Transfer Pricing Adjustment Deleted: Cost-to-Cost Reimbursement for Event Expenses is Not a ‘Service’ Warranting Mark-up

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Transfer Pricing Adjustment Deleted: Cost-to-Cost Reimbursement for Event Expenses is Not a ‘Service’ Warranting Mark-up

ISSUE

Whether the reimbursement of event-related expenses (hotel, travel, etc.) incurred by the assessee on behalf of its Associated Enterprise (AE) and recovered on a cost-to-cost basis constitutes a “service” requiring a profit mark-up under Transfer Pricing regulations.

FACTS

  • The Transaction: The assessee incurred expenses for air tickets, hotels, cabs, and other event-related services by paying third-party vendors on behalf of its AE.

  • The Recovery: These amounts were recovered from the AE on a strict cost-to-cost basis (no profit margin added).

  • TPO’s Action: The Transfer Pricing Officer (TPO) treated this activity as a service provision. He identified 7 comparable companies, computed an arm’s length mark-up of 8.17%, and proposed an adjustment adding profit to these reimbursements.

DECISION

  • Pass-Through Nature: The Tribunal held that the assessee merely facilitated payments to third-party vendors. It did not render any value-added service to the AE in this regard.

  • No Service, No Mark-up: Since the assessee acted only as a paying agent or conduit, the transaction does not qualify as a “service” that warrants a mark-up. Cost-to-cost reimbursement is the Arm’s Length Price (ALP) for such pass-through costs.

  • Verdict: The Transfer Pricing adjustment was deleted. [In Favour of Assessee]

II. YEAR-END PROVISIONS ALLOWABLE IF SCIENTIFICALLY ESTIMATED

 

ISSUE

Whether year-end provisions created for “installation/authorized services” and “sales commission” are allowable deductions under Section 37(1), or if they are liable to be disallowed as unascertained/ad-hoc liabilities, and whether TDS provisions apply to such provisions.

FACTS

  • The Claim: The assessee created provisions in its books at year-end for:

    1. Installation and authorized services (akin to warranty).

    2. Sales commission.

  • AO’s Disallowance: The AO disallowed these as impermissible ad-hoc provisions.

  • TDS Aspect: The assessee argued that since the respective parties’ accounts were not credited (only a provision account was used), no TDS liability arose at that stage.

DECISION

  • General Principle: Year-end provisions are generally allowable if they are not merely “ad-hoc” but are based on a reasonable estimate of a present obligation. They are usually reversed in the succeeding year when actual payment happens.

  • Scientific Basis Test: Relying on the principle of Rotork Controls (Supreme Court), the Tribunal held that provisions for services (similar to warranty) are allowable if calculated on a scientific basis (e.g., based on past historical data).

  • TDS: The Tribunal clarified that since the payee’s account is not credited, the question of TDS does not arise at the provision stage.

  • Remand: The matter was remanded to the AO to verify the “additional evidence” and ascertain if the assessee used a scientific method to calculate these provisions. If yes, the deduction must be allowed.

  • Verdict: [Matter Remanded]

KEY TAKEAWAYS

  1. Reimbursements in TP: To avoid litigation on reimbursements, ensure you have a “pure agent” arrangement. The invoice from the third party should ideally be in the name of the AE (if possible) or clearly backed by a debit note with “back-to-back” supporting vouchers. If you add any internal cost (like admin time), the TPO will demand a mark-up on the whole amount.

  2. The “Scientific Basis” Defense: You cannot just provision a round figure like “Rs. 10 Lakhs” for warranty. You must have a working sheet: “Based on the last 3 years, 2% of sales result in warranty claims; therefore, provision = 2% of current sales.” This historical data makes the provision “scientific” and allowable.

  3. TDS on Provisions: This is a very helpful clarification. Often, auditors insist on TDS on year-end provisions. This ruling confirms that if the party is not identified/credited, TDS is not required (Section 40(a)(ia) is not triggered). TDS triggers when the invoice is actually booked/credited to the vendor next year.

