Case Law Details
PCIT-16 Vs Zee Entertainment Enterprises Limited (Bombay High Court)
The Bombay High Court considered an appeal filed by the Revenue challenging an order of the Income Tax Appellate Tribunal (ITAT) for Assessment Year 2010-11. The Revenue raised eleven questions of law relating to disallowance under Section 40(a)(ia), transfer pricing adjustment on corporate guarantee commission, and disallowance under Section 14A read with Rule 8D.
With respect to questions (c) and (d), concerning whether disallowance under Section 40(a)(ia) could be made in cases involving short deduction of tax at source, the Court held that the issue was already covered by its earlier decision in Media Worldwide Limited. Relying on that decision, which had considered judgments of several High Courts, the Court reiterated that no disallowance under Section 40(a)(ia) is warranted merely because there is a short deduction of tax at source. Consequently, these questions did not give rise to any substantial question of law and were not entertained. Since questions (a) and (b) were linked to the same issue, the Court observed that their consideration had become academic.
Questions (e) to (i) related to the appropriate commission rate for corporate guarantees provided by the assessee to its associated enterprises. The Court noted that this issue was squarely covered by its earlier decision in Everest Kento Cylinders Ltd. In that case, the Court had distinguished a corporate guarantee from a bank guarantee and held that the considerations governing the two are separate and distinct. While a bank guarantee issued by a commercial bank may justify a higher commission, a corporate guarantee given by a parent company for loans availed by its associated enterprise stands on a different footing. Following the earlier precedent, the Court held that a commission rate of 0.5% was appropriate and that the 3% rate adopted by the Transfer Pricing Officer was not justified. Accordingly, questions (e) to (i) were also held not to raise any substantial question of law.
Question (j), concerning disallowance under Section 14A read with Rule 8D(2)(ii), was also found to be covered by binding precedent. Referring to the decisions in Morgan Stanley India Capital Pvt. Ltd. and South Indian Bank Ltd., the Court observed that where an assessee’s own funds and other non-interest-bearing funds exceed the investments made in tax-free securities, it is presumed that such investments were made out of interest-free funds. Since the ITAT had recorded a factual finding that the assessee’s own funds exceeded the tax-free investments, the Court held that no substantial question of law arose.
As regards question (k), the Court found that the question as framed by the Revenue was not properly worded. It therefore reformulated the issue to consider whether disallowance under Section 14A read with Rule 8D(2)(iii) should be restricted only to investments that had actually yielded exempt income during the relevant year. The Court held that this reformulated question required consideration and admitted the appeal only on that limited issue.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. The above Appeal has been filed by the Appellant Revenue challenging the order dated 28th February 2019 passed by the Income Tax Appellate Tribunal (ITAT). The Assessment Year in question is A.Y.2010-11.
2. According to the Revenue, the impugned order of the ITAT gives rise to the following 11 questions of law:-
(a) Whether on the facts, in the circumstances of the case and as per law, the Hon’ble Tribunal has erred in directing to delete the disallowance u/s. 40(a)(ia) r.w.s. 194J in respect of ‘Carriage Fees/ Channel Placement Fees’ and failing to appreciate that the payments made for use/right to use of ‘process’ are ‘royalty’ as per Explanation 6 to section 9(1)(vi) hence such payments are covered u/s. 194J of the Income-tax Act, 1961?
(b) Whether on the facts, in the circumstances of the case and as per law, the Hon’ble Tribunal has erred in directing to delete the disallowance u/s. 40(a)(ia) r.w.s. 194J of Carriage Fees/ Channel Placement Fees, whereas the jurisdictional ITAT, Mumbai ‘L’ Bench, in its order dated 28.03.2014 in the case of ADIT-(IT)-2(2), Mumbai Vs Viacom 18 Media Pvt. Ltd., has confirmed that the payments made for use/right to use of ‘process’ are ‘royalty’ in terms of the Income-tax Act, 1961?
