Internal Advice Request 31/97; Nissho Iwai American Corp. v. U.S.; sale for exportation; dutiability of quota payments; dutiability of commission

HQ 547054 August 6, 1999 RR:IT:VA 547054 GOB CATEGORY: VALUATION Area Director Port of New York, JFK Airport U.S. Customs Service Building #77 Jamaica, NY 11430 RE: Internal Advice Request 31/97; Nissho Iwai American Corp. v. U.S.; sale for exportation; dutiability of quota payments; dutiability of commission Dear Sir: This in reply to your memorandum of September 23, 1997, received in this office on March 30, 1998, which forwarded the abovereferenced request for internal advice that arose in the context of an audit concerning Boys Industry, Inc. (“BII”). We regret the delay in responding. Although BII is no longer in business, we are advised that our response is necessary for loss of revenue calculations. FACTS: BII is an importer of men’s and boy’s casual sportswear. The transactions at issue involve BII and an unrelated trading company, Palmon (U.A.E.) Ltd. (“Palmon”). Counsel for BII states that Palmon is a middleman seller who contracts out the actual production of the merchandise to unrelated contractors. BII uses the services of Suez Trading Ltd. (“Suez”) to procure quota, to inspect the merchandise, and for other related services. Counsel for BII attached the agreement between BII and Suez to its submission and noted that BII terminated its relationship with Suez which is no longer is business. Notwithstanding the fact that both parties to the agreement are no longer in business, the agreement is relevant to certain of the issues involved herein. The agreement between BII and Suez provides in pertinent part as follows: ... Boy’s Industry appoints Suez Trading as their sole representative in the Gulf Region ... where S.T. agrees to work exclusively with B.I. in the U.S.A. ... Suez Trading will take full responsibility for: dealing in and purchasing Quota on behalf of B.I.; for all sample programmes and requirement fulfillment; Quality Control; timely delivery; and will negotiate for the keenest freight rates to the U.S.A. on behalf of B.I. S.T. will further take responsibility for controlling and developing new sourcing areas for B.I. and will use its best endeavors to arrange finance credit terms advantageous to B.I... It is hereby agreed that in return for its services, B.I. will pay S.T. a sum of 2% on its F.O.B. purchases from the Gulf Region... The agreement extended from January 1, 1993 through December 31, 1994 when it was to be “automatically renewed for [a] further period of 2 years upon mutual[ly] agreed terms and conditions.” The copy of the agreement provided does not contain the signature of the named BII official; the agreement was signed by Suez. Suez is not related to BII, Palmon, or any of the contractors who manufacture the merchandise. BII paid Suez a two percent fee plus $0.50 per garment quota charge. The quota charge was paid regardless of the cost of the actual quota, and was paid even if there was no quota applicable. Counsel states that this charge was paid in an effort to shift the risk of quota fluctuation and to fix BII’s costs. When BII ordered merchandise through Palmon, counsel states that Suez coordinated the shipping arrangements and the procurement of quota. With respect to the $0.50 per garment quota payment, this office examined one document which appears to be a bill from a manufacturer, Royal Readymade Garments Factory, to Suez referencing two order numbers and the corresponding quota charge of $0.50 per garment. With respect to the service fees that Suez receives from BII, counsel has submitted a letter from Suez detailing the arrangement. The letter states that Suez is retained by BII to source, identify, utilize, and contract suitable factories for BII. BII negotiates its own prices while Suez takes control over production quality, timely delivery, and purchasing applicable quota. The letter goes on to state that it was unfeasible to purchase quota when needed on an ad hoc basis since quota prices can vary dramatically during the year and that would make contracting for merchandise difficult since the costs could vary dramatically. In addition, the letter also states generally that Suez obtains quota by acting as an “unofficial quota broker.” Counsel also indicated that the quota provider is almost never the manufacturer of the goods and that when the manufacturer and quota provider are the same, BII will pay duty on the quota charge. Counsel states that since Palmon generally subcontracted the cut, make and trim operation of the imported garments, it has not always been able to accurately predict how many garments the subcontractors would have available at time of shipment. As a result, Palmon occasionally substituted alternative styles of garments of equal value. Counsel indicated that in a minor portion of BII’s transactions, the prices varied slightly and these variances were not reflected in the entry documents. Palmon performed a periodic reconciliation of the price discrepancies and Palmon treated the discrepancies as price adjustments. These adjustments were billed by debit notes. Counsel indicated that these undisclosed value