IN THE ITAT CHENNAI BENCH ‘D’
Fuji Electric India (P.) Ltd.
v.
DCIT*
Manu Kumar Giri, Judicial Member
and S. R. RAGHUNATHA, Accountant Member
ITA No. 701 (Chny) of 2025
[Assessment year 2020-21]
DECEMBER  1, 2025
Siddhesh Chaugula, CA for the Appellant. A R V Sreenivasan, CIT for the Respondent.
ORDER
S. R. Raghunatha, Accountant Member.- This appeal is filed by the Assessee against the order bearing DIN & Order No. ITBA / AST / S / 143(3) / 2024-25 / 1066444187(1) dated 05.07.2024 of the Learned Assessing Officer, for the Assessment Year (A.Y.) 2020-21 passed in compliance to directions vide F.No.257/DRP-2/Bang/2023-24 dated 26.06.2024 of the Ld.DRP.
2. At the outset, there is a delay of 160 days in filing the appeal before this Tribunal. The Assessee has filed an affidavit adducing the reason that due to change in administration, there was a delay in filing the appeal. After hearing both the parties, we are of the view that the Assessee has adduced sufficient reason/cause for delay in filing the appeal and therefore we condone the delay in filing the appeal and adjudicate the same on the basis of grounds of appeal raised.
3. Ground No.1 is general in nature and no specific argument has been raised for these grounds by the Ld.AR. Hence, Ground No.1 of the Assessee does not call for any adjudication.
4. Ground No.2 is in relation to transfer pricing adjustment of Rs.7,96,238/-towards reimbursement of expenses.
5. The Ld.AR contended that the Assessee is engaged in the sale, manufacturing, and trading of power backup and power conditioning products, including Stabilizers, Transformers, UPS (Single and Three Phase), Inverters, Solar Power Generating Systems, Active Harmonic Filters, Industrial Drives. These products are sold and serviced across India. During the year under consideration, for the purpose of administrative convenience the Assessee incurred certain expense of Rs.97,45,873/- such as air tickets, hotel accommodation, cabs etc. for its Associated Enterprise (AE) – Fuji Electric Co. Ltd. These expenditure were in the nature of reimbursement and therefore the Company recovered these costs from AE on cost-to-cost basis. The invoices were also submitted before the Transfer Pricing Officer (TPO) and he has noted in his Order u/s.92CA(3) of the Income-tax Act, 1961 (‘the Act’) dated 31.03.2020 that on verification of the details it is submitted that each transaction involves performance of multiple functions like booking of Air Tickets, hotel accommodation, Cabs etc. and arranging video shoot, stall design etc., for the events conducted at 6 major cities in India. The TPO did not agree with the contention of the Assessee and held that certain mark-up should be attributed. Accordingly, the TPO carried out search and identified 7 comparables and worked out mark up of 8.17 % leading to adjustment of Rs.7,96,238/-. The DRP upheld the adjustment proposed by the TPO.
6. The Ld.AR contended that the expenses to third party in connection with the marketing event conducted by the AE was met by the Assessee for the sake of convenience and claimed as cost-to-cost reimbursement. The Assessee is a full-fledged manufacturer and it did not carry on marketing event/activity for the AE and no value additions were made by the Assessee to its AE. Hence, no service element was involved in the subject international transaction warranting a mark-up.
7. Per contra the Ld.DR contended that reimbursement of expenses is a separate international transaction and therefore it resulted in passive rendition of service to the AE warranting mark-up.
8. After hearing both the parties and considering the material on record, we observe that the AE has engaged third party vendors for organizing marketing events in India and for the sake of convenience, the payments were routed through the Indian entity i.e. the Assessee and later the Assessee has received back the monies spent as reimbursement (cost to cost basis). In our view, the Assessee has not per se rendered any service to its AE except for facilitating the payments. This passive act of the Assessee cannot be construed as rendering any service to the AE and hence it cannot be considered as an international transaction warranting a separate mark-up. Further, as pointed by the Ld.AR, the Assessee’s core business is manufacturing and it is not organizing marketing events, hence the TPO’s action of attributing a mark-up of 8.17% by identifying comparable companies engaged in the business of event organizers is incorrect and unsustainable. Therefore, the amount recovered from the AE relating to the reimbursement of expenses which were incurred on behalf of AE does not require a separate mark-up and hence the adjustment of Rs.7,96,238/- is deleted. Accordingly, this ground of appeal relating to transfer pricing adjustment of Rs.7,96,238/- is allowed.
9. The Assessee has created two provisions in the year end viz.,
