Reconsideration of HQ 548014 (Sept. 13, 2002); Consulting Fees; Technical Service Fees; Price Actually Paid or Payable; Proceeds of Subsequent Resale.

HQ W548464 MAY 25, 2004 VAL:RR:IT:VA W548464 jsj CATEGORY: Valuation Area Director U.S. Customs and Border Protection JFK Airport Building 77 Jamaica, New York 11430 Re: Reconsideration of HQ 548014 (Sept. 13, 2002); Consulting Fees; Technical Service Fees; Price Actually Paid or Payable; Proceeds of Subsequent Resale. Dear Area Director: The purpose of this correspondence is to respond to the request of Ermengildo Zenga Corporation (Zegna) for reconsideration of HQ 548014 (Sept. 13, 2000). This Internal Advice reconsideration is being issued subsequent to a review of the following: (1) HQ 548014; (2) The submissions of counsel for the importer dated: July 16, 2001, December 17, 2002, January 23, 2003, February 4, 2003, January 6, 2004 and May 20, 2004; (3) Customs Service Compliance Assessment Report dated: July 19, 2001; (4) Customs and Border Protection Regulatory Audit Supplemental Report dated: September 18, 2003; (5) Memorandum of the National Commodity Specialist Division dated: August 23, 2001; and (6) Memorandum of the JFK Airport Area Director dated: August 7, 2001. Counsel's submission of July 16, 2001 included the following attachments: (1) "Technical Services and Retail Consulting Agreement" executed between Ermenegildo Zenga Corporation and Ermenegildo Zenga Holditalia S.p.A. (Holditalia); (2) An undated, unsigned two-paragraph document of undetermined source allegedly addressing the two percent fee paid by Zegna; (3) A second undated, unsigned multiple page document of undetermined source entitled: "Holditalia Responsibility for EZCO Retail Division;" and (4) Judicial decisions and CBP rulings. Counsel's submission of December 17, 2002 included the following attachments: (1) A partial listing of Zegna Group companies; (2) A Ermenegildo Zenga Holditalia S.p.A. organizational chart; (3) An affidavit of Financial Director of Holditalia's Retail Operations Division; (4) A copy of a franchise agreement between Holditalia and a Brazilian franchisee Vesprem Modas LTDA; (5) The "Technical Services and Retail Consulting Agreement" executed between Zenga and Holditalia also provided in Zegna's earlier submission; (6) An affidavit of Zegna's Vice-President, Financial; (7) Documents from Holditalia's Retail Operations Division, Information Services Unit, suggested by counsel to illustrate the services provided to Zegna; (8) A second affidavit of Zegna's Vice-President, Financial; (9) Customs Compliance Assessment Report of Zegna dated July 19, 2001; (10) A copy of a document described by the importer as a "typical invoice" from ZECO Trading S.A. to Zegna for merchandise to be sold in a Zegna retail store; A copy of a document described by the importer as a "typical invoice" from ZECO Trading S.A. to Zegna for merchandise to be sold to a non-related department store; and (12) A second affidavit of the Financial Director of Holditalia's Retail Operations Division addressing Holditalia's revenue and the related cost of services. Customs and Border Protection, in addition to reviewing the above referenced submissions and documentation, conducted two telephone conferences with counsel representing Zegna. The telephone conferences were conducted on March 26, 2004 and May 18, 2004. The Customs Service in the initial Internal Advice memorandum that is subject to this reconsideration concluded that the technical consulting fees were "dutiable as part of the price actually paid or payable for the imported merchandise or, in the alternative, as a statutory addition to the price actually paid or payable, namely proceeds." This decision was based on "insufficient information" to rebut the presumption that payments made by the buyer to a seller are part of the price actually paid or payable and to conclude that the fees were not proceeds of a subsequent resale of the imported merchandise. The Office of Regulations and Rulings notes that it was not requested to address whether the relationship between the parties influenced the price. This internal advice memorandum does not, therefore, offer any opinion on the acceptability of the related party price. FACTS Ermenegildo Zenga Holditalia S.p.A. (Holditalia) is an Italian holding company of the "Zegna Group." Ermenegildo Zenga Corp. (Zenga) is the United States subsidiary of Ermenegildo Zenga International N.V. (Zenga International). Zenga International is a subsidiary of Holditalia. Zenga imports "Zenga Group" wearing apparel into the United States. The imported merchandise is sold to independent merchandisers, as well as through Zenga-owned retail stores and outlet stores. Zegna entered into a contract on March 3, 1996 with Holditalia which is entitled: "Technical Services and Retail Consulting Agreement." The contract provides, in pertinent part: 1. Inventory Control. The Technical Consultant [Holditalia] agrees to develop and maintain a computerized central inventory tracking and control system designed to record