STARKEY LABORATORIES INDIA PVT. LTD.,NOIDA V. DCIT CIRCLE-24(2), NEW DELHI

ITA 3205/DEL/2023

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Starkey Laboratories India Pvt. Ltd. appealed against the order of the Commissioner of Income Tax, Delhi-12, which confirmed the disallowance of Rs.1,09,96,986/- claimed as provisions for marketing, advertisement, and discount expenses under Section 37(1) of the Income Tax Act, 1961. The expenses were disallowed by the Assessing Officer (AO) on grounds that they were not incurred during the year and were contingent in nature. The Tribunal found that the lower authorities had not adequately considered the agreements and the consistent accounting practices followed by the assessee, leading to a decision to remand the case for a fresh examination.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 790694 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-12-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Assessment Year: 2016-2017
• Appeal Filed On: 10-11-2023
• Other Referred Cases: Bharat Earth Movers vs. Commissioner of Income-tax, Rotork Controls India (P.) Ltd. vs. Commissioner of Income-tax, Chennai, Kyocera Document Solutions India Pvt. Ltd vs. DCIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: RAM AVTAR SHARMA; LD. A VIRTUAL HEARING
• Keywords: Set aside; Opportunity of being heard; Revenue expenditure; Transfer pricing; International transaction; Business expenditure; Corroborative evidences; Rule of consistency; Principle of natural justice; Capital asset converted into stock in trade; Procedural lapse
• Section: 143(3); 142(1); 145; 37(1)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘G’: NEW DELHI BEFORE SHRI YOGESH KUMAR U.S., JUDICIAL MEMBER AND SHRI MANISH AGARWAL, ACCOUNTANT MEMBER ITA No.3205/Del/2023 (ASSESSMENT YEAR 2016-17) Starkey Laboratories India Pvt. Ltd., C-2, Sector-7, Gautam Buddha Nagar-201301, Uttar Pradesh. PAN-AAKCS6072R Vs. Dy. CIT, Circle-24(2), New Delhi. (Appellant) (Respondent) Assessee by Shri Ram Avtar Sharma, CA, Shri Bhupesh Aggarwal and Shri Tanya Sharma, CA. Department by Shri Manish Gupta, Sr. DR Date of Hearing 11.09.2025 Date of Pronouncement 05 .12.2025 O R D E R PER MANISH AGARWAL, AM: This appeal is filed by the Assessee against the order of the Ld. Commissioner of Income Tax, Delhi-12, [‘the CIT(A)’ in short] dated 21.09.2023 passed u/s 250 of the Income Tax Act, 1961 in Appeal No. CIT(A) Delhi-8/10690/2019-20 against the assessment order dated 29.12.2019 passed u/s 143(3) of the Act for Assessment Year 2016-17. 2. Brief facts of the case are that assessee is a company engaged in the business of assemble, manufacture, integrate, test, sell, install, operate, maintain and repair all kind of hearing aid products and equipment. The return of income was filed on Printed from counselvise.com 2 ITA No.3205 Del/2023 Starkey Laboratories India Pvt. Ltd. vs. DCIT 28.11.2016 declaring total income of Rs.2,80,78,750/-. The case of the assessee was selected for scrutiny and various statutory notices were issued from time to time which were replied by the assessee. The AO has referred the case for determining of Arm’s Length Price (‘ALP’) with respect to international transaction to the TPO u/s 92CA(3) of the Act who vide order dated 29.10.2019 has not proposed any adjustment with respect to such transaction. Thereafter the AO observed that assessee has claimed expenses to the tune of Rs.1,09,96,986/- towards the Provision for Marketing expenses of Rs.54,43,284/-, Advertisement of Rs.3,38,336/- and Discount of Rs.52,15,366/- which were claimed in the Profit and Loss (P&L) Account and these expenses were not incurred during the year and are contingent in nature. Therefore, the AO disallowed all these expenditures and added back to the total income of the assessee. Accordingly, the total income of the assessee was computed at Rs.3,90,75,736/-. 3. Against this order, the assessee preferred an appeal before the Ld. CIT(A) who vide impugned order dated 21.09.2023 dismissed the appeal of the assessee and confirmed the disallowance so made. 4. Aggrieved by the said order, the assessee is in appeal before the Tribunal by taking the following grounds of appeal: “1. On the facts and circumstances of the case the Ld. CIT(A) has erred in upholding the disallowance of Rs.1,09,96,986/- of the Provision for expenses for Discount, Marketing and Advertisement expenses claimed by the appellant under Section 37(1) of the Income Tax Act, 1961. 2. The order of the CIT(A) is not sustainable in law in as-much-as the order has been passed without affording adequate opportunity of being heard to the Assessing Officer as required u/s 250(1)(b) of the Income Tax Act, 1961. Printed from counselvise.com 3 ITA No.3205 Del/2023 Starkey Laboratories India Pvt. Ltd. vs. DCIT 3. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.” 5. Since, both the grounds of appeal are with respect to the disallowance of Rs.1,09,96,986/- made by AO on account of provisions for expenses for Discount, Marketing and Advertisement expenses which were confirmed by the Ld. CIT(A), thus, they are taken together for consideration. 6. Before us, the Ld. AR of the assessee reiterated what was stated before the lower authorities and submits that the assessee has made the sales of hearing aids where targets were fixed for the distributors for making sales. He submits that for achieving such sales, distributors were allowed to incur marketing expenses in terms of the dealership agreement as per which they were provided per unit marketing expenses. As per the said agreements, during the year under appeal total marketing expenses to be reimbursed was computed at Rs.1,20,25,000/- out of which a sum of Rs.71,03,500/- were claimed by the respective parties and the remaining was claimed as the provisions towards the market expenses. The Ld. AR submits that as per the agreements, the amount of marketing expenses to be reimbursed to the dealers is confirmed and, therefore, it is not contingent liability and therefore, the same was claimed as expenditure