• HQ 547608
• Feb 21, 2002

• Type : Valuation • HTSUS :
•  Related:   547623; 545938; 546583; 542141; 545194   

VAL: RR:IT:VA 547608 NL

Port Director Los Angeles-Long Beach Seaport 301 East Ocean Blvd. Long Beach, CA 90802 SUBJECT: Application for Further Review (AFR) of Protest No. 2704-99-100150; Agency Commissions; Royalty Payments

Dear Port Director: This is in response to your memorandum dated December 16, 1999, forwarding the above-referenced AFR concerning the dutiability of certain fees paid by the importer, Big 5 Corporation (Big 5), to Mercury International Trading Corp. (Mercury) for services rendered in the importation of athletic footwear. Additional submissions dated October 27, 1999, and April 17, 2000, were forwarded on your behalf. We are also in receipt of several submissions by the importer as discussed below. You requested this office to review the instant Protest No. 2704-99-100150 together with Protest No. 2704-99-100339, filed by Dollar General Corp. (Dolgen) also at the Port of Los Angeles-Long Beach Seaport. The basis for simultaneous consideration is that both importers made payments to Mercury, and the common issue is whether bona fide buying agency relationships exist between the two importers and Mercury. The companion decision is being issued on this date as HRL 547623. In the instant decision we have taken into account representations made by counsel for Mercury in a submission dated June 19, 2001, in connection with the Dollar General protest. You have advised that other protests involving various footwear importers and Mercury have been suspended pending this decision.

FACTS:

In this lead protest, the merchandise was manufactured in China and shipped from Hong Kong to Los Angeles where Big 5 made entry on December 3, 1997. The entry summary included an invoice showing the seller as Madison Trading Ltd., Hong Kong (hereinafter Madison), and the buyer as Big 5, at that time doing business as United Merchandise Corporation.

A statement at the bottom of the commercial invoice presented at entry reads:

“We certify that commission and royalties in the amount of USD 2,595.00 and USD 2,076.00 respectfully will be paid to the selling agent, Mercury International Trading, a U.S. based company, outside the letter of credit.”

The merchandise was appraised using transaction value based on the invoice price plus the 10% commission and the 8% royalty fee. This appraisement was based on the Port’s position that the 10% commission Big 5 pays to Mercury is dutiable as a selling commission and that the 8% royalty fee is dutiable as an indirect payment to the seller and as a condition of sale.

According to Big 5, the commission payments to Mercury are not additions to the price actually paid or payable because Mercury is a bona fide buying agent on behalf of Big 5 and none of the commission inures to the benefit of the seller, Madison. Big 5 states that the reference in the commercial invoice to Mercury as the selling agent was a clerical error that has not been repeated, and does not reflect the reality of the relationship between Big 5 and Mercury.

According to Big 5, Mercury began acting as its bona fide buying agent in 1995 pursuant to a verbal agreement. Big 5 advises that this verbal agreement was reduced to writing in October 1998, following the initiation of this Protest. Big 5 also claims that it is directly involved in selecting products and foreign vendors as sources of its production in the Far East. In addition, Big 5 noted that its employees occasionally travel to the Far East, but when it decides to purchase footwear from a specific vendor, it typically notifies and places the order through Mercury. Although no purchase orders were submitted for review, Big 5 contends that it specifies the purchase price, product specifications, labeling quantity, and shipment dates for its importation transactions and that Mercury does not have the authority to deviate from the terms specified by Big 5. Moreover, Big 5 claims that Mercury acts only upon specific instructions and that Mercury is prohibited from issuing purchase orders without Big 5’s prior approval. Big 5 contends that it ultimately controls the terms of the purchase and negotiation process.

