Payments for use of trademark based on percentage of net sales of licensed merchandise; royalties; proceeds; buying commissions

DEPARTMENT OF THE TREASURY U.S. CUSTOMS SERVICE WASHINGTON, D.C. HQ W544781 March 4, 1994 VAL CO:R:C:V W544781 CRS CATEGORY: Valuation John M. Peterson, Esq. Neville, Peterson & Williams 39 Broadway New York, N.Y. 10006 RE: Payments for use of trademark based on percentage of net sales of licensed merchandise; royalties; proceeds; buying commissions Dear Mr. Peterson: This is in reply to your letter dated August 21, 1991, on behalf of Richard Warren, Inc., (the “buyer”) in which you requested a ruling on the valuation of certain wearing apparel imported from Hong Kong. We regret the delay in responding. FACTS: The buyer proposes entering into a trademark licensing agreement with Marisa Christina Inc. (“Christina”), an importer of women's sportswear. A copy of the proposed licensing agreement (the “agreement”) was attached as Exhibit A to your submission. Under the agreement, Christina will grant the buyer a license to use the “Marisa Christina” trademark in connection with the design, manufacture, importation and marketing of dresses in the United States, Canada, the United Kingdom and Germany. The buyer will design dresses using the “Marisa Christina” trademark. The dresses will be produced by Asian manufacturers (the “sellers”) unrelated to either the buyer or Christina. The buyer will be the importer of record and will act solely for its own account. In consideration for the right to use the “Marisa Christina” trademark, the buyer will pay Christina a royalty equal to a percentage of the buyer's net sales of the licensed dresses in the U.S. In addition, guaranteed minimum royalty payments, payable quarterly, would be due during the term of the agreement, irrespective of the volume of the buyer's sales of licensed merchandise during the period. . In order to assist it in purchasing garments from foreign manufacturers, the buyer also intends to enter into a buying agency agreement with C.M. Marisa Christina (H.K.) Ltd. (the “agent”). A copy of a buying agency agreement dated July 1, 1991, was attached as Exhibit B to your submission of August 22, 1991. The agent is related to Christina through common ownership but is not related to any of the foreign garment manufacturers. The agent would act as the buyer's non-exclusive buying agent and would perform various services, including: surveying potential markets; assisting in price negotiations; obtaining samples and price quotes; placing orders; visiting manufacturer's factories in order to check the quality of merchandise; acquiring quota; and arranging for shipment. The terms of the buying agency agreement provide that the agent would receive a commission equal to six percent of the f.o.b. foreign port value of the merchandise. The agent would invoice the buyer for its services on a monthly or other periodic basis, as agreed by the parties. The buyer would pay the foreign manufacturers either by opening an irrevocable letter of credit (“L/C”) in their favor, or by opening a master L/C in favor of the agent which would in turn pay the manufacturers. The agent would not take title to the merchandise or the bear the risk of its loss. Moreover, the agent's sole compensation would be its commission, no part of which would inure to the benefit of the manufacturers or other sellers of the garments. Finally, the buying agency commissions will be identified separately on the commercial invoices from the price actually paid or payable for the merchandise, and documentation showing the identity of, and the amount paid to, the seller(s), will be provided. ISSUE: The issues presented are: (1) whether the royalty paid by the buyer to Christina is considered a dutiable royalty such that it constitutes a statutory addition to the price actually paid or payable for the imported merchandise; and (2) whether the commission paid to the agent constitutes a bona fide buying commission such that it is not included in the transaction value of the imported merchandise. 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 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. For the purposes of this ruling we have assumed that transaction value is the appropriate basis of appraisement. The term “price actually paid or payable” is defined by section 402(b)(4) of the TAA which provides in relevant part: (A) The term “price actually paid or payable” means the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation 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. 19 U.S.C. § 1401a(b)(4). Royalty Payments Section 402(b)(1) of the TAA provides for five additions to the price actually paid or payable. Among these are: any royalty or license fees related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of sale of the imported merchandise for exportation to the United States; and the proceeds of any subsequent resale, disposal or use of the imported merchandise that accrue, directly or indirectly, to the seller. 