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HQ 543984


February 22, 1988

CLA-2 CO:R:CV:V 543984 EK

CATEGORY: VALUATION

District Director of Customs
San Francisco, California

RE: Request for Internal Advice No. 34/87

Dear Sir:

This is in response to your internal advice request regarding various valuation issues which arise in connection with the importation of merchandise by a certain importer.

FACTS:

The importer is a United States corporation which is owned by both a U.S. corporation (hereinafter referred to as SPC), and a Japanese corporation (hereinafter referred to as RC). The equity holdings in the importer by SPC and RC is set a 50 percent each. The importer will purchase and import items from many different vendors, including merchandise produced by RC itself. In the initial phase of the operation, the sole purchaser from the importer in the United States will be SPC. It is anticipated that in the future, the importer will sell to customers other than SPC.

An agreement between SPC and RC provides that a certain company (hereinafter referred to as YTC), will perform procurement and shipping functions. YTC is 40 percent owned by RC. A written buying agency agreement has been entered into between the importer and RC, with RC acting as buying agent and YTC acting as RC's sub-agent.

The merchandise to be imported will be invoiced at a price consisting of the following: 1) the purchase price paid to the actual vendor; 2) an addition for inland charges for merchandise purchased on an ex-factory basis; 3) a service fee to RC for procurement activity; 4) a service fee paid to YTC for performing
all remaining services, i.e., pick-up of merchandise at vendor's factory, delivery to shipping facilities, arranging for export documentation and shipping the merchandise to the United States.

The written buying agency agreement between the importer and RC, as agent, provides that RC shall utilize the services of YTC as sub-agent in carrying out the services provided for under the agreement. The importer will pay RC as agent for services rendered a commission equal to 9.36% of the amount due for all goods based on the ex-factory price. Of this 9.36%, RC will retain 3.51% as its compensation for procurement services and the remaining 5.85% will be remitted to YTC for consolidation and shipping services rendered. With respect to merchandise manufactured by RC itself, the commission will be 5.85% which will inure to the benefit of YTC and RC will not receive any part of the 5.85% commission.

In addition, the agreement provides that an amount equal to 3% of all finished goods based on the ex-factory price shall be paid by the importer to cover the cost of inland charges when such is not included. This 3% includes seaworthy packing, inland freight, forwarding agents' fees, Customs fees, and container stuffing charges. The 3% represents an estimate by RC and YTC as to the amounts which are fair and reasonable for such charges. An estimate is utilized because it would be impractical to keep account of the actual amount paid, given the small dollar value of the charges.

With respect to the 3% charge noted above, the importer estimates that approximately 30% of such charge represents the cost of seaworthy packing. Therefore, 0.9% of the ex-factory price is estimated to be the cost of packing which the importer recognizes as a dutiable charge for Customs purposes.

None of the parties have an ownership interest in any of the vendors which will sell to the importer (other than RC selling directly to the importer). However, one of the vendors, NDC, has a 1.5% ownership interest in YTC. A second vendor has a 15% ownership interest in YTC.

RC, acting as agent for the importer, will provide the importer with price quotations from the vendors who will produce the imported merchandise. The price quotations are compiled after discussion by RC and the various vendors and include price quotations by RC for its own merchandise. There are also independent price negotiations by personnel of the importer directly with the vendors.

ISSUES:

Whether transaction value is applicable in appraising the merchandise sold to the importer by RC, its related party in Japan.

Whether the inland charges are properly excluded from the dutiable value of the imported merchandise.

Whether the commissions paid to both RC and YTC are excluded from transaction value as non-dutiable buying commissions.

LAW AND ANALYSIS:

The preferred method of appraising merchandise is transaction value which is defined as the "price actually paid or payable" for merchandise when sold for exportation to the United States, plus certain enumerated additions (section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1930 (TAA); 19 U.S.C. 1401a(b)). The relevant provision with regard to related parties states the following:

The transaction value between a related buyer and seller is acceptable . . . 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. See, section 402(b)(2)(B).

In determining whether the relationship between the parties influences the price of imported merchandise, if it is shown that the buyer and seller, albeit related, buy and sell from one another as if they are not related, this indicates that the price is not influenced by the relationship between the parties, and appraisement pursuant to transaction value is proper. If the price is determined in such 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 between the parties.

