RR:IT:VA 546262 KCC

Port Director
U.S. Customs Service
JFK Airport, Building #77
Jamaica, New York 11430

RE: Internal Advice 18/94; transaction value; buying commission; Pier 1 Imports, Inc. v. United States; Rosenthal-Netter, Inc. v. United States; Jay-Arr Slimwear, Inc. v. United States; New Trends, Inc. v. United States; J.C. Penney Purchasing Corp. v. United States; Dorco Imports v. United States; related party; 19 U.S.C. 1401a(g)(1); interest; T.D. 85-111 and Clarification; Generra Sportswear Co. v. United States; Moss Mfg. Co. v. United States; claimed rate of interest does not exceed the level for such transactions prevailing in the country where, and when the financing was provided; HRLs 543765, 544610, 542141, and 544965; letter of credit confirmation charge

Dear Port Director:

This is in regards to your memorandum under cover of which you forwarded a request for internal advice (IA 18/94) submitted by Gibney, Anthoney & Flaherty (including Follick & Bessich, P.C.) on behalf of Amar Textiles (USA) Inc. ("Amar"). The request was received in this office on February 8, 1996. The issues raised are whether commissions and finance charges paid to the alleged agent, Viva Texturium, are included in the price actually paid or payable in determining transaction value for the imported fabric. Audit Report No. 220-93-CEO-002 dated June 30, 1994, a memorandum from Chief, Textile and Plastics Branch, National Commodity Specialist Division, New York Seaport, dated February 2, 1996, and information submitted at a meeting on July 11, 1996, and in an additional submission dated September 13, 1996, and September 3, 1997, were taken into consideration in reaching this decision. We regret the delay in responding to your request.

FACTS:

J.M. Viva International and then its successor, Amar Textiles (USA) Inc. ("Amar") import textile fabric from various unrelated suppliers and related mills ("foreign suppliers") in Japan, India, Pakistan, Indonesia, Korea, Thailand and Taiwan. J.M. Viva International imported textile fabric through February 1992 until Amar purchased its assets, merchandise stock, clientele and location. Shortly thereafter, Amar commenced importing on its own behalf. Amar is a wholly-owned subsidiary of Amarnani Textiles Ind. (PVT) Ltd., of Bombay, India ("Amarnani"). Amar states that it does not purchase any fabric from Amarnani and none of its transactions involve Amarnani. You note that the owners of Amar, Amarnani, Viva Textorium of Dubai, United Arab Emirates ("Viva", the purported buying agent), Harry (Japan) Ltd. (supplier), and Harry (UK) Ltd. (supplier), are all brothers. Additionally, the owner of J.M. Viva International is a sister. All the importations of the textile fabric use the trademark "Harry Collection" which is owned by Amarnani. Moreover, you state that the textile fabric sold by Fuji in Japan was manufactured by Harry (Japan) Ltd. and payment was made with Harry (Japan) Ltd. listed as the beneficiary. Viva has been authorized to use this trademark in its sales in the home market of Dubai, United Arab Emirates ("U.A.E.") without payment.

In an Agreement dated January 3, 1992, Viva agreed to perform various services on behalf of Amar. 1 of the Agreement states that Viva agrees to act as "Purchasing Agent" for Amar and perform the following services:

2. liaison with suppliers and manufactures of textile goods located in various countries; 3. "...establish Letters of Credit on behalf of the Importer [Amar] in favour of the suppliers located in various countries, selected by the Purchasing Agent [Viva] and will not represent suppliers selected by the Purchaser [Amar]; 4. ensure that the suppliers ship the textile fabric pursuant to the terms and conditions of Amar's order and ensure the textile fabric is received according to Amar's requirements, including conforming to United States regulations; 5. process through bankers documents under the established Letters of Credit; 6. verify these documents before transmittal to Amar; 7. obtain and send to Amar samples of textile fabric ordered by Amar; 8. ensure suppliers ship textile fabric through Amar's specified shipping lines or airlines; 9. liable for non-shipment or late shipment of textile fabric to Amar; 10. represent Amar in negotiations and settlement with suppliers concerning the defective, damaged or shortage of ordered textile fabrics; and 11. ensure that suppliers's payments are timely submitted and is liable for late payment; Amar is not liable for late payment to the suppliers.

