HQ 547917 - Internal Advice Request 2000-2301-2565-1018 Price paid or payable, proceeds of sale; rebates; transaction value; selling commission - United States International Trade Commision Rulings

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HQ 547917

November 2, 2001

RR:IT:VA 547917 KDW

CATEGORY: VALUATION

Port Director
U.S. Customs Service
Attention: Pedro Martinez, Jr., CST 697
100 Los Indios Blvd., Box 800
Los Indios, TX 78567

RE: Internal Advice Request 2000-2301-2565-1018 Price paid or payable, proceeds of sale; rebates; transaction value; selling commission

Dear Port Director:

This is in response to your internal advice request dated July 19, 1998, concerning the importations to the United States of fabric rolls by Shason, Inc. In preparing our response we reviewed your submission and the prior disclosure letter of counsel for Shason, Inc. dated January 21, 1998. We regret the delay in response.

FACTS:

Shason, Inc. (“Shason”) imports fabric in rolls through the ports of Laredo and El Paso, Texas from Mexico. In preparation for a Compliance Assessment Review, Shason conducted an in-house review of its import transactions and reported to Customs that it made an additional payment in 1996 to its supplier, ******, S.A. de C.V. (“******”), and that it received a rebate in 1997. Shason states that it is not related to ******. In 1996, Shason entered into an agency agreement with ******. The agreement provides in paragraph 1 that Shason, Inc. will be the “EXCLUSIVE” sales agent in the United States.

Paragraph 2 of the agreement states that:

“[a]s long as Shason, Inc. reaches sales about ****** us dollars (U.S. $******) each calendar year, Shason, Inc. will be entitled to receive a net commission of **% of gross sales in the United States, but during the first and second year could be less than ******* US.”

In paragraph 5, the agreement states

“Shason and ****** will discuss pricing from time to time based upon estimated manufacturing costs, estimated sales and sales volume. ****** will invoice Shason tentatively based on the agreed sales prices which will be likely to achieve a **% commission. Shason, Inc. will review its book every year and resubmittance should be made annually, no later than the end of November. If adjustments need to be made, these adjustments will be made so as to insure that Shason should be assured to receive a **% commission. Shason will provide a separate account book for ******. ****** can review Shason books related to ****** account at any time at its own cost. Otherwise with mutual trust Shason will adjust its book to generate a **% profit.” Sic.

The agreement also indicates that ****** bears risks associated with unsalable or defective merchandise, late or nonpayments. For example, the agreement states in paragraph 6, that “[b]y no means will Shason accept any credit risk for uncollectable amount.” In paragraph 9, the agreement provides that “Shason will not be responsible for inventory and/or merchandise left in our warehouse.” Additionally, the agreement states that ****** is responsible for its own advertising, and promotions in paragraphs 10 and 11.

Counsel for Shason states in its January 21, 1998, letter that, although the agreement refers to the company as a sales agent and states that it will receive a “commission”, Shason actually takes title and risk of loss for the merchandise imported remitting payment for each shipment. Counsel explains that the agreement is inartfully drafted and that Shason is guaranteed a **% profit on the resale of fabric from ******. In years where more sales yield more than **% net profit, Shason remits the excess profit back to Texitivision. In years when sales yield less than **% net profit, ****** will rebate to Shason the difference between the profit made and **%. The adjustments are calculated in November of each year.

Shason claims that the adjustments that were actually made pursuant to the agreement are relatively miniscule and thus do not affect the price as entered. In support of this argument, Shason directs Customs to look at the prices charged by its competitors. “Shason believes that the declared values on its invoices from ****** were either the same or higher than the prices charged by other Mexican mills for identical or similar”(sic.)products.

You find that increases and but not decreases based on the **% guarantee to Shason are proper adjustments to the price actually paid or payable.

ISSUES:

Does the transaction between ****** and Shason constitute a bona fide sale? What is the appropriate basis of appraisement for the imported fabric?

