Kia Australia Pty Ltd and Chief Executive Officer of Customs [1999] AATA 547 (27 July 1999)

Last Updated: 17 August 1999

DECISION AND REASONS FOR DECISION [1999] AATA 547

ADMINISTRATIVE APPEALS TRIBUNAL )

) Nos V97/308, V98/1046,

GENERAL ADMINISTRATIVE DIVISION ) V98/1169 & V99/334

Re KIA Australia Pty Ltd

Applicant

And Chief Executive Officer of Customs

Respondent

DECISION

Tribunal Deputy President B. M. Forrest Senior Member B. H. Pascoe Mr C. Ermert, Member

Date 27 July 1999

Place Melbourne

Decision The Tribunal sets aside the decision under review and remits the matter to the respondent for reconsideration with a direction that the payment in question is a "buying commission" as that term is defined in s. 155(1) of the Customs Act 1901.

.........(Sgd. B.M. Forrest)...........

Deputy President

CUSTOMS - valuation of goods - transaction value - price related costs - whether commission paid to an agent is a buying commission - whether agent is "associated with" the vendor of imported goods - decision set aside.

Customs Act 1901 s. 155

Re Kia Australia Pty Ltd and Chief Executive Officer of Customs (1997) 47 ALD 161; (1997) 25 AAR 284

Kia Australia Pty Ltd v Chief Executive Officer of Customs 1 September 1998 (unreported)

REASONS FOR DECISION

27 July 1999 Deputy President B. M. Forrest Senior Member B. H. Pascoe Mr C. Ermert, Member

1. This is an application to review a decision of the respondent to include, in the customs value of motor vehicles and spare parts imported in October 1996 by KIA Australia Pty Ltd ("KIA Australia") from KIA Industrial Co. Ltd. ("KIA Korea"), the buying commission paid to Itochu Corporation, Tokyo ("Itochu"). The commission was paid to Itochu as agent for KIA Australia in the purchase of the imported goods and would be a "price related cost" and therefore a component of the transaction value for duty purposes unless it was a "buying commission" as defined in s. 155(1) of the Customs Act 1901 ("the Act").

2. In the decision under review the respondent decided that the association between Itochu and KIA Korea precluded the commission being treated as a buying commission for the purposes of the Act.

3. The applicant, KIA Australia, is a company incorporated in Australia and is a wholly owned subsidiary of Itochu, formerly known as C. Itoh & Co. Pty. Ltd. Itochu also owned 2% of the outstanding shares in KIA Korea in 1996, when the decision under review was made. It was said in the present hearing that this percentage decreased to .05% in 1998 following the takeover of KIA Korea by Hyundai. Orders for the imported goods are placed with KIA Korea by Itochu as agent for KIA Australia in accordance with a Buying Agency Agreement dated July 1996. KIA Australia was appointed distributor of KIA motor vehicles and parts by a Distributorship Agreement dated 1 October 1996.

4. The reviewable decision was affirmed by the Tribunal (differently constituted) see: Re Kia Australia Pty Ltd and Chief Executive Officer of Customs (1997) 47 ALD 161; (1997) 25 AAR 284. The applicant appealed that decision to the Federal Court. The Federal Court (Finkelstein J.), allowed the appeal (unreported 1 September 1998), set aside the decision of the Tribunal and remitted the matter to the Tribunal to be heard and determined again. Both the decision of the Tribunal and of the Federal Court were concerned principally with the question of whether the 2% shareholding in KIA Korea by Itochu resulted in those two companies being associated and whether such association precluded the commission from being treated as a buying commission. The Tribunal held that it did. The Federal Court said (at page 11):

"It was not open for the Tribunal to conclude that merely because Itochu held 2% of the issued capital of Kia the two companies were associated within the meaning of s 155(2)(e)(ii). Further, even if that shareholding did amount to an association it was still necessary for the Tribunal to consider whether that association was in relation to the imported goods or in relation to the other goods referred to in s 155 (2)(a)(i) or in relation to any of the services referred to in s 155(2)(b)(i). The Tribunal did not consider this issue at all. It had [sic] it would not have been open to it to find the relevant relationship merely because of the shareholding."