merchandise receipts, identify inventory discrepancies, analyze sales trends and maintain adequate stock, etc., for a continually expanding network of retail outlets. Technical Consultant is to provide all required programming, assistance in obtaining hardware capable of meeting the Company's needs and training of the Company's [Zegna] personnel on an ongoing basis. Store Designs/Point-of-Sale Advertising. The Technical Consultant agrees to provide continuing assistance to the Company with regards to the design of retail outlets and point-of-sale advertising in order to maximize sales. Zegna, in consideration of the services addressed in Paragraphs 1 and 2 of the Agreement, agreed to pay Holditalia two percent (2%) of its "annual net sales with respect to merchandise sold through its retail shops. It is specifically noted that the "Technical Services and Retail Consulting Agreement" does not address sales made by Zegna through Zegna outlet stores or to independent retailers. ISSUE Should the two percent (2%) fee Zegna pays to Holditalia pursuant to the "Technical Services and Retail Consulting Agreement" be considered part of the price actually paid or payable, proceeds of a subsequent resale, or should it be considered for something other than the imported merchandise and not dutiable? LAW AND ANALYSIS The federal agency responsible for interpreting and applying the United States Code and the regulations of the U.S. Customs and Border Protection, as they relate to the final appraisement of merchandise, is Customs and Border Protection (CBP). Customs and Border Protection, in accordance with its legislative mandate, appraises imported merchandise in accordance with Section 402 (b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979. The preferred method of appraisement is transaction value. 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 equal to - (A) the packing costs incurred by the buyer with respect to the imported merchandise; (B) any selling commissions incurred by the buyer with respect to the imported merchandise; (C) the value, apportioned as appropriate, of any assist; (D) 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; and (E) the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller. (Emphasis added). The "price actually paid or payable," as defined in the Trade Agreements Act, is: the 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. 19 U.S.C. 1401a (b)(4)(A). (Emphasis added). Price Actually Paid or Payable Customs and Border Protection has long held the position that all monies paid by the buyer to a foreign seller or to a party related to a seller are part of the price actually paid or payable for imported merchandise pursuant to the transaction value method of appraisement. See HQ 542169 (Sept. 18, 1980), TAA #6; HQ 547532 (Nov. 2, 2001). The presumption that all payments made by a buyer to a seller are part of the price actually paid or payable for imported merchandise was affirmed by the Court of Appeals for the Federal Circuit in Generra Sportswear Co. v. United States, 905 F. 2d. 377 (Fed. Cir. 1990). See also HQ 547532 (Nov. 2, 2001). The court in Generra held that the term "total payment" in the definition of the phrase "price actually paid or payable" was intended to be all inclusive. See id. at 379. The reasoning underlying the Court's decision stems from the language of section 1401 a (b)(4)(A) which states that the price actually paid or payable is the "total payment" made for imported merchandise whether the payments are "direct or indirect." 19 U.S.C. 1401a (b)(4)(A). The Generra court further held that: Congress did not intend for [Customs and Border Protection] to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, are for the merchandise or for something else. Id. at 380. The court, quoting Moss Mfg. Co. v. United States, 896 F. 2d 535, 539 (Fed. Cir. 1990), concluded that the "straightforward approach [of section 1401 a (b)] is no doubt intended to enhance the efficiency of [CBP's] appraisal procedure; it would be frustrated were we to parse the statutory language ... and require [CBP] to engage in [a] formidable fact-finding task...." Id. at 380. The presumption that all payments made by a buyer to a seller or a party related to the seller are part of the price actually paid or payable is rebuttable. The burden of establishing that the payments are unrelated to the imported merchandise rests, however, on the importer. See Chrysler Corp. v. United States, 17 C.I.T. 1049 (Ct. Int'l Trade 1993); see also HQ 547532. The question of significance with regards to whether the two percent fee should be part of the price actually paid or payable is whether the fee is a `payment... made or to be made for imported merchandise." (Emphasis added). If the fee is not "for imported merchandise," then it is not part of the price actually paid or payable. Counsel for Zegna suggests through argument and documentation, that the two percent fee that is paid by Zegna to the Retail Operations Division of Holditalia is for the following services: 1) Coordinating the image and