VAL CO:R:C:V 544472 ML
------------------, Esq.
--------,-------- o,
--------------------
-- East --th Street
New York, N.Y. -----
RE: Valuation of Ladies Apparel Purchased Through
Related Buying Agents
Dear Mr. ---------:
This is in response to your letter dated March 9,1990,
requesting a prospective ruling that payments made by -----------
---------s (U.S.A.) N.V. (hereinafter referred to as the
"importer") to two related buying agents, ------- Ltd
(hereinafter referred to as "------- I" or "------- II") are not
part of the transaction value of imported merchandise under
section 402(b) of the Tariff Act of 1930, as amended by the
Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(b)).
FACTS:
The importer is purchasing ladies wearing apparel. The
primary sources of supply for its merchandise are companies to
which the importer is related as the term is defined in section
402(g) of the TAA. The importer is wholly owned by -------------
---------------- (hereinafter referred to as "-----------
Holdings"). Mr. "A" owns 55.81% of the share capital of B-------
--- Holdings and seven other shareholders own the remaining
44.19%. ----------- Textiles Limited in Hong Kong and ----------
- Textiles Limited in Ireland are also wholly owned subsidiaries
of ------------Holdings. Both manufacture apparel for the
importer, as well as, unrelated United States importers.
-------------------- Limited in Sri Lanka also manufactures
ladies apparel for the importer and unrelated United States
importers, but ----------- Holding owns only a 70% interest in
this company (the owner of the remaining 30% has not been
stated).
The importer purchases ladies apparel from related and
unrelated vendors in the Far East and imports and resells the
merchandise in the United States. At present, the importer
purchases virtually all merchandise through ------- Ltd., a
company owned by Mr. "A" (3.61%) and by Mrs. "A" (96.39%). The
importer expects that its increased demand for merchandise will
not be able to be met by its related factories. Therefore, the
importer will use the buying services of two related buying
agents. ------- I will buy merchandise from unrelated sources,
while ------- II will purchase merchandise from related
factories. Mrs. "A" will own 48.19% of ------- I and 96.39% of
------- II. Mr."A" will effectively own 30% of ------- I and
3.61% of ------- II. The remaining percentage of ------- I to be
owned by the seven other shareholders of ----------- Holding.
The buying agents will receive a commission ranging from 5%
to 15% for services rendered on behalf of the importer. These
buying agents will perform (or utilize the services of
identically owned subagents to perform) some, or all of the
following tasks: locating unrelated sources for goods when
necessary; the negotiation of favorable prices; the placement of
orders; the inspection of merchandise; filing claims where
merchandise is defective; arranging for shipment; procuring
necessary quota; procurement of samples and the preparation of
necessary export documentation. The commission rate will vary
depending upon the locale of sourcing; the quantities purchased;
and other considerations relating to the degree and level of
services provided.
Under the facts, the manufacturers will invoice the importer
for the goods and the buying agent will forward that invoice to
the importer together with an invoice for its buying commission
and for expenses incurred in connection with the purchase and
exportation of the merchandise. The importer will then forward
the payment to the buying agents who will in turn remit payments
for the merchandise to the supplier and retain that amount which
relates to commissions and expenses. Buying agents will not be
permitted to make any purchase commitments on behalf of the
importer absent express authority, nor will they be permitted to
solicit or accept remuneration of any kind from any supplier or
to buy and sell for their own account in transactions involving
the importer. Additionally, the buying agents will be
prohibited from sharing their commissions with any of the
suppliers.
It is also expected that the agents, acting for the
importer, will in some instances procure temporary quota from
sources unrelated to the factories supplying the merchandise and
incur an expense, which it would pass on to the importer.
Similarly, if the agents use their own quota they will again
require the importer to make compensation. In this type of
situation, the agent will separately invoice the importer.
ISSUES:
(1) Whether the amounts paid to ------- I or ------- II
under the agreement with the importer are includable in the
transaction value?
(2) Whether the quota charges paid to ------- I or II by
the importer are part of the "price actually paid or payable" for
the merchandise?
