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HQ 544304

March 20, 1989

CAL-2 CO:R:C:V 544304 DHS

CATEGORY: VALUATION

Richard C. Katz, Esq.
81 Main Street
White Plains, N.Y. 10601

RE: Dutiability of commissions paid to foreign company Dear Mr. Katz:

This is in reference to your letter of February 7, 1989, regarding the effect of section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(b)), on certain contemplated transactions to be entered into by your clients company. You request a binding ruling regarding the dutiability of certain commissions to be paid to a related foreign company in exchange for services in aiding in the purchase of merchandise from foreign manufacturers. You also inquire as to the dutiability of certain quota charges.

FACTS:

You state that your client is the exclusive U.S. importer of a specific brand of wearing apparel. This domestic company is contemplating entering into an agreement with it's parent company in Japan to assist their company in purchasing merchandise from individual manufacturers in Hong Kong, Singapore and Korea. The prospective agent is to perform the services of assisting in selecting suppliers; transmitting purchase orders; negotiating the most favorable prices on behalf of the importer; assisting in financing transactions and transmitting payment for goods from the domestic company to the overseas suppliers; arranging for shipping; and translating. The Japanese parent company may also engage sub-agents to facilitate contact with the individual factories in Hong Kong, Singapore and Korea. You state that the factories will manufacture merchandise pursuant to your clients purchase orders. They will invoice your client directly for the finished merchandise. Your client will remit the factory invoice price of the goods to the factory through its agent. The manufacturers of the merchandise are not related to the Japanese parent or the sub-agent. You have not submitted a buying agency agreement or any other documentation.

The commissions to be received by the agent are not expected to exceed ten percent of the factory invoice price for the goods. The duties performed by the sub-agents are to be compensated through the payment of commissions by the domestic company.

With respect to the quota charges, you state that in certain instances the quota will be purchased from unrelated parties other than the actual manufacturers/sellers of the goods. In those instances, the domestic company will be invoiced directly by the quota holder for quota purchases. Payment for quota will be made through the Japanese parent.

ISSUES:
a) Can a parent corporation act as an agent for its subsidiary corporation?
b) From the facts presented, does a bona fide buying agency relationship exist?
c) Are payments for quota part of the "price actually paid or payable" for the imported merchandise when sold for exportation to the United States?

LAW AND ANALYSIS:

With respect to the fact that the Japanese parent and the importer are related, we note that the circumstances surrounding such related party transactions are subject to close scrutiny in determining whether a commission is a bona fide buying commission. Bushnell v. United States, C.A.D. 110 (1973). This, however, does not preclude the existence of a buying agency.

The comment to section 14M, Restatement of the Law of Agency (ALI, 1958) provides that, in the absence of fraud or other illegal conduct:

...a subsidiary may become an agent for the corporation which controls it or the corporation may become the agent of the subsidiary.

This conclusion is further supported by New York Air Brake Company v. International Steam Pump Co., 64 Misc, 347, 120 NYS 683 (1909), aff'd 136 App. Div. 931, 120 NYS 1137, and Park Avenue Imports v. United States, 62 Cust. Ct. 1035, ARD 255 (1969).

In C.S.D. 83-107, dated June 28, 1983 (Headquarter's Ruling Letter 542912), the importer was established as a subsidiary of the foreign parent corporation. The same individual served as president of both companies and was the major stockholder in the buyer. We sustained the conclusion that the relationship of the
firms does not preclude a buyer-agent relationship, even when the agent is the parent of the corporation. Based upon the supporting facts of that case, we found a buying agency existed.

We now address the second issue regarding the existence of a buying agency under the facts presented by your client.

For purposes of this prospective ruling request, we are assuming that transaction value will be applicable as the basis of appraisement.

Transaction value is defined in section 402(b)(1) of the TAA. This section provides, in pertinent part, that the transaction value of imported merchandise is the price actually paid or payable for the merchandise plus amounts for the items enumerated in section 402(b)(1). Buying commissions are not specifically included as one of the additions to the "price actually paid or payable". The "price actually paid or payable" is more specifically defined in section 402(b)(4)(a) as:

The total payment (whether direct or indirect...) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.

