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HQ W563617





September 14, 2007

CLA-02 OT:RR:CTF:VS W563617 HEF

CATEGORY: VALUATION

Port Director
U.S. Customs and Border Protection
Edward H. McNamara Terminal
2596 Worldgateway Place
Detroit, Michigan 48242

RE: Buying agency commissions; related parties; foreign inland freight

Dear Port Director:

This letter is in response to a request for internal advice dated October 27, 2006, on behalf of the importer, Marck and Associates, Inc. (“Marck”), concerning the dutiability of certain commissions paid by the importer to Niceton International Limited (“Niceton”) for services rendered in connection with the importation of stoneware cups and mugs. During our examination of the request for internal advice, a question arose as to whether Marck properly excluded foreign inland freight charges from the price actually paid or payable for the imported merchandise. Our response addresses both issues. A teleconference was held with counsel for the importer on June 19, 2007. In issuing this letter, we have given consideration to counsel’s additional submissions, dated February 16, 2007, and August 22, 2007.

FACTS:

Marck is an importer of ceramics and glassware that services the decorating industry. This request for internal advice concerns an entry made on December 15, 2005. Upon an initial review of the transaction, the import specialist questioned whether the commissions should be included in the value of the merchandise under 19 U.S.C. § 1401a. The import specialist believed that Marck, Niceton, and the manufacturer of the merchandise, Shandong Zibo Niceton-Marck Huaguang Ceramic Limited (“Shandong”), were related parties involved in a joint venture.

Marck’s website states that it entered into a joint venture with its primary ceramic supplier and formed Shandong in 2004. Marck & Associates, Inc., http://www.marckassoc.com/about.cfm (last visited November 1, 2006). In the request for internal advice, counsel for Marck disputes the existence of a joint venture between Niceton and Marck. Counsel asserts that Marck is not related to Niceton and that no joint venture agreements exist between the two parties. Regardless of whether a joint venture exists between the parties, Marck does own a non-controlling five percent interest in Shandong. Nonetheless, counsel contends that Marck’s ownership interest in Shandong does not allow it to exercise any operational direction or restraint over Shandong, nor does it affect the price paid or payable for the subject merchandise.

Niceton also holds a non-controlling thirty-eight percent interest in Shandong. Counsel for Marck contends, however, that Niceton is financially detached from Shandong with respect to the commissions it receives from Marck. To this end, counsel asserts that Niceton does not share any profit, loss, or commission with Shandong, nor does Niceton receive any remuneration from Shandong with respect to the transactions conducted on Marck’s behalf.

Counsel advises that Marck ordered merchandise from various manufacturers through Niceton. Although no formal agency agreement existed between Marck and Niceton at the time of the transactions at issue, counsel asserts that Niceton performed the activities of a buying agent on Marck’s behalf. Counsel states that these activities included negotiating favorable pricing, visiting manufacturers, obtaining samples, purchasing merchandise at its instruction, surveying potential markets, assisting with financial arrangements, shipping and inspecting merchandise for quality control, directing processes for defective merchandise, and preparing all necessary shipping and customs documents. In the request for internal advice, counsel states that in exchange for these services, Marck paid Niceton a commission of ten percent of the “F.O.B. plant unit price” of the merchandise. We note, however, that the invoices from Shandong to Niceton contain the term of sale “F.O.B. Qingdao.” The invoice from Niceton to Marck also contains the term of sale “F.O.B. Qingdao.” In addition to the “F.O.B. Qingdao” price, Niceton’s invoice also specifies an “ex-factory total amount.” This amount is calculated on the invoice by subtracting from the “F.O.B. Qingdao” subtotal an amount for foreign inland freight charges.