5. Section 161(1) of the Act determines that the "transaction value" of imported goods is an amount equal to the sum of their adjusted price in their import sales transaction and of their price related costs to the extent that those costs have not been taken into account in determining the price of the goods.

6. The definition of "price related costs" in s. 154(1) of the Act includes in the transaction value:

(d) commission, other than a buying commission, or brokerage, paid or payable, directly or indirectly, by or on behalf of the purchaser in respect of the goods;...

7. Section 155(1) of the Act defines "buying commission":

"155. (1) Subject to subsection (2), a reference in this Division to a buying commission in relation to imported goods is a reference to an amount paid or payable by or on behalf of the purchaser of the goods directly or indirectly to a person who, as an agent of the purchaser, represented the purchaser in the purchase of the goods in the import sales transaction."

8. However under s. 155(2) an amount paid by a purchaser of imported goods to another person shall be taken not to be a buying commission unless it meets the negative test of at least one of the criteria mentioned. Section 155(2) relevantly provides:

"(2) An amount paid by a purchaser of imported goods to another person in the circumstances referred to in subsection (1) shall be taken not to be a buying commission unless a Collector is satisfied that that other person did not and does not:

(a) produce, in whole or in part, or control the production, in whole or in part of:

(i) the imported goods, or any other goods whose value would be taken into account in determining, or attempting to determine, the transaction value of the imported goods; or

(ii) any other goods of the same class as goods referred to in subparagraph (i);

(b) supply, or control the supply of, any services:

(i) whose value would be taken into account in determining, or attempting to determine, the price of the imported goods; or

(ii) any other services of the same class as the services referred to in subparagraph (i);

(c) ...

(d) ...

(e) in relation to any of the goods referred to in subparagraph (a)(i) or any of the services referred to in subparagraph (b)(i):

(i) act as an agent for, or in any other way represent, the producer, supplier, or vendor of the goods or services; or

(ii) otherwise be associated with any such person except as the agent of the purchaser; or

(f) ..."

9. As a matter of construction Finkelstein J. held that the clause that precedes sub-paras. (i) and (ii) of s. 155(2)(e) of the Act qualifies both sub-paras. (i) and (ii). He said (at page 9):

"Before turning to consider the meaning of the word "associated" there is a preliminary question of construction that must be resolved. That question is whether the clause that precedes subparagraphs (i) and (ii) of s 155(2)(e) qualifies both subparagraphs or only the first subparagraph. In other words, the question is whether the agent and the vendor or supplier (as the case requires) must be associated "in relation to any of the goods referred to in [s 155(2)(a)(i)] or any of the services referred to in [s 155(2)(b)(i)]" before that association (if there is one) will prevent the commission that is paid to the agent being treated as a buying commission.

There is some difficulty with the language of s 155(2)(e). A natural reading of the sub-section makes it clear that the opening clause does qualify subparagraph (i). The position is less clear in the case of subparagraph (ii). The difficulty is that the words of subparagraph (ii) do not naturally follow the opening clause to produce co-ordinate clauses. However, if the words "otherwise be" in s 155(2)(e)(ii) are read as "is otherwise" the problem disappears.

In any event, it would be an unusual result if the opening clause of s 155(2)(e) only qualifies subparagraph (i). In the case of a payment to an agent of the vendor or to an agent of the supplier the payment will be excluded from being taken to be a buying commission if that agency was in relation to the goods referred to in s 155(2)(a)(i) or the services referred to in s 155(2)(b)(i). There is no reason why the same qualification should not attach to a payment made to an associate of the vendor or supplier. Indeed, it would be unjust if a payment made to an associate of the vendor or supplier would not be a buying commission when the same payment if made to an agent would be a commission of that character. For these reasons it is necessary to construe the opening clause of s 155(2)(e) as one which qualifies both subparagraphs (i) and (ii)."

