HQ 545550 - Internal advice 75-93; transaction value; buying agency; commissions; price actually paid or payable; quota - United States International Trade Commision Rulings

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HQ 545550

September 13, 1995

VAL R:C:V 545550 IOR

CATEGORY: VALUATION

Area Director
JFK Airport

RE: Internal advice 75-93; transaction value; buying agency; commissions; price actually paid or payable; quota

Dear Sir:

This is in response to an internal advice request initiated by the importer and forwarded to us by your memorandum dated September 16, 1993, which was received in Headquarters on February 15, 1994. We are in receipt of a 1993 memorandum from the NIS, and submissions from the importer, the most recent being dated December 8, 1994. The importer initiated the request for internal advice during an audit by Customs Regulatory Audit. Liquidation of the subject entries is being held pending this response. Our file contains a copy of Regulatory Audit's Consumption Entry Review Report ("audit report") dated January 4, 1994. This decision follows a November 17, 1994 meeting between counsel for the importer and members of my staff in the Value Branch. We regret the delay in responding.

FACTS:

The subject merchandise consists of wearing apparel, imported primarily from Hong Kong. The importer is a U.S. corporation, with a related "buying office" established in Hong Kong. According to the importer, the buying office functions to provide office space, clerical assistance and communications facilities for principals of the importer during their buying trips to Hong Kong. The buying office also receives a free allocation of quota from the Hong Kong government, which quota is utilized in connection with the imported merchandise. The importer supplies fabric, buttons, lace and other trim items for the cut, make and trim ("CMT") operations performed by the manufacturers ("Manufacturer 1," "Manufacturer 2" and "Manufacturer 3") in Hong Kong. The importer is billed for the CMT. In approximately sixty-eight percent of the subject entries, Agent 1 is claimed to be the buying agent for merchandise purchased from Manufacturer 1, and in the remaining 32% of the entries Agent 2 is claimed to be a buying agent for merchandise purchased from Manufacturer 2 and Manufacturer 3. The importer pays an agency commission of six percent of the FOB price of the merchandise each, to Agents 1 and 2. However the importer remits ten percent of the FOB price to each of the agents, who in turn are obligated to pay four percent of the FOB price to the buying office. According to the importer, the four percent paid over to the buying office is a transmission of funds made by the importer to support the buying office's operations, and is paid through the agents in order to avoid additional bank charges and paperwork.

Manufacturer 1 is a subsidiary of Agent 1 and two principals and directors of Agent 1 and Manufacturer 1 are also directors of the buying office. Agent 1 is a holding company which owns Manufacturer 1. Agent 2 and Manaufacturers 2 and 3 are not related.

The importer entered into separate buying agency agreements with the buying office, Agent 1 and Agent 2. Notwithstanding the agency agreement between the importer and the buying office, dated February, 1988, the buying office does not perform buying agency services. The agreement does not provide for any compensation to the buying office. The agency agreement entered into between the importer and Agent 1, is stated to be effective as of January 2, 1976 and the agreement entered into between the importer and Agent 2 is dated October 24, 1981. Details of the agency agreements are discussed below in the Law and Analysis portion of this decision.

When the buying office's quota is used, the agents route the orders through the buying office, which then forwards the orders to the manufacturers. The buying office also receives payments from the importer and pays the manufacturer on behalf of the importer. According to the importer's December 8, 1994 submission this routing of the purchase orders and payment is necessary in order to satisfy Hong Kong government quota eligibility requirements. When Agent 1 uses its allocation of free quota from the Hong Kong government for the imported merchandise, the buying office is not involved in the transaction in any manner. According to the auditor's calculations, Agent 1's prices to the importer are higher than Manufacturer 1's prices to Agent 1, over and above the amount of the commission. This difference in price is attributed to the fact that Agent 1 used a lower exchange rate than the Customs Information Exchange Rate. Agent 2 uses the published exchange rate. According to the importer's May 27, 1993 letter to the Region II, Regional Commissioner of Customs, Agent 1 requested the importer to agree to use the lower exchange rate, due to fear of a fall in the U.S.$ to the Hong Kong$.

The merchandise was entered on the basis of transaction value. The entered value is the total FOB price paid to the agents for the merchandise, and does not include quota payments or commissions paid to Agents 1 and 2. The importer takes the position that the commissions are not dutiable because they consist of buying commissions and nondutiable payments to the buying office. The importer takes the alternative position that the merchandise should be appraised on the basis of the price paid to the manufacturers, if it is determined that Agents 1 and 2 are sellers of the imported merchandise.

