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HQ 548199

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March 19, 2003

RR:IT:VA 548199 DCC

CATEGORY: VALUATION

Anthony Gonzalez
U.S. Customs Service
Port of Corpus Christi
555 North Carancahua Street
Suite 570
Corpus Christi, TX 78401

RE: Request for Internal Advice; Related Party Service Agreement Fees

Dear Mr. Gonzalez:

This is in response to your request for internal advice forwarded by your office on September 5, 2002, concerning the treatment of certain consulting, sourcing, and logistical fees paid by [  ], the “Importer,” to [  ], the “Middleman.”

In addition to your request, we received one submission from Miller & Chevalier, Counsel for the Importer, dated August 21, 2002. We did not receive comments from your office or the Customs Management Center. On November 14, 2002, we met with Counsel to discuss the internal advice request in detail.

Business proprietary information furnished in connection with the request will be accorded confidential treatment. Such information is designated by brackets, and will be redacted from the public version of this letter.

Facts:

The Importer operates petrochemical refining complexes in [   ], and [   ]. The Importer is also engaged in refined products marketing, chemicals trading, and crude oil supply. The Middleman is a global trader of petroleum products and provides various trading, inventory and risk management services for crude oil, refined products, metals, and other commodities. The Middleman is not engaged in the actual production of petroleum products. Both the Importer and the Middleman are wholly-owned subsidiaries of [ ], the “Parent.” All three companies are headquartered in [   ]. In January 2002, the

Parent divided a former business group, [   ], into two companies to create the Importer and Middleman.

The Middleman and Importer entered into seven product-specific “Supply and Marketing Agreements, the “Agreements,” that cover purchases of crude oil, gasoline blending components, vacuum gas oil and straight run fuel oil, naphtha, fuel oil cutter, refined products, and miscellaneous products. With the exception of optimization services, which are only covered by the crude oil agreement, the terms of all seven agreements are similar.

The Middleman is the Importer’s sole supplier of crude oil, except in cases when the Middleman purchases oil from certain areas not covered by the Agreements. Under the Agreements, the Importer may purchase petroleum products from the Middleman under one of two types of transactions: the Cost Intent Program and the Market Price Program.

For products purchased under the Cost Intent Program, the Importer declares its intent to purchase merchandise before the Middleman executes an agreement to purchase petroleum on behalf of the Importer. Under the Market Price Program, the Middleman sells merchandise to the Importer from its own inventory of petroleum products. For 2002, approximately 70% - 80% of the merchandise was supplied under the Cost Intent Program and the Market Price Program covered approximately 20% - 30% of the merchandise, by volume.

Also under the terms of the Agreements, the Middleman provides a range of supply and marketing services to the Importer in exchange for a flat annual fee paid in equal monthly installments. For crude oil products, the Middleman also provides “optimization services.” According to Counsel, optimization services represent use of the Middleman’s expertise and trading capability to maximize the profitability of the Importer’s refinery operations based on the Importer’s supply requirements.

The Agreements also cover “inventory position management” services. This service entails management of the Importer’s product inventory levels in order to maximize the Importer’s profit under alternative market conditions. According to Counsel’s submission, “the intent of these services is to manage the short term builds and draws of inventory relative to normal operating inventory, and the price risk that these builds and draws create.”

In addition to the services described above, the Middleman agrees to provide “movement services, scheduling, and inspections.” Movement services include ship chartering, loss control, marine services, cargo operations and consulting services. Under the Agreements, the Middleman also arranges for third party inspection and analysis of product and provides scheduling for pipeline movement of oil. In exchange for these services, under the crude oil agreement, the Importer pays the Middleman a flat fee of [   ] per year for marine transportation services, and [   ] for other services, the “Service Fee.”

Because the appraisement of merchandise depends on the structure of the commercial transaction we analyze the treatment of the Service Fees for customs valuation purposes separately under the Cost Intent Program and the Market Price Program.

Issues:

Whether, under the Cost Intent Program, Service Fees paid by the Importer to the Middleman for marketing and supply services should be included in the transaction value of the merchandise for customs valuation purposes; and

Whether, under the Market Price Program, Service Fees paid by the Importer to the Middleman for marketing and supply services should be included in the transaction value of the merchandise for customs valuation purposes.

Law and 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, codified at 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 enumerated statutory additions. 19 U.S.C. § 1401a(b)(1).

Section 402(b)(4) of the TAA defines the term “price actually paid or payable” as, “the total payment (whether direct or indirect . . .) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.” 19 U.S.C. § 1401a(b)(4). The TAA also requires adjustments to the price actually paid or payable to determine the transaction value of the merchandise. The statutory additions include packing costs, selling commissions, assists, royalties or license fees, and the proceeds of any subsequent resale that accrue to the seller. 19 U.S.C. § 1401a(b)(1).