LAW AND ANALYSIS:
The preferred method of appraising merchandise is
transaction value which is defined in section 402(b) of the
Tariff Act of 1930, as amended by the Trade Agreements Act of
1979 (TAA: 19 U.S.C. 1401a(b)) as the "price actually paid or
payable" for merchandise when sold for exportation to the United
States, plus certain enumerated additions.
In order for transaction value to be applicable when related
parties are involved, the requirements of section 402(b)(2)(B) of
the TAA must be fulfilled. This section provides that the
transaction value of merchandise may serve as the basis of
appraisement in related party transactions if:
...an examination of the circumstances of the sale of
the imported merchandise indicates that the
relationship between such buyer and seller did not
influence the price actually paid or payable; or if the
transaction value of the imported merchandise closely
approximates-
(i) the transaction value of identical
merchandise, or of similar merchandise, in
sales to unrelated buyers in the United
States;
(ii) the deductive value or computed value for
identical merchandise or similar
merchandise; ...
each value referred to in clause (i) or (ii) that is
used for comparison must relate to merchandise that was
exported to the United States at or about the same time
as the imported merchandise.
In determining whether the relationship between the parties
influenced the price of the merchandise, 19 CFR 152.103(j)(2)(i)
provides that if it is shown that the buyer and seller, although
related, bought from and sold to each other as if they were not
related, this would demonstrate that the price had not been
influenced by the relationship, and transaction value would be
accepted. If the price is determined in a manner which is
consistent with the normal pricing practice of the industry, or
with the way the seller deals with unrelated buyers then it is
considered not to have been influenced by the relationship of the
parties. (See TAA No.61, dated March 25, 1983 542792). The
parties may also use a series of test values as a basis of
comparison to the transaction value. If the transaction value
closely approximates any one of the test values, it will be
accepted.
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. The concerned appraising officer
has the responsibility of making the determination as to whether
the price has been influenced by the relationship.
Buying commissions are not specifically included as one of
the additions to the price actually paid or payable. The "price
actually paid or payable" is defined in section 402(b)(4)(a) as:
The total payment (whether direct or indirect...) made,
or to be made, for imported merchandise by the buyer
to, or for the benefit of, the seller.
The importer, ------- I and II and several of the
manufacturers are related persons under section 402(g) of the
TAA. However, the mere fact that the parties are related does
not preclude a finding that a bona fide buying agency
relationship exists.
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 the agent.
B & W Wholesale Co. v. United States, 58 CCPA 92, C.A.D. 1010,
436 F.2d 1399 (1971). Customs also considers the nature of the
services performed by the agent giving rise to the payment to
determine whether the costs should be included in the transaction
value of the merchandise. Jay-Arr Slimwear, Inc. v. United
States, 12 CIT , 681 F.Supp. 875, 878 (1988). As the court
stated in Slimwear, if the expenses are associated with selling
or producing the merchandise, rather than ministerial functions
in procuring the goods, the costs are dutiable.
Customs published a general notice in the Customs Bulletin
dated March 15, 1989, reminding interested parties what evidence
is required to establish a bona fide buying agency relationship.
In the notice, Customs quoted from Headquarters Ruling letter
(HRL) No. 542141, dated September 29, 1980 (TAA #7) establishing
that:
... 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. 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.
Cases such as Slimwear stressed that having legal authority
to act as buying agent and acting as buying agent were two
different matters and that the Customs Service was entitled to
examine evidence which proved the latter. In order to view the
relationship of the parties as a bona fide buying agency, Customs
must examine all relevant factors and each case is governed by
its own particular facts. J.C. Penney Purchasing Corporation et
al. v. United States, 80 Cust. Ct. 84, C.D. 4741 (1978), 451 F.
Supp. 973 (1983); United States v. Knit Wits (Wiley) et al., 62
Cust. Ct. 1008, A.R.D. 245 (1969).
In New Trends Inc. v. United States, 10 CIT 637, 645 F.
Supp. 957 (1986), the Court of International Trade set forth
several factors upon which to determine the existence of a bona
fide buying agency. These factors include: 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.
The inquiry does not end here, however. To be exempt from
dutiable value, the importer must additionally 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; See also,
Manhattan Novelty Corp., 63 Cust. Ct. at 702; Nelson Bead Co., 42
CCPA at 183; United States v. Knit Wits (Wiley), 62 Cust. Ct.
