RR:IT:VA 546607 KCC
Port Director
U.S. Customs Service
P.O. Box 619050
DFW Airport,, Texas 75261
RE: Application for Further Review of Protest 5501-96-100341; 5501-97-100244; multi-tiered transaction; sale for export; dutiability of alleged buying commissions; right of principal to control agent’s conduct
Dear Port Director:
This is in regard to the Application for Further Review of Protest 5501-96-100341 dated November 11, 1996, filed by Baker & McKenzie, on behalf of Charles L. Hardtke, Inc., regarding the appraisement of animal hides and skins pursuant to transaction value in §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. Information provided in an additional submission and in a meeting with this office has been taken into consideration in reaching this decision. We regret the delay in responding.
FACTS:
Charles L. Hardtke, Inc. (“Hardtke”) is a domestic supplier of animal hides and skins of both domestic and foreign origin. The imported merchandise at issue consists of pangolin skins imported from Laos. The pangolin skins are of Laotian origin and are subject to tanning in Laos. The tanning process is chrome tannage, colored and finished in glazed analin color. Hardtke states that the price between and among grades varies because of the laws of supply and demand. Hardtke claims that the skins at issue are used in the manufacture of Western wear, principally cowboy boots, which should be of Grade I quality skin containing no holes. Hardtke notes that ideal coloring is worth more to a bootmaker than a lesser quality skin with holes.
Hardtke described the transaction process as outlined below and submitted various documents to support its assertions. Hardtke states that the sale of pangolin skins is initiated by Hardtke placing a purchase order to Tropical Leather Tannery Co., Bangkok, Thailand (“Tropical”). Tropical is a subsidiary of Kittiwat & Watsanee (“K&W”) and was formed specifically for the purpose of handling the pangolin leather trade. An advance partial payment is made by Hardtke. Hardtke states that the order and advance partial payment are “confirmed” by memoranda from Tropical.
Hardtke states that subsequent to the initiation of the order with Tropical, Tropical, either as a seller or as its agent, negotiates with Vientiane Tannery “(“VT”) in Laos for the production of the pangolin skins. Tropical is responsible for procuring the skins for Hardtke and oversees shipping of the product to Hardtke. A memorandum from K&W to Hardtke dated April 11, 1996, describes that relationship as follows:
For the part that are done in Thailand, Kittiwat Watsanee Trading represent Charles L. Hardtke Inc. in procuring, inspecting, grading, dispatching, document processing and all related activities in his buying of leathers from Vientiane Tannery (pangolin leathers). In Laos P.D.R. we have to employ a tanning specialist to look after the skins going through each process with the Lao Manufacture paying him around five percent depending on each shipment. We have to finance most of the Lao manufacturer’s business. Export tax and freight cost are also paid by us. The cost of doing business and traveling expense are all part of what the Thai part has to pay.
Upon shipment and receipt of the imported pangolin skins, Hardtke makes payment of the outstanding balance in accordance with instructions received by Tropical. Hardtke makes all its payments to K&W and the V.N. Group as directed by Tropical for advances and any outstanding balances after the leather is imported into the U.S. Tropical provides Hardtke directions on who to pay and relevant account information for Hardtke to make the wire transfers. Mr. Hardtke states that he and Mr. Kitiwatt of K&W visited VT where Mr. Ping, Manger of VT, informed him that he was paid the face value of the invoices by K&W. Mr. Ping gave Mr. Hardtke copies of three bank transfer forms showing wire transfers of 100,000 each. No evidence was submitted to link the bank transfer payments from K&W to actual invoices to Tropical/K&W&W or Hardtke. No payments are made by Hardtke directly to VT. Other than the relationship between Tropical and K&W, Hardtke states that none of the foreign parties is “related” pursuant to §402(g) of the TAA.
Hardtke states that it appears that the V.N. Group is employed by K&W to “look after” the production of the leathers in Laos. Hardtke states that the services performed by the V.N. Group are those commonly performed by a buying agent and are in the nature of quality control services rendered as a tanning and dyeing agent. Hardtke states that no diversion of the payment from Hardtke to the V.N. Group inured to the benefit of Tropical, K&W or VT. Additionally, Hardtke states that K&W also employed the services of a quality inspector and that no portion of this payment was made to VT.
Hardtke submitted the following documentation as ones which are representative of a typical transaction between itself, Tropical/K&W, and VT:
A facsimile from Hardtke to Tropical dated October 3, 1995, discussing what appears to be three different orders including change in an order for 1,000 pieces and a Purchase Order to Tropical from Hardtke referencing the October 3, 1995, facsimile for 1000 pieces of Pangolin.
A facsimile from Tropical to Hardtke dated November 29, 1995, confirming shipment of 861 pieces of Pangolin and with instructions as to payment of the outstanding balance to K&W and V.N. Group accounts.
Invoice No. 97/VTT dated November 25, 1995, from VT in Lao People’s Democratic Republic to Tropical showing shipment from Lao P.D.R. with a total invoice price of US$9,668 for 861 pieces of Manis Javanica Leathers
Packing List dated November 25, 1995, from VT to Hardtke for 861 pieces of Manis Javanica Leathers.