1)Provision for Installation and Authorised services: Rs.65,50,563/- and
2)Provision for Sales Commission: Rs.1,85,56,926/-.
10. In the Draft Assessment Order, the AO has disallowed the same on the ground that provision is not allowable as per the Act. Aggrieved, the Assessee filed objections before DRP. The DRP sustained both the additions made by the AO on the premise that year end provisions without payment of TDS are not allowable. Against the final assessment order, now the Assessee is agitating both the aforesaid issues before us and the Ld.AR submitted as under:
“Background of Business Operations
• The Appellant is engaged in the manufacture, sale, and trading of power backup and power conditioning products, including Stabilizers, Transformers, UPS (Single and Three Phase), Inverters, Solar Power Generating Systems, Active Harmonic Filters, and Industrial Drives. These products are sold and serviced across India, necessitating various operational expenditures.
Nature of Provisions
(a) Provision for Authorized Service Provider Charges – Due to the technical nature of the products and geographically widespread customer base, the Appellant engages Authorized Service Providers (ASPs) to handle Installation, Preventive maintenance, Repairs and replacements. These ASPs operate across geographies and incur expenses while servicing customers. Given the logistical challenges and time lags in receiving invoices from distant locations, the Appellant creates year-end provisions for services rendered during the financial year, even if invoices are received in the subsequent period.
(b) Provision for Sales Commission – To support its pan-India operations from limited bases (Chennai, Pune, Mumbai), the Appellant relies on services of referrers who generate sales leads. Upon successful conversion of a lead into a sales order:
– The Appellant becomes liable to pay commission to the referrer.
– A provision is created at year-end for such commissions.
– Actual payment is made only after the customer settles the invoice, ensuring prudent financial management.
Accounting Treatment
• The Appellant follows the mercantile system of accounting as per Section 145 of the Income-tax Act, 1961, under which:
– Expenses are recognized when incurred, not when paid.
– Year-end provisions are made for expenses relating to the financial year, even if invoices are pending.
– These provisions are reversed upon receipt of actual invoices in the next financial year, and liabilities are booked accordingly.
• This practice is in line with accounting standards and supported by judicial precedents:
• Rotork Controls India (P.) Ltd. v CIT [(314 ITR 62) (SC)]
• Bharat Earth Movers v CIT [(245 ITR 428) (SC)]
Additional Evidence Submitted
• The Appellant on 10.10.2025 along with genuine reasons preventing submission before Assessing Officer, submitted following documents as additional evidence
– Vendor-wise installation charges for which invoices were received in the subsequent financial year, corresponding to provisions accounted for during the FY 2019-20, alongwith copy of such invoices / supporting’s.
– Vendor wise sales commission invoices (covering 81.56% of provision) accounted in subsequent financial year, corresponding to provisions accounted for during the FY 2019-20, alongwith copy of such invoices / supporting’s.
Non-Applicability of Section 40(a)(ia)
• Without prejudice to above, the Appellant submits that the Assessing Officer has not invoked Section 40(a)(ia) of the Act in the assessment Order.
• Even if considered, the disallowance under this section is not applicable due to the following:
• Section 40(a)(ia) applies only in cases of non-compliance with Chapter XVII-B (TDS provisions).
• TDS is not attracted on mere provision entries. Provisions are based on best estimates as of 31 March, and liability crystallizes only upon receipt of invoices.
• As per Section 199, TDS is applicable only when payment is made or credited to a specific payee’s account. Section 199 provides –
“Any deduction made in accordance with the foregoing provisions of this Chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made.”
• No Income Accrual to Payee at Year-End
– Year-end provisions do not result in income accrual to vendors or referrers. Therefore in the absence of income accrual, no TDS liability arises.
– Sections 194C, 194H, 194I, and 194J require TDS only on the income component of payments.
– Since vendors typically raise invoices in the subsequent financial year, income accrues to them only then. Therefore, TDS liability does not arise on year-end provisions.
• Reliance is placed on various judicial precedents supporting that there is no requirement to deduct tax on year end provisions
— Karnataka Power Transmission Corporation (Karnataka HC)
— Lemnisk (P.) Ltd v. DCIT  (Bangalore ITAT)
— Apollo Tyres Ltd. v. DCIT  (Delhi ITAT)
— Dishnet Wireless Ltd. v. DCIT (Chennai ITAT)