You take the position that the buying office controls the agents and the manufacturers and that the manufacturers receive a fixed amount for the CMT, therefore no sale for exportation has taken place, and the merchandise cannot be appraised on the basis of transaction value. In addition, you were unable to verify the payments made to the manufacturers by the agents because the agents' payments to the manufacturers were for amounts in addition to those paid for merchandise imported by the importer. The audit report concludes that the imported merchandise was undervalued by the amounts of the ten percent commissions and quota paid to Agents 1 and 2. We have not been provided with any documentary evidence with regard to the quota payments made to Agents 1 and 2.

ISSUE:

Whether the payments made to Agent 1 and Agent 2 are included in the transaction value of the imported merchandise.

LAW AND ANALYSIS:

The preferred method of appraisement is transaction value. Transaction value is defined by §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 additions specified in §402(b)(1)(A) through (E). The "price actually paid or payable" is defined in TAA §402(b)(4)(A) as "the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise...) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller."

Based on the facts submitted, there is no basis for precluding transaction value as a basis of appraisement for the subject imported merchandise. The fact that the importer supplies materials for the garments and is billed for the CMT does not preclude the use of transaction value as a basis of appraisement. An assembly transaction may be used as the basis of transaction value.

Customs Regulations 19 CFR §152.103(a)(3) provides the following with respect to assembled merchandise:

The price actually paid or payable may represent an amount for the assembly of imported merchandise in which the seller has no interest other than as the assembler. The price actually paid or payable in that case will be calculated by the addition of the value of the components and required adjustments to form the basis for the transaction value.

Customs has applied this provision where the price paid by the importer is for processing of the imported merchandise. See Headquarters Ruling Letter ("HRL") 543737 dated July 21, 1986 and HRL 543593 dated March 28, 1986. Both decisions involved foreign processing of materials supplied by the importer, which were subsequently imported into the U.S. Customs determined that the transactions between the importer and the foreign processors represented sales for exportation to the U.S. under TAA §402(b), and may therefore be the bases for transaction value. In HRL 543737 and 543971 transaction value was determined to be represented by the amounts paid for the processing of the merchandise, the costs of acquiring the merchandise and transporting the merchandise to the processor. In HRL 543971, the value of the merchandise supplied free of charge to the processor by the importer was included in the transaction value as an assist. Based on the above rulings and Customs Regulation §152.103(a)(3), we find that payment to the manufacturers of a fixed amount for CMT, does not mean that a sale for exportation did not occur, and does not preclude appraisement on the basis of transaction value.

One of the additions to the price actually paid or payable is "any selling commission incurred by the buyer with respect to the imported merchandise," under §402(b)(1)(B). In order to find that the importer's payments to the agent are not included in the transaction value of the imported merchandise, we must examine all relevant factors in deciding whether a bona fide buying agency relationship exists. We have ruled that "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." HRL 542141 dated September 29, 1980. In Pier 1 Imports, Inc. v. United States, 13 CIT 161, 708 F.Supp. 351 (1989) and Rosenthal-Netter, Inc. v. United States, 12 CIT 77, 679 F. Supp. 21, aff'd. 861 F.2d 261 (Fed. Cir. 1988), the court set forth factors to consider in deciding whether a bona fide agency relationship exists. These factors will be addressed separately with respect to Agent 1 and Agent 2.

Agent 1

The first factor is the right of the principal to control the agent's conduct. Although no single factor is determinative, the primary consideration is the "right of the principal to control the agent's conduct with respect to the matters entrusted to him." J.C. Penney Purchasing Corp. et al. v. United States, 80 Cust. Ct. 84, C.D. 4741, 451 F.Supp. 973 at 983 (1978). In Rosenthal-Netter, in examining the control the importer had over the agent, the court considered the importer's control over the choice of manufacturers, over the handling and shipment of the imported merchandise and over the manner of payment. The importer's submissions do not address the importer's involvement in selecting manufacturers. Of the three invoices to the importer, two identify Manufacturer 1 as the manufacturer, and one identifies the buying office as the manufacturer. There is no evidence as to how the shipping was arranged. There is no evidence that Agent 1 absorbs the costs of shipping and handling. Finding that an agent absorbs the costs of shipping and handling would be a factor against finding the existence of a buying agency relationship. Rosenthal-Netter, Inc. v. United States, supra, 12 CIT at 80-81. With regard to payment for the merchandise, the importer has no control over the amounts that are actually paid to the manufacturers, as the letters of credit are in favor of Agent 1 and are in amounts sufficient to cover the price of the merchandise as well as the commissions. In Rosenthal-Netter, where the importer had opened letters of credit in favor of the intermediary from which the intermediary deducted its commissions, handling charges, etc. the court found that the importer had failed to control the manner of payment.

