HQ 0544610 - Application for Further Review of Protest No. 3001-89- 000907; dutiability of commissions paid to purported buying agents, quota payments and finance charges - United States International Trade Commision Rulings

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HQ 544610

December 23, 1991

VAL CO:R:C:V 544610 DPS

CATEGORY: VALUATION

District Director
Seattle, Washington

RE: Application for Further Review of Protest No. 3001-89- 000907; dutiability of commissions paid to purported buying agents, quota payments and finance charges

Dear Sir:

The subject protest and application for further review concerns the appraisement of numerous entries of garments imported from the Far East by Nikoata USA, Inc. (importer/protestant). The appraisement issues raised in the subject protest relate to the inclusion of certain finance charges, buying commissions and quota payments in the dutiable values of the imported merchandise.

FACTS:

Am-Asian Resources Ltd. (AAR) was chartered in Hong Kong in 1980 as a trading company and was engaged in finding manufacturing sources for garment production in Macau, North China and Hong Kong. In 1984, the owners of AAR became acquainted with Mr. Thomas McCormick, who was affiliated with a U.S. company. In 1985, Mr. McCormick and the owners of AAR formed Nikoata U.S.A., Inc. (NUSA) and Nikoata Far East Limited (NFE). Both NUSA and NFE are jointly owned by McCormick and the owners of AAR. The parties determined that because of its location in Hong Kong, NFE alone would handle all the sourcing of manufacturers, ordering, expediting, and inspecting in Hong Kong and Macau and that NFE would assist AAR in the handling of NUSA, purchase transactions in China, Sri Lanka, the Philippines, Thailand, Indonesia, and the rest of the Far East, since AAR had experienced personnel and contacts in the garment businesses in these countries.

The protest at issue covers some 96 entries of wearing apparel from various countries of origin. All of the entries involve buying commissions, not all have finance charges associated with them, and only a limited number of entries where the country of origin is Hong Kong involve quota charges.
NUSA claims that duties should only be assessed on the purchase prices of garments plus the dutiable assist costs, if any, under the transaction value method of appraisement. NUSA also claims that buying commissions paid to AAR and NFE are bona fide, and that finance charges and third party quota charges are not dutiable. Your office has taken the position that AAR and NFE are not buying agents under the control of NUSA, but sellers of merchandise, thereby making the 10% commission paid to AAR and the 5% commission to NFE dutiable. Seattle Customs further takes the position that quota charges paid by AAR to a third party are dutiable because AAR acts as a seller; and that the finance charges at issue are for fabric and trim, acquired for NUSA by AAR with AAR funds, and are used in the production of the goods, which therefore makes them dutiable.

ISSUES:

(1) Whether a bona fide buying agency relationship exists between the NUSA and AAR, and between NUSA and NFE.

(2) Whether payments made by NUSA to AAR for quota are considered to be part of the price actually paid or payable.

(3) Whether finance charges paid by NUSA to AAR are considered dutiable as part of the price actually paid or payable for the imported merchandise.

LAW & ANALYSIS:

For the purpose of this response, we are assuming that transaction value is the appropriate 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 (19 U.S.C. 1401a(b);TAA) as the "Price actually paid or payable for the merchandise" plus amounts for the five enumerated statutory additions in 402(b)(1).

Buying Commissions

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 402(b)(4) 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 a bona fide buying agency exists between an importer and an alleged "buying agent" is not determined by any single factor, but depends upon the relevant facts of each case. See J.C. Penney Purchasing Corp. v. United States, 451 F. Supp. 973 (Cust. Ct. 1978). The primary consideration in determining whether a bona fide buying agency relationship exists between an importer and an alleged buying agent is the right of the principal to control the agent's conduct with respect to matters entrusted to the agent. B & W Wholesale Co., Inc. v. United States, 58 CCPA 92, C.A.D. 1010, 436 F.2d 1399 (1971).

In a general notice published in the Customs Bulletin on March 15, 1989, Customs provided an explanation of its position on buying commissions. The following excerpts illustrate that position:

While bona fide buying commissions are nondutiable, evidence must be submitted to Customs which clearly establishes that fact. In this regard,
Headquarters Ruling Letter 542141, dated September 29, 1980, also cited as TAA No. 7, provided:

...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.

