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TMI Blog2023 (12) TMI 927X X X X Extracts X X X X X X X X Extracts X X X X ..... ided in Rule 8D (2)(iii), but once Rule 8D is not applicable in this year then we are not inclined to work out disallowance as Rule 8D. Thus, in line with the earlier decisions of the Tribunal, we hold that 5% of exempt income will be taken as disallowance for the purpose of Section 14A and accordingly, assessee gets part-relief. Disallowance of expenditure incurred on settlement claims - HELD THAT:- This issue is squarely covered by the decision of the Tribunal in assessee s own case for A.Y. 2005-06 [ 2020 (3) TMI 799 - ITAT MUMBAI] wherein disallowance in respect of settlement of claims have been allowed. Decided in favour of assessee. TP adjustment commission on letter of credit - international transaction or not? - AO has made addition in respect of non-recovery by the assessee from its AE and the issue of letter of credit holding that assessee has not charged any commission from the AE - HELD THAT:- We find that the Tribunal in A.Y.2005-06 [ 2020 (3) TMI 799 - ITAT MUMBAI] has decided this issue in favour of the assessee stating CIT(A) after appreciating the contention of assessee concluded that issuance of Letter of Comfort does not constitute an internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an agreement. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that LoC has no binding force when it morally binds the assessee and the AE and failure to honour this will have widespread repercussions on their business. 4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that LoC cannot be treated as equivalent to guarantees merely because they are not enforceable notwithstanding various consequences attached with it in case of failure to honour it. 3. In assessee s appeal the issues which has been challenged before us is, firstly, with regard to disallowance of Rs. 2,81,81,000/- made under Section 14A ;and secondly, disallowance of expenditure incurred by the assessee on settlement claims of Rs. 19,12,240/-. 4. We will first take up assessee s appeal. At the outset, it has been submitted that in assessee s appeal, in so far as ground No.1 relating to disallowance of expenditure incurred by the assessee on settlement of commission, same is squarely covered by the decision of the Tribunal in assessee s own case for A.Y. 2005-06, wherein disallowance in respect of settlement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se to the show-cause notice, assessee had submitted that no amount is disallowable because all the borrowed funds were utilized only for the purpose of its business and no part of such borrowings were utilized for the acquisition of shares yielding the dividend income. However, ld. Assessing Officer invoked Rule 8D and made disallowance of Rs. 1,88,85,000/-. Despite the fact that Rule 8D was not applicable in A.Y.2007-08. Ld. CIT(A) however, has made enhancement on the ground that AO has not done proper working of Rule 8D and computed further disallowance of Rs. 2,81,81,000/- which was enhancement of disallowance over and above the disallowance made by the Assessing Officer. Accordingly, total disallowance made by him was Rs. 4,70,66,000/-. The enhancement was on account of computation of disallowance based on Rule 8D and rejecting the contention of the assessee that firstly, it has surplus funds and therefore, no disallowance of interest can be made and secondly he held that it cannot be said that no other expenditure was attributable for earning exempt income. The ld. CIT (A) thus, computed the disallowance, both on account of interests Rule 8D(2)(ii) and on indirect expenses und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of investment worked out and disallowance should be reduced substantially. However, his working is based on formula provided in Rule 8D (2)(iii), but once Rule 8D is not applicable in this year then we are not inclined to work out disallowance as Rule 8D. Thus, in line with the earlier decisions of the Tribunal, we hold that 5% of exempt income will be taken as disallowance for the purpose of Section 14A and accordingly, assessee gets part-relief. 10. In so far as Revenue appeal is concerned, it has been stated that in all the grounds only issue raised is with regard to transfer pricing adjustment commission on letter of credit, which is covered by the decision of the Tribunal in assessee s own case for A.Y.2005-06. 11. The brief facts are that the Assessing Officer has made addition of Rs. 5,75,38,800/- on account of transfer pricing adjustment in respect of non-recovery by the assessee from its AE and the issue of letter of credit holding that assessee has not charged any commission from the AE. The ld. CIT (A) has deleted the said adjustment after observing and holding as under:- 9.4 I have considered the facts of the case and written submissions and oral arguments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were to dispose of its shares in the AE(s) without first obtaining the consent of the Banker or having ensured that the AE's liability to the bank is discharged in full no legal recourse is available to the banker against such dilution or disposal; and d) as the very title of the LoC suggests, the LoC merely provides comfort to the Bank as to the AE's ability / willingness to perform its obligations and neither creates nor is intended to create any kind of binding recourse which the Banker may have on the appellant. v. Moreover, it is a incidental benefit arising merely from passive association with the group and are therefore not regarded as giving rise to arrangements subject to remuneration. Para 7.13 of OECD Guidelines, July 2011 deal with the issue which is reproduced hereunder: Similarly, an associated enterprise should not be considered to receive an intra- group service when it obtains incidental benefits attributable solely to its being part of a larger concern, and not to any specific activity being performed. For example. no service would be received where an associated enterprise by reason of its affillation alone has a credit-rating higher than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18.01.2008. In reply to the show-cause, the assessee submitted that no adjustment is ought to be made as Letter of Comfort would not represent international transaction within the meaning of section 92B(1). It was further stated that merely an unequivocal statement of intention expressed by assessee not being bilateral, is not a transaction and letter is a private affair between the assessee and the lender/banker (non associate and is not a transaction between two associate). The contention of assessee was not accepted by TPO by taking view that transaction relating to provision for Letter of Comfort and payment of commission for the services by AE to the assessee would fall within the definition in term of international transaction 92B of the Act. The TPO made adjustment of Rs. 8.70 crore on account of issuance of Letter of Comfort. The Id. CIT(A) after appreciating the contention of assessee concluded that issuance of Letter of Comfort does not constitute an international transaction. The Id. CIT (A) appreciated the difference between corporate guarantee and Letter of Comfort. The Ld. AR further submits that there is a basic difference between corporate guarantee and Letter of C ..... 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