**HQ 545420**

**May 31, 1995**

**VAL CO:R:C:V 545420 ER**

**CATEGORY:** Valuation

Frank J. Desiderio, Esq.

Harold I. Loring, Esq.

Grunfeld, Desiderio, Lebowitz & Silverman

245 Park Avenue

New York, NY 1016-0002

**RE:** Sale for Exportation of Merchandise Imported Pursuant to a
Three-Tiered Sales Arrangement; Buying Agents; Management Service
Payments; Quota Payments.

Dear Messrs. Desiderio and Loring:

This is in response to your submissions dated August 31, 1993 and
November 17, 1994, on behalf of your client, Pioneer Apparel Limited
(\"Pioneer\"), in which you request a ruling regarding the valuation of
certain knitted apparel imported pursuant to three and four-tiered sales
arrangements. We regret the delay in responding.

**FACTS:**

[Sale for Exportation]{.underline}

The following facts are set out in your ruling request. Pioneer,
incorporated in the British Virgin Islands with its principal offices in
Macau, was established to sell knitted apparel to U.S. retailers on a
delivered duty paid basis. Pioneer will have no presence in the U.S. but
will be the importer of record for the subject merchandise.

Representatives of the U.S. retailers will generally meet with Pioneer
representatives in Hong Kong to discuss, negotiate and finalize the
terms of all purchase transactions before issuing purchase orders to
Pioneer\'s Macau office. The U.S. retailers will open letters of credit
to Pioneer in Hong Kong for the agreed upon delivered duty paid prices.
Pioneer then will utilize the services of buying agents to procure the
merchandise.

You state that Pioneer is not related to any knitwear factories. Pioneer
or its buying agents will purchase the merchandise either directly from
factories or through a middleman. Pioneer will require statements from
each middleman to disclose whether the middleman is \"related\" to the
factory. In some instances, Pioneer is \"related\" to the middleman.

In all instances, the garments will be produced based upon the
specifications of the U.S. retailer. The factory will apply labels in
the garments which identify, and/or bear the trademarks of, the U.S.
retailers. The identity of the U.S. retailer will be reflected on the
factory invoice, shipping documentation and marks and numbers shown on
the shipping cartons.

Pioneer will undertake the obligation to pay for the merchandise, take
title to the merchandise and assume risk of loss therefor. After
importation into the U.S., Pioneer, as the importer of record, will make
the arrangements to deliver the goods to the retailers in the U.S. Title
to the goods will pass to the retailer upon delivery of the goods in the
U.S. and Pioneer will draw down on the letter of credit in Hong Kong.

In those instances where Pioneer or the middleman provides materials to
the vendor and contracts to manufacture the goods on a cut, make and
trim basis (\"CMT\"), the invoices accompanying the shipment will show
the CMT price charged and paid to the factory, and the cost of the
materials provided as an assist.

Pioneer will be billed by, and pay, the factories or the middlemen, as
the case may be, for the manufacturing of the garments.

[Buying Agents]{.underline}

The buying agents in the employ of Pioneer, Prospector Enterprises
Limited (\"Prospector\") and Primeasia Sources Limited (\"Primeasia\"),
are \"related\" to Pioneer, as per the definition set forth in 19 U.S.C.
1401a(g)(1). The agents are not presently related to, or controlled by,
any of the factories producing and selling the merchandise. The buying
agents will not accept title to the goods nor will they incur any risk
of loss. The ultimate authority and responsibility for, and control
over, the manufacture and delivery of goods will be retained by Pioneer.

The agents will enter into written agreements with Pioneer. Unsigned
copies of prototypical agreements are enclosed. These unsigned
agreements indicate that each agent will provide traditional buying
agency services for Pioneer. When a buyer\'s inquiry is received by
Pioneer, it will be forwarded to the agents to obtain information on
sourcing and price quotations. The agreements require the buyer\'s
written authorization with regard to most matters ([i.e.]{.underline} ,
setting prices, granting allowances, changes to specifictions, extending
delivery, and entering into any binding commitments). Pioneer directs
the agents to place production orders with factories designated by
Pioneer. The commissions paid to the agents will be based upon the value
of the shipments sourced by them. Buying agent commissions will be
invoiced separately for each purchase transaction.

[Management Service Payments]{.underline}

In your first submission you state that Pioneer will contract with
Tillsonburg Services Limited, a related company, for management
services. Such services include: arranging financing, accounting,
administration, shipping, procurement, storage, inspection, and delivery
of fabric. Fees for these services are to be billed directly to Pioneer
on a cost-plus basis. An unsigned copy of the management services
agreement between Pioneer and Tillsonburg was provided with the ruling
request.