10. Accordingly, the Tribunal was required to determine what was the meaning of the expression "associated with" in sub-para. (ii) of s 155(2)(e) and whether Itochu was "associated with" KIA Korea in accordance with that meaning. To determine whether the two companies were associated within the meaning of sub-para. (ii) of s. 155(2)(e) required principally a consideration of the terms of two agreements to which both Itochu and KIA Korea were parties.

11. The first of the agreements is a Capital Collaboration Agreement ("CC Agreement") dated 20 May 1983. Under this agreement Itochu and Toyo Kogyo Co. Ltd. ("Mazda") agreed to subscribe for shares in KIA Korea resulting in the 2% shareholding by Itochu. However, the respondent sought to rely on Article 3 of the CC Agreement (which referred to Itochu as C.I.), which stated:

"3.1 TOYO and/or C.I shall positively, actively and sincerely collaborate with KIA in matters pertaining to offering KIA technical support, exploration of the market, development of production and giving financial support requested by KIA in order to enable KIA to attain the capability at the level of an advanced motor vehicle manufacturer in international market and Korean domestic market in accordance with the terms and conditions to be agreed upon among KIA and TOYO and/or C.I separatly [sic].

3.2 For the purpose of attaining future cooperative benefits among the parties, the parties hereto intend to propel jointly KIA's business in Korea or in third countries, if necessary. In such case, the parties hereto shall collaborate with one another, if possible, respecting and considering the importance of the other party's benefits positively and actively in accordance with the terms and conditions to be agreed upon among KIA and TOYO and/or C.I."

12. It was accepted by the respondent that the technical support and development of production was provided by Mazda but it was argued that the agreement to collaborate on "exploration of the market" and the intention "to propel jointly KIA's business in Korea or in third countries, if necessary" demonstrated an association between Itochu and KIA Korea.

13. The second agreement is the Distributorship Agreement dated 1 October 1996 under which KIA Australia was appointed sole Australian distributor for KIA Korea and which provided for Itochu to be buying agent of KIA Australia and responsible for the importation of the motor vehicles and parts on behalf of KIA Australia. The payment clause in this agreement (Article 6) included a right of Itochu to open Letters of Credit in favour of KIA Korea.

14. Mr Takashi Nakao, the Managing Director of KIA Australia, in a written statement supplemented by oral evidence, said that he had been employed by Itochu for 24 years. Itochu is a major international trading house and one of the five largest Japanese companies. Its primary business is buying and selling goods. Mr Nakao is not a director of Itochu. He became Managing Director of KIA Australia in May 1996. Although employed by Itochu in 1983, Mr Nakao had no involvement in the negotiations which resulted in the CC Agreement. It was his belief as a result of enquiries he made with management in Japan, that the CC Agreement in its terms remains in force. He maintained that the relationship between KIA Korea and Itochu has been on a normal commercial arms length basis governed by agreements made at arms length. He said that, from his experience in international trade, the terms of the Distributorship Agreement were typical of other Itochu distributorship agreements and of agreements by buying agents generally. Mr Nakao accepted that it was likely the intent of Clause 3.1 of the CC Agreement was for Itochu to assist in development of the market for KIA Korea, but maintained that such development would be undertaken in the interests of Itochu. He was aware of three other distributorship agreements between KIA Korea and Itochu covering Czechoslovakia, Austria and Hungary. He also believed that there were agreements in existence in relation to other countries and there were several countries in which Itochu did business involving KIA Korea but with no formal agreement. He was not aware of any payment by KIA Korea to Itochu for the provision of any market services. Mr Nakao stated that prices were negotiated on an arms length basis based on market competition and with the support of Itochu.

15. It was submitted by Mr Northcote for the respondent that Itochu was relevantly "associated with" KIA Korea within the meaning of sub-para. (ii) of s. 155(2)(e) of the Act so that the commission paid by KIA Australia should be taken not to be a buying commission and thus included in the customs value of the imported goods. It was said that it is not necessary to examine whether the relationship between Itochu and KIA Australia in fact affected the terms of the import sales transaction. Further it was said that as s. 155(2) is a deeming provision designed to aid administration of the customs valuation provisions, its application is the same regardless of whether the prices or commissions paid are fair, or at arms length or not. It was also said that, unless the decision-maker is satisfied that Itochu and KIA Korea are not associated then the commission cannot be regarded as a buying commission regardless of whether the terms of the import sales transaction were influenced by that association.