19 U.S.C. § 1401a(b)(1). You contend that the royalty paid by the buyer is neither a royalty pursuant to section 402(b)(l)(D) nor a proceed under section 402(b)(l)(E). In regard to the dutiability of royalty and license fees, the Statement of Administrative Action provides in relevant part: Additions for royalties and license fees will be limited to those that the buyer is required to pay, directly or indirectly, as a condition of sale of the imported merchandise for exportation to the United States. In this regard, royalties and license fees for patents covering processes to manufacture the imported merchandise will generally be dutiable, whereas royalties and license fees paid to third parties for use, in the United States, of copyrights and trademarks related to the imported merchandise, will generally be considered as selling expenses of the buyer and therefore will not be dutiable. However, the dutiable status of royalties and license fees paid by the buyer must be determined on a case-by-case basis and will ultimately depend on: (i) whether the buyer was required to pay them as a condition of sale of the imported merchandise for exportation to the United States; and (ii) to whom and under what circumstances they were paid. For example, if the buyer pays a third party for the right to use, in the United States, a trademark or copyright relating to the imported merchandise, and such payment was not a condition of the sale of the merchandise for exportation to the United States, such payment will not be added to the price actually paid or payable. However, if such payment was made by the buyer as a condition of sale of the merchandise for exportation to the United States, an addition will be made.  Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted, in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 48-49. The royalty in question is paid to a third party, Christina, for the right to use the “Marisa Christina” trademark in the U.S. Provided the royalty is not a condition of sale, the amount of the payment will not be added to the price actually paid or payable. The Customs Service recently issued a notice regarding the dutiability of royalty payments. 27:6 Cust. B. & Dec 1 (February 10, 1993). After considering the legislative history of the provisions in question, prior case law and the Statement of Administrative Action, the notice set forth a method for determining whether a royalty payment was dutiable consisting of the following questions: Was the imported merchandise manufactured under patent? Was the royalty involved in the production or sale of the imported merchandise? Could the importer buy the product without paying the fee? 23:6 Cust. B. & Dec. at 9-11. Negative responses to the first and second questions, and an affirmative response to the third, point toward non-dutiability. In the instant case, the imported garments are not manufactured under patent; rather the agreement gives the buyer the right to use the licensed mark in connection with the manufacture and sale of the imported garments. Nor is the royalty involved in the production or sale of the imported merchandise. The royalty for the right to use the “Marisa Christina” trademark in the U.S. (and the other countries noted above) is paid to a third party rather than to the sellers, and is separate from the purchase price of the garments. Finally, the buyer can import the garments without paying the royalty since the royalty only becomes due upon net sales of the licensed merchandise. While the agreement provides for guaranteed minimum royalty payments, it is our position that this fact does not render the royalty payment a condition of sale. Accordingly, the royalty payment by the buyer is not an addition to the price actually paid or payable under 19 U.S.C. § 1401a(b)(l)(D). Finally, you contend that the royalty payments by the buyer to Christina cannot be considered proceeds of a subsequent resale, disposal or use of the imported merchandise. You have stated that Christina and the sellers are unrelated. Accordingly, provided that no portion of the payments accrues, directly or indirectly, to the sellers, the royalty payments would not constitute an addition to the price actually paid or payable under 19 U.S.C. § 1401a(b)(l)(E). Buying Commissions Bona fide buying commissions are not an addition to the price actually paid or payable. Pier 1 lmports Inc. v. United, States, 708 F. Supp. 351, 354, 13 CIT 161, 164 (1989); Rosenthal-Netter, Inc, v. United States, 679 F. Supp. 21, 23, 12 CIT 77, 78 (1988); Jay-Arr Slimwear, Inc v. United States, 681 F. Supp. 875, 878, 12 CIT 133, 136 (1988). The existence of a bona fide buying commission depends upon the relevant factors of the individual case. E.g., J.C. Penney Purchasing Corp. y. United States, 451 F. Supp. 973, 983 (Cust. Ct. 1978). The importer has the burden of proving the existence of a bona fide agency relationship and that the payments to the agent constitute bona fide buying commissions. Rosenthal-Netter, 679 F. Supp. 21, 23; New Trends, Inc, v. United States, 645 F. Supp. 957, 960, 10 CIT 637 (1986). In determining whether an agency relationship exists, the primary consideration is the right of the principal to control the agent's conduct with respect to those matters entrusted to the agent. J.C. Penney, 451 F. Supp. 973, 983. The existence of a buying agency agreement has been