display of each product collection in Zegna's retail stores; 2) Developing window displays and other visual marketing tools to foster sales of the imported merchandise; 3) Working with architects and engineers to develop a consistent, uniform interior appearance for each store as relates to fixtures, lighting and equipment; 4) Working with architects and engineers to ensure that projects are completed timely; 5) Maintaining a customer database and providing information on customer statistics designed to foster sales; 6) Creating mailings and procedures for communicating with customers; 7) Developing and maintaining a computer system to record and track sales at each retail store for marketing purposes; and 8) Financial planning and control. Counsel additionally provided statements in the form of affidavits from the Financial Director for Retail Operations at Holditalia and the Vice President-Financial at Zegna. The Financial Director and the V.P.-Financial state that the Retail Operations Division of Holditalia is not a profit center. Counsel's position on behalf of the importer is that the two percent fee paid by Zegna to the Retail Operations Division of Holditalia does not inure to the direct profitability of Holditalia because the Retail Operations Division's budget is based on and consumes the entire two percent fee paid by Zegna. The importer suggests to CBP that the two percent technical consulting and retail services fee has a historical basis in its international franchise operations that predates the establishment of Zegna-owned retail stores in the United States. Counsel suggests that the two percent fee paid by foreign franchisees has long been determined by both the franchisees and Holditalia to be an appropriate sum to cover only the costs of the Retail Operations Division in its provision of services. The importer further maintains that since Zegna's U.S. retail operations came into existence, Zegna and Holditalia have arrived at the same conclusion that the fee is adequate to cover the costs of the services provided and nothing more. Zegna, in support of its position, provided CBP with a copy of an executed franchise agreement between Holditalia and a Brazilian franchisee. The importer suggests that a review of the franchise agreement supports the position that the two percent fee is not for imported merchandise, but for technical consulting and retail marketing services. Customs and Border Protection understands the position of Zegna, but subsequent to reviewing the same information and documentation has arrived at a different conclusion. CBP initially notes that the two percent fee is based on the net profits of the U.S. retail operations and is directly linked to the sales of merchandise through the retail operations. Although counsel suggests that the perspective of the Retail Operations Division is long-term, this office notes that the budget of the Retail Operations Division will fluctuate during periods of good sales and times of poor sales. The payments made by Zegna pursuant to the "Technical Services and Retail Consulting Agreement" are based on sales projections and then adjusted annually either upward or downward to correct for any error in the projection. This office is further of the opinion that the services identified as being provided to Zegna are described in broad, general terms. Greater specificity would have aided the decision of CBP, but would not, alone, have been determinative. Customs and Border Protection has been advised that the two percent fee is accounted for as a general selling expense by Zegna and as revenue for services not revenue for goods by Holditalia. This office has additionally been advised that the services are not charged to Zegna by Holditalia on a per service basis precluding CBP from confirming that the services received correspond, dollar for dollar, to the two percent of net sales paid. The documentation provided to CBP does not enable this office to conclude that some or all of the payments made by Zegna to Holditalia pursuant to the consulting agreement do not go to the benefit of other entities, possibly foreign franchisees. The sample documents provided from the Information Systems Unit of the Retail Operations Division confirm payments by Holditalia for goods or services, but does not establish the entity that received the benefits of those goods or services. A review of the Holditalia franchise agreement with the Brazilian franchise also does not resolve CBP's concerns. The franchise agreement states in Section VI, 12.1, that the franchisee shall pay Holditalia a yearly fee of two percent of the franchisee's net turnover. The franchisee, in return, receives the right to establish a Zegna Group franchise. The franchisee is also provided design, know-how and guidelines concerning store layout, furniture, displays and the like to standardize the image of Zegna. The franchisor is, additionally, provided computer software and, "from time to time," operating guidelines which include marketing strategy. Marketing strategy is stated to consist of, among