RR:IT:VA 547006 RC
John M. Peterson, Esq.
Neville, Peterson, & Williams
Counsellors at Law
80 Broad Street, 34th Floor
New York, New York 10004
RE: Price actually paid or payable; inspection fees
Dear Mr. Peterson:
This is in response to your request for a ruling, received
by our office February 18, 1998, on behalf of your client, Dayton
Hudson Corporation ("Dayton Hudson"). The request concerns the
dutiability of certain inspection fees.
FACTS:
Dayton Hudson ("importer") owns and operates major retail
store chains ("Group Stores") throughout the United States. The
Group Stores include Target Stores, Mervyn's, Dayton's, Hudson's
and Marshall Field & Co. All of these companies import footwear
into the United States; the footwear is appraised according to
"transaction value" in section 402(b) of the Tariff Act of 1930,
as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C.
section 1401a).
The importer has contracted with a Hong Kong-based
corporation ("agent") to perform certain inspection services in
connection with footwear exported from Hong Kong, Korea, China,
Indonesia and Taiwan to the above-listed Group Stores of the
importer, in the United States. A copy of the Inspection
Agreement ("Agreement") between the importer and the agent was
attached to the ruling request. The Agreement sets forth, in
part, that, at the importer's request, the agent will perform the
following four different kinds of inspections:
Factory Evaluations, to determine whether a vendor has the
ability to meet the importer's performance and manufacturing
standards for specified product; Introduction Audits, conducted
prior to actual production of footwear, in accordance with the
importer's Footwear Inspection Procedure for each footwear
program; During Production Inspections, on the first purchase
order of each new style. These inspections are conducted when the
finished product is first coming off the production line, and
covers both the finished product and in line checks of problem
areas discovered during the end line product check; and Final
Random Inspections, as requested by the importer on each purchase
order.
As compensation for these inspection services, the
importer's Group Stores each agree to pay the agent an inspection
fee based on the value of the goods inspected either in terms of
a certain percentage of the value of the inspected goods or as a
flat fee based on the volume of goods shipped.
The agent will invoice the importer for the inspection
services weekly, and conduct an annual reconciliation after
fiscal year shipping volumes are determined. The inspection
agent has no particular experience or expertise in footwear
manufacture, purchasing or marketing and was chosen by the
importer in part because of the agent's lack of business
connections to foreign footwear manufacturers. It is assumed for
purposes of this ruling that the importer, the agent, and the
foreign vendors are all "unrelated parties."
The parties agree specifically that the agent may not charge
vendors for any services without receiving written authorization
from a senior official employed by the importer. The Agreement
further provides for full or partial payment to the agent for
inspection services performed in the event the importer cancels
an order for inspected merchandise, and provides that the agent
will forfeit its inspection fee if goods are received by one of
the importer's stores and do not meet specifications as a result
of the agent's "deliberate negligence." The Agreement prohibits
the agent from attempting to recover its inspection fee from the
vendor without the importer's permission.
The Agreement provides that vendors will be charged back for
all the agent's costs derived from re-inspecting rejected
purchase orders, or for any re-inspections resulting from a
vendor's failure to furnish correct factory addresses and/or
inspection dates. The Agreement authorizes the agent to issue
debit notes to vendors for the recovery of such costs directly,
including all of agent's out of pocket expenses. The importer
disclaims responsibility for paying the agent any re-inspection
fees, but pledges its best efforts to assist the agent in
collecting these fees.
This ruling is limited to prospective import transactions
involving these same parties which are conducted in the same
manner as those described above.
ISSUE:
Whether the above-described inspection fees, made by the
importer to an unrelated third party, are included in transaction
value either as part of the "price actually paid or payable" for
the imported merchandise or as an addition thereto.
LAW AND ANALYSIS:
We are assuming, for the purposes of this ruling, that
transaction value is the appropriate basis of appraisement for
the imported merchandise. Merchandise imported into the United
States is appraised in accordance with the provisions of 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)). This section
provides, in pertinent part, that the transaction value of the
imported merchandise is the price actually paid or payable for
merchandise when sold for exportation to the United States plus
various 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." We note, in particular,
that section 402(b)(1) provides, in pertinent part, that the
price actually paid or payable for imported merchandise is
increased by amounts for the enumerated statutory additions
insofar as they are not otherwise included within the price
actually paid or payable. Those enumerated items are:
(A) the packing costs incurred by the buyer with
respect to the imported merchandise;
(B) any selling commission incurred by the buyer with
respect to the imported merchandise;
(C) the value, apportioned as appropriate, of any
assist;
(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.
Section 402(h)(1)(A) of the TAA provides, in pertinent part,
as follows:
The term assist' means any of the following if
supplied directly or indirectly, and free of charge or
at reduced cost, by the buyer of imported merchandise
for use in connection with the production or the sale
for export to the United States of the merchandise: . .
.
(iv) 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.
There is no specific provision regarding fees paid for
inspection services. However, such fees are somewhat similar to
buying commissions. Buying commissions are fees paid by an
importer to an agent for the service of representing the importer
abroad in the purchase of the goods being valued. They are not
specifically included as one of the additions to the price
actually paid or payable. It has been determined that bona fide
buying commissions are not added to the price actually paid or
payable. Pier I Imports, Inc. v. Untied States, 13 CIT 161, 164,
708 F.Supp. 351. 353 (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, 12
CIT 133, 136, 681 F.Supp 875, 878 (1988). The importer 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, supra, 22. 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.