adjustments were communicated to Customs in the context of a prior disclosure dated April 11, 1995. Counsel contends that the pricing discrepancies did not result in a duty underpayment because BII was entering merchandise at the price BII paid Palmon rather than the lower prices paid by Palmon to the unrelated subcontractors. According to counsel, at the audit exit conference Customs identified the following three areas as resulting in losses of revenue: (1) price adjustments - for 1993, totaled $300,562 in debit notes between Palmon and BII; (2) quota charges - Customs’ auditors determined that these quota charges were dutiable (counsel contends that it is Customs’ position that where the transfer of quota is illegal or unauthorized in the foreign country of export, such quota charges must be dutiable - in 1993, the amount determined was $749,816 and in 1994, the amount was $918,416); and (3) service fees - Customs determined that the 2% fee paid to Suez is dutiable (for 1993, the amount was $114,348 and for 1994, the amount was $174,616). With respect to the price adjustments, counsel contends that once Palmon receives an order from BII, Palmon will place a corresponding purchase order with a manufacturer. The Palmon order will state that the order is placed on behalf of BII and that the goods are destined for BII in the U.S. The garments are made to U.S. specifications which include the permanent placement in the garment of trade name labels and labels which indicate BII’s or their customer’s “RN” number. In addition, the garments possess quota documentation reflecting shipment to, and for, the U.S. market. Included in the materials your office submitted for our review was a letter from counsel dated March 26, 1997, in which arguments were made and commercial documents were attached in an effort to support appraisement at “the first sale,” the price between the manufacturer and Palmon. We reviewed a series of documents from several transactions. The following is a description of the documents for one of the transactions. 1. This document is on Palmon stationery and appears to be an order which is for BII. The document indicates order numbers, amounts, the manufacturer’s name (in this case, Azaiba Clothing Factory), and further indicates that the goods are shipped on the account and risk of BII. The invoiced amount is $58,857.75. The terms are F.O.B. U.S. 2. This document is a commercial invoice from Azaiba Clothing Factory to BII in the amount of $58,857.75. The invoice references the same order numbers as the first document. The terms are duty-paid. 3. This document is an invoice from Classique Enterprises Ltd. to BII. This document references the same order numbers and indicates that the merchandise indicated in the invoice was produced by Azaiba Clothing Factory on behalf of Classique Enterprises Ltd. The invoiced amount is for $58,857.75 and the terms are F.O.B. U.S. The goods are to be shipped from Oman to New York. 4. This document is a purchase order from BII which references the same order number that appears on the other documents. 5. This document is a bill of lading from the shipper listing Azaiba Clothing Factor as the exporter and BII as the consignee. The document has an itemization of each of the order numbers and a description of the merchandise. It also indicates that the shipment is being sent freight collect. 6. This document is a reproduction of document #3 with the proof of payment in the form of a check payable to Classique Enterprises Ltd. We did not receive commercial invoices reflecting transactions between the manufacturer and Palmon. ISSUES: 1. Whether the transaction between the manufacturers and Palmon may be used for purposes of determining the appraised value of the imported merchandise. 2. Whether the quota payments are to be included in the price actually paid or payable. 3. Whether the fee paid by BII to Suez is to be included in the price actually paid or payable. LAW AND ANALYSIS: Merchandise imported into the United States is appraised in accordance with section 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, which is defined as "the price actually paid or payable for the imported merchandise when sold for exportation to the United States," plus certain enumerated additions thereto to the extent they are not otherwise included in the price actually paid or payable. 19 U.S.C. 1401a(b)(1). Transaction value is an acceptable basis of appraisement, however, only if, inter alia, 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 of the merchandise closely approximates certain "test values," i.e., previously accepted values of identical or similar merchandise. 