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.
- 2 -
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
- 3 -
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.
- 4 -
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.
- 5 -
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,
Commercial Rulings Division