be restricted by the imaginary boundaries placed by the corporates when it comes tightening the loose ends of corporate governance.

This article delves into the basis which the Regulators considered for concluding a mutual understanding and agreement between related parties to be an RPT notwithstanding the  contention of the company. The essential question of law involved in this case was whether the allocation of certain products and geographic areas between RPs constitutes an RPT. The article contains our analysis of SEBI’s order and highlights the recent order passed by the SAT upon appeal  in the matter, reaffirming the said stand.

Read more →

Summary of Important Supreme Court Judgements on IBC

/0 Comments/in , /by

Team Resolution | resolution@vinodkothari.com

Loader Loading…
EAD Logo Taking too long?

Reload Reload document
| Open Open in new tab

Download as PDF [656.18 KB]

Rainbow versus Raman: A Riddle so crucial and so hard to resolve

/0 Comments/in , , /by

– Vinod Kothari

The heart of insolvency law is the priority order or the waterfall given in sec. 53, and one of the very crucial issues in the priority of secured creditors is whether statutory claims will rank at par with secured creditors by virtue a provision in the respective laws giving the Government a status of a secured creditor, or will have to rank at the fifth priority as provided by sec. 53 (1) (e), there is a situation of uncertainty.

Essentially, the statute will have to step in, because courts can only interpret the law as seen and read by the courts; courts cannot mend the law to meet what might have been the design of the law. On the contrary, if the lawmakers leave the law as is, liquidators will have to face claims, as they already are facing, from state governments claiming equality of ranking with secured creditors, even though many liquidations might have already closed or distributed their assets.

Read more →

Clog on redemption of mortgage after publication of sale notice – SC reiterates word of law u/s 13(8)

/1 Comment/in , /by

– Team Resolution | resolution@vinodkothari.com

Introduction

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ( ‘SARFAESI Act’) provides methods that can be undertaken by a secured creditor to recover its dues in case of a default.

Section 13 of the SARFAESI Act being an important section contains provisions relating to ‘Enforcement of Security Interest’. Sub-section (2) and (4) of section 13 describes the manner and timeline within which the creditor can enforce its rights to recover the dues against a Non-Performing Asset (‘NPA’). While, on one hand, the creditor has a right to sell the secured asset; in juxtaposition is the right of the borrower to have the property released on repayment of dues. These rights are in conflict with each other and therefore, there is a need to have clarity around the point of time at which the borrower would lose the right of redemption and the lender’s right of sale becomes absolute.

At this stage, section 13(8) of the SARFAESI Act comes into picture. The present provision of section 13(8) states that where any default has been made by the borrower in terms of repayment of the dues, the amount outstanding if repaid by the borrower at any time before the date of publication of auction notice by the creditor, such a creditor shall not have any further right to transfer or to take any other step in relation to transfer of such secured asset. On a contrary, the earlier provision stated that the right of the borrower to redeem the mortgaged property shall be available till the date fixed for sale or transfer.

The provision of section 13(8) has often been debated upon wherein, several High Courts have held different views. However, a recent ruling of the Hon’ble Supreme Court in the matter of Celir Llp v Bafna Motors (Mumbai) Pvt. Ltd.[1] , has clarified the position and scope of section 13(8) before and after the amendment.

Read more →

Statutory dues cannot override section 53: Supreme Court clarifies the applicability of Rainbow ruling

/0 Comments/in , , /by

– Barsha Dikshit | resolution@vinodkothari.com

Introduction 

Section 53 of Insolvency and Bankruptcy Code, 2016 (‘IBC’) has created a waterfall citing priority of dues. Whether it is distribution in liquidation process or resolution plan – both processes would need to honour the priorities under Section 53 of IBC. However, in September, 2022, in State Tax Officer v. Rainbow Papers Ltd., the Hon’ble Supreme Court (SC) held that by virtue of the ‘security interest’ created in favour of the Government under GVAT, the State is a ‘secured creditor’ as per the definition in IBC. Hence, as workmen’s dues are treated pari passu with secured creditors’ dues, so should the debts owed to the State be put at the same pedestal  as the debts owed to workmen under the scheme of section 53(1)(b)(ii). [Read our detailed analysis on Rainbow Papers ruling here]. As such, this ruling led to anomalies in interpretation, as it shuffled the already well-settled view on priorities of tax dues vis-a-vis secured creditors. 