19 U.S.C. 1401a(b)(2)(B). Sale for Exportation Issue For merchandise imported pursuant to a threetiered transaction to be appraised on the basis of the manufacturermiddleman sale, there must first exist a bona fide sale between the manufacturer and the middleman. For Customs purposes, the term "sale,” as articulated by the court in J.L. Wood v. U.S., 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974), is defined as the transfer of property from one party to another for a consideration. No single factor is decisive in determining whether a bona fide sale has occurred. Customs makes each determination on a casebycase basis and will consider such factors as whether the purported buyer 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 the circumstances of the transaction indicate that the parties are functioning as buyer and seller. Headquarters Ruling Letter (HRL) 545709, dated May 12, 1995; HRL 545474, dated August 25, 1995. In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (1992), the Court of Appeals for the Federal Circuit reviewed the standard for determining transaction value when there is more than one sale which may be considered as being a sale for exportation to the United States. In so doing, the court reaffirmed the principle of a prior case, E.C. McAfee Co. v. United States, 842 F.2d 314 (1988), that the manufacturer's price, rather than the middleman's price, is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. Nissho Iwai, 982 F.2d at 511. In reaffirming the McAfee standard the court stated that in a threetiered distribution system, "the manufacturer's price constitutes a viable transaction value when the goods are clearly destined for export to the United States and when the manufacturer and the middleman deal with each other at arm's length, in the absence of any nonmarket influences that affect the legitimacy of the sales price. As the government itself recognizes, that determination can only be made on a casebycase basis." Id. at 509. See also, Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993). It is the importer's responsibility to demonstrate that the standard set forth in Nissho and Synergy has been met. HRL 545144, dated January 9, 1994. To support its contention that there is a bona fide sale for export to the U.S. from the manufacturers to Palmon which meets the court’s standard in Nissho Iwai, counsel has provided copies of purchase orders, commercial invoices and various other documentation relevant to the transactions. Specifically, counsel has provided transactional documents from several transactions. Palmon issued a purchase invoice for a particular type of merchandise. The document states that the merchandise was on account and risk of BII. The documentation submitted establishes that the goods were clearly destined for the U.S. The garments are made to U.S. specifications which include the permanent placement in the garment of trade name labels and labels which indicate BII’s or their customer’s “RN” number. In addition, the garments possess quota documentation reflecting shipment to, and for, the U.S. market. HRL 546518, dated February 9, 1998. However, we do not find that there is a sale between the manufacturers and Palmon that may serve as the basis of appraisement. The manufacturer’s commercial invoice was issued to BII and indicated that the terms of sale were F.O.B. U.S. Since the evidence indicates that risk of loss was on BII, and since Palmon was not mentioned on the manufacturer’s invoice as a party to the transaction, BII has not established that there was, in fact, a sale between the manufacturer and the middleman, Palmon, upon which appraisement may be based. Counsel included some documentation from Palmon to the manufacturer regarding the quantities and sizes ordered. However, we did not receive commercial invoices between the manufacturer and Palmon. In addition, our determination is supported by the fact that the bill of lading from the vessel operator, which indicates that the merchandise was shipped from Azaiba Clothing Factory to BII freight collect, contains no reference to Palmon’s participation in the transaction. Accordingly, we find that there is no adequate documentary evidence to support the assertion that there is a sale between the manufacturers and Palmon that may serve as the basis of appraisement. Dutiability of Quota BII pays Suez a fee of $0.50 per garment. Counsel states that this fee was paid to Suez regardless of the actual price of the quota and regardless of whether the goods were subject to quota. This fee was paid, counsel explains, to shift the risk of quota fluctuation and to fix its costs. Customs has held that quota payments made by the buyer to a third party unrelated to the seller are not part of the price actually paid or payable, e.g., HRL 542169, dated September 18, 1980 (TAA No. 6). Quota charges paid by the buyer to an agent are not part of the price actually paid or payable so long as the payments are not remitted, directly or indirectly, to the seller. HRL 543655, dated December 13, 1985. In Generra Sportswear Company v. United States, 905 F.2d 377, 380 (Fed. Cir. 1990), the court held in regard to quota payments that: [a]s long as the...