CLA-2 CO:R:C:V 543911 CW
Area Director of Customs
JFK Airport
Jamaica, New York 11430
RE: Application for Further Review of Protest No. 1001-5-001953
contesting the appraisement of certain jewelry imported by
Zale Corp. from Hong Kong
Dear Sir:
The above-referenced protest contests your determination of
the appraised value of certain jewelry manufactured in Hong Kong
and imported by Zale Corp. in 1984.
FACTS:
The record reflects that the three Hong Kong manufacturers
of the jewelry in question submitted invoices for the merchandise
to Z of Hong Kong Ltd., a wholly-owned subsidiary of the importer
(protestant). The Hong Kong subsidiary, in turn, invoiced the
importer for the merchandise after adding an average mark-up of
approximately 30 percent to the manufacturers' invoice prices.
None of the manufacturers is related to either the Hong Kong
subsidiary or the importer.
Your office determined that transaction value under 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)), is properly
represented by the invoice prices from the Hong Kong subsidiary
to the importer. Protestant maintains that, for several
alternative reasons, transaction value should be represented by
the Hong Kong manufacturers' invoice prices.
Counsel for the protestant contends initially that the Hong
Kong subsidiary acted as the importer's buying agent in regard
to the jewelry in question, and that the subsidiary's mark-up to
the importer constituted compensation for the purchasing
functions performed by the former. Therefore, counsel states
that as the mark-up represents a buying commission, it is not
dutiable as part of transaction value pursuant to TAA #7 dated
September 29, 1980 (HQ 542141). Although no written buying
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agency agreement existed between the importer and its Hong Kong
subsidiary, counsel asserts that the totality of the evidence
clearly shows that the relationship between the parties was that
of agent and principal.
According to counsel, the functions performed by the Hong
Kong subsidiary on behalf of, and solely at the direction of, the
importer included investigating various supply and manufacturing
sources, working with the importer regarding price and delivery
matters, coordinating material requirements, maintaining quality
control, accompanying employees of the importer on visits to the
manufacturers, inspecting the finished jewelry and arranging for
its shipment to the U.S. We note that counsel's initial
submission stated that the fact that the jewelry was shipped
directly from the manufacturers to the importer supports the
conclusion that transaction value should be represented by the
manufacturers' invoice prices. However, information subsequently
submitted indicates that the jewelry was shipped directly from
the manufacturers to the importer only during the period when the
subsidiary was not fully staffed. According to this information,
once the subsidiary's office was fully staffed, the jewelry was
hand-carried from the manufacturers to the subsidiary who then
shipped the merchandise to the U.S.
Counsel explains that the 30 percent average mark-up
reflected on the Hong Kong subsidiary's invoices was "intended as
a bookkeeping measure to ensure parity with the price [the
importer] would have had to pay for similar jewelry purchased in
the New York City area market." Two affidavits executed by the
persons who served as the importer's international controller and
the Hong Kong subsidiary's general manager during the relevant
time period have been submitted to corroborate the above-stated
facts related by counsel for the protestant.
As an alternative argument, counsel maintains that
transaction value for the subject jewelry should properly be
represented by the manufacturers' invoice prices based on the
meaning of the words "when sold for exportation to the United
States" in the statutory definition of transaction value (section
402(b) of the TAA). Counsel cites the recent decision of the
Court of Appeals for the Federal Circuit in E.C. McAfee Company
et al. v. United States et al., No. 87-1441, 842 F.2d 314 (Fed.
Cir. 1988), as authority for the proposition that where there
exist two sales for the same merchandise -- one between the
foreign manufacturer and a foreign middleman and the other
between that middleman and a U.S. customer -- and both sales
satisfy the statutory standard of being "for exportation to the
United States," appraisement shall be based upon the
manufacturer's sales price.
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ISSUES:
1. Whether the Hong Kong subsidiary's average 30 percent
mark-up in its invoice price to the importer for the jewelry in
question constitutes a nondutiable buying commission.