In exchange for Viva's services, the Agreement establishes that Amar agrees to pay Viva the following amounts:

1. cost of goods paid to the supplier; 2. Letter of Credit confirmation charge of 2% of the cost of goods; 3. If applicable, Marine Insurance of 0.2% of the cost of goods; 4. Letter of Credit interest of 12.5% payable for 30 days on the cost of goods; 5. Buyer commission of 3% on the cost of the goods; 6. Trust Receipt Interest of 12.5% payable for 120 days on the total of the above amounts. i.e. 1-5; 7. Documentation Charges of 0.065% on the cost of goods; 8. Courier/Other charges of $25.00 per document; and 9. Overdue interest of 12.5% payable in case of non-payment on the due date for payment as mentioned in the Debit Note from Viva.

It is your position that transaction value pursuant to 402(b) of the TAA is based on the invoices from Viva less deductions for international freight, marine insurance (#3 above), documentation charges (#7 above) and courier charges (#8 above). Although the written Agreement exists, it is your position that Viva performs none of the services traditionally handled by a buying agent. Thus, a bona fide buying agency does not exist and the 3% buying commission (#5 above) is part of the price actually paid or payable for the imported merchandise. Additionally, it is your position that the following amounts are also included in the price actually paid or payable:

total amount for the letter of credit confirmation charge (#2 above) because this amount is excessive. Normally, letter of credit confirmation charges range from $25.00 to $75.00. total amount for the letter of credit interest of 12.5% for the 30 days (#4 above) because interest does not normally accrue within the first 30 days from purchase. any amount over the actual interest rate prevailing in the U.A.E. for the trust receipt interest (#6 above) and for the overdue interest (#9 above).

Amar contends that Viva secures foreign suppliers of fabric, acts as its representative in purchasing the fabric which it agreed to purchase, transmits samples of any fabric ordered by it, and opens letters of credit on its behalf and in favor of the foreign suppliers. Amar states that pursuant to the Agreement, it alone has the right to designate the foreign supplier found by Viva and that Viva is prohibited from representing any foreign supplier which is selected by Amar. Thus, Amar maintains that the Agreement serves as a comprehensive buying agreement, which includes separate provisions for financing the purchase of the fabric by Amar and the payment of interest to Viva for such financing. Additionally, Amar notes that the foreign suppliers of the fabric are paid for the goods through the letters of credit opened by Viva on Amar's behalf and that the foreign suppliers do not permit nor collect interest on delayed payments for the ordered textiles.

Amar states that it files an entry and deposits duties in accordance with the purchase price shown on the commercial invoice issued by the foreign supplier of the textile fabric. Generally, the commercial invoice shows Amar as either the purchaser or consignee. However, Amar states that where required by the letter of credit or as designated by the foreign supplier Viva may be shown as either the purchaser or consignee. In all cases, Amar is shown as the party to be notified and receive shipment of the textile fabric. Additionally, at or about importation, Viva issues to Amar a debit note and separate invoice. The invoice sets forth the cost of the goods plus the various charges that Amar will incur for insurance, commission, documentation, and couriers, as well as the interest charges it will incur in order to finance the purchase price. The debit note sets forth the total amount due and the due date, which is 150 days from the date of the debit note. Amar makes payments for its purchases on a running basis, rather than on a shipment by shipment basis. For example, a compilation prepared by Amar's accountant listing purchases from March 1992 to November 1993, and payments made during this period shows that Amar made purchases valued at nearly six million dollars and made payments of over three million dollars.

ISSUE:

1. Whether the commission paid to Viva Textorium constitutes a bona fide buying commission such that it is not included in the transaction value of the imported merchandise.

2. Whether the financing charges paid by Amar to Viva Textorium are included in the transaction value of the imported merchandise.

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the United States is transaction value pursuant to 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. 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 numerated additions. The term "price actually paid or payable" is defined in 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.

As a general matter, Customs presumes that the price paid by the importer is the basis of transaction value. We note that you have not questioned the roles of Amar as the buyer and the foreign suppliers as sellers. However, before determining whether the commissions paid to Viva constitute bona fide buying commissions, we find it best to clarify the roles of the buyer and seller involved in the sale for exportation to the U.S. of the imported merchandise.

The financial relationship between the parties confuses much of the evidence which would establish a buyer and seller transaction or the principal-agent relationship. Because of the financing requirements, the invoice terms are often obscured. Many of the invoices list Viva as the buyer and Amar as the consignee while others list Amar as the buyer. These designations are often requirements necessary when establishing letters of credit.