(c) Whether on the facts, in the circumstances of the case and as per law, the Hon’ble ITAT has erred in directing to delete the disallowance u/s. 40(a)(ia) and thereby holding that the short deduction of tax will not result into disallowance u/s. 40(a)(ia) of the Act, without appreciating that the Hon’ble Kerala High Court in its judgment dated 20.07.2015 in the case of CIT-1, Kochi Vs PVS Memorial Hospital Ltd. [2015] 60 com 69 (Kerala) has clearly laid down that the disallowance u/s. 40(a)(ia) would be made even in the cases of short deduction of tax?
(d) Whether on the facts, in the circumstances of the case and as per law, the Hon’ble ITAT has erred in directing to delete the disallowance u/s. 40(a)(ia), without appreciating that Section 40(a)(ia) is not a charging Section but is a machinery Section and thus the expression “tax deductible at source under Chapter XVII-B” occurring in the said Section has to be understood as tax deductible at source under the appropriate provision of Chapter XVII-B and hence, tax deductible under wrong section of Chapter XVII-B would result into invoking of Section 40(a)(ia) of the Act?
(e) Whether on the facts, in the circumstances of the case and as per law, the Hon’ble Tribunal has erred in holding that the rate of 0.5% is appropriate for charging commission to provide corporate guarantee to its associate enterprises as against the rate of 3% determined by the TPO?
(f) Whether on the facts, in the circumstances of the case and as per law, the ITAT erred in directing to restrict the charging of commission for corporate guarantee at 0.5% instead of 3% adopted by the AO/TPO, relying on the decision of ITAT in the case of Everest Kanto, without discussing & appreciating the facts brought on record by TPO and without appreciating that country, currency, etc., of the AE are different?
(g) Whether on the facts, in the circumstances of the case and as per law, the Hon’ble ITAT has erred in directing to restrict the charging of commission for corporate guarantee at the rate of 0.5% instead of 3% adopted by the AO/TPO without following any most appropriate method and in holding that the rate of 0.5% determined in the case of Everest Kanto as corporate guarantee fees will be applicable in this case of assessee without dealing with the facts of the case?
(h) Whether on the facts, in the circumstances of the case and as per law, the Hon’ble Tribunal has erred in directing to restrict the corporate guarantee commission at 0.50% instead of 3% adopted by the AO/TPO in view of the decision in the case of M/s Everest Kanto Cylinders Ltd although the rate of guarantee commission differs from case to case as per the individual credit rating, risk factor and other factors affecting risk involved in providing guarantee?
(i) Whether on the facts, in the circumstances of the case and as per law, the Hon’ble ITAT has erred in applying the corporate guarantee rate arrived at in the case of Everest Kanto for the A Y 2007-08 for the distinguishable facts of the assessee for A Y 2009-10 in violation of Rule 10B(4) on the stipulation to use contemporaneous date?
(j) Whether on the facts, in the circumstances of the case and as per law, the Hon’ble Tribunal was right in deleting the disallowance u/s.14A r.w. Rule 8D(2)(ii) failing to appreciate that the assessee has not substantiated any nexus between the exempt investments and its own funds?
(k) Whether on the facts, in the circumstances of the case and as per law, the Hon’ble Tribunal was right in deleting the disallowance u/s. 14A r.w. Rule 8D(2)(iii) failing to appreciate that the AO had given detailed reasoning in the assessment order for rejecting the working of disallowance u/s. 14A of the assessee and computing the disallowance as per Rule 8D(2)(iii)?
