CLA-2 CO:R:C:V 543708 CW

District Director of Customs
Los Angeles, California 90731

RE: Application for Further Review of Protest No. 2704-4-002249, Contesting the Appraisement of Certain Electronic Communications Equipment from Japan

Dear Sir:

The above-referenced protest dated June 14, 1984, contests the appraisement by your office of certain merchandise imported during the period October 20, 1983, through December 29, 1983, by ("importer"), a wholly-owned subsidiary of the manufacturer of the merchandise in Japan, ("parent").

We understand that, pursuant to an agreement between the Area Director, JFK Airport Area, and the importer, the appraisement issues involved in this case are being presented to Headquarters for resolution via this Application for Further Review. A number of protests identical to this one have been filed by the importer in connection with identical or similar merchandise entered through other ports of entry. The entries subject to this protest are generally representative of the entries encompassed by all the protests.

FACTS:

An audit of the importer's accounting and import records was conducted by the Regulatory Audit Division, New York Region, to determine the reliability of the information submitted to Customs in connection with consumption entries filed by the importer during the period April 1, 1979, through March 31, 1982. The audit report dated December 3, 1982, concludes that the importer acted as the Japanese parent company's selling agent rather than as the buyer for importations made by the importer's ("R & T") and ("B/E") Divisions.

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In view of this conclusion, the audit report states that the entered values for the subject importations should be increased by the amount of the undeclared selling commissions paid to the importer. In almost all instances, the entered values for the merchandise equaled the transfer prices between the parent and its related importer. The audit report indicates that, in these instances, the selling commission equaled the difference between the related party transfer price and the importer's invoice price to the ultimate purchaser. Therefore, the addition of the selling commissions to these entered values results in appraised values equal to the invoice prices to the ultimate purchasers.

The audit revealed in regard to entries filed by the importer's R & T and B/E Divisions that the structure of these importations fell into four general categories. The first category involved importations in which formal sales contracts existed only between the parent company and the ultimate purchasers in the U.S. In regard to these transactions, all orders from the ultimate purchasers were forwarded to one of the two referenced divisions of the importer, who, in turn, forwarded the orders to the parent. With a few exceptions, the merchandise was then invoiced from the parent to the importer, who entered the merchandise in its name at the related-party invoice price which equaled the parent's contract price to the U.S. customer, less the importer's selling commission. With respect to a few of the contracts in this category, sales commission agreements existed between the parent and the importer.

The second category includes transactions governed by "three-party contracts" involving the parent, importer, and ultimate purchaser. The third category encompasses importations made pursuant to sales contracts between the importer and the U.S. customers, while the final category relates to transactions in regard to which no formal contracts were in effect. The audit report notes that the importer essentially performed the same functions in regard to all categories of importations and that, additionally, the overall methods of doing business were the same for all categories. As a result, the report indicates that since the importer clearly acted as a selling agent for importations involving contracts between the parent and the ultimate purchasers, the importer also acted as a selling agent with respect to the other categories of transactions.

Also cited by the auditors as evidence that the importer served as the parent's selling agent for merchandise imported by the R & T and B/E Divisions are certain telexes between the related parties which, according to the audit report, show that the parent exerted substantial control over all aspects of the transactions, including determining the transfer prices, the

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importer's "resale" prices, and the amount of the commissions. The report further points out that an agreement described by representatives of the importer as a "commission and fees agreement" existed between the parent and importer. This agreement, which apparently applied to all categories of transactions, provides that the importer shall perform a variety of services for the parent in consideration for the payment by the parent of a fixed amount to be adjusted annually.

The national import specialist concurs in the audit report's conclusion regarding this issue.

Counsel for the protestant (importer) has incorporated as part of his written statement in support of the protest the importer's lengthy response of September 2, 1983, to the audit findings. Protestant's basic position is that the audit period findings are erroneous and that no evidence exists which supports a Customs determination that either the R & T or B/D Divisions has acted as a selling agent since the end of the audit period. In fact, counsel asserts that it is "inappropriate and illegal for the Customs Service to extend the audit period conclusions to a period for which there is no evidence."

