Pgnig Upstream Norway AS (PUN) sold dry gas to its sister company (PST). According to the tax authorities the price for the gas had not been determined at arm’s length, cf. Section 13-1, first paragraph, of the Tax Act, and an assessment of additional income was issued. Judgement of the Court The Court decided in favour of the tax authorities. It found that the tax authorities had correctly concluded that there was a reduction in PUN’s income, and that the reduction was due to parties being under common control. The key point for the Court was that there was an imbalance in the functional profiles of PUN and the sister company, PST. Through certain deductions in the purchase price, PUN had indirectly been charged for parts of the sister company’s downside risk, without being allowed a share in potential upside profits. Excerpts “(…)In any event, the Court of Appeal finds reason to note that the [text removed] agreement in any event does not support PUN’s view that the price in the internal agreement is at arm’s length. In this regard, the Court of Appeal notes that the [text removed] agreement, like the Interconnection Agreement, concerned the purchase of all the gas offered by the seller ([text removed]) each day. The volume of gas was about 1/3-1/4 of the volume in the Interconnection Agreement, i.e. a fairly significant volume. The contract period was three years, whereas in the Interconnection Agreement it was ten years. The delivery point and price basis were essentially the same. Both contracts also contain deductions for balancing costs and transport/entry costs in the downstream market area. The main difference is that while the Interconnection Agreement makes deductions from PUN’s remuneration for MAC, DOF and OHSC (“Out of Hours Service-Cost”), the [text removed] Agreement instead provides for a premium for the seller. This amounts to [text removed] Euro/MWh. To the Court of Appeal, it appears prima facie balanced and market-based to grant the seller a share in the buyer’s profit potential upon resale, as the Court of Appeal understands the [text removed] Agreement to express. It is not necessary for the Court of Appeal to assess in detail the other agreements referred to by the Norwegian State, which have several differences from the Internal Agreement. In any event, it is more likely than not that there was a reduction in income due to the community of interest between PUN and PST. The Court of Appeal adds that the Appellant also cannot succeed with the argument that the Oil Tax Office, prior to the court proceedings, has selected agreements based on selection criteria that exclude relevant agreements. The nine agreements in question were selected by the Petroleum Tax Office and submitted to the Directorate of Taxes in connection with a request for evidence from the PUN relating to contracts that were the subject of the Petroleum Tax Office’s “observations” during the administrative proceedings, see above. The Directorate of Taxes did not grant an exemption from the duty of confidentiality for these agreements, see Section 22-3, second paragraph, of the Dispute Act. It is not argued by PUN that this constitutes a procedural error, but that it has an impact on the assessment of evidence as to whether there is a reduction pursuant to Section 13-1 of the Tax Act. The Court of Appeal cannot see that this is the case. It is in the nature of the case that the taxpayer may in practice find it difficult to substantiate its view. However, this must be seen in light of the fact that the content of dry gas agreements is highly sensitive information, which is subject to a duty of confidentiality. The Court of Appeal considers that any incomplete overall picture of the pricing of dry gas is not such as to indicate that the price in the internal agreement is at arm’s length. Moreover, any criticism of the administration’s selection of agreements during the court proceedings can hardly be seen to support the invalidity of the prior administrative decision. In any event, the selection appears to be objective, based on the considerations relating to the duty of confidentiality that apply. Accordingly, there is a reduction pursuant to Section 13-1 of the Tax Act due to the community of interest between PST and PUN. (…) The Court of Appeal notes that the assessment is clearly neither arbitrary nor grossly unreasonable. The exercise of the discretion is specific and thoroughly justified in relation to the facts of the case. Shell’s remuneration under the dispatching agreement with PUN appeared, at the time of the decision, to be the best available basis of comparison for PST’s services related to booking the necessary capacity and nominating the gas to make it available for sale at the hub. It was clearly relevant to emphasise that Shell performed dispatching up to the beach, and that PST’s tasks were (only) related to the further fate of the gas after this delivery point. There is no reason to doubt that neither the MAC deduction nor the relevant parts of the DOF deduction were a type of deduction recognised by the tax office in its own database. This could be taken into account in the circumstances, see above. The deductions that the administration did not accept must also be seen in the light of the deductions that were actually accepted: costs related to transport capacity (exit and entry tariffs), costs related to making the gas available for sale at the hub (nomination costs, etc. – i.e. the part of the DOF deduction that was accepted), and costs related to imbalances (discrepancies between nominated and allocated volume). These are costs that have either facilitated PUN’s access to the market in a larger perspective or are related to circumstances for which PUN is most likely to bear the risk. The Court of Appeal finds that the discretion takes due account of the division of functions between PUN and PST, when only those parts of the deductions that are specifically linked to ...