ASST CIT 16(1), MUMBAI vs. ZEE ENTERTAINMENT ENTERPRISES LTD, MUMBAI

The assessee is engaged in the business of broadcasting of TV channels. We shall first take up the appeal filed by the assessee. The first issue urged therein relates to transfer pricing adjustment made on guarantee fees in respect of Corporate Guarantee given by the assessee to its associated enterprise named Taj TV in respect of following facilities availed by it from IDBI Bank :

Learned AR submitted that the corporate guarantee provided by the assessee should not be considered as international transactions and accordingly contended that the TP provision should not have been applied on those transactions. In this regard, he placed reliance on the decision rendered in following cases:- i) Bombay Dyeing & Manufacturing Co. Ltd. Vs. DCIT (87 taxamnn.com 213) ii) Marico Ltd. Vs. ACIT (70 taxamnn.com 214) iii) Sin Clinpharm Pvt. Ltd. Vs. DCIT (88 taxamnn.com 338) iv) DCIT Vs. Cyient Ltd.(91 taxamnn.com 353) v) Micro Ink Ltd. Vs. Addl.CIT (63 taxamnn.com 353)

Then the Learned AR then advance his alternative submissions on this issue. He submitted that the overdraft facility, per se, does not result in giving of loan immediately. He submitted that the Overdraft facility is a facility given by the bank to its AE, which would enable the AE to withdraw funds whenever required. He submitted that the interest shall be charged by the bank on the actual amount of loan taken by the assessee. He submitted that the AE is having its own asset and receivables and has also provided margin of 25% to IDBI Bank to avail over draft facility. Accordingly, he submitted that the IDBI bank has taken corporate guarantee from the assessee as a safer course only. In respect of corporate guarantee given on the Guarantee given by IDBI on behalf of M/s Taj TV, the Ld A.R submitted that it is only a counter guarantee

The Learned AR submitted that the issue relating to corporate guarantee was examined by the Tribunal in assessee’s own case in A.Y. 2008-09 in reported in (2017) 118 TTJ 65. In that year, the learned TPO made TP adjustments in respect of corporate guarantee @ 3% of the “average amount of loan outstanding” during that year. The assessee challenged the same and the Tribunal has restricted the addition to 0.5%. Accordingly the Learned AR submitted that, without prejudice to its main contention that the corporate guarantee is not an international transaction, the TP adjustment on the Corporate Guarantee given on over draft facility should be restricted to 0.5% of the “average amount of loan outstanding”, instead of computing the guarantee charges on the sanctioned limit of overdraft facility.

In respect of counter guarantee given by the assessee for the guarantees given to IDBI Bank to Taj TV, the learned AR submitted that the Guarantee given by IDBI Bank to Taj TV is a non-fund based facility, i.e., there will be no movement of funds unless the guarantee given by IDBI bank was invoked by the beneficiary in case of failure of Taj TV to honour its commitments. He submitted that the assessee has given only counter guarantee to IDBI Bank and hence the assessee would be liable to pay to IDBI only when the guarantee is invoked by IDBI Bank, i.e., it shall be invoked only if the recovery made by the bank from Taj TV falls short of the required amount. He submitted that this situation is unlikely in view of strong asset base held by Taj TV. Since there is no movement of fund i.e. main guarantee as well as counter guarantee is non-fund based transactions, the Ld A.R submitted that TP adjustment of 4 M/s. Zee Entertainment Enterprises Limited 0.5% will be on higher side. The Learned AR submitted that an identical issue was considered by Hon'ble Bombay High Court in the case of CIT Vs. Asian Paints (India) Ltd. (2016) 75 tamann.com 152, wherein the assessee therein had charged 0.20% as guarantee commission and the same was upheld by the Tribunal. The Hon'ble Bombay High Court has dismissed the appeal filed by the Revenue, since the Revenue had accepted the orders passed by the Tribunal in earlier years deleting the addition. He submitted that the T.P adjustment on the Counter guarantee given by the assessee may be restricted to 0.20% of the Guarantee amount actually given.

On the contrary, the learned DR submitted that the assessee has given guarantee to IDBI Bank for both facilities named overdraft facilities and guarantee facility extended by it to AE of the assessee. Hence, TP adjustment may be made at uniform rate of 0.5% on both the facilities. He submitted that the “guarantee” is included in the definition of International Transaction in sec. 92B of the Act.

We have heard rival contentions and perused the record. We noticed that the Coordinate Bench of the Tribunal has considered the issue relating to giving of corporate guarantee in the assessee’s own case and has held that guarantee commission should be worked out at 0.50% of the average amount of loan outstanding. Before us, the assessee has argued that the corporate guarantee given by the assessee should not be considered to be an international transaction. However, since a particular view has already taken by the Coordinate Bench of the Tribunal in assessee’s own case in A.Y. 2008- 09, we prefer to follow the same. Accordingly, in respect of corporate guarantee given on overdraft facility, following the order passed by Tribunal in AY 2008- 09, we direct the Assessing Officer to restrict TP adjustment to 0.5% of average amount of loan outstanding during the year. In respect of counter guarantee given by the assessee for the guarantee given by IDBI Bank on behalf of Taj TV, we agree with the contentions of learned AR that non-fund based facility cannot be treated at par with the the fund based facility. We notice that in the 5 M/s. Zee Entertainment Enterprises Limited case of Asian Paints (India) Ltd (supra), 0.20% has been held to be appropriate by the Tribunal. Accordingly, we direct the Assessing Officer to compute TP adjustment in respect of counter guarantee given at 0.20% of the amount of counter guarantee.

