RR:IT:VA 547642 DCC
John B. Pellegrini
Ross & Hardies
Park Avenue Tower
65 East 55th Street
New York, NY 10022-3219
RE: Transaction Value; Bona Fide Buying Commission; Nissho Iwai; Assists; HRL 547643; HRL 547644
Dear Mr. Pellegrini:
This is in response to your three ruling requests dated February 9, 2000, on behalf of The Associated Merchandising Corporation ("AMC"), concerning the determination of transaction value of imported merchandise pursuant to three unexecuted agreements (the "Agreements").
Although slightly different, all three Agreements detail payments to AMC under three different programs: the First Cost Buying Agency ("First Cost") Program, the Guaranteed Landed Cost ("GLC") Program, and the Product Development Program. We note that the Agreements may not be actual agreements because two of the three programs appear to be incompatible. Under the First Cost Program AMC will supposedly act as a buying agent for AMC's clients. Under the GLC Program, however, AMC will perform as an independent middleman buying and selling merchandise for its own account. Because you submitted three separate ruling requests that raise different valuation issues, we assume that these programs operate independently. Therefore, we address independently the dutiability of payments made under each of these programs.
FACTS:
AMC is one of three major U.S. apparel-sourcing companies with offices in over 50 countries. Until recently, the voting shares of AMC were owned by several different retail store chains. Recently, however, Target Corporation acquired a majority of AMC's outstanding voting shares. According to your letter, AMC acts as buying agent on behalf of its U.S. clients which include retail
department stores, specialty stores, mass merchandising organizations, and other entities (the "Clients").
According to the Agreements, AMC will perform the following services for the Clients: place orders with vendors; expedite shipment of merchandise; prepare bills, invoices and documents related to shipment, payment to vendors, merchandise delivery, and purchase of samples; prepare reports on market conditions and special overseas merchandise offerings; assist buyers visiting AMC's offices; and inspect merchandise.
In addition, your ruling requests describe the services that AMC may provide that are either not contained or fully detailed in the Agreements. According to your letters, AMC will negotiate with vendors that are known to the Clients; visit vendors and subcontractors to inspect quality, production progress, and origin of the merchandise; assist in the negotiation of prices; tender payment to the vendors at the express written consent of the Clients; prepare documents necessary for the importation of the merchandise; and assist Clients in presenting claims against vendors for compensation related to merchandise quality or late shipments.
You further state that AMC has no ownership interest in any of the suppliers or factories of the merchandise. Furthermore, according to your letters, after notice to-and approval from-the Clients, AMC may provide financial assistance to the suppliers or participate in the manufacture of the merchandise.
Under the Agreements, AMC may be compensated through one of the two previously mentioned purchasing programs-the Guaranteed Landed Cost Purchasing Program ("GLC") and the First Cost Buying Agency Program ("First Cost"). In addition, AMC offers Clients various product development services through the "Product Development Program."
First Cost Buying Agency Program
Under the First Cost Buying Agency Program, AMC will receive a commission based on a percentage of the "selling" price, either FOB port of export or ex-factory price of the goods. The commission will be payable at the time the goods are shipped. The percentage varies depending on the dollar value of the merchandise. The percentages are apparently negotiable between AMC and the Clients on a case by case basis. In addition, in the event that the value of the merchandise purchased does not exceed a certain amount during a twelve month period, the Clients are required to pay AMC a minimum service charge, which is a flat fee regardless of the volume of merchandise shipped. This annual service charge service charge is also negotiable.
You state that the Clients will control the actions of AMC. Although the Agreements state that AMC will act as a buying agent for the Clients, the Agreements contain no provisions detailing how the Clients will exercise such control. In addition, although you state AMC will instruct vendors to provide the Clients with detailed commercial invoices-indicating the tariff category, country of origin, first cost of the merchandise, and name and address of the manufacturer-there is no comparable language in the Agreements.
