HQ 0544396 - Administrative and Quality Control Services, Fabric Costs and Buying Commissions; 19 U.S.C. 1401a(b); 19 U.S.C. 1402(b)(2)(b); Busnell v. United States - United States International Trade Commision Rulings

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HQ 544396
May 14, 1990

VAL-CO:R:C:V 544396 DHS

CATEGORY: VALUATION

Nancy J. Wollin, Esq.
Sandler, Travis & Rosenberg, P.A.
5200 Blue Lagoon Drive
Miami, Florida 33126-2022

RE: Administrative and Quality Control Services, Fabric Costs and Buying Commissions; 19 U.S.C. 1401a(b); 19 U.S.C. 1402(b)(2)(b); Busnell v. United States

Dear Ms. Wollin:

This is in response to your letter of September 5, 1989, and additional submission dated April 23, 1990, requesting a ruling regarding the dutiability of payments made to Textile Sourcing, Inc., a company located in the British Virgin Islands by Private Manufacturing, Inc., the importer, for administrative services and quality control services provided by its wholly- owned subsidiary in Mexico. You further inquire about the dutiability of fabric purchased by Textile Sourcing and supplied to the Mexican assembler. Finally, you inquire as to the dutiability of commissions to be paid to a related company located in Hong Kong in exchange for services in procuring fabric and other components to be used in the manufacture of garments in Mexico, as well as, services in aiding in the purchase of completed merchandise from foreign manufacturers.

FACTS:

You state that your client, Private Manufacturing, Inc., plans to establish a corporation in Texas for the purpose of importing garments manufactured and/or assembled in Mexico from a related facility and unrelated manufacturers. These manufacturers will engage in full cut, make and trim (CMT) activities as well as assembly of U.S. components which will be entered under the "807 program". The importer will supply the U.S. as well as the foreign components free of charge to the manufacturers.

You inquire about payments made by the importer to Textile Sourcing for services performed by its Mexican subsidiary, S-Co. You state that Textile Sourcing is related to the importer within the meaning of section 402(g) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA: 19 U.S.C. 1401a(g)). You state that S-Co will perform the services of assisting the importer in determining what types of garments can be economically made by the manufacturer; accounting and billing services; quality control supervision; and various other administrative services on an as-needed basis. Textile Sourcing will invoice the importer for the services provided by S-Co at regular intervals (e.g., monthly). S-Co will at all times act under the direct control of the importer. S-Co may also, from time to time, provide similar services to unrelated companies both in Mexico and in the U.S.

You also inquire about the cost of fabric to be purchased by Textile Sourcing and resold to the Mexican manufacturers to be used in the CMT operations. The manufacturers will then sell the garments which incorporate the fabric to the importer.

Finally, you inquire about the dutiability of commissions paid for services to be provided by a company located in Hong Kong in aiding the importer in procuring components to be used in the manufacturing operations, as well as, assisting the importer in its purchase and importation into the U.S. of completed garments from unrelated manufacturers. The buying agent may also assist the importer in the purchase of foreign fabric to be cut in the U.S. and shipped to a Mexican manufacturer for use in the "807" assembly operations.

You have submitted a draft buying agency agreement which provides only the name of the importer and does not furnish the name of the agent or the signatures of the concerned parties.

ISSUES:

(1) Are payments made to Textile Sourcing, Inc., a related company located in the British Virgin Islands, for administrative services and quality services performed by a related company located in Mexico dutiable?

(2) Are payments made to Textile Sourcing for fabric which will be purchased and resold to the Mexican manufacturers dutiable?

(3) Are the activities performed by an agent who is related to the importer sufficient to conclude that a buying agency exists?

LAW AND ANALYSIS:

For the purpose of this prospective ruling request, we are assuming that transaction value will be the applicable basis of appraisement.

Transaction value is defined in section 402(b)(1) 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 the merchandise when sold for exportation to the United States," plus certain enumerated additions. The "price actually paid or payable" is more specifically defined in section

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.

Only those items specifically referred to in section 402(b)(1) may be added to the price actually paid or payable when not otherwise included within the price. These items referred to in section 402(b)(1) are:

"(A) the packing costs incurred by the buyer with respect to the imported merchandise;

"(B) any selling commission incurred by the buyer with respect to the imported merchandise;

"(C) the value, apportioned as appropriate, of any assist;

"(D) any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States; and

"(E) the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.

You state that the administrative services, the quality control services and the supervisory functions to be performed by S-Co are to be conducted under the supervision of the importer. You allege that these are the type of activities normally undertaken by the buyer on its own account. The fees paid for these services are not included within any of the above enumerated items under section 402(b)(1). Therefore, these fees are not to be part of the transaction value for the imported merchandise.

You additionally inquire about the dutiability of fabric purchased and resold to the Mexican manufacturers to be used in the CMT operations. The manufacturers will then sell the finished garments to the importer. Assuming that transaction value is the applicable basis of appraisement, the price to be paid by the importer for the finished garments will include the cost of the fabric as part of the price actually paid or payable. Note, however, that since the concerned parties are related, the appraising officer must be satisfied that the transaction value is acceptable under section 402(b)(2)(B) of the TAA.

Finally, you inquire about the dutiable status of certain commissions to be paid to a foreign agent for the services of aiding in the purchase of fabric to be provided to the Mexican assembler as well as aiding in the purchase of finished garments.

Buying commissions are not specifically included as one of the additions to the "price actually paid or payable." As stated in HRL 542141 (TAA #7), dated September 29, 1980, "...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."

You have stated that the agent is related to the importer. However, you have not provided any information regarding the nature of this relationship. Therefore, we can only advise you that a relationship of an agent with the importer does not preclude the existence of a buying agency. However, the circumstances surrounding such related party transactions are subject to close scrutiny in determining whether a commission is a bona fide buying commission. Bushnell v. United States, C.A.D. 110 (1973).

Based upon the facts and draft buying agency agreement presented, the services to be performed by the agent are indicative of those generally provided in a buying agency relationship. However, in order to find that a bona-fide buying agency exists, satisfactory documentation which will fulfill the concerns addressed above and will meet the requirements described in TAA #7, must be presented at the time of entry. Furthermore, the actions of the parties must conform to your letter, the buying agency agreement and the documentation to be presented. 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.

HOLDING:

In view of the foregoing, the fees paid for the administrative services, quality control services and the supervisory functions to be performed by S-Co are not to be part of the transaction value for the imported merchandise.

In addition, the price paid for the fabric which is to be purchased and resold to the Mexican manufacturers by Textile Sourcing is to be included in the price actually paid or payable by the importer.

Finally, the commissions to be paid to the prospective company to perform the services of assisting in the purchase of the merchandise from the foreign manufacturers are to be considered bona fide buying commissions as long as the considerations discussed above are followed.

Sincerely,

Jerry Laderberg

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