VAL CO:R:C:V 544895 GG
xxxxxxx xxxxx
Vice President, Finance & Administration
xxxxxx USA
Two xxxxxxx Road
xxxxxxxxx, New Jersey 07004-2287
RE: Transaction value; buying agency; related parties;
dutiability of commissions and royalty payments
Dear Mr. xxxxx:
This is in response to your request, dated December 26,
1991, for a ruling on the valuation of certain merchandise to be
imported by xxxxxx xxx and xxxxxxx xx xxxxx.
FACTS:
xxxxxx xxx and xxxxxxx xx xxxxx are importers and
distributors of eyeglass and sunglass frames (hereinafter
"eyewear") in the United States. Both businesses plan to
increase efficiency and to promote expansion by reorganizing
their operations. The following account is a description of the
companies' proposed new structure.
xxxxxx xxx is located in New Jersey. Formerly known as
xxxxxxxx xxxxxxx Corp., xxxxxx xxx is a wholly-owned subsidiary
of xxxxxx xxxxxxx. xxxxxx xxxxxxx, in turn, is owned by xxxxxx
SpA and xxxxxx BV. xxxxxx BV, a Dutch company, is a wholly-
owned subsidiary of xxxxxx SpA, an Italian concern. The
ownership interest of xxxxxx SpA in xxxxxx xxx will continue
without change after the restructuring.
xxxxxxx xx xxxxx is another wholly-owned subsidiary of
xxxxxx xxxxxxx. It also is located in the United States.
The eyewear xxxxxx xxx plans to import will be manufactured
in Italy both by related and unrelated parties. The major
suppliers, xxxxxx Industrie Srl and xxxxxxxxx, are related to
xxxxxx SpA; they are also, according to xxxxxx xxx, related to
xxxxxx xxx by stock ownership and blood. Although xxxxxxx xx
xxxxx will import most of its eyewear from unrelated
manufacturers in Japan, it too, will order some of its
merchandise from related parties.
xxxxxx xxx states that the prices it and xxxxxxx xx xxxxx
pay to the overseas manufacturers reflect and include all costs
for materials, fabrication, general and administrative expenses,
packing and transportation costs, and reasonable profits to the
manufacturers. These prices, it maintains, are consistent with
arm's length pricing and are in accordance with generally
accepted accounting principles.
Facts Pertinent only to Issue 1.
The plan contemplates that xxxxxx xxx and xxxxxxx xx xxxxx
will utilize an agent to perform buying services for them. They
have entered into a written buying agency agreement with a
related company called xxxxx Srl ("xxxxx"). In the future
either or both importers may replace xxxxx with a buying agent
who would be a subsidiary of their own United States operations.
Under the agreement, xxxxx will perform the following
services: locating sources of finished merchandise; entering
into purchase contracts with manufacturers/sellers; locating
sources of raw materials and coordinating their shipment to
manufacturers for production of finished products; negotiating
the most advantageous prices and terms of payment for xxxxxx xxx
and xxxxxxx xx xxxxx; inspecting merchandise; advising xxxxxx xxx
and xxxxxxx xx xxxxx of new products; visiting factories to
ensure that the manufactured merchandise meets quality standards
and that work in progress is being completed in accordance with
shipping schedules; submitting samples to xxxxxx xxx and xxxxxxx
xx xxxxx; arranging shipments; providing for short-term
warehousing; and executing claims against suppliers for defective
merchandise or shortages on behalf of xxxxxx xxx and xxxxxxx xx
xxxxx.
The foreign manufacturers will invoice xxxxxx xxx and
xxxxxxx xx xxxxx directly for the cost of the merchandise; xxxxxx
xxx and xxxxxxx xx xxxxx will pay this amount to the agent who
then will remit the same sum to the manufacturer. These
commercial invoices will identify the foreign manufacturer as the
seller. The agent will provide xxxxxx xxx and xxxxxxx xx xxxxx
with separate invoices for any buying commissions and non-
production related expenses incurred on their behalf, such as
inland freight and hauling and lighterage charges. xxxxx can
only incur such expenses with the consent of the principals.
None of the sums dispersed to the agent as compensation for its
services as a buying agent, or as reimbursement for non-
production related expenses, will be paid directly or indirectly
to the manufacturers/sellers, and these amounts will not inure in
any way to the benefit of the manufacturers/sellers.
