VAL R:C:V 545627 er
Area Director
JFK Airport
RE: Request for Internal Advice 11/94; Buying Agency; Sale for Exportation; Commissions; Royalties; Quota.
Dear Sir:
This is in response to your memorandum dated February 14, 1994, forwarding the request for internal advice dated January 14, 1994, submitted by counsel on behalf of Adirondack Trading, Inc. ("Adirondack"), the importer. Also included is a memorandum from the Chief, National Import Specialist Division, Branch 5, New York Seaport, dated April 8, 1994. On August 2, 1995, we were informed that Adirondack would be represented by new counsel. On September 13, 1995, new counsel advised us that corporate dissolution papers would be filed for the company on September 15, 1995, and, accordingly, that any liability to Customs would be assessed against the shareholders.
FACTS:
The following facts are taken from your memorandum, the New York Seaport memorandum and from the submission presented by original counsel. Adirondack has been importing wearing apparel from Hong Kong through their purported buying agent, Eventide Clothing Company Limited ("Eventide"). Eventide places orders with various factories. The factories draw up commercial invoices made out to Eventide. Eventide then draws up a new invoice to the importer which is submitted to Customs for appraisement purposes. The invoice price does not include quota charges, commissions and royalty payments paid separately by the importer to Eventide.
Counsel states that Eventide was charging Adirondack a different price for the merchandise than that charged by the manufacturers. Counsel concedes that Eventide's markup on the goods may be viewed as inconsistent with the principal/buying agency relationship. Additionally, there is no written buying agency agreement between Eventide and Adirondack.
It is your opinion that Eventide is an independent buyer/seller and that the sale from Eventide to the importer, adjusted to include commissions, royalties and quota charges, is the sale to be used for appraisement 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)).
If Eventide is a buying agent, counsel contends that the quota charges, commissions and royalties paid to the importer are not dutiable. However, if Customs determines that Eventide is an independent buyer/seller of the merchandise, counsel claims that appraisement should be based on the sale between the manufacturer and Eventide.
According to the original submission, the subject garments were made according to Adirondack specifications with each garment incorporating an embroidered design. Adirondack is the owner of the exclusive trademark rights to such embroidered designs and has advised that it sold the garments exclusively in the United States. Each of the garments also incorporated a label which displayed the RN number issued to Adirondack by the Federal Trade Commission. The garments were packed in boxes which were marked to show Adirondack as the consignee and the United States as the destination. The garments were exported from Hong Kong under cover of export licenses issued by the Hong Kong government. The export licenses showed Adirondack as the consignee with the United States as the country of final destination. Each of the export licenses included the required manufacturer's declaration that it was the manufacturer of the goods and that the information contained in the export licenses was true. The export licenses also disclosed the quantity and FOB value of the goods.
ISSUE:
Whether Eventide is a bona fide buying agent?
If Eventide is not a bona fide buying agent, whether the merchandise imported by Adirondack should be appraised on the basis of the transaction between Adirondack and Eventide or on the basis of the transaction between Eventide and the manufacturer?
LAW AND ANALYSIS:
The preferred method of appraising imported merchandise is transaction value which is defined in section 402(b)(1) of the TAA. This section provides, in pertinent part, that the transaction value of the imported merchandise is the "price actually paid or payable" for the merchandise when sold for exportation to the United States plus amounts equal to:
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(B) any selling commission incurred by the buyer with respect to the imported merchandise;
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(D) any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the
imported merchandise for exportation to the United States;
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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."
Regarding whether Eventide is a bona fide buying agent, we agree with you that insufficient evidence has been submitted to enable us to conclude that Eventide was acting as a bona fide buying agent for the importer. In determining whether a bona fide buying agency exists between an importer and an alleged "buying agent", the primary consideration is the right of the principal to control the agent's conduct with respect to matters entrusted to him. See, Pier 1 Imports, Inc. v. United States, 708 F.Supp. 351, 13 CIT 161 (1989); J.C. Penney Purchasing Corp. et al. v. United States, 80 Cust. Ct. 84, C.D. 4741, 451 F. Supp. 973 (1978). As pointed out in the memorandum from the New York Seaport, there is no written agreement between Adirondack and Eventide, and the facts and documentation presented by counsel indicate that Adirondack did not exercise control over the agent's activities. We, accordingly, conclude that Eventide was not acting as a bona fide buying agent for Adirondack. The remaining question is whether the transaction between Eventide and the manufacturer or the transaction between Eventide and Adirondack was a sale for exportation to the U.S.
In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit reviewed the standard for determining transaction value when there is more than one sale which may be considered as being for exportation to the United States. In so doing, the court stated that Customs' previous policy of basing transaction value on the sale which most directly caused the merchandise to be exported to the United States proceeded from an invalid premise. Nissho Iwai, 982 F.2d 505, 511.
