RR:IT:VA 548014 EM
Area Director
U.S. Customs Service
JFK Airport, Building 77
Jamaica, New York 11430
RE: Internal Advice 01/012; Dutiability of technical consulting fees
Dear Port Director:
This is in response to your request for Internal Advice dated August 23, 2001, regarding the dutiability of certain payments made to xxxxxx by the importer of record xxxxxx. This inquiry emanates from a Compliance Assessment Report issued by the New York Field Office.
The internal advice was requested on behalf of xxxxxx by Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP in response to the findings contained in the July 19, 2001 Compliance Assessment Report (hereinafter “the Report”). Specifically, Regulatory Audit recommends that fees paid to the related supplier for technical services and retail consulting be considered dutiable.
The importer’s Counsel disagrees with this finding. In response to the Report, Counsel submitted a Supplemental Information Letter (hereinafter “SIL”) for review under the Excellerated Resolution Process. Your review of the SIL affirmed Regulatory Audit’s position. Subsequently, this SIL was forwarded to our office pursuant to a request for Internal Advice.
The July 1, 2001 SIL submitted by Counsel, your August 7, 2001 memorandum, and an August 23, 2001 National Commodity Specialist Division memorandum were taken into consideration in reaching this decision. We further considered the July 19, 2001 Report submitted by the New York Office of Regulatory Audit. We regret the delay in responding.
FACTS:
xxxxxx (hereinafter the “Seller”) and xxxxxx (hereinafter the “Importer”) are related parties within the meaning of 19 U.S.C. 1401a(g)(1). The Seller supplies its wearing apparel to the United States market exclusively through its sales to the Importer. The Importer alleges that it re-sells the vast majority of this merchandise to unrelated retailers such as xxxxxx. Additionally, the Importer operates its own chain of retail outlets offering the subject merchandise for sale throughout the United States.
The Seller provides certain technical consulting services to the Importer’s retail outlets pursuant to the Technical Services and Retail Consulting Agreement (hereinafter “Agreement”). The Agreement provides for, in relevant part, the following:
Inventory Control. The Technical Consultant [the Seller] agrees to develop and maintain a computerized central inventory tracking and control system designed to record merchandise receipts, identify inventory discrepancies, analyze sales trends and maintain adequate stock, etc., for a continually expanding network of retail outlets. Technical consultant [the Seller] is to provide all required programming, assistance in obtaining hardware capable of meeting the Company’s [the Importer’s] needs and training of the Company’s [the Importer’s] personnel on an on-going basis.
Store Design/Point-of-Sale Advertising. The Technical Consultant [the Seller] agrees to provide continuing assistance to the Company [the Importer] with regard to the design of retail outlets and point-of-sale advertising in order to maximize sales.
Compensation. In consideration for the services to be provided by the Technical Consultant [the Seller] in connection with this agreement, the Company [the Importer] agrees to pay Technical Consultant [the Seller] an amount equal to 2% of the Company’s [the Importer’s] annual net sales with respect to merchandise sold through its retail shops. Payment is to be made quarterly, based on anticipated annual sales.
According to Counsel, no sales contract between the Importer and the Seller exists. Furthermore, Counsel indicated that the purchase orders are filed electronically and that no evidence of conditions of the transaction appears on the purchase orders. Counsel’s July 16, 2001 submission contained “Exhibit C, ” a paragraph purported to explain the accounting process between the Importer and the Seller. The document is undated, unsigned, and has no visible letterhead.
Additionally, Counsel submitted a supplemental list of the services provided under the Agreement in its Exhibit D. These services included: collection image, visual merchandising, store planning, direct marketing/customer management, retail personnel training, and MIS/electronic data processing. A description accompanied each enumerated service provided by the Seller.
Counsel alleges that Exhibit D provides an explanation of the activities performed by the Seller pursuant to the Agreement: “[T]hese fees are paid to [the parent company] for specific non-merchandise related undertakings relating to activity set forth in a written agreement. (see Exhibit D).” Exhibit D appears to be a portion of a report that explains the activities performed by the Seller for the United States market. The author is not identified and no data is contained within the exhibit.
In the value section of the Compliance Assessment Report, the auditors conclude that transaction value is the appropriate basis of appraisement for transactions between the Seller and the related Importer. Additionally, the auditors determined that the Importer’s payment of 2% of its annual retail outlet sales to the Seller is dutiable. The Report explains, in pertinent part, that:
[T]he fees are treated separately in xxxxxx [the Importer’s] accounting records as expenses related to retail store operations… [T]he 2% fee is paid only on goods sold at xxxxxx [the Importer’s] own retail store, i.e., the vast majority of imported merchandise (much of which is similar, if not identical) is not subject to the fee. For example, merchandise sold to unrelated retailers such as xxxxxx, is not subject to the retail fee.
Regulatory Audit determined that these fees were part of the price actually paid or payable. The Auditor’s Rejoinder in the Compliance Assessment Report indicates that:
The CA team contends that the Consulting Fees constitute a dutiable finding as presented in this report. The importer has not provided any substantial proof that the additional payments made to their related foreign supplier are not part of the price paid or payable for the imported merchandise. Since the importer contends that the price paid or payable is not controlled by the parent company, then additional support should have been provided.
