United States International Trade Commision Rulings And Harmonized Tariff Schedule

faqs.org  Rulings By Number  Rulings By Category  Tariff Numbers

faqs.org > Rulings and Tariffs Home > Rulings By Number > 1998 HQ Rulings > HQ 546681 - HQ 560114 > HQ 547006

Previous Ruling Next Ruling
HQ 547006

---

April 28, 1998

RR:IT:VA 547006 RC

CATEGORY: VALUATION

John M. Peterson, Esq.
Neville, Peterson, & Williams
Counsellors at Law
80 Broad Street, 34th Floor
New York, New York 10004

RE: Price actually paid or payable; inspection fees

Dear Mr. Peterson:

This is in response to your request for a ruling, received by our office February 18, 1998, on behalf of your client, Dayton Hudson Corporation ("Dayton Hudson"). The request concerns the dutiability of certain inspection fees.

FACTS:

Dayton Hudson ("importer") owns and operates major retail store chains ("Group Stores") throughout the United States. The Group Stores include Target Stores, Mervyn's, Dayton's, Hudson's and Marshall Field & Co. All of these companies import footwear into the United States; the footwear is appraised according to "transaction value" in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. section 1401a).

The importer has contracted with a Hong Kong-based corporation ("agent") to perform certain inspection services in connection with footwear exported from Hong Kong, Korea, China, Indonesia and Taiwan to the above-listed Group Stores of the importer, in the United States. A copy of the Inspection Agreement ("Agreement") between the importer and the agent was attached to the ruling request. The Agreement sets forth, in part, that, at the importer's request, the agent will perform the following four different kinds of inspections: Factory Evaluations, to determine whether a vendor has the ability to meet the importer's performance and manufacturing standards for specified product; Introduction Audits, conducted prior to actual production of footwear, in accordance with the importer's Footwear Inspection Procedure for each footwear program; During Production Inspections, on the first purchase order of each new style. These inspections are conducted when the finished product is first coming off the production line, and covers both the finished product and in line checks of problem areas discovered during the end line product check; and Final Random Inspections, as requested by the importer on each purchase order.

As compensation for these inspection services, the importer's Group Stores each agree to pay the agent an inspection fee based on the value of the goods inspected either in terms of a certain percentage of the value of the inspected goods or as a flat fee based on the volume of goods shipped.

The agent will invoice the importer for the inspection services weekly, and conduct an annual reconciliation after fiscal year shipping volumes are determined. The inspection agent has no particular experience or expertise in footwear manufacture, purchasing or marketing and was chosen by the importer in part because of the agent's lack of business connections to foreign footwear manufacturers. It is assumed for purposes of this ruling that the importer, the agent, and the foreign vendors are all "unrelated parties."

The parties agree specifically that the agent may not charge vendors for any services without receiving written authorization from a senior official employed by the importer. The Agreement further provides for full or partial payment to the agent for inspection services performed in the event the importer cancels an order for inspected merchandise, and provides that the agent will forfeit its inspection fee if goods are received by one of the importer's stores and do not meet specifications as a result of the agent's "deliberate negligence." The Agreement prohibits the agent from attempting to recover its inspection fee from the vendor without the importer's permission.

The Agreement provides that vendors will be charged back for all the agent's costs derived from re-inspecting rejected purchase orders, or for any re-inspections resulting from a vendor's failure to furnish correct factory addresses and/or inspection dates. The Agreement authorizes the agent to issue debit notes to vendors for the recovery of such costs directly, including all of agent's out of pocket expenses. The importer disclaims responsibility for paying the agent any re-inspection fees, but pledges its best efforts to assist the agent in collecting these fees.

This ruling is limited to prospective import transactions involving these same parties which are conducted in the same manner as those described above.

ISSUE:

Whether the above-described inspection fees, made by the importer to an unrelated third party, are included in transaction value either as part of the "price actually paid or payable" for the imported merchandise or as an addition thereto.

LAW AND ANALYSIS:

We are assuming, for the purposes of this ruling, that transaction value is the appropriate basis of appraisement for the imported merchandise. Merchandise imported into the United States is appraised in accordance with the provisions of 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)). This section provides, in pertinent part, that the transaction value of the imported merchandise is the price actually paid or payable for merchandise when sold for exportation to the United States plus various additions.

The "price actually paid or payable" is defined in section 402(b)(4)(A) of the TAA 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." We note, in particular, that section 402(b)(1) provides, in pertinent part, that the price actually paid or payable for imported merchandise is increased by amounts for the enumerated statutory additions insofar as they are not otherwise included within the price actually paid or payable. Those enumerated items 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.

Section 402(h)(1)(A) of the TAA provides, in pertinent part, as follows:

The term assist' means any of the following if supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the United States of the merchandise: . . .

(iv) Engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise.

There is no specific provision regarding fees paid for inspection services. However, such fees are somewhat similar to buying commissions. Buying commissions are fees paid by an importer to an agent for the service of representing the importer abroad in the purchase of the goods being valued. They are not specifically included as one of the additions to the price actually paid or payable. It has been determined that bona fide buying commissions are not added to the price actually paid or payable. Pier I Imports, Inc. v. Untied States, 13 CIT 161, 164, 708 F.Supp. 351. 353 (1989); Rosenthal-Netter, Inc. v. United States, 679 F.Supp. 21, 23, 12 CIT 77, 78, aff'd 861 F. 2d 261 (Fed. Cir. 1988); Jay-Arr Slimwear Inc., v. United States, 12 CIT 133, 136, 681 F.Supp 875, 878 (1988). The importer has the burden of proving that a bona fide agency relationship exists and that payments to the agent constitute bona fide buying commissions. Rosenthal-Netter, supra, 22. 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. Headquarters Ruling Letter (HRL) 542141 (September 29, 1980) (also known as TAA #7). 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. Id.

