HQ 544987 - Application for Further Review of Protest 1001-90-000730; buying agency; related parties; dutiability of commissions; insufficient evidence of payments - United States International Trade Commision Rulings

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HQ 544987

July 18, 1994

VAL CO:R:C:V 544987 LR

CATEGORY: VALUATION

Area Director of Customs
J.F.K. Area
Jamaica, N.Y. 11430

RE: Application for Further Review of Protest 1001-90-000730; buying agency; related parties; dutiability of commissions; insufficient evidence of payments

Dear Sir:

The above-referenced protest and application for further review was filed by counsel on behalf of El Greco Inc. (protestant) against your decision appraising the goods at the invoice value, plus ten percent. We regret the delay in responding.

FACTS:

El Greco is an importer of footwear. The 70 entries which are the subject of this protest and application for further review concern the importation of footwear from Brazil during 1988 and 1989 from various factories. Customs appraised the footwear at the invoice value plus ten percent.

Protestant alleges that there is no statutory or regulatory basis for the ten percent addition to the invoice values, and even if there is a basis, the protestant has not been made aware of such basis, as mandated by 19 CFR 152.101(d). Therefore, the protest alleges that the decision to assess duty on El Greco's importations from Brazil at the invoice value plus ten percent is arbitrary, capricious, and a violation of the customs laws and regulations. Counsel claims that despite its requests for specific information regarding the ten percent addition, including a FOIA request, it was not notified why this addition was made. It claims that the CF 29 issued to protestant gave no reason for the value advance, other than to say "based on information supplied by Regulatory Audit, all Brazilian imports will be appraised at the FOB value net pkd. plus 10%."

Your position is that the results of the Regulatory Audit's Division's report and the recommendation of the Special Agent in Charge justify the ten percent value advance to determine the transaction value of the shipments.

The record indicates that the Regulatory Audit Division, New York Region, performed a review of the accounting records and importation documents of protestant and issued a report dated December 31, 1990. The audit encompassed the period 1983 through 1986. The report indicates that due to a lack of cooperation, it was necessary to obtain the necessary records by means of a Customs summons. The report concludes that during the period 1984 through 1986 protestant intentionally omitted dutiable assists and undervalued its merchandise from Korea. The report documents the undervaluation of footwear from Korea in connection with 19 consumption entries filed during this period.

The above findings do not relate to the entries which are the subject of the protest which were filed much later (1988 and 1989) and concern the importation of footwear from Brazil, not Korea. Although the report indicated "numerous payments being made to Buying Agents in various countries which we have determined to be dutiable" and that "a supplemental audit report will be issued which will address other areas of possible undervaluations", we have been unable to obtain a copy of such a report. We were orally advised that no supplemental audit report was prepared.

After discussions with various import specialists and auditors in the New York Region concerning the protest, we were orally advised that the ten percent addition was for selling commissions El Greco paid in connection with the imported goods. However, we have been unable to obtain any documentation of such payments.

After this office advised counsel that it appeared that the ten percent addition related to commissions, counsel filed a supplemental submission dated October 23, 1992, addressing this issue. Counsel contends that such addition was not proper because any commissions El Greco paid in connection with the imported merchandise were non-dutiable buying commissions. Counsel advised that in sourcing from Brazil, El Greco utilizes two buying agents: Sapatus Assessoria & Lancamentos Ltd. ("Sapatus") and the Alec Corporation ("Alec", the U.S. arm of "GVD"). Counsel points to Headquarters Ruling Letter (HRL) 544265, dated February 7, 1990, which found that based on the information submitted, the relationship between El Greco and Sapatus was that of a bona fide buying agency. (This prospective ruling was issued in response to El Greco's November 17, 1988, ruling request). Counsel indicates that in October 1989, El Greco entered into a written buying agency agreement with the Alec. A copy of this agreement was submitted. Counsel claims that both the favorable ruling and the buying agency agreement demonstrate the bona fides of the buying agency relationships.

ISSUE:

Whether the decision to add ten percent to the invoice value to obtain the appraised value was correct.

LAW AND ANALYSIS:

Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. ?1401a). The preferred method of appraisement under the TAA is transaction value, defined as "the price actually paid or payable for the merchandise when sold for exportation to the United States," plus five enumerated additions, including any selling commission incurred by the buyer with respect to the imported merchandise.