The transaction value between a related buyer and seller is acceptable if it closely approximates the transaction value of identical or similar merchandise in sales to unrelated buyers in the United States. Id.

Therefore, with respect to the instant case regarding the sales between RC and the importer, the provisions in the joint
venture agreement indicate that RC will quote prices for its product in the same manner and on the same conditions at which it quotes prices to unrelated customers. The importer has submitted a statement from the seller indicating that the prices it quotes to the importer are prices at which the seller would sell to unrelated purchasers. In addition, the importer has submitted a statement from RC indicating that it would in fact sell the same products to unrelated purchasers in the United States. Therefore, a comparison can be made between the prices paid by the importer and those paid by unrelated purchasers.

For purposes of determining whether the relationship between the parties influences the price, we are assuming that the facts are as presented in counsel's submission of December 12, 1986; specifically, RC-produced merchandise would be available and sold to unrelated purchasers in the United States at the same price at which RC sells to the importer. It appears from the totality of the circumstances surrounding the sale between the related parties that the relationship does not influence the price and that transaction value is a valid means of appraisement.

With respect to the 3% addition to the ex-factory price for inland charges, the importer states that the buying agency agreement entered into between the parties defines "inland charges" to include seaworthy packing, inland freight, forwarding agent's fees, Customs fees, go-down charges and container stuffing charges.

Section 402(b)(4) of the TAA states the following:

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.

Regarding ex-factory sales, section 152.103(a)(5), Customs Regulations [19 CFR 152.103(a)(5)], states:

If the price actually paid or payable by the buyer to the seller for the imported merchandise does not include a charge for foreign inland freight and other charges for services incident to the international shipment of merchandise (an ex-factory price), those charges will not be added to the price.

Packing costs which are incurred by the buyer with respect to the imported merchandise are added to the "price actually paid or payable" pursuant to section 402(b)(1) of the TAA.

With the above-noted provisions in mind, with respect to both the sales from unrelated vendors to the importer and from RC to the importer, we agree that of the 3% addition to the ex- factory price, only the amount representing seaworthy packing is to be added to the "price actually paid or payable" in determining transaction value. This conclusion, i.e., regarding the non-dutiability of the inland charges, applies only with respect to ex-factory sales as indicated in 19 CFR 152.103(a)(5).

The importer states that the 0.9% for seaworthy packing is an estimate rather than an actual figure. However, the amount must be based upon "sufficient information" as indicated in section 402(b)(1). The term "sufficient information" means information that establishes the accuracy of such amount, difference, or adjustment. See, section 402(h)(5), TAA. Although the importer states that it is more practical to provide estimated amounts, it is our conclusion that the information is available and that the burden is on the importer to submit actual figures to Customs for appraisement purposes.

For purposes of this internal advice request, we have concluded that the two vendors mentioned above (NDC - 1.5% ownership in YTC; 2nd vendor - 15% ownership in YTC), are not related to the importer within the meaning of section 402(g) of the TAA.

The final issue to resolve is whether the commissions paid to both RC and YTC are to be included in the dutiable value of the imported merchandise. It is well-settled that fees paid to a selling agent are dutiable while those paid to a buying agent are non-dutiable. No single factor is determinative in establishing the existence of a bona fide buying agency relationship. The existence of such a relationship is ascertained by examining all relevant factors. The primary consideration in determining whether a buying agency relationship exists is the right of the principal to control the agent's conduct with respect to matters entrusted to him. B & W Wholesale Co., Inc. v. United States, 58 CCPA 92, C.A.D. 1010 (1971), J.C. Penney Purchasing Corporation et al. v. United States, C.D. 4741 (1978). The alleged agent performs duties on behalf of its principal, the buyer. It may not act as an independent seller, nor as a representative of the manufacturer. United States v. Manhattan Novelty Corp., 63 Cust. Ct. 699, A.R.D. 263 (1969).

A relevant factor in determining the relationship is the fact that none of the commission paid by the buyer inures to the benefit of the seller. As stated in Reliance International Corp. v. United States, 62 Cust. Ct. 845, at 849, 305 F.Supp. 20, at 24 (1969),:

Commissions paid by the purchaser to agents for services rendered in procuring the merchandise, inspecting and packing goods, arranging for shipment and acting as a paymaster for account of the buyer, no part of which commissions inure to the benefit of the seller, are buying commissions.
(Emphasis added).