In Jay-Arr Slimwear Inc., v. United States, supra, the Court of International Trade cited examples of services which are characteristic of those rendered by a buying agent. These services include compiling market information, gathering samples, translating, placing orders based on the buyer's instructions, procuring the merchandise, assisting in factory negotiation, inspecting and packing merchandise and arranging for shipment and payment (emphasis added).

Several court cases have considered the dutiability of fees paid for inspection services. Whether fees paid for inspection services are dutiable depends, in part, on the type of services provided. In Jay-Arr Slimwear Inc. v. United States, supra, the court found that "[c]ommissions representing services associated with the actual production of the merchandise are a component of the selling price and thus, dutiable." In that case, where it appeared that the buyer's alleged "agent" was related to the foreign seller of the imported merchandise, and performed extensive inspection services, with commissions negotiated on a style-by-style basis, the Court held that the plaintiff had not satisfied its evidentiary burden to show that the payments were bona fide buying commissions. Three pre-TAA decisions employed a similar analysis. In Norco Sales Co. v. United States, 65 Cust. Ct. 778 (1970), the buyer's "agent" worked hand-in-hand with the foreign manufacturer's employees to coordinate all manufacturing processes, and arrange for the delivery of components for final assembly. The court held that the "handling" services performed by the agent were not typical of those performed by buying agents, but were instead intimately involved with the nature of the merchandise produced; they were costs related to the manufacture and assembly of the goods, and therefore included in dutiable value. In International Fashions, Inc. v. United States, 76 Cust. Ct. 92, aff'd 64 CCPA 35 (1976), the court held that where an agent was required to inspect all component pieces at each stage of manufacturing, this was essentially a "quality control" function which would otherwise be performed by a factory worker, and thus be part of the cost of manufacturing the goods. By contrast, in Concord Electronics Corp. v. United States, 85 Cust. Ct. 87 (1980), the court held that fees for inspection services which did not amount to production quality control services were not dutiable.

In two rulings applying the TAA, Customs considered the dutiability of inspection fees. In HRL 543365, dated November 1, 1984, Customs held that fees for inspection services, limited to on-site inspection to verify only quantities of components exported and assembled garments returning to the United States, were not part of the "price actually paid or payable" for the goods. Similarly, in HRL 544681, dated July 21, 1991, Customs held that a one-time visit by employees of the importer to the foreign vendor's factories to inspect the merchandise prior to shipment, was not included in the "price actually paid or payable" for the imported merchandise. However, in HRL 544088, dated March 25, 1988, it was determined that fees paid for design and consulting work are assists and thus an addition to the price actually paid or payable.

Based on the above decisions, we conclude that inspection fees, to the extent that they are paid for services generally performed by buying agents are not added to the price actually paid or payable for imported merchandise. However, where the inspection services entail quality control along the lines of production related design or development, and intimate involvement in the nature of the goods produced, the inspection fees may be dutiable either as part of the price actually paid or payable or as an assist.

In this case, based on the submitted information, the inspection agent's activities appear to be of the kind typically performed by a buying agent. The inspection agent has no expertise in the manufacture of footwear; it does not furnish the importer's vendors with technical assistance; nor does it tell the factories how to make the footwear. The "Factory Evaluations" are conducted merely to determine whether a vendor has the ability to meet the importer's performance and manufacturing standards for specified product. The "Introduction Audits" are conducted prior to actual production of footwear, in accordance with the importer's Footwear Inspection Procedure for each footwear program. The "During Production Inspections" are conducted only on the first purchase order of each new style. These inspections are conducted when the finished product is first coming off the production line, and covers both the finished product and in line checks of problem areas discovered during the end line product check, after the factory has subjected the products to its own quality control procedures. The "Final Random Inspections" are conducted only upon request of the importer on each purchase order.

Furthermore, we note that the written agency agreement expressly prohibits the agent from performing services for, or collecting compensation from, the foreign suppliers without first obtaining the importer's permission. Lastly, the inspection fees are paid to the agent by the importer and do not inure to the benefit of the seller or a party related to the seller. See, Generra Sportswear Co. v. United States, 8 CAFC 132, 905 F.2d 377 (1990), and Chrysler Corporation v. United States, Slip Op. 93-186, 17 C.I.T. 1049 (1993).

Based on the information provided, the inspection services here are similar to activities typically performed by bona fide buying agents, and do not amount to production quality control intimately involved with the nature of the merchandise produced. Consequently, the inspection services are not part of the price actually paid or payable.

With respect to whether the inspection fees should be added to the price actually paid or payable, as assists, again, we note that the inspection services appear to be relatively limited in nature with respect to involvement in production. Furthermore, there is no indication that the inspection agent supplies the seller with "development," in any manner (directly or indirectly). Therefore, we find that the inspection fees do not constitute an assist.

HOLDING:

Based on the facts provided, we find that the inspection fees are not part of the total payment for the goods to be included in the price actually paid or payable, nor do they constitute an assist to be added to the price actually paid or payable.

Sincerely,

Acting Director
International Trade Compliance
Division

Previous Ruling Next Ruling