16. It was submitted by Mr Gross for the applicant that there is nothing in the CC Agreement which can be said to create the sort of association in relation to imported goods that is prescribed by sub-para. (ii) of s. 155(2)(e). It was argued that it cannot be said that, through operation of that agreement, KIA Korea and Itochu are associated in relation to specific imports 13 years later. Mr Gross maintained that Itochu's objective has been to achieve the lowest buying price from KIA Korea to optimise the profits of its wholly owned subsidiary. He argued that the relationship with KIA Korea was the relationship of a major customer and distributor where it is normal commercial practice to find and develop markets for the relevant goods. It was said that if the Distributorship Agreement created an "association" for the purposes of sub-para. (ii) then the majority of such agreements involving a buying agent would contravene that provision.

17. In his judgment Finkelstein J. examined the construction of certain provisions contained in Division 2 of Part VIII of the Act. It is unnecessary to restate this discussion here. His Honour noted that amendments to the Act in 1987 and 1989 were in part, for the purpose of rendering ineffective a number of practices which had developed and by which importers attempted to reduce the duty of customs payable on imported goods. He said (at page 10):

"The purpose for including as a component of the price of imported goods payments that are made to an agent who is also an agent of or associated with the vendor of goods or the supplier of services as a component of the price the imported goods is to ensure that duties of customs are imposed on the actual price of those goods. That is the reason why the agency or association must be in respect of the imported goods or in respect of the supply of other goods or services whose value would be taken into account in determining the price of the imported goods. This reason suggests that the association must be something more than a mere "connection" between the agent and the vendor or supplier. It also suggests that an agent to whom a commission is paid will relevantly be "associated with" the vendor or supplier if the agent and the vendor or supplier are acting together or have some common purpose in relation to the goods referred to in s 155(2)(a)(i) or the services referred to in s 155(2)(b)(i).

In this regard the Oxford English Dictionary provides a more useful definition of "associate" than does the Macquarie Dictionary. One meaning that the Oxford English Dictionary attributes to the word "associate" is: "to join (person, or one person with another), in common purpose, action, or condition; to link together, unite combine, ally, confederate." It is in this sense that the word "associated" in s 155(2)(e)(ii) should be understood. Thus, to establish an association will require something more than a connection between the agent and the vendor."

18. Having regard to the meaning of "associate" identified by His Honour and to the terms of both the CC Agreement and the Distributorship Agreement to which Itochu and KIA Korea were parties, we do not accept that the agreements create an association between the two companies other than that Itochu is the agent of the purchaser of the goods, KIA Australia. If the respondent is correct in maintaining that the Distributorship Agreement creates an association precluded by sub-para. (ii) of s. 155(2)(e), it is difficult to envisage how any distributorship agreement to which the buying agent is a party would not also create an association. In our view there is nothing in the present agreement which indicates an association in relation to the imported goods other than as an agent for the purchaser. The respondent considered that the fact Itochu was a party to distributorship agreements in some other countries demonstrated an association. Rather, in our view that is an indication to the contrary, that Itochu's role in relation to KIA Korea is solely that of purchaser or buying agent. Equally, the argument that Itochu may well be the largest customer of KIA Korea does not of itself result in an association for the purposes of sub-para. (ii) in relation to the imported goods.