in the Profit & Loss Account. The Ld. AR also drew our attention to the working in this respect which is available in the Paper Book filed before us. Regarding provision of Advertisement Expenses the assessee stated that these are of the identical nature as of the marketing expenses. Regarding the provision for Discount, it is stated by the Ld. AR that these expenses are also recorded in terms of the dealership agreement and therefore, they are not the contingent liability. The Ld. AR further submits that in Assessment Year 2010-11 and 2011-12, these expenses were allowed in the Assessment Order passed u/s Printed from counselvise.com 4 ITA No.3205 Del/2023 Starkey Laboratories India Pvt. Ltd. vs. DCIT 143(3), therefore, the same deserves to be allowed in the year under appeal also. With respect to ground of appeal No. 2, the Ld. AR submits that no proper opportunities was provided to the assessee by ld. CIT(A) for virtual hearing, therefore, the Ld. CIT(A) has violated the mandatory provision of section 250(2) of the Act. The assessee also filed a written submission which read as under: GROUND 1: \"On the facts and circumstances of the case the Ld. CIT(A) has erred in upholding the disallowance of Rs.1,09,96,986/-of the provision for expenses for Discount, Marketing and Advertisement expenses claimed by the appellant u/s 37(1) of the Income tax Act, 1961.\" 1.1. Appellant had the following provisions in its books for the year ended on 31.03.2016: TABLE-1 Particulars Short Term Provision amount Long Term Provision amount Total Provision as on 31.03.2016 Provisions for Marketing Expenses 54,43,284 - 54,43,284 Provision for Advertisement 3,38,336 1,11,135 4,49,471 Provision of Discount 52,15,366 15,82,899 67,98,265 Total as on 31.03.2016 1,09,96,986 16,94,034 1,26,91,020/- (Party wise breakup of Provisions of Rs. 1,26,91,020/- as on 31.03.2016 are enclosed as on Page no. 43A-43B of PB). 1.2. It is respectfully submitted that the provisions for discount, marketing. and advertisement expenses have been created in respect of contractual obligations arising from agreements entered into by the appellant with its various distributors. These expenses represent accrued liabilities that are payable in accordance with the terms of the respective agreements. The appellant has consistently recognized such expenses on a proportionate basis, corresponding to the sales targets achieved by the respective parties during the relevant financial year. The provisions have been made in accordance with the mercantile system of accounting and are thus allowable as business expenditure under section 37(1) of the Income-tax Act. 1961, being incurred wholly and exclusively for the purpose of business. 1.3. Out of the total provision made of Rs. 1,26,91,020/-, the Ld. AO has disallowed the Short term provisions. The details of which is given as under: Particulars Short Term Provision Printed from counselvise.com 5 ITA No.3205 Del/2023 Starkey Laboratories India Pvt. Ltd. vs. DCIT Provisions for Marketing Expenses 54,43,284 Provision for Advertisement 3,38,336 Provision of Discount 52,15,366 Total 1,09,96,986 1.4. It is respectfully submitted that as per Section 145(1) of the Income-tax Act, 1961, income chargeable under the head \"Profits and gains of business or profession\" shall be computed in accordance with either the cash or mercantile system of accounting, regularly employed by the assessee. The appellant follows the mercantile system, under which income and expenditure are accounted for on an accrual basis, irrespective of actual receipt or payment. Further. Section 145(2) empowers the Central Government to notify accounting standards to be followed by certain classes of assessee, In line with this, the appellant complies with the Accounting Standards prescribed by the ICAI, particularly Accounting Standard-1 (AS-1), which mandates that revenues and expenses must be recognized as they are earned of incurred, based on the principle of prudence. 1.5. Additionally, under Section 209(3) of the Companies Act, 1956 (now Section 128 of the Companies Act, 2013), companies are required to maintain books of account on an accrual basis. Accordingly, the appellant has consistently accounted for its liabilities, including provisions, in the financial year to which they pertain. This practice is in accordance with the prescribed legal and accounting framework and supports the allowability of such provisions under Section 37(1) of the Income-tax Act, 1961. 1.6. BASIS FOR PROVISON FOR MARKETING ADVERTISEMENT EXPENSE- AND 1.6.1. The provision for marketing and advertisement expenses has been created based on formal agreements executed between appellant and its distributors, wherein a fixed percentage or a specified amount per unit is contractually payable towards marketing and advertisement expenses upon achievement of predefined purchase targets. The appellant consistently recognizes such provisions at the agreed rate either as a percentage of purchases or on a per-unit basis for purchases actually achieved during the relevant financial year. This practice reflects the accrual of a present obligation and is in line with the contractual terms and applicable accounting principles. 1.6.2. The provisions for marketing expenses were not made on an ad hoc basis but were computed based on actual purchases made by the distributors during the Financial Year 2015-16, in accordance with the terms of the respective agreements. 