INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD
I.T.A. No. 3120/Ahd/2010 – Assessment Year : 2006- 07
Mastek Limited Vs. The Addl. CIT
Date of Pronouncement : 29/02/2012
ITAT that the taxpayer’s UK subsidiary was not merely undertaking marketing activities. The Tribunal held that the UK subsidiary should be characterized as a distributor on the basis of its agreement with the taxpayer, selling efforts, market and credit risks and overall business strategies. Furthermore, the Tribunal held that the reward has to be determined with regard to return on sales rather than a mark-up on value added expenses (marketing and selling expenses).
Tribunal relied on international transfer pricing guidance to determine the appropriate characterization and rewards of a distributor vis-a-vis a mere marketing service provider. In relying inter alia on the distribution agreement to reach its conclusion, the Tribunal has also reiterated an important principle earlier upheld by the Delhi Tribunal in the case of Sony India Pvt. Ltd4. that the contractual terms of an agreement should be given due consideration as long as the terms are consistent with the economic substance of the transaction.
In another recent ruling issued by the Ahmedabad Tribunal in the case of AIA Engineering Ltd., the Tribunal had taken cognizance of inter-company agreements, detailed functions and risks of that taxpayers’ UAE subsidiary to conclude that the subsidiary was a distributor and not merely a marketing service provider.
The above principles have wide applicability to distributors of goods and services. Taxpayers engaged in distribution and sales activities for their group entities should review their facts such as agreements, employee functions, remuneration and business strategies that would be scrutinized to determine their characterization and arm’s length rewards.