Interestingly, the recent ruling of SC in Paschimanchal Vidyut Vitran Nigam Ltd. Vs. Raman Ispat Private Limited & Ors. [Civil Appeal Nos. 7976 of 2019] has confined the applicability of Rainbow Papers to its own factual circumstances, thereby, providing relief to all stakeholders, especially IPs undertaking liquidation/resolution processes, who started receiving demands from tax authorities on the strength of Rainbow Papers.

Read more →

Classification of fraud and reporting

/0 Comments/in , , /by

Should borrower be given an opportunity of being heard?

-Rhea Shah, Executive | rhea@vinodkothari.com

Background

A recent ruling of the Supreme Court placed emphasis on the classification of an account as fraudulent and the consequences thereof. The ruling is in favour of incorporating the principles of natural justice during the process of declaring an account as fraudulent.

Fraud classification by banks and NBFCs is essentially guided by Master Directions on Frauds – Classification and Reporting by commercial banks and select FIs[1] and the Master Direction – Monitoring of Frauds in NBFCs (Reserve Bank) Directions, 2016[2], respectively (‘Fraud Directions’). However, there has been a certain extent of ambiguity as to the procedural aspects of the classification. While the basic purpose of such classification remains to ensure the early detection and reporting of a fraudulent transaction, it also entails significance in implementing a procedure that is fast and robust for the RBI to disseminate information regarding fraudulent borrowers and related parties.

Read more →

Regulatory developments in   Insolvency and bankruptcy law in 2022 – a quick round-up

/0 Comments/in , , , /by

– Sikha Bansal, Partner & Barsha Dikshit, Partner | resolution@vinodkothari.com

IBC, in a very short span of its life, has undergone multifarious amendments. In 2022, there were no amendments in the Code, but almost all regulations were amended.   Majority of the amendments aimed at compressing the timelines. Few other amendments filled the gaps in law and provided clarity.

A quick snapshot of the key changes introduced in the CIRP regulations, Liquidation regulations, voluntary liquidation regulations and IP regulations, in the year 2022 is provided below. A brief discussion can also be referred to in our video on the same.

Key Amendments in IBBI (Insolvency Resolution Process For Corporate Persons) Regulations, 2016[1]

IBBI introduced several changes in the IRPCP Regulations vide Notifications dated 9th February, 2022, 14th June, 2022, 13th September, 2022,  16th September, 2022, and 20th September, 2022. The amendments mostly focused on reducing the timeline of corporate insolvency resolution process, removing ambiguities, facilitating IPs thereby increasing value and realisation for stakeholders.

Resolution Professionals have been empowered to invite EOI for resolution plans for one or more assets of CD with approval of CoC,  if no resolution plan for CD is received within the given timeline. Resolution plan shall  also provide for the manner of pursuing  avoidance transaction application and distribution of realisation therefrom, if any. Timelines for certain activities during CIRP have been reduced.

Further, the regulations now also provide for payment of a regulatory fee at the rate of 0.25% of the realisable value  under approved resolution plan to the Board w.e.f 1st October, 2022 which will form part of CIRP cost.

Read more →

Secondment contract as ‘services’: Supreme Court held under Indian taxation regime

/0 Comments/in , , , /by

– Neha Sinha, Assitant Legal Advisor | neha.sinha@vinodkothari.com 

Background

Secondment of employees have become increasingly popular amongst corporate entities which enter into secondment arrangements to leverage the expert knowledge and specific skill sets. The seconded employees work on a deputation basis in the seconded companies they are seconded to which require their technical expertise on certain matters. Since the seconded employee works for the seconded company during the secondment period, a pertinent question arises on whether the seconded employee becomes an employee of the seconded company. If yes, then what are the likely implications in the context of service tax. 

Read more →