1.6.3. It is submitted that the provision pertains to expenses accrued during the year under consideration, as the liability arises upon the achievement of purchase targets by the distributors. Although the payment is contingent upon the submission of requisite documentation evidencing the execution of specified marketing activities, the liability is determinable and accrued as of the balance sheet date. Accordingly, the provision is allowable as a deductible expenditure for A.Y. 2016-17 under the mercantile system of accounting. Printed from counselvise.com 6 ITA No.3205 Del/2023 Starkey Laboratories India Pvt. Ltd. vs. DCIT 1.7. BASIS FOR PROVISION FOR DISCOUNT: 1.7.1. The provision for discounts has been made in accordance with the terms of formal agreements executed between the appellant company and its distributors, wherein a fixed percentage of additional discount is contractually offered as a business incentive upon achievement of defined sales or purchase targets. As per the agreements, distributors become eligible for such discounts upon fulfilling the target thresholds stipulated therein. Accordingly, appellant has recognized provisions at the agreed rate, either on actual achievement of targets during the current financial year or, in certain instances, on a proportionate basis supported by past experience and historical data. 1.7.2. These provisions have not been created on an ad hoc or estimated basis but are created on the basis of actual purchases made by distributors during Financial Year 2015- 16 and as per binding terms of the respective agreements. The liability for such discounts accrues in the current year based on the purchases made, although disbursernent may occur in subsequent periods subject to compliance with specific conditions such as settlement of dues and submission of requisite documentation. Therefore, the provision represents an accrued liability and is allowable as a deductible expenditure for A.Y. 2016-17 under the mercantile system of accounting. 1.7.3. It is respectfully submitted that appellant, being a company governed by the provisions of the Companies Act, is maintaining its books of account under the mercantile system of accounting as mandated under Section 145 of the Income-tax Act. 1961. Accordingly, income and expenditure are recognized on an accrual basis in accordance with the Generally Accepted Accounting Principles (GAAP) and applicable Accounting Standards notified under Section 145(2). 1.7.4. The provisions for marketing, advertisement, and discount expenses were created in respect of liabilities accrued during the relevant financial year (F.Y. 2015-16) and are in the nature of revenue expenditure. Therefore, such provisions are allowable under Section 37(1) of the Act, being expenditure laid out wholly and exclusively for the purposes of business. 1.7.5. It is further submitted that the corresponding income relating to these business activities has been duly offered to tax in the same assessment year, thereby ensuring proper application of the matching principle under mercantile accounting. 1.8. Instance of Provision made by the appellant for Marketing Advertisement and Discount during the year: (1) \"Astra Hearing Solutions\"- Rs. 49,21,500/- Appellant company entered into an agreement with the party namely \"Astra Hearing Solutions\" whereby it was agreed to reimburse the marketing expenses of Rs 1,850/- per unit based on the units which the party purchased during the year. Please refer to the clause 7.2 of the Dealership agreement dated 08th Mar 2013 with Astra Hearing Solutions at Page No. 3 of the agreement and Page No. 46 of PB. Printed from counselvise.com 7 ITA No.3205 Del/2023 Starkey Laboratories India Pvt. Ltd. vs. DCIT Copy of above agreement along with addendum dated 17th July 2015 is enclosed at Page No 44 to 52 of PB. In the present case, during the financial year 2015-16, the said party had purchased a total of 6,500 units. As per the agreed rate of 21,850 per unit, the total marketing expenses eligible for reimbursement stood at 1,20,25,000/-. Out of this amount, 271,03,500/- was already utilised by the party up to 31st March 2016, and the remaining balance of 249,21,500/- was accordingly provisioned in the books of account for FY 2015-16. It is pertinent to highlight that the entire 6,500 units were sold by the party on or before 31st March 2016, therefore marketing expense of Rs. 49,21,500/- has been accrued and ascertained in F.Y. 2015-16 hence provision for the same was made in F.Y. 2015- 16. Further, the same was paid in subsequent year based on submission of supporting bills to the appellant. (Copy of Sales Data is enclosed as on Page No 131-221 of PB). It is submitted that the appellant subsequently settled the total provision of ₹1,12,34,648/- (which includes amount of Rs. 49,21,500 pertaining to F.Y. 2015-16 and Rs. 63,13,148/- pertaining to F.Y. 2016-17) in FY 2017-18 by way of waiver of invoice amounts equivalent to the eligible incentive, through adjustment against bills raised after completion of period. The incentive was thus passed on to dealers by reducing the dealer's payable amount against future sales to the extent of ₹1,12,34,648/-. Details of the same are as under: F.Y. Total Reimbursement Reimbursement utilized Provision 2015-16 Rs.12,02,5000 (6,500 units *1,850/-) Rs.71,03,500 Rs.49,21,500 2016-17 Rs.63,13,155.8 (2,676.20 units *2,359/-) - RS.63,13,148 Total 71,03,500 1,12,34,648 It is submitted that the liability so provisioned in both years was not contingent in nature. Rather, it arose directly from a binding commercial obligation and was computed based on the actual units sold, in line with the terms of the agreement. The agreement was operational during the relevant period, and the liability was determinable with reasonable certainty and substantiated by sales data and consistent historical trends. Moreover, the subsequent issuance of benefits in FY 2017-18 substantiates the fact that the provision was made in respect of a real and existing obligation, which was ultimately settled, thereby fulfilling all criteria of a valid provision under the applicable accounting framework (AS 29). (ii) \"Pearl Hearing Aid Centre\"-Rs. 1,09,836/- It is submitted that as part of the Appellant's structured dealer incentive program, a commercial arrangement was in place with Pearl Hearing Aid Centre during the financial year 2015-16, wherein the dealer was eligible for the following incentives: Printed from counselvise.com 8 ITA No.3205 Del/2023 Starkey Laboratories India Pvt. Ltd. vs. DCIT Marketing Support: Reimbursement at the rate of 5% of the cumulative invoiced value of goods supplied at dealer price and Business Incentive: A credit Note at the rate of 10% upon achieving a purchase target of ₹10,00,000/- during the period 1st April 2015 to 31st March 2016. In line with this arrangement, the dealer achieved gross purchases of 210,00,376/- during the relevant period. After adjusting for promotional offers and discounts, the net eligible sale value stood at 8,32,376/-, in accordance with the terms of the agreement which permitted inclusion of sales made under schemes or offers for target calculation Copy of agreement with the above party is enclosed at Page No 53-61 of PB. Copy of Sales Data is enclosed as per Page No 222-223 of PB. Based on this, the following provisions were made in the books for FY 2015-16: Provision for Marketing Support: 28,32,376×5% 41.619/-. Provision for Business Incentive. 