Counsel contends that Marck exercised control over Niceton throughout the transactions in question and provided the following details of how the parties generally conducted business. To initiate a transaction, Marck submitted a “replenishment order” to Niceton to direct production of the items listed on the order. Then, Niceton arranged for the purchase of the merchandise from Shandong and other factories based on Marck’s instruction. For the transactions at issue, counsel states that shipment of the merchandise was provided by the seller’s own conveyance to a reload warehouse in Qingdao. As merchandise was delivered to the reload warehouse, Niceton advised Marck via electronic reports which articles were completed. Marck then sent instruction to Niceton as to which articles should be shipped and the time frame for shipping. After Marck confirmed its decisions, Niceton arranged the export shipment based on Marck’s directions. Counsel attests that Marck’s purchase orders were generated at the same unit pricing as the replenishment order, but the purchase orders were specific to the items actually shipped. After the containers were loaded at the warehouse, Niceton issued an invoice to Marck. With respect to the transactions at issue, the invoice submitted by counsel separately lists the subtotal “F.O.B. Qingdao” amount, an “ex-factory total” amount, and an amount representing a ten percent commission. The commission charge was calculated by multiplying the “F.O.B. Qingdao” amount by ten percent. Upon receipt of the invoice, Marck sent a wire transfer to Niceton to cover the “F.O.B. Qingdao” price to the factory and Niceton’s commission. Counsel advises that Marck paid all shipping and handling costs associated with the merchandise from the seller’s place of business to the United States. In addition, counsel states that Marck could have purchased the goods directly from the manufacturer without using Niceton as an agent.

In connection with the transactions at issue, the following documents were submitted:
copies of electronic communications between employees of Marck and Niceton, dated November 3, 2005 and November 5, 2005; a copy of a buying agency agreement between Marck and Niceton, signed on October 31, 2006; copies of Marck’s purchase orders to Niceton, dated November 30, 2005; a copy of Niceton’s invoice to Marck, dated November 23, 2005; copies of Shandong’s invoices to Niceton, dated November 14, 2005; a copy of a wire transfer confirmation, dated March 23, 2006, listing, per Marck’s instruction, Niceton as the beneficiary; a copy of a wire transfer confirmation, dated April 18, 2006, listing per Niceton’s instruction, Shandong as the beneficiary; a list of all the contracts for which Niceton remitted payment to Shandong in the April 18, 2006 wire transfer; a copy of the entry summary, dated December 15, 2006; a copy of an invoice from Niceton to Marck, dated November 23, 2005, listing foreign inland freight charges for the imported merchandise; and a copy of an internal document entitled “Customs and FDA.”

ISSUES:

Whether the commission paid to Niceton constituted a bona fide buying commission such that it is not included in the transaction value of the imported merchandise.

Whether the amount for foreign inland freight may be excluded from the price actually paid or payable.

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). 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). This letter does not address the acceptability of the prices between the related parties. We will assume, for the purposes of this response, that transaction value is acceptable.

Commissions

Selling commissions incurred by the buyer with respect to the imported merchandise are statutory additions to transaction value. See 19 U.S.C. § 1401a(b)(1)(B). Bona fide buying commissions, however, are not identified as additions to the price actually paid or payable, and the courts have construed that they are not an element to be included in transaction value. See Pier 1 Imports, Inc. v. United States¸13 Ct. Int’l Trade 161, 164, 708 F. Supp. 351, 354 (1989); Rosenthal-Netter, Inc. v. United States, 12 Ct. Int’l Trade 77, 78, 679 F. Supp. 21, 23 (1988), aff’d, 861 F.2d 261 (Fed. Cir. 1988); and Jay-Arr Slimwear, Inc. v. United States, 12 Ct. Int’l Trade 133, 136, 681 F. Supp. 875, 878 (1988). The importer has the burden of proving that a bona fide agency relationship exists and that payments to the agent constitute bona fide buying commissions. Pier 1 Imports, Inc., 13 Ct. Int’l Trade at 164; Rosenthal-Netter, Inc., 12 Ct. Int’l Trade at 78; and New Trends, Inc. v. United States, 10 Ct. Int’l Trade 637, 640, 645 F. Supp. 957, 960 (1986).

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, 983 (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. Id.; Pier 1 Imports, Inc., 13 Ct. Int’l Trade at 164; Rosenthal-Netter, Inc., 12 Ct. Int’l Trade at 79; and Jay-Arr Slimwear, 12 Ct. Int’l Trade at 138. In addition, the courts have examined such factors as 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. See J.C. Penney Purchasing Corp., 80 Cust. Ct. at 95-98.