With respect to the royalty payments, Big 5 states that they do not accrue to the seller and are paid for the right to use the trademarks in the United States. The licensor of the trademarks is Spalding Sports Worldwide, Inc.(Spalding), a U.S. company. For the merchandise that is the subject of this protest, Mercury is Spalding’s licensee. Big 5, which makes a payment to Mercury for 8% of the price Big 5 pays to Madison for the imported footwear, does not do so under a written sublicense agreement with Mercury because, as explained by Big 5, Mercury’s License Agreement with Spalding does not permit it to sublicense. Big 5 has submitted a letter prepared after filing of the lead protest (dated July 15, 1999), addressed to Big 5 and signed by officers of Spalding and Mercury, in which it is stated that:

the royalty payments made by Big 5 Corporation to Mercury International are for the right to sell and market the specific footwear bearing the Spalding name or logo in the United States…the royalty payments you make to Mercury International are not shared directly or indirectly with any foreign company, including the foreign manufacturer of the imported shoes. The royalty payments are not related to Big 5’s payments to the foreign manufacturer and are not, directly or indirectly a condition of the sale for exportation to the United States of the imported footwear…[Y]ou are instructed to continue to remit your royalty payments to Mercury International for our administrative convenience and control.

The Protestant has not provided a copy of the License Agreement between Spalding and Mercury. It is noted that the letter of July 15, 1999, requests Big 5 to make royalty payments to Mercury, but makes no representations concerning Mercury’s payments to Spalding. From these indications this office understands that payments designated as “royalty” payments are made by Big 5 to Mercury and may relate in some way to Mercury’s status as a sublicensor of Spalding for the rights to use Spalding’s trademarks. However, no representation has been made that these payments are in turn remitted to Spalding.

The Relationship between Mercury and Big 5

In connection with the Dollar General Protest, Mercury has submitted information regarding its relationships with Dollar General and the seller Madison. We find this information to be relevant to the instant Protest.

According to Mercury, it has represented various footwear importers for over 20 years by providing traditional buying agency services as set out in buying agency agreements. The services include “line building” in which the agent collaborates with the principal by providing market research and analysis, and by assisting in the selection of shoe categories and features. Mercury states that until the instant protests Customs has not questioned Mercury’s understanding that these are bona fide buying agency relationships pursuant to which the commissions paid to Mercury outside of the appraised value of the merchandise. Mercury refers us to HRL 545938 (June 5, 1996), in which Customs Headquarters stated that an agent may engage in the incidental design activities associated with “line building” while remaining under the supervision and control of a principal.

With respect to the purchasing and importing processes, Mercury states that after the principal has selected the products to be procured, Mercury assists with identifying sources, prices and terms. The principal then submits a purchase order to Mercury and Mercury forwards that purchase order to Madison. Madison then forwards the purchase order to various manufacturers. The principal knows which manufacturers will be supplying footwear, and knows that Madison will function as the intermediary. Payment is by letters of credit opened by the principal in favor of Madison. When the merchandise is ready for exportation, the merchandise is delivered to the importer’s consolidator who arranges for shipment to the U.S. The merchandise is shipped to the U.S. with an invoice prepared by Madison for the full purchase price of the merchandise. The importer pays Madison an amount equal to the invoice price of the merchandise and Mercury simultaneously issues a separate invoice to the importer for the buying commissions and royalties. The importer makes a separate payment to Mercury for the royalties and buying commissions.

Mercury emphasizes that in these activities the principal at all times controls the sourcing of the merchandise, controls the shipment of the merchandise, and controlled all payments.

The Relationship between Mercury and Madison

The Protestant and the Port of Los Angeles dispute whether Mercury and Madison, the seller of the merchandise, are related persons within the meaning of section 402(g)(1), TAA (19 USC 1401a(g)(1)).

There are undisputed indications that Mercury and Madison work closely together; the Port of Los Angeles observes that in nearly every transaction involving Mercury that it has examined, Madison is the seller. The Port at the time of appraisement had information that one individual was an officer of both entities, and that shares in both were held by one person. At that time the percentage of equity held was not known. The appraising officer concluded that Mercury and Madison were related parties, and took this into account in determining that the commission and royalty were additions to the price actually paid or payable.

In its submissions Mercury contends that it is not related to Madison. It states that Madison is not owned or controlled by Mercury, and that Mercury does not have a financial interest in Madison. Mercury states that the one shareholder in common does not hold a controlling interest in either company. It is represented that the diversity of ownership between Mercury and Madison was such that their dealings were at arms’ length.

Concerning ownership, Mercury states that the shares in Mercury are owned by six members of one family. One of these family members owns 42 percent of Madison. Two officers of Mercury hold 18 percent of Madison. Mercury also confirms that a vice-president of Mercury serves as treasurer of Madison.