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 focus of transaction value is the actual transaction between the buyer and seller... Moreover, the court stated the foreign sellers must obtain quota before they can export their merchandise. Id. 380. Under Generra, it is Customs’ position that all payments to a seller are presumed to be part of the price actually paid or payable for imported merchandise, e.g., HRL 544640, dated April 26, 1991. However, when quota payments are made to third parties unrelated to the seller of the imported merchandise, Customs has held that the payments are not included in transaction value as part of the price actually paid or payable. There must be sufficient evidence to indicate that the payments do not inure to the benefit of the seller. HRL 544016, dated June 22, 1988, aff’d by HRL 544245, dated July 31, 1989. Accordingly, the issue that must be resolved in this case is who was the seller of the imported merchandise and whether that party received any of the quota payments. In determining who was the seller of the imported merchandise, Customs must consider the information contained on the transaction documents. With respect to the $0.50 per garment quota payment, this office examined one document which appears to be a bill from a manufacturer (Royal Readymade Garments Factory) to Suez for two order numbers and the corresponding quota charge of $0.50 per garment. Since we have determined that the sale for appraisement purposes is the sale from the manufacturer to BII, the payment for quota from BII through Suez to the manufacturer is part of the total payment made by the buyer to or for the benefit of the seller. Dutiability of Service Fee Paid to Suez Whether or not a bona fide buying agency exists between an importer and an alleged "buying agent" is not determined by any single factor, but depends upon the relevant facts of each case. See J.C. Penney Purchasing Corp. v. United States, 451 F. Supp. 973 (Cust. Ct. 1978). The primary consideration in determining whether a bona fide buying agency relationship exists between an importer and an alleged buying agent is the right of the principal to control the agent's conduct with respect to matters entrusted to the agent. B & W Wholesale Co., Inc. v. United States, 58 CCPA 92, C.A.D. 1010, 436 F.2d 1399 (1971). While bona fide buying commissions are nondutiable, evidence must be submitted to Customs which clearly establishes that fact. In this regard, Headquarters Ruling Letter 542141, dated September 29, 1980 (TAA No. 7), provided: “... an invoice or other documentation from the actual foreign seller to the agent would be required to establish that the agent is not a seller and to determine the price actually paid or payable to the seller. Furthermore, the totality of the evidence must demonstrate that the purported agent is in fact a bona fide buying agent and not a selling agent or an independent seller.” In New Trends Inc. v. United States, 10 CIT 637, 645 F. Supp. 957 (1986), the Court of International Trade set forth several factors upon which to determine the existence of a bona fide buying agency. These factors include: whether the agent's actions are primarily for the benefit of the importer, or for himself; whether the agent is fully responsible for handling or shipping the merchandise and for absorbing the costs of shipping and handling as part of its commission; whether the language used on the commercial invoices is consistent with the principalagent relationship; whether the agent bears the risk of loss for damaged, lost, or defective merchandise; and whether the agent is financially detached from the manufacturer of the merchandise. In addition, the importer must show that "none of the commission inures to the benefit of the manufacturer." The agreement between BII and Suez is excerpted in the FACTS section of this ruling. Counsel has submitted certain additional information, including the following: a letter dated September 22, 1994 from Suez to BII describing how quota works in connection with BII’s purchases in the Gulf region; a letter dated July 13, 1994 from Palmon to Suez asking Suez to arrange quota with respect to orders from BII; and a response letter dated July 15, 1994 from Suez to Palmon. Counsel has also submitted a letter dated November 12, 1995 from Suez to BII sending the “following documents for Customs purposes” - invoices, bill of lading, job order sheet, and proof of payment. Palmon Invoice No. P UAE 3689 indicates 14,946 shirts were shipped “On Account & Risk of Messrs : Boys Industry Inc.” Bukhamseen Garment Factory invoice no. 0589 indicates the shirts were sold to BII. Submitted documentation also includes a cheque payment voucher dated February 15, 1994 from Suez to Bukhamseen Garment Factory for quota charges. Certain other invoices indicate that merchandise was shipped for the account of and risk of BII. After a consideration of the evidence of record, we find that the fee paid to Suez by BII is a bona fide buying commission. The documentary evidence is sufficient to establish that Suez had the authority to operate as the agent of BII, and that it in fact did act as the agent of BII. Therefore, the fee is not included in the price actually paid or payable. HOLDINGS: 1. The transactions between the manufacturers and Palmon may not be used for purposes of determining the appraised value of the imported merchandise. 2. The quota payments are to be included in the price actually paid or payable. 3. The service fee paid to Suez is a bona fide buying commission. Therefore, it is not included in the price actually paid or payable. 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, Thomas L. Lobred Chief, Value Branch