Functions performed by an agent such as searching the market for the best available prices for sale to the importer, making quality control inspection of merchandise prior to shipment, arranging shipment, and making payments on behalf of the buyer, none of which inures to the benefit of the agent, are all relevant factors in determining whether the agency relationship exists. Reliance International Corp. v. United States, supra.

Although a written buying agency agreement supports the notion of a bona fide agency relationship, it is not dispositive of the issue. It is merely evidence that the parties intended to create an agency relationship. Rosenthal-Netter, Inc., v. United States, Slip Op. 88-9, decided January 28, 1988, citing, J.C. Penney, supra.

Turning to the facts of this particular case, it is important to note that the alleged buying agent, RC, has a 50 percent interest in the importer. This is a factor to consider in determining whether the importer, as principal, truly controls RC, the agent.

The importer states that RC is a buying agent with YTC acting as sub-agent. Rather than characterize YTC as sub-agent of RC, the determination as to whether YTC is a buying agent of the importer is necessary; however, this fact only becomes relevant with respect to instances where RC is the actual seller of the merchandise. When RC is the seller, then YTC receives a 5.85% commission. In order for this 5.85% commission to be non-dutiable as alleged by the importer, it must be a buying commission paid to a bona fide buying agent of the importer, i.e., YTC. In sales to the importer from unrelated vendors, the commission of 9.36% is paid to RC, with RC remitting 5.85% to YTC. The determination as to the dutiability of the 9.36% as a buying commission is made vis-a-vis the importer and RC.

The terms of the agreement between the importer and RC specify that RC shall utilize the services of YTC in carrying out the functions performed pursuant to the agreement. The importer initiates all transactions by placing purchaser orders with RC. Neither RC nor YTC can order merchandise on behalf of the importer without the express direction of the importer.

The agent, RC, locates and negotiates with vendors pursuant to specifications and orders issued by the importer. The importer must approve all prices. RC will inspect all finished goods for conformity to specifications and supervise transportation arrangements. RC will ensure that individual commercial invoices from each vendor covering merchandise sold to the importer are available.

Therefore, the circumstances taken as a whole indicate that the importer exercises the requisite degree of control so as to establish a principal-agent relationship with RC. The commission paid to RC, 9.36% on sales from unrelated vendors to the importer are properly excluded from the transaction value of the imported merchandise.

With regard to sales from RC to the importer with a 5.85% commission to YTC, it is our conclusion that such amount is to be included in the transaction value. The requisite degree of control vis-a-vis the importer and YTC has not been established. Moreover, since the seller has a 40% ownership interest in YTC, then it is clear that the payment to YTC inures to the benefit of the seller.

We indicated above that the two vendors which have a financial interest in YTC (NDC - 1.5% interest; 2nd vendor - 15% interest) are not related to the importer within the meaning of section 402(g) of the TAA. However, regarding sales from these vendors to the importer, the commission paid to YTC is not a buying commission in that a principal-agent relationship has not been established with YTC. Also, the two vendors will indirectly receive a portion of the payment. Having established the principal-agent relationship between the importer and RC, the 3.51% commission to RC in sales from the two vendors is properly excluded from the transaction value.

HOLDING:

Transaction value pursuant to section 402(b) of the TAA is proper in appraising the merchandise sold from RC to the importer.

Regarding the 3% addition to the ex-factory price, the portion representing all but the seaworthy packing charges is properly excluded from transaction value in sales to the importer from both RC and unrelated vendors. This is applicable with respect to sales from NDC and from the 2nd vendor which both hold a minimal interest in YTC. In addition, the amount representing seaworthy packing must be based upon actual figures rather than estimates.

With respect to the commissions paid by the importer, the transaction value of sales from RC to the importer should include the commission, i.e., the 5.85% paid to YTC. The transaction value of merchandise which is sold from unrelated vendors should exclude the 9.36% fee incurred by the importer as a non-dutiable buying commission. The merchandise sold to the importer from the two vendors which have a financial interest in YTC should be appraised pursuant to transaction value, with the 3.51% commission paid to RC excluded as a buying commission; however, the 5.85% commission paid to YTC is included in the dutiable value of the merchandise.

Sincerely,

John Durant

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