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HQ 545817

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October 25, 1995

R:IT:V 545817 er
CATEGORY: VALUATION

Port Director
JFK Airport

RE: Request for Internal Advice; IA 45/94; bona fide sale; selling commissions.

Dear Sir:

This is in response to your undated memorandum (file no. APP-3-K:C:A: GK) forwarding counsel's request for internal advice, dated March 15 and June 13, 1994, submitted on behalf of its client, Panshoes USA, Inc. ("Panshoes"). We regret the delay in responding.

FACTS:

Panshoes is a wholly-owned subsidiary of Calzaturificio Pancaldi S.P.A., ("the parent" or "Pancaldi") located in Italy. Panshoes acts as importer of record in all but a few instances and in all instances the parent is the manufacturer and seller of the imported merchandise.

The President of both the parent and Panshoes is Natalino Pancaldi. Panshoes and its parent also share an Executive Vice President named Stephano Pancaldi. Both President and Executive Vice President are domiciled in Italy. Panshoes has an another Executive Vice President named Thomas Chunovic who is domiciled in the U.S. Chunovic is not an officer of the parent/seller.

Transactions are initiated when Panshoes receives purchase orders from unrelated American customers. The customer letterhead purchase orders are addressed to the parent in care of Tasso. Tasso is described by the importer as a salesman for Panshoes. Purchase orders are received by Panshoes on customer letterhead. Purchase orders received by the parent reflect the price that the customer will pay, not the price Panshoes pays the parent. Copies of purchases orders were submitted.

For each transaction, the parent prepares two sets of invoices, copies of which were submitted with this request. One set is said to represent the transaction between Panshoes and the parent and is the invoice which is presented to Customs for duty purposes. In the upper left hand section of the invoice is a space labelled "agent". This space is filled in with the name of either "Panshoes" or "Our Fourth Generation". Our Fourth Generation is a subsidiary of Panshoes and is located in the same office as Panshoes. In either case, Panshoes acts as importer of record.

The second set of invoices prepared by the parent is said to represent the transaction between Panshoes and the U.S. customer. Panshoes' only input on this invoice is a handwritten date and an invoice number.

The terms of sale recorded on the invoices between the parent and Panshoes are C&F. The terms of sale recorded on the invoices between Panshoes and the U.S. customer are FOB JFK Airport. In an interview with your office on November 24, 1992, Mr. Chunovic stated that the terms of sale on the invoice between the parent and Panshoes should state FOB and that the invoice did not include freight. Statements to the same effect were made by Stephano Pancaldi during a meeting with Customs officials on August 3, 1993. A written agreement between the parent and Panshoes dated February 1, 1984, a copy of which was submitted, identifies the terms of sale between the parent and Panshoes as FOB Italian port of shipment. During a telephone conversation with an import specialist on August 4, 1994, Stephano Pancaldi claimed that the parent is responsible for the merchandise and has all risk for damage until the merchandise arrives at the U.S. customer's premises.

Prior to February 1, 1993, Mr. Chunovic received a seven percent (7%) commission from the parent based on the net sales of shoes in the United States. In February 1, 1993, by written agreement, this commission was divided into two portions, one part payable to Mr. Chunovic and the other part payable to J.J. Tal Limited. J.J. Tal Limited is a company owned by Mr. Chunovic and his wife and purportedly provides design consulting services.

Copies of the following documents were also submitted: Mr. Chunovic's affidavit dated April 8, 1994; auditor’s notes from meeting of August 3, 1993; debit note for international freight charges to be paid by Panshoes to the parent; report of interview of Mr. Chunovic on January 31, 1990, by two Import Specialists; price lists; report of interview of Mr. Chunovic on November 24, 1992, by two Import Specialists and National Import Specialist's Assistant; employment agreements dated December 21, 1988 and February 1, 1993 between Panshoes and Mr. Chunovic; letter agreements dated February 1, 1991 and 1993 between Pancaldi and Mr. Chunovic regarding payment of commissions; and design consulting agreement dated February 1, 1993, between Panshoes and J.J. Tal Limited.