28,32,376 × 10% 283,238/- During FY 2015-16, the dealer submitted relevant bills and utilised a portion of the marketing support amounting to ₹15,021 The remaining balance of 226,598/- was accordingly provisioned in the books as an outstanding obligation towards marketing support and amount of Rs. 83,238/- was provisioned in the books as an outstanding obligation towards Business incentive. Details of the same are as under: F.Y. Type Total Reimbursement Reimbursement utilized Provision 2015-16 Marketing Support Rs.41,619 (Rs.8,32,376 x 5%)) Rs.15,021 Rs.26,598 Business Incentive Rs.83,238 (Rs.8,32,376 x 10%) - Rs.83,238 Total Rs.1,09,836 It is pertinent to highlight that the gross sales of Rs. 10,00,376/-was made to the party on or before 31st March 2016, therefore provisions totaling to Rs. 1,09,836/ has been accrued and ascertained in F.Y. 2015-16 hence provision for the same was made in F.Y. 2015-16. Further, the same was paid in subsequent year based on submission of supporting bills to the appellant. Appellant had subsequently settled the total provision of ₹1,09,836/- in FY 2016-17 by way of waiver of invoice amounts equivalent to the eligible incentive, through adjustment against bills raised after completion of period. The incentive was thus passed on to dealers by reducing the dealer's payable amount against future sales to the extent of Rs.1,09,836/- . It is important to note that the provisions created were not based on estimations or contingencies. They were:  Clearly quantifiable, based on actual sales achieved:  Rooted in contractual obligation, under standard incentive terms offered to dealers; and  Confirmed by subsequent settlement, thus reinforcing that the obligations were real and accrued as of the reporting date. Printed from counselvise.com 9 ITA No.3205 Del/2023 Starkey Laboratories India Pvt. Ltd. vs. DCIT The commercial terms and methodology of calculation were fully disclosed during the course of assessment proceedings, along with a sample agreement reflecting the applicable terms. Despite this, the Ld. CII(A) disallowed the provision by treating it as a contingent liability. without appreciating the binding nature of the commercial arrangement, the precision in computation, and the subsequent fulfilment of the obligation. The disallowance reflects a clear misappreciation of facts and a failure to examine the nature of the transaction in its proper context. The Ld. CII(A) did not dispute the existence of the sale, nor the issuance of credit notes in the subsequent year, yet ignored these crucial facts while categorising the provision as unascertained. It is respectfully submitted that the provision meets all three essential criteria laid down under the applicable accounting framework (AS 29), namely:  A present obligation arising from a past event (dealer achieved the sales target).  A reliable estimate of the amount (based on contractual percentage), and  An expected outflow of economic resources (discharged through credit notes). Therefore, the disallowance is both factually and legally unsustainable and deserves to be reversed. (iii) \"Atharva Speech and Hearing\"-Rs. 7,54,226/-. It is submitted that in the case of Atharva Speech and Hearing as per the terms of the agreement the Dealer will be entitled to Business Incentive quarterly in form of Credit Note equivalent to 15% of MRP of the products purchased in respective quarter\" upon achieving a purchase target of 230,00,000/-during the period from 1st April 2015 to 31st March 2016, which was later extended until 31st May 2016. As per Clause 7 of the agreement, the incentive was to be calculated on the basis of the MRP, which was to be notified by the Company from time to time. Please refer Page No. 66 of the PB. During the year, the dealer made purchases aggregating to 250,28,171/-on MRP basis. Based on this, the eligible business incentive amounted to ₹7,54,226/-. By the end of the extended period, the dealer had achieved the prescribed purchase target. Accordingly, a provision of 7,54.226/- was created in the books of the Appellant during FY 2015-16, in line with the terms of the agreement and based on actual purchases made. Copy of agreement with the above party is enclosed at Page No 62-72 of PB. It is pertinent to highlight that the gross sales of Rs. 50,28,171/-was made to the party on or before 31st March 2016, therefore provisions totaling to Rs. 7,54,226/- has been secured und ascertained in F.Y. 2015-16 hence provision for the same was made in F.Y. 2015-16. Further, the same was paid in subsequent year based on submission of supporting bills to the appellant. Copy of Sales Data is enclosed as per Page No 224-226 of PB. Appellant had subsequently settled the total provision of 27,54,226/- in FY 2016-17 by way of waiver of invoice amounts equivalent to the eligible incentive, through adjustment against bills raised after completion of period. The incentive was thus passed on to dealers by reducing the dealer's payable amount against future sales to the extent of 27,54,226/-. This provision was:  Precisely computed based on actual sales and contractual percentages;  Rooted in a binding commercial obligation, and not based on estimates or assumptions; Printed from counselvise.com 10 ITA No.3205 Del/2023 Starkey Laboratories India Pvt. Ltd. vs. DCIT  Subsequently discharged, confirming the liability was real and accrued. Despite these facts being on record and the computation being straightforward and contractually governed, the Ld. CIT(A) disallowed the said provision on the erroneous ground that it was contingent in nature. This disallowance has been made without giving due weight to the evidence placed before the authorities. The agreement explicitly setting out the discount structure and incentive terms. 