2. Whether the transactions between the manufacturers and
the Hong Kong subsidiary qualify as sales "for exportation to the
United States" and, if so, whether the holding in the E.C. McAfee
case requires that these transactions be used to determine
transaction value.
LAW AND ANALYSIS:
We note at the outset the essential inconsistency between
the alternative positions advanced by counsel for the protestant.
On the one hand, counsel maintains that because the Hong Kong
subsidiary acted merely as the importer's buying agent, the
jewelry was, in effect, sold by the manufacturers to the importer
-- not to the subsidiary. On the other hand, counsel contends in
his alternative argument that there was a sale between the
manufacturers and the Hong Kong subsidiary and that, because the
sale satisfies the statutory standard of being "for exportation
to the United States," transaction value should be based upon the
manufacturers' invoice prices. Notwithstanding the clear
contradiction between the two positions, both will be addressed
in this decision letter.
Concerning the first issue, section 402(b) of the TAA
defines transaction value as "the price actually paid or payable
for the merchandise when sold for exportation to the United
States," plus amounts for the items specified in section
402(b)(1) if they are not already included in that price.
Although selling commissions are specified as one of the
additions to the price actually paid or payable, buying
commissions are not.
No single factor is determinative in establishing the
existence of a bona fide buying agency relationship. The
existence of such a relationship must be ascertained by examining
all relevant factors and each case is governed by its own
particular facts. J.C. Penney Purchasing Corp. v. United States,
80 Cust. Ct. 84, C.D. 4741, 451 F. Supp. 973 (1978). Where the
existence of an agency relationship is not clearly established,
the legal relationship is not that of agency. New Trends, Inc.
v. United States, 10 CIT __, 645 F. Supp. 957 (1986). The
commissionaire performs the duties of an agent acting on behalf
of its principal, the buyer. It may not act as an independent
seller, nor as a representative of the manufacturer. United
States v. Manhattan Novelty Corp., 63 Cust. Ct. 699, A.R.D. 263
(1969); (See also TAA #7). Where the relationship between the
parties is that of buyer and seller rather than principal and
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agent, an item claimed to be a "buying commission" is not
deductible from appraised value. B & W wholesale Co., Inc. v.
United States, 58 CCPA 92, C.A.D. 1010 (1971).
With respect to the instant case, counsel for the protestant
concedes that no written buying agency agreement existed between
the importer and the Hong Kong subsidiary. In this regard, it
has been held that while the existence of such an agreement lends
support to a claim that a bona fide buying agency relationship
exists, the absence of one is not fatal to such a claim, provided
the available evidence, taken as a whole, establishes the
existence of such a relationship. See Mitsui & Co. (U.S.A.),
Inc. v. United States, 66 Cust. Ct. 553, R.D. 11740 (1971); and
Rosenthal-Netter, Inc. v. United States, 12 CIT __, 679 F. Supp.
21 (1988). It is our opinion that, on balance, the available
evidence in this case establishes that the Hong Kong subsidiary
acted as an independent seller rather than as the importer's
buying agent in regard to the merchandise in question.
Although the two affidavits submitted by protestant attest
to the fact that the Hong Kong subsidiary performed certain
functions on behalf of the importer which are typical of those
rendered by buying agents, this appears to be the only evidence
before us that tends to support the existence of a buying agency
relationship between the two related parties. A review of the
manufacturers' invoices to the Hong Kong subsidiary for the
merchandise in question reveals that in all but one instance the
jewelry was hand-carried from the manufacturers to the Hong Kong
subsidiary who then arranged for their shipment to the U.S.
These invoices contain no reference to the importer, nor do they
indicate that the subsidiary was purchasing the merchandise for
anyone other than itself.