other things, the operation and organization of the store, merchandise balance, displays and merchandising directions. Stated more directly, the franchise agreement provides for the payment of a two percent fee by the franchisee to Holditalia for consideration in three primary forms: (1) Setting up the franchise; (2) The franchisor's expertise and guidance in retail sales and marketing; and (3) The use of the Zegna trademark. The franchise agreement, similar to the "Technical Services and Retail Consulting Agreement," does not confirm for CBP how the sales prices of goods between the franchisor and franchisee are determined. A further review of the franchise agreement also reveals issues of concern to CBP that lead this office to conclude that the franchise agreement and the "Technical Services and Retail Consulting Agreement" are too dissimilar for comparison. Most significant is the fact that the franchisee receives the licensing rights to the Zegna trademark, which the franchise agreement indicates is internationally renowned and warrants significant protection, as additional consideration for the two percent franchise fee. The U.S. Zegna entity, CBP is advised, owns the trademark in the United States. The franchise agreement further provides that the franchisee is not obligated to use the franchisor's software, that "[e]ach and every cost, expense or other burden" related to the installation of the software is to be borne by the franchisee, and that travel, food an accommodation expenses of Zegna Group personnel that assist the franchisee with store operation and marketing are the responsibility of the franchisee. Counsel advised CBP of the possible availability of a profit and loss statement of the Holditalia Retail Operations Division. If CBP was of the conclusion that this might have made a difference in the decision rendered in this internal advice memorandum, it would have been requested. While the profit and loss statement may have established that the Holditalia Retail Operations Division was a non-revenue generating division of Holditalia, it would not have confirmed that all of the sums paid by the Zegna retail stores in the United States were consideration in the form of goods and services provided directly to Zegna in the U.S. One of the significant facts for the Office of Regulations and Rulings in rendering this decision is the fact that no information has been brought forward nor has any been identified that would have enabled this office to conclusively establish that the sums paid by Zegna in the U.S. only inure to the benefit of Zenga Group sales in the United States. If the technical services and consulting fees even partially inure to the benefit of other Zegna Group entities or franchisees, the fees must be considered as being for imported merchandise. As CBP noted in the initial internal advice memorandum, no sales contract exists between Holditalia and Zegna. Although counsel has provided examples of invoices between one Zegna entity and a U.S. retail store, and another between Zegna and a non-Zegna owned department store, this documentation does not prove sufficient to rebut the presumption that the two percent fee should be part of the price actually paid or payable. The "General Sale Conditions" printed on the simple two page invoices establish the sale price and some of the terms of sale, but do not enable CBP to understand how the sales prices for goods sold by Holditalia to Zegna are determined. Neither the invoices nor any other document enable CBP to confirm that the payment of the two percent fee is not a condition of the sale between Holditalia and Zegna. Customs and Border Protection, subsequent to a review of the extensive amount of documentation brought forward and the resourceful arguments of counsel concludes that the two percent "Technical Services and Retail Consulting Agreement" fee is part of the price actually paid or payable. It is the determination of this office that the fee is a "payment... made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller." Proceeds of Any Subsequent Resale The Customs Service also concluded in HQ 548014 that if the payments made by Zegna pursuant to the "Technical Services and Retail Consulting Agreement" were not part of the price actually paid or payable, that they would be considered as one of the statutory additions to the price actually paid or payable, namely proceeds of a subsequent resale of the imported merchandise. Having concluded that the fee should be part of the price actually paid or payable and lacking information and documentation to confirm how Holditalia and Zegna establish the sale price between one another, this office does not deem it necessary to address this subject beyond the statements made in the original internal advice memorandum. HOLDING The two percent (2%) fee Ermengildo Zenga Corporation pays to Ermenegildo Zenga Holditalia S.p.A. pursuant to the "Technical Services and Retail Consulting Agreement" is part of the price actually paid or payable. Sincerely, Virginia L. Brown, Chief Value Branch