1.9. In view of the above submission, it is clear that Appellant has provided the benefit of provision made to customer in the subsequent year which reflects that the provisions made were not on adhoc basis but on actual basis. 1.10. Further, it is submitted that all the provisions were made rationally. based on the actual sales made during the Assessment Year 2016-17. Hence, provisions for marketing, advertisement, and discount expenses should be allowable against the corresponding revenue offered for taxation for A.Υ. 2016-17. 1.11. In the above cases, provisions were made based on accrual of marketing, advertisement, and discount expenses during the A.Y. 2016-17 but was only due in subsequent year i,e., payable on receipt of expense vouchers or payable on completion of target period ete. Since provisions were accrued in A.Y. 2016-17 same should be allowed in Α.Υ. 2016-17. CONTENTION OF THE LD. AO PARA PAGE OF ORDER AO's order 4.3 7-8 1.12. It is respectfully submitted that the Learned Assessing Officer, while disallowing the provisions created for discount, marketing. and advertisement expenses, has erroneously construed them as contingent liabilities based on future uncertainties. This interpretation is factually and legally incorrect. The provisions in question were not contingent in nature but represent ascertained liabilities accrued during the relevant financial year, Le., F.Y. 2015-16, arising out of binding contractual obligations between the appellant and its customers/distributors. These provisions were made after applying a reasonable and consistent basis of estimation in accordance with the agreed terms for sales promotion activities such as discounts, marketing reimbursements, and advertisement support. 1.13. It is submitted that the appellant, following the mercantile system of accounting as prescribed under Section 145 of the Income-tax Act, 1961, duly recognized these expenses on accrual basis. Accordingly. the said provisions, being in the nature of revenue expenditure incurred wholly and exclusively for the purposes of business, are allowable under Section 37(1) of the Act. Contingent liability has been defined in Accounting Standard - 29 (AS 29) in Clause 10.4, which is as under: A contingent liability is: A possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or Printed from counselvise.com 11 ITA No.3205 Del/2023 Starkey Laboratories India Pvt. Ltd. vs. DCIT A present obligation that arises from past events but is not recognised because:  it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or  a reliable estimate of the amount of the obligation cannot be made It is submitted that as per AS-29 the liability is contingent in nature under the following circumstances: There is a possibility of the obligation confirmed on occurrence or non-occurrence of the uncertain event which is not in control of the enterprise. I. An obligation due to past event but cannot be recognised due 10 II. Low Probability of outflow of resources for settlement of the liability or III. Lack of reliable estimation of the outflow As explained, above provisions are the liabilities accrued but not due during the A.Y. 2016-17 and was paid in subsequent year. Therefore, they are not in contingent nature. Hence these provisions should not have been disallowed. 1.14. Further, it is pertinent to mention that Tax Auditor has also not reported any amount in the Tax Audit Report as Contingent Liability in Clause 21(g) during A.Y. 2016-17. Copy of Tax Audit report of AY 2016-17 is enclosed at Page no. 255-269 of PB. Please refer page no. 259 of PB. 1.15. In the case of the appellant, the existence of the liability is substantiated, as in the majority of instances, the purchase targets stipulated in the respective agreements with the parties have been met during the relevant previous year. In certain cases where the targets have not been fully achieved, proportionate purchase targets have been attained and based on the consistent historical business relationship and prior performance, there exists a high degree of certainty regarding the achievement of the remaining targets. Consequently, appellant has created provisions for expenses accrued and incurred during the relevant previous year, which are ascertained liabilities and payable to the respective parties. These provisions have been recognized in accordance with the mercantile system of accounting regularly followed by the appellant and are allowable under section 37(1) of the Income- tax Act, 1961, being expenses incurred wholly and exclusively for the purpose of business. 1.16. The. Ld. AO has stated in clause (i) of Para 4.3 of Assessment Order as under: \"The assessee company had submitted that above amounts are payable to their customers on achievement of sales target by a particular future date (which does not ends within the AY 2016-17). The assessee company's claim of provisions based for sales target in future, makes the provisions contingent in nature. If the future sales target are not met, then provisions created in earlier years will have to be reversed. But this probability of reversal makes the provision contingent in nature.