Buying commissions, payments made by importer, handling, marketing and advertising.

HQ W547585 September 28, 2001 RR:IT:VA W547585 KDW Port Director U.S. Customs Service JFK Airport Bldg 77 Jamaica, NY 11365 Attn: Dianne Wickware/Anthony Zucco RE: Buying commissions, payments made by importer, handling, marketing and advertising. Dear Port Director: This is in response to a request for ruling dated November 17, 1999, regarding the dutiability of certain payments made by 4 YOU America, LLC's (hereinafter "4 You" or "Distributor") to 4 YOU A/S (hereinafter "A/S"). In addition to the original request letter, we considered the distributorship agreement dated September 30, 1999, a supplemental letter dated February 1, 2000, and telephone conferences, in formulating this decision. We are treating this as a Request for Internal Advice, because there are current transactions involving the factual pattern below. We regret the delay in responding. FACTS Pursuant to the information submitted 4 YOU, a United States corporation, imports wearing apparel into the United States. The apparel contains marks licensed by A/S, a Denmark corporation that owns the 4 YOU and 2 YOU trademarks. 4 YOU is the sole distributor in the United States of the 4 YOU and 2 YOU merchandise lines. You state that 4 YOU and A/S are not related, and that A/S is not related to any of the manufacturers of the imported goods. 4 YOU submits a copy of an agreement between it and A/S entitled "Contract about sales agreement in the U.S., Mexico, Puerto Rico, Panama, and The Carribbean Islands" ("Agreement"). The Agreement provides for a three-year contract between 4 YOU and A/S whereby 4 YOU is granted exclusive distributor rights in the designated territory. The Agreement is automatically extended for two years where neither party objects. The "products" covered by the agreement are all products contained in A/S' apparel collection sold under the 4 YOU trademark or other trademark owned by A/S. The terms of the agreement provide that 4 YOU may only sell the trademark merchandise to "specialty and department stores and men's stores of high standing." The agreement prohibits 4 YOU from selling the trademark merchandise in supermarkets. Further, the agreement in Section 7(d) prohibits 4 YOU from contacting A/S' suppliers. Under the agreement, 4 YOU is required to pay A/S for the acquisition cost of the merchandise, a 15% buying commission and a 15% handling/marketing/advertising fee. The percentage is based on the acquisition cost of the merchandise. The acquisition cost includes the price payable to the manufacturer plus shipping and quota charges not included in that price. The buying commission, according to the written agreement, is a fee to A/S for the following services: securing freight rates and quota, advising of merchandise availability; visiting factories; collecting samples; obtaining price quotes; placing orders; expediting, verifying, inspecting and performing quality control; controlling packaging and labeling; and providing invoices. The handling/marketing/advertising fee is for the following services: developing the collection; maintaining the collection current with respect to style and trends; production control; photography; catalogues; world-wide advertising campaigns; shop in shop design concepts; monitoring and protecting trademarks. The agreement also sets out the terms of payment and division of risk between the parties. The terms to 4 YOU are CIP New York. Section 6 (f) of the agreement contains minimum levels for orders per color for the certain categories of products. 4 YOU is responsible for defective merchandise up to three percent of the total pieces delivered to it, unless more than fifty percent of the total number of pieces in a particular model is defective. (Section 6(d) of the agreement) 4 YOU is responsible for payment of the customs duties. For quota items, 4 YOU bears the risk should the merchandise not be delivered due to a closed quota. (Section 10 (d) of the agreement). A/S invoices 4 YOU for the cost of the goods payable to the manufacturer and for the buying commission described above. The fees for handling/marketing/advertising are invoiced by A/S separately. 4 YOU receives copies of the manufacturer's invoices as backups. The other documents submitted are those for shipments including invoices, packing lists, entry forms, and textile licenses. These documents indicate that the merchandise is sold for the account and risk of A/S, and that A/S makes payment to the manufacturer for the merchandise. The packing lists indicate that the cartons are marked "4 YOU A/S - DENMARK". The terms of sale vary on the different invoices submitted. Some of the invoices from the manufacturer indicate CFR New York and others indicate FOB a named foreign port. All of the invoices from A/S to 4 YOU indicate CIP New York. Based on the terms of the agreement and the sale documents submitted, 4 YOU states that the payments made by it to A/S are not dutiable. 4 YOU alleges that the relationship between it and A/S is that of principal and agent. Specifically, 4 YOU claims that A/S acts as the buying agent for it and the 15% commission fee is a nondutiable buying commission. Further, 4 YOU states that payments for handling/marketing/advertising made by it to A/S are similar to license fees paid to a third party and not a condition of sale for exportation to the United States of the merchandise. Therefore, 4 YOU claims that those payments are also not dutiable. Further, 4 YOU claims that those payments are for services A/S performs as part of the distributorship agreement are post importation technical assistance, and thus are nondutiable. ISSUES: 1) Are 4 YOU and A/S acting as principal and agent? 2) Are the fees paid by 4 YOU to A/S are part of the transaction value of the imported merchandise? LAW & ANALYSIS The preferred method of appraising imported merchandise is transaction value as defined in § 402(b)(1) of the Tariff Act of 1930, amended by the Trade Agreement Act of 1979 (TAA; 19 U.S.C. 1401a(b)). The transaction value of the imported merchandise is "the price actually paid or payable for the merchandise when sold for exportation to the United States" plus amounts for certain enumerated items in section 403(b)(1) of the TAA. 19 U.S.C. 1401a(b)(1). For purposes of this ruling we assume that the appropriate basis of appraisement is transaction value. The "price actually paid or payable" is "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." 