A report, dated October 27, 1994, was received from the Chief, National Import Specialist Branch, New York Seaport, concurring with your position that the goods should be appraised based on the price actually paid or payable by the U.S. customer.

ISSUE:

Whether a bona fide sale occurs between Pancaldi and Panshoes? Whether certain commissions payable to Mr. Chunovic and J.J. Tal Limited constitute selling commissions?

LAW AND ANALYSIS:

We will assume that transaction value, the preferred method of appraisement, applies. Transaction value is defined in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA) (19 U.S.C. 1401a(b)), as "the price actually paid or payable for the merchandise when sold for exportation to the United States ...", plus certain statutory additions, including any selling commission incurred by the buyer with respect to the imported merchandise. (19 U.S.C. 1401a(b)(1)(B). In order for the merchandise to appraised based on the transaction between the parent and Panshoes, a bona fide sale for exportation must occur between these parties.

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.

Customs recognizes the term "sale," as described in J.L. Wood v. U.S., 62 CCPA 25, 33 C.A.D. 1139, 505 F.2d 1400, 1406 (1974), to be a transfer of property from one party to another for consideration. In ascertaining whether a bona fide sale has taken place between a purported buyer and seller of the imported merchandise, no single factor is determinative. Rather, the relationship is to be ascertained by an overall view of the entire situation, with the result in each governed by the facts and circumstances of the case itself. Dorf International, Inc. v. United States, 61 Cust. Ct. 604, A.R.D. 245 (1968). Also see, HRL 545709, dated May 12, 1995.

Several factors may indicate whether a bona fide sale exists between the purported buyer and seller. In determining whether property or ownership has been transferred, Customs considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, Customs may examine whether the purported buyer paid for the goods and whether in general the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. See, HRL 545709, supra.

In ascertaining whether the relationship of the parties to the transaction is that of a buyer-seller in which the parties maintain an independence in their dealings, as opposed to that of a principal-agent in which the former controls the actions of the latter, Customs will consider whether the potential buyer:
a. provided (or could provide) instructions to the seller;
b. was free to sell the items at any price he or she desired;
c. selected (or could select) his or her own customers without consulting the seller; and
d. could order the imported merchandise and have it delivered for his or her own inventory.

See, HRL 545709, supra.

Regarding assumption of risk of loss the evidence is contradictory. On the one hand the importer claims that risk of loss is borne by Panshoes from the time the goods are placed on board at the Italian port. In support of this claim, the importer points out that the terms of sale on the invoices between the parent and panshoes are C&F. However, during a telephone conversation with an import specialist on August 4, 1994, Stephano Pancaldi claimed that the parent is responsible for the merchandise and bears all risk for damage until the merchandise arrives at the U.S. customer's premises. Adding to the lack of clarity, a written agreement between the parent and Panshoes dated February 1, 1984, identifies the terms of sale between the parent and Panshoes as FOB Italy. It is customary in FOB shipment contracts for the buyer, at his own expense, to charter a vessel; however, in the instant case, the importer pays the parent for the amount of the freight charges in a separate payment and it is the parent who deals with the shipper. In sum the terms of sale are inconclusive with regard to risk of loss.

Regarding whether Panshoes provided, or could provide, instructions to the parent, no documents or other evidence were submitted which would reflect that Panshoes was in a position to provide instructions to the parent company. In fact, the purchase orders received by Panshoes from the U.S. customer are addressed, not to Panshoes, but to the parent corporation in care of Panshoes' "agent", Tasso. Moreover, the purchase orders forwarded to the parent by Panshoes reflect the price that the U.S. customer will pay, not the price Panshoes is supposed to pay the parent. In his affidavit, Mr. Chunovic claimed that the orders received from the U.S. customers are sent directly to the parent and that Panshoes does not rewrite purchase orders received from the U.S. customers before they are forwarded. Forwarding the original purchase order, according to Mr. Chunovic, accounts for why the price on the purchase orders sent to the parent reflects the price to be paid by the U.S. customer and not that to be paid by Panshoes. According to Mr. Chunovic, because of their "staff limitations and the fact that [they] are not automated in the preparation of [their] orders it would be necessary for [them] to rewrite all the orders ... This creates an unnecessary burden and therefore has not been done. (section 8)