3. We will deal with each of the questions separately. On going through the aforesaid questions, we find that questions (c) & (d) are squarely covered by a decision of this Court in the case of The Principal Commissioner of Income Tax-16, Mumbai V/S Media Worldwide Limited, Mumbai [Income Tax Appeal No.19 of 2020 decided on 24th April 2026]. In fact questions (c) & (d) as projected above are almost identical the questions that were considered by this Court in Media Worldwide Limited (supra). In this decision, after relying upon decision not only of this Court, but that of the Calcutta High Court, the Delhi High Court, the Karnataka High Court and the Uttarakhand High Court, this Court inter alia held that in case of short deduction of tax at source, no disallowance under Section 40(a)(ia) is warranted. Therefore, questions (c) & (d), in our view, are squarely covered by the decision in Media Worldwide Limited (supra) and hence, do not gives rise to any substantial question of law. Hence they are not entertained.
4. As far as questions (a) & (b) are concerned, since we have held that questions (c) & (d) itself do not raise any substantial question of law, entertaining questions (a) & (b) really becomes academic.
5. As far as questions (e) to (i) are concerned, they relate to the rate that would be appropriate for charging commission for the Assessee to provide a corporate guarantee for loans taken by its associated enterprises. This issue and which is covered by questions (e) to (i) came up before this Court in the case of Commissioner of Income-tax, Mumbai V/S Everest Kento Cylinders Ltd. [(2015) 58 com 254 (Bombay)]. In this decision, this Court took the view that one cannot equate giving of a bank guarantee to giving a corporate guarantee. This Court held that if a bank guarantee is obtained from Commercial Banks, a higher commission may be justified. However, if the Assessee Company is issuing a corporate guarantee to the effect that if the subsidiary AE does not repay the loan availed of, then in such event, the Assessee would repay the loan, the consideration for issuance of such a guarantee are separate and distinct from that of a bank guarantee. Ultimately the Court held that 0.5% is appropriate for charging commission to provide a corporate guarantee for discharging the loans of its associated enterprises as against the rate of 3% determined by the Transfer Pricing Officer. In these circumstances, we find that questions (e) to (i) are also squarely covered by the decision of this Court in Everest Kento Cylinders (supra) and hence do not gives rise to any substantial question of law. Hence, not entertained.
6. As far as question (j) is concerned, we find that this question is also squarely covered by a decision not only of this Court in the case of Principal Commissioner of Income-tax V/S Morgan Stanley India Capital Pvt Ltd [(2025) 177 taxmann.com 699 (Bombay)] but also that of the Hon’ble Supreme Court in the case of South Indian Bank Ltd V/S Commissioner of Income-tax [(2021) 130 taxmann.com 178]. In both these judgments it has been held that where the Assessee’s own funds and other non-interest bearing funds were more than the investment made in tax free securities, it would be presumed that the investment made by the Assessee would be from its interest free funds. In the facts of the present case, it is not in dispute that the Assessee’s own funds and other non-interest bearing funds were more than the investment made in tax free securities. Once this is the factual finding of the ITAT, we find that by virtue of the law laid down by this Court in Morgan Stanley India Capital Pvt Ltd (supra) as well as by the Hon’ble Supreme Court in South Indian Bank Ltd (supra), question (j) does not give rise to any substantial question of law. Hence, it is not entertained.
7. Question (k) as projected by the Revenue is not happily worded. Hence, question (k) is re-framed as under:-
“(k) Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the disallowance u/s. 14A r.w. Rule 8D(2)(iii) should only be made with respect to investment which have actually yielded exempt income during the relevant year.”
8. In our view this question requires consideration, and hence, the above Appeal is only entertained with reference to the re-framed question (k) reproduced earlier.
9. Bhansali, the learned advocate appearing on behalf of the Respondent waives service.
10. The Registrar (Judicial) / Registrar, High Court, Original Side, Bombay to ensure that the original record in relation to this Appeal is summoned from the tribunal and offered for inspection of the parties. This paper book is treated sufficient for the purpose of admission of this Appeal. However, the parties shall prepare a private paper book, if required. The Registry shall send intimation of admission of this Appeal enclosing therewith a copy of this order so as to enable the Tribunal to act accordingly.
11. This order will be digitally signed by the Private Secretary/ Personal Assistant of this Court. All concerned will act on production by fax or email of a digitally signed copy of this order.
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