09 July 2015

Commissions paid by manufacturer to related exporter - Inclusion in export price

European Union’s General Court has upheld the downward adjustment to the export price in respect of commissions paid by the manufacturer to its exporter. The applicant-manufacturer here was of the view that they and the exporter (Singaporean entity) formed a single economic entity and that, consequently, there was no need to carry out any downward adjustments in export price to the EU. The council here though did not dispute existence of common control but had denied presence of single economic entity. The dispute involved imports of certain fatty alcohols and their blends originating in India, Indonesia and Malaysia.

Noting that such an entity can be found to exist only if the functions carried out by the related trader are similar to those of an internal sales department, the court also rejected the plea of presence of single economic entity. Observing that overall functions carried out by the related trader in the marketing and export of not only the concerned product but other products as well, both within the group and in its relations with independent third party producers, have to be examined, the court rejected the plea of single entity noting that overall activities of the related exporter were based to a significant extent on supplies from unrelated undertakings and hence same cannot be considered as internal sales department.

The court, on 25-6-2015, for this purpose also held that existence of such written contract between the manufacturer and the exporter also demonstrates that the relationship between them is organised on the basis of normal commercial conditions as distinguished from other related companies between which any payment of commissions is based only on a series of verbal agreements.

Relevant clauses of the agreement between the two were also considered by the court in this regard to deny existence of single entity and while rejecting the plea that written agreement is necessary for the purposes of governing transfer pricing between related parties and complying with the recommendations of the Organisation for Economic Co-operation and Development (OECD) on transfer pricing. Further, functions carried out by the exporter were found to be similar to those of an agent working on a commission basis and hence applicability of provisions of Article 2(10)(i) of the EU’s Basic Regulation were found to be correct. The court also rejected the plea that similar adjustment to the normal value was also required.


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