\" 1.17. Regarding the above contention of the Ld. AO, we wish to submit that the Ld. AO has not reviewed the agreements with parties submitted by the Appellant during Assessment Proceeding. Printed from counselvise.com 12 ITA No.3205 Del/2023 Starkey Laboratories India Pvt. Ltd. vs. DCIT 1.18. It is respectfully submitted that the condition of achieving purchase targets is not uniformly applicable across all agreements. In the case of the dealership agreement with \"Astra Hearing Solutions,\" wherein a provision of ₹49,21,500/- has been made towards marketing expenditure, no specific purchase target is stipulated as a condition for reimbursement. The provision arises from a binding contractual obligation and established business practice and has been recognized under the mercantile system of accounting. Accordingly, the expenditure qualifies as a deductible business expense under section 37(1) of the Income-tax Act, 1961, being incurred wholly and exclusively for business purposes. Please refer to the clause 7.2 of the Dealership agreement date 08thMar 2013 at Page No.3 of agreement and Page No. 46 of PB. Copy of said agreement along with addendum dated 17th July 2015 is enclosed at Page No. 44-52 of PB. 1.19. It is further submitted that the possibility of achieving the purchase target at a future date does not render the provision for expenditure as contingent in nature, particularly when there exists a high degree of probability of the occurrence of the event. In the present case, based on historical trends and consistent business conduct, the achievement of purchase targets by the distributors/customers was reasonably certain and not dependent on any uncertain or speculative condition. 1.20. It is submitted that the obligation to make payments arises in accordance with the terms of the agreement once the sales targets are met. However, in adherence to the mercantile system of accounting, the appellant has proportionately accrued the expenses during the relevant previous year based on the purchases already made. Accordingly, such provision represents an ascertained liability and qualifies for deduction under section 37(1) of the Income-tax Act, 1961, being incurred wholly and exclusively for the purposes of business. 1.21. It is submitted that the provisions created by the appellant are based on a systematic and consistent methodology, supported by past experience and contractual terms. The liability is determined based on fixed percentages of sales or per-unit rates as agreed with distributors for discounts, marketing, and advertisement. These are not arbitrary provisions but represent accrued liabilities under the mercantile system of accounting. The appellant has consistently followed this practice since inception. 1.22. It is a settled position in law that once a business liability has arisen, its deductibility under section 37(1) of the Income-tax Act, 1961 cannot be denied merely because its quantification or discharge may occur at a future date. A reasonable estimation of the liability is sufficient for allowability. CONTENTION OF THE LD. CIT(A) PARA PAGE OF ORDER CIT's order 7.2 23-24 1.23. The Ld. CIT (A) while confirming the disallowances stated that the appellant could not prove before AO during Assessment proceeding with supporting evidences that the provisions were actually ascertained and crystalised during F.Y. 2015-16. Further Hon'ble CIT has also mentioned that amount of such expenses is not quantified, it shows that the concerned party has not yet provided the relevant services and raised bills/invoices and Printed from counselvise.com 13 ITA No.3205 Del/2023 Starkey Laboratories India Pvt. Ltd. vs. DCIT therefore the appellant has not debited the amount of such marketing/advertisement expenses as regular expenses but debited as provision. 1.24. Regarding the above contention of the Ld. CIT(A), it is submitted that the provisions created by the appellant are only created on the amount of sales made during FY 2015-16 (A.Υ. 2016-17). Provisions are created on vary scientific basis and past estimates that customer achieves the target in future. 1.25. Further, in many cases target has already been achieved in A.Y. 2016-17, appellant has not credited the amount to party account only because the supporting documents of expenses incurred by customers were pending. Appellant received the supporting documents in subsequent year and accordingly, the amount was credited to the customers account in subsequent year. It shows that provisions were reasonable and quantifiable during A.Y. 2016-17. 1.26. It is respectfully submitted that since the provisions were made on the amount of sales made during A.Y. 2016-17 and such revenue was offered for taxation in A.Y. 2016-17 hence provisions created by the appellant based on sales should be allowable. 1.27. We wish to further mention that in one of case of \"Astra Hearing Solution\" there was no requirement to fulfil any target on the part of customer, discount was provided per unit sold and credited to party on receipt of supporting of expenditure made by customer. Provision related to such party was Rs. 49,21,500/- out of total disallowance of Rs. 1,09,96,986/- made in the case of Appellant. 1.28. The Id. CIT(A) has not even reviewed the agreement submitted during appellate proceeding and also not consider the appellant's submission and just relied on AO's order. The Ld. CIT(A) had fully erred in ignoring the appellant submission and not considering that the terms of the agreement with the \"Astra Hearing Solution\" are different from terms with the other party and erred in treating the provision made of Rs. 49.21,500/- for Astra Hearing Solution\" on same line with other provision made. 1.29. \"The Ld. CIT(A) has not made any comment on the instances and agreements referred and submitted during the appellate proceedings and passed order solely on the basis of Assessment Order. 1.30. It is further submitted that Appellant in its submission before the Ld. CIT(A) has mentioned that the appellant has been consistently creating provisions towards Discounts, Marketing, and Advertisement Expenses at the end of each financial year and claiming the same as allowable business expenditure under section 37(1) of the Income-tax Act, 1961. Such provisions have been allowed in scrutiny assessments completed under section 143(3) for the Assessment Years 2010-11 and 2011-12, thereby acknowledging their admissibility under the provisions of the Act. 1.31. In this regard the Ld. CIT(A) has commented that the assessment orders for AY 2010- 11 and 2011-12 are very cryptic and it is seen that the issue of marketing/advertisement Printed from counselvise.com 14 ITA No.3205 Del/2023 Starkey Laboratories India Pvt. Ltd. vs. DCIT expenses has not been examined since no clear finding is given by the AO in those assessment orders. Further the CIT(A) has also mentioned that agreements which are submitted for case of A.Y. 2016-17 have come into existence after the period covered by Λ.