Section 402(b)(4) of the TAA provides in relevant part:

(A) 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 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.

19 U.S.C. ?1401a(b)(4). Additions to the price actually paid or payable will be made only if there is sufficient information to establish the accuracy of the additions and the extent to which they are not included in the price. 19 CFR 152.103(c). If sufficient information is not available with respect to any amount, the transaction value of the imported merchandise concerned shall be treated, for purposes of this section, as one that cannot be determined. See HRL 544177, September 19, 1988.

The only issue which is presented in this case is whether the ten percent was a proper addition to the invoice value. For purposes of this decision, we assume that transaction value is the proper basis of appraisement and that the invoice value represents the price actually paid or payable for the imported merchandise.

Although we have been advised that the value advance was for dutiable selling commissions, the record contains little evidence relating to El Greco's payment of commissions. There is a report of an importer's premises visit, dated March 3, 1987, indicating that El Greco pays a buying commission to "Sapatus" and "GVD" that ranges from 5 to 10 percent. There are copies of two checks, dated May 5, 1983, from El Greco to Cezar Roberto De Olivera, one of the principals of Sapatus. And, there is some evidence that one of the agents, Sapatus, and one of the manufacturers, Calcados Dikora Ltda. ("Dikora"), are related parties. This relationship was specifically discussed in HRL 544265:

The newly disclosed facts indicate that the agent and the manufacturer are related. The burden is therefore, on the importer to establish that the agent acted solely on behalf of the importer and that the relationship of the agent and the manufacturer does not encroach upon the principal-agent relationship. In this instant case, the services to be performed by the agent are indicative of those generally provided in a buying agency relationship. Further you have presented evidence which supports the fact that the commissions paid to the agent by the importer have not in the past inured to the benefit of the manufacturer. You further state that the future action of the agent will conform to the past action of the agent.

Based upon the treatment of the past transactions by the import specialist and the information you have provided regarding the prospective transactions, the relationship in question appears to be a bona-fide buying agency. Note however, the actual determination as to the existence of a buying agency will be made by the appraising officer at the applicable port of entry...

In a request for reconsideration of this ruling, your office advised that no contract exists establishing a formal agency agreement, that the agent has refused to allow Customs to examine his books, and that the agent owns a 40% interest in the factory. Noting these circumstances, in a memorandum dated July 30, 1990, we advised that:

The burden of proof as to whether or not a bona fide buying agency relationship exists rests with the importer, and we are not satisfied that the importer will exercise the requisite degree of control over the agent. As the importer has not met his burden of proof as to the existence of a bona fide buying agency and does not allow Customs to verify the facts pertaining to the importation of the merchandise into the United States, the concerned appraising officer has the responsibility of making the determination as to whether the buying commission are bona fide.

The problem in the instant case, is that there is no indication in the record that El Greco made additional ten percent payments in connection with the imported footwear. Although we have been orally advised that the ten percent addition represents selling commission paid by El Greco in connection with the importation of the footwear, the record contains no evidence which reflects these payments. As indicated above, the audit report does not contain any such evidence. Our attempts to obtain additional evidence from the appropriate customs offices concerning the ten percent addition were unsuccessful. Moreover, while the expressed concern regarding HRL 544265, supra, was whether there was a bona fide buying agency relationship between Sapatus and Dikora, the importations which are the subject of this protest involve more than one agent and various manufacturers. If the value advance was meant to address this issue, there is no indication why it was done across the board.

Assuming the addition was for commissions, there appears to be no basis for the ten percent figure. The only mention of a ten percent commission is in a 1987 import specialist report indicating that El Greco pays a buying commission to Sapatus and GVD that ranges from five to ten percent. The buying agency agreement submitted by counsel between El Greco and Alec refers to a seven percent commission. HRL 544265, regarding commissions El Greco paid to Sapatus, refers to a five percent commission.

As provided in 19 CFR 152.103(c), additions to the price actually paid or payable will be made only if there is sufficient information to establish the accuracy of the additions and the extent to which they are not included in the price. In this case, there is insufficient information to establish the accuracy of the ten percent addition. Based on the record before us, the ten percent addition cannot be supported.

HOLDING:

The decision adding ten percent to the invoice value to obtain transaction value is not supported by the record. Therefore, you are directed to grant the protest. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Lexis, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director

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