In J.C. Penney Purchasing Corp., supra, the court stated that in finding the existence of a buying agency relationship, it attributed significance to the fact that the importer actually visited factories and participated in negotiations with the factory. In this case there is no evidence regarding the importer's contact with the manufacturers or the importers involvement in any price negotiations. The fact that Agent 1 requested the importer to agree to a lower exchange rate, in favor of Agent 1 indicates that the importer may not have the requisite control over Agent 1.

The second factor to consider is the transaction documents. In this case the one manufacturer's invoice in our file does not identify that the purchase is made by the importer. The invoice only identifies Agent 1. An invoice or other documentation from the actual foreign seller to the buying agent is required in order to establish that the agent is not a seller and to determine the price actually paid or payable to the seller. See U.S. Customs Service General Notice, Customs Bulletin dated March 15, 1989, which cites Headquarters Ruling Letter 542141 (HRL) dated September 29, 1980, also cited as TAA No. 7. However, even if the manufacturer's invoice is provided, "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." Id. In this case, the invoices of the manufacturers are in HK$, and the Agent's invoices to the importer are in US$. However, as the exchange rate used by Agent 1 is lower than the published exchange rate, Agent 1 is charging the importer a higher price than Agent 1 pays to the manufacturer. This higher price received by Agent 1, is in addition to the commission charged by Agent 1. Agent 1 presumably keeps the difference between the price (not including the commission) it charges the importer and the amount it pays the manufacturer. These facts indicate that Agent 1 is not acting only on behalf of the importer, but is acting for its own benefit. These facts do not establish that Agent 1 is not a seller. The amount paid to the manufacturer cannot be determined from the transaction documents and in this case, Customs has been unable to otherwise verify the amounts paid to the manufacturer by the agents.

The third factor to consider is whether the importer could have purchased directly from the manufacturers without employing the agent. No evidence or information has been presented on this factor.

The fourth factor to consider is whether the agent is operating an independent business primarily for its own benefits. In Rosenthal-Netter the court cites the Restatement (Second) of Agency section 14K comment a (1958) for "factors to assist in determining when one is selling to, as opposed to acting as an agent for, the alleged principal":

(1) That he is to receive a fixed price for the property, irrespective of the price paid by him. This is the most important. (2) That he acts in his own name and receives the title to the property which he thereafter is to transfer. (3) That he has an independent business in buying and selling similar property.

Rosenthal-Netter, 679 F.Supp. at 25. In this case, we do not have evidence with regard to all of the above factors. However, we do have the manufacturer's invoice which does not identify that the purchase was made on behalf of the importer, and the importer has confirmed that Agent 1 charges the importer a higher amount for the merchandise than is charged by the manufacturer, by virtue of the lower exchange rate.

The fifth factor is the existence of a buying agency agreement. A buying agency agreement exists in this case. It is the position of Customs that "having legal authority to act as buying agent and acting as buying agent [are] two different matters" and Customs is entitled to examine evidence which proves the latter. U.S. Customs Service General Notice, 11 Cus. Bull. & Dec. 15 (March 15, 1989). See also Pier 1 Imports, supra; Jay-Arr Slimwear Inc. v. United States, 12 CIT 133, 681 F. Supp. 875 (1988); and Rosenthal-Netter, supra. Therefore, despite the existence of an agency agreement, we are still required to determine whether the agent acts as a bona fide buying agent. In this case the buying agency agreement is inconsistent with the actions of the parties to the extent that it does not address the 4% commission that Agent 1 is to pay to the buying office, or that certain transactions must go through the buying office, or that the agent will use a lower exchange rate.

In New Trends Inc. v. United States, 10 CIT 637, 645 F.Supp. 957, in addition to the above factors, the Court of International Trade considered whether the agent bears the risk of loss for damaged, lost or defective merchandise. In this case, the agent is liable for defective or nonconforming merchandise due to its negligence, only to the extent of its commissions. We find that such liability does not negate the existence of a buying agency relationship between the importer and Agent 1.

Based on the foregoing analysis we find that the totality of the evidence regarding the relationship between the importer and Agent 1 does not demonstrate that Agent 1 is a bona fide buying agent rather than a selling agent or an independent seller. Based on the appearance of the importer's lack of sufficient control over the actions of Agent 1, the lack of evidence that the importer is unable to import the merchandise without Agent 1, Agent 1's markup on the price of the merchandise, the lack of mention of the importer on the manufacturer invoice, the silence of the agency agreement on the agent's involvement with the buying office and the appearance that Agent 1 is operating a business primarily for its own benefits, we conclude that Agent 1 is an independent seller of the merchandise.