In determining whether a purported buying agent qualifies as a bona fide agent, it is also necessary to consider the relationship between the buying agent and the seller. Headquarters Ruling Letter (“HRL”) 548222, dated February 27, 2003. We note that Niceton and Shandong are related pursuant to 19 U.S.C. § 1401a(g)(1)(F), as Niceton holds thirty-eight percent of the voting stock or shares of Shandong. Nevertheless, the fact that profits realized by an agent may indirectly benefit the manufacturer does not in itself bar commissions from being non-dutiable. Bushnell International, Inc. v. United States, 60 C.C.P.A. 157; 161; 477 F.2d 1402, 1406 (1973). However, the circumstances surrounding transactions among related parties are subject to closer scrutiny in determining whether a commission is a bona fide buying commission. See HRL 544512, dated December 20, 1990; HRL 545176, dated June 28, 1993; and HRL 544895, dated July 22, 1992. In this regard, we also note that Marck and Shandong are related parties pursuant to 19 U.S.C. § 1401a(g)(1)(F), as Marck holds five percent of the voting stock or shares of Shandong.

The existence of a bona fide buying commission is to be determined by the totality of the circumstances. See HRL 542141, dated September 29, 1980 (TAA No. 7).

Marck executed a buying agency agreement with Niceton following the initiation of this request. As such, the 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, 558 (1971); and Rosenthal-Netter, Inc., 12 Ct. Int’l Trade at 83.

Despite the absence of an agency agreement at the time of the transactions in question, Marck submits that the services provided by Niceton were characteristic of those of a buying agent. These services included negotiating favorable pricing, visiting manufacturers, obtaining samples, purchasing merchandise at its instruction, surveying potential markets, assisting with financial arrangements, shipping and inspecting merchandise for quality control, directing processes for defective merchandise, and preparing necessary shipping and customs documents. These activities are consistent with that of a buying agent. See J.C. Penney Purchasing Corp., 80 Cust. Ct. at 96-97.

In finding the existence of a buying agency relationship, the court in J.C. Penney Purchasing Corp. stated that it attributed significance to the fact that the importer actually visited factories and participated in negotiations with the factory. Id. at 96. In this case, the only evidence presented regarding the importer’s contact with the manufacturer or the importer’s involvement in price negotiations with the manufacturer is Marck’s assertions that it had contact with the factories to the extent that it could directly purchase goods from Shandong, if so inclined, and that Niceton could not agree to Shandong’s pricing without its approval.

The e-mails between employees of Niceton and Marck indicate that Marck provided instruction to Niceton as to when certain merchandise should be released from the reload warehouse for shipment to various ports. Thus, Marck exercised some degree of control over Niceton during the shipping and handling phase of the transactions. The fact that Marck exhibited some form of control over Niceton suggests the existence of a bona fide buying agency arrangement.

Another factor to consider is the transaction documents. An invoice or other documentation from the actual foreign seller to the buying agent is required in order to establish that the agent is not a seller and to determine the price actually paid or payable to the seller. See HRL 544965, dated February 22, 1994. Marck submitted two invoices from the foreign seller for the shipments of merchandise. The invoices were issued to Niceton, but they also indicated that the merchandise would be transshipped to Detroit. The prices on the manufacturer’s invoices indicated the price actually paid or payable to the seller. In this case, the prices on the manufacturer’s invoices were identical to the itemized prices for the merchandise on Niceton’s invoices. Niceton’s invoice clearly displayed the commission as an addition to the price paid or payable to Shandong. In addition, Niceton’s invoice indicated that Shandong was the manufacturer of the merchandise.

