Dell Products vs. Tax East (Norway Court of Appeal)

Dependent Agent Permanent Establishment: Tests to determine Agent’s right to bind, & dependence on, principal

The assessee, a company registered in the Netherlands but resident in Ireland for tax purposes appointed Dell AS, a Norwegian company, as its “commissionaire” for sales to customers in Norway. Dell AS entered into agreements in its own name and its acts (under the commission agreement and Commission Act) did not bind the principal. The assessee claimed that it was not taxable in Norway in respect of the products sold through Dell AS on the ground that Dell AS was not its “Dependent Agent Permanent Establishment” (DAPE) under Article 5(5) of the Norway-Ireland DTAA on the ground that (a) the agent had no authority to enter into contracts “in the name of the assessee” and legally bind the assessee and (b) the agent was not a “dependent” agent. However, the income-tax department took the view that Dell AS constituted a PE under Article 5(5) of the DTAA and that 60 percent of Dell Products’ net profit on sales in Norway was attributable to the PE. This was confirmed by the Oslo District Court. On appeal by the assessee to the Court of Appeal, HELD dismissing the appeal:

(i) Under Article 5(5) of the DTAA, an agent is considered a permanent establishment for the principal if two conditions are fulfilled (i) the agent must be “dependent” on the principal and (ii) the agent must have the right to conclude contracts “in the name of” the principal. The question whether the agent has the authority to conclude contracts on behalf of the enterprise has to be considered, not from a literal sense whether the contracts are “in the name of the enterprise”, but from a functional sense whether the agent “in reality” binds the principal. The objective of Article 5 (5) is to protect the principle of source taxation, i.e. that the tax shall be due to the country where the revenue was created. This principle would be disregarded if only the commission relationship was considered despite the financial and legal attachment between the agent and the principal being strong. To ask if Dell AS “in reality” binds Dell Products is in accordance with the functional interpretation of Article 5 (5). The “substance” must prevail over the form. The fact that a commissionaire under the Commissionaire Act and the commission agreement does not bind the principal through his sales is not enough to rule out that a permanent establishment does not exist (Vienna Convention, OECD Model Convention Commentary, Commentaries by Klaus Vogel & Arvid Skaar considered, decision of the French SAT in Zimmer that as the commissionaire did not bind the principal, it was not a PE despite dependence on the principal not followed);

(ii) On facts, Dell Products was “in reality” bound by the contracts concluded by Dell AS because (a) all sales were made under the trademark “Dell”; (b) the sales were made on standard / approved conditions laid down by Dell Products; (c) in practice, all of the agent’s agreements were honoured by the principal and (d) there were no instances where the agent’s sales have not been accepted by the principal;

(iii) The question whether the agent is “dependent” on the principal has to be decided on the application of various tests such as the degree of instruction and control. On facts, Dell AS was “dependent” on Dell Products because (a) Dell AS was only allowed to sell permitted products on conditions of prices and guarantees determined by Dell Products, (b) there was an overlap of board members in the two companies and a board member of Dell Products was the general manager of Dell AS, (c) due to the integrated accounting system of the Dell companies Dell Products had full insight to the finances of Dell AS, (d) under the commission agreement, Dell Products had access to Dell AS’ premises, (e) Dell AS sold goods as a commissionaire only on behalf of Dell Products though it had the theoretical right to sell for others; (f) all business of Dell AS was done under the trademark Dell, its letterheads, agreements and advertisements had the logo “Dell”. Dell AS was thus “branded” identically as the rest of the Dell Group, but without owning the brand. All these facts made Dell AS fully dependent on the principal. Without the commission agreement, Dell AS may as well close down its operations. The fact that the agent acted independently in matters of staff hire, purchase and lease of assets and premises, etc was irrelevant because the “big picture” showed Dell AS to be dependent on Dell Products;

(iv) The determination of profits “attributable” to the PE has to be done as if the agent was “independent” of the principal. On the methods to be used, Article 7(2) of the DTAA provides for the “direct method” of allocating all costs and revenue between the HO and the PE while Article 7(4) provides for the “indirect method” of allocating only the net profits using keys such as sales, revenues, expenses, number of employees, capital structure or a combination of these factors. In Norway, the “indirect method” is in practice. This is practical because the accounts do not permit individual items of income and expenditure to be identified for allocation purposes and also because it gives a result which is in accordance with the arm’s length principle. While under Article 7(2), a two-step procedure has to be adopted by first determining a commercial remuneration for Dell AS and then a commercial profit for other functions performed by the PE, under Article 7(4) it is sufficient that the result to a reasonable degree corresponds to the arm’s length principle and requires that the PE should be allocated revenues in accordance with its functions, risk and assets used. On facts, the value creation occurred through sales made by Dell AS and it was “the major value driver”. Dell Products’ functions and contribution to the value creation was limited compared to the activity of Dell AS. Consequently, allocating 60% of Dell Products’ profits from sales in Norway to the PE was reasonable (over & above the assessment of commission in the agent’s hands).