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. In addition, the importer must 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. More recently, in Pier 1 Imports, Inc. v. U.S., 708 F.Supp 351 (CIT 1989), the court reiterated the factors set forth in New Trends and J.C. Penney, and emphasized that control over the
purchasing process was strong evidence that an agency relationship exists. The court found the manner of payment to establish that the agent purchased merchandise only at the direction of the importer. In Pier 1, the agent did not retain the discretion to deduct commissions, freight charges, or bear the risk of loss. In addition, none of the commissions inured to the benefit of the manufacturer/seller. The court found that the agent did not "purchase" the merchandise until after the importer ordered the merchandise, and forwarded the funds necessary for acquisition. Thus, in Pier 1, the agent operated only at the direction of the importer, not autonomously.

As the above cited court decisions make clear, any determination of whether a bona fide buying agency relationship exists, depends on the facts in each particular case. Here, we must determine the validity of the purported buying agency relationship, between Nikoata U.S.A. and AAR, and Nikoata U.S.A. and NFE.

Based on the information submitted, ie., an audit report concerning Nikoata's activities prior to the protested entries, the buying agency agreements, a small assortment of sample invoices which counsel advised had been "revised" or "corrected" at least twice, and counsel's explanation that obtaining manufacturer's invoices and proofs of payment for all the merchandise involved in the protested entries is impossible, it appears that the criteria for finding a bona fide buying agency relationship between the importer, AAR and NFE cannot be satisfied. Absent evidence of communications by NUSA directing AAR and NFE, proofs of payment to manufacturers, AAR and NFE, and any other documentation evidencing control by NUSA over the purported buying agents, we have no choice but to find that no bona fide buying agency relationship exists under the circumstances.

In addition, information gathered by Customs during the course of an investigation indicates that: AAR was founded as a trading company and sells to various companies besides Nikoata U.S.; AAR handled all arrangements with manufacturers including the preparation of documents; AAR controlled the transactions with manufacturers to the extent that AAR is not under Nikoata's control; AAR continues to sell to others, and maintains a showroom where buyers place orders; AAR and NFE are not separate entities; NFE consists of four clerks contained within the space of AAR; and finally, the owners of AAR make all decisions for NFE.

Based on the total lack of first hand documentation demonstrating Nikoata U.S.A.'s control over its purported buying agents, AAR and NFE, and absent actual manufacturers' invoices covering the 96 entries being protested, we must reject the existence of a bona fide buying agency relationship between Nikoata U.S.A., AAR and NFE. Thus, the sale for purposes of establishing transaction value is the sale for exportation between AAR and NUSA.

Quota Charges

Counsel argues that the quota payments made to AAR or to other third parties, as reflected in the sample transaction documents submitted with the subject protest, are not dutiable. However, based on the documents provided, it appears that Nikoata U.S.A. paid AAR directly for quota which AAR acquired from a third party. In accordance with the court case discussed below, it appears that the subject quota payments should be included in the price actually paid or payable for the subject merchandise.

In Generra Sportswear Company v. United States, 905 F.2d 377 (Fed. Cir. 1990), the United States Court of Appeals for the Federal Circuit was presented with the issue of whether quota charges were properly included in the transaction value of imported merchandise. The importer purchased cotton knit blouses from the seller in Hong Kong at a price of $6.00 each. The seller agreed to obtain type A transfer quota at $0.95 per unit. The importer paid the seller an amount for the shirts, exclusive of quota. The seller then billed the importer's buying agent for the quota charges under a separate invoice and this amount was paid for by the importer's buying agent. The Customs Service appraised the merchandise at $6.95 per unit by combining the amounts stated on the two invoices.

A protest was filed by the importer and denied by Customs. The importer filed suit in the Court of International Trade challenging the denial of the protest. The court held the payments to be non-dutiable and ordered the Customs Service to refund excess duties collected. The United States subsequently filed an appeal with the United States Court of Appeals for the Federal Circuit which reversed the lower court's decision.

The court determined that since quota payments are not specifically addressed by the statutory language, then the appraisal by the Customs Service was based upon a permissible construction of the statute. The Court stated that it is reasonable to conclude that the quota charges are properly part of the "total payment . . . made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller." The court further stated:

As long as the quota payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods.

In addition, the court stated that it is irrelevant that the buyer did not pay the quota charges directly to the seller. The payment was made on behalf of the buyer by its buying agent.

In accordance with the court's decision in Generra, the payments for quota made by the importer (Nikoata U.S.A) to its purported agent (AAR), which on the basis of the evidence presented is the seller, are included as part of the price actually paid or payable for the imported merchandise, and are therefore dutiable.

