CLA-2 CO:R:CV:V 543984 EK
District Director of Customs
San Francisco, California
RE: Request for Internal Advice No. 34/87
Dear Sir:
This is in response to your internal advice request
regarding various valuation issues which arise in connection with
the importation of merchandise by a certain importer.
FACTS:
The importer is a United States corporation which is owned
by both a U.S. corporation (hereinafter referred to as SPC), and
a Japanese corporation (hereinafter referred to as RC). The
equity holdings in the importer by SPC and RC is set a 50 percent
each. The importer will purchase and import items from many
different vendors, including merchandise produced by RC itself.
In the initial phase of the operation, the sole purchaser from
the importer in the United States will be SPC. It is anticipated
that in the future, the importer will sell to customers other
than SPC.
An agreement between SPC and RC provides that a certain
company (hereinafter referred to as YTC), will perform
procurement and shipping functions. YTC is 40 percent owned by
RC. A written buying agency agreement has been entered into
between the importer and RC, with RC acting as buying agent and
YTC acting as RC's sub-agent.
The merchandise to be imported will be invoiced at a price
consisting of the following: 1) the purchase price paid to the
actual vendor; 2) an addition for inland charges for merchandise
purchased on an ex-factory basis; 3) a service fee to RC for
procurement activity; 4) a service fee paid to YTC for performing
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all remaining services, i.e., pick-up of merchandise at vendor's
factory, delivery to shipping facilities, arranging for export
documentation and shipping the merchandise to the United States.
The written buying agency agreement between the importer
and RC, as agent, provides that RC shall utilize the services of
YTC as sub-agent in carrying out the services provided for under
the agreement. The importer will pay RC as agent for services
rendered a commission equal to 9.36% of the amount due for all
goods based on the ex-factory price. Of this 9.36%, RC will
retain 3.51% as its compensation for procurement services and the
remaining 5.85% will be remitted to YTC for consolidation and
shipping services rendered. With respect to merchandise
manufactured by RC itself, the commission will be 5.85% which
will inure to the benefit of YTC and RC will not receive any part
of the 5.85% commission.
In addition, the agreement provides that an amount equal to
3% of all finished goods based on the ex-factory price shall be
paid by the importer to cover the cost of inland charges when
such is not included. This 3% includes seaworthy packing, inland
freight, forwarding agents' fees, Customs fees, and container
stuffing charges. The 3% represents an estimate by RC and YTC as
to the amounts which are fair and reasonable for such charges.
An estimate is utilized because it would be impractical to keep
account of the actual amount paid, given the small dollar value
of the charges.
With respect to the 3% charge noted above, the importer
estimates that approximately 30% of such charge represents the
cost of seaworthy packing. Therefore, 0.9% of the ex-factory
price is estimated to be the cost of packing which the importer
recognizes as a dutiable charge for Customs purposes.
None of the parties have an ownership interest in any of
the vendors which will sell to the importer (other than RC
selling directly to the importer). However, one of the vendors,
NDC, has a 1.5% ownership interest in YTC. A second vendor has a
15% ownership interest in YTC.
RC, acting as agent for the importer, will provide the
importer with price quotations from the vendors who will produce
the imported merchandise. The price quotations are compiled
after discussion by RC and the various vendors and include price
quotations by RC for its own merchandise. There are also
independent price negotiations by personnel of the importer
directly with the vendors.
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ISSUES:
Whether transaction value is applicable in appraising the
merchandise sold to the importer by RC, its related party in
Japan.
Whether the inland charges are properly excluded from the
dutiable value of the imported merchandise.
Whether the commissions paid to both RC and YTC are
excluded from transaction value as non-dutiable buying
commissions.
LAW AND ANALYSIS:
The preferred method of appraising merchandise is
transaction value which is defined as the "price actually paid or
payable" for merchandise when sold for exportation to the United
States, plus certain enumerated additions (section 402(b) of the
Tariff Act of 1930, as amended by the Trade Agreements Act of
1930 (TAA); 19 U.S.C. 1401a(b)). The relevant provision with
regard to related parties states the following:
The transaction value between a related buyer and
seller is acceptable . . . if an examination of the
circumstances of the sale of the imported merchandise
indicates that the relationship between such buyer and
seller did not influence the price actually paid or
payable. See, section 402(b)(2)(B).
In determining whether the relationship between the parties
influences the price of imported merchandise, if it is shown that
the buyer and seller, albeit related, buy and sell from one
another as if they are not related, this indicates that the price
is not influenced by the relationship between the parties, and
appraisement pursuant to transaction value is proper. If the
price is determined in such a manner which is consistent with the
normal pricing practice of the industry, or with the way the
seller deals with unrelated buyers, then it is considered not to
have been influenced by the relationship between the parties.