Marck submitted a copy of a wire transfer it executed in favor of Niceton for an amount equal to the sum of the price of the merchandise, the commission, and the foreign inland freight charges. In New Trends, Inc., the court found that a similar arrangement was evidence negating the existence of a bona fide agency relationship. 10 Ct. Int’l Trade at 641-42. The court, however, noted that the importer failed to produce the method of payment to the manufacturer. Id. In the instant case, Marck also submitted a copy of a wire transfer in favor of Shandong, per Niceton’s instruction, as well as copies of internal documents specifying which contracts were covered by the wire transfer payment and the amount for each contract. Upon review of these documents, it appears that the seller received the correct amounts for the merchandise and that the commissions paid to Niceton did not inure to the benefit of Shandong. Consequently, based on the evidence provided, we find that the method of payment does not preclude the existence of a bona fide agency relationship. See HRL 548163, dated August 29, 2002.

As it is important to establish that the purported buying agent is not, in fact, an independent seller, the subject transactions must be evaluated for indications that the agent is selling on its own account to the importer of the merchandise. In this regard, the agent would typically not take title to the merchandise. J.C. Penney Purchasing Corp., 80 Cust. Ct. at 100. The assumption of title by a purported agent is one indication that it is performing as an independent buyer and seller, but does not in itself preclude a finding that a bona fide buying agency exists. Id. Moreover, an agent typically will not bear the risk of loss for imported merchandise. Rosenthal-Netter, 12 Ct. Int’l Trade at 83. Finally, another factor indicating that the purported agent may be an independent seller is whether the importer absorbs the costs of shipping and handling of the merchandise. New Trends, Inc., 10 Ct. Int’l Trade at 641. The transaction documents support Marck’s assertion that it paid all shipping and handling costs from the seller’s door to the U.S. location. Therefore, Niceton did not absorb the cost of shipping and handling of the merchandise. With respect to passage of title and risk of loss, Shandong’s invoices designate the term of sale as “F.O.B. Qingdao.” “F.O.B.” or “Free on Board” is a term of sale, which means that the “seller must deliver the goodsat the named port of shipment and in the manner customary at the port on board the vessel nominated by the buyer.” See Incoterms 2000, 50 (1999). Consequently, the seller assumes the risk of loss of or damage to the goods until the goods pass the ship’s rail at the named port of shipment. Id. The terms of sale on Niceton’s invoice to Marck are also “F.O.B. Qingdao.” Therefore, it appears that Niceton bore the risk of loss for the merchandise momentarily, if at all. It is also unclear from the evidence presented whether Niceton ever held title to the merchandise. In very limited circumstances, Customs and Border Protection (“CBP”) has found a bona fide agency to exist although the agent held title to and bore the risk of loss for the imported merchandise for a brief period of time. See HRL 545624, dated October 25, 1994; and HRL 544669, dated August 15, 1991. In both HRL 545624 and HRL 544669, CBP found that the totality of the circumstances demonstrated that the purported agent was not an independent seller. Based on the totality of evidence presented to CBP and the foregoing analysis, we find that a bona fide buying agency relationship existed between Marck and Niceton.

Accordingly, the commissions should not be included in the transaction value of the imported merchandise.

Foreign Inland Freight

The term “price actually paid or payable” is defined as:

[T]he 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 from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit, of the seller.

In the instant case, the terms of sale are “F.O.B. Qingdao.” With respect to foreign inland freight in sales other than ex-factory, section 152.103(a)(5)(ii), Customs Regulations (19 C.F.R. § 152.103(a)(5)(ii)), provides:

Sales other than ex-factory. As a general rule, in those situations where the price actually paid or payable for imported merchandise includes a charge for foreign inland freight, whether or not itemized separately on the invoices or other commercial documents, that charge will be part of the transaction value to the extent included in that price. However, charges for foreign inland freight and other services incident to the shipment of the merchandise to the United States may be considered incident to the international shipment of that merchandise within the meaning of § 152.102(f) if they are identified separately and they occur after the merchandise has been sold for export to the United States and placed with a carrier for through shipment to the United States.

Section 152.103(a)(5)(iii), Customs Regulations (19 C.F.R. § 152.103(a)(5)(iii), states:

Evidence of sale for export and placement for through shipment. A sale for export and placement for through shipment to the United States under paragraph (a)(5)(ii) of this section shall be established by means of a through bill of lading to be presented to the port director. Only in those situations where it clearly would be impossible to ship merchandise on a through bill of lading (e.g., shipments via the seller’s own conveyance) will other documentation satisfactory to the port director showing a sale for export to the United States and placement for through shipment to the United States be accepted in lieu of a through bill of lading.

