HQ 547033 - Price actually paid or payable; consultant fees - United States International Trade Commision Rulings

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HQ 547033

June 25, 1998

RR:IT:VA 547033 RC

CATEGORY: VALUATION

Nancy J. Wollin, Esq.
Sandler, Travis & Rosenberg, P.A.
400 Colony Square, Suite 200
1201 Peachtree Street, N.E.
Atlanta, Georgia 30361

RE: Price actually paid or payable; consultant fees

Dear Ms. Wollin:

This is in regard to your request for a ruling, dated March 2, 1998, submitted on behalf of your client, [XXXX XXXX XXXX] ("importer"), concerning the dutiability of certain consulting fees. We have also considered your subsequent submissions dated April 13 and 23, 1998. Your request for confidentiality with regard to the bracketed information has been granted and will not be disclosed in copies of this ruling made available to the public.

FACTS:

The importer imports garments from various unrelated manufacturers throughout the world and in this instance, plans to engage the services of a [XXXX] "consultant," a Hong Kong-based service provider, who will act in the capacity of Field Import Fabric Consultant on behalf of the importer. A letter dated December 7, 1997, from the importer to the consultant regarding the services to be performed by the consultant was submitted. The consultant's primary duties will include acting as mill liaison for the importer and assisting the importer in ensuring that woven fabric purchased by the manufacturers for use in the production of garments to be purchased by the importer conform to the importer's stringent quality specifications. The duties which will be performed by the consultant on the importer's behalf parallel activities currently performed by importer-employed Import Sourcing Managers. These services include:

Coordinating delivery date of the fabric from the mills to the manufacturer.
Assisting the mills with fabric development. Locating fabric sources meeting the importer's specifications.
Assisting with fabric testing and quality control functions. Acting as on-site liaison between the importer and the mill including training the fabric QC manager.

You advise that the consultant's assistance to the mills in their fabric development activities is restricted to interpreting the instructions provided by the importer and acting as liaison between the mill and the importer. For example, the importer will forward a swatch of fabric to the consultant and request that he communicate to the mill that it should design a fabric similar in construction to the swatch provided. The mill will undertake the development and design of the fabric, the cost of which will be incorporated into the value of the garments to be imported. The consultant's assistance in this process will be restricted to explaining to the mill how a given fabric's weave should be comprised, such as "20 threads North and 16 threads East" pursuant to the specifications developed by the importer's designers in the U.S. For fabric prints designed by the importer in the U.S., the consultant will present a sample of the fabric to the mill and convey the importer's instructions that the mill should replicate the particular print or plaid.

The consultant will not actually assist the mill in developing the replicate fabric, but is charged merely with communicating the instructions of the importer and acting as a go-between should any questions arise. For instance, the mill might have a question concerning the color to be used in the fabric. Often words describing colors in English do not translate perfectly into Mandarin. As such, it would be incumbent upon the consultant to explain the correct color to the mill. While "lime green" might be recognizable to an English-speaker, its equivalent in Mandarin might be more of a light green or other shade not contemplated by the US-based fabric designers wishing to impart this particular color concept to the mill. The consultant's fluency in Mandarin enables him to convey the wishes and desires of the importer to the mill.

All fabric at issue is purchased directly by the manufacturers. The importer will not provide fabric to the manufacturers free of charge or at a reduced price.

The consultant is also the principal of [XXXX XXXX XXXX], a buying agent used by the importer in connection with its purchases of knit garments (sweaters). However, the consultant's activities as the importer's consultant are separate and distinct from his function as a principal of the buying agent. Under the terms of the consulting agreement between the importer and the consultant, the consultant will be compensated by a flat fee wire transfer [XXXX ] per month, plus expenses, to his Hong Kong bank. A separate account has been set up at a separate bank for the buying commissions paid to the buying agent, which are based on the FOB price of the knit garments purchased with the buying agent's assistance. The activities performed by the consultant and the buying agent, respectively, as Field Fabric Consultant in connection with woven fabric sourcing and as a buying agent in connection with knit garment sourcing, will at all times be readily distinguishable and separately identifiable.

