Customs Ruling HQ 545420 - Sale for Exportation of Merchandise Imported Pursuant to a Three-Tiered Sales Arrangement; Buying Agents; Management Service Payments; Quota Payments.

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HQ 545420
May 31, 1995

Type : Valuation • HTSUS :
Related: 545144; 545360; 542141; 542121; 542169; 542150; 543913; 543992; 543820; 543512; 542122; 544323; 544423; 544976

VAL CO:R:C:V 545420 ER

Frank J. Desiderio, Esq.
Harold I. Loring, Esq.
Grunfeld, Desiderio, Lebowitz & Silverman
245 Park Avenue
New York, NY 1016-0002

RE: Sale for Exportation of Merchandise Imported Pursuant to a Three-Tiered Sales Arrangement; Buying Agents; Management Service Payments; Quota Payments.

Dear Messrs. Desiderio and Loring:

This is in response to your submissions dated August 31, 1993 and November 17, 1994, on behalf of your client, Pioneer Apparel Limited ("Pioneer"), in which you request a ruling regarding the valuation of certain knitted apparel imported pursuant to three and four-tiered sales arrangements. We regret the delay in responding.

FACTS:

Sale for Exportation

The following facts are set out in your ruling request. Pioneer, incorporated in the British Virgin Islands with its principal offices in Macau, was established to sell knitted apparel to U.S. retailers on a delivered duty paid basis. Pioneer will have no presence in the U.S. but will be the importer of record for the subject merchandise.

Representatives of the U.S. retailers will generally meet with Pioneer representatives in Hong Kong to discuss, negotiate and finalize the terms of all purchase transactions before issuing purchase orders to Pioneer's Macau office. The U.S. retailers will open letters of credit to Pioneer in Hong Kong for the agreed upon delivered duty paid prices. Pioneer then will utilize the services of buying agents to procure the merchandise.

You state that Pioneer is not related to any knitwear factories. Pioneer or its buying agents will purchase the merchandise either directly from factories or through a middleman. Pioneer will require statements from each middleman to disclose whether the middleman is "related" to the factory. In some instances, Pioneer is "related" to the middleman.

In all instances, the garments will be produced based upon the specifications of the U.S. retailer. The factory will apply labels in the garments which identify, and/or bear the trademarks of, the U.S. retailers. The identity of the U.S. retailer will be reflected on the factory invoice, shipping documentation and marks and numbers shown on the shipping cartons.

Pioneer will undertake the obligation to pay for the merchandise, take title to the merchandise and assume risk of loss therefor. After importation into the U.S., Pioneer, as the importer of record, will make the arrangements to deliver the goods to the retailers in the U.S. Title to the goods will pass to the retailer upon delivery of the goods in the U.S. and Pioneer will draw down on the letter of credit in Hong Kong.

In those instances where Pioneer or the middleman provides materials to the vendor and contracts to manufacture the goods on a cut, make and trim basis ("CMT"), the invoices accompanying the shipment will show the CMT price charged and paid to the factory, and the cost of the materials provided as an assist.

Pioneer will be billed by, and pay, the factories or the middlemen, as the case may be, for the manufacturing of the garments.

Buying Agents

The buying agents in the employ of Pioneer, Prospector Enterprises Limited ("Prospector") and Primeasia Sources Limited ("Primeasia"), are "related" to Pioneer, as per the definition set forth in 19 U.S.C. 1401a(g)(1). The agents are not presently related to, or controlled by, any of the factories producing and selling the merchandise. The buying agents will not accept title to the goods nor will they incur any risk of loss. The ultimate authority and responsibility for, and control over, the manufacture and delivery of goods will be retained by Pioneer.

The agents will enter into written agreements with Pioneer. Unsigned copies of prototypical agreements are enclosed. These unsigned agreements indicate that each agent will provide traditional buying agency services for Pioneer. When a buyer's inquiry is received by Pioneer, it will be forwarded to the agents to obtain information on sourcing and price quotations. The agreements require the buyer's written authorization with regard to most matters (i.e. , setting prices, granting allowances, changes to specifictions, extending delivery, and entering into any binding commitments). Pioneer directs the agents to place production orders with factories designated by Pioneer. The commissions paid to the agents will be based upon the value of the shipments sourced by them. Buying agent commissions will be invoiced separately for each purchase transaction.

