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 > 2002 HQ Rulings > HQ 547487 - HQ 561808 > HQ 547623

Previous Ruling Next Ruling
HQ 547623

---

February 21, 2002

VAL: RR:IT:VA 547623 NL

CATEGORY: VALUATION

Port Director
Los Angeles-Long Beach Seaport
301 East Ocean Blvd.
Long Beach, CA 90802

SUBJECT: Application for Further Review (AFR) of Protest No. 2704-99-100339; Agency Commissions; Royalty Payments

Dear Port Director:

This is in response to your memorandum dated December 15, 1999, forwarding the above-referenced AFR concerning the dutiability of certain fees paid by the importer, Dolgencorp, Inc. (Dolgen), to Mercury International Trading Corp. (Mercury) for services rendered in the importation of athletic footwear. Additional submissions dated July 19, 2000, June 19, 2001, July 9, 2001 and November 15, 2001 were forwarded on behalf of Dolgen. We held a conference with counsel for Dolgen and Mercury on October 4, 2000.

You requested this office to review the instant Protest together with Protest No. 2704-99-100150, filed by Big 5 also at the Port of Los Angeles-Long Beach Seaport. The basis for simultaneous consideration is that both Dolgen and Big 5 made payments to Mercury, and the common issue is whether bona fide buying agency relationships exist between the two importers and Mercury. The companion decision is being issued on this date as HRL 547608.

You have advised that other Protests involving various footwear importers and Mercury have been suspended pending this decision.

FACTS:

In this lead protest, the merchandise was manufactured in China and shipped to Los Angeles where Dolgen made entry on August 13, 1998. The entry summary included an invoice showing the seller as Madison Trading Ltd., Hong Kong (hereinafter Madison), and the buyer Dolgen.

The merchandise was appraised using transaction value based on the invoice price plus 8% commission, 5% royalty fee, and 2% representing a charge identified as a “handling fee”. This appraisement was based on the appraising officer’s position that the 8% commission that Dolgen pays to Mercury is dutiable as a selling commission, and that the 5% royalty fee paid to Mercury is dutiable as an indirect payment to the seller and as a condition of sale. The appraising officer understood that the 2% handling fee was also paid indirectly to the seller, and found it to be dutiable. Dolgen does not dispute that it paid the 8% and 5% fees to Mercury.

It is Dolgen’s position that the payments to Mercury for commissions are not additions to the price actually paid or payable because Mercury is a bona fide buying agent on behalf of Dolgen and none of the commission inures to the benefit of the seller, Madison. Dolgen contends that the 2% handling fee, which appears on its purchase orders, is not paid to any person, but is an internal accounting device. The affadavit to this effect of Dolgen’s Director of Imports has been provided.

According to Dolgen, Mercury began acting as its bona fide buying agent pursuant to a verbal agreement. The procedures followed by the two parties were as follows: once the footwear was selected by Dolgen, Mercury assisted in identifying sources, prices and delivery terms. With these established, Dolgen issued purchase orders to Mercury setting out product specifications, prices, sources and delivery terms. Mercury then transmitted the purchase orders to Madison, which placed orders with the manufacturers. The merchandise was shipped by the manufacturer through Dolgen’s consolidator with an invoice from Madison. For the commission Mercury invoiced Dolgen separately and Dolgen made separate payment to Mercury.

Dolgen states that Mercury acted only at its direction and in its best interest; that merchandise was ordered only after written instruction to Mercury from Dolgen; that Mercury did not share its commissions with any seller/manufacturer; and that Mercury did not receive any remuneration in these transactions beyond the commissions.

Shortly after the initiation of this protest Dolgen and Mercury entered into a written buying agency agreement. See Exhibit A to Dolgen’s Memorandum in Support of Protest.

By separate invoice Dolgen made payments to Mercury based on a percentage of the invoice price paid by Dolgen for the footwear. These payments were considered royalty license fees by both Dolgen and Mercury, although Dolgen was not party to any license agreement. Mercury was the holder as either licensee or sublicensee of the rights to use certain marks owned by Dunlop and Chic by H.I.S. on the imported footwear. It appears that as the holder of these rights Mercury arranged for marks to be placed by the footwear manufacturers on the merchandise before sale and importation into the U.S. It appears from the Agreements, which this office reviewed, that Mercury was not authorized to sublicense the trademark rights to Dolgen. Nevertheless, both Dolgen and Mercury seem to have considered the payments from Dolgen in the nature of license fees, and Mercury appears to have made related payments to Dunlop and Chic by H.I.S. It is unclear whether the Dolgen payments are in turn paid dollar-for-dollar to the licensors. Mercury represents that in any event, the Dolgen payments are not remitted to the manufacturers or to Madison.