In addition, the statute authorizes the exclusion of certain expenses including the cost of construction, erection, assembly, or maintenance of the merchandise after importation into the United States; transportation of merchandise after importation; customs duties and other Federal taxes. 19 U.S.C. § 1401a(b)(3). The statute also defines the term price actually paid or payable to exclude the cost of “transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States.” 19 U.S.C. § 1401a(b)(4)(A).

Transaction value is only acceptable if the buyer and seller are not related, or if related, the circumstances of sale indicate that the relationship did not influence the price actually paid or payable, or the transaction value approximates certain test values. 19 U.S.C. § 1401a(b)(2)(A)-(B). Because we are not ruling on the acceptability of the price and the scope of your request concerns only the treatment of certain payments by the Importer to the Middleman, we assume for purposes of this ruling that transaction value is acceptable under the circumstances. In addition, we focus on the fees paid for services other than movement services, which are clearly incident to the international shipment under 19 U.S.C. § 1401a(b)(4)(A) and therefore not included in the transaction value of the merchandise.

Service Fees under the Cost Intent Program

Under the Cost Intent Program, the Importer declares its intent to purchase a certain type of petroleum products before the Middleman executes an agreement to purchase the products on behalf of the Importer from a third party. In this case, the price paid by the Importer is the delivered transfer price of the petroleum, which is defined by the Agreement as the Middleman’s actual cost plus actual freight, deadfreight and demurrage costs, insurance, gravity adjustments, intransit loss and risk of contamination, and execution costs. For petroleum purchased under the Cost Intent buying program, we analyze the treatment of the Service Fees as commissions.

While selling commissions are added in the price actually paid or payable, as a general matter, bona fide buying commissions are not. See Pier 1 Imports, Inc. v. United States, 708 F.Supp. 351 (Ct. Int’l Trade 1989). The existence of a bona fide buying commission depends upon the relevant factors of the individual case. See Rosenthal-Netter, Inc., Plaintiff v. United States, 679 F. Supp. 21 (Ct. Int’l Trade 1988) (“[T]he Court must examine all relevant factors in deciding whether a bona fide agency relationship exists.” Rosenthal-Netter, 679 F. Supp. at 23).

In Rosenthal-Netter, the CIT listed several factors for analyzing a agency relationship including: “the right of the principal to control the agent's conduct; the transaction documents; whether the importer could have purchased directly from the manufacturers without employing an agent; whether the intermediary was operating an independent business, primarily for its own benefit; and, the existence of a buying agency agreement.” Rosenthal-Netter, 679 F. Supp. at 23. Of these factors, Rosenthal-Netter gives greatest weight to the ability of the principal to control the agent. See id. (“The primary consideration is the ‘right of the principal to control the agent's conduct with respect to the matters entrusted to him.’” (quoting J.C. Penny Purchasing Corp. v. United States, 451 F. Supp. 973, 983 (Cust. Ct. 1978)).

Based on the information presented we determine that the Middleman acts as a bona fide agent when the Importer purchases petroleum products under the Cost Intent Program. Under the Agreement, the Importer provides the Middleman with a monthly slate of petroleum products that the Middleman is expected to supply for the Importer’s benefit. The Importer, however, retains authority to approve purchases made by the Middleman on the Importer’s behalf. In addition, the Agreement explicitly states that the Importer retains sole discretion to determine the quantity of merchandise to be supplied by the Middleman. The right of the Importer to control the Middleman under the Agreement indicates that the Middleman is an agent of the Importer. Furthermore, the intent of the services covered by the Agreement—including optimization, inventory position management, and risk management—is to allow the Importer to obtain petroleum products on the most favorable terms possible. The provision of these services, as well as the nature of the relationship between the parties, is consistent with a buying agency relationship and therefore supports our determination that the Middleman is a bona fide buying agent of the Importer.

Service Fees under the Market Price Program

Under the Market Price Program, the Importer purchases products from the Middleman’s contract positions for future deliveries of petroleum. In these transactions, the Importer’s price is the market price—as determined by the Gulf Coast market price—plus amounts for brokerage fees, freight, insurance, and any other direct costs that the Middleman would receive when selling to a third party. When the Importer purchases petroleum under the Market Price Program the Middleman acts as a buyer and seller rather than an agent of the Importer. For these transactions, therefore, we analyze whether the Service Fees are payments that should be part of, or added to, the price actually paid or payable for the merchandise.

Counsel argues that because the Service Fees are not among the five enumerated statutory additions to the price actually paid or payable, there is no legal authority to include the payments in the transaction value of the merchandise. We disagree.