Foreign inland costs of shipping, handling and risk of loss
will by borne by the manufacturers. From the point of lading on
international carriers, xxxxxx xxx or xxxxxxx xx xxxxx will bear
all costs as well as the risk of loss.
xxxxx will only be permitted to commit to orders, prices or
other terms of sale with the manufacturers upon the specific
instructions and approval of xxxxxx xxx or xxxxxxx xx xxxxx. The
principals will review and approve price lists of all
manufacturers for all merchandise prior to its shipment.
Under the agreement, xxxxx will receive 10% of the
manufacturer's invoice price as a commission for services
rendered on xxxxxx xxx or xxxxxxx xx xxxxx's behalf.
Facts Pertinent only to Issue 2.
A relatively small portion of xxxxxx xxx's total imports
will consist of designer products, for which it will pay, through
xxxxxx SpA, a licensing fee to unrelated overseas licensors. In
this regard, xxxxxx SpA plans to enter into an advertising and
royalty fee arrangement with the unrelated overseas licensors.
Under the proposed arrangement, xxxxxx SpA will be charged a fee
for "advertising expenses" in a specified annual sum.
xxxxxx xxx states that all fees will be separately invoiced
to unrelated overseas licensors by xxxxxx SpA (although perhaps
what is meant is that the overseas licensors will invoice xxxxxx
SpA), and the payments will not be tied in any way to the sale of
merchandise to xxxxxx xxx. Rather, these annual fees will be
paid by xxxxxx SpA for the licensors' worldwide advertising and
marketing efforts and rights, and, as counsel for xxxxxx xxx
explains, for the use of the licensors' names. These payments
will be unrelated to the price actually paid or payable for
merchandise shipped to xxxxxx xxx because the fees will be paid
to the unrelated licensors regardless of whether sales to the
United States occur.
Annual invoices will be prepared from xxxxxx SpA to the
unrelated overseas licensors. Invoices in identical sums will be
reflected separately between xxxxxx SpA and xxxxxx xxx. xxxxx,
the alleged buying agent, will direct the invoices to, and on
behalf of, its principal, xxxxxx xxx.
ISSUE:
1) Whether commissions earned by a bona fide buying agent
for the account of an importer are part of appraised value
despite the fact that the agent, importer(s) and manufacturer(s)
are related?; and
2) Whether annual licensing and advertising fees which are
separately invoiced and ultimately paid to unrelated licensors
are to be added to the price actually paid or payable?
LAW AND ANALYSIS:
Issue 1.
The primary method of appraising imported merchandise is
transaction value. 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 amounts for
certain items enumerated in Section 402(b)(1) of the Tariff Act
of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19
U.S.C. 1401a(b)(1)). Selling commissions incurred by the buyer
with respect to the imported merchandise are one of those
enumerated items (Section 402(b)(1)(B) TAA); bona fide buying
commissions, however, are not a proper element of transaction
value. See Pier 1 Imports, Inc. v. United States, 708 F. Supp.
351, 254, 13 CIT 161, 164 (1989); Rosenthal-Netter, Inc. v.
United States, 12 CIT 77, 78, 679 F. Supp. 21, 23 (1988), aff'd,
No. 88-1294 (Fed. Cir. Nov. 10, 1988); Jay-Arr Slimwear, Inc. v.
United States, 12 CIT 133, 136, 681 F. Supp. 875, 878 (1988).
The transaction value of imported merchandise will be
accepted as the appraised value if the buyer and seller are
related but the relationship does not influence the price
actually paid or payable, or if the transaction value closely
approximates a test value. 19 U.S.C. 1401a (b)(2)(A)(iv) and
(b)(2)(B) and (b)(2)(C). In determining whether the relationship
between the buyer and seller influenced the price of the goods,
the buyer and the seller must prove that although they are
related, they buy and sell from one another as if they are not
related. For purposes of this response, we are assuming that
transaction value is applicable in appraising the merchandise and
that the relationship between the parties does not influence the
price actually paid or payable. However, we have not reviewed
this particular issue and offer no conclusions on this point.
The concerned appraising officer has the responsibility of making
the determination as to whether the price has been influenced by
the relationship.