Dolgen and Mercury urge that these payments are separate from the sale for exportation of the footwear, and are made for rights to use and sell the trademarks in the United States. Consequently, it is argued, they should not be considered as part of, or additions to, the price actually paid or payable for the footwear.

The Relationship between Mercury and Dolgen

In connection with the instant protest, Mercury has submitted information regarding its relationships with Dolgen and the seller Madison.

According to Mercury, it has represented various footwear importers for over 20 years by providing traditional buying agency services as set out in buying agency agreements. The services include “line building” in which the agent collaborates with the principal by providing market research and analysis, and by assisting in the selection of shoe categories and features. Mercury states that until the instant protests Customs has not questioned Mercury’s understanding that these are bona fide buying agency relationships pursuant to which the commissions paid to Mercury are outside of the appraised value of the merchandise. Mercury refers us to HRL 545938 (June 5, 1996), in which Customs Headquarters stated that an agent may engage in the incidental design activities associated with “line building” while remaining under the supervision and control of a principal.

With respect to the purchasing and importing processes, Mercury states that after the principal has selected the products to be procured, Mercury assists with identifying sources, prices and terms. The principal then submits a purchase order to Mercury and Mercury forwards that purchase order to Madison. Madison then forwards the purchase order to various manufacturers. The principal knows which manufacturers will be supplying footwear, and knows that Madison will function as the intermediary. Payment is by letters of credit opened by the principal in favor of Madison. When the merchandise is ready for exportation, the merchandise is delivered to the importer’s consolidator who arranges for shipment to the U.S. The merchandise is shipped to the U.S. with an invoice prepared by Madison for the full purchase price of the merchandise. The importer pays Madison an amount equal to the invoice price of the merchandise and Mercury simultaneously issues a separate invoice to the importer for the buying commissions and royalties. The importer makes a separate payment to Mercury for the royalties and buying commissions.

Mercury emphasizes that in these activities the principal at all times controls the sourcing of the merchandise, controls the shipment of the merchandise, and controlled all payments.

The Relationship between Mercury and Madison

The Protestant and the Port of Los Angeles dispute whether Mercury and Madison, the seller of the merchandise, are related persons within the meaning of section 402(g)(1), TAA (19 USC 1401a(g)(1)).

There are undisputed indications that Mercury and Madison work closely together; the Port of Los Angeles observes that in nearly every transaction involving Mercury that it has examined, Madison is the seller. The Port at the time of appraisement had information that one individual was an officer of both entities, and that shares in both were held by one person. At that time the percentage of equity held was not known. The appraising officer concluded that Mercury and Madison were related parties, and took this into account in determining that the commission and royalty were additions to the price actually paid or payable.

In its submissions Mercury contends that it is not related to Madison. It states that Madison is not owned or controlled by Mercury, and that Mercury does not have a financial interest in Madison. Mercury states that the one shareholder in common does not hold a controlling interest in either company. It is represented that the diversity of ownership between Mercury and Madison was such that their dealings were at arms’ length.

Concerning ownership, Mercury states that the shares in Mercury are owned by six members of one family. One of these family members owns 42 percent of Madison. Two officers of Mercury hold 18 percent of Madison. Mercury also confirms that a vice-president of Mercury serves as treasurer of Madison.

ISSUES:

Whether the commissions paid by Big 5 to Mercury are to be treated as selling commissions;

Whether the “royalty” payments made by Big 5 to Mercury are to be treated as part of, or additions to, the price actually paid or payable for the imported merchandise; and

Whether the “handling charges” are to be included in appraised value.

LAW & ANALYSIS:

Merchandise imported into the United States is appraised in accordance with §402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. §1401a). The primary basis 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 statutorily enumerated additions to the price actually paid or payable including:

(B) any selling commission incurred by the buyer with respect to the imported merchandise; (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

19 U.S.C. §1401a(b)(1)(B), (D)-(E). As such, additions will be made only if amounts in respect of royalties, proceeds, etc. are not otherwise included in the price actually paid or payable.

The entry under protest was appraised under transaction value. The appraising officer has not questioned the price reflected on the invoice for the merchandise, and for the purposes of this decision it is understood that appraisement under transaction value is appropriate.

