TaxTMI 
TaxTMI 
2013 (11) TMI 193
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....k of the full fledged distributorship including the credit risk. 3. For these and such other reasons as may be urged at the time of hearing, the order of the Ld. Commissioner of Income-tax (Appeals) may be vacated and that of the Assessing Officer be restored. 2. Main issue relates to the characterization of the business of the assessee and benefit under proviso to section 92C(2). The assessee stated that it is a service provider whereas the Transfer Pricing Officer has treated it as a distributor. As per the Transfer Pricing study, the assessee is a service provider and earned commission income from its Associate Enterprises based on the agreement between assessee and its Associated Enterprises. The commission was treated as International Transaction under the head provision of marketing and installation services. Haworth is the leading modular furniture manufacturer. The group's headquarter is in USA. It has offices, showrooms, dealers and manufacturing facilities around the world. The group is divided primarily into three regions, the Americas, Europe and Asia Pacific Region. Most of its products and designs are patented. The multinational giant entere....
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....w Plast Ergonomics Ltd. 3. Godrej & Boyce Mfg. Co. Ltd. (Segmental) 4. Maxima Systems Ltd. (Segmental) 5. Mercury Manufacturing Co. Ltd. 6. Shakti Met-Dor Ltd. 3. Operating Profit/Operating Cost was taken as Profit Level Indicator (PLI) and Transactional Net Margin Method (TNMM) was chosen as a Most Appropriate Method. The Transfer Pricing Officer in his order has come to the conclusion that assessee is a distributor of furniture produced by Haworth group companies. The reason for arriving at this conclusion by the Transfer Pricing Officer is that furniture sold in India are procured from the group concerns itself from abroad. As per the clauses of the agreement, the assessee is entitled for sales commission at the rate of 85% of the difference between the price paid by the Indian customers and the price at which the products are procured by the AE. The Transfer Pricing Officer has provided the following reasons to come to the conclusion that the assessee is a distributor. The relevant para is reproduced below : "Vide submission dated 22.1.2006 a few sa....
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....his, the Transfer Pricing Officer calculated the sales of Singapore entity as Rs. 32,58,78,454/- and treated this figure as the assessee's sale figure and arrived at the Arm's Length Price of the international transaction at the rate of 8.6% based on the TP/ sales of the comparable. The PLI was changed to OP/Sales as against OP/Cost maintained by the Transfer Pricing study. The Transfer Pricing Officer recalculated OP/Sales of the assessee. While doing so Rs. 21,46,081/- representing liability written back in P&L account was not considered as an operating profit by the Transfer Pricing Officer. 8. The contention of the assessee had been as under: "At the outset, we submit that the TPO has grossly erred in re-characterising the appellant as a distributor, in respect of its service related activities. The re-characterisation is based on arbitrary notions and is not in any way a measure of the actual affairs. The TPO has failed to appreciate the differences in the two activities, and consequently issued an order which is devoid of commercial logic. This is clearly evident from the fact that the Revenue has acceded to the appellant's....
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..... However, these functions of installation & commissioning and clearing & forwarding are incidental activities, meant to facilitate the key activity of marketing the products of Haworth Group in India. Further, these are not performed by the appellant directly, but through agents/sub-contractors appointed for this purpose. Moreover, the activities of installation and clearing and forwarding are performed by the appellant purely as a customer service. If the appellant were to refuse to perform these activities, then there would be a likelihood of loss of business, resulting in reduced commission income for the appellant. Accordingly, from the appellant's perspective, it would be justifiable to incur expenses on clearing, forwarding and commissioning, if the commission income earned is adequate to cover these expenses, and provide a net margin comparable with industry standards. Mere carrying out of certain lateral functions would not mean that the basic characterization of the appellant changes to that of a trader. The trading activities conducted by the appellant are incidental to the main activities of provision, of marketing ser....