Management Service Payments

In your first submission you state that Pioneer will contract with Tillsonburg Services Limited, a related company, for management services. Such services include: arranging financing, accounting, administration, shipping, procurement, storage, inspection, and delivery of fabric. Fees for these services are to be billed directly to Pioneer on a cost-plus basis. An unsigned copy of the management services agreement between Pioneer and Tillsonburg was provided with the ruling request.

In your second submission you state that Pioneer intends to modify the arrangement with Tillsonburg to exclude responsibility for fabric procurement services, while retaining responsibility for fabric financing. The procurement services will instead be performed by the buying agents, Prospector and Primeasia, who are already involved in fabric procurement and in sourcing the finished garments.

Quota Payments

Where possible, Pioneer proposes to obtain quota from third parties unrelated to the manufacturers of the merchandise. Additionally, Pioneer intends to report all quota charges on the quota statements accompanying each shipment.

ISSUES:

1. Whether transaction value for Pioneer importations may be based on the price paid to the manufacturer;

2. Whether the commissions paid by Pioneer to its agents are non-dutiable;

3. Whether quota payments made to parties other than the manufacturer are non-dutiable; and

4. Whether the management service payments paid by Pioneer to a related company are non-dutiable.

LAW AND ANALYSIS:

Sale for Exportation

The method of appraisement will be transaction value pursuant to section 402(b) of the Tariff act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a). Section 402(b)(1) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the "price actually paid or payable for the merchandise when sold for exportation to the United States", plus enumerated additions.

The "price actually paid or payable" is defined in section 402(b)(4)(A) of the TAA as 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...) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller."

In Nissho Iwai American Corp. v. United States, No. 92-1239, Slip Op. (Fed. Cir. Dec. 28, 1992) and Synergy Sport International, Ltd. v. United States, No. 93-5, Slip Op. (CIT Jan. 12, 1993), the U.S. Court of Appeals for the Federal Circuit and the Court of International Trade, respectively, addressed the proper dutiable value of merchandise imported pursuant to a three-tiered distribution arrangement involving a foreign manufacturer, a middleman and a U.S. purchaser. In both cases the middleman was the importer of record. In each case the court held that the price paid by the middleman/importer was the proper basis for transaction value. Each court further stated that in order for a transaction to be viable under the valuation statute, it must be a sale negotiated at arm's length, free from any nonmarket influence and involving goods clearly destined for the U.S.

Likewise, we note that in the context of filing an entry, Customs Form 7501 ("CF 7501"), an importer is required to make a value declaration. As indicated by the language of CF 7501 and the language of the valuation statute, there is a presumption that such transaction value is based on the price paid by the importer.

In accordance with the Nissho Iwai and Synergy decisions and our own precedent, we will continue to presume that an importer's declared transaction value is based on the price the importer paid. See, HRL 545144 (January 19, 1994) and HRL 545360 (May 31, 1994). In those situations where the importer requests appraisement on the basis of a sale from the foreign manufacturer to the middleman (and the importer is not the middleman) the importer must submit sufficient evidence to show that the price is acceptable under the standard set forth in Nissho Iwai and Synergy. That is, the importer must establish that it was an "arm's length sale," and that the goods sold were "clearly destined for the U.S." at the time they were sold or contracted to be sold.

In this case, counsel for Pioneer contemplates two importation scenarios. In the first instance, Pioneer, either directly or through its buying agents, will make direct factory purchases. Pioneer requests that transaction value be based on the price that Pioneer pays to the knitwear factories. In accordance with Nissho Iwai and Synergy, Customs will presume that Pioneer's declared transaction value is based on the price paid by Pioneer, the importer of record. However, if in the future Pioneer establishes an interest in any knitwear factory from which it makes purchases, Pioneer must so inform Customs and will be required to substantiate that the transaction between the related parties is at arm's length.

In the second instance, Pioneer or its buying agents will make purchases through a middleman unrelated to the factory and requests that transaction value be based on the sale between the middleman and the knitwear factories rather than on the price that Pioneer pays to the middleman. In order to accept the price paid by the middleman to the manufacturer as the basis of transaction value, a bona fide sale must occur between the manufacturer and the middleman and the sale must be a "sale for exportation" according to the standard set forth in Nissho Iwai.