— Agreenco Fibre Foam (P.) Ltd.  (Cochin ITAT)
These decisions reinforce that TDS liability arises only when income accrues to the payee.
In view of the above, the Appellant respectfully submits that:
• Provisions for ASP charges and sales commission are legitimate business expenditures allowable under Section 37.
• Disallowance under Section 40(a)(ia) is not warranted.
• Alternatively, if disallowance is contemplated, the expenditure should be allowed in the subsequent year when TDS was deposited. However, the due date for filing a revised return for that year has expired, and the assessment is closed. Any disallowance now would result in permanent disallowance, contrary to legislative intent and equity.”
11. The Ld.DR contended that year end provisions are not allowable and more over it is not established by the Assessee that the provision for installation and authorized services is created on scientific basis except for filing additional evidence before this Tribunal for the very first time and therefore the Ld.DR pleaded that the additional evidence should not be admitted.
12. We have heard the arguments of the rival parties and perused the material on record. For the reasons adduced in the petition for admission of additional evidence we are convinced that the Assessee did not have sufficient time to furnish the same before the lower authorities and therefore we admit the additional evidence filed by the Assessee and hereby adjudicate the case on merits of the issue.
13. Firstly, we are cautious of the fact that these year end provisions are relating to the expense of the subject AY but the Assessee would not have received the invoices and/or initiated the payment. Therefore, these year end provisions are created and then reversed immediately in the succeeding financial year. These accounting treatments are done on the basis of the Accounting Standards prescribed by ICAI to reflect the true and correct picture in the financial statement of a particular year. We are also of the view that year end provisions, other than ad hoc provisions, are allowable as deduction as long as they are reversed in the immediately succeeding financial year. Further, though these provisions are created, the respective parties account is not credited and therefore the question of TDS does not arise. Therefore, we hereby conclude that the year end provisions, other than ad-hoc provisions, are allowable as deduction.
14. Apart from these aspects, we are also of the view that in general ad hoc provision for expenses are not allowable under the Act. However, as long as the provisions for installation and authorized services (which is similar to provision for warranty) and created on scientific basis, the same is allowable as deduction. This issue is no more res integra as it has already been settled by the Hon’ble Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT . Therefore, we hold that the provision for installation and authorized services is allowable as deduction as long as the same is established that it is created on scientific basis. In this regard, we also note that the Assessee has filed additional evidence, which we have admitted and therefore in the interest of justice, we hereby remand this issue to the file of the AO to verify the additional evidence to ascertain whether the provisions are created on scientific basis and if his finding is in the affirmative, the same should be allowed as a deduction. Accordingly, these grounds of appeal in relation provision for installation and authorized services and provision for sales commission are allowed in principle however, for the limited purposes of verification of additional evidence the matter is remanded to the AO. Thus Ground nos. 3 & 4 are partly allowed for statistical purposes.
15. Ground no.5: Erroneous computation of book profits.
15.1 The Ld.AR contended that the Assessee had book losses but the AO while passing the Final Assessment Order in the Computation Sheet has erroneously computed book profit of Rs.18,16,055/-. We find that the issue has emerged post DRP directions, we hereby direct the AO recompute the book profits u/s.115JB of the Act in accordance with law.
16. Ground No.6: Levy of ad hoc interest of Rs.21,248/-.
16.1 The Ld.AR contended that the AO has levied ad hoc interest in the computation sheet erroneously. Therefore, we direct the AO to verify the same while passing the giving effect order and compute the same in accordance with law.
17. Ground No.7: Reasonable opportunity:
17.1 Since the additional evidence is admitted and the main issues are remanded back to the AO, the grievance of the Assessee is effectively addressed and as such there is no necessity to deal with this ground separately.
18. Ground No.8: Levy of penalty: We find this ground is consequential and it does not separate adjudication.
19. In the result the appeal of the Assessee is partly allowed for statistical purposes.