The transaction value between a related buyer and seller is
acceptable if it closely approximates the transaction value of
identical or similar merchandise in sales to unrelated buyers in
the United States. Id.
Therefore, with respect to the instant case regarding the
sales between RC and the importer, the provisions in the joint
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venture agreement indicate that RC will quote prices for its
product in the same manner and on the same conditions at which
it quotes prices to unrelated customers. The importer has
submitted a statement from the seller indicating that the prices
it quotes to the importer are prices at which the seller would
sell to unrelated purchasers. In addition, the importer has
submitted a statement from RC indicating that it would in fact
sell the same products to unrelated purchasers in the United
States. Therefore, a comparison can be made between the prices
paid by the importer and those paid by unrelated purchasers.
For purposes of determining whether the relationship
between the parties influences the price, we are assuming that
the facts are as presented in counsel's submission of December
12, 1986; specifically, RC-produced merchandise would be
available and sold to unrelated purchasers in the United States
at the same price at which RC sells to the importer. It appears
from the totality of the circumstances surrounding the sale
between the related parties that the relationship does not
influence the price and that transaction value is a valid means
of appraisement.
With respect to the 3% addition to the ex-factory price for
inland charges, the importer states that the buying agency
agreement entered into between the parties defines "inland
charges" to include seaworthy packing, inland freight, forwarding
agent's fees, Customs fees, go-down charges and container
stuffing charges.
Section 402(b)(4) of the TAA states the following:
The term 'price actually paid or payable' means
the total payment (whether direct or indirect, and
exclusive of any costs, charges, or expenses incurred
for transportation, insurance, and related services
incident to the international shipment of the merchandise
from the country of exportation to the place of importation
in the United States) made, or to be made, for imported
merchandise by the buyer to, or for the benefit of, the
seller.
Regarding ex-factory sales, section 152.103(a)(5), Customs
Regulations [19 CFR 152.103(a)(5)], states:
If the price actually paid or payable by the buyer to
the seller for the imported merchandise does not include
a charge for foreign inland freight and other charges for
services incident to the international shipment of
merchandise (an ex-factory price), those charges will
not be added to the price.
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Packing costs which are incurred by the buyer with respect
to the imported merchandise are added to the "price actually paid
or payable" pursuant to section 402(b)(1) of the TAA.
With the above-noted provisions in mind, with respect to
both the sales from unrelated vendors to the importer and from RC
to the importer, we agree that of the 3% addition to the ex-
factory price, only the amount representing seaworthy packing is
to be added to the "price actually paid or payable" in
determining transaction value. This conclusion, i.e., regarding
the non-dutiability of the inland charges, applies only with
respect to ex-factory sales as indicated in 19 CFR 152.103(a)(5).
The importer states that the 0.9% for seaworthy packing is
an estimate rather than an actual figure. However, the amount
must be based upon "sufficient information" as indicated in
section 402(b)(1). The term "sufficient information" means
information that establishes the accuracy of such amount,
difference, or adjustment. See, section 402(h)(5), TAA.
Although the importer states that it is more practical to provide
estimated amounts, it is our conclusion that the information is
available and that the burden is on the importer to submit actual
figures to Customs for appraisement purposes.
For purposes of this internal advice request, we have
concluded that the two vendors mentioned above (NDC - 1.5%
ownership in YTC; 2nd vendor - 15% ownership in YTC), are not
related to the importer within the meaning of section 402(g) of
the TAA.
The final issue to resolve is whether the commissions paid
to both RC and YTC are to be included in the dutiable value of
the imported merchandise. It is well-settled that fees paid to a
selling agent are dutiable while those paid to a buying agent are
non-dutiable. No single factor is determinative in establishing
the existence of a bona fide buying agency relationship. The
existence of such a relationship is ascertained by examining all
relevant factors. The primary consideration in determining
whether a buying agency relationship exists is the right of the
principal to control the agent's conduct with respect to matters
entrusted to him. B & W Wholesale Co., Inc. v. United States,
58 CCPA 92, C.A.D. 1010 (1971), J.C. Penney Purchasing
Corporation et al. v. United States, C.D. 4741 (1978). The
alleged agent performs duties 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).
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A relevant factor in determining the relationship is the
fact that none of the commission paid by the buyer inures to the
benefit of the seller. As stated in Reliance International Corp.
v. United States, 62 Cust. Ct. 845, at 849, 305 F.Supp. 20, at 24
(1969),:
Commissions paid by the purchaser to agents for
services rendered in procuring the merchandise,
inspecting and packing goods, arranging for shipment
and acting as a paymaster for account of the buyer,
no part of which commissions inure to the benefit
of the seller, are buying commissions.