You state that this assertion is untrue because, in fact, all purchase orders received by Panshoes on customer letterhead are rewritten by Panshoes and it is the rewritten orders that Panshoes sends to the parent. The rewritten prices are identical to those on the customer letterhead purchase orders. You submitted copies of the purchase orders sent to Panshoes by the U.S. customer as well as copies of the rewritten purchase orders forwarded to the parent. These purchase orders reveal that the purchase order received by Panshoes is indeed rewritten and that the prices on both purchase orders are the same. In light of the importer's failure to adequately explain these inconsistencies, we agree that the evidence presented fails to establish that Panshoes was acting as an independent buyer/reseller of the merchandise.

Other factors also support this conclusion. Regarding pricing determinations, the information submitted fails to demonstrate that Panshoes was in a position to set their own resale prices. In conversations with Customs, Stephano Pancaldi gave conflicting answers to questions posed by Customs officials regarding this issue. Specifically, you report that in a meeting on August 3, 1993, Mr. Pancaldi asserted that "Panshoes can mark up the prices to its customer at any percentage it chooses, without consulting [the parent]". But when asked who determines the prices between Pancaldi and Panshoes and the prices between Panshoes and the customer, he indicated that he is the one who makes such determinations based on the application of a formula. Mr. Pancaldi then demonstrated to Customs the exact formula he uses to calculate the prices between Panshoes and the customer. Under the circumstances you concluded, and we agree, that Pancaldi exercises control over all pricing aspects of the transaction.

The two invoices prepared by the parent also raise concerns. One invoice allegedly represents the transaction between Pancaldi and Panshoes. This is the invoice presented to Customs. In the upper left hand of this invoice a space labeled "agent" appears. The space is completed with the name of either "Panshoes" or its subsidiary. Counsel explains that the presence of the word "agent" is attributable to the fact that a pre-printed form is used by Pancaldi in connection with all of its sales, both with and without agents, worldwide. According to counsel, the presence of the C&F shipping terms take precedence over the pre-printed "agent" language and demonstrate that the transaction is a bona fide sale. As discussed above, we have determined that the shipping terms appearing on the invoices are inconclusive; therefore, we cannot determine that a sale has occurred between Pancaldi and Panshoes based on the written shipping terms appearing on the invoices. Moreover, as you point out, no acceptable explanation has been offered as to why the "agent" space is completed with reference to Panshoes or its subsidiary. As you note, and we agree, if Panshoes were not the agent the space next to the word "agent" would most probably be left blank, or the word "agent" would be crossed out.

It is not clear whether Panshoes selected, or could select, their own customers without consulting the seller. Nor can any guidance be sought on this matter by looking to when Panshoes' obligation to pay Pancaldi arises. In his affidavit Mr. Chunovic claims "in the event that an order is rejected by one of our customers or the customer fails to pay us for the shoes, Panshoes bears the full responsibility for any loss which is incurred as a result. Seller expects to be paid for all shoes which it ships to Panshoes regardless of whether Panshoes, in turn, receives payment from its customer and regardless of whether Panshoes is, in fact, able to sell the shoes which it imports." (section 10) You point out that this statement is in contradiction to statements Mr. Chunovic made during the course of two different meetings with five different import specialists. During the first of these meetings, which occurred on January 31, 1990, Mr. Chunovic was not able to provide proof of payment for a shipment that was imported over three months before. He claimed at that time that he paid the parent only upon the sale of the merchandise here in the U.S. He provided proof of payment for that shipment a month later. In the second meeting, which occurred on November 24, 1992, Mr. Chunovic claimed that if Panshoes didn't get paid, Panshoes would not pay the parent. Thus, the facts once again fail to support the contention that Panshoes could transact independently from the parent corporation.

Regarding whether Panshoes could order the imported merchandise and have it delivered for their own inventory you point out that in his affidavit Mr. Chunovic claims that when the goods are imported, they are "placed in a warehouse facility and over the course of time are delivered to our customers ... goods are not shipped directly by seller to a Panshoes customer here in the United States." (section 10) You state that this assertion is misleading because Panshoes does not have a warehouse and implies that Panshoes is taking physical possession of the merchandise that is held in inventory.