The following is a summary of the information and legal arguments provided by counsel for the importer in support of the application for further review:

The importer is a substantial and independent U.S. corporation which maintains its own financial and accounting records. Each of the importer's divisions manages its own employees, develops and implements marketing plans, negotiates with the parent company and with U.S. customers, retains authority to accept or reject customer orders, and decides trade terms with customers. There is a transfer of title and risk from the parent to the importer on virtually all transactions with the exception of a limited number of sales in which the importer has specifically acted for the parent as an agent by express agreement. The importer pays its parent as a normal supplier with no remittances beyond negotiated transfer prices.

Specifically in regard to the R & T Division, the only contracts which existed between the parent and ultimate purchasers related to several transactions involving a single U.S. customer. Although it is conceded that the merchandise covered by these contracts should properly have been entered at the

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contract prices to the U.S. customer, R & T did not act as a sales agent in regard to these transactions. The last of these contracts was entered into in 1979, and none exist as of the date of this submission (July, 1985). Moreover, none of the entries subject to this protest relate to merchandise purchased by this U.S. customer. While the audit report notes the existence of certain other contracts between the parent and another U.S. customer, the merchandise covered by these contracts was properly entered at the prices to the U.S. customer.

In regard to R & T importations involving contracts between the importer and U.S. customers and those for which no formal contract exists, R & T conducts signifi- cant price negotiations both with the parent and U.S. customers. Because the R & T contracts with U.S. customers frequently are governed by bid procedures, there is a need to discuss bid prices to the U.S. customers with the parent.

With respect to the B/D Division, its business is largely conducted on an inventory basis. However, during the audit period there were in existence two large contracts with U.S. customers that did not involve inventory sales. One of these contracts was executed as a three-party contract between the parent, importer, and U.S. customer. This structure was adopted because of the U.S. customer's long-standing relationship with the parent and because the parent was viewed as an essential party due to the extensive engineering required to develop the product in question. The fact that this was a three-party contract does not negate B/D's independent status or preclude the existence of separate sales for profit between the parent and importer and between the importer and U.S. customer. This agreement was termin- ated in 1983 for reasons unrelated to the selling commission issue.

The second contract involving B/D, although des- cribed in the audit report as a three-party contract, was actually only a two-party contract between the importer and the U.S. customer. The confusion on this point apparently arose from the fact that this contract was preceded by a letter agreement between the parent, importer, and U.S. customer. The parent was included in this agreement because the parent was to provide the development engineering for this project. The contract between the importer and U.S. customer was terminated in 1983.

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The auditors' conclusion that B/D acted as a selling agent with respect to most of its importations apparently was based solely on these two unusual contracts. No evidence was cited in the audit report to support the auditors' conclusions of agency in regard to the numerous transactions not covered by these contracts. None of B/D's importations have been or are governed by exclusive contracts between the parent and U.S. customers. Moreover, B/D has never entered into a selling agency agreement with the parent.

The major portion of non-contract B/D importations consists of merchandise imported for inventory. The auditors found that B/D was not acting as a selling agent in regard to these products. The remaining non- contract B/D importations consist of "drop shipments" in which product orders are shipped directly from the parent's manufacturing facility to the ultimate purchaser. The audit report's conclusion that B/D acted as a selling agent in regard to these trans- actions apparently was based solely on the fact that B/D's customers were listed as consignees on the parent's invoices. "Drop shipping" is a common international and U.S. domestic practice which carries no implication that an agency relationship exists between the manufacturer and importer.

The telexes cited in the audit report represent a small number of isolated instances which primarily date from the early part of the audit period. All are from R & T and all represent communications sent after prices have been set through negotiations. The auditors' determination that a so-called "commission and fees" agreement existed between the related parties is in error and apparently was based upon a rough oral translation of the agreement. The agreement clearly is a service agreement containing no discussion of marketing or commissions. Moreover, the agreement specifically prohibits the importer from carrying out the most typical and fundamental role of an agent: entering into agreements and commitments in the name of the parent.

The current valuation statute, 19 U.S.C. 1401a, provides that selling commissions may be added to the price actually paid or payable by the buyer to the seller only if they are "incurred by the buyer" in the sale for exportation. The statute neither contemplates nor authorizes the addition of selling commissions incurred by a subsequent purchaser in a domestic sale made after the sale for exportation. Therefore, the essential question presented in this case is whether there were sales between the parent and importer

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with respect to the merchandise subject to this protest. If it is determined that there were sales, then the matter is at an end simply because the importer did not incur selling commissions. Rather, it charged markups to the ultimate purchasers.