(Emphasis added).
Functions performed by an agent such as searching the
market for the best available prices for sale to the importer,
making quality control inspection of merchandise prior to
shipment, arranging shipment, and making payments on behalf of
the buyer, none of which inures to the benefit of the agent, are
all relevant factors in determining whether the agency
relationship exists. Reliance International Corp. v. United
States, supra.
Although a written buying agency agreement supports the
notion of a bona fide agency relationship, it is not dispositive
of the issue. It is merely evidence that the parties intended to
create an agency relationship. Rosenthal-Netter, Inc., v. United
States, Slip Op. 88-9, decided January 28, 1988, citing, J.C.
Penney, supra.
Turning to the facts of this particular case, it is
important to note that the alleged buying agent, RC, has a 50
percent interest in the importer. This is a factor to consider
in determining whether the importer, as principal, truly controls
RC, the agent.
The importer states that RC is a buying agent with YTC
acting as sub-agent. Rather than characterize YTC as sub-agent
of RC, the determination as to whether YTC is a buying agent of
the importer is necessary; however, this fact only becomes
relevant with respect to instances where RC is the actual seller
of the merchandise. When RC is the seller, then YTC receives a
5.85% commission. In order for this 5.85% commission to be
non-dutiable as alleged by the importer, it must be a buying
commission paid to a bona fide buying agent of the importer,
i.e., YTC. In sales to the importer from unrelated vendors, the
commission of 9.36% is paid to RC, with RC remitting 5.85% to
YTC. The determination as to the dutiability of the 9.36% as a
buying commission is made vis-a-vis the importer and RC.
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The terms of the agreement between the importer and RC
specify that RC shall utilize the services of YTC in carrying out
the functions performed pursuant to the agreement. The importer
initiates all transactions by placing purchaser orders with RC.
Neither RC nor YTC can order merchandise on behalf of the
importer without the express direction of the importer.
The agent, RC, locates and negotiates with vendors pursuant
to specifications and orders issued by the importer. The
importer must approve all prices. RC will inspect all finished
goods for conformity to specifications and supervise
transportation arrangements. RC will ensure that individual
commercial invoices from each vendor covering merchandise sold to
the importer are available.
Therefore, the circumstances taken as a whole indicate that
the importer exercises the requisite degree of control so as to
establish a principal-agent relationship with RC. The commission
paid to RC, 9.36% on sales from unrelated vendors to the importer
are properly excluded from the transaction value of the imported
merchandise.
With regard to sales from RC to the importer with a 5.85%
commission to YTC, it is our conclusion that such amount is to be
included in the transaction value. The requisite degree of
control vis-a-vis the importer and YTC has not been established.
Moreover, since the seller has a 40% ownership interest in YTC,
then it is clear that the payment to YTC inures to the benefit of
the seller.
We indicated above that the two vendors which have a
financial interest in YTC (NDC - 1.5% interest; 2nd vendor - 15%
interest) are not related to the importer within the meaning of
section 402(g) of the TAA. However, regarding sales from these
vendors to the importer, the commission paid to YTC is not a
buying commission in that a principal-agent relationship has not
been established with YTC. Also, the two vendors will indirectly
receive a portion of the payment. Having established the
principal-agent relationship between the importer and RC, the
3.51% commission to RC in sales from the two vendors is properly
excluded from the transaction value.
HOLDING:
Transaction value pursuant to section 402(b) of the TAA is
proper in appraising the merchandise sold from RC to the
importer.
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Regarding the 3% addition to the ex-factory price, the
portion representing all but the seaworthy packing charges is
properly excluded from transaction value in sales to the importer
from both RC and unrelated vendors. This is applicable with
respect to sales from NDC and from the 2nd vendor which both hold
a minimal interest in YTC. In addition, the amount representing
seaworthy packing must be based upon actual figures rather than
estimates.
With respect to the commissions paid by the importer, the
transaction value of sales from RC to the importer should include
the commission, i.e., the 5.85% paid to YTC. The transaction
value of merchandise which is sold from unrelated vendors should
exclude the 9.36% fee incurred by the importer as a non-dutiable
buying commission. The merchandise sold to the importer from the
two vendors which have a financial interest in YTC should be
appraised pursuant to transaction value, with the 3.51%
commission paid to RC excluded as a buying commission; however,
the 5.85% commission paid to YTC is included in the dutiable
value of the merchandise.
Sincerely,
John Durant
Acting Director, Commercial
Rulings Division