Internal Advice; Alleged Buying Agency; Royalty Payments for the Right to Use a Trade Name, Brand Name and Related Trademarks

HQ W545759 August 11, 1995 VAL R:C:V W545759 RSD CATEGORY: Valuation District Director United States Customs Service P.O. BOX 789 300 2nd Ave South Great Falls, Montana 59403 RE: Internal Advice; Alleged Buying Agency; Royalty Payments for the Right to Use a Trade Name, Brand Name and Related Trademarks Dear Sir: This is in response to your memorandum, APP 6-12: DEN : JH, dated August 2, 1994, requesting internal advice on the dutiability of alleged buying commissions and royalties paid by Brambilla USA to related companies in Hong Kong and France. The file contains a "Handling Services Agreement" and a royalties agreement. On April 7, 1995, all the entry documents pertaining to an import transaction were faxed to our office. We regret the delay in responding. FACTS: Brambilla U.S.A. (henceforth "BUSA") is an importer of down filled jackets and is based in Denver, Colorado. It is 100% owned by Brambilla Cogros S.A (henceforth "BCSA"), whose main office is located in Paris, France. BCSA also owns Brambilla, LTD. (henceforth "BLTD"), which is based in Hong Kong. On December 2, 1991, BUSA and BLTD entered into a "Handling Services Agreement ", in which BUSA appointed BLTD as its agent to provide purchasing, handling, and financing services in connection with obtaining certain goods from a specified territory. Under the agreement, BLTD agreed to provide the following purchasing services for BUSA : I ) executing promptly the orders for purchasing goods requested by BUSA and effecting all purchases at the most advantageous prices and conditions for BUSA then available; 2) when making purchases informing sellers that they are acting on behalf of BUSA and that the goods will be exported to the United States for sale and distribution there by BUSA; 3) keeping separate, proper and accurate accounts and records of the purchases made on behalf of BUSA, including the identity and the address of the sellers and the quantity, total net price, the price per piece for such goods, and permitting BUSA to review such information at any reasonable time.  The Handling Services Agreement also provides that BLTD is to perform the following services for BUSA: 1) sourcing accessories and fabrics, including hang tags, labels, zippers, snaps, plastic garment bags, and similar items to be delivered to manufacturers on a timely basis so as to not delay production or delivery; 2) ordering follow-up and delivery of reports in connection with purchases made by BUSA 3) ensuring that the quality and specifications of all goods are in accordance with those required by BUSA; 4) countersigning the commercial invoice for each product shipment and in the case of the People's Republic of China, securing local means of control of quality and specifications of purchased goods, such as (for example) the Chinese Commodities Inspection Bureau or a similar agency and countersign reports of such agency; 5) ensuring that all necessary documents are prepared in a timely fashion so as to not delay shipment or jeopardize import into the United States during Customs clearance. BLTD was required to pay for the goods purchased on BUSA's behalf by drawing against a letter of credit provided by BLTD at its own expense. For providing the above mentioned services in connection with the acquisition of down jackets , paragraph 5 of the Handling Services agreement indicates that BUSA will pay to BLTD a fee equal to 12 percent of BLTD's "cost of goods" purchased by BUSA through BLTD. BUSA is invoiced separately for this fee. Cost of goods is defined as the cost of raw materials, findings and manufacturing. Under paragraph 6 of the Handling Services Agreement, regarding leather jackets and bags, BUSA agreed to pay BLTD 9 percent of BLTD's "cost of goods," which is defined in the same way as the cost of goods for down jackets. In the entry documents submitted to Customs, BUSA submitted two separate invoices from BLTD. One of the invoices from BLTD is for the merchandise and the other invoice is for the handling charges. The record also contains an invoice for 1,000 pieces from the manufacturer of the merchandise, Shanghai Animal by Products. The unit C&F price of the merchandise stated on the manufacturer's invoice is $10.98, but the unit C&F price shown on BLTD's invoice for merchandise is $13. 15. BLTD's merchandise invoice indicates that a freight charge of a dollar per unit was added to the cost of the merchandise, but it does not show any addition was made for the handling charges. There is no explanation as to why the unit price shown on BLTD's invoice for the imported merchandise was higher than the unit price indicated on the manufacturer's invoice. The file also contains a royalties agreement between BUSA and BCSA, entered into on June 10, 1988. The agreement provides that in the normal course of business, BCSA, operating in and from France, shall supply BUSA with sketches, patterns, and or models of garments styled and designed by BCS grant BUSA the use in the United States of the registered brand name "Brambilla '·with the accompanying and related trade names, trademarks and logos; and provide assistance in connection with establishment of credit facilities and similar business arrangements. The royalties agreement further explains that because there was likely to be a delay in BUSA's