PTCs & SPVs
Pass Through Certificates (PTCs) are issued by banks as safeguards against risk. They are issued when the bank feels that it has too many risky assets to hold on to or when additional capital for lending is needed. Through PTCs, banks transfer some of their long-term mortgaged assets onto other investors like mutual funds. In this way, they share some of their risks with other players, release capital and book profits. The investors stand to earn more money for sharing the risk.
The transfer is done by means of a special purpose vehicle (SPV) which mediates between the investor and the borrower. The PTC ensures that the loan repayment is made to the investor instead of the bank thus the borrower is accountable to the investor. If the borrower defaults, the SPV sells off the mortgaged assets and recovers the money.
The fund industry is at loggerheads with the Income Tax (IT) department over income received from PTCs. The tax authorities raised tax demands of over Rs 500 crore from several AMCs.
Fund houses subscribe to PTCs issued by various SPVs. So when SPVs receive the interest, they distributed it to its beneficiaries (mutual funds in this case). But during the filing of returns for SPVs, the IT department passed an order that a SPV is an Association of Person (AOP) and not a trust. Hence, the tax department came up with the required amount to be paid on the grounds that the fund house is a member of AOP and is jointly liable in respect of the demand against the SPVs. So logically, fund houses should pay tax on income generated through PTCs.
This did not go down well with the AMCs, who approached the Bombay High Court. The court quashed the IT department’s demand and told the latter not to attach or freeze bank accounts of the AMCs and directed it to vacate all attachments on fund houses.
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