Airway bill dated July 3, 1996 from Cargo Marketing International Co., Ltd showing shipper as Vientiane in Lao and consignee as Exotic from Vientiane through Bangkok to Dallas with freight prepaid.
Ministry of Agriculture, Forestry, Irrigation and Cooperatives Vientiane Certificate Re: Export Permit No. 3054 referring to 1,050 pieces of Pangolin, Manis Javanica, from Lao P.D.R. with a date stamp for November 27, 1995.
Lao People’s Democratic Republic Export Permit No. 3054 showing the exporter as Vientiane Tunnery, Invoice Identification as 97/25/11/95, for Manis Javanica Leathers 1,050 pieces for US$4,200 from Laos direct to Hardtke U.S.
Herman-Miles Trucking, Inc. Bill of Lading showing shipping date of December 13, 1995 from shipper Trans-Trade Inc. to Hardtke from Dallas to El Paso for Pangolin skins from Lao P.D.R. which were delivered on December 14, 1995.
Hardtke internal Receiving Report dated December 15, 1995, showing 859 pieces of Pangolin skins with notes which indicated that: -the skins are of Grade II poor quality, -not similar to past shipments, -not good finish, -low percentage, and -it is unknown which purchase order number is to be used.
Trans-Trade, Inc. Invoice #4005801 dated December 8, 1995, to Hardtke for Pangolin skins from shipper Tropical for Brokerage Services in the U.S.
Customs Entry Summary Documentation Package (CF 7501) which includes the U.S. Declaration for Importation or Exportation of Fish or Wildlife showing the foreign consignor as VT and the U.S. importer as Hardtke of 861 pieces of Manis Javanica, Pangolin tanned skins with a domestic value of US$9,113 dated December 11, 1995.
Hardtke claims that the transaction value is based on the amount paid VT plus incidentals for damaged skins and for the specialist on tanning and dyeing. Hardtke claims that the additional payments made to Tropical/K&W are either attributable to a “second sale” of the pangolin leather to the U.S. or are buying commissions which are statutorily not part of the price actually paid or payable in determining transaction value pursuant to §402(b)(1)(B) of the TAA. Hardtke states that neither Tropical or K&W are agents of VT. No written buying agency agreement exist.
It is your position that the values presented on the invoices are not the prices paid for the imported goods. The subsequent payments to Tropical/K&W are part of the price actually paid or payable. You state that the evidence establishes that Tropical/K&W are acting as independent sellers or are as limited partners of the vendor, VT.
ISSUE:
1. Whether the imported merchandise may be appraised based on the transaction between VT and Tropical/K&W.
Whether the evidence submitted supports a finding that the commissions paid constitute bona fide buying commissions such that they are not 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 statutory additions, including:
(B) any selling commission incurred by the buyer with respect to the imported merchandise,
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.
Multi-tiered Transaction
For it’s first position, Hardtke contends that the instant situation involves a multi-tiered transaction with the merchandise first being sold from VT to Tropical/K&W, then from Tropical/K&W to Hardtke. Thus, it is Hardtke’s position that two sales take place, with the claimed sale for exportation being that between VT and Tropical/K&W.
In Nissho Iwai American Corp. v. United States, 16 CIT 86, 786 F. Supp. 1002 (1992), rev'd in part, 982 F.2d 505 (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 dutiable value of merchandise imported pursuant to a three-tiered distribution arrangement involving a foreign manufacturer, a middleman and a United States purchaser. In both cases, the middleman was the importer of record. In each case, the court held that the price paid by the middleman/importer was the proper basis for transaction value. Each court further said 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 the United States.
We note that in the context of filing an entry, Customs Form (“CF”) 7501, an importer is required to make a value declaration. As indicated by the language of CF 7501, the language of the valuation statute, and in accordance with the Nissho Iwai and Synergy decisions and our own precedent, we presume that transaction value is based on the price paid by the importer. See, Headquarters Ruling Letter (“HRL”) 545114 dated May 31, 1994 and HRL 545648 (IA 10/94) dated August 31, 1994. In further keeping with the courts’ holdings, we note that in those situations where an importer requests appraisement based on the price paid by the alleged middleman to the foreign manufacturer, and the importer is not the middleman, the importer may do so. However, it will be the importer’s responsibility to show that such price is acceptable under the standard set forth in Nissho Iwai and Synergy. That is, the importer must present sufficient evidence that the alleged sale was a bona fide arm’s length sale and that it involved goods clearly destined for the United States. With regard to this Nissho Iwai analysis, the importer, Hardtke, is not the middleman. The middleman for this examination is Tropical/K&W. Thus, Hardtke must present sufficient evidence that the sale between VT and Tropical/K&W is a bona fide arm’s length sale and that it involves goods clearly destined for the United States.
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. Wood v. U.S., 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974). While J.L. Wood was decided under the prior appraisement statute, Customs adheres to this definition under the TAA. 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, HRL 544775 dated April 3, 1992 and HRL 543633 dated July 7, 1987. Also relevant is whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. See, HRL 545474 dated August 25, 1995.