Furthermore, according to your letters, the Clients will pay a "Service Charge as outlined in Exhibit B." Exhibit B was not included with any of your three ruling requests. According to paragraph 2.a. of the Agreements, however, the Service Charge is the sum of three marginal percentage rates applied on an incremental basis to the total value of the merchandise. Finally, the Agreements prohibit the Clients from selling seven categories of goods in certain geographic areas.
Guaranteed Landed Cost Purchasing Program
Under the proposed Guaranteed Landed Cost Purchasing Program, Clients will request a price quote from AMC for a particular good. AMC will quote the Clients a "Guaranteed Landed Cost" price, which includes all landed cost charges relating to all merchandise shipped to the client, including the cost of such merchandise and AMC's charges to the Clients for freight, insurance, duty, tariffs, taxes, warehousing, assessments, consolidation and deconsolidation relating to such merchandise. The first cost and the applicable service charge are disclosed to the Clients in a lump sum. Thus, the cost to the Clients is the GLC.
Although AMC's charges for freight, insurance, etc., will not change, AMC does not assume the risk of a price change by the foreign vendor. Should such a change occur, the price change is passed on to the Clients as part of the GLC.
AMC will place orders with foreign vendors for merchandise ordered by the Client. For purposes of Section 402 of the Tariff Act of 1930, as amended (codified at 19 U.S.C. § 1401a), AMC is not related to the foreign vendors. AMC will establish the price with the vendor, as well as the terms of sale. In a proposed transaction, AMC will purchase the goods either "ex works" at the vendor's factory, or FOB at a designated foreign port of exportation. AMC will hold title to the merchandise and will bear the risk of loss while it is in route to the United States. Also, AMC will arrange for international transportation and insurance, and will act as the importer of record for the merchandise when it enters the United States. AMC will be responsible for all aspects of Customs clearance, and will pay all duties assessed.
When the vendor exports the goods, the bill of lading will indicate that the goods are consigned to AMC in the United States. After the goods clear Customs, AMC will complete the sale by making the goods available to the Clients in the United States. To protect itself from the risk of non-payment, AMC will request a standby be letter of credit or letters of undertaking from the Clients as further assurance of payment.
Product Development Program
In addition to the above programs, AMC may, be compensated for additional services through a "product development fee." According to the Agreements, this fee may cover sizing, design and other product development services. According to your letter, the "development" services provided by AMC will be in the nature of conducting market research and promulgating standards for the production of imported goods, i.e., AMC will research in the United States styles that appeal to U.S. consumers. In addition, AMC maintains a "Bureau of Standards" which "assists in establishment of size specifications and grading charts applicable to imported merchandise."
According to your submission, AMC's marketing brochures describe the product development services as product managers that "help principals to analyze current retail performance, identify future merchandise opportunities, research new developments in fabrics, silhouettes and countries of origin, and creating a strategy that outline the program by category, style, fabric, vendor, price, delivery, ads, targeted sales events, retail and profitability goals." You further state that AMC may analyze fashion trends, develop a core of fashion trends and color palettes, develop computerized "objective sheets" for each item to be developed, providing specifications such as targeted fabric, style, flat sketches, sizing, price, delivery dates and other pertinent items, and forward that information to its overseas offices, which then determine the best offshore factories for production. Finally, you state that AMC's product development services will be performed in the United States. You did not provide a copy of AMC's marketing brochures.
ISSUES:
1. Whether fees paid to AMC under the First Cost Buying Program are bona fide commissions and therefore not part of the price actually paid or payable.
2. Whether the transactions between the foreign vendors, AMC, and the U.S. Clients are bona fide sales conducted at arm's length, wherein the merchandise was clearly destined for the United States, allowing transaction value to be based on the vendor's sales price.
3. Whether services performed by AMC under the Product Development Program constitute an assist, such that the value of the work performed should be included in the appraised value of the imported merchandise.