850, 854-55, R.D. 11640 (1986), Rosenthal-Netter, Inc. v. United
States, 12 CIT , Slip Op. 88-9 (1988).
On the basis of the information you have provided regarding
the transactions in question, we are satisfied that the importer
will exercise the requisite degree of control over ------- I, the
buying agent, who buys from unrelated manufacturers. In
fulfilling the importers express orders, the agent will show that
his actions are primarily for the benefit of the importer. The
buying agent here, does not hold title to the merchandise, nor
does he bear the risk of loss for damaged, lost or defective
merchandise. The proposed arrangement makes it clear that the
responsibility for absorbing the costs of shipping and handling
will ultimately lie with the importer. Finally, the language to
be used on the commercial invoice and the terms of the buying
agency agreement are consistent with the existence of a buying
agency relationship. The importer, not the agent will be listed
as the purchaser of the merchandise. Additionally, the proposed
agency agreement clearly states that none of the commissions paid
to the agent will inure to the benefit of the manufacturers. If
the tasks performed by the agent comport with those proposed to
be performed, both in the draft agency agreement and in the brief
submitted to Customs, then any commissions paid to ------- I will
be viewed as buying agency commissions and, as such, are not part
of dutiable value.
The next situation to be addressed, is the case where
------- II, a related party of the importer, will buy merchandise
from another related party and will be paid commissions by its'
related importer. Again, the relationship between the parties is
not an absolute bar to finding a buying agency relationship, but
the importer must demonstrate conclusively that it exercises
absolute control over the buying agent with respect to the
transactions. It is essential that no portion of the commissions
paid to ------- II inure to the benefit of those factories in
which the related parties have an interest. If the actions of
the agent are consistent with the facts provided and the buying
agency agreement as presented, any commissions paid to ------- II
will be nondutiable buying commissions. Note however, that the
degree of control asserted over the agent is factually specific
and could vary with each importation. The actual determination
as to the existence of a buying agency will be made by the
appraising officer at the applicable port of entry upon the
presentation of the proper documentation as described in TAA # 7.
Please note, that the approval of these buying arrangements
in no way authorizes the acceptability of a 15% buying agency
fee. The appraising officer will determine whether the highest
possible percentage (i.e., 15%) greatly exceeds the percent
commission that is normal in the trade for bona fide buying
agents. Documentary evidence detailing the extent of additional
services provided beyond those normally performed by such agents
would need to be presented to the appraising officer.
The second issue you have raised involves whether any quota
charges paid to ------- I or II by the importer are part of the
"price actually paid or payable" for the imported merchandise.
Customs has consistently held that in cases where quota payments
are paid tot he seller, or a party related to the seller, the
amount of the payments is part of the total payment to the
seller; and thus, is included in the transaction value of the
merchandise. See, HRL 542169 (TAA #6), dated September 18, 1980;
HRL 542150 (TAA #14), dated January 6, 1981; and HRL 543931,
dated February 22, 1988. The U.S. Court of Appeals for the
Federal Circuit recently affirmed this position in Generra
Sportswear Co. v. United States, Slip Op. 89-1652, dated May 22,
1990. To the extent that the factories supply quota and the
importer compensates the seller for that quota, those charges
will be part of the "price actually paid or payable" for the
imported merchandise. On the other hand, payments made by the
buyer to an unrelated third party or to a governmental agency
would not be part of the "price actually paid or payable" for the
imported merchandise.
HOLDING:
(1) In light of the foregoing, the payments to be made to
------- I and II are buying commissions under a proposed bona
fide buying agency agreement. As such, the payments will not be
part of the transaction value of the merchandise. The
commissions, however, should not exceed the percent commission
which is normal in the trade for bona fide buying agents.
(2) To the extent that the factories supply quota and the
importer compensates the seller for that quota, those charges
will be part of the "price actually paid or payable" for the
imported merchandise. Payments made by the buyer to an unrelated
third party or to a governmental agency would not be part of the
"price actually paid or payable" for the imported merchandise.
Sincerely,
John Durant, Director
Commercial Rulings Division