VAL CO:R:C:V 544610 DPS
District Director
Seattle, Washington
RE: Application for Further Review of Protest No. 3001-89-
000907; dutiability of commissions paid to purported buying
agents, quota payments and finance charges
Dear Sir:
The subject protest and application for further review
concerns the appraisement of numerous entries of garments
imported from the Far East by Nikoata USA, Inc.
(importer/protestant). The appraisement issues raised in the
subject protest relate to the inclusion of certain finance
charges, buying commissions and quota payments in the
dutiable values of the imported merchandise.
FACTS:
Am-Asian Resources Ltd. (AAR) was chartered in Hong Kong
in 1980 as a trading company and was engaged in finding
manufacturing sources for garment production in Macau, North
China and Hong Kong. In 1984, the owners of AAR became
acquainted with Mr. Thomas McCormick, who was affiliated with
a U.S. company. In 1985, Mr. McCormick and the owners of AAR
formed Nikoata U.S.A., Inc. (NUSA) and Nikoata Far East
Limited (NFE). Both NUSA and NFE are jointly owned by
McCormick and the owners of AAR. The parties determined that
because of its location in Hong Kong, NFE alone would handle
all the sourcing of manufacturers, ordering, expediting, and
inspecting in Hong Kong and Macau and that NFE would assist
AAR in the handling of NUSA, purchase transactions in China,
Sri Lanka, the Philippines, Thailand, Indonesia, and the rest
of the Far East, since AAR had experienced personnel and
contacts in the garment businesses in these countries.
The protest at issue covers some 96 entries of wearing
apparel from various countries of origin. All of the entries
involve buying commissions, not all have finance charges
associated with them, and only a limited number of entries
where the country of origin is Hong Kong involve quota
charges.
NUSA claims that duties should only be assessed on the
purchase prices of garments plus the dutiable assist costs,
if any, under the transaction value method of appraisement.
NUSA also claims that buying commissions paid to AAR and NFE
are bona fide, and that finance charges and third party quota
charges are not dutiable. Your office has taken the
position that AAR and NFE are not buying agents under the
control of NUSA, but sellers of merchandise, thereby making
the 10% commission paid to AAR and the 5% commission to NFE
dutiable. Seattle Customs further takes the position that
quota charges paid by AAR to a third party are dutiable
because AAR acts as a seller; and that the finance charges at
issue are for fabric and trim, acquired for NUSA by AAR with
AAR funds, and are used in the production of the goods, which
therefore makes them dutiable.
ISSUES:
(1) Whether a bona fide buying agency relationship exists
between the NUSA and AAR, and between NUSA and NFE.
(2) Whether payments made by NUSA to AAR for quota are
considered to be part of the price actually paid or payable.
(3) Whether finance charges paid by NUSA to AAR are
considered dutiable as part of the price actually paid or
payable for the imported merchandise.
LAW & ANALYSIS:
For the purpose of this response, we are assuming that
transaction value is the appropriate basis of appraisement.
Transaction value is defined in section 402(b)(1) of the
Tariff Act of 1930, as amended by the Trade Agreements Act of
1979 (19 U.S.C. 1401a(b);TAA) as the "Price actually paid or
payable for the merchandise" plus amounts for the five
enumerated statutory additions in 402(b)(1).
Buying Commissions
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 402(b)(4) 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.
Whether or not a bona fide buying agency exists between
an importer and an alleged "buying agent" is not determined
by any single factor, but depends upon the relevant facts of
each case. See J.C. Penney Purchasing Corp. v. United
States, 451 F. Supp. 973 (Cust. Ct. 1978). The primary
consideration in determining whether a bona fide buying
agency relationship exists between an importer and an alleged
buying agent is the right of the principal to control the
agent's conduct with respect to matters entrusted to the
agent. B & W Wholesale Co., Inc. v. United States, 58 CCPA
92, C.A.D. 1010, 436 F.2d 1399 (1971).
In a general notice published in the Customs Bulletin on
March 15, 1989, Customs provided an explanation of its
position on buying commissions. The following excerpts
illustrate that position:
While bona fide buying commissions are nondutiable,
evidence must be submitted to Customs which clearly
establishes that fact. In this regard,
Headquarters Ruling Letter 542141, dated September
29, 1980, also cited as TAA No. 7, provided:
...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.
In New Trends Inc. v. United States, 10 CIT 637, 645 F.
Supp. 957 (1986), the Court of International Trade set forth
several factors upon which to determine the existence of a
bona fide buying agency. These factors include: whether the
agent's 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 manufacturer of the
merchandise. In addition, the importer must show that "none
of the commission inures to the benefit of the manufacturer."