In regard to nearly all of the transactions between the parent and importer, the terms of delivery were either CIF P.O.E. (port of entry), CIF Los Angeles (or other named port), or FOB Japan. The trade terms for the transactions between the importer and its U.S. customers ranged from CIF P.O.E. to FOB customer premises. The parent manufactured the goods and delivered them to the carrier at the port of shipment for shipment to the importer or directly to the importer's customer in the U.S. In all cases, the parent's invoices name the importer as the buyer.

The Uniform Commercial Code (U.C.C.) provides that, unless otherwise agreed, title and risk of loss pass from the seller to the buyer in CIF destination and FOB point of shipment contracts (referred to as "shipment contracts") when the goods are delivered to the carrier for shipment. This is true even though in regard to CIF purchases, the price to the buyer includes the freight and insurance costs to bring the goods to the named destination. Therefore, in almost every transaction between the parent and importer in this case, title and risk of loss passed to the importer at the port of shipment in Japan. This requires a finding that these related-party transactions constitute sales. Moreover, the fact that the trade terms between the importer and its U.S. customers frequently were CIF P.O.E. when the terms for the related-party transactions were CIF P.O.E. or CIF Los Angeles has no affect on whether there were sales between the parent and importer.

ISSUE:

Whether the Japanese manufacturer's U.S. subsidiary acted as a bona fide buyer of the imported merchandise or as a selling agent for the parent in connection with sales to customers in the U.S.

LAW AND ANALYSIS:

There appears to be no dispute in this case that the proper basis of appraisement for the affected merchandise is transaction value, section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA). Transaction value is

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defined as "the price actually paid or payable for the merchandise when sold for exportation to the United States, plus amounts" for certain items to the extent that they are not already included in that price. One of the items to be added to the price actually paid or payable is "any selling commission incurred by the buyer with respect to the imported merchandise."

We agree with counsel for the importer that the basic issue to be addressed in this case is whether the subject transactions between the importer and parent constitute bona fide sales. If it is determined that there were sales, then transaction value would properly be represented by the price actually paid or payable for the merchandise by the importer to the parent, assuming that this related-party transaction price is "acceptable" within the meaning of section 402(b)(2)(B) of the TAA. No selling commission could be added to this price since no selling commission was "incurred by the buyer with respect to the imported merchandise." A determination that there were no sales necessarily results in a finding that transaction value should be represented by the price actually paid or payable for the merchandise by the U.S. customer to the parent (through the importer, acting as the parent's agent).

In J. L. Wood v. United States, 62 CCPA 25, C.A.D. 1139 (1974), it was stated that for appraisement purposes the word "sales" should be given "its ordinary meaning, namely: transfers of property from one party to another for a consideration." The court concluded in that case that "ownership of the imported merchandise was transferred from (the parent) to (the U.S. subsidiary) for a valuable consideration." The court also noted that the existence of a parent-subsidiary relationship will not, of itself, preclude the existence of a bona fide sale. Section 2-106(1) of the U.C.C. similarly defines "sale" as "the passing of title from the seller to the buyer for a price."

In previous Headquarters rulings involving the question of whether bona fide sales existed between a foreign seller and its related U.S. importer, the primary factor considered was whether there was a transfer of ownership (i.e., title and risk of loss) from the seller to the purported buyer. Other factors discussed included whether the amounts remitted to the seller by the importer equaled the related-party transfer prices, and whether these payments could be linked to specific import transactions. See, for example, rulings dated April 2, 1986 (543446), May 29, 1986 (543511), March 15, 1985 (543441), and June 10, 1982 (542673; C.S.D. 82-137).

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With respect to consideration in this case, we note that the audit findings do not contradict protestant's assertion that no amounts beyond the transfer prices were remitted by the importer to the parent for the imported merchandise. Therefore, we are assuming for purposes of this decision that the parent's invoice prices to the importer were actually paid and that these payments can be linked to specific import transactions.

A reading of sections 2-319, 2-320, 2-401, 2-504, and 2-509 of the U.C.C., as well as the Official Comments to those sections, discloses that a determination of when title and risk of loss pass from the seller to the buyer in a particular transaction depends on whether the applicable contract is a "shipment" or "destination" contract. According to these provisions, FOB point of shipment contracts and all CIF and C & F contracts are "shipment" contracts, while FOB place of destination contracts are "destination" contracts. These provisions indicate that, unless otherwise agreed by the parties, title and risk of loss pass from the seller to the buyer in "shipment" contracts when the merchandise is delivered to the carrier for shipment, and in "destination" contracts when the merchandise is delivered to the named destination.