Counsel contends that the fees paid pursuant to the Agreement are unrelated to the purchase of the imported merchandise and are therefore non-dutiable. Counsel makes three claims to support its position. First, the fees are treated separately in the Importer’s accounting records, as expenses related to retail store operation. Second, the fees incurred from the technical consulting services are accounted for separately from the cost or purchase of inventory. Third, the vast majority of the imported merchandise is not subject to the fee because the Importer only sells a small portion of the subject merchandise at its own retail stores.
It is the National Commodity Specialist’s position that the technical consulting services are part of the transaction value of the goods. The NCS determined that the fee accrues for ongoing activity related to the ongoing importation and sale of the goods and concludes that the services are directly related to the merchandise. As such, they are a bona fide addition to the price paid or payable.
ISSUE:
1. Whether fees paid by the importer to the related party supplier are part of the price actually paid or payable?
2. Whether fees paid by the importer to the related party are proceeds of a subsequent resale and, as such, additions to the price actually paid or payable?
LAW AND ANALYSIS:
Price Actually Paid or Payable
The preferred method of appraising merchandise imported into the United States is transaction value pursuant to Section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 1401a. 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. The term “price actually paid or payable” means:
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 from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.
19 U.S.C. 1401a(b)(4).
Transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain "test values," e.g., the deductive or computed value of identical or similar merchandise determined pursuant to actual appraisements of imported merchandise. §402(b)(2)(B) of the TAA. In the instant case, the Importer and the Seller are related parties. Nonetheless, transaction value is the appropriate basis of appraisement pursuant to the findings of the Report.
There is a rebuttable presumption that all payments made by a buyer to a seller, or party related to a seller, are part of the price actually paid of payable. See HQ 545663, dated July 14, 1995. This position is based on the meaning of the term “price actually paid or payable” as addressed in Generra Sportswear Co. v. United States, 8 CAFC 132, 905 F.2d 377 (1990). 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).
However, 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 that 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. Accordingly, the technical consulting fees 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.
Exhibit D enumerates the technical consulting activities performed pursuant to the Agreement: [developing the] collection image, visual merchandising, store planning, direct marketing/customer management, retail personnel training, and MIS/electronic data processing. At first glance, the enumerated activities appear to be unrelated to the cost for the imported merchandise.
However, the origin of Exhibit D is unknown. Furthermore, Counsel informs us that no sales contract exists for the sale of the merchandise to the Importer. Absent any other persuasive, external indicia of the terms of sale for the imported merchandise, we cannot ascertain whether the sale of the merchandise was conditioned upon the profits inured by the Seller vis-à-vis the [Technical Services] Agreement. As such, the payment must be included as part of the price paid or payable.
Even if the technical consulting fees were not part of the price paid or payable, the fees would be dutiable as proceeds.
Proceeds of a Subsequent Re-sale
Under transaction value, when a fixed percentage of the buyer’s profit from the resale of the merchandise inures to the seller, the proceeds are part of the price paid or payable within the meaning of Section 402(b)(1)(E) of the TAA.
As stated in the General Notice on Dutiability of “Royalty” Payments, proceeds are defined as “issues; income; yield; receipts; produce; money or article or other thing of value arising or obtained by the sale of property; the sum, amount or value of property sold or converted into money or into other property.” Black’s Law Dictionary, 6th ed., 1990 at p. 1204. Another definition of proceeds is “what is produced by or derived from something (as a sale, investment, levy business) by way or total revenue; the total amount brought in ***” Webster’s Third New International Dictionary 1986.
With regard to proceeds, the Statement of Administrative Action provides that:
Additions for the value of any part of the proceeds of any subsequent resale, disposal or use of the imported merchandise that accrues directly or indirectly to the seller, do not extend to the flow of dividends or other payments from the buyer to the seller that do not directly relate to the imported merchandise. Whether an addition will be made must be determined on a case-by-case basis depending on the facts of each individual transaction.
19 C.F.R. 152.103(g).
In the instant case, the technical consulting fees are a percentage of the re-sale profit generated by the merchandise sold in the Importer’s retail outlet stores. We do not conclude, based upon that fact alone, that the payments are proceeds.
The Importer provides insufficient evidence to demonstrate that these fees are more than an additional payment to the Seller for the imported merchandise. First, the Importer alleges that the fees for the technical consulting services and the sale of the merchandise are treated separately in the accounting records, but Exhibit C does not provide any actual documentation of such records. Second, the Importer did not submit specific documentation of the technical consulting services provided by the Seller pursuant to the [Technical Service] Agreement. Exhibit D appears to list all of the services performed by the Seller on behalf of the Importer and other United States retailers not included in the contract.
Even if we assume that Exhibits C and D constituted adequate documentation for the Importer’s allegations, the absence of a sales agreement effectively precludes us from assessing whether adherence to the [Technical Services] Agreement is a condition for the sale of the merchandise. Consequently, we cannot conclude that the fees are payments for technical consulting services that are unrelated to the sale of the merchandise. We find, therefore, that these fees are dutiable as an addition to the price actually paid or payable, namely proceeds.
HOLDING:
Based on the evidence before us, the technical consulting fees the are dutiable as part of the price actually paid or payable for the imported merchandise or, in the alternative, as a statutory addition to the price actually paid or payable, namely proceeds.
You are directed to mail this decision to the internal advice applicant, no later than sixty (60) days from the date of this letter. On that date, 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.gov, by means of the Freedom of Information Act, and other public methods of distribution.
Sincerely,
Virginia Brown, Chief
Value Branch