ISSUES:

Whether the commissions paid by Big 5 to Mercury are to be treated as selling commissions; and

Whether the “royalty” payments made by Big 5 to Mercury are to be treated as part of, or additions to, the price actually paid or payable for the imported merchandise.

LAW & ANALYSIS:

Merchandise imported into the United States is appraised in accordance with §402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. §1401a). The primary basis of appraisement under the TAA is transaction value, defined as the price actually paid or payable for the merchandise when sold for exportation to the United States, plus five statutorily enumerated additions to the price actually paid or payable including:

(B) any selling commission incurred by the buyer with respect to the imported merchandise; (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; and (E) the proceeds of any subsequent resale, disposal or use of the imported merchandise that accrue, directly or indirectly to the seller

19 U.S.C. §1401a(b)(1)(B), (D)-(E). As such, additions will be made only if amounts in respect of royalties, proceeds, etc. are not otherwise included in the price actually paid or payable.

The entry under protest was appraised under transaction value. The appraising officer has not questioned the price reflected on the invoice for the merchandise, and for the purposes of this decision it is understood that appraisement under transaction value is appropriate.

Related Persons

The Port of Los Angeles determined that Mercury is related to the seller Madison on the basis of having a common officer and having a common shareholder. Having reviewed the circumstances, including Mercury’s representations, this office finds that the entities are related pursuant to section 402(g)(1). Here, the presence of a common officer in the two entities is strongly suggestive of a relationship pursuant to §402(g)(1)(C), and Customs previously has found two companies sharing a common board member to be related. See, HRL 546583 (December 2, 1997). Also, pursuant to §402(g)(1)(F), ownership or control of five percent or more of voting stock or shares renders such an owner related to the entity owned. In this instance at least one member of the family group controlling Mercury appears to be related by reason of share ownership to both Mercury and Madison. It thus could be concluded that this renders Mercury and Madison related.

In our view the clearly applicable test of relatedness in this case is that set forth in §402(g)(1)(G), which provides that

[T]wo or more persons directly or indirectly controlling, controlled by, or under common control with, any person[.]

are related. Mercury is controlled by a family shareholding group. Approximately 60 percent of the shares in Madison are held either by Mercury shareholders or employees – 42 percent by a single member of the Mercury family group and 18 percent by two Mercury executives. The fact that a vice president of Mercury serves as the treasurer of Madison serves to emphasize the degree of Mercury management’s involvement in Madison. Under these facts, a finding under §402(g)(1)(G) that Madison and Mercury are under the common control of the Mercury ownership group is warranted.

Commissions

Buying commissions are fees paid by an importer to his agent for the service of representing him abroad in the purchase of the goods being appraised. Although selling commissions are specifically included in the appraised value of the merchandise, bona fide buying commissions are not added to the price actually paid or payable. Pier 1 Imports, Inc. v. United States, 708 F. Supp. 351, 13 CIT 161, 164 (1989); Rosenthal-Netter, Inc. v. United States, 679 F. Supp. 21, 23, 12 CIT 77, 78, aff'd, 861 F.2d 261 (Fed. Cir. 1988); Jay-Arr Slimwear, Inc. v. United States, 681 F. Supp. 875,878, 12 CIT 133, 136 (1988). The importer, however, has the burden of proving that a bona fide agency relationship exists and that payments to the agent constitute bona fide buying commissions. Rosenthal-Netter, Inc, supra., New Trends, Inc. v. United States, 10 CIT 637, 645 F. Supp. 957 (1986); Pier 1 Imports, Inc, supra.

Big 5 executed a buying agency agreement with Mercury following the initiation of this Protest. As such, that buying agency agreement is without effect with respect to this decision. However, while the existence of a buying agency 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. Mitsui & Co. (U.S.A.), Inc. v. United States, 66 Cust. Ct. 553, R.D. 11740 (1971); and Rosenthal-Netter, Inc., supra.