By your account, after the merchandise arrives at JFK Airport, it is moved from a container station to the Air Freight Warehouse, which is the distribution warehouse used by brokers servicing many clients. Merchandise rarely remains in the warehouse for more than a day or two. The parent designates which customers the cartons are destined for, and the customer makes arrangements for a trucker to pick up the merchandise at the distribution warehouse. Therefore, except for the rare occasion described below, you state that Panshoes does not take physical possession of the merchandise.

In his affidavit, Mr. Chunovic claims that Panshoes has an "in-stock program". (section 5) This is defined as a program in which Panshoes places orders with the parent for merchandise that has not been ordered by customers. Panshoes is to keep the merchandise in stock until they are able to find a customer for the merchandise. You state that this program was not in existence at the time the Customs Audit began. Until that time, Panshoes never sent an order to the parent unless it received an order from a customer. At the time of your submission, you assert that by Mr. Chunovic's own admission, the in-stock program made up a very small percentage of their total importations. Because Panshoes does not have a warehouse in which to store inventory and because the so-called in-stock program is so minimal, you believe, and we agree, that Panshoes has not demonstrated that they operate in an independent capacity from Pancaldi.

You additionally note that in his affidavit Mr. Chunovic claims that "there is no restriction on our purchasing products from other vendors/manufacturers. Seller exercises no control over from whom we purchase". (section 13) In actuality, you report, Panshoes has never dealt with any party except the parent. This factor, while not determinative, does detract from the claimed validity of a buyer/seller relationship, particularly when considered in light of the other information, discussed above.

In certain occasions the parent has dealt directly with U.S. customers. You state that this occurs when a customer is having financial problems. Nonetheless, even when the parent deals directly with customers, the parent remits to Messrs. Chunovic and Tasso the exact same commission amounts they receive when Panshoes acts as importer of record. In these instances, as conceded by counsel, the price at which the merchandise is entered is the price between the seller and the U.S. customer, with the commissions included within the price actually paid or payable.

Effective February 1, 1993, Mr. Chunovic, on behalf of J.J. Tal Limited, entered into design consulting agreements with both Pancaldi and Panshoes in which it was agreed that J.J. Tal Limited would receive a "design" commission in an amount equal to two and one third percent (2-1/3%) of the net sales on shoes sold in the U.S., whether Panshoes acts as importer of record or whether Pancaldi deals directly with the U.S. customers. J.J. Tal Limited is owned by Mr. Chunovic and his wife and purportedly offers design consulting services.

On February 1, 1993, Mr. Chunovic also signed a separate letter agreement with Panshoes in which it was agreed that Mr. Chunovic would receive a commission in an amount equal to four and two thirds (4-2/3%) of the net sales on shoes sold in the U.S. Effectively, the three new agreements simply split the seven percent (7%) commission which Mr. Chunovic had always been receiving on net sales of shoes, into two payments equalling the same seven percent (7%) on the net sales.

Indeed, whether any so-called design services were performed is in question as neither the design consulting agreement with the parent or Panshoes provides any details about the nature of the services to be performed by J.J. Tal Limited. The services are described only as "line building". Moreover, as you point out, because the parent is the only seller of the imported merchandise who would use the designs, it is your belief that any design services would be for the benefit of the parent/manufacturer, not Panshoes. In effect, the new arrangement whereby the commission is split in two does not alter the nature of the seven percent (7%) selling commission, which, to the extent it is incurred by the buyer with respect to the imported merchandise, will constitute part of transaction value pursuant to 19 U.S.C. 1401a(b)(1)(B).

HOLDING:

Based on the submitted facts and evidence, we find that there is not a bona fide sale between Panshoes and their parent corporation, Pancaldi. The imported merchandise, accordingly, should be appraised based on the price actually paid or payable by the U.S. customer. Pursuant to 19 U.S.C. 1401a(b)(1)(B), any selling commission beyond what is remitted in the price actually paid or payable will constitute part of transaction value.

Sincerely,

Acting Director
International Trade

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