It is our position that the evidence falls short of establishing a bona fide sale between VT and Tropical/K&W. The invoice from VT to Hardtke is inconsistent with your claim that there was a bona fide sale between the manufacturer, VT, and the middleman, Tropical/K&W, as an invoice from the manufacturer, VT, to the middleman, Tropical/K&W, does not exist. The documents submitted at entry are consistent with a finding that the only sale was between VT and Hardtke. Additionally, no purchase orders from Tropical/K&W to VT were submitted. As the existence of a bona fide sale between VT and Tropical/K&W is not established, transaction value is based on the price the importer, Hardtke, paid for the imported merchandise.
Buying Commission
Alternatively, Hardtke claims that the additional payments made to Tropical/K&W are buying commissions which are statutorily not part of the price actually paid or payable in determining transaction value pursuant to §402(b)(1)(B) of the TAA. 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.
Whether the relationship is one of agent-principal is to be determined by the substance of the transaction, not by the labels the parties attach to it. Pier 1 Imports, Inc. v. U.S., supra., and Monarch Luggage Co. v. U.S., 715 F. Supp. 1115, 13 CIT 523 (1989). 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).
With respect to the instant case, no written buying agency agreement exists between Hardtke and Tropical/K&W. In this regard, it has been held that while the existence of such an agreement lends support to a claim that a bona fide buying agency relationship exists, the absence of one is not fatal to such a claim, provided the available evidence, taken as a whole, establishes the existence of such a relationship. Mitsui & Co. (U.S.A.), Inc. v. United States, 66 Cust. Ct. 553, R.D. 11740 (1971); and Rosenthal-Netter, Inc., supra.
It is our position that the evidence presented by Hardtke is insufficient to show that Tropical/K&W actually performed the typical services of a buying agent. The primary consideration is the right of the principal to control the agent’s conduct. The facts and documentation available indicate that Hardtke did not exercise control over the agent’s activities. Based on the correspondence between Hardtke and the agent, it is apparent that Hardtke discussed the terms of the price for the leather for each shipment with Tropical/K&W. Tropical/K&W allocated the amount of different skins the importer could purchase and set the price and payment terms. There is no indication that Hardtke directed Tropical/K&W or the V.N. Group to perform the normal functions of a buying agent.
It does appear that Tropical/K&W performed some buying agent services. The agent did monitor the manufacturing process at VT, acquired samples for Hardtke, arranged for transportation, performed quality control, negotiated prices and accepted payments. However, these services were performed by Tropical/K&W on behalf of themselves and VT, not at the direction of Hardtke. The correspondence submitted indicates that Tropical/K&W are acting as a selling agent for VT or as VT’s partners. Tropical/K&W letters/facsimiles to Hardtke use the term “partner” in reference to VT. Numerous correspondence between the parties indicates that the agent’s primary responsibility lies with VT and not with Hardtke. Additionally, information obtained by Customs indicates that Tropical/K&W is an agent for VT and that everything concerning buying and selling of Hardtke leathers produced by VT is done through Tropical/K&W in Bangkok Thailand. Additionally, a letter from Tropical to Hardtke dated January 4, 1996, discussing business with VT states that “I [Tropical] could not survive with the commission they are giving me.”
Additionally, there are no payments made to VT by Hardtke. There are no invoices between Tropical/K&W and Hardtke establishing the exact amount for the agent’s buying commission or other expenses undertaken on behalf of Hardtke. Hardtke’s payments are made, as directed by Tropical, to K&W and the V.N. Group. Hardtke submitted copies of three bank transfer forms showing wire transfers of 100,000 each to VT. However, no evidence was submitted to link the bank transfer payments to actual invoices to Hardtke.
The evidence available does not indicated that Hardtke had any control over Tropical/K&W. Accordingly, we do not find that a buying agency relationship existed between Hardtke and Tropical/K&W. Thus, the transaction value for the imported leather includes all the payments made by Hardtke, as instructed by Tropical, to K&W.
Additionally, it is our position that the payments made to the V.N. Group are payments made for the benefit of the seller. As stated by Hardtke, K&W hired the V.N. Group to “look after” VT’s production of the leather which involved services rendered for tanning and dyeing. These services assist the seller, VT, in its production of the leather. The payments made by Hardtke to the V.N. Group at the instruction of Tropical/K&W are included in transaction value as part of the price actually paid or payable because they are payments made by the buyer for the benefit of the seller.
HOLDING:
Based on the evidence presented, a bona fide sale between VT and Tropical/K&W does not exist. The transaction value is based on the price the importer, Hardtke, paid for the imported merchandise. The evidence submitted is insufficient to support a finding that Tropical/K&W is Hardtke’s buying agent. Therefore, we conclude that the fees paid do not constitute bona fide buying commissions and are, therefore, included in the transaction value of the imported merchandise. The payments made by Hardtke to the V.N. Group at the instruction of Tropical/K&W are included in transaction value as part of the price actually paid or payable because they are payments made by the buyer for the benefit of the seller.
This Protest should be DENIED. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065 dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision.
Sixty days from the date of the decision the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on customs Home Page on the World Wide, Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Thomas L. Lobred
Chief, Value Branch