Related Persons

The Port of Los Angeles determined that Mercury is related to the seller Madison on the basis of having a common officer and having a common shareholder. Having reviewed the circumstances, including Mercury’s representations, this office finds that the entities are related pursuant to section 402(g)(1). Here, the presence of a common officer in the two entities is strongly suggestive of a relationship pursuant to §402(g)(1)(C), and Customs previously has found two companies sharing a common board member to be related. See, HRL 546583 (December 2, 1997). Also, pursuant to §402(g)(1)(F), ownership or control of five percent or more of voting stock or shares renders such an owner related to the entity owned. In this instance at least one member of the family group controlling Mercury appears to be related by reason of share ownership to both Mercury and Madison. It thus could be concluded that this renders Mercury and Madison related.

In our view the clearly applicable test of relatedness in this case is that set forth in §402(g)(1)(G), which provides that

[T]wo or more persons directly or indirectly controlling, controlled by, or under common control with, any person[.]
are related. Mercury is controlled by a family shareholding group. Approximately 60 percent of the shares in Madison are held either by Mercury shareholders or employees – 42 percent by a single member of the Mercury family group and 18 percent by two Mercury executives. The fact that a vice president of Mercury serves as the treasurer of Madison serves to emphasize the degree of Mercury management’s involvement in Madison. Under these facts, a finding under §402(g)(1)(G) that Madison and Mercury are under the common control of the Mercury ownership group is warranted.

Commissions

Buying commissions are fees paid by an importer to his agent for the service of representing him abroad in the purchase of the goods being appraised. Although selling commissions are specifically included in the appraised value of the merchandise, bona fide buying commissions are not added to the price actually paid or payable. Pier 1 Imports, Inc. v. United States, 708 F. Supp. 351, 13 CIT 161, 164 (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, 681 F. Supp. 875,878, 12 CIT 133, 136 (1988). The importer, however, 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, Inc, supra., New Trends, Inc. v. United States, 10 CIT 637, 645 F. Supp. 957 (1986); Pier 1 Imports, Inc, supra.

Dolgen executed a buying agency agreement with Mercury following the initiation this Protest. As such, that buying agency agreement is without effect with respect to this decision. However, while the existence of a buying agency agreement lends support to a claim that a bona fide buying agency relationship exists, the absence of one is not fatal to such a claim, provided the available evidence, taken as a whole, establishes the existence of such a relationship. Mitsui & Co. (U.S.A.), Inc. v. United States, 66 Cust. Ct. 553, R.D. 11740 (1971); and Rosenthal-Netter, Inc., supra.

Whether the relationship is one of agent-principal is to be determined by the substance of the transaction, not by the labels the parties attach to it. Pier 1 Imports, Inc. v. U.S., supra, and Monarch Luggage Co. v. U.S., 715 F. Supp. 1115, 13 CIT 523 (1989). The existence of a bona fide buying commission depends upon the relevant factors of the individual case. J.C. Penney Purchasing Corp. v. United States, 80 Cust. Ct. 84, 95, C.D. 4741, 451 F. Supp. 973 (1978). Although no single factor is determinative, the primary consideration is the right of the principal to control the agent's conduct with respect to those matters entrusted to the agent. Jay-Arr Slimwear, Pier 1 Imports, Inc., J.C. Penney, and Rosenthal-Netter, supra. In addition, the courts have examined such factors as whether the purported agent's actions were primarily for the benefit of the principal; whether the agent was responsible for the shipping and handling and the costs thereof; whether the language used in the commercial invoices was consistent with a principal-agent relationship; whether the agent bore the risk of loss for damaged, lost or defective merchandise; and whether the agent was financially detached from the manufacturer of the merchandise. The degree of discretion granted the agent is a further consideration. New Trends, 645 F. Supp. 957. As such, the existence of a bona fide buying commission is to be determined by the totality of the circumstances. See, Headquarters Ruling Letter (HRL) 542141 dated September 29, 1990 (TAA No.7).

It is evident that Mercury performed some of the duties traditionally associated with a bona fide buying agent in the immediate situation. However, Customs must examine all relevant factors in deciding whether a bona fide agency relationship exists. See J.C. Penney, 80 Cust.Ct. at 96, 451 F.Supp. at 983-84. Here, where the agent is related within the meaning of §402(g)(1) to the seller, the importer has a higher burden to establish that the agency arrangement is entirely under the control of the importer.

