Norwegian tax ruling – A change ‘agent' for India?

International tax jurisprudence is increasingly influencing tax settlements in India. A globalised, wired world also poses challenges to traditional taxation conventions, many of which date back to an era of physical goods and onsite services.

The role of international jurisprudence in interpreting tax matters in Indian courts is clearly brought out in the case of CIT vs. Visakhapatnam Port Trust (144 ITR 146), where the Andhra Pradesh High Court made the following observation: “Any person interpreting a tax treaty must now consider decisions and rulings worldwide relating to similar treaties. The maintenance of uniformity in the interpretation of a rule after its international adaptation is just as important as the initial removal of divergences.”

Subsequent rulings, including the Supreme Court's decision in the Azadi Bachao Andolan case as well as the Vodafone case, have relied on decisions of the UK's House of Lords in interpreting Indian tax provisions.

In this context, a recent ruling by the Norwegian Supreme Court on ‘dependent agent permanent establishment' calls for attention.

The Rationale of dependence

A permanent establishment sets threshold limits for triggering taxation in the source country. The rationale for taxing a foreign enterprise as an ‘Agency PE' in the source State is that it can choose to either conduct the business on its own or through a domestic agent.

The OECD model recognises an agent as PE if he is dependent on the principal and habitually concludes contracts on behalf of the principal.

India's tax treaties mostly adopt a similar approach in determining whether a foreign enterprise is taxable in India on account of activities carried out by an agent.

The challenge is in determining whether, first, the agent is dependent, and second, the agent has the authority to conclude contracts ‘on behalf of' the principal. Finally arises the question of profit attribution to this form of PE.

The relevant tax treaty would help determine whether an agent is dependent or not. For example, under the India-France treaty for avoidance of double taxation, even if an agent is wholly or almost wholly dependent on the foreign enterprise, he would still be treated as independent if the transactions with the principal are at arm's length.

Also, under many tax treaties, the right of the dependent agent to conclude contracts on behalf of the principal is an additional requirement for establishing Agency PE.

The Norwegian ruling

The Norwegian Supreme Court has analysed how the terms ‘on behalf of' and ‘has authority to conclude contracts in the name of' should be understood with reference to the Agency PE clause of the Norway-Ireland tax treaty.

The ruling has therefore reverted to the primary question of whether an agent had the ‘right to conclude contacts on behalf of' the principal. In the recent case cited earlier, a company registered in the Netherlands but resident in Ireland (for tax purposes), appointed a Norwegian company as its ‘commissionaire' for sales to customers in Norway.

The commissionaire entered into agreements in its own name.

It is interesting to note that as per Norwegian domestic law, an agreement between a commissionaire and a third party is not legally binding on the principal.

Norwegian tax authorities adopted a functional approach and asserted that contracts entered into by the commissionaire were ‘in reality' binding on the principal; consequently, a PE was created in Norway.

The Supreme Court, however, based its judgment on the extant wordings of the tax treaty and ruled that ‘authority to conclude contracts on behalf of' indicated that the contracts must be legally binding on the principal for a PE to be created.

Relevance in India

If a subsidiary in India carries out agency functions for its parent but enters into contracts independently bearing all associated risks and losses, there appears to be a strong case that an Agency PE would not be created.

Therefore, any question of attribution would be merely theoretical. An obvious conclusion, however, would be that an associated enterprise status could lead to differential benchmarking from other subsidiaries of multinational companies that act as limited risk distributors.

A host of Agency PE rulings in India, beginning with the DHL case to the more recent SET Satellite, Rolls-Royce and BBC rulings, have dwelt on this issue from a functional perspective rather than a contractual one.

It is therefore interesting to watch how a civil law jurisdictional Supreme Court decision would have a bearing on any common law interpretation.

(The author is Executive Director — Tax and Regulatory Services, PwC India.)

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