Whether the relationship is one of agent-principal is to be determined by the substance of the transaction, not by the labels the parties attach to it. Pier 1 Imports, Inc. v. U.S., supra, and Monarch Luggage Co. v. U.S., 715 F. Supp. 1115, 13 CIT 523 (1989). The existence of a bona fide buying commission depends upon the relevant factors of the individual case. J.C. Penney Purchasing Corp. v. United States, 80 Cust. Ct. 84, 95, C.D. 4741, 451 F. Supp. 973 (1978). Although no single factor is determinative, the primary consideration is the right of the principal to control the agent's conduct with respect to those matters entrusted to the agent. Jay-Arr Slimwear, Pier 1 Imports, Inc., J.C. Penney, and Rosenthal-Netter, supra. In addition, the courts have examined such factors as whether the purported agent's actions were primarily for the benefit of the principal; whether the agent was responsible for the shipping and handling and the costs thereof; whether the language used in the commercial invoices was consistent with a principal-agent relationship; whether the agent bore the risk of loss for damaged, lost or defective merchandise; and whether the agent was financially detached from the manufacturer of the merchandise. The degree of discretion granted the agent is a further consideration. New Trends, 645 F. Supp. 957. As such, the existence of a bona fide buying commission is to be determined by the totality of the circumstances. See, Headquarters Ruling Letter (HRL) 542141 dated September 29, 1990 (TAA No.7).

It is evident that Mercury performed some of the duties traditionally associated with a bona fide buying agent in the immediate situation. However, Customs must examine all relevant factors in deciding whether a bona fide agency relationship exists. See J.C. Penney, 80 Cust.Ct. at 96, 451 F.Supp. at 983-84. Here, where the agent is related within the meaning of §402(g)(1) to the seller, the importer has a higher burden to establish that the agency arrangement is entirely under the control of the importer.

This office finds that the evidence submitted is insufficient to establish the existence of a bona fide buying agency relationship between the importer Big 5 and the purported agent Mercury. The submissions do not include copies of purchase orders or any other communications from Big 5 directing Mercury to purchase merchandise on Big 5’s behalf. Further, the documentation lacks concrete indication that at any time Big 5 instructed Mercury how to conduct its agency on behalf of the principal. It is therefore not possible to consider Big 5’s claims that Mercury performed the duties of an agent as set forth in the judicial authorities cited above. Taken together with our finding that Mercury and the seller Madison are related, we cannot under these circumstances find that the importer has met its burden to show a buying agency relationship.

The commissions paid to Mercury, inasmuch at they are payments made to a person related to the seller that have not been shown to be bona fide buying commissions, are considered to be for the benefit of the seller and part of the price actually paid or payable for the subject merchandise. See, §402(b)(4)(A).

Royalty Payments

As stated above, 19 U.S.C. 1401a(b)(1)(D) provides, in pertinent part, that 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 is to be added to the price actually paid or payable for the merchandise. The Statement of Administrative Action (SAA), which forms part of the legislative history of the TAA, provides that:

Additions for royalties and license fees will be limited to those that the buyer is required to pay, directly or indirectly, as a condition of sale of the imported merchandise for exportation to the United States. In this regard, royalties and license fees for patents covering processes to manufacture the imported merchandise will generally be dutiable.... However, the dutiable status of royalties and license fees paid by the buyer must be determined on a case-by-case basis and will ultimately depend on: (i) whether the buyer was required to pay them as a condition of sale of the imported merchandise for exportation to the United States; and (ii) to whom and under what circumstances they were paid.... [A]n 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.

Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 48-49.

As the language of the SAA makes clear, 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. Thus the first inquiry is whether the payments at issue are part of the price actually paid or payable for the imported merchandise.

Based on Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990), Customs presumes that all payments made by the buyer to the seller are part of the price actually paid or payable for imported merchandise. In Generra, the Court of Appeals held that the term “total payment” is all-inclusive and that "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." The court also stated:

Congress did not intend for the Customs Service to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, are for the merchandise or for something else. As we said in Moss Mfg. Co. v. United States, 896 F.2d 535, 539 (Fed. Cir.1990), the “straightforward approach [of section 1401a(b)] is no doubt intended to enhance the efficiency of Customs’ appraisal procedure; it would be frustrated were we to parse the statutory language in the manner, and require Customs to engage in the formidable fact-finding task, envisioned by [appellant].

