NYNAS NAPHTHENICS PVT LTD,MUMBAI vs. DCIT-5, CIRCLE 13(1)(2), MUMBAI

This appeal by the assessee is directed against the final assessment order dated 25.10.2024 passed by the learned Assessing Officer under section 143(3) read with section 144C(13) and section 144B of the Income-tax Act, 1961 ('the Act'), for the assessment year 2021–22, pursuant to the directions issued by the Dispute Resolution Panel ('DRP'). 2. At the time of hearing, the assessee pressed only two grounds. The first ground concerns non-grant of working capital adjustment while determining the arm's length price of the international transactions under the trading segment. The second ground concerns the additional claim for deduction under section 80G in respect of CSR expenditure of Rs.27,00,000 incurred by way of contribution to the PM CARES Fund for COVID-19. The remaining grounds were not pressed and are accordingly dismissed as not pressed.

We shall first take up the ground relating to working capital adjustment. The assessee had sought adjustment on account of the differences in inventory, trade receivables and trade payables between the assessee and the comparable companies selected for benchmarking the trading segment. The TPO did not grant the adjustment. The DRP also declined to interfere, principally on the ground that the assessee had not demonstrated, with the necessary data, the material effect of the differences in working capital upon the margins of the comparable companies and that a reasonably accurate adjustment could not be made on the basis of a general claim.

The Ld. Authorised Representative (AR) submitted that the claim was not a general or ad hoc claim. It was submitted that the assessee had furnished the detailed working capital computation of the comparable companies along with the relevant supporting material, which is placed at pages 270 to 300 of the paper book. According to the Ld. AR, the authorities below rejected the claim without examining the computation and the supporting data already available on record. It was contended that differences in the levels of inventory, receivables and payables have a direct bearing on the operating margins and, therefore, an appropriate adjustment is required under Rule 10B(3) of the Income-tax Rules, 1962. Reliance was placed on the decisions of the co- ordinate benches in Deputy Commissioner of Income Tax v. BP India (P.) Ltd., ITA No.4873/Mum/2025, and Packt Publishing Private Limited v. Deputy Commissioner of Income Tax, ITA No.8922/Mum/2025.

The Ld. Departmental Representative (DR), on the other hand, relied upon the final assessment order and the directions of the DRP. It was submitted that working capital adjustment cannot be allowed as a matter of course and that the assessee must first establish the material differences and furnish reliable data from which a reasonably accurate adjustment can be computed.

We have heard the rival submissions and perused the material available on record. Working capital adjustment is intended to neutralise the effect of 2 differences in the levels of inventory, trade receivables and trade payables of the tested party vis-a-vis the comparable companies. Such differences may affect the operating margins because the period for which funds remain blocked in inventory or receivables, or are available through trade credit, carries a time value. Rule 10B(3) permits an adjustment where the difference materially affects the price, cost or profit arising from the transactions and a reasonably accurate adjustment can be made to eliminate its effect. Thus, the claim cannot be rejected merely in principle; equally, it can be granted only upon verification of reliable data and the accuracy of the computation.

In the present case, the assessee specifically refers to the computation and supporting details placed at pages 270 to 300 of the paper book. The correctness and sufficiency of these details have not been examined by the TPO. The DRP rejected the claim on the premise that the requisite particulars had not been demonstrated. Since the issue is essentially factual and the computation requires verification with reference to the accounts of the assessee and the comparable companies, we consider it appropriate to restore the issue to the file of the Assessing Officer/TPO. The Assessing Officer/TPO shall examine the computation and supporting material furnished by the assessee and grant appropriate working capital adjustment in accordance with Rule 10B(3), if the claim is found to be factually correct and capable of reasonably accurate computation. The assessee shall furnish all further details that may be called for and shall be afforded a reasonable opportunity of being heard. This ground is allowed for statistical purposes.

The second ground relates to the assessee's additional claim for deduction under section 80G in respect of the contribution of Rs.27,00,000 made to the PM CARES Fund. In the computation accompanying the return of income, the assessee had treated the payment as CSR expenditure. The said expenditure was disallowed while computing the business income. Thereafter, the assessee raised an alternative claim before the DRP that the contribution should be allowed as deduction under section 80G. The DRP noted that the deduction had not been claimed in the return of income and that the Assessing Officer had not discussed the claim in the draft assessment order. It, therefore, 3 held that, having regard to section 144C(2) of the Act, the claim was not amenable for consideration at the threshold.

The Ld. AR submitted that the claim under section 80G did not constitute an unrelated or independent claim. It arose directly from the disallowance of the very same CSR expenditure while computing business income and was made only in the alternative. According to the Ld. AR, once the expenditure was not allowed under the head 'Profits and gains of business or profession', the assessee was entitled to claim the deduction under section 80G, subject to fulfilment of the statutory conditions. It was further submitted that the appellate authorities are competent to entertain an additional legal claim even though it was not made in the return of income.

In support of the above submissions, the Ld. AR relied upon the decision of the Hon'ble Bombay High Court in Commissioner of Income Tax v. Pruthvi Brokers & Shareholders (P.) Ltd. (2012) 349 ITR 336 (Bom.), and the decision of the co-ordinate bench in Landmark Worldwide Breakthrough Technologies Pvt. Ltd. v. Deputy Commissioner of Income Tax, ITA No.1303/Mum/2026. It was submitted that the restriction upon the Assessing Officer in entertaining a fresh claim otherwise than by a revised return does not curtail the powers of the appellate authorities to consider a claim arising from the facts already on record.

The Ld. DR relied upon the final assessment order and the directions of the DRP. It was submitted that the claim was not made in the return of income, did not form the subject matter of examination by the Assessing Officer and would require verification of the payment as well as the conditions prescribed under section 80G.

We have considered the rival submissions. The contribution of Rs.27,00,000 and its character as CSR expenditure formed part of the assessment proceedings, and the alternative claim under section 80G arose only because the expenditure was not allowed while computing business income. The claim, therefore, arises from the subject matter and the facts already before the authorities below. The Hon'ble jurisdictional High Court in 4 Pruthvi Brokers & Shareholders (P.) Ltd. (supra) has held that an appellate authority has jurisdiction to entertain a claim not made in the return of income. Accordingly, the mere fact that the deduction was not claimed in the return or examined by the Assessing Officer cannot, by itself, be a ground to decline consideration of the claim. Further, the disallowance of an expenditure as CSR expenditure while computing business income does not, by itself, bar an otherwise admissible deduction under section 80G. The admissibility and quantum of deduction must, however, be examined strictly in accordance with the conditions of that section. The payment, the identity and eligibility of the donee, the prescribed receipt, the mode of payment and the extent of deduction have not been verified by the Assessing Officer. We, therefore, restore this claim to the file of the Assessing Officer, who shall verify the relevant documents and, upon being satisfied that the statutory conditions are fulfilled, allow the deduction under section 80G in accordance with law. A reasonable opportunity of being heard shall be afforded to the assessee. This ground is allowed for statistical purposes.

In the result, the appeal of the assessee is partly allowed for statistical purposes.