Agent 2

In determining whether Agent 2 is a buying agent for the importer we must address the factors raised above. With respect to the first factor, control, the importer's submissions do not address the importer's control over the choice of manufacturers, or the handling and shipment of the merchandise. Payment for the merchandise is made by the importer by a letter of credit issued in favor of Agent 2, in an amount sufficient to pay for the merchandise and the 10% commission paid to Agent 2. Of the three invoices from Agent 2 to the importer, all identify the manufacturer of the merchandise. However, a sales contract dated January 16, 1991 issued by Agent 2, indicates that a purchase order on behalf of the importer has been placed with the buying office. In this sales contract, the buying office is identified as the supplier and no other supplier or manufacturer is identified. There is no evidence that Agent 2 absorbs the costs of shipping and handling. There is no evidence regarding the importer's contact with any of the manufacturers, or the importer's involvement in negotiations with the manufacturers.

The second factor to consider is the transaction documents. The sales contract is stated to be made on behalf of the importer. Again, the one manufacturer invoice in the file does not identify the importer, and was issued to the buying office. The one invoice from the buying office to Agent 2 does not identify the importer either. The invoices from Agent 2 are all issued to the importer and identify the manufacturer. The sight payment advice in US$ is issued to the importer by Agent 2, and the manufacturer receipt for payment is issued to the buying office in HK$. There does not appear to be any mark up of the price between the importer and Agent 2, Agent 2 and the buying office, and the buying office and the manufacturer. As stated above, although the manufacturers invoice is provided, "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 U.S. Customs Service general Notice, Customs Bulletin dated March 15, 1989.

No evidence has been presented on the third factor regarding the importer's ability to purchase merchandise directly without employing the agent. We also do not have evidence that the agent is operating an independent business primarily for its own benefit, except for the fact that neither the buying office's invoice to Agent 2 or the manufacturer invoice to the buying office makes any reference to the importer, which tends to indicate that Agent 2 is acting in its own name.

With regard to the fifth factor, a buying agency agreement does exist in this case. However, again the agency agreement is inconsistent with the actions of the parties to the extent that it does not address the 4% commission that Agent 2 is to pay to the buying office, or that certain transactions must go through the buying office. With respect to risk of loss, according to the agency agreement, Agent 2 assumes no liability for defective, delayed or cancelled shipments of merchandise.

Based on the foregoing analysis, we find that the totality of the evidence provided to Customs regarding the relationship between the importer and Agent 2 does not demonstrate that Agent 2 is a bona fide buying agent rather than a selling agent or an independent seller. The lack of evidence with regard to the relationship between the importer and Agent 2 makes us unable to determine that Agent 2 is a bona fide buying agent, therefore we conclude that Agent 2 is either an independent seller or a selling agent.

Price Actually Paid or Payable

The importer takes the position that in the event we conclude that Agents 1 or 2 are not bona fide buying agents, the transaction value of the imported merchandise should be based on the price paid by Agents 1 and 2 to the manufacturers of the imported merchandise. In Nissho Iwai American Corp. v. United States, No. 92- 1239, slip op. (Fed. Cir. Dec. 28, 1992) and Synergy Sport International, Ltd. v. United States, No. 93-5, slip op. (Ct. Int'l. Trade Jan. 12, 1993), the U.S. Court of Appeals for the Federal Circuit and the Court of International Trade, respectively, addressed the proper dutiable value of merchandise imported pursuant to a three-tiered distribution arrangement involving a foreign manufacturer, a middleman and a U.S. purchaser. In both cases the middleman was the importer of record. In each case the court held that the price paid by the middleman/importer was the proper basis for transaction value. Each court further held that in such three-tiered distribution arrangements, in order for a transaction to be viable under the valuation statute, it must be a sale negotiated at arm's length, free from any nonmarket influences and involving goods clearly destined for the United States.

Likewise, in the context of filing an entry, Customs Form 7501, an importer is required to make a value declaration. As indicated by the language of CF 7501 and the language of the valuation statute, there is a presumption that such transaction value is based on the price paid by the importer. In this regard, field instructions dated March 8, 1993 from the Director of Trade Operations, provide that where an importer requests appraisement based on the price paid by the middleman to the foreign manufacturer (and the importer is not the middleman), the importer may do so. However, it is the importer's responsibility to show that such price is acceptable under the standard set forth in Nissho Iwai and Synergy. That is, the importer must present sufficient evidence that the sale was at "arm's length," and that the goods sold were "clearly destined for the United States," within the meaning of 19 U.S.C. 1401a(b).