In reviewing the documents presented to us, we note that, in our opinion, they do not clearly establish that a sale exists between the factories and the middlemen. Under 19 U.S.C. 1484(a)(1), it is the importer of record's responsibility to use reasonable care in filing the declared value with Customs. Accordingly, if Pioneer is able to establish by evidence that a bona fide sale to the middleman has occurred then the decisions reached in Nissho Iwai and Synergy would be relevant. Purchase orders, invoices, other agreements between the parties and proof of payment would all be relevant to this determination.

Assuming Pioneer is able to substantiate a sale between the manufacturer and the middleman, the following information would be relevant to the determination of whether the sale was "at arm's length" and involved goods "clearly destined" for the U.S. Counsel has declared that the middlemen and Pioneer are not "related" to any of the knitwear suppliers, as that term is defined by 19 U.S.C. 1401a(g). In light of the fact that there is no evidence to the contrary, we will assume that if there are sales between the middlemen and the factories they are at "arm's length" and that, therefore, the first requirement set forth in Nissho Iwai has been met. In addition we note that Pioneer will require statements from each middleman regarding the status of the middleman's relationship with the factory and that should a middleman ever be related to the factory, Pioneer will alert Customs to this fact. Under these circumstances, counsel states that Pioneer understands that the middleman may be required to substantiate the fact that the factory sale was at arm's length, and that if the middleman cannot so substantiate, the transaction between Pioneer and the middleman will be used for purposes of appraisement.

Because this is a prospective transaction and we do not have actual documents relating to the described transaction, no definite conclusions can be reached regarding the second requirement in Nissho Iwai that the goods be "clearly destined for the U.S." at the time of sale. However, we note that the following information would support a finding that the requirement has been met: (1) The factory produces the garments to fulfill a pre-existing purchase order issued by the U.S. retailer; (2) the factory places labels in the garments which identify or represent the trademarks of U.S. retailers; (3) the factory packs the garments in shipping cartons which identify the U.S. retailer, by marks and numbers, as the ultimate destination; and (4) the export licenses controlling the volume of garments shipped to the U.S. cover specific garments. Customs will also require a copy of the factory invoice.

Buying Agent Commissions

Bona fide buying commissions are not an addition to the price actually paid or payable. Pier 1 Imports, Inc. v. United States, 708 F.Supp. 351, 354, 13 CIT 161, 164 (1989); Rosenthal-Netter, Inc. v. United States, 679 F.Supp. 21, 23 12 CIT 77, 78 (1988); Jay-Arr Slimwear, Inc. v. United States, 681 F.Supp. 875, 878, 12 CIT 133, 136 (1988).

The existence of a bona fide buying commission depends upon the relevant factors of the individual case. Eg., J.C. Penney Purchasing Corp. v. United States, 451 F.Supp. 973, 983 (Cust. Ct. 1978). The importer has the burden of proving the existence of bona fide buying commissions. Rosenthal-Netter, 679 F.Supp. at 23; New Trends, Inc. v. United States, 645 F.Supp. 957, 960, 10 CIT 637 (1986).

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, provides:

...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 determining whether an agency relationship exists, the primary consideration is the right of the principal to control the agent's conduct with respect to those matters entrusted to the agent. J.C. Penney at 983. The existence of a buying agency agreement has been viewed as supporting the existence of a buying agency relationship. Dorco Imports v. United States, 67 Cust. Ct. 503, 512, R.D. 11753 (1971). In addition, the courts have examined such factors as: Whether the purported agents' actions were primarily for the benefit of the principal; whether the principal or the agent was responsible for the shipping and handling and the costs thereof; whether the importer could have purchased directly from the manufacturers without employing an agent; whether the intermediary was operating an independent business, primarily for its own benefit; and whether the purported agent was financially detached from the manufacturer of the merchandise. Rosenthal-Netter, 679 F.Supp. 21, 23 (1988); New Trends, 645 F.Supp. 957, 960-962.

In the instant case the duties performed by the agents are those typically performed by bona fide buying agents, and include compiling market information, obtaining samples, placing orders on Pioneer's instructions, inspecting the merchandise and arranging for shipment. The agents will not accept title to the merchandise, nor will they assume any risk of loss. The agents will place production orders with the factories designated by Pioneer and only at the direction of Pioneer. Moreover, Pioneer will also control the manner of payment, either deciding to pay the factory/vendor directly and paying the agent separately on the commission invoice, or by remitting funds to the agent sufficient to cover the cost of goods and commission with instructions to remit the cost of goods to the factory. Additionally, the buying agreement requires Pioneer’s written authorization with regard to most matters including setting prices, granting allowances, changes to specifications, extending delivery and entering into binding commitments.