This office finds that the evidence submitted is insufficient to establish the existence of a bona fide buying agency relationship between the importer Dolgen and the purported agent Mercury. The submissions do not include any communications from Dolgen directing Mercury to purchase merchandise on its behalf. Further, the documentation lacks concrete indication that in any particular instance Dolgen instructed Mercury how to conduct its agency on behalf of the principal. It is therefore not possible to evaluate Dolgen’s claims that Mercury performed the duties of an agent as set forth in the judicial authorities cited above or as set forth in the post-protest buying agency agreement. Taken together with our finding that Mercury and the seller Madison are related, we cannot under these circumstances find that the importer has met its burden to show a buying agency relationship.

The commissions paid to Mercury, inasmuch at they are payments made to a person related to the seller that have not been shown to be bona fide buying commissions, are considered to be for the benefit of the seller and part of the price actually paid or payable for the subject merchandise. See, §402(b)(4)(A).

Royalty Payments

As stated above, 19 U.S.C. §1401a(b)(1)(D) provides, in pertinent part, that 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 is to be added to the price actually paid or payable for the merchandise. The Statement of Administrative Action (SAA), which forms part of the legislative history of the TAA, provides that:

Additions for royalties and license fees will be limited to those that the buyer is required to pay, directly or indirectly, as a condition of sale of the imported merchandise for exportation to the United States. In this regard, royalties and license fees for patents covering processes to manufacture the imported merchandise will generally be dutiable.... However, the dutiable status of royalties and license fees paid by the buyer must be determined on a case-by-case basis and will ultimately depend on: (i) whether the buyer was required to pay them as a condition of sale of the imported merchandise for exportation to the United States; and (ii) to whom and under what circumstances they were paid.... [A]n addition will be made for any royalty or license fee paid by the buyer to the seller, unless the buyer can establish that such payment is distinct from the price actually paid or payable for the imported merchandise, and was not a condition of the sale of the imported merchandise for exportation to the United States.

Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 48-49.

As the language of the SAA makes clear, an addition will be made for any royalty or license fee paid by the buyer to the seller, unless the buyer can establish that such payment is distinct from the price actually paid or payable for the imported merchandise. Thus the first inquiry is whether the payments at issue are part of the price actually paid or payable for the imported merchandise.

Based on Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990), Customs presumes that all payments made by the buyer to the seller are part of the price actually paid or payable for imported merchandise. In Generra, the Court of Appeals held that the term “total payment” is all-inclusive and that "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." The court also stated:

Congress did not intend for the Customs Service to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, are for the merchandise or for something else. As we said in Moss Mfg. Co. v. United States, 896 F.2d 535, 539 (Fed. Cir.1990), the “straightforward approach [of section 1401a(b)] is no doubt intended to enhance the efficiency of Customs’ appraisal procedure; it would be frustrated were we to parse the statutory language in the manner, and require Customs to engage in the formidable fact-finding task, envisioned by [appellant].

Generra, 905 F.2d at 380 (brackets in original).

The presumption that all payments made by the buyer to the seller are part of the price actually paid or payable may be rebutted. In Chrysler Corporation v. United States, 17 CIT 1049 (1993), the Court of International Trade applied the standard in Generra and determined that certain shortfall and Special Application fees which the buyer paid to the seller were not a component of the price actually paid or payable for the imported merchandise. The Court found that the evidence established that these fees were independent and unrelated costs assessed because the buyer failed to purchase other products from the seller and not a component of the price of the imported engines.

Under the above rationale, the royalty payments at issue will not be considered part of the price actually paid or payable if the evidence clearly establishes that, like those in Chrysler, they are totally unrelated to the imported merchandise. The burden of establishing that the payments are totally unrelated to the imported merchandise rests with the importer. Generra, 905 F.2d at 380.

Using the analysis set forth in Generra and Chrysler, in HRL 545194 (September 13, 1995) Customs determined certain fees, characterized by the parties as license fees, to be part of the price actually paid or payable in a situation where the importer’s payments were made to the sellers or to parties related to the sellers. In that case, the seller’s invoices specifically indicated that the importer was to pay the royalty fees and the only agreements indicated that the fees were to be paid to one of the sellers.

Here, the evidence submitted is not sufficient to show that the payments are totally unrelated to the payments for the imported footwear.