Instead, the court in Nissho Iwai reaffirmed the principle of E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that a manufacturer's price, rather than the middleman's price, is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. In reaffirming the McAfee standard the court stated that in a three-tiered distribution system:
The manufacturer's price constitutes a viable transaction value when the goods are clearly destined for export to the United States and when the manufacturer and the middleman deal with each other at arm's length, in the absence of any non-market influences that affect the legitimacy of the sales price....[T]hat determination can only be made on a case-by-case basis.
Id. at 509. See also, Synergy Sport International, Ltd. v. United States, 18 C.I.T. , Slip Op. 93-5 (Ct. Int'l. Trade January 13, 1993).
As a general matter in situations of this type, Customs presumes that the price paid by the importer is the basis of transaction value. However, in order to rebut this presumption the importer must, in accordance with the court's standard in Nissho Iwai, provide evidence that in the claimed sale the goods were "clearly destined for export to the United States" and that the manufacturer and middleman dealt with each other at "arm's length."
It is your position, and that of the New York Seaport, that the importer has failed to provide sufficient evidence to indicate that the sale from the manufacturer to Eventide was a sale for exportation to the United States. We agree. Normally, Customs will presume that a transaction between parties which are not related, within the meaning of section 402(g) of the TAA, is conducted at "arm's length". Because we have not been presented with any information as to whether Eventide and the manufacturers are related, we are unable to conclude that the transactions are conducted at "arm's length". In view of the failure to satisfy the "arm's length" criteria articulated by the court in Nissho Iwai, the transaction between Eventide and the manufacturers may not be considered a sale for exportation to the U.S. and may not form the basis of transaction value. Accordingly, the transaction upon which the goods must be appraised is that between Adirondack and Eventide.
Although counsel has presented us with documentation and facts in support of its position that the merchandise was "clearly destined" for the United States, this information, by itself, is insufficient to satisfy the two-fold standard set forth by the court in Nissho Iwai for establishing that a lower sale is a sale for exportation. Moreover, even if we were presented with evidence that the transaction between Eventide and the manufacturers was conducted at "arm's length", the information submitted regarding whether the goods were "clearly destined" for the U.S. is not persuasive. Namely, we note that the manufacturer's invoice does not specify the name of the importer, nor does it indicate that the goods are destined for delivery in the U.S. To the contrary, the invoice specifies that delivery of the merchandise is local. Additionally, we were not presented with any purchase orders from Adirondack which could link the imported merchandise to the merchandise referenced on the manufacturer's invoice.
You also point out that although the manufacturer completed a declaration on the export licenses, this in and of itself is not sufficient to demonstrate that the merchandise was clearly destined for the U.S. Because Eventide was the quota holder (as evidenced by the T.C.R. number on the export license) they were responsible for completing the majority of the export license information and for obtaining the necessary validation stamp from the Hong Kong government. Thus, quota could have been obtained from the Hong Kong government and the export license issued before the manufacturer filled out its declaration. You note that often export licenses are granted when no manufacturer declaration is made. Lastly, you observe that an additional indication that the export licenses need not be completed before allotment of quota and completion of a sale is evidenced by the fact that the prices on the export licenses do not match those on the manufacturer's invoices. Thus, you conclude, the declaration on the export licenses is not persuasive regarding the final destination of the imported merchandise.
As stated above, merchandise appraised under transaction value is based on the "price actually paid or payable" for the merchandise. This price includes the "total payment" made, or to be made, by the buyer to, or for the benefit of, the seller. In the instant case, in addition to the invoice amount, amounts for commissions, quota and royalties are paid to Eventide. As set forth above, because Eventide is not a bona fide buying agent, the commissions are considered part of the price actually paid or payable for the merchandise.
Regarding quota payments, it is Customs position that in instances where quota payments are made to the seller, or to 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 19, 1980; 542150 (TAA #14), dated January 6, 10981; 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. United States, 905 F.2d 377 (Fed. Cir. 1990).
As to the royalties described under section 402(b)(1)(D) of the TAA, both statute and regulation parallel the Statement of Administrative Action ("SAA"), which was adopted by Congress and has the force of law. The SAA provides that "an addition will be made for any royalty or license fee paid by the buyer to the seller, unless the buyer can establish that such payment is distinct from the price actually paid or payable for the imported merchandise, and was not a condition of the sale of the imported merchandise for exportation to the United States." SAA, H.R. Doc No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of Treasury, Customs Valuation under the TAA of 1979 (October 1981), at 48-49. No information was provided concerning the nature of the royalty payments to Eventide; therefore, the importer did not establish that the royalties were distinct from the price actually paid or payable and were not a condition of the sale. Accordingly, the royalties are also part of the transaction value of the imported merchandise.
HOLDING:
Based on the information submitted Eventide is not a bona fide buying agent for Adirondack. The transaction upon which the merchandise should be appraised is that between Adirondack and Eventide. The transaction value of the merchandise includes the amounts for commissions, quota and royalties paid to Eventide. In view of the information regarding the corporate dissolution, you may want to bring this matter to the attention of Regional Counsel.
Sincerely,
John Durant, Director
Commercial Rulings Division