Υ.2010-11 & 2011-12 therefore contention of Appellant cannot be accepted. 1.32. We wish submit that during the AY 2010-11 and 2011-12, similar type of agreements were made and Ld. AO has scrutinised the expenses of Assessee in detailed. Since Ld. AO has not made addition for provisions, same were not mentioned in the order. We are also enclosing the questionnaire issued by the Ld. AO for the A.Y. 2011-12 which clearly depicts that detailed scrutiny of expense of appellant was made during assessment proceedings of A.Y. 2011-12. (Copy of the Notice issued u/s 142(1) for AY 2010-11 & AY 2011-12 is placed at Page No. 272-276 and 279-281 of PB respectively) (Copy of assessment order passed for the AY 2010-11 & AY 2011-12 is enclosed at Page No. 270-271 and 277-278 of PB respectively.) (Copy of Financial Statements of F.Y. 2009-10 and FY 2010-11 is enclosed at Page No. 282-287 and 288-293 of PB respectively.) 1.33. In view of above submission, it is clear that Appellant is making provisions on consistent basis and same is accepted by Ld. AO in past proceedings as well as in the assessment proceeding done after A.Y. 2016-17. 1.34. The Hon'ble Supreme Court in the case of Bharat Earth Movers vs. Commissioner of Income-tax [2000] 112 Taxman 61 (SC) held that \"The law is settled, if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring /the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in present though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.\" Copy of case law is placed on Page No. 296-299 of PB. 1.35. The Hon'ble Supreme Court in the case of Rotork Controls India (P.) Ltd. vs. Commissioner of Income-tax, Chennai [2009] 180 Taxman 422 (SC) held that \"A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when a. an enterprise has a present obligation as a result of a past event b. it is probable that an outflow of resources will be required to settle the obligation; and c a reliable estimate can be made of the amount of the obligation. Printed from counselvise.com 15 ITA No.3205 Del/2023 Starkey Laboratories India Pvt. Ltd. vs. DCIT if these conditions are not met, no provision can be recognized. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. (Copy of the above case law is enclosed at Page No. 300-310 of PB). 1.36. It is submitted that in the case of appellant, provision for discount. marketing and advertisement expenses has been made on the basis of the agreement between the appellant and the distributors whereby a percentage discount/incentive/marketing/advertisement expenses are payable as per the terms of agreement, on the achievement of the purchase target fixed for by the distributors in some cases. 1.37. It is submitted that the provisions were not made on ad hoc basis by the appellant. The appellant company creates provision for the marketing expenses at the agreed rate of percentage of purchase or basis amount on per unit for discount/incentive/marketing/advertisement expenses to be incurred in respect of the purchases that has been attained during the current year. It is submitted that all the three conditions for recognizing a liability for the purposes of provisioning were satisfied in appellant case. 1.38. The Hon'ble ITAT, Delhi Bench \"C\" in the case of Kyocera Document Solutions India Pvt. Ltd vs. DCIT, in ITA No. 7104 & 7105/Del/2018 for AY 2013-14 held that “13. Considered the rival submissions and material placed on record. We observed that assessee declares certain incentives to its own employees and based on that, employees who achieved the targets were awarded as per the promotional policy promoted by the assessee. Based on that, assessee determines the total liability on such sales promotion expenses. Based on that, assessee records the expenditure on gross basis and settles the vendors on actual basis based on the actual utilisation. Since assessee has to pick the relevant expenditure based on the concept of matching principle and accordingly we observed that assessee has settled about 88% of the gross provision created for this purpose. As per the method of accounting adopted by the assessee, the assessee reverses the unutilized or unsettled portion of the provisions during the next assessment year. This is being followed consistently by the assessee. Further we observed that whether the expenditure is booked in this year or reversed in the subsequent year, it has effect revenue neutral considering the fact that tax rates are similar for both the years under consideration. Therefore, the assessee has brought on record complete details of creation of provisions as well as actual reversal of provisions and to the portion of unutilized provisions are being reversed in the subsequent assessment year and this is the regularly followed method of accounting, therefore, we do not see any reason to sustain the additions made by the Assessing Officer. Accordingly, the above said sales promotion expenses claimed by the assessee are allowed on the basis of matching the relevant expenses the revenue recorded during the year.