2013 (11) TMI 193 - AT - Income Tax

Arm s length price - Transfer price adjustments - Characterization of Business Benefit of Section 92C(2) - Nature of Assessee Service provider or Not Entitlement of Commission - Ordinary Commission Agent or Distributor - 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 The agreement between the assessee and the Associated Enterprises indicated that the assessee was a distributer of the Associated Enterprises - Held that - The assessee cannot be categorized as distributer but as a service provider only - Moreover in subsequent order of the Transfer Pricing Officer for A.Y. 2006-07 had held assessee as commission agent in similar set of facts which justify the view of CIT(A) on the issue in the year under consideration - Though every assessment year was independent assessment year for the purpose of taking any legal view on taxation, but cardinal principle of interpretation was that consistency should not be disturbed unless facts and circumstances are different - On the proper analysis of the assessee s functions, the CIT(A) was justified in holding that assessee was not a distributer but a service provider alone and entitled for commission on service provided by it - The reasoned factual finding of the CIT(A) needs no interference. The characterization of the assessee not as a distributor but as a service provider was also confirmed in the subsequent order of the Transfer Pricing Officer for the AY 2007-08 - appellant was not found a distributor but as a service provider by the CIT(A) - The CIT(A) held that the Transfer Pricing Officer was wrong in changing the Profit 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 was not tainted by any related party activity - Therefore, the correct Profit Level Indicator was Operating Profit/Total Cost - In normal circumstances, a trader carries inventory risk and stores the goods for future sale - A trader also carries the risk of goods being unsold - The appellant does not carry any such inventory risk, since it does not maintain any stock for resale purposes. The commission was calculated based on the sale proceeds in India and the cost to the Associated Enterprises - The Associated Enterprises was well within its right and also based on commercial principles to source the supply of furniture from anywhere - In case Associated Enterprises had sourced the supply of furniture from its own related entities namely Haworth Furniture Shanghai Company Ltd. (China) or Haworth Australia or Haworth Holland as mentioned by the Transfer Pricing Officer. It does not change assessee from commission agent to distributor - The agreement does not bar in any way such transactions between the group entities. The facts as categorically mentioned by the Transfer Pricing Officer that the goods were directly shipped from the group companies to the buyers in India makes the point more clear that the assessee was not a distributor, it was only a facilitator for such transactions and for which it receives commission - Decided against Revenue.

Summary

Issues Involved:
1. Characterization of the assessee's business.
2. Entitlement to commission under the proviso to section 92C(2).
3. Determination of the correct Profit Level Indicator (PLI).

Issue-wise Detailed Analysis:

1. Characterization of the Assessee's Business:
The primary issue was whether the assessee should be characterized as a service provider or a distributor. The Revenue argued that the assessee was a distributor of the Associated Enterprises (AE), while the assessee claimed to be a service provider entitled to commission. The Transfer Pricing Officer (TPO) concluded that the assessee was a distributor because the furniture sold in India was procured from group concerns abroad, and the assessee was entitled to sales commission based on the price difference between Indian customers and AE procurement prices.

However, the CIT(A) and the Tribunal found that the assessee was indeed a service provider. The CIT(A) observed that the terms of the market and project management agreements clearly indicated that the assessee was entitled to commission, and the foreign entity directly made sales to Indian customers, collecting proceeds directly. The sales proceeds did not pass through the assessee's books, and the assessee was not responsible for customer payments to the AE. The Tribunal upheld this view, noting that the assessee facilitated transactions and received commission, confirming the assessee's role as a service provider.

2. Entitlement to Commission Under Proviso to Section 92C(2):
The assessee's entitlement to commission was based on agreements with the AE. For the period from April 2003 to December 2003, the assessee was entitled to 85% of the difference between the price paid by Indian customers and the procurement price by Haworth Singapore. From January 2004 to March 2004, the commission was 98.5% of the price paid by Indian customers less the procurement price by Haworth Singapore. The TPO calculated the sales of the Singapore entity and treated it as the assessee's sales figure, arriving at an Arm's Length Price (ALP) based on TP/sales of comparables.

The CIT(A) held that the assessee was entitled to commission as a service provider, not a distributor. The Tribunal upheld this, emphasizing that the assessee's role as a facilitator for transactions and the commission structure supported the characterization as a service provider.

3. Determination of the Correct Profit Level Indicator (PLI):
The TPO had changed the PLI from Operating Profit/Total Cost (OP/Cost) to Operating Profit/Sales (OP/Sales). The CIT(A) disagreed, stating that the income of the assessee was from commission, and the cost base was not influenced by related party activity. Therefore, the correct PLI was OP/Cost.

The Tribunal supported the CIT(A)'s decision, noting that the assessee's income was commission-based, and the cost base was appropriate for determining the PLI. The Tribunal found the CIT(A)'s reasoning sound and upheld the use of OP/Cost as the correct PLI.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s findings that the assessee was a service provider entitled to commission and that the correct PLI was OP/Cost. The Tribunal emphasized consistency in interpretation and upheld the CIT(A)'s reasoned factual findings. The appeal was pronounced dismissed in open court on 27/02/2013.