Nevertheless, based on the evidence submitted, Amar appears to be recognized as the buyer of the goods by the foreign suppliers. The foreign supplier's commercial invoices show Amar as either the purchaser or consignee. However, the correspondence from the foreign suppliers regarding payment of the imported merchandise is addressed directly to Amar. Additionally, Purchase Order Confirmations were submitted showing orders made by Amar directly to the foreign suppliers, referencing Viva as the party authorized to establish the letter of credit. Generally, the terms of sale on the commercial invoices from the foreign suppliers to Amar are C&F (Cost and Freight) New York or CIF (Cost Insurance Freight) New York and this cost is included in the foreign supplier's invoice price. Thus, the foreign suppliers are responsible for procurring transporation to New York. In these situations, Risk of Loss passes to Amar when loaded onto the ship at the port of exportation. Shipment of merchandise is made directly to Amar from the foreign suppliers. Although Viva does act as an independent seller in the U.A.E., it does not appear that Viva acts as an intermediate seller in these transactions. Viva never takes possession of the goods, but merely arranges for insurance and provides financing of the imported goods for Amar. Amar pays for these services via the Agreement when billed by Viva on an individual invoice basis. Thus, the buyer in these transactions is Amar and the foreign suppliers are the sellers. We must next determine whether Viva acts as a bona fide buying agent for Amar.

1. Buying Commission

Buying commissions are fees paid by an importer to his agent for the service of representing him aborad in the purchase of the goods being appraised. 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 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.

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. 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).

When examining whether a purported agent is a bona fide buying agent, closer scrutiny is warranted where special circumstances exist. Although the purported agent, Viva Textorium, and the buyer, Amar Textiles (USA) Inc., are not related pursuant to 402(g)(1) of the TAA and 19 U.S.C. 1401a(g)(1), the owners of these two companies are brothers. Additionally, Viva is financing Amar's purchases. Although these circumstances do not prima facie negate a buying agency relationship, they warrant closer scrutiny of the alleged principal-buyer relationship.

The existence of a buying agency agreement has been viewed as supporting the existence of a buying agency relationship. Dorco Imports v. United States, 67 Cust. Ct. 503, 512, R.D. 11753 (1971). Although a buying agency agreement was presented in this case, it is Customs position that "having legal authority to act as a buying agent and acting as a buying agent are two separate matters and Customs is entitled to examine the evidence which proves the latter. U.S. Customs Service General Notice, 11 Cust Bull. 15 (March 15, 1989) See, HRL 544965 dated February 22, 1994.

It is our position that insufficient evidence was presented to show that Viva actually performed as a buying agent pursuant to the Agreement or that it performed the typical services of a buying agent, such as compiling market information, and gathering samples, placing orders pursuant to Amar's direction, assisting in price negotiations, inspecting and packing merchandise and arranging for shipment. Amar states that it instructs Viva with respect to the fabrics needed and their specifications, the fabric it will accept and order, the foreign supplier it will buy from, the quantities it requires, the prices it agrees to pay, and the shipping dates it requires. Other than the above statements by Amar, no evidence such as correspondence between Amar and Viva, purchase orders, or contracts, was submitted to substantiate Amar's claims and Viva's action with regard to the responsibility as set forth in the Agreement. On the contrary, the Purchase Order Confirmations submitted establish that Amar dealt directly with the foreign supplier; no reference to Viva or a buying agent is made in these documents other than Viva's responsibilities in establishing the letter of credit. Additionally, as counsel noted in the September 3, 1997, submission, the president of Amar provides the supplier with instructions as to shipment and advises that the "Dubai Office"/Viva has been informed to open a letter of credit. This evidence establishes that Amar performed one of Viva's alleged buying agent responsibilities, shipping instructions, as set forth in the Agreement.

As stated previously, the financial relationship between the parties confuses much of the evidence which would establish a principal-agent relationship. Because of the financing requirements, the invoice terms are obscured. Many of the invoices list Viva as the buyer and Amar as the consignee while others list Amar as the buyer. These designations are often requirements necessary when establishing letters of credit. Thus, an examination of the commercial invoices is not helpful in this situation.

The Agreement states that Viva is responsible for securing foreign suppliers for Amar, ensuring that the foreign suppliers ship the goods pursuant to the terms and conditions of Amar's order, ensuring the goods are received according to Amar's requirements including conforming to U.S. regulations, ensuring the foreign suppliers ship the goods as instructed by Amar and represent Amar in negotiations and settlement with the foreign suppliers concerning defective, damaged or shortage of ordered merchandise. Amar notes that its president periodically travels abroad to review samples of fabric, meet potential foreign suppliers, and negotiate prices on behalf of Amar. Amar states that Viva arranges these meetings and based on Amar's instructions often narrows the styles and colors of fabric from which Amar will choose. Amar states that it reserves the right to make and actually makes all the decisions as to ultimate choice of fabric and pricing.

