Substance over form in distribution agreements: sole selling arrangements may constitute agency, not vendor-purchaser relations.

A distribution arrangement is characterised by the substance of the agreement, not by invoice form or tax collection practice. Where a sole selling intermediary forwards orders for the manufacturer, issues invoices on the manufacturer's behalf, earns commission, and assists in recovery of sale proceeds, with the manufacturer retaining control over prices, discounts and enforcement of claims, the relationship is one of principal and agent. The intermediary does not become a purchaser buying goods for resale on its own account merely because invoices are issued in its name and sales tax is collected by it. On these terms, the agreement was held to create agency, not a sale.

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Issues: Whether, on a proper construction of the agreement dated 1 January 1964, the relationship between the applicant and its sole selling agent was that of principal and agent or vendor and purchaser.

Analysis: The agreement described the intermediary as sole selling agent, required it to forward orders with advances, authorised it to issue invoices on behalf of the manufacturer, fixed its remuneration by way of commission, and empowered it to take steps for realisation of sale proceeds and to sue in the manufacturer's name if the purchaser defaulted. The controlling terms concerning prices, discounts, collection of proceeds, and enforcement of claims showed that the agent acted for the manufacturer and did not buy the goods for resale on its own account. The mere fact that invoices were issued in the agent's name and sales tax was collected by it was not decisive, since the legal relationship had to be gathered from the agreement itself.

Conclusion: The relationship was that of principal and agent and not vendor and purchaser. The answer to the referred question was therefore in the negative and in favour of the assessee.

Ratio Decidendi: The true relationship between parties to a distribution arrangement is determined by the substance of the agreement, and where the intermediary sells on behalf of the manufacturer for commission with the manufacturer retaining control over the sale process and realisation of price, the arrangement is one of agency and not sale.

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