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in accordance with the provisions of Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 ("TAA"; codified at 19 U.S.C. § 1401a). The preferred basis of appraisement is transaction value, defined as "the price actually paid or payable for merchandise when sold for exportation to the United States." 19 U.S.C. § 1401a(b)(1). Accordingly, we have assumed for the purposes of this ruling letter that transaction value is the appropriate basis of appraisement.
First Cost Agency Buying Program
The term "price actually paid or payable" is defined 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." 19 U.S.C. § 402(b)(4). Transaction value, however, does not include buying commissions provided a bona fide buying agency relationship exists between the buyer and the agent. See Pier 1 Imports, Inc. v. United States, 708 F. Supp. 351 (Ct. Int'l Trade 1989).
The existence of a bona fide buying commission depends upon the relevant factors of each particular case. See J.C. Penney Purchasing Corp. v. United States, 451 F. Supp. 973 (Cust. Ct. 1978). In this regard, the importer has the burden of proving the existence of a bona fide agency relationship and that payments to the agent constitute bona fide buying commissions. New Trends, Inc. v. United States, 645 F. Supp. 957 (Ct. Int'l Trade 1986); B.W. Wholesale Co. v. United States, 462 F. Supp. 1399, (C.C.P.A. 1971).
To determine whether a bona fide buying relationship exists Customs examines the totality of the evidence. In New Trends, the Court of International Trade set forth several factors for determining whether a bona fide buying agency relationship exists. These factors include:
1. Whether the principal controls the agent's activities and conduct;
2. Whether the principal is aware of the price paid to the supplier, or does the principal simply pay the agent a fixed price;
3. Whether the agent has a separate identity as an independent seller of merchandise;
4. Whether the principal is able to purchase merchandise directly from suppliers;
5. Whether the agent's actions are primarily for the benefit of the importer or for himself;
6. Whether the agent is fully responsible for handling or shipping the merchandise and for absorbing the costs of shipping and handling as part of his commission;
7. Whether the language used on the commercial invoice is consistent with the principal-agent relationship;
8. Whether the agent bears the risk of loss for damaged, lost or defective merchandise;
9. Whether the agent is financially detached from the manufacturer of the merchandise;
10. Whether the agent's duties are ministerial or discretionary; and
11. Whether the parties have entered into a buying agency agreement.
You claim the commissions to be paid pursuant to AMC's buying agency program-the First Cost Agency Buying Program-are buying agency commissions under the TAA and therefore not dutiable. You state that the Clients will fully control AMC's conduct and that the foreign vendors will be advised of the identity of the Clients. You also note that AMC may take title to the merchandise, but only at the direction of the Clients.
Regarding the Clients' control of AMC, although you state that the Clients will exercise control over AMC, it is not clear from the Agreements how the Clients will exert such control. Aside from a single provision that AMC will act as the buying agent, the Agreements contain no provisions to indicate how the Clients may exercise control over AMC. As one of three major U.S. apparel-sourcing companies, AMC will have significant leverage in dealing with the Clients. Furthermore, the Agreements specifically prohibit the Clients from selling seven categories of goods in certain geographic areas. This provision contradicts your claim that the Clients will control AMC.
In addition, it is apparent that AMC will play a central role in executing the prospective transactions. According to the Agreements, AMC will negotiate and place orders with the foreign vendors. In addition, AMC will bill the Clients and remit payment to the vendors. Furthermore, under the product development program, AMC will develop fashion trends and color palettes, arrange for the production of samples, and develop computerized "objective sheets" for each item to be developed. These objective sheets will provide specifications regarding fabric, style, flat sketches, sizing, pricing, and delivery dates. Moreover, AMC may receive title to, and risk of loss for, the merchandise. These provisions indicate that AMC will play an essential non-ministerial role in the negotiating, structuring, and conducting the transactions between the foreign vendors and the Clients.