Moreover, the subsidiary's average 30 percent mark-up over
the manufacturers' invoice prices is not separately itemized as a
buying commission on any of the subsidiary's invoices to the
importer, but is merely reflected on the invoices as part of the
price for the jewelry. In this regard, we are unaware of any
evidence which would indicate that the mark-up was considered by
either of the related parties as compensation to the subsidiary
for the purchasing functions which it performed. In fact, in
explaining the reason for the subsidiary's average 30 percent
mark-up, the affidavits executed by the importer's international
controller and the subsidiary's general manager during the
relevant time period state only that this was a bookkeeping
measure designed to raise the price of the jewelry to equal the
price of similar jewelry in the New York City area market. The
importer's former international controller states that "[i]n
effect, this became the intra-company transfer price between" the
related parties. We also view as persuasive the statement by
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your office in the Customs Protest and Summons Information Report
dated January 6, 1986, that the subsidiary's mark-up greatly
exceeds the 5 to 7 percent commission that is normal in the trade
for bona fide buying agents.
With respect to the three Headquarters rulings cited by
counsel in support of the contention that the mark-up represents
a buying commission, we believe that these rulings are
distinquishable on their facts from the instant case. Again, in
determining whether a buying agency relationship exists, each
case is governed by its own particular facts. In our view, the
facts in this case establish that the Hong Kong subsidiary acted
as an independent seller of the jewelry in question.
In regard to counsel's alternative position, a memorandum of
April 1, 1988 (HQ 544179), from the Deputy Assistant Commissioner
(Commercial Operations) to all Regional Commissioners, published
in the May 4, 1988, issue of the Customs Bulletin (18 Cust. Bull.
7), stated that the court in the E.C. McAfee case:
... held that in the circumstances before it,
transaction value was represented by the cost to
the distributors of tailoring services in Hong Kong
with the addition of the cost of fabric and certain
other adjustments ('assembly price') rather than on
the basis of the price paid by the United States
customers to Hong Kong distributors for imported,
made-to-measure clothing produced in Hong Kong
('consumer price'). In so holding, the court empha-
sized on several occasions that the decision was
limited to the particular factual circumstances
before it.
Accordingly, the April 1, 1988, memorandum concluded that
"insofar as Headquarters is concerned, the principles set forth
within the subject court case should only be applied with regard
to the importation of made-to-measure clothing when the
distributor and tailor are located in the same country."
Therefore, the holding in the E.C. McAfee case will not be
applied to the instant case.
TAA #57 dated January 21, 1983 (HQ 542928), sets forth
Headquarters' position regarding the manner in which merchandise
should be appraised where there are two or more transactions
which might give rise to a transaction value. We stated in
TAA #57 that:
... the transaction to which the phrase 'when sold
for exportation to the United States' refers when
there are two or more transactions which might rise
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to a transaction value, is the transaction which
most directly causes the merchandise to be exported
to the United States.
That case involved a situation in which a foreign manufacturer
sold merchandise to another foreign company which, in turn, sold
the merchandise to a U.S. purchaser. Although the manufacturer
was not related to the second foreign company, the second company
was related to the U.S. importer. We concluded that the goods
were not shipped from the country of manufacture to the U.S. as a
result of the sale from the manufacturer to the second foreign
company but as a result of the sale from the second company to
the U.S. purchaser. Thus, we held that it is this second sale to
which we must look for a transaction value. See also C.S.D. 84-
54 dated December 1, 1983 (HQ 543098), and Headquarters rulings
dated February 4, 1986 (HQ 543676), and June 3, 1986
(HQ 543710).
We believe that the holding in TAA #57 is clearly
controlling with respect to the instant case. Therefore,
consistent with that ruling, we find that the transaction value
of the jewelry in question should be based upon the sale between
the Hong Kong subsidiary and the importer.
HOLDING:
On the basis of the information presented, it is our opinion
that the Hong Kong subsidiary acted as an independent seller of
the merchandise in question, and that transaction value should be
based upon the invoice price between the subsidiary and the
importer. Accordingly, you are directed to deny the protest in
full.
Sincerely,
John Durant
Director, Commercial
Rulings Division
Enclosure