Interest & Finance Charges

In the course of their ongoing business relationship, AAR used its credit to borrow funds for NUSA's purchases, and was to be reimbursed for all finance and interest charges incurred. Certain of these finance charges are described on the "corrected" sample invoices submitted by protestant's counsel.

In T.D. 85-111 of July 17, 1985, Customs addressed the issue of interest payments:

Interest payments, whether or not included in the price actually paid or payable for imported merchandise, should not be considered part of dutiable value provided the following criteria are satisfied: (1) the interest charges are identified separately from the price actually paid or payable; (2) the financing arrangement in question is made in writing; (3) when required by Customs, the buyer can demonstrate that: the goods undergoing appraisement are actually sold at the price declared as the price actually paid or payable, and the claimed rate of interest does not exceed the level for such transaction prevailing in the country where, and at the time, when the financing was provided.

In rulings issued subsequent to the T.D. 85-111, Customs held that interest payments, whether or not included in the price actually paid or payable for imported merchandise, will not be considered part of dutiable value, provided the criteria set out in T.D. 85-111 are met. See Headquarters Ruling Letter (HRL) 543531, dated April 30, 1985, and HRL 544082 dated September 19, 1988. On December 16, 1988, Customs issued HRL 544155, which held that the importer's payments to the seller met the requirements of T.D. 85-111, which at the time was the only applicable statement by Customs on determining the dutiability of payments that were allegedly interest payments. Subsequently, on July 17, 1989, Customs published a Statement of Clarification for T.D. 85- 111 (54 FR 29973) which was published in the Customs Bulletin of July 26, 1989, wherein Customs interpreted the term "interest" to encompass only bona fide interest charges, not simply the notion of interest arising out of delayed payment. Customs further stated that "bona fide interest charges are those payments that are carried on the importer's books as interest expenses in conformance with generally accepted accounting principles." This clarification became effective October 16, 1989, which was ninety days after publication in the Federal Register. See also, C.S.D. 91-10 which recognizes and applies the Statement of Clarification for T.D. 85-111.

In a distinct case involving reimbursement for interest payments to a third party, Customs held that an amount paid by the importer to a foreign seller, which represented reimbursement for the interest charges that the foreign seller paid to a third party, was a dutiable expense. In HRL 543765, dated August 8, 1986, Customs found that such reimbursement paid to a seller did not fall into the purview of T.D. 85-111, which excludes interest from the dutiable value of goods, and found such payments to be dutiable.

Here, the agreements between NUSA and AAR indicate that where required, AAR will use its credit to borrow funds for NUSA's purchases and will be reimbursed by Nikoata for all finance and interest charges which are incurred by AAR (See Exhibit 4 to protestant's AFR submission, Buying Agency Agreement at paragraph 6). These charges are similar to those involved in HRL 543765 described above. NUSA reimburses AAR for finance and interest charges incurred by AAR in the course of making purchases for NUSA. This type of reimbursement for finance charges is not of the type contemplated by T.D. 85-111. Accordingly, consistent with the holding in HRL 543765, we find NUSA's reimbursement of finance charges to be dutiable as part of the price actually paid or payable for the imported merchandise.

In so holding, we note that Customs Statement of Clarification for T.D. 85-111, concerning the dutiability of interest charges, published in the Customs Bulletin of July 26, 1989, and subsequent rulings including HRL 544395 of November 23, 1990, and C.S.D. 91-10, are in no way affected by the holding herein.

HOLDING:

(1) Based on the information presented, and the lack of documentation presented by the protestant, we find that under the circumstances, bona fide agency relationships do not exist between NUSA and AAR, and NUSA and NFE. Accordingly, the purported buying agency commissions are dutiable.

(2) The payments made by NUSA to AAR for quota are considered to be part of the price actually paid or payable for the imported merchandise in accordance the Court's decision in Generra Sportswear Company v. U.S., 905 F.2d 377 (Fed. Cir. 1990).

(3) The protestant's payment of finance charges to AAR are dutiable to the extent that these payments are reimbursements to AAR for finance and interest charges incurred by AAR in the course of making purchases for NUSA.

Consistent with the decision set forth above, your are hereby directed to deny the subject protest. A copy of this decision should be attached to the Customs Form 19 and mailed to the protestant as part of the notice of action on the protest.

Sincerely,

John Durant, Director

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