Ind AS 115 | Principal vs Agent in High Sea Sale Transactions

1. Question

India Tech Industries Limited hereinafter referred to as “the company” is engaged in the business of importing and distributing machinery components. The company entered into CIF agreement with Aussie Tech Inc., an Australian manufacturer of specialised automotive parts for supply of transmission modules. As per the agreement, the Aussie Tech dispatched a consignment of transmission modules from the port of Sydney on 12th April 2025, with the shipment expected to arrive at the port of Chennai later that month.

While the goods were still in transit and had not yet entered Indian territorial waters, the company negotiated a high sea sale with Meta Drive Engineering Limited, an Indian manufacturing company. The company executed a high sea sale agreement in favour of Meta Drive and endorsed the bill of lading, thereby transferring title and risk to Meta Drive during the voyage itself. Thus, after such high-sea sales Meta Drive has got full responsibility for customs clearance and post-arrival obligations.

Despite transferring the goods in transit, the company remained contractually bound to pay Aussie Tech under the original purchase contract, even if Meta Drive defaulted. This obligation exposed the company to credit risk, as its liability to the supplier continued irrespective of Meta Drive’s payment timing. Further, the company faced a form of inventory risk during the transit period because, until the high sea sale agreement was executed and accepted by Meta Drive, the company bear the commercial risk associated with identifying an alternative buyer. The company also asserts that it had complete discretion to determine the resale price in the high sea sale to Meta Drive and hence it earned a trading margin rather than a commission.

However, the management of the company is of belief that the company acted as an agent in the aforesaid transaction as it did not handle logistics, insurance, or customs obligations, all of which were passed on directly to Meta Drive. Moreover, the company never took physical possession of the goods. Thus, the company’s role was merely of arranging procurement rather than fulfilling a substantive performance obligation.

Based on the commercial substance of the transaction and the extent of inventory risk, credit risk, control over goods, and pricing discretion, whether the company should be treated as a principal or an agent for revenue recognition purposes under Ind AS 115?

2. Relevant Provision

Ind AS 115 – Revenue from Contracts with Customers

Para B34 of Ind AS 115

When another party is involved in providing goods or services to a customer, the entity shall determine whether the nature of its promise is a performance obligation to provide the specified goods or services itself (ie the entity is a principal) or to arrange for those goods or services to be provided by the other party (ie the entity is an agent).

Para B35 of Ind AS 115

An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. However, an entity does not necessarily control a specified good if the entity obtains legal title to that good only momentarily before legal title is transferred to a customer…..

Para B36 of Ind AS 115

An entity is an agent, if the entity’s performance obligation is to arrange for the provision of the specified good or service by another party. An entity that is an agent does not control the specified good or service provided by another party before that good or service is transferred to the customer. When (or as) an entity that is an agent satisfies a performance obligation, the entity recognises revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified goods or services to be provided by the other party. An entity’s fee or commission might be the net amount of consideration that the entity retains after paying the other party the consideration received in exchange for the goods or services to be provided by that party.

Para B37 of Ind AS 115

Indicators that an entity controls the specified good or service before it is transferred to the customer (and is therefore a principal) include, but are not limited to, the following:

(a) the entity is primarily responsible for fulfilling the promise to provide the specified good or service. This typically includes responsibility for the acceptability of the specified good or service…

(b) the entity has inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer…

(c) the entity has discretion in establishing the price for the specified good or service. Establishing the price that the customer pays for the specified good or service may indicate that the entity has the ability to direct the use of that good or service and obtain substantially all of the remaining benefits…