HQ 0544088 - Dutiability of commissions to third parties; Dutiability of commissions to design consultants - United States International Trade Commision Rulings

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HQ 544088

March 25, 1988

CLA-2 CO:R:CV:V 544088 DH

CATEGORY: VALUATION

Robert Eisen, Esq.
Coudert Brothers
200 Park Avenue
New York, N.Y. 10166

RE: Dutiability of commissions to third parties; Dutiability of commissions to design consultants

Dear Mr. Eisen:

This is in reference to your letter of November 12, 1987, regarding the effect of 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)), on certain contemplated transactions to be entered into by your company. You request a binding ruling regarding the dutiability of certain commissions to be paid to an unrelated Hong Kong company in exchange for services in aiding in the purchase of merchandise from Hong Kong manufacturers. Further, you inquire as to the dutiability of commissions paid for designs and design counselling services with regard to your company's manufacturing operations which are to be performed in Hong Kong.

FACTS:

You state that your client is contemplating employing an unrelated agent in Hong Kong to assist their company in purchasing wearing apparel and accessories. The prospective agent is to perform the services of obtaining samples from the vendors; surveying the potential markets for the principal; ordering merchandise for the principals; arranging for payment terms; inspecting the finished products; arranging for the storage, consolidation, inland freight, lighterage and the like; acquiring the fabric and piece goods used in manufacturing the imported goods; acquiring the necessary quota; arranging for packing and shipping of the manufactured products to the principal; and providing the manufacturer's invoices, fabric supplier's invoices, quota invoices and inspection certificates. Each activity performed by the agent is to be in a manner dictated by the principal and in the best interest of the principal. The commissions to be received by the agent will be ten percent of the f.o.b. price of the goods (including quota), or, where applicable, ten percent of the sum of Cut, Make and Trim (C.M.T.), fabric charges and quota charges incurred in connection with goods purchased through the service of the buying agent. No sample documentation has been provided, although a draft buying agency agreement has been submitted.

You further state that the importer is contemplating entering into an agreement with another Hong Kong corporation for the purpose of obtaining design and consulting services. This foreign corporation will provide the services of furnishing engineering, development, artwork, plans and sketches for the importer; as well as grant the exclusive use of the design concepts and assistance in connection with the importation, advertising, merchandising, promotion, sale and distribution of the merchandise. Additionally, this Hong Kong corporation is to provide non-tangible consulting services regarding the design and development of the importer's merchandise. A commission of five percent of the f.o.b. price (including quota) of the imported goods from the Far East, or where applicable, five percent of the sum of C.M.T., quota charges and fabric charges incurred with respect to such goods will be received for these services.

You have stated that neither foreign company is related to the importer; however, they are related to one another. The only remuneration for their services will be commissions paid pursuant to the agreements with the importer; and no part of these commissions will be shared with the manufacturers, or each other. You also state that both companies are separately responsible for paying all costs of conducting their respective functions, including assessments which may be made against salary or wages of those directly or indirectly employed by their respective companies. No ownership interest in the manufacturers or the suppliers who sell merchandise to the principal are to be obtained by the agent. In addition, you state that the invoices provided from the manufacturers will indicate that the apparel and accessories are being sold to the importer, or to the agent for the account of the importer.

ISSUES:

Are commissions to be paid in exchange for an unrelated Hong Kong corporation's services of assisting in the purchasing of merchandise from Hong Kong manufacturers considered a buying commission?

Are the commissions to be paid in exchange for services of supplying designs and design counselling services with regard to the importer's manufacturing operations to be performed in Hong Kong by a Hong Kong corporation considered a dutiable assist?

LAW AND ANALYSIS:

For purposes of this prospective ruling request, we are assuming that transaction value will be applicable as a basis of appraisement.

Transaction value is defined in section 402(b)(1) of the TAA. This section provides, in pertinent part, that the transaction value of imported merchandise is the price actually paid or payable for the merchandise plus amounts for the items enumerated in section 402(b)(1). 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 more specifically 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.

It is clear from the statutory language that in order to establish transaction value one must know the identity of the seller and the amount actually paid or payable to him. Whether or not the purported agent is the seller is to be determined by the documents presented. 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. See TAA No.7, dated September 29, 1980 (542141).

The Restatement (Second) of Agency section 14K(1958) defined an agent as:

One who contracts to acquire property from a third person and convey it to another is the agent of the other only if it is agreed that he is to act primarily for the benefit of the other and not for himself.

In order to continue to view the relationship of the parties as a bona fide buying agency, Customs must examine all the relevant factors. 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. 251 (1969). The primary consideration, however, "is the right of the principal to control the agent's conduct with respect to the matters entrusted to him." Dorf Int'l, Inc., et al. v. United States, 61 Cust. Ct. 604, A.R.D. 245, 291 F. Supp. 690 (1968). The degree of discretion granted the agent is an important factor. New Trends Inc. v. United States, 10 CIT _, 645 F. Supp. 957 (1986).

The Court of International Trade in the case of New Trends Inc., supra, 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 manufacturers of the merchandise.

These factors have been determining factors applied by the Courts to deny the existence of a buying agency relationship in New Trends, Inc., supra, Jay-Arr Slimwear Inc. v. United States, _CIT_, Slip Op. 88-21 (1988), Rosenthal-Netter, Inc. v. United States, _CIT_ , Slip Op. 88-9 (1988).

On the basis of the information you have provided regarding the prospective transactions in question, if the terms of the buying agency agreement are identical to those outlined in your letter and set forth above and the actions of the parties also conform, the importer will exercise the requisite degree of control over the buying agent. Therefore, we conclude that the commissions to be paid to the agent constitute bona fide buying commissions and will not have to be included in the determination of the transaction value.

You have also requested a prospective ruling as to the dutiability of commissions to be paid to another unrelated Hong Kong corporation which will provide the importer with designs and design consulting services.

It is your contention that the services to be performed by the foreign corporation are assists developed or performed outside the United States and therefore, the commissions to be paid for these services are dutiable.

Assuming that transaction value is the applicable method of appraisement, the value of an assist would be added in an appropriately apportioned manner to the "price actually paid or payable" for the merchandise.

The definition of an assist (in pertinent part) as set forth in section 402(h)(1)(A) is:

...any of the following if supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the United States of the merchandise: ...

(iv) Engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the
United States and are necessary for the production of the imported merchandise.

Section 402(h)(1)(B) defines the parameters of section 402(h)(1)(A)(iv). This section provides:

No service or work to which subparagraph (A)(iv) applies shall be treated as an assist for purposes of this section if such service or work-

(i) is performed by an individual who is domiciled within the United States;

(ii) is performed by that individual while he is acting as an employee or agent of the buyer of the imported merchandise; and

(iii) is incidental to other engineering, development, artwork, design work, or plans or sketches that are undertaken within the United States.

Pursuant to the facts provided, the commissions involved would be considered to be dutiable as a part of the acquisition cost of the assists since the design and consulting services described are specifically enumerated in the statute, and these services are to be undertaken outside of the United States.

HOLDING:

In view of the foregoing, it is our conclusion that the commissions to be paid to the prospective company to perform the services of assisting in the purchase of merchandise from the

Hong Kong manufacturers are to be considered bona fide buying commissions; and therefore, not to be added to the price actually paid or payable.

We further conclude that the commissions which will be paid to the other Hong Kong corporation for design work and design consulting services are to be treated as assists and included in the calculation of transaction value.

Sincerely,

John Durant

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