In determining whether any particular transaction may be considered a possible basis for transaction value under Nissho Iwai, the first question that needs to be addressed is whether such transaction constitutes a sale. In J.L. Wood v. U.S., 62 CCPA 25, at 33, C.A.D. 1139 (1974), the court defined the term "sale" as the "transfers of property from one party to another for a consideration." Although the J.L Wood case was decided under the appraisement statute prior to the TAA, Customs has applied this basic concept of what constitutes a sale under the TAA. Only after determining that there is a sale, do we reach the issue of whether it was negotiated at arms length and whether the goods were destined for the U.S. Several factors may indicate whether a bona fide sale exists between a potential seller and buyer. In determining whether property or ownership has been transferred, Customs considers whether the alleged buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, Customs may examine whether the alleged buyer paid for the goods, whether such payments are linked to specific importations of merchandise, and whether, in general, the roles of the parties are functioning as buyer and seller. Headquarters Ruling Letter ("HRL") 545705 dated January 27, 1995; HRL 545542 dated December 9, 1994.

In the present case, we do not have enough information to determine the roles of the respective parties and whether bona fide sales exist between Agents 1 and 2 and the manufacturers they deal with. As indicated in the facts, the entries are based on the invoice prices from Agents 1 and 2 to the importer. We do not have any complete sets of documents relating to the subject transactions nor other information which would enable us to determine that there is a bona fide sale between Agent 1 and the manufacturers. We do have a complete set of documents relating to a transaction between a manufacturer, the buying office, Agent 2 and the importer. However, according to the importer's submission, Agent 2 does not bear any risk of loss, and we do not have any information regarding the passage of title. Customs has also been unable to verify that payments made by the agents to the manufacturers are linked to specific importations of merchandise. As indicated above, there is a presumption that transaction value is based on the price the importer pays. Therefore, absent sufficient information to determine that another transaction is a bona fide sale, the merchandise should be appraised based on the price the importer pays. The test articulated in Nissho Iwai applies only to situations involving more than one viable transaction value. Therefore, based on the above noted presumption, the transaction value of the imported merchandise should be based on the prices that the importer pays Agents 1 and 2.

As we have determined that Agent 1 is a seller of the merchandise and that the transaction value of the imported merchandise should be based upon the price paid by the importer to Agent 1, we must now determine the price paid to Agent 1. In addition to the invoiced price for the merchandise, the importer also pays Agent 1 a commission of 10% based on the total FOB price of the imported merchandise. It has been the longstanding position of the Customs Service that all monies paid to the foreign seller, or a party related to the seller, are part of the "price actually paid or payable" for the merchandise under transaction value. This is consistent with the Court's decision in Moss Manufacturing Co., Inc. v. United States, 13 CIT 420, 714 F.Supp. 1223 (1989), in which the court held that payments made to the seller of merchandise for disbursement to the importer's legitimate buying agent were part of the price actually paid or payable. The importer had failed to show that the total payment was not for the benefit of the seller. In Moss Manufacturing, it was of no concern how the money was disbursed by the seller. 13 CIT at 426-427. The court looked no further than to the fact that the payment was made to the seller. Similarly, in this case, the importer has not shown that the total payment to Agent 1 is not for the benefit of the seller, Agent 1. Therefore, we find that the total 10% commission paid to each agent is part of the price actually paid or payable for the imported merchandise.

With respect to merchandise purchased through Agent 2, as we are unable to determine that the commission paid to Agent 2 is a nondutiable buying commission, the total commission must be included in the transaction value of the imported merchandise, for the reasons stated above.

The regulatory audit report includes quota payments made by the importer to Agents 1 and 2 in its "schedule of additional dutiable undervaluations." As the importer has failed to establish that Agents 1 and 2 are bona fide buying agents, the quota payments made to Agents 1 and 2 are included in the transaction value of the imported merchandise as part of the price actually paid or payable for the imported merchandise, to, or for the benefit of, the seller.

Therefore, the transaction value of the imported merchandise includes the total commissions paid to Agents 1 and 2 by the importer, the quota payments made to Agents 1 and 2 by the importer, the CMT paid to Agents 1 and 2, plus the value as assists of any materials supplied to the manufacturers by the importer.

HOLDING:

Based on the totality of the evidence presented it is our conclusion that the total commissions paid by the importer to Agents 1 and 2 were not for bona fide buying agency services, and the commissions should be included in the transaction value of the imported merchandise. As the importer has failed to establish that Agents 1 and 2 are not selling agents or independent sellers of the imported merchandise, the quota payments made to them by the importer are included in the transaction value of the imported merchandise.

This decision should be mailed by your office to the internal advice requester no later than 60 days from the date of this letter. On that date 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, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director
Commercial Rulings Division

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