With regard to the fact that the purported agent and the
foreign manufacturers are related, we note that while such a
relationship does not preclude the existence of a buying agency,
the circumstances surrounding such related party transactions are
subject to closer scrutiny when determining whether a commission
is bona fide. See Bushnell v. United States, C.A.D. 1104, 477
F.2d 1402 (1973); HRL 544512, dated December 20, 1990; HRL
544472, July 30, 1990. The totality of the evidence relative to
the transactions must demonstrate that the purported agent is in
fact bona fide. See HRL 544512.
To determine 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, 354,
13 CIT 161, 164 (1989) (quoting J.C. Penney Purchasing Corp. v.
United States, 80 Cust. Ct. 84, 95, C.D. 4741, 451 F. Supp. 973,
983 (CIT 1978); Rosenthal-Netter, Inc. v. United States, 12 CIT
77, 80, 679 F. Supp. 21, 24 (1988), aff'd, No. 88-1294 (Fed. Cir.
Nov. 10, 1988); HRL 543837, dated February 18, 1987; HRL 543911,
dated November 1, 1988; HRL 544008, dated August 17, 1988. By
limiting xxxxx to committing to orders, prices, or other terms of
sale only after being instructed to do so, or for which prior
approval has been received, xxxxxx xxx and xxxxxxx xx xxxxx under
the proposed arrangement will control the purchasing process.
Control over the purchasing process is strong evidence that an
agency relationship exists. See Rosenthal-Netter, 12 CIT at 77,
708 F. Supp. at 354; J.C. Penney, 80 Cust. Ct. at 95-96, 451 F.
Supp. at 983.
You indicate that xxxxl will compile market information,
gather samples, procure merchandise, assist in factory
negotiation, and inspect merchandise for the importers. Such
services are characteristic of those usually performed by a
buying agent. See Jay-Arr Slimwear Inc. v. United States, 12 CIT
133, 137, 681 F. Supp. 875, 878 (1988).
Other indicia of an agency relationship are outlined in New
Trends Inc. v. United States, 10 CIT 637, 645 F. Supp. 957
(1986). They are: whether the agent's actions are primarily for
the benefit of the importer, or for himself; whether the agent is
fully responsible for handling or shipping the merchandise and
for absorbing the costs of shipping and handling as part of its
commission; whether the language used on the commercial invoices
is consistent with the principal-agent relationship; whether the
agent bears the risk of loss for damaged, lost or defective
merchandise; and whether the agent is financially detached from
the manufacturer of the merchandise. In addition, the importer
must show that "none of the commission inures to the benefit of
the manufacturer." J.C. Penney, 80 Cust. Ct. at 97, 451 F. Supp.
at 984.
On the basis of the information you have provided, we are
satisfied that the above factors exist. In fulfilling xxxxxx
xxx's and xxxxxxx xx xxxxx's express orders, xxxxx's actions will
be primarily for the benefit of the importers. Although xxxxx
will arrange for handling and shipment of eyewear, the importers
will pay for and bear the risk of loss of such shipments. The
commercial invoices from the foreign manufacturers will be
directed to xxxxxx xxx and xxxxxxx xx xxxxx, and will identify
the foreign manufacturer as the seller. xxxxx will, in turn,
provide the importers with separate invoices for any buying
commissions and non-production related expenses incurred on the
importers' behalf. Finally, the proposed agency agreement states
that none of the commissions paid will inure to the benefit of
the manufacturers/sellers. If the tasks performed by xxxxx
comport with those proposed to be performed, then the commissions
paid to xxxxx will be viewed as buying agency commissions and
will not be part of the appraised value.
In sum, under the proposed set of facts, xxxxx, although a
related party, will be a bona fide buying agent of both xxxxxx
xxx and xxxxxxx xx xxxxx. Nothing contained in this ruling
precludes the concerned field officer from reviewing either the
question of control or whether the price actually paid or payable
between the parties was influenced by the relationship.
Issue 2.
In the absence of a written licensing agreement, we are
unable to rule on this aspect of your ruling request.
HOLDING:
1) Under the facts presented, commissions paid to a buying
agent for services performed on behalf of a principal, which are
not included in the payment made by the buyer to the seller, may
not be a part of appraised value despite the fact that the buyer,
seller and agent are related.
2) In the absence of a written licensing or royalty
agreement we are unable to rule on the issue of whether licensing
fees should be added to the price actually paid or payable for
the merchandise when sold for exportation to the United States.
Sincerely,
John Durant
Director, Commercial