Regarding the means of payment, Pioneer will be billed by, and pay, the factories/middlemen vendors for the manufacturing of the garments. With most of its suppliers in Hong Kong and China, Pioneer will work on an open account basis -- this means that the vendor (factory or middleman) will issue an invoice to Pioneer for the goods and Pioneer will remit payment by cheque or telegraphic transfer. In such cases, payments will generally be on a periodic lump sum basis in part settlement of the seller's account. Letters of credit will be used primarily for F.O.B. purchases in Indonesia, India, Dubai, Korea, Taiwan, South America, etc. where each payment will correspond to a specific invoice.

Because the buying agency agreements are neither signed nor dated we are unable to rule on their sufficiency as regards the specific transactions described. However, based on the remaining information submitted with the ruling request, the arrangements between Pioneer and its agents appear to satisfy the criteria of a bona fide buying agency relationship. So long as the agents, Prospector and Primeasia, remain under the control of the principal, Pioneer, with regard to the procurement function, and the transactions are carried out as described above and documented in accordance with the legal requirements, the buying commissions at issue appear to qualify for non-dutiable status.

In addition, you state that Pioneer will ship a substantial portion of its merchandise by air and that very often, the supplier's commercial invoice to Pioneer will not be available at the time the goods depart the foreign port. In order that Customs clearance not be delayed for want of the invoice from the supplier, Pioneer proposes that the buying agent prepare an "agent's invoice" showing the value for Customs clearance. Upon receipt of the factory/middleman invoice you state that Pioneer would be able to verify the amounts of the two invoices against each other, if so requested by Customs. As discussed above, Customs ordinarily requires that the importer present the invoice or other documentation from the actual foreign seller to the agent to establish that the agent is not the seller. Because, however, there is otherwise sufficient evidence that the agent is a bona fide buying agent, so long as Pioneer is able to present Customs with the seller's invoice as a means of verification shortly after the time of importation, in this case the failure to present the factory invoice at the time of importation will not result in the denial of non-dutiable treatment of the buying commissions. It is up to the import specialist to determine an acceptable time frame in which the actual factory invoice must be presented.

Please note that the existence of a buying agency relationship is factually specific. The actual determination will be made by the appraising officer at the port of entry and will be based on the entry documentation submitted. The totality of the evidence must therefore demonstrate that the purported agent is in fact a bona fide buying agent and not a selling agent nor an independent seller. 23:11 Cust. Bull. & December 9, General Notice dated March 15, 1989; HRL 542121 (September 29, 1991)

Quota Payments

Pioneer proposes to obtain quota from third parties unrelated to the manufacturers, where possible. Under the three-tiered sales arrangement when Pioneer obtains quota from third parties unrelated to the seller/manufacturer the quota payments will not be included in transaction value so long as the quota charges are identified separately from the price actually paid or payable. However, in instances where quota payments are made to parties related to the manufacturer/seller, the payments will be dutiable. Customs has consistently held that in cases where quota payments are paid to the seller, or a party related to the seller, then the amount of the payments is part of the total payment to the seller, and, accordingly, is included in the transaction value of the merchandise. See, HRLs 542169 (TAA #6), dated September 18, 1980; 542150 (TAA #14), dated January 6, 1981; and 543913, dated February 22, 1988. This position was affirmed by the U.S. Court of Appeals for the Federal Circuit in Generra Sportswear Co. v. U.S., 905 F.2d 377 (Fed. Cir. 1990).

Similarly, under the four-tiered sales arrangement where Pioneer pays the middleman a price which includes quota, and the middleman procures quota from a third-party related to the factory, the quota payments will be dutiable. Where the quota is obtained from a third-party unrelated to the seller, the payments will not be dutiable.

Under both the three and four-tiered sales arrangements, where the non-dutiability of quota payments is claimed, it is incumbent upon Pioneer to be able to confirm the validity of such claim with appropriate documentation and that the imported merchandise is entitled to entry in accordance with Treasury Decision (T.D.) 86-56, dated March 6, 1986.

Management Services Fees

Tillsonburg performs certain management services for Pioneer, some of which involve the procurement of assists. The term "assist" refers to materials, components, parts and similar items incorporated in imported merchandise, and supplied free of charge or at a reduced cost by the buyer in connection with the production or sale for export to the U.S. of the merchandise. 19 U.S.C. 1401a(h)(1)(A)(i).

