1.11     Query

Treatment of commission earned by a consignee

in the profitand loss account

1.Company ‘A’ is acting as a consignment agency of company ‘B’. At no point of time title of all goods passes to the consignee. The consignor gives commission to the consignee on the total sales effected by it. Bills are raised by the consignee in the names of the customers on behalf of the consignor. In terms of the consignment agreement- the nomenclature/legend “on consignment sale-account company B” appears on all bills issued by the consignee who collects the proceeds from the customers and transfers the same to the consignor.

2.The querist has informed that the agreement explicitly states that-

(i)         the agreement is a consignment agreement by reason of which there is no sale of goods supplied by the consignor to the consignee and for any reason if any sales tax liability arises on such deliveries, the same will be reimbursed to the consignor, and

(ii)        the consignee shall be responsible to recover and pay the sales tax/CST to the concerned authorities.

3.The consignee is getting itself assessed with Sales Tax Department in its own name as a dealer, dealing in the items sold on behalf of the consignor.

4.The querist has sought the opinion of the Expert Advisory Committee as to which of the following alternatives are in accordance with the provisions of the Companies Act, 1956 for the disclosure of consignment sale in the profit and loss account of the consignee and the Committee may cite cases on the subject, if any:

(i)         whether only the gross commission earned by the consignee should be shown on the credit side of the profit and loss account (as received/receivable from the consignor); or 

(ii)        the consignee can show on the credit side of the profit and loss account. Gross consignment sales effected by it and on debit side ‘amount paid/payable in respect of sale of goods on consignment account.’

                                       Opinion                                  May 7, 1986                                                 

1.The Committee notes that Accounting Standard 9 on Revenue Recognition issued by the Institute of Chartered Accountants of India states in the definition of the term “revenue” that “in an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivable of other consideration.”

2. The Committee is therefore of the opinion that alternative (i) indicated by the querist in para (4) above i.e. the gross commission earned by the consignee should be shown on the credit side of the profit and loss account for the purpose of the provisions of the Companies Act, 1956. This is because the goods are sold on behalf of the consignor and the bills are also raised on behalf of the consignor. In the opinion of the Committee, the payment of sales tax by the consignee is not relevant for the purpose of disclosure of gross commission in the profit and loss account of consignor.

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