Generra, 905 F.2d at 380 (brackets in original).

The presumption that all payments made by the buyer to the seller are part of the price actually paid or payable may be rebutted. In Chrysler Corporation v. United States, 17 CIT 1049 (1993), the Court of International Trade applied the standard in Generra and determined that certain shortfall and Special Application fees which the buyer paid to the seller were not a component of the price actually paid or payable for the imported merchandise. The Court found that the evidence established that these fees were independent and unrelated costs assessed because the buyer failed to purchase other products from the seller and not a component of the price of the imported engines.

Under the above rationale, the royalty payments at issue will not be considered part of the price actually paid or payable if the evidence clearly establishes that, like those in Chrysler, they are totally unrelated to the imported merchandise. The burden of establishing that the payments are totally unrelated to the imported merchandise rests with the importer. Generra, 905 F.2d at 380.

Using the analysis set forth in Generra and Chrysler, in HRL 545194 (September 13, 1995) Customs determined certain fees, characterized by the parties as license fees, to be part of the price actually paid or payable in a situation where the importer’s payments were made to the sellers or to parties related to the sellers. In that case, the seller’s invoices specifically indicated that the importer was to pay the royalty fees and the only agreements indicated that the fees were to be paid to one of the sellers.

In this case, the evidence presented does not prove that the payments are totally unrelated to the imported footwear. Although the Protestant claims that the payments were for rights to exploit the trademark in the licensed territory, the evidence does not support this. For the purposes of this protest it is understood that there is a royalty agreement between Mercury and Spalding, but no agreement was submitted for review. At the same time, it is acknowledged by the Protestant Big 5 that it cannot be a licensee or sublicensee under that agreement. Big 5 is therefore not a party to any license agreement. It may not even be considered as a sublicensee by oral agreement with Mercury, given that Mercury itself does not have authority under its agreement with Spalding to sublicense.

While the agreement between Spalding and Mercury concerns, among other things, rights of trademark exploitation in a given territory, we do not find linkage between that agreement and Big 5’s payments to Mercury. Big 5 submitted a letter from Spalding which directed Big 5 to submit payments to Mercury, but there is nothing in the record obligating Big 5 to make such payments. There are no written agreements between Mercury and Big 5 or between Mercury and the licensor Spalding concerning Big 5’s royalty payments. There is nothing in the record submitted indicating a commitment on the part of Mercury to remit Big 5’s payments to Spalding. It is therefore inappropriate to conclude that Big 5’s payments are subject to the Spalding/Mercury licensing agreement. In the final analysis, we decline to consider these payments to be royalty payments at all; the explanation given for their purpose is unpersuasive.

It also will be recalled that the payments are based upon a percentage of the price paid by Big 5 to Mercury for each importation. In this regard the payments relate precisely to the sales for exportation of the merchandise. Where there is a clear linkage of the payments to the sale of the merchandise, and at the same time a lack of clear linkage to the royalty obligations of Mercury, the authority of Customs to treat the payments as part of the payment for the goods is well-founded under Generra and related authorities.

Notwithstanding the fact that the payments in question are identified as royalties, we conclude that they are actually part of the total payment for the imported merchandise. These payments to a party (Mercury) related to the seller (Madison) constitute indirect payments to the seller. See HRL 545194 and decisions cited therein.

Having concluded that the payments at issue are part of the price actually paid or payable for the imported merchandise, we do not address whether they could alternatively be considered royalties or proceeds under TAA §402(b)(1)(D) and (E). The subject entries should be liquidated based on a transaction value that includes the “royalty” payments to Mercury.

HOLDING:

This Protest should be DENIED.

In conformity with the foregoing, we find that the commissions paid by Big 5 to Mercury do not constitute bona fide buying commissions, but rather are payments made to seller or for the benefit of the seller. As such, the commissions are to be included in the transaction value of the imported merchandise.

We find that the “royalty” payments are to be treated as part of the price actually paid or payable for the imported merchandise. Therefore, the royalty payments are to be included in the transaction value of the imported merchandise.

In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, this decision and the Customs Form 19 are to be mailed to the protestant no later than sixty days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision. Sixty days from the date of the decision, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Virginia L. Brown Chief, Value Branch