TMI Blog2013 (11) TMI 193X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 entered the Indian market through a 100% subsidiary named Haworth (India) Private Limited which was incorporated on November 24, 1997, with its registered office at New Delhi. The company is a subsidiary of Haworth Inc., USA. It provides marketing and installation support services to Haworth Furniture (Thailand) Co. Ltd. (Haworth Thailand) and Haworth Singapore Pte. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 sample invoices have been filed. A bare perusal of the sample invoices so filed revealed that the AE i.e. Haworth Singapore Pte. Ltd. had not procured the goods from any unrelated enterpriser. All the goods were directly shipped from some or the other group companies. It is seen that the goods were directly supplied by either M/s Haworth Furniture Shanghai Company Ltd. (China) or Haworth Australia or Haworth Holland etc. This very fact takes away all the sanctity of the agreement. The grand agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 contentions in the subsequent years, without any material change in facts. The TP order for AY 2006-07, which has accepted the assessee's characterization as a service provider is enclosed for your good self's perusal in Attachment 19 (in pages 497 to 520 of the paper book). Accordingly, we humbly submit that the TPO has erred in characterizing the appellant as a distributor, and this fact has been ratified by the Revenue as well as the Honourable Tribunal for AY 2006-07. The appellant is a service provider and not a distributor. In this regard, our submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses 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 services and form a very small percentage of the sales made in India. Establishment of customer relationships in India facilitates earning of commission income. By undertaking trading activities, the appellant ensures customer relationships and secures a basis to get larger contracts in future, which in turn would help the appellant to earn more commission income. The market for office furniture is quite competitive, and non-fulfillment of customer requirements would only end up in losing the potential customer. The trading activities so carried out are thus complementary to the main activity of providing marketing support services and are meant to facilitate earning of commission income. The market for office furniture is quite competitive, and non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 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. Based on the above, we would like to submit before your good self that the appellant cannot be characterized as a trader for benchmarking purposes, since its core business is that of a marketing service provider. A summary of the differences between the FAR of a distributor and that of the appellant mentioned above, to emphasize on the fact that the appellant is not a full-fledged distributor and accordingly, should be analysed from the perspective of the activities actually undertaken i.e. those of a marketing support service provider. FAR comparison of a distributor vis- -vis the appellant Sr. No. Particulars Distributor The appellant Conclusion 1 Ownership Distributor buys and sells goods on his own behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 and books of accounts were not rejected by the Assessing Officer. The agreement as analysed by the Transfer Pricing Officer mentions the method of calculation of the commission to be earned by the assessee. It is not clear as to how 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. The Transfer Pricing Officer has made a categorical observation that all goods were directly shipped from some or the other group companies. This conclusion of the Transfer P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses 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(A) and submitted that assessee is a service provider whereas Transfer Pricing Officer has wrongly treated it as distributor. 11. According to 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 is treated as International Transaction under the head provision of marketing and installation services. As stated above, Haworth is the leading modular furniture manufacturer having its headquarter in USA and having its 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 above s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 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 Associated Enterprises. Having come to the conclusion that assessee is a distributor, the Transfer Pricing Officer has worked backwards, based on the commission income earned, to arrive at the sale of the Associate Enterprises. The assessee has earned a commission of Rs. 4,76,56,741/-. 12. On the analysis of the agreement between the assessee and Associated Enterprises for the period from April, 2003 to December, 2003, the Transfer Pricing Officer observed that on the orders procured by Haworth India, a commission at 85% of the difference between the price paid by Indian customers and price at which the products are procured by Hawo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icing 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.e., Haworth Singapore Pte. Ltd., was responsible for paying commission to the assessee. The commission is calculated based on the sale proceeds in India and the cost to the Associated Enterprises. The Associated Enterprises is well within its right and also based on commercial principles to source the supply of furniture from anywhere. In case Associated Enterprises has 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. 14. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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