As noted above, AMC may receive title and assume the risk of loss for the merchandise. Customs has found in rare circumstances that a principal may direct an agent to assume title and bear the risk of loss for a brief time without precluding a finding that a bona fide agency relationship exists. See HRL 545624, dated October 25, 1994. Generally, however, transfer of title and risk indicates that the parties are performing as buyer and seller. Although the fact that AMC will sometimes hold title and assume the risk of loss is not determinative of whether there was a bona fide agency relationship, the totality of the circumstances indicate that AMC will perform as an independent buyer and seller of the merchandise.
Several factors raise doubts as whether there will be a bona fide principal-agent relationship between the Clients and AMC. The current market conditions underlying the prospective transactions, the absence of provisions in the Agreements detailing the ability of the Clients to control AMC, the possibility that AMC will receive title and assume the risk of loss, and AMC's essential role in the prospective transactions all indicate AMC will be acting as an independent seller of merchandise. Based on these circumstances, we determine that the Buying Agency Program is not consistent with a bona fide principal-agent relationship and payments made pursuant to the program will be not be treated as buying commissions.
Guaranteed Landed Cost Program
For Customs purposes, the word "sale" generally is defined as a transfer of ownership in property from one party to another for consideration. J.L. Woods v. U.S., 62 CCPA, 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974). The primary factors to consider in determining whether there has been a transfer of property or ownership are whether the alleged buyer has assumed the risk of loss, and whether the buyer has acquired title to the imported merchandise. See, Headquarters Ruling Letter (HRL) 544775, dated April 3, 1992. No one factor is determinative and the relationship must be ascertained by an overall view of the entire situation and the particular facts and circumstances involved.
Concerning what evidence or documentation should be presented to show whether a bona fide sale has occurred, we stated in the informed compliance publication, What Every Member of the Trade Community Should Know About: Bona Fide Sales and Sales for Exportation, the following:
Contracts, distribution and other similar agreements, invoices, purchase orders, bills of lading, proof of payment, correspondence between the parties, and company reports or brochures all may serve as evidence that a party possesses title and risk of loss and functions as a buyer/seller, indicating that a bond fide sale occurs. Such documentation should be consistent in its entirety and with the transaction in general (i.e., consistent prices, dates, parties and merchandise). Further, the documentation and language included therein should reveal the substance of the transaction, including the obligations and roles of the parties. While formal sales contracts and other types of memorialized agreements (such as distribution or production agreements) generally are most revealing in this regard, other documentation (such as purchase orders, invoices, and proof of payment) evincing the structure of the transaction are crucial, especially in the absence of any written agreements. The terminology utilized in such agreements and documentation, i.e., "buyer, " "seller," "principal," or "agent," although indicative, is not dispositive of the parties' roles.
You state that AMC purchases merchandise from foreign vendors, with the terms of sale for a typical transaction being "ex works" at the vendor's factory or FOB at a designated foreign port of exportation. You also state that when AMC purchases merchandise from foreign vendors, it assumes title to such goods while they are en route to the United States, and AMC assumes the risk of loss for such merchandise. Besides your descriptions of the transaction, you submitted the Agreements. The Agreements, however, are between AMC and its U.S. Clients, and therefore pertain to the terms and conditions between these parties and do not describe the transactions between AMC and foreign vendors.
Based on the information provided above-namely that AMC will receive title to the goods and assume the risk of loss-there will be actual sales from foreign vendors to AMC. Consequently, there will be two sales: first from the foreign vendor to AMC, and second from AMC to the Clients. This analysis, however, is based on your descriptions of the proposed transactions. Any determination of whether an actual sale for exportation occurs will depend on the totality of the evidence for each particular transaction. The types of evidence listed in What Every Member of the Trade Community Should Know About: Bona Fide Sales and Sales for Exportation, supra, will be necessary to show that a sale for exportation takes place. The actual determination will be made by the appraising officer at the applicable port of entry based on the totality of the evidence, including the entry documentation submitted.
In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992) and Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993), the U.S. Court of Appeals for the Federal Circuit and the Court of International Trade, respectively, addressed the proper sale on which to base transaction value in the sale 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. Both courts held that the manufacturer's price, rather than the middleman's price, was valid as long as the transaction between the manufacturer and the middleman fell within the statutory provision for valuation. The courts explained 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 influences and involving goods "clearly destined for export to the United States."
