us-cbp-cross-rulings-hq-544088•HQ 544088: Dutiability of commissions to third parties; Dutiability of commissions to design consultants
HQ 544088: Dutiability of commissions to third parties; Dutiability of commissions to design consultants
us-cbp-cross-rulings-hq-544088HQ 544088: Dutiability of commissions to third parties; Dutiability of commissions to design consultantsGuidance
Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.
HQ 544088
March 25, 1988
CLA-2 CO:R:CV:V 544088 DH
CATEGORY: Valuation
Robert Eisen, Esq.
Coudert Brothers
200 Park Avenue
New York, N.Y. 10166
RE: Dutiability of commissions to third parties; Dutiability of
commissions to design consultants
Dear Mr. Eisen:
This is in reference to your letter of November 12, 1987,
regarding the effect of section 402(b) of the Tariff Act of 1930,
as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C.
1401a(b)), on certain contemplated transactions to be entered
into by your company. You request a binding ruling regarding the
dutiability of certain commissions to be paid to an unrelated
Hong Kong company in exchange for services in aiding in the
purchase of merchandise from Hong Kong manufacturers. Further,
you inquire as to the dutiability of commissions paid for designs
and design counselling services with regard to your company's
manufacturing operations which are to be performed in Hong Kong.
FACTS:
You state that your client is contemplating employing an
unrelated agent in Hong Kong to assist their company in
purchasing wearing apparel and accessories. The prospective
agent is to perform the services of obtaining samples from the
vendors; surveying the potential markets for the principal;
ordering merchandise for the principals; arranging for payment
terms; inspecting the finished products; arranging for the
storage, consolidation, inland freight, lighterage and the like;
acquiring the fabric and piece goods used in manufacturing the
imported goods; acquiring the necessary quota; arranging for
packing and shipping of the manufactured products to the
principal; and providing the manufacturer's invoices, fabric
supplier's invoices, quota invoices and inspection certificates.
Each activity performed by the agent is to be in a manner
dictated by the principal and in the best interest of the
principal. The commissions to be received by the agent will be
ten percent of the f.o.b. price of the goods (including quota),
or, where applicable, ten percent of the sum of Cut, Make and
Trim (C.M.T.), fabric charges and quota charges incurred in
connection with goods purchased through the service of the buying
agent. No sample documentation has been provided, although a
draft buying agency agreement has been submitted.
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You further state that the importer is contemplating
entering into an agreement with another Hong Kong corporation for
the purpose of obtaining design and consulting services. This
foreign corporation will provide the services of furnishing
engineering, development, artwork, plans and sketches for the
importer; as well as grant the exclusive use of the design
concepts and assistance in connection with the importation,
advertising, merchandising, promotion, sale and distribution of
the merchandise. Additionally, this Hong Kong corporation is to
provide non-tangible consulting services regarding the design and
development of the importer's merchandise. A commission of five
percent of the f.o.b. price (including quota) of the imported
goods from the Far East, or where applicable, five percent of the
sum of C.M.T., quota charges and fabric charges incurred with
respect to such goods will be received for these services.
You have stated that neither foreign company is related to
the importer; however, they are related to one another. The only
remuneration for their services will be commissions paid pursuant
to the agreements with the importer; and no part of these
commissions will be shared with the manufacturers, or each other.
You also state that both companies are separately responsible for
paying all costs of conducting their respective functions,
including assessments which may be made against salary or wages
of those directly or indirectly employed by their respective
companies. No ownership interest in the manufacturers or the
suppliers who sell merchandise to the principal are to be
obtained by the agent. In addition, you state that the invoices
provided from the manufacturers will indicate that the apparel
and accessories are being sold to the importer, or to the agent
for the account of the importer.
ISSUES:
Are commissions to be paid in exchange for an unrelated
Hong Kong corporation's services of assisting in the purchasing
of merchandise from Hong Kong manufacturers considered a buying
commission?
Are the commissions to be paid in exchange for services of
supplying designs and design counselling services with regard to
the importer's manufacturing operations to be performed in Hong
Kong by a Hong Kong corporation considered a dutiable assist?
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LAW AND ANALYSIS:
For purposes of this prospective ruling request, we are
assuming that transaction value will be applicable as a basis of
appraisement.
Transaction value is defined in section 402(b)(1) of the
TAA. This section provides, in pertinent part, that the
transaction value of imported merchandise is the price actually
paid or payable for the merchandise 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.
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. Whether
or not the purported agent is the seller is to be determined by
the documents presented. 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. See TAA No.7, dated September 29, 1980 (542141).
The Restatement (Second) of Agency section 14K(1958)
defined an agent as:
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.
In order to continue 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 (1983); 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 the agent is
an important factor. New Trends Inc. v. United States, 10 CIT _,
645 F. Supp. 957 (1986).
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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 the 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 manufacturers of the merchandise.
These factors have been determining factors applied by the
Courts to deny the existence of a buying agency relationship in
New Trends, Inc., supra, Jay-Arr Slimwear Inc. v. United States,
_CIT_, Slip Op. 88-21 (1988), Rosenthal-Netter, Inc. v. United
States, _CIT_ , Slip Op. 88-9 (1988).
On the basis of the information you have provided regarding
the prospective transactions in question, if the terms of the
buying agency agreement are identical to those outlined in your
letter and set forth above and the actions of the parties also
conform, the importer will exercise the requisite degree of
control over the buying agent. Therefore, we conclude that the
commissions to be paid to the agent constitute bona fide buying
commissions and will not have to be included in the determination
of the transaction value.
You have also requested a prospective ruling as to the
dutiability of commissions to be paid to another unrelated Hong
Kong corporation which will provide the importer with designs and
design consulting services.
It is your contention that the services to be performed by
the foreign corporation are assists developed or performed
outside the United States and therefore, the commissions to be
paid for these services are dutiable.
Assuming that transaction value is the applicable method of
appraisement, the value of an assist would be added in an
appropriately apportioned manner to the "price actually paid or
payable" for the merchandise.
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The definition of an assist (in pertinent part) as set
forth in section 402(h)(1)(A) is:
...any of the following if supplied directly or
indirectly, and free of charge or at reduced cost,
by the buyer of imported merchandise for use in
connection with the production or the sale for
export to the United States of the merchandise:
...
(iv) Engineering, development, artwork,
design work, and plans and sketches that
are undertaken elsewhere than in the
United States and are necessary for the
production of the imported merchandise.
Section 402(h)(1)(B) defines the parameters of section
402(h)(1)(A)(iv). This section provides:
No service or work to which subparagraph (A)(iv)
applies shall be treated as an assist for purposes
of this section if such service or work-
(i) is performed by an individual who is
domiciled within the United States;
(ii) is performed by that individual
while he is acting as an employee or
agent of the buyer of the imported
merchandise; and
(iii) is incidental to other
engineering, development, artwork,
design work, or plans or sketches that
are undertaken within the United States.
Pursuant to the facts provided, the commissions involved
would be considered to be dutiable as a part of the acquisition
cost of the assists since the design and consulting services
described are specifically enumerated in the statute, and these
services are to be undertaken outside of the United States.
HOLDING:
In view of the foregoing, it is our conclusion that the
commissions to be paid to the prospective company to perform the
services of assisting in the purchase of merchandise from the
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Hong Kong manufacturers are to be considered bona fide buying
commissions; and therefore, not to be added to the price actually
paid or payable.
We further conclude that the commissions which will be paid
to the other Hong Kong corporation for design work and design
consulting services are to be treated as assists and included in
the calculation of transaction value.
Sincerely,
John Durant
Acting Director, Commercial
Rulings Division
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