19. The primary contention of the respondent is that the CC Agreement demonstrates an association between Itochu and KIA Korea caught by sub-para. (ii). As related to Itochu, Clause 3.1 of this agreement requires Itochu to "positively, actively and sincerely collaborate with KIA in matters pertaining to ... exploration of the market ... and giving financial support requested by KIA ... in accordance with the terms and conditions to be agreed upon...". The previous decisions in this matter concentrated on the giving of financial support by way of subscribing capital in KIA Korea. The question here is whether the collaboration required under the agreement results in Itochu being associated with KIA Korea for the purposes of sub-para. (ii). Association may well involve collaboration but it is doubtful that every collaboration is an association. A taxpayer will, hopefully, collaborate with the Australian Taxation Office in making an appropriate contribution of taxes but very few taxpayers would regard themselves as being associated with that office. A citizen will collaborate with police in investigating an offence but, again, that is not an association. To "collaborate" in the present context means "to work, one with another; cooperate" (see The Macquarie Dictionary 2^nd Ed.) for a particular purpose. Collaboration may be for the joint benefit of the collaborators but may also be for individual benefit. In addition, both Clauses 3.1 and 3.2 require any collaboration or cooperation to be in accordance with terms and conditions to be agreed upon. In this regard we accept the evidence of Mr Nakao that the CC Agreement contains the only terms and conditions. We are satisfied that the collaboration referred to in the agreement and subsequently practised means no more than the normal collaboration expected between a manufacturer and a major purchaser/distributor. Itochu may well have provided market advice to KIA Korea but this does not amount to an association, simply cooperation to enable both parties to sell more vehicles for each party's respective benefit.

20. The CC Agreement was entered into in 1983, some 13 years before KIA Australia commenced to import vehicles and parts, paying a buying commission to its parent company Itochu. No association between Itochu and KIA Korea has been suggested other than the agreement to collaborate on some ongoing basis (on terms to be agreed upon) and the appointment of Itochu or a subsidiary of Itochu in several countries. We are satisfied that this connection does not amount to an association for the purpose of sub-para.(ii) of s 155(2)(e). Even if the agreement of 1983 could be said to have resulted in an association for the purposes of sub-para. (ii), which we do not accept, the association in 1996 in relation to the goods imported into Australia was solely as the agent of the purchaser.

21. It was submitted for the respondent that as s. 155(2) is a deeming provision and, if an association between the buying agent and the supplier can be found, then the amount paid to the buying agent will not be a "buying commission". We cannot accept this submission. The basis of the respondent's approach would appear to make any collaboration between a buying agent and a supplier as an association. Furthermore, the submission appears to ignore the words "except as the agent of the purchaser". The exception where the association is as agent for the purchaser is clear. Further, the association has to be in relation to any of the goods referred to in sub-para. (a)(i) or any of the services referred to in sub-para. (b)(i) of s. 155(2). A collaboration, even an association arising from the collaboration agreement, does not preclude a payment from being buying commission in relation to those goods or services. We are satisfied that there is no association pursuant to sub-para. (ii) of s. 155(2)(e) in relation to the imported goods other than as agent for the purchaser.

22. The respondent accepted that the terms of the import transaction were not influenced other than by way of arms length negotiation by any relationship between Itochu and KIA Korea. We also accept the evidence of Mr Nakao on this point. If there is any doubt about the degree of association required to bring sub-para. (ii) into operation, it is appropriate to consider the object and purpose of s. 155, and the mischief it was intended to redress. This purpose is clear from the Second Reading Speech of the Customs and Excise Legislation Bill (No. 2) 1987 (Hansard, House of Representatives 18 November 1987) when the new s. 155 was introduced.

23. We are satisfied that the commission paid to Itochu was not a component of the transaction value of the imported goods. It was remuneration to Itochu as representative of KIA Australia in relation to the imported goods. There is nothing in s. 155(2) which precludes the payment from being a buying commission.

24. It follows that the decision under review is set aside and, the matter remitted to the respondent for reconsideration with a direction that the payment by KIA Australia to Itochu in relation to the imported goods is a "buying commission" as that term is defined in the Act.

I certify that the 24 preceding paragraphs are a true copy of the reasons for the decision herein of

Deputy President B.M. Forrest

Senior Member B.H. Pascoe

Mr C. Ermert, Member

Signed: .....................................................................................

Associate

Date/s of Hearing 12 April 1999

Date of Decision 27 July 1999

Counsel for the Applicant Mr L. Gross

Solicitor for Applicant Louis Gross & Associates

For the Respondent Mr R. Northcote, departmental advocate