However, Amar's president informed Customs that while abroad he normally picks out his own manufactures and orders directly from them. Additionally, Customs understands that samples of the goods and the purchased goods are shipped directly from the supplier to Amar. Moreover, Customs understands that Viva does not have personnel in the foreign suppliers countries and, therefore, is unable to exercise quality or quantity control as stated in the Agreement. No evidence was presented that Viva represents Amar in any dealings with the foreign suppliers other than in providing the financing and marine insurance for Amar's purchases. Based on the evidence presented, Amar has not established that Viva was acting as a bona fide buying agent. Therefore, we conclude that the fees paid to Viva do not constitute bona fide buying commissions, and are, therefore, included in the transaction value of the imported merchandise.

2. Finance Charges

Next, we must determine whether the finance charges, i.e., letter of credit interest for 30 days (#4 above), the trust receipt interest (#6 above), and overdue interest (#9 above) are excluded from transaction value based on the criteria set forth in T.D. 85-111 dated July 17, 1985, and the Statement of Clarification for T.D. 85-111 dated July 17, 1989 (54 F.R. 29973) (the "Clarification"). T.D. 85-111 states that interest payments, whether or not included in the price actually paid or payable for imported merchandise, shall not be regarded as part of the customs value provided that:

(a) The charges are distinguished from the price of the goods; (b) The financing arrangement was made in writing; (c) Where required, the buyer can demonstrate that - Such goods are actually sold at the price declared as the price actually paid or payable, and - The claimed rate of interest does not exceed the level for such transactions prevailing in the country where, and when the financing was provided.

T.D. 85-111 is to apply whether the financing is provided by the seller, a bank or another natural or legal person, and if appropriate, where the merchandise is valued under a method other than transaction value.

In the Clarification, Customs stated that for purposes of T.D. 85-111, "the term 'interest' encompasses only bona fide interest charges, not simply the notion of interest arising out of delayed payment." Customs further added that "bona fide interest charges are those payments that are carried on the importer's books as interest expenses in conformance with generally accepted accounting principles." There appears to be no dispute that the finance charge payments at issue are "bona fide interest charges." Customs audit indicated that the finance charges are carried on Amar's books as interest in accordance with generally accepted accounting principles. Thus, the finance charges are bona fide interest charges.

You cite to HRL 543765, dated August 8, 1986, and HRL 544610 dated December 21, 1991, for the principal that the interest charges are not those contemplated by T.D. 85-111 and the Clarification and should be dutiable as part of the price actually paid or payable for the imported merchandise. It is our position that these cases are factually distinguishable from the instant case.

In HRL 543765, the importer entered into a written agreement with a foreign manufacturer whereby the importer included in its payment for the imported merchandise interest charges paid by the foreign manufacturer to a piece goods vendor in connection with the manufacturer's financing of its purchase of the piece goods. The importer's position was that pursuant to T.D. 85-111 the interest charges were non-dutiable. This decision stated that:

The reimbursement by the importer of the manufacturer's interest payments to the vendor will not confer upon the importer the benefits that one would enjoy upon entering into a financing arrangement whereby payment in full is delayed and the interest which accrues represents the time value of money. We view the interest charges to be paid by the manufacturer to the vendor as merely an expense of doing business which will subsequently be passed on by the manufacturer to the importer as part of the price for the imported merchandise.

Thus, HRL 543765 determined that the reimbursement by the importer of the interest charges paid by the manufacturer to the vendor were dutiable as part of transaction value pursuant to 402(b) of the TAA. See also, HRL 544610 dated December 21, 1991, which determined that interest charges incurred by the importer for fabric and trim used in the manufacture of the imported merchandise are not the type of interest charges contemplated by T.D. 85-111, and, thus were dutiable as part of the price actually paid or payable.