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....ustomers of Haworth Singapore. The purchase orders in respect of such contracts also are sent by the customers directly to Haworth Singapore for execution, without the appellant being involved. These points and even the functional conduct of the appellant confirm the fact that Haworth Singapore has authority to conclude the contracts and not the appellant. Therefore, the main function of a trader, i.e. conclusion of contracts with customers is missing in the functional profile of the appellant. * Provision of warranty/product risk A trader is responsible for claims against the goods sold to the customers. Clause IV of the inter-company agreement fixes the responsibility arising out of claims from Haworth Singapore's contract with Indian customers to Haworth Singapore. Thus, Haworth Singapore would be liable for all claims of warranties, etc. towards its Indian customers and the appellant would not be liable for the same. * Inventory risk In normal circumstances, a trader carries inventory risk and stores the goods for future sale. A trader also carries t....
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....rovider, the appellant bears the credit risk only to the extent of the commission income accrued on the respective sales. The credit risk of the entire sale price recoverable from final customer is borne by Haworth Singapore. Another essential characteristic of a distributor is absent from the activities carried out by the appellant." 9. The CIT(A) having considered the same, observed that as per the market and project management agreement dated 01.01.2002 as well as 01.01.2004 the terms and condition governing the transaction between the assessee and Associated Enterprises mentions clearly that the assessee is entitled for commission. The foreign entity directly makes the sale to Indian customers and collects the proceeds directly. This fact was found to be undisputed. The sale proceeds of the foreign entity i.e. Associated Enterprises does not pass through the books of accounts of the assessee. As per the liability clause of the agreement, it is clear that the assessee is not responsible for the payment from the customers to the Associated Enterprises. The bills are not raised by the assessee on Indian customers for the sales made by Associated Enterprises. Therefore, the sales....
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....t Level Indicator (PLI) from Operating Profit/Total Cost to Operating Profit/Sales because the income of the assessee is from the commission and the cost base is not tainted by any related party activity. Therefore, the correct Profit Level Indicator is Operating Profit/Total Cost. 10. Same has been opposed before us. The Ld. Departmental Representative submitted that the CIT(A) grossly erred in holding the assessee as a service provider and thus entitled to commission whereas the agreement between the assessee and the Associated Enterprises indicated that the assessee was a distributer of the Associated Enterprises. The CIT(A) also erred in not appreciating the fact that the assessee was not an ordinary commission agent of the Associated Enterprises but a distributor of the Associated Enterprises undertaking the task of installing and commissioning the service of Associated Enterprises and thereby assuming all the normal risk of the full fledged distributorship including the credit risk. Accordingly the order of the CIT(A) be set aside and that of the Transfer Pricing Officer on the issue be restored. On the other hand, Ld. Authorised Representative supported the order of the CIT....
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....ile Haworth India undertakes minimum value addition activity and is in marketing and installation services, companies that provide similar services or those that undertake similar business was accepted since these companies would undertake similar functions. So far as manufacturers are concerned, the level of warranty and credit risks assumed by Haworth India would be much less than the risks borne by these independent manufacturers. Based on these search criteria, the assessee has selected six companies as comparable companies from the publically available database as mentioned in para 3 above. Operating Profit/Operating Cost was taken as Profit Level Indicator (PLI) and Transactional Net Margin Method (TNMM) was chosen as a Most Appropriate Method. However, the Transfer Pricing Officer did not agree with same and came to the conclusion that assessee is a distributor of furniture produced by Haworth group companies. The reason for arriving at this conclusion by the Transfer Pricing Officer is that furniture sold in India are procured from the group concerns itself from abroad. According to the Transfer Pricing Officer, as per the structure of the agreement, the assessee is entitle....
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....he proceeds directly. It is undisputed that the sale proceeds of the foreign entity i.e. Associated Enterprises does not pass through the books of accounts of the assessee. As per the liability clause of the agreement, it is abundantly clear that the assessee is not responsible for the payment from the customers to the Associated Enterprises. The bills are not raised by the assessee on Indian customers for the sales made by Associated Enterprises. Therefore, the sales made by the Associated Enterprises cannot be treated as sales made by the assessee. The books of accounts are audited and the Assessing Officer had concluded the assessment based on the audited accounts of the assessee. The books of accounts were not rejected by the Assessing Officer. The agreement as analysed by the Transfer Pricing Officer mentioned the method of calculation of the commission to be earned by the assessee. The Transfer Pricing Officer has not able to clarify the fact that the related parties or the group entities only are shipping furniture to Indian customers directly has a bearing on the issue of characterization of the assessee as a distributor. As per the agreement, the Associated Enterprises, i.....