For organising the distribution of goods in foreign countries, agency is the simplest form being used by many multinationals. Therefore, this form of commercial agency is being frequently used for international trade practices. To have agents abroad and to work with them, it is required to have a well drafted agency agreement. In light of different laws applying to different jurisdictions and absent any uniformly applying set of rules in international transactions, it is commonplace to be baffled about what kind of agreement should be drawn while appointing an agent for sale/ distribution of goods or services in a foreign jurisdiction.
This article is aimed to provide preliminary information that may be helpful for Foreign Corporations to appoint an ‘Agent’ in India for selling products in India and also Indian Corporations that desire to appoint an ‘Agent’ in overseas jurisdiction for selling products or services. Specific laws applying to country of residence of principal and country of residence of agent will be required to be examined at the time of drafting an actual agency agreement. Devising an International Agency is not simply a matter of Commercial Contract drafting. Apart from the same, it has got issues pertaining to International Taxation and Planning which should be properly addressed so as to ensure that tax litigation does not arise in future and could be dealt with properly. This guide may be treated only as a general piece of advice and for specific advice, tax lawyer and/ or a firm dealing in matters of Commercial Contract Drafting must be consulted. Should your needs arise from areas of Ahmedabad, Delhi, Mumbai or Bangalore, we may be able to directly help you.
Amongst others, aspects pertaining to (1) Points to be covered in International Agency Agreement (2) Risk of creating a Permanent Establishment that may expose foreign corporation to unwanted tax obligations in India and (3) Rights of Representative Assessee (Agent) to retain any sum payable to Foreign Principal, are specifically relevant while devising an International Agency and covered in this Article.
•Points required to addressed while drafting an International Agency contract:-
While clauses to be incorporated in at time of drafting of a commercial contract will normally depend on needs of businesses, we aim to provide broad pointers about what generally should be included; these pointers are in no way exhaustive; boilerplate clauses that don’t require special attention are deliberately not addressed in this article but must be incorporated in agreement as per needs. Also, suggestions about what could be incorporated in clauses are also illustrative and actual clauses could be much more detailed or simpler depending on needs of businesses. The suggested points and clauses are narrated hereunder:-
•Agent’s general obligations- This is a subject matter of negotiation between Agent and Principal; extent of agent’s obligations e.g. communication and updates to Principal, specific duties, avoiding conflict of interest, remittance of sums and time frame for the same, not competing with the principal etc. may be delineated in such clause. Additionally, it may be proper to mention whether agent has authority to delegate his functions further should be made clear as also the level of skills and diligence required from Agent along with proper narration of the same.
•Principal’s general obligations- This again is a subject matter of negotiation between Agent and Principal; clause can provide certain issues as covered in Agent’s obligations clause. More important in this clause however, is any indemnities to be provided by Principal to agent for any loss, injuries sustained during performance of his functions, payment of agent’s remuneration and dues and time frame for the same and an indemnity against any proceedings for product liability or deficiency in services.
•Agent’s commission- Like any other agency contract, agent’s commission, when and how it becomes due, rights of principal to retain such amount under specified circumstances, could be mentioned in clause pertaining to Agent’s commission.
•Intellectual property- In case of specialized product/ services involving IP rights, principal might want to be clear about IP rights involved by incorporating a separate schedule enlisting and narrating all IP rights. Also, it may be fruitful to describe the extent of authorization to agent to use such IP rights while performing his duties as agent.
•Non-competition- To prevent the issues of taking over the market share by the agent himself, it is always advisable to develop an understanding from beginning itself for non-competition for a definite period after termination. Mere prescription about non-competition may not suffice as many legal issues will be involved and will be required to be addressed separately. To read more about the same, you may refer to a separate article written by us captioned as:- “Are Restrictive Covenants – Non-Compete Clauses Commonly put in Contracts Enforceable ?”
•Confidentiality- What information is to be treated as confidential and why must be captured in this clause. Due care should be exercised not to make the clause appear unnecessarily onerous e.g. by incorporating unqualified undertaking by agent to ensure compliance from third parties, as the same might affect enforceability.
•Resolution of disputes and governing law- This is very crucial clause which in case of dispute would determine the future course of action and jurisdiction. In international contracts, Indian law permits choice of foreign substantive law and also foreign seated arbitration and such clauses are considered enforceable by Indian Courts. Similarly, various other jurisdictions allow choice of foreign substantive law governing the contract and foreign seated arbitration.
•Addressing the Risk of Creating a Permanent Establishment
This aspect pertains to International Taxation and proper planning thereof to have certainty as regards tax obligations. Mere sale of products or services in overseas jurisdiction will not make a given corporation liable for tax in such jurisdiction unless there is an economic nexus to profit generating activity. The concept of economic nexus is normally addressed as “Business Connection” in domestic legislation but that also is not relevant as in most of the cases there will be a Double Taxation Avoidance Agreement in subsistence. While creating Agency, the corporation shall be specially attentive to the aspect as to whether it will end up creating a Permanent Establishment (“PE”) in jurisdiction of residence of Agent. A PE could be created under many different circumstances normally enumerated under Article 5 of tax treaty. Special attention must be given to Article 5(5) of OECD Model Treaty, based whereupon majority of individual DTAAs are likely to be drawn. Article 5(5) enumerates circumstances relevant to activities of agent and careful analysis must be made therefore about scope of activities of Agent and Principal’s supervision, that will or will not result in a permanent establishment making principal liable for taxation in overseas jurisdiction.
•Rights of Representative Assessee (Agent) to retain any sum payable to Foreign Principal
The provisions pertaining to Representative Assessee are normally to be found in domestic legislation. In India, s.160(1)(i) of Income Tax Act, 1961 defines ‘representative assessee’ in respect of the income of a non-resident specified in sub-section (1) of section 9, the agent of the non-resident or the one who is treate3d as an agent under section 163. Representative assessee can be assessed as agent of non-resident principal for income of such principal through the agent. Owing to such liability of an agent, s.162 of the Indian Income Tax Act, 1961grants right to every representative assesee to recover tax paid by him as result of assessment for income of principal, right to agitate assessment as agent. What a foreign Principal should be mindful of while appointing an agent in India is that such agent-representative assessee, if it apprehends that it may be assessed as such, has a right to retain out of any money payable by him to a non-resident, a sum equal too its ‘estimated liability’. Such provisions are to be found in other jurisdictions’ tax laws as well. A very careful drafting of guarantees and other provisions of agreement is therefore required to protect monetary interests with understanding as regards to what extent any agreement could dilute the rights granted under statute.
Various other aspects such as withholding taxes, exchange control regulations etc. must also be considered and addressed while devising an International Agency.
Author of this Article:
Adv. Ravish Bhatt,
Partner, R&D Law Chambers,
Dual Qualified Lawyer Solicitor | International Tax Affiliate
Connect with Mr. Bhatt on Linkedin: https://www.linkedin.com/in/adit-ravishbhatt/
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