As previously mentioned in the summary of the protestant's position, there was in existence during the audit period a three- party contract involving the parent, importer (B/E Division), and a U.S. customer. Of the eleven entries subject to this protest, five encompass merchandise purchased by this U.S. customer during 1982 and 1983. They are Entry Nos. 84-523010-3, 84-522919-8, 84- 503474-9, 84503617-4, and 84-503724-1. Counsel for the importer advises that although this three-party contract was terminated sometime during 1983, certain shipments of spare parts continued to be made to the U.S. customer after the termination date pursuant to the delivery terms specified in the contract. It appears that the delivery terms set forth in the contract govern the five shipments under consideration here. We note in this regard that the contract provides that "products shall be delivered to (the U.S. customer) FOB-Japan." For the most part, the available documentation concerning these five entries (e.g., purchase orders and invoices) confirms that the trade terms to the U.S. customer were FOB Japan. Moreover, most of the invoices from the parent to the importer in regard to these entries reflect that the terms of delivery to the importer also were FOB Japan, although several specify terms of CIF Los Angeles.

Therefore, in accordance with the previous discussion of "shipment" contracts under the cited U.C.C. provisions, title and risk of loss passed from the parent at the time the merchandise covered by these entries was delivered to the carrier in Japan.

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It is also clear that the U.S. customer received title and assumed the risk of loss upon delivery of the goods to the carrier. Thus, we conclude that, with respect to this merchandise, title and risk of loss passed directly from the parent to the U.S. customer without an intervening sale between the parent and importer.

The available documentation supporting three additional entries (i.e., Entry Nos. 84-241379-0, 84-241573-0, and 84-241125-5) reflect that the terms of delivery for these transactions between the parent and importer (R & T Division) were CIF Los Angeles, while, for the most part, the delivery terms for the transactions between the importer and the U.S. customer were CIF P.O.E. Here again, both the transactions between the parent and importer and those between the importer and U.S. customer are governed by the U.C.C. rules relating to "shipment" contracts. Therefore, we find that when the merchandise covered by these entries was delivered to the carrier in Japan, title and risk of loss passed not to the importer but directly to the U.S. customer.

The documentation supporting Entry No. 84-503590-0 reflects that the delivery terms for the transaction between the parent and importer (B/D) were CIF Sacramento, while the terms for the transaction between the importer and U.S. customer were FOB destination in the U.S. Therefore, applying the previously- discussed U.C.C. provisions to these transactions, title and risk of loss passed from the parent to the importer when the merchandise was delivered to the carrier in Japan. Because the transaction between the importer and U.S. customer is subject to the U.C.C. rules relating to "destination" contracts, title and risk of loss for this merchandise passed from the importer to the U.S. customer when the merchandise was delivered to the U.S. destination. Thus, we are satisfied that there were actual sales of the subject merchandise from the parent to the importer.

The documentation relating to the final two entries, Entry Nos. 84-503420-2 and 84-503561-2, supports protestant's contention that the merchandise covered by these entries was imported for inventory and resold to U.S. customers only after it was placed in inventory in the U.S. Therefore, we believe that the transactions between the parent and importer (B/D) involving this merchandise constitute bona fide sales.

HOLDING:

On the basis of the information presented in this case, we conclude that there were no sales between the parent and importer with respect to the merchandise covered by Entry Nos. 84- 523010-3, 84-522919-8, 84-503474-9, 84-503617-4, 84-503724-1, 84-

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241379-0, 84-241573-0, and 84-241125-5. Transaction value for this merchandise should be based upon the price actually paid or payable by the U.S. customers. Actual sales between the parent and importer took place in regard to the merchandise covered by Entry Nos. 84-503590-0, 84-503420-2, and 84-503561-2. Transaction value for this merchandise should be based upon the price actually paid or payable by the importer, assuming that the related-party transaction prices are deemed "acceptable" within the meaning of section 402(b)(2)(B) of the TAA.

Sincerely,

John Durant
Acting Director, Commercial
Rulings Division