HQ 0544235 - Request for Ruling on Dutiability of Purchasing Expenses - United States International Trade Commision Rulings

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HQ 544235
November 25, 1988

CLA-2 CO:R:CV:V 544235 VLB

CATEGORY: VALUATION

John B. Pellegrini, Esq.
Ross & Hardies
529 Fifth Avenue
New York, New York 10017-4608

RE: Request for Ruling on Dutiability of Purchasing Expenses

Dear Mr. Pellegrini:

This is in response to your letter dated August 23, 1988 requesting a ruling on a proposed arrangement between the Importer and the Contractor.

FACTS:

The Importer is proposing to purchase articles of footwear pursuant to two agreements with the Contractor. The first contract entitled "Agreement on Long Term Production Cooperation" involves the manufacture and interchange of footwear, components and materials.

The second contract is entitled "Service Agreement". This agreement states that the Contractor shall be responsible for receiving and inspecting materials and components, insuring delivery to the correct assembly plant and various other administrative duties. In consideration for rendering these services, the Contractor will receive a 10% commission based on the footwear purchase price.

ISSUES:

(1) Whether transaction value is applicable in appraising the merchandise to be sold to the Importer by the Contractor.

(2) Whether the transaction value includes the amounts paid to the Contractor under the Service Agreement.

LAW AND ANALYSIS:

The first issue involves what appraisal method will be used to determine the value of the footwear for duty purposes. The preferred method of appraisement is transaction value which is defined in the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. section 1401a(b)) as the "price actually paid or payable for the merchandise when sold for exportation to the United States . . . ." From the information provided, it appears that the transaction value is the appropriate basis of appraisement.

The second issue involves what costs will be included in the transaction value. The term "price actually paid or payable" is defined in TAA section 402(b)(4)(A) as:

. . . the total payment (whether direct or indirect, and exclusive of any charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of 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. (emphasis added).

You contend that the payments to the Contractor under the Service Agreement should not be considered part of the price paid for the merchandise. You argue that the true nature of the arrangement will not involve the Contractor selling footwear to the Importer, but rather the Contractor will be selling services such as inspection of materials and components to the Importer.

We are unable to agree with your conclusions. The fact that the services are contracted for separately does not negate the relationship they have to the merchandise and the purchase of the footwear. The payments are tied specifically to the invoice purchase price for specified merchandise. In addition, you submitted a Memorandum of Understanding between the parties wherein they agreed that the Contractor's fees for their services are to be calculated into the quoted factory prices. Therefore, it is impossible to separate the price paid for the merchandise from the price paid for the alleged unrelated services.

The proposed arrangement differs from the transactions discussed in the Headquarters ruling cited as TAA No. 52. In TAA No. 52 the contractor was paid for fabricating garments using fabric purchased by the contractor from supplies designated by
the importer. The price negotiated between the importer and the seller was limited to only the fabricating services. The cost of the fabric was a separate item on the purchase order and the invoice. Under a separate service agreement, the contractor was compensated for delivery and inspection services based on a percentage of the fabric's cost. The payments were made at periodic intervals unrelated to the sale of any specific merchandise. In that case we held that the payments under the service contract were not part of the "price actually paid or payable".

In the proposed arrangement, the payments under the Service Agreement are based on the purchase price and the invoices for specific merchandise. Therefore, the commission would be part of the "price actually paid or payable" for specific identifiable footwear. Thus, the commission payments would be part of the transaction value of the merchandise.

HOLDING:

(1) Transaction value pursuant to section 402(b) of the TAA is proper in appraising the merchandise sold from the Contractor to the Importer based on the information you submitted for our review.

(2) The payments provided for in the Service Agreement are based on the purchase price of the merchandise and the invoice. The payments are therefore tied to specific merchandise and are part of the "price actually paid or payable" for the imported merchandise. Thus, the commission payments will be included in the dutiable value of the merchandise.

Sincerely,

John Durant, Director

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