Customs has ruled that certain management services are not considered to be assists. See, HRL 543992 (September 10, 1987) and HRL 543820 (December 26, 1986) HRL 543512 (April 9, 1985) and HRL 542122 (TAA #4). Some of the services provided by Tillsonburg are analogous to the services described in these rulings. Based on those rulings, the portion of the fee related to arranging financing, accounting, administration, clerical activities and international transportation of the assembled merchandise to the U.S., would be non-dutiable.

In support of its position that the management service fees related to assist procurement, storage and inspection are non-dutiable, counsel cites to TAA #20 and HRL 544323 dated March 8, 1990. In TAA #20 acquisition costs included: purchasing, receiving, inspection, warehousing and transporting component parts from the importer's plant in Illinois to its assembly plant in Mexico, tasks which were undertaken at the corporate headquarters in Illinois by individuals domiciled within the United States. See also, HRL 544423 dated June 3, 1990. TAA #20 was modified in HRL 544323 where Customs recognized that the term "procurement assist" is not a term defined in the TAA. Rather the TAA simply defines what materials or services are considered assists. The proper inquiry is whether the particular item or activity is considered to be an assist or part of the value of an assist within the definition in section 402(h)(1)(A) of the TAA.

Subsequently, in HRL 544423 dated June 3, 1991, Customs addressed whether commissions paid to a buying agent for obtaining piece goods supplied to apparel manufacturers and used in the production of imported garments should be considered part of the cost of the assist. Having first determined that a bona fide agency relationship did not exist, we held that commissions paid by an importer to an "agent" for procuring materials to be incorporated into imported merchandise were part of the cost of acquiring the assist and were therefore dutiable.

In HRL 544976 dated March 17, 1993, Customs found that commissions paid by an importer to an agent for procuring assists were part of the cost of acquiring an assist and were part of the price actually paid or payable. However, Customs also noted that where a buying agency agreement existed, and the role in procuring fabric assists was incorporated as part of the buying agency agreement, the commissions would be non-dutiable, assuming the existence of a bona fide buying agency.

In the instant case, there is no buying agency relationship, or written agreement to that effect, between Tillsonburg and Pioneer. Therefore, in accordance with HRLs 544423 and 544976 the costs of services performed by Tillsonburg which relate to the procurement of assists are dutiable. Costs associated with inspection services are dutiable inasmuch as they are regarded as part of the procurement function. See TAA #20.

In your most recent submission you state that Pioneer intends to modify its management services agreement with Tillsonburg to exclude responsibility for fabric procurement services, while retaining responsibility for fabric financing. The procurement services will be performed by Pioneer's buying agents.

Inasmuch as the buying agency agreements make no mention of assist procurement, such services if performed by the buying agents, will also be dutiable. We note, however, that in its latest submission counsel states that the agreements will be modified to include assist procurement in the buying agent duties.

Warehousing services which occur while the assists are in transit are generally regarded as part of the procurement function and are dutiable. See, HRL 544323 dated March 8, 1990. In the instant case, it is unclear from the facts when the warehousing of assists occurs. We are therefore unable to rule on whether the costs associated with warehousing assists are dutiable.

As conceded by counsel, and as required by law, the fees relating to delivery/transportation of the fabric to the factory will be included in the appraised value of the merchandise.

HOLDING:

1. Transaction value may be based on the price paid to the middleman in instances where Pioneer purchases the imported merchandise directly, or through its agents, from the manufacturers. So long as Pioneer is able to establish that a sale for exportation occurred between the manufacturer and a middleman, transaction value may be based on the price paid to the manufacturer for merchandise purchased by Pioneer through a middleman.

2. The commissions paid by Pioneer to its agents appear to be bona fide buying commissions and as such are not dutiable as part of the transaction value of the merchandise.

3. In instances where Pioneer or its buying agents make quota payments to parties unrelated to the seller and the quota charges are identified separately from the price actually paid or payable, quota charges will not be included in transaction value. Where payment for quota is made to a party related to the seller, the payment is dutiable.

4. The fees relating to Tillsonburg's procurement and delivery/transportation of the fabric to the factory will be included in the appraised value. The remaining fees relating to the management services are non-dutiable providing certain conditions, discussed above, are met.

Sincerely,

John Durant, Director
Commercial Rulings Division