Headquarters Ruling Letter (HRL) 542141 (September 29, 1980)
(also known as TAA #7). 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. Id.
In Jay-Arr Slimwear Inc., v. United States, supra, the Court
of International Trade cited examples of services which are
characteristic of those rendered by a buying agent. These
services include compiling market information, gathering samples,
translating, placing orders based on the buyer's instructions,
procuring the merchandise, assisting in factory negotiation,
inspecting and packing merchandise and arranging for shipment and
payment (emphasis added).
Several court cases have considered the dutiability of fees
paid for inspection services. Whether fees paid for inspection
services are dutiable depends, in part, on the type of services
provided. In Jay-Arr Slimwear Inc. v. United States, supra, the
court found that "[c]ommissions representing services associated
with the actual production of the merchandise are a component of
the selling price and thus, dutiable." In that case, where it
appeared that the buyer's alleged "agent" was related to the
foreign seller of the imported merchandise, and performed
extensive inspection services, with commissions negotiated on a
style-by-style basis, the Court held that the plaintiff had not
satisfied its evidentiary burden to show that the payments were
bona fide buying commissions. Three pre-TAA decisions employed a
similar analysis. In Norco Sales Co. v. United States, 65 Cust.
Ct. 778 (1970), the buyer's "agent" worked hand-in-hand with the
foreign manufacturer's employees to coordinate all manufacturing
processes, and arrange for the delivery of components for final
assembly. The court held that the "handling" services performed
by the agent were not typical of those performed by buying
agents, but were instead intimately involved with the nature of
the merchandise produced; they were costs related to the
manufacture and assembly of the goods, and therefore included in
dutiable value. In International Fashions, Inc. v. United
States, 76 Cust. Ct. 92, aff'd 64 CCPA 35 (1976), the court held
that where an agent was required to inspect all component pieces
at each stage of manufacturing, this was essentially a "quality
control" function which would otherwise be performed by a factory
worker, and thus be part of the cost of manufacturing the goods.
By contrast, in Concord Electronics Corp. v. United States, 85
Cust. Ct. 87 (1980), the court held that fees for inspection
services which did not amount to production quality control
services were not dutiable.
In two rulings applying the TAA, Customs considered the
dutiability of inspection fees. In HRL 543365, dated November 1,
1984, Customs held that fees for inspection services, limited to
on-site inspection to verify only quantities of components
exported and assembled garments returning to the United States,
were not part of the "price actually paid or payable" for the
goods. Similarly, in HRL 544681, dated July 21, 1991, Customs
held that a one-time visit by employees of the importer to the
foreign vendor's factories to inspect the merchandise prior to
shipment, was not included in the "price actually paid or
payable" for the imported merchandise. However, in HRL 544088,
dated March 25, 1988, it was determined that fees paid for design
and consulting work are assists and thus an addition to the price
actually paid or payable.
Based on the above decisions, we conclude that inspection
fees, to the extent that they are paid for services generally
performed by buying agents are not added to the price actually
paid or payable for imported merchandise. However, where the
inspection services entail quality control along the lines of
production related design or development, and intimate
involvement in the nature of the goods produced, the inspection
fees may be dutiable either as part of the price actually paid or
payable or as an assist.
In this case, based on the submitted information, the
inspection agent's activities appear to be of the kind typically
performed by a buying agent. The inspection agent has no
expertise in the manufacture of footwear; it does not furnish the
importer's vendors with technical assistance; nor does it tell
the factories how to make the footwear. The "Factory
Evaluations" are conducted merely to determine whether a vendor
has the ability to meet the importer's performance and
manufacturing standards for specified product. The "Introduction
Audits" are conducted prior to actual production of footwear, in
accordance with the importer's Footwear Inspection Procedure for
each footwear program. The "During Production Inspections" are
conducted only on the first purchase order of each new style.
These inspections are conducted when the finished product is
first coming off the production line, and covers both the
finished product and in line checks of problem areas discovered
during the end line product check, after the factory has
subjected the products to its own quality control procedures.
The "Final Random Inspections" are conducted only upon request of
the importer on each purchase order.
Furthermore, we note that the written agency agreement
expressly prohibits the agent from performing services for, or
collecting compensation from, the foreign suppliers without first
obtaining the importer's permission. Lastly, the inspection fees
are paid to the agent by the importer and do not inure to the
benefit of the seller or a party related to the seller. See,
Generra Sportswear Co. v. United States, 8 CAFC 132, 905 F.2d 377
(1990), and Chrysler Corporation v. United States, Slip Op.
93-186, 17 C.I.T. 1049 (1993).
Based on the information provided, the inspection services
here are similar to activities typically performed by bona fide
buying agents, and do not amount to production quality control
intimately involved with the nature of the merchandise produced.
Consequently, the inspection services are not part of the price
actually paid or payable.
With respect to whether the inspection fees should be added
to the price actually paid or payable, as assists, again, we note
that the inspection services appear to be relatively limited in
nature with respect to involvement in production. Furthermore,
there is no indication that the inspection agent supplies the
seller with "development," in any manner (directly or
indirectly). Therefore, we find that the inspection fees do not
constitute an assist.
HOLDING:
Based on the facts provided, we find that the inspection
fees are not part of the total payment for the goods to be
included in the price actually paid or payable, nor do they
constitute an assist to be added to the price actually paid or
payable.
Sincerely,
Acting Director
International Trade Compliance
Division