A notice entitled Determining Transaction Value in Multi-Tiered Transactions, T.D. 96-87, 30/31 Cust. Bull 52/1, January 2, 1997, clarifies some of the issues that arise in multi-tiered transactions in determining which is the sale for exportation to the U.S. for the purpose of determining transaction value. In that notice, we stated that there is a presumption that transaction value is based on the price actually paid by the importer. That notice goes on to describe the documentation and information needed to rebut that presumption and support a ruling request that transaction value should be based on a sale involving a middleman and the manufacturer or other seller, rather than on the sale in which the importer is a party.
When a multi-tiered transaction takes place, Nissho is applicable. In applying Nissho, we have stated that there is a presumption that transaction value is based on the price actually paid by the importer. Here the middleman, AMC, is the importer.
You state that AMC is not related to any of the vendors from which goods will be purchased. We assume, therefore, that such sales are negotiated at arm's length free from any nonmarket influences. In addition, the merchandise at issue will be shipped to AMC's U.S. customers. You state that bills of lading, invoices, and marks and labels on the goods and their containers will indicate the United States as the destination of the merchandise. Thus, the merchandise is "clearly destined for export to the United States." Consequently, assuming there are sales from the foreign vendors to AMC, those sales could serve as the basis for the price actually paid or payable. We note this ruling does not address the situation in which AMC provides financial assistance to suppliers or participates in the manufacture of merchandise.
Product Development Program
You ask whether certain services performed-for which AMC assesses the Clients a "Product Development Fee"-constitute assists as contemplated by the TAA. As discussed above, 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 statutory additions. Assists constitute one of these additions. See section 402(b)(1)(C) of the TAA.
The term "assist" refers to any goods and services supplied directly or indirectly, and free of charge or at reduced cost, by the buyer for use in connection with the production or the sale for export to the United States of the imported merchandise. Among other things, assists include "engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise." 19 U.S.C. § 1401a(h)(1)(A)(iv).
You assert that under the TAA, the subject design work is not an assist because it is in the nature of "research performed prior to the product definition stage, which merely aids a buyer in deciding what type of goods to purchase." In addition, you suggest that AMC's product development services are incidental to the production of the goods and argue that because those services are performed in the United States, cannot represent an assist.
Only activities necessary for the production of imported merchandise will be considered assists. See HRL 544621, dated April 22, 1991 (artist's renditions of various tone and color combinations necessary for the production of imported merchandise and therefore an assist). According to the Agreements and your description of AMC's marketing brochure, AMC's product development services include designing, developing fashion trends and color palettes, arranging for the production of samples, providing specifications regarding fabric, style, flat sketches and sizing, and determining the best manufacturer for production. Given the extensive nature of AMC's product development services, we determine that these services are necessary for the production of the subject merchandise. However, such services are only dutiable if performed outside the United States. Based on your representation that AMC's product development services are performed in the United States, we determine that such services do not constitute an assist under section 402(h)(1)(A)(iv) of the TAA. So long as AMC's activities are performed in the United States, services provided under the Product Development Program will not be considered to be assists, and payments for those services will therefore not be included in transaction value.
HOLDING
For the reasons discussed above, we determine that fees paid pursuant to the First Sale Buying Program are not bona fide buying commissions. In addition, we find the sales under the GLC Program as described in your submissions, are bona fide sales, wherein the merchandise was clearly destined for the United States, allowing transaction value to be based on the foreign vendor's sales price to AMC, the importer. Finally, services provided by AMC under the Product Development Program will not be considered to be assists and therefore the payments for the services will not be included in transaction value, so long as the AMC's product development services are performed in the United States.
As provided above, these findings remain subject to any determinations that may be made by the appraising port officer based on documentation provided at the time of entry.
Sincerely,
Virginia L. Brown
Chief, Value Branch
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