An amount paid by an importer to a foreign seller, which purportedly represents reimbursement for the interest charges that the foreign seller pays to a third party, is dutiable. Generra Sportswear Co. v. United States, 8 CAFC 132, 905 F.2d 377 (1990), and Moss Mfg. Co. V. United States, 896 F.2d 535, 539 (Fed. Cir. 1990). Such a reimbursement does not fall within the purview of T.D. 85-111 and the Clarification. In the instant case, the interest charges are not for interest charges paid to purported buying agent or seller as reimbursement for the interest charges it paid the foreign manufacturer for piece goods or fabric and trim used in the manufacturer of the imported goods, but are interest charges paid to finance the importer's purchase of imported merchandise. Therefore, we do not find HRL 543765 and HRL 544610 relevant in this situation.

One of the criteria which must be satisfied for the finance charges to be excluded is that they are distinguished from the price of the goods. As evidenced from the submitted documents, the finance charges are distinguished from the price of the imported merchandise. At importation, the invoice lists the price of the goods imported. Thereafter, a separate invoice is sent from Viva to Amar listing the finance charges that accrued for the imported merchandise. Thus, there is no question as to what constitutes the price of the goods from the finance charges for the goods. Next, the financing agreement must be in writing. In this situation, the specific terms and conditions of the financing arrangement between the parties is contained in the January 3, 1992 Agreement. The Agreement sets forth the exact rate of interest chargeable over various time periods.

You claim that the interest rate for the finance charges is excessive compared to the prevailing rate in the U.A.E.. You compared the Agreement rates to those of the U.A.E. Central Bank which ranged from 7.87% to 9.84%. Amar contends that using the U.A.E. Central Bank rates in this situation is unsuitable. The U.A.E. Central Bank rates are akin to the Federal Reserve bank-to-bank rate. Amar states that the relative positions of the parties must be considered when deciding whether the interest rate charged is appropriate and that a comparison should be made for rates charged by banks to commercial customers in the U.A.E.. T.D. 85-111 states with specificity that the importer must demonstrate that "[t]he claimed rate of interest does not exceed the level for such transactions prevailing in the country where, and at the time when the financing was provided." Thus, it is our position that the comparison should be made to similar transactions. To compare bank-to-bank interest rates like the U.A.E. Central Bank rate is unacceptable. The comparison of interest rates should be made on a similar transaction level.

Amar has submitted a faxed letter from Viva which lists examples of lending rates for various banking institutions in the U.A.E. for prime commercial customers. The rates range from 10% to 11% which Amar states are intended for unsecured loans to commercial customers with ample credit and excellent credit histories or long-terms associations with the banks in question. Amar and Viva negotiated the 12.5% interest rate when Amar was a relatively new company with no credit history and a lack of substantial assets. Thus, it was difficult for Amar to secure financing. Amar contends that the slight difference between what the banks could offer and what was negotiated between the parties is not excessive in light of Amar's position. Amar also submitted its newest negotiated Agreement with Viva in which the interest rates were negotiated down to 10.5%. Based on the rates between banks and commercial customers submitted by Amar in its January 6, 1994 submission, we conclude that the interest rates between Amar and Viva are appropriate, reasonable, and reflect the level for such transactions prevailing in the country where, and at the time when such financing was provided. Because all the criteria of T.D. 85-111 and the Clarification have been meet, the finance charges are not included in the price actually paid or payable for the imported merchandise.

Generally, letter of credit confirmation charges are not included in the price actually paid or payable for imported merchandise. You state that normally letter of credit confirmation charges range from $25.00 to $75.00. In this case, the letter of credit confirmation charge is 2% of the cost of the goods which you contend is an excessive fee for this charge. Thus, you disallow this charge and include it in the price actually paid or payable for the imported merchandise. The 2% letter of credit confirmation charge relates to the expense incurred by Viva to secure a letter of credit for Amar's benefit. Without statutory authority we can not include a charge in the price of the goods merely because the costs may be excessive. As there is no authority to add the letter of credit confirmation charge to the price actually paid or payable, the letter of credit confirmation charge is not included in the transaction value of the imported goods.

HOLDING:

The evidence submitted is insufficient to support a finding that Viva is Amar's buying agent. Therefore, we conclude that the fees paid to Viva do not constitute bona fide buying commissions and are, therefore, included in the transaction value of the imported merchandise. As the criteria of T.D. 85-111 and the Clarification has been meet, the finance charges are not included in the price actually paid or payable for the imported merchandise. The 2% letter of credit confirmation charge is also not included in the price actually paid or payable.

This decision should be mailed by your office to the internal advice requester no later than 60 days from the date of this letter. On that date the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Informational Act and other public access channels.

Sincerely,


Acting Director
International Trade Compliance
Division