J.C. Penney, 80 Cust. Ct. at 97, 451 F. Supp. at 984. More
recently, in Pier 1 Imports, Inc. v. U.S., 708 F.Supp 351
(CIT 1989), the court reiterated the factors set forth in New
Trends and J.C. Penney, and emphasized that control over the
purchasing process was strong evidence that an agency
relationship exists. The court found the manner of payment
to establish that the agent purchased merchandise only at the
direction of the importer. In Pier 1, the agent did not
retain the discretion to deduct commissions, freight charges,
or bear the risk of loss. In addition, none of the
commissions inured to the benefit of the manufacturer/seller.
The court found that the agent did not "purchase" the
merchandise until after the importer ordered the merchandise,
and forwarded the funds necessary for acquisition. Thus, in
Pier 1, the agent operated only at the direction of the
importer, not autonomously.
As the above cited court decisions make clear, any
determination of whether a bona fide buying agency
relationship exists, depends on the facts in each particular
case. Here, we must determine the validity of the purported
buying agency relationship, between Nikoata U.S.A. and AAR,
and Nikoata U.S.A. and NFE.
Based on the information submitted, ie., an audit report
concerning Nikoata's activities prior to the protested
entries, the buying agency agreements, a small assortment of
sample invoices which counsel advised had been "revised" or
"corrected" at least twice, and counsel's explanation that
obtaining manufacturer's invoices and proofs of payment for
all the merchandise involved in the protested entries is
impossible, it appears that the criteria for finding a bona
fide buying agency relationship between the importer, AAR and
NFE cannot be satisfied. Absent evidence of communications
by NUSA directing AAR and NFE, proofs of payment to
manufacturers, AAR and NFE, and any other documentation
evidencing control by NUSA over the purported buying agents,
we have no choice but to find that no bona fide buying agency
relationship exists under the circumstances.
In addition, information gathered by Customs during the
course of an investigation indicates that: AAR was founded as
a trading company and sells to various companies besides
Nikoata U.S.; AAR handled all arrangements with
manufacturers including the preparation of documents; AAR
controlled the transactions with manufacturers to the extent
that AAR is not under Nikoata's control; AAR continues to
sell to others, and maintains a showroom where buyers place
orders; AAR and NFE are not separate entities; NFE consists
of four clerks contained within the space of AAR; and
finally, the owners of AAR make all decisions for NFE.
Based on the total lack of first hand documentation
demonstrating Nikoata U.S.A.'s control over its purported
buying agents, AAR and NFE, and absent actual manufacturers'
invoices covering the 96 entries being protested, we must
reject the existence of a bona fide buying agency
relationship between Nikoata U.S.A., AAR and NFE. Thus, the
sale for purposes of establishing transaction value is the
sale for exportation between AAR and NUSA.
Quota Charges
Counsel argues that the quota payments made to AAR or to
other third parties, as reflected in the sample transaction
documents submitted with the subject protest, are not
dutiable. However, based on the documents provided, it
appears that Nikoata U.S.A. paid AAR directly for quota which
AAR acquired from a third party. In accordance with the
court case discussed below, it appears that the subject quota
payments should be included in the price actually paid or
payable for the subject merchandise.
In Generra Sportswear Company v. United States, 905 F.2d
377 (Fed. Cir. 1990), the United States Court of Appeals for
the Federal Circuit was presented with the issue of whether
quota charges were properly included in the transaction value
of imported merchandise. The importer purchased cotton knit
blouses from the seller in Hong Kong at a price of $6.00
each. The seller agreed to obtain type A transfer quota at
$0.95 per unit. The importer paid the seller an amount for
the shirts, exclusive of quota. The seller then billed the
importer's buying agent for the quota charges under a
separate invoice and this amount was paid for by the
importer's buying agent. The Customs Service appraised the
merchandise at $6.95 per unit by combining the amounts stated
on the two invoices.
A protest was filed by the importer and denied by
Customs. The importer filed suit in the Court of
International Trade challenging the denial of the protest.
The court held the payments to be non-dutiable and ordered
the Customs Service to refund excess duties collected. The
United States subsequently filed an appeal with the United
States Court of Appeals for the Federal Circuit which
reversed the lower court's decision.
The court determined that since quota payments are not
specifically addressed by the statutory language, then the
appraisal by the Customs Service was based upon a permissible
construction of the statute. The Court stated that it is
reasonable to conclude that the quota charges are properly
part of the "total payment . . . made, or to be made, for
imported merchandise by the buyer to, or for the benefit of,
the seller." The court further stated:
As long as the quota payment was made to the seller
in exchange for merchandise sold for export to the
United States, the payment properly may be included
in transaction value, even if the payment
represents something other than the per se value of
the goods.
In addition, the court stated that it is irrelevant that
the buyer did not pay the quota charges directly to the
seller. The payment was made on behalf of the buyer by its
buying agent.