viewed as supporting the existence of a buying agency relationship. Dorco Imports v. United States, 67 Cust. Ct. 503, 512, R.D. 11753 (1971). In addition, the courts have examined such factors as: whether the purported agent's actions were primarily for the benefit of the principal; whether the principal or the agent was responsible for the shipping and handling and the costs thereof; 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 whether the purported agent was financially detached from the manufacturer of the merchandise. Rosenthal-Netter, 679 F. Supp. 21, 23 (1988); New Trends, 645 F. Supp. 957, 960-962. In the situation you describe the duties performed by the agent are those typically performed by a bona fide buying agent, and include compiling market information, obtaining samples, placing orders on the buyer's instructions, inspecting the merchandise and arranging for shipment. The buyer will select the garments to be purchased. Moreover, the buying agency agreement provides that the agent will place orders only upon the specific instructions of the buyer. In regard to payment, the buyer will pay the seller directly or open an irrevocable L/C with the seller as beneficiary. Alternatively, the buyer will open a master L/C with the agent as beneficiary; the agent will in turn pay the sellers. You have advised this means of payment would be used in the case of smaller, financially unsophisticated manufacturers. In Pier 1 Imports, Inc, y. United States, 708 F. Supp. 351 (CIT 1989), a master L/C, payable to an agent, was issued for each purchase order, and the L/C was drawn at sight or was issued back-to-back with an L/C between the agent and the seller. This arrangement was held to demonstrate the principal's control over the agent. Id. at 354. Here the situation is distinguishable in that the amount of the L/C apparently will not always conform to the amount of the purchase order. To this degree, the financing arrangement indicates less than complete control over the payment process. Nevertheless, where master L/Cs are made payable to the agent you have advised that the agent will provide the buyer with copies of the seller's invoices which will show an amount identical to the payment to the agent. Furthermore, the buying agency agreement provides that the agent will only act upon the receipt of specific instructions from the buyer. In addition, the agent will issue separate invoices for buying commissions and expenses incurred on behalf of the buyer, e.g., costs related to inland freight, hauling and lighterage. The buying agency agreement provides that these expenses will only be incurred with the prior consent of the buyer. Accordingly, provided the buyer conforms to the terms of the buying agency agreement, it is our position that the buyer will exercise sufficient control over the actions of the agent. The fact that the agent and seller are financially detached also supports the existence of an agency relationship. New Trends at 962. The agent and sellers in the transaction in question will be unrelated. Paragraph 8 of the Buying Agency Agreement dated July 1, 1991. Moreover, the commissions paid to the agent will not inure to the benefit of the sellers. Buying Agency Agreement, paragraph 7. Consequenty, the information presented supports a finding that the agent and seller are financially detached. Finally, Customs has held that an invoice or other documentation from the actual foreign seller to the agent is required in order to establish that the agent is not the seller, as well as to determine the price actually paid or payable to the seller. Headquarters Ruling Letter (HRL) 542141 dated September 29, 1991 (TAA No. 7). In this regard you have indicated that the buying agency commissions will be shown separately from the price actually paid or payable for the imported merchandise. Furthermore, documentation showing the identity of, and the price _ charged by, the seller, will be attached to the entry documentation. Accordingly, based on the above it is our position that the commissions paid by the buyer to the agent constitute bona fide buying commissions and are therefore would not form part of , the price actually paid or payable for the imported merchandise. Please note, however, that the existence of a buying agency relationship is factually specific. The actual determination will be made by the appraising officer at the port of entry and will be based on the entry documentation - submitted. The totality of the evidence must therefore demonstrate that the purported agent is in fact a bona fide buying agent and not a selling agent nor an independent seller. 23:11 Cust B. & Dec. 9, General Notice dated March 15, 1989; HRL 542141. HOLDING: The payments by the buyer are neither royalties of section 402 (b)(1)(D) of the TAA, nor proceeds of section 402(b)(l)(E), and therefore should not be added to the price actually paid or payable for the imported merchandise.  Provided the parties adhere to the terms of the buying agency agreement, commissions paid to C.M. constitute bona fide buying commissions such that they do not form part of the price actually paid or payable. Sincerely, John Durant, Director Commercial Rulings Division