Although the customs valuation statute and regulations address many of the additional charges that importers sometimes pay sellers, some payments are not specifically covered by law or regulation. The mere absence of a charge from the statutory additions listed in 19 U.S.C. § 1401a(b)(1), however, does not mean that such charges cannot be considered part of the price actually paid or payable for the merchandise. The Court of Appeals for the Federal Circuit addressed this issue when it considered the treatment of payments for quota paid to a seller in Generra Sportswear Co. v. United States, 905 F.2d 377 (CAFC 1990). The court noted that, “[B]ecause section 1401a(b) does not precisely address whether or not quota payments may be included in transaction value, we determine whether the appraisal was based on a permissible construction of the statute.” Id. at 379 (concluding quota payments may be included in the transaction value of the merchandise as part of the price actually paid or payable).

Similarly, the fact that a particular charge is not among the listed exclusions in the customs value statute does not mean that such payments must be included in the transaction value. The Court of International Trade considered this situation in Tikal Distrib. Corp. v. United States, 93 F.Supp. 2d 1269 (Ct. Int’l Trade 2000), when it addressed the treatment of payments for exclusivity rights. The CIT noted, “[Simply] because the particular additional payments are not expressly excluded, it does not automatically follow that such payments are part of the price actually paid or payable for the imported goods, and thus includible in transaction value.” Id. at 1271 (upholding Customs’ determination that payments for exclusivity rights should be included in the transaction value).

The premise that transaction value may include payments not listed in the statute is further supported by the Federal Circuit’s broad interpretation of the term “total payment” in the context of customs valuation. In Luigi Bormioli Corp. v. United States, 304 F.3d 1362 (Fed. Cir. 2002), the Federal Circuit stated that, “We have interpreted the term ‘total payment’ in the ‘price actually paid or payable’ definition to be all inclusive.” Id. at 1367 (holding that transaction value may include a finance charge paid by the importer).

When an importer makes extra payments to the seller that are not specifically addressed by statute or regulation, Customs presumes that the payments are part of the value of the merchandise. As noted by the Federal Circuit, “[a] payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods.” Generra, 905 F.2d at 380. Although this presumption applies to unrelated party transactions, it is especially true for related party transactions.

The presumption that all payments to a seller are part of the transaction value may be rebutted by evidence that clearly establishes that the payments, like those in Chrysler Corp. v. United States, 17 CIT 1049 (1993), are completely unrelated to the imported merchandise. In Chrysler, the Court of International Trade held that a shortfall penalty payment paid by the importer to the seller is not part of the price actually paid or payable because the importer demonstrated that the payments were completely unrelated to the imported merchandise.

Counsel claims that the Service Fees are completely unrelated to the imported merchandise and therefore not part of the price actually paid or payable. Counsel notes that the Service Fees are paid in equal monthly installments and do not vary according to the value or volume of imported petroleum. In support of this claim, Counsel cites C.S.D. 83-40, 17 Cust. Bull. & Dec. 795 (Sept. 21, 1982) and HRL 547033 (June 25, 1998).

To determine whether a particular payment should be included in the transaction value of the merchandise, Customs analyzes the nexus between the payment and the imported merchandise. See VWP of America v. United States, 163 F.Supp. 2d 645, 652 (Ct. Int’l Trade 2001) (“Whether a particular [payment] provokes liability for customs duties depends upon its relevance to importation.”). In particular, Customs examines the nature of the additional payments, whether the amount of the payments varies according to the value or quantity of merchandise, the timing and frequency of the payments, and whether the payments add value to the imported goods.

Based on the evidence presented, for sales from the Middleman to the Importer under the Market Price Program, we determine that Service Fees are related to the imported merchandise and therefore part of the price actually paid or payable. Although Counsel asserts that the Service Fees are completely unrelated to the merchandise the evidence presented does not support this claim. The nature of the Service Fees indicates that the payments are intricately connected to the imported petroleum. Indeed, the procurement and inventory management services provided under the Agreement facilitate the Importer’s purchase and importation of the petroleum. Furthermore, the two rulings cited by Counsel may be distinguished from the present case because those rulings did not involve payments between related parties. Consequently, the Importer has not overcome the presumption that all payments to a seller are part of the transaction value. We therefore determine that the Service Fees are part of the price actually paid or payable and included in the transaction value of the imported merchandise.

Holding:

Based on information presented we determine that under the Cost Intent Program the Service Fees paid by the Importer to the Middleman are buying commissions made pursuant to a bona fide agency relationship. Therefore, pursuant to 19 U.S.C. 1401a(b)(1), these payments should not be included in the transaction value of the merchandise. Furthermore, under the Market Price Program, the Service Fees are properly included in the transaction value of the merchandise.

You are to mail this decision to the internal advice applicant no later than 60 days from the date of this letter. On that date, 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

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