Dolgen submitted for consideration certain trademark licensing agreements : one between licensor Chic by H.I.S. and licensee Mercury, and the other between licenser Dunlop Slazenger and Mercury. We consider it significant that Dolgen is not a party to either agreement, nor is it a sublicensee of Mercury. Under the Chic by H.I.S. agreement Mercury is prohibited from sublicensing. At least under that licensing agreement Dolgen may not even be considered as a sublicensee by oral agreement with Mercury.

We do not find linkage between the licensing agreements and Dolgen’s payments to Mercury. There is nothing in the record obligating Dolgen to make payments related to trademark rights. There are no undertakings by Mercury to remit Dolgen’s payments to the licensors. It is therefore inappropriate to conclude that Dolgen’s payments are subject to the licensing agreements, or even related to them. In the final analysis, we decline to consider these payments to be royalty payments at all; the explanation given for their purpose is unpersuasive.

It also will be recalled that the payments are based upon a percentage of the price paid by Dolgen to Mercury for each importation. In this regard the payments relate precisely to the sales for exportation of the merchandise, and have not been shown to relate in any way to the Spalding/Mercury licensing agreement. In other words, there is a stronger basis for Customs to conclude that the payments relate to the merchandise than for Customs to conclude that the payments relate to the post-importation exploitation of trademarks.

Notwithstanding the fact that the payments in question are identified as royalties, we conclude that they are actually part of the total payment for the imported merchandise. These payments to a party (Mercury) related to the seller (Madison) constitute indirect payments to the seller. See HRL 545194 and decisions cited therein.

Having concluded that the payments at issue are part of the price actually paid or payable for the imported merchandise, we do not address whether they could alternatively be considered royalties or proceeds under TAA §402(b)(1)(D) and (E).

Even if Big 5 could establish that these payments were royalties relating to rights to exploit the trademark in the licensed territory, trademark royalties paid to a party related to the seller are generally considered dutiable. See, e.g., HRL 545361 (July 20, 1995). The subject entries should be liquidated based on a transaction value that includes the “royalty” payments to Mercury.

Having concluded that the “royalty” payments are part of the price actually paid or payable, we find no need to analyze this issue by reference to the TAA provisions for royalties or proceeds.

As a final matter, this office has taken note of the Protestant’s claim that the instant situation is on all fours with HRL 544575 (January 31, 1991) with regard to agency commissions and royalty payments. This office does not consider the ruling cited to be controlling here. HRL 544575 was issued as a prospective ruling on the basis of the facts submitted by the requester; the instant protest takes account of facts submitted by the importer, Customs and counsel for Mercury. In HRL 544575, unlike here, Customs found a bona fide buying agency; here we find otherwise. Finally, in 544575 the importer was said to have been a sublicensee of certain distributorship and advertising rights, whereas here the weight of evidence is to the contrary. The importer is not a sublicensee, and there is insufficient enumeration of the rights that are being paid for. We therefore disagree with the Protestant that HRL 544575 requires any particular outcome in the instant protest with regard to agency or other payments.

Handling Charges

The appraising officer identified on the Dolgen purchase orders a 2 percent handling charge, and having no sufficient explanation of the purpose or disposition of this charge, considered it as includable in appraised value.

Dolgen upon application for further review states that the handling charge is an internal accounting device, and does not represent a payment to any other party. Dolgen draws attention to the fact that the handling charge does not appear on invoices submitted by Madison, Mercury or any other entity, but appears only on Dolgen’s purchase order. In particular, it can be observed from the representative letter of credit advice for the lead protest, which serves as proof of payment, that the handling charge was not included in the payment to Madison. We therefore accept Dolgen’s representation that the purpose of the charge is the tracking and equalization of landed costs, and that it does not reflect any payment to others. As such, it should not be included in the appraised value of the subject merchandise.

HOLDING:

This Protest should be denied In PART AND GRANTED IN PART.

In conformity with the foregoing, we find that the commissions paid by Dolgen to Mercury do not constitute bona fide buying commissions, but rather are payments made to a party related to the seller for the benefit of the seller. As such, the commissions are to be included in the transaction value of the imported merchandise.

We find that the “royalty” payments are part of the price actually paid or payable for the imported merchandise and, consequently, are to be included in the transaction value of the imported merchandise.

The handling charge is not to be included in the appraised value of the merchandise.

In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, this decision and the Customs Form 19 are to be mailed to the protestant no later than sixty days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision. Sixty days from the date of the decision, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Virginia L. Brown
Chief, Value Branch

Previous Ruling Next Ruling