LAW AND ANALYSIS:

As you are aware, 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 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 certain enumerated statutory additions. 19 U.S.C. § 1401a(b)(1). The statutory additions include any selling commissions incurred by the buyer with respect to the imported merchandise and any the proceeds of any subsequent resale, disposal or use of the imported merchandise that accrue to the seller. (19 U.S.C. § 1401a(b)(1)(B) and (E))

A prerequisite to finding a transaction value acceptable is the finding that a bona fide sale for exportation to the United States has occurred. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit found that the term “sold” for purposes of 19 U.S.C. §1401a(b)(1) means a transfer of title from one party to another for consideration. (citing J.L. Wood v. United States, 505 F.2d 1400 (CCPA 1974)) However, several factors may indicate whether a bona fide sale occurs between a buyer and seller. In making its determination as to whether property or ownership has been transferred, Customs considers whether the buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, Customs may examine whether the buyer paid for the goods and the payments are linked to specific importations of merchandise, the terms of sale, and whether the roles of the parties indicate that they are functioning as buyer and seller. See HRLs 545705 dated January 27, 1995, 546142 dated November 29, 1996, and 546225 dated April 14, 1997.

In this case, we find that ****** never transfers ownership of the fabric to Shason. Rather, the agreement makes it clear that Shason is to act as ******’s agent in the sale to the U.S. customer. First, the agreement clearly states that Shason is a “sales agent” and is to receive a “commission”. Moreover, according to the agreement, Shason does not ever assume the risk of loss for the fabric. The agreement between the parties indicates that loss due to nonpayment or late payment by customers in the United States is born by ******. (paragraphs 4 and 6) The agreement also indicates that Shason is not responsible for unsalable or defective merchandise (paragraph 3, 9 and 13). While we recognize that the text of the agreement contains numerous grammatical errors, we believe that the functions of the parties bear out the relationship and indicate an agency relationship rather than a sale.

In Dorf International, Inc., et al. v. United States, 61 Cust. Ct. 604; 291 F. Supp. 690 (1968), the Court recognized that it is consistent with an agency relationship that the agent was required to pay the manufacturer for products shipped to the United States whether or not the agent had been paid by the U.S. customers. Further, the Court in Dorf recognized that it is consistent with an agency relation that the agent paid the cost of transportation from the factory to the port of entry, selected the customhouse broker who made the customs entry and paid the estimated customs duties. The Court noted that "[t]he expense of this is of course covered in the amount of * * * [its] fixed commission." Id. citing United States v. General Electric Co., 272 U.S. at 484. and C.B.S. Business Equipment Corp. v. Underwood Corporation, 240 F.Supp. at 421. While Dorf was decided based on the old valuation law using export values, the factors of agency remain unchanged.

Similarly here, it is consistent with the agency arrangement that Shason paid for merchandise shipped to it, and that it paid the costs of transportation and importation into the United States. Further, although it appears, based on the terms of sale “f.o.b. Mexico City” stated on the invoice, that Shason may take title to the fabric, the mere taking of title to merchandise does not preclude a finding that Shason was acting as an agent. Rather, the “total factual context” must be considered. J.C. Penney Purchasing Corp. v. United States, 80 Cust. Ct. 84; 451 F.Supp. 973 (1978); see also Mitsui &Co.(U.S.A.), Inc. v. United States, 66 Cust. Ct. 553 (1971). Based on the functions of the parties as delineated in the agreement, the position of this office is that Shason acts as a selling agent for ****** in sales to the customers in the United States.

Accordingly, the imported merchandise should be appraised using transaction value based on the price actually paid or payable by the U.S. customer. Since that price is presumed to include Shason’s **% selling commission, no addition or adjustment to the price actually paid or payable is warranted under 19 U.S.C. 1401a(b)(1)(B) for that amount.

HOLDING:

Based on the information submitted, no bona fide sale occurs between Shason and ******. Accordingly, transaction value based on the price actually paid or payable by the U.S. Customer is the appropriate basis of appraisement under 19 U.S.C. § 1401a(b).

This decision should be mailed by your office to the party requesting internal advice no later than sixty days from the date of this letter. On that date the Office of Regulations & 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,

Virginia L. Brown
Chief, Value Branch

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