It is clear from the statutory language that in order to establish transaction value one must know the identity of the seller and the amount actually paid or payable to him. As stated in Headquarter ruling 542141 (TAA #7), dated September 29, 1980, "...an invoice or other documentation from the actual foreign seller to the agent would be required to establish that the agent is not a seller and to determine the price actually paid or payable to the seller. Furthermore, the totality of the evidence must demonstrate that the purported agent is in fact a bona fide buying agent and not a selling agent or an independent seller."

The Restatement (Second) of Agency section 14K (1958) defined an agent as:

One who contracts to acquire property from a third person and convey it to another is the agent of the other only if it is agreed that he is to act primarily for the benefit of the other and not for himself.

In order to view the relationship of the parties as a bona fide buying agency, Customs must examine all the relevant factors. J.C. Penney Purchasing Corporation et al. v. United States, 80 Cust. Ct. 84, C..D. 4741 (1978), 451 F. Supp. 973 (1983); United States v. Knit Wits (Wiley) et al., 62 Cust. Ct. 1008, A.R.D. 251 (1969). The primary consideration, however, "is the right of the principal to control the agent's conduct with respect to the matters entrusted to him." Dorf Int'l, Inc., et al. v. United States, 61 Cust, Ct. 604, A.R.D. 245, 291 F. Supp. 690 (1968). The degree of discretion granted the agent is an important factor. New Trends Inc. v. United States, 10 CIT _, 645 F. Supp. 957 (1986).

The Court of International Trade in the case of New Trends Inc., supra, set forth several factors upon which to determine the existence of a bona fide buying agency. These factors include: whether the agents actions are primarily for the benefit of the importer, or for himself; whether the agent is fully responsible for handling or shipping the merchandise and for absorbing the costs of shipping and handling as part of its commission; whether the language used on the commercial invoices is consistent with the principal-agent relationship; whether the agent bears the risk of loss for damaged, lost or defective merchandise; and whether the agent is financially detached from the manufacturers of the merchandise.

The above-stated factors have been determining factors applied by the courts to deny the existence of a buying agency relationship in New Trends, Inc., supra, Jay-Arr Slimwear Inc. v. United States, _CIT_, Slip Op. 88-21 (1988), Rosenthal-Netter, Inc. v. United States, _CIT_, Slip Op. 88-9 (1988).

On the basis of the information you have provided regarding the prospective transactions in question, if the terms of the buying agency agreement are identical to those outlined in your letter and set forth above and the actions of the parties also conform, the importer will exercise the requisite degree of control over the buying agent. The actual determination as to the existence of a buying agency will be made by the appraising officer at the applicable port of entry upon the presentation of the proper documentation as described in TAA #7. Based upon these considerations, we conclude that the commissions to be paid to the buying agent constitute bona fide buying commissions which will not be dutiable under transaction value.

Finally, with respect to the dutiability of the quota charges we are unable to issue a ruling at this time since a proposal requiring all quota charges paid as a prerequisite to the exportation of foreign merchandise to the United States to be dutiable, is currently under review. This notice was published in the Federal Register (53 FR 46626) on November 18, 1988. The legal authority requiring Customs to refrain from acting is found in section 177.7(a), Customs Regulations (19 CFR 177.7(a)), which provides, in part, "...no ruling letter will be issued ...in any instance in which it appears contrary to the sound administration of the Customs and related laws to do so."

HOLDING:

In view of the foregoing, it is our conclusion that the commissions to be paid to the prospective company to perform the services of assisting in the purchase of merchandise from the foreign manufacturers are to be considered bona fide buying commissions as long as the considerations discussed above are followed.

Additionally, because we are presently reviewing comments regarding the dutiability of quota charges, it would be contrary to the sound administration of the Customs laws for us to issue any rulings regarding the dutiability of quota charges at this time.

Sincerely,

John Durant, Director,

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