The Next issue urged by the assessee relates to disallowance made u/s. 14A of the Act.

During the year under consideration, the assessee received dividend income of 12.06 crores and claimed the same as exempt. The assessee disallowed a sum of ` 41.33 lakhs u/s. 14A of the Act. The Assessing Officer took the view that the disallowance has to be computed by the assessee as per Rule 8D of the I.T. Rules. Accordingly, he worked out the disallowance to 63.07 lakhs, which resulted in an addition of ` 21.70 lakhs. The Learned DRP also confirmed the same.

The Learned AR submitted that the own funds available with the assessee is more than the value of investments and hence no disallowance under rule 8D(2)(ii) of the I.T. Rules out of interest expenditure is called for, as per decision rendered by Hon'ble Bombay High Court in the case of HDFC Bank Ltd. (366 ITR 505). The Learned AR further submitted that Special bench of the Tribunal has held in the case of ACIT Vs. Vireet Investment (P) Ltd. (2017) 82 taxmnn.com 415, that for the purpose of computing disallowance u/s. 14A read with rule 8D, only those investments which yielded exempt income during the year are to be considered. The Learned AR further submitted that the disallowance u/s. 14A read with Rule 8D(2)(iii) will work out to ` 32.71 lakhs only, if we consider only those investments which has yielded exempt income. He submitted that the assessee itself has disallowed a sum of ` 41.33 lakhs. Accordingly the learned AR submitted that the disallowance made by the Assessing Officer should be deleted.

We have heard learned DR and perused the record. From the financial statements filed by the assessee, we noticed that the own funds available with 6 M/s. Zee Entertainment Enterprises Limited the assessee as at the beginning and end of the year, were more than the value of investment during those dates. Hence, as per the decision rendered by Hon'ble Bombay High Court in the case of HDFC Bank Ltd. (supra), no disallowance out of interest expenditure is called for as per Rule 8D(2)(ii) of the I.T Rules.

With regard to disallowance to be made under rule 8D(2)(iii) out of administrative expenses, only those investments which have yielded exempt income have to be considered for working out the average value of investments, as per decision rendered by Delhi Special Bench of the Tribunal in the case of Vireet Investment (P) Ltd. (supra). The assessee has given working of the disallowance u/r. 8D(2)(iii) by considering only those investments which have yielded dividend income. As per the working, disallowance works out to ` 32.71 lakhs whereas, the assessee itself has disallowed a sum of ` 41.33 lakhs. Accordingly, learned AR submitted that the disallowance made by the assessee voluntarily should be sustained and enhancement made by the Assessing Officer should be excluded. We agree with the contentions of the assessee in view of the decision rendered by the Special bench in the case of Vireet Investments (supra). We have stated earlier that the assessee has furnished a statement of working of disallowance under Rule 8D(2)(iii) of the I T Rules by considering only those investments which have yielded exempt income, as per which the disallowance worked out to Rs.32.71 lakhs, i.e. more than the amount disallowed by the assessee. Hence for the limited purpose of verifying the above said statement, we restore this issue to the file of the Assessing Officer. If the is satisfied with the workings given by the assessee, the disallowance u/s. 14A of the Act should be restricted to ` 41.33 lakhs, i.e. the voluntary disallowance made by the assessee should be accepted. Otherwise, the AO may take appropriate decision in accordance with the law.

We shall now take up the appeal filed by the Revenue. The only issue urged therein relates to the disallowance made u/s. 40(a)(ia) of the Act on carriage fees/channel placement fees for lower deduction of tax at source. The 7 M/s. Zee Entertainment Enterprises Limited assessee had deducted tax at source on carriage fees/channel placement fees u/s. 194C of the Act. The Assessing Officer took the view that the said payment would fall within the definition of “royalty” and hence the assessee should have deducted tax at source @ 10% u/s. 194J of the Act. In view of short deduction of tax at source, the AO disallowed the expenditure claim u/s 40(a)(ia) of the Act. The Learned DRP had held in the immediately preceding year i.e. in A.Y. 2010-11 that provisions of section 194J will not be applicable to these payments, as they do not come within the definition of “royalty”. Accordingly, by following its decision rendered in A.Y. 2010-11, the learned DRP deleted the disallowance made by the Assessing Officer u/s. 40(a)(ia) of the Act during the year under consideration. The revenue is aggrieved by the decision of Ld DRP.

The Learned DR supported the view taken by the Assessing Officer and submitted that the disallowance proposed by the AO u/s 40(a)(ia) of the Act should be sustained. The Learned AR, on the contrary, submitted that an identical issue has been considered by Hon'ble Bombay High Court in the case of CIT Vs. UTV Entertainment Television Ltd. (2017) (399 ITR 443) and the Hon’ble High Court has held that the channel placement charges/carriage fees would attract tax deduction at source u/s. 194C of the Act and the said payments are not in the nature of royalty. Accordingly, the learned AR submitted that the direction given by learned DRP should be upheld.

Having heard the rival submissions on this issue, we find merit in the contentions of the assessee as direction given by learned DRP is supported by the decision rendered by Hon'ble Bombay High Court in the case of UTV Entertainment Television Ltd. (supra). Accordingly, we uphold the direction given by learned DRP on this issue.

In the result, appeal filed by the assessee is treated as partly allowed and appeal filed by the Revenue is dismissed.