\" (Copy of the above case law is enclosed at Page No 311-335 of PB). Printed from counselvise.com 16 ITA No.3205 Del/2023 Starkey Laboratories India Pvt. Ltd. vs. DCIT 1.39. It is respectfully submitted that in the case of appellant, the provisions for discount/ incentive/ marketing and advertisement expenses have been created because being company the appellant follows mercantile system of accounting mandatorily. The provisions have been made for business liability which arisen in the current year although the liability to pay may have to be quantified and discharged at a future date. The provisions for discount, marketing and advertisements have been created based on the agreements with parties and accrued during the current year hence allowable as deduction in the current year. In view of the above submission, it is respectfully prayed that the disallowance of ₹1,09,96,986/- made by the Ld. AO on account of provision for Discounts, Marketing, and Advertisement Expenses. which were incurred wholly and exclusively for the purpose of business are allowable under section 37(1) of the Income-tax Act, 1961 be kindly deleted. 2. GROUND 2: The Ld. CIT(A) has passed an order without affording adequate opportunity of being heard as required u/s 250(1)(b) of Income Tax Act, 1961. Section 250(2) of the Act stipulates that CIT(A) shall dispose of the appeal only after giving the appellant an opportunity of being heard. The provision of a fair and meaningful hearing is not a mere procedural formality but a substantive right conferred upon the appellant under the Act. In the case of the appellant, the Ld. Commissioner of Income Tax (Appeals) has failed to afford a proper and effective opportunity of being heard before the disposal of the appeal. This constitutes a material procedural irregularity and is in contravention of the mandatory provisions of Section 250(2) of the Income Tax Act, 1961, which requires that the appellant be given a fair opportunity to be heard before the appeal is adjudicated. Such omission not only violates the express provisions of the Act but also infringes the fundamental principles of natural justice, rendering the appellate proceedings vitiated and the order passed legally untenable, non est, and inoperative in the eyes of law. It is pertinent to note that while submitting detailed ground-wise written submissions on 02.05.2623 during the course of the appellate proceedings, the appellate proceedings, the appellant had requested for a virtual hearing prior to the passing of my final order. The relevant extract from the said submission is reproduced below: “In response to above notice for submitting ground wise written submission. It is submitted that Appellant has already submitted the reply to earlier hearing Notice dated 02/08/2023. We are submitting the acknowledgement of reply submitted earlier and we are also submitting the Ground wise written submission again. It is requested to let us know if any details/ documents is required in connection with our submission. It is further requested to allow us Virtual Hearing before passing any final order.\" (Copy of the acknowledgement for the submission made is enclosed at Page No. 294- 295 of PB). Printed from counselvise.com 17 ITA No.3205 Del/2023 Starkey Laboratories India Pvt. Ltd. vs. DCIT It is respectfully submitted that Virtual Hearing request was made by the appellant to Ld. CIT(A) at the time of making ground wise written submission on dated 02.09.2023 but the Ld. CIT (A) has not given Virtual hearing before passing order 21.09.2023. Hon'ble Income Tax Appellate Tribunal, Cochin Bench, in the case of Shwas Homes Private Limited (ITA No. 250/Coch/2023), held that Needless to say, the CIT(A) shall afford meaningful opportunities to the assessee, before passing any order. (Copy of the above case law is enclosed at Page No. 336-338 of PB). 3.GROUND 3: Appellant craves for grant of permission to add alter or withdraw any ground of appeal at or any time before the hearing of appeal.” 7. On the other hand, the Ld. Sr. DR supported the orders of the lower authorities and submits that the Ld. AO and Ld. CIT(A) has considered the submissions made by the assessee and after considering the same disallowance was confirmed. Ld. SR. DR drew our attention to para 7.2 of CIT(A)’s order wherein the Ld. CIT(A) has observed that the agreements in reference with respect to the dealership regarding Advertisement and Market reimbursement were executed in Financial Year 2013-14 relevant to AY 2014-15 and they were not in existence in Assessment Year 2010-11 and 2011-12, therefore, it cannot be said that the order of Assessment Year 2010-11 and 2011-12 were passed under identical circumstances where the provisions for these expenses as claimed by assessee were allowed. 8. Heard the parties and perused the materials available on record. At the outset, it is seen that the main contention of the assessee is that the provisions made are in compliance to the agreement executed with the dealers which are available in the PB pages 44 onwards. From the perusal of these agreements, we find that all these agreement were executed in Financial Year 2013-14 and 2014-15. None of the agreement was executed for Assessment Year 2010-11 and 2011-12, therefore, the Printed from counselvise.com 18 ITA No.3205 Del/2023 Starkey Laboratories India Pvt. Ltd. vs. DCIT claim of the assessee that the Assessment Order passed for Assessment Years 2010- 11 and 2011-12 are to be followed as a principle of consistency. Accordingly, this argument of the assessee cannot be accepted. 9. Regarding the very nature of the expenses being claimed as ascertain liability, it is seen that the assessee tried to made out the case solely on the basis of the agreements executed with the dealers and further submits that the Ld. CIT(A) has not allowed the assessee reasonable and proper opportunities of being heard. In this case, considering these facts in larger interest of the justice, we set aside the order of lower authorities and remand back to the file of Ld. CIT(A) with the directions to allow the assessee to one more opportunity to represent its case, keeping in mind the observations made hereinabove with respect to the principle of consistency. With these directions, the appeal of the assessee is partly allowed for statistical purposes. 10. In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open Court on 05.12.2025. Sd/- Sd/- (YOGESH KUMAR U.S) (MANISH AGARWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 05.12.2025 PK/Sr. Ps Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI Printed from counselvise.com "