In accordance with the court's decision in Generra, the
payments for quota made by the importer (Nikoata U.S.A) to
its purported agent (AAR), which on the basis of the evidence
presented is the seller, are included as part of the price
actually paid or payable for the imported merchandise, and
are therefore dutiable.
Interest & Finance Charges
In the course of their ongoing business relationship,
AAR used its credit to borrow funds for NUSA's purchases, and
was to be reimbursed for all finance and interest charges
incurred. Certain of these finance charges are described on
the "corrected" sample invoices submitted by protestant's
counsel.
In T.D. 85-111 of July 17, 1985, Customs addressed the
issue of interest payments:
Interest payments, whether or not included in the
price actually paid or payable for imported
merchandise, should not be considered part of
dutiable value provided the following criteria are
satisfied: (1) the interest charges are identified
separately from the price actually paid or payable;
(2) the financing arrangement in question is made
in writing; (3) when required by Customs, the buyer
can demonstrate that: the goods undergoing
appraisement are actually sold at the price
declared as the price actually paid or payable, and
the claimed rate of interest does not exceed the
level for such transaction prevailing in the
country where, and at the time, when the financing
was provided.
In rulings issued subsequent to the T.D. 85-111, Customs
held that interest payments, whether or not included in the
price actually paid or payable for imported merchandise, will
not be considered part of dutiable value, provided the
criteria set out in T.D. 85-111 are met. See Headquarters
Ruling Letter (HRL) 543531, dated April 30, 1985, and HRL
544082 dated September 19, 1988. On December 16, 1988,
Customs issued HRL 544155, which held that the importer's
payments to the seller met the requirements of T.D. 85-111,
which at the time was the only applicable statement by
Customs on determining the dutiability of payments that were
allegedly interest payments. Subsequently, on July 17, 1989,
Customs published a Statement of Clarification for T.D. 85-
111 (54 FR 29973) which was published in the Customs Bulletin
of July 26, 1989, wherein Customs interpreted the term
"interest" to encompass only bona fide interest charges, not
simply the notion of interest arising out of delayed payment.
Customs further stated that "bona fide interest charges are
those payments that are carried on the importer's books as
interest expenses in conformance with generally accepted
accounting principles." This clarification became effective
October 16, 1989, which was ninety days after publication in
the Federal Register. See also, C.S.D. 91-10 which
recognizes and applies the Statement of Clarification for
T.D. 85-111.
In a distinct case involving reimbursement for interest
payments to a third party, Customs held that an amount paid
by the importer to a foreign seller, which represented
reimbursement for the interest charges that the foreign
seller paid to a third party, was a dutiable expense. In HRL
543765, dated August 8, 1986, Customs found that such
reimbursement paid to a seller did not fall into the purview
of T.D. 85-111, which excludes interest from the dutiable
value of goods, and found such payments to be dutiable.
Here, the agreements between NUSA and AAR indicate that
where required, AAR will use its credit to borrow funds for
NUSA's purchases and will be reimbursed by Nikoata for all
finance and interest charges which are incurred by AAR (See
Exhibit 4 to protestant's AFR submission, Buying Agency
Agreement at paragraph 6). These charges are similar to
those involved in HRL 543765 described above. NUSA
reimburses AAR for finance and interest charges incurred by
AAR in the course of making purchases for NUSA. This type of
reimbursement for finance charges is not of the type
contemplated by T.D. 85-111. Accordingly, consistent with
the holding in HRL 543765, we find NUSA's reimbursement of
finance charges to be dutiable as part of the price actually
paid or payable for the imported merchandise.
In so holding, we note that Customs Statement of
Clarification for T.D. 85-111, concerning the dutiability of
interest charges, published in the Customs Bulletin of July
26, 1989, and subsequent rulings including HRL 544395 of
November 23, 1990, and C.S.D. 91-10, are in no way affected
by the holding herein.
HOLDING:
(1) Based on the information presented, and the lack of
documentation presented by the protestant, we find that under
the circumstances, bona fide agency relationships do not
exist between NUSA and AAR, and NUSA and NFE. Accordingly,
the purported buying agency commissions are dutiable.
(2) The payments made by NUSA to AAR for quota are
considered to be part of the price actually paid or payable
for the imported merchandise in accordance the Court's
decision in Generra Sportswear Company v. U.S., 905 F.2d 377
(Fed. Cir. 1990).
(3) The protestant's payment of finance charges to AAR are
dutiable to the extent that these payments are reimbursements
to AAR for finance and interest charges incurred by AAR in
the course of making purchases for NUSA.
Consistent with the decision set forth above, your are
hereby directed to deny the subject protest. A copy of this
decision should be attached to the Customs Form 19 and mailed
to the protestant as part of the notice of action on the
protest.
Sincerely,
John Durant, Director