profitability , payments for the service shall be negotiated by the parties and begin when economically practical for BUSA. On May 15, 1990 the parties signed an amendment to the royalties agreement. This amendment provided that BUSA's obligation to make payments to BCSA for the services indicated in the original royalties agreement commenced on April I, 1990. The royalty payments were based on 1.5 percent of BUSA's net sales per year. Net sales per year were defined as gross sales, less discounts and returns. ISSUES: Are the payments for so-called "handling charges" from BUSA to BLTD pursuant to a Handling Services Agreement bona fide buying commissions? Are the royalty payments from BUSA to BCSA for the use of trademarks, brand names, trade names and various other services dutiable? LAW AND ANALYSIS: For the purpose of this ruling request, we are assuming that transaction value will be applicable as the basis of appraisement. As you know, transaction value is defined in section 402(b)(l ) of the TAA. This section provides, in the pertinent part, that the transaction value of imported merchandise is "the price actually paid or payable for merchandise when sold for exportation to the United States," plus amounts for the items enumerated in section 402(b)( 1). Buying commissions are not specifically included as one of the additions to the "price actually paid or payable." The "price actually paid or payable": is more specifically defined in section 402(b)(4)(A) 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. BUYING COMMISSIONS It is clear from the statutory language that in order to establish transaction value one must know the identity of the seller and the amount actually paid or payable to him. As stated in Headquarters Ruling Letter HRL 542141 (TAA #7), dated September 29, 1980, "...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 order to view the relationship of the parties as a bona fide buying agency, Customs must examine all the relevant factors. J.C. Penney Purchasing Corporation et al. v. United States, 80 Cust. Ct. 84, C.D. 4741 (1978), 451 F.Supp 973 (1978); United States v. Knit Wits (Wiley) et al, 62 Cust. Ct. 1008, A.R.D. 251 (1969). The primary consideration, however, "is the right of the principal to control the agent's conduct with respect to the matters entrusted to him." Dorf
  Int'l Inc. et al v United States, 61 Cust. Ct. 604, A.R.D. 245, 291 F.Supp. 690 (1968). The degree of discretion granted to the agent is an important factor. New Trends Inc. v. United States, 10 CIT 637, 645 F.Supp. 957 (1986). The plaintiff bears the burden of proof to establish the existence of a bona fide buying commission. Monarch Luggage Company Inc., v. United States. 13 CIT 523, 715 F.Supp. 1115 (1989). The Court of International Trade in the case of New Trends Inc., supra, 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 commercial invoices is consistent with the principal-agent 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 Jay-Arr Slimwear Inc. , v. United States, 12 CIT 133, 681 F.Supp. 875 (1988), the Court of international Trade cited examples of services which are characteristic of those rendered by a buying agent. These services include compiling market information, gathering samples, translating, placing orders based on the buyer's instructions, procuring the merchandise, assisting in factory negotiation, inspecting and packing merchandise and arranging for shipment and payment. The existence of a buying agency agreement tends to support a finding of the existence a bona fide buying agency relationship. Although a buying agency agreement was presented in this case, it is the position of Customs that "having legal authority to act as a buying agent and acting as a buying agent are two separate matters and Customs is entitled to examine evidence which proves the latter. U. S. Customs Service General Notice, 11 Cus. Bull. & Dec. 15 (March 15, 1989). See HQ 54.4965, February 22, 1994. The information submitted in connection with the instant internal advice request is insufficient to support the existence of a bona fide agency relationship. Although a number of services performed by BLTD are among those usually performed by a bona fide buying agent, there are several aspects of its conduct that the importer failed to control. First, nothing in the agreement or on the entry documents shows that the importer controlled from which factory BLTD ordered the merchandise or that the importer had to approve the order before it was placed with the manufacturer . Similarly, there is no evidence that BUSA could buy the merchandise directly from the manufacturer without going through BLTD. No purchase orders for the merchandise were submitted. Second, there is no indication that BUSA controlled the method of payment for the merchandise. BLTD paid for the imported merchandise by drawing a letter of credit that it opened at its own expense. The agreement does not specify how BUSA will pay for the goods. The court in Rosenthal-Netter v. United States, 12 CIT 77, 679 F.Supp. 21, aff'd 861 F.2d 261 (Fed. Cir. 1988) found that an importer's failure to control the manner of payment is a factor evidencing the non-existence of an agency relationship. While the importer has provided  Customs with a copy of the manufacturer's invoice, it does not establish the price actually paid or payable, or that the agent is not a seller because the manufacturer's