In the instant case, counsel for Marck asserts that the shipments were via the seller’s own conveyance. In cases where the seller provides inland transportation via its own conveyance, rather than by a hired carrier, it is necessary to present documentary support in the specific case for consideration by the appropriate port director. See HRL 547074, dated September 17, 1999. In HRL 547074, we examined whether foreign inland freight charges could be excluded from the price actually paid or payable when the seller provides transportation via its own conveyances. In that case, the importer stated that it would be able to provide documentation that would clearly indicate the placement of the goods for transport through to the United States. In almost all instances, the importer stated that the merchandise would be designated for a particular end user in the United States, but, at a minimum, be consigned to a U.S. location. The importer stated that the documentation of costs incurred by the seller for such shipments could include internal time/distance/equipment usage/employee hour reports, accounting records for costs and expenses, or other similar documents. CBP ultimately held that the amounts for foreign inland freight may be excluded from the price actually paid or payable, assuming that appropriate documentary support exists and is provided to CBP. Moreover, CBP stated that the sufficiency of the evidence submitted concerning such costs would have to be considered on a case-by-case basis.

In All Channel Products v. United States, 16 Ct. Int’l Trade 169, 787 F. Supp. 1457 (1992), aff’d, 982 F.2d 513 (Fed. Cir. 1992), the court considered whether foreign inland freight charges could be deducted from the C.I.F. price of the imported merchandise. The court stated:

Without belaboring what is obvious from a reading of § 152.103(a)(5)(ii) and (iii), the amended regulations were intended to provide a tightly circumscribed exception to the “general rule” (i.e., that inland freight charges included in a CIF or other non-ex-factory sales price are dutiable) where the importer can satisfactorily document that the FIF charges were “incident to the international shipment of the merchandise.”

Customs has broad discretion in prescribing the forms of satisfactory documentation that foreign inland freight charges are “incident to the international shipment of the merchandise.”

Id. at 172-73.

In the instant case, Marck provided an invoice from its agent for foreign inland freight charges. In addition, a document entitled “Customs and FDA” was submitted. Counsel for Marck describes the “Customs and FDA” document as an “internal document.” The document categorizes the imported merchandise according to tariff classification and lists the price for the merchandise imported under each tariff number and the amount of commission charged for the imported merchandise under each tariff number. Counsel for Marck states that the foreign inland freight charges can be determined by subtracting the “Sum of TTL INVOICE LESS CFRT” line from the “Sum of TOTAL INVOICE $” line. We do not find these documents to be persuasive. Although counsel for Marck asserts that the seller provided transportation via its own conveyances, no documentation was provided from the seller to evidence the actual costs it incurred for the foreign inland freight.

Thus, based on the documentary evidence provided, Marck should not be permitted to deduct the foreign inland freight charges. However, in accordance with 19 C.F.R. § 152.103(a)(5)(iii), we note that the port director has the discretion to determine whether any further information submitted to the port on this issue is satisfactory to show a sale for export to the United States and placement for through shipment to the United States in lieu of a through bill of lading.

HOLDING

Based on the totality of the evidence presented, we find that the commissions paid by the importer to the alleged agent are bona fide buying commissions. As such, the commissions do not form part of the price actually paid or payable.

Based on the information provided with respect to the foreign inland freight charges, the foreign inland freight charges should be included in the price actually paid or payable for the imported merchandise. However, as noted above, the importer may provide further documentation satisfactory to the port director to justify the exclusion of these charges from the price actually paid or payable.

Please mail this decision to counsel for the internal advice applicant no later than sixty days from the date of this letter. Sixty days from the date of this letter, the Office of Regulations and Rulings will take steps to make this decision available to CBP personnel and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, and by means of the Freedom of Information Act as well as by other means of public distribution.

Sincerely,

Monika R. Brenner, Chief Valuation and Special Programs Branch


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