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 monthly fees the importer pays to the consultant for the above-described services are included in the transaction value of the imported merchandise.

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 the price actually paid or payable for merchandise when sold for exportation to the United States.

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 fees 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.

As a general proposition, Customs finds that fees paid to third parties, to the extent that they are similar to bona fide buying commissions, are generally not part of the price actually paid or payable for imported merchandise. See, Jay-Arr Slimwear Inc., v. United States, 12 CIT 133, 681 F.Supp 875 (1988); Norco Sales Co. v. United States, 65 Cust. Ct. 778 (1970); International Fashions, Inc. v. United States, 76 Cust. Ct. 92, aff'd 64 CCPA 35 (1976); Concord Electronics Corp. v. United States, 85 Cust. Ct. 87 (1980); Headquarters Ruling Letter (HRL) 543365, dated November 1, 1984; and HRL 544681, dated July 21, 1991. However, when inspection or consulting-type services are at issue and entail quality control along the lines of production related design or development, and intimate involvement in the nature of the goods produced, the fees may be dutiable either as part of the price actually paid or payable, or as an assist. See, HRL 544088, dated March 25, 1988.

In this case, the consultant's activities appear to be typical of those performed by a buying agent. The consultant's primary duties will include acting as mill liaison for the importer and assisting the importer in ensuring that woven fabric purchased by the manufacturers for use in the production of garments to be purchased by the importer conform to the importer's stringent quality specifications.

The fact that the consultant acts both as "consultant" with respect to woven fabric sourcing, for a flat fee, and as a "buying agent" with respect to knit garment sourcing, for an amount based on the FOB value, does not per se vitiate the existence of a bona fide buying agency between the importer and the consultant for the services performed as a consultant. Our ruling is limited to the questions regarding the inclusion of the consultant fees in the price actually paid or payable and whether they constitute assists to be included in the transaction value.

While the consultant's activities as the importer's consultant are separate and distinct from his function as a principal of the buying agent and the terms of the consulting agreement between the importer and the consultant are different, the activities performed as the consultant, in connection with woven fabric sourcing, are similar to those performed by a bona fide buying agent.

Based on the information provided, the consultant 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. See, HRL 547058, dated May 19, 1998 Consequently, the consulting fees are not part of the price actually paid or payable. We assume for purposes of this ruling that the consultancy fees will be paid exclusively to the consultant and that no part will inure to the benefit of the foreign manufacturers/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).

With respect to whether the consultant services constitute assists, again, based on your description, we note that the consultant's services appear to be relatively limited in nature with respect to involvement in production. All fabric at issue is purchased directly by the manufacturers. The importer will not provide fabric to the manufacturers free of charge or at a reduced price. There is no indication that the consultant supplies the seller with "development," in any manner (directly or indirectly).

Customs has ruled that services similar to those provided by the consultant do not constitute assists. For example, in HRL 544887, October 2, 1992, Customs held that engineering support performed by the importer's agent, involving the explanation of blueprints, designs, or drawings in order to ensure that language barriers do not impede or interfere with the full understanding of the manufacturing specifications, did not constitute assists. Customs has ruled that management and supervisory personnel services, provided on behalf of the importer did not constitute assists. See, HRL 543992, dated September 10, 1987; HRL 543820, dated December 22, 1986; and HRL 544421, dated April 3, 1990. Moreover, in HRL 544421, Customs held that cooking and medical services did not constitute assists. See, also, HRL 542122 (TAA #4); there, Customs held that accounting services and legal services did not constitute assists and those services were not included in the price actually paid or payable for the imported merchandise.

Based on the above considerations, we find that the consultant services, as described, are not assists.

HOLDING:

Based on the facts provided, we find that the consultant fees are for services to be performed akin to those provided by a bona fide buying agent on behalf of the importer. Therefore the consulting fees are not to be included in the price actually paid or payable, nor do the services to be performed constitute an assist to be added to the price actually paid or payable.

Sincerely,

Acting Director
International Trade Compliance

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