19 U.S.C. 402(b)(4). 4 YOU claims that the relationship between it and A/S is that of principal and agent, and that the transaction value is the price between 4 YOU and the manufacturer exclusive of any of the fees or commissions paid to A/S. Further, 4 YOU claims that the fees paid to A/S are buying commissions or nondutiable fees for third party licensing and post-importation technical assistance. Thus, the first inquiry in this case is whether the relationship between 4 YOU and A/S is that of agent and principal. The totality of the evidence must demonstrate that the purported agent is in fact a buying agent and not a selling agent or an independent seller. See 23 Gust. B. & Dec., No. 11, General Notice, dated March 15, 1989, at 9; and HQ 542141, dated September 29, 1980 (TAA #7). It is well settled that the essence of an agency relationship is the exercise of control by the principal over the conduct of the agent as to those matters entrusted to the agent's care. See New Trends. Inc. v. United States, 10 CIT 637; 645 F. Supp. 957 (1986)(citing Globemaster Midwest. Inc. v. United States, 67 Gust. Ct. 539, 337 F. Supp. 645, 470 (1971)). In addition, the Court of International Trade ("CIT') in Rosenthal-Netter. Inc. v. United States, 679 F. Supp. 21 , 23 (1988), adopted the factors outlined in the Restatement (Second) of Agency section 14K (1958) illustrating the circumstances under which a party is acting as an agent. The Restatement provides that "one who contracts to acquire property from a third person and convey it to another is the agent of the other only if it is agreed that he is to act primarily for the benefit of the other and not for himself." Further, the court looked at a list of factors indicating when a party is acting as a seller as opposed to an agent to the proposed principal. A party is acting as a seller if: The party receives a fixed price for the property, irrespective of the price paid by him. The party acts in his own name and receives title to the property which he thereafter is to transfer. The party has an independent business in buying and selling similar property. Whether a relationship is one of agent-principal is to be determined by the substance of the transaction, not by the labels the parties attach to it. Pier 1 Imports, Inc. v. U.S., supra., and Monarch Luggage Co. v. U.S., 715 F. Supp. 1115, 13 CIT 523 (1 989). Based on the sale documentation submitted by 4 YOU, it is our position that A/S appears to be acting as a seller, rather than an agent in the transaction. Specifically, we note that one of the commercial invoices submitted states that the merchandise is "For Account & Risk Of" A/S. Further, the cartons are marked "4 YOU A/S -Denmark". Thus, it appears that A/S acts in its own name and receives title to the property. In addition to the documentation indicating a sale, we note that the degree of control A/S has over the transaction as described in the agreement between the parties is also indicative of a sale contract. A/S controls the manner and terms of payment, the territory of sales by 4 YOU, the terms of delivery, and the manufacturers of the merchandise. The lack of control over the choice of factories is a factor the CIT has considered to negate the existence of an agency relationship. Rosenthal-Netter, at p. 23. Similarly, the CIT has also recognized that an importer's failure to control the manner of payment is evidence that an agency relationship does not exist. New Trends, at p. 961. In this case, we find the totality of the circumstances does not indicate the existence of an agency relationship. Rather, the circumstances indicate that 4 YOU does not exercise substantive control over A/S, and that A/S is an independent seller. With respect to the Headquarters rulings cited by counsel in support of the contention that the payments represent a buying commission, these rulings are distinguishable from the instant case in that the level of control by the buyer over the agent was substantial. In HRL 546341, dated November 12, 1996, unlike here, the facts provided, among other factors, that the agent lacked the authority to accept or reject price quotations on behalf of the importer, and the importer paid the suppliers directly. In HRL 547117, dated August 31, 1998, the agent was prohibited from issuing purchase orders to the suppliers on behalf of the importer, and never bore risk of loss. Further, in determining whether a buying agency relationship exists, each case is governed by its own particular facts. In our view, the facts in this case establish that A/S is acting as an independent seller of the merchandise in question. Thus, we find that the transaction value in this case is the price paid by 4 YOU to A/S, which includes any amounts designated as commissions or fees paid to A/S. Based on Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990), Customs presumes that all payments made by the buyer to the seller are part of the price actually paid or payable for imported merchandise. In Generra, the Federal Circuit held that the term "total payment" is all-inclusive and that "as long as the quota 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." Id. Since we find that A/S is an independent seller of the imported merchandise, we find that all of the specified payments made by 4 YOU to A/S are part of the transaction value for the imported merchandise. HOLDING: Based on the information submitted, A/S acts as an independent seller in the transactions with 4 YOU. Therefore, the amounts paid by 4 YOU as alleged buying commissions and handling/marketing/advertising fees are part of the transaction value for the imported merchandise. This decision should be mailed by your office to Ms. lndie K. Singh at 550 West Merrick Road, Valley Stream, NY 11580-5101, counsel for 4 YOU, no later than sixty days from the date of this letter. On that date the Office of Regulations & Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act, and other public access channels. Sincerely, Virginia L. Brown Chief, Value Branch