C&F price is lower than the C&F price shown on BLTD's invoice for the imported merchandise. BLTD also produces a second invoice for what is called "handling charges". There is no explanation for why BLTD charges BUSA a higher unit price for the imported merchandise than is shown on the manufacturer's invoice. We also note that one of the services to be provided by BLTD under the Handling Services Agreement is the sourcing of accessories of fabric for delivery to the manufacturers. Since there is nothing in the agreement requiring that BLTD obtain any approval from BUSA, it appears that BLTD had complete discretion regarding this service. This also indicates that BLTD is not acting as BUSA's agent. In addition, the method of calculating BLTD's commission as provided for in paragraph 5 and 6 of the Handling Services Agreement also suggests that BLTD is not operating as BUSA's agent. The commission is based on "BLTD's cost of goods" defined as the cost of raw materials, findings, and manufacturing. The term "cost of goods" implies that BLTD may acting as a seller because it seems that BLTD has an interest in the goods before they are purchased by BUSA. Moreover, we are not sure how the agent would have access to the information regarding the cost of raw materials, findings, and manufacturing involved in producing the imported merchandise. The information provided to Customs regarding the relationship between the parties is insufficient to establish that BLTD was under the control of BUSA. Instead of being a bona fide agent, it appears the BLTD was acting as an independent seller. Therefore, we conclude that the fees paid to BLTD do not constitute bona fide buying commissions, but rather would be included in the price actually paid or payable by BUSA for the imported merchandise. ROYALTY PAYMENTS You also inquire as to whether royalty payments paid by BUSA to its parent company, BCSA, in France, for the right to use the Brambilla brand name, trade names, and the related trademarks and logos in the United States would be dutiable. In regard to the dutiability of royalties, 19 U.S.C. 1401a(b)(l) provides that transaction value of imported merchandise includes... "any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States." The corresponding regulation is found in section 152.103(t), Customs Regulations. Both the statute and the regulation parallel the Statement of Administrative Action which was adopted by Congress and has the force of law. According to the Statement of Administrative Action, generally royalty payments to third parties are not dutiable unless they are a condition of the sale of the imported merchandise. It provides in the 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 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. With regard to royalties paid by the buyer to the seller, the SAA provides that "an addition will be made for any royalty or license fee paid by the buyer to the seller, unless the buyer can establish that such payment is distinct from the price actually paid or payable from the imported merchandise, and was not a condition of the sale of the imported merchandise for exportation to the United States." (emphasis added). In this case; the royalty payments were paid to BCSA for the right to use the Brambilla brand name, trade name, and related trademarks. The royalties agreement provides that for the right to use the trademarks, BUSA will pay to BCSA 1.5 percent of its net sales. Assuming that BCSA was not the seller of the merchandise or a party related to the seller, it is unlikely that the royalty payments would be dutiable. The royalties would be dutiable only if they were a condition of sale (i.e. if the seller required BUSA to pay them). A review of any purchase agreements, contracts, etc. pertaining to the subject transactions would indicate whether the payment of royalties were a condition of sale of the imported merchandise. However, based on the entry documents presented, it appears that BLTD, a party related to BCSA, may be the real seller of the merchandise. Under these circumstances, we believe that it is more likely that the payment of the royalties, would be a condition of the sale for exportation of the imported merchandise. See HRL 545361, dated July 14, 1995. In that case, we ruled that certain trademark royalties were dutiable when paid to the seller or a party related to seller but Not where they were paid to a third party unrelated to the seller. If BLTD is the seller, it is also possible that the royalty may be part of the total payment made for the imported merchandise, by the buyer directly or indirectly, to, or for the benefit of, the seller. Accordingly, further investigation is necessary and additional information and documents such as sales contracts, purchase orders, proof of payment etc. should be obtained to determine who is the seller of merchandise, and the dutiable status of the royalties. If you need additional assistance, please feel free to contact us again. HOLDING: Based on the information presented to Customs, it is our conclusion that the handling charges paid to BLTD cannot be considered bona fide buying commissions. Therefore, such charges are included in the price actually paid or payable by BUSA. As indicated above, whether the royalty payments are dutiable will depend on whether the payment is a condition of sale. Sincerely, John Durant, Director Commercial Rulings Division