In your second submission you state that Pioneer intends to modify the
arrangement with Tillsonburg to exclude responsibility for fabric
procurement services, while retaining responsibility for fabric
financing. The procurement services will instead be performed by the
buying agents, Prospector and Primeasia, who are already involved in
fabric procurement and in sourcing the finished garments.

[Quota Payments]{.underline}

Where possible, Pioneer proposes to obtain quota from third parties
unrelated to the manufacturers of the merchandise. Additionally, Pioneer
intends to report all quota charges on the quota statements accompanying
each shipment.

**ISSUES:**

> 1\. Whether transaction value for Pioneer importations may be based on
> the price paid to the manufacturer;
>
> 2\. Whether the commissions paid by Pioneer to its agents are
> non-dutiable;
>
> 3\. Whether quota payments made to parties other than the manufacturer
> are non-dutiable; and
>
> 4\. Whether the management service payments paid by Pioneer to a
> related company are non-dutiable.

**LAW AND ANALYSIS:**

[Sale for Exportation]{.underline}

The method of appraisement will be transaction value pursuant to section
402(b) of the Tariff act of 1930, as amended by the Trade Agreements Act
of 1979 (TAA; 19 U.S.C. 1401a). Section 402(b)(1) of the TAA provides,
in pertinent part, that the transaction value of imported merchandise is
the \"price actually paid or payable for the merchandise when sold for
exportation to the United States\", plus enumerated additions.

The \"price actually paid or payable\" is defined in section
402(b)(4)(A) of the TAA as 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\...) made, or to be made, for
the imported merchandise by the buyer to, or for the benefit of, the
seller.\"

In [Nissho Iwai American Corp. v. United States]{.underline}, No.
92-1239, Slip Op. (Fed. Cir. Dec. 28, 1992) and [Synergy Sport
International, Ltd. v. United States]{.underline}, No. 93-5, Slip Op.
(CIT Jan. 12, 1993), the U.S. Court of Appeals for the Federal Circuit
and the Court of International Trade, respectively, addressed the proper
dutiable value of merchandise imported pursuant to a three-tiered
distribution arrangement involving a foreign manufacturer, a middleman
and a U.S. purchaser. In both cases the middleman was the importer of
record. In each case the court held that the price paid by the
middleman/importer was the proper basis for transaction value. Each
court further stated that in order for a transaction to be viable under
the valuation statute, it must be a sale negotiated at arm\'s length,
free from any nonmarket influence and involving goods clearly destined
for the U.S.

Likewise, we note that in the context of filing an entry, Customs Form
7501 (\"CF 7501\"), an importer is required to make a value declaration.
As indicated by the language of CF 7501 and the language of the
valuation statute, there is a presumption that such transaction value is
based on the price paid by the importer.

In accordance with the [Nissho Iwai]{.underline} and
[Synergy]{.underline} decisions and our own precedent, we will continue
to presume that an importer\'s declared transaction value is based on
the price the importer paid. [See]{.underline}, HRL 545144 (January 19,
1994) and HRL 545360 (May 31, 1994). In those situations where the
importer requests appraisement on the basis of a sale from the foreign
manufacturer to the middleman (and the importer is not the middleman)
the importer must submit sufficient evidence to show that the price is
acceptable under the standard set forth in [Nissho Iwai]{.underline} and
[Synergy]{.underline}. That is, the importer must establish that it was
an \"arm\'s length sale,\" and that the goods sold were \"clearly
destined for the U.S.\" at the time they were sold or contracted to be
sold.

In this case, counsel for Pioneer contemplates two importation
scenarios. In the first instance, Pioneer, either directly or through
its buying agents, will make direct factory purchases. Pioneer requests
that transaction value be based on the price that Pioneer pays to the
knitwear factories. In accordance with [Nissho Iwai]{.underline} and
[Synergy]{.underline}, Customs will presume that Pioneer\'s declared
transaction value is based on the price paid by Pioneer, the importer of
record. However, if in the future Pioneer establishes an interest in any
knitwear factory from which it makes purchases, Pioneer must so inform
Customs and will be required to substantiate that the transaction
between the related parties is at arm\'s length.

In the second instance, Pioneer or its buying agents will make purchases
through a middleman unrelated to the factory and requests that
transaction value be based on the sale between the middleman and the
knitwear factories rather than on the price that Pioneer pays to the
middleman. In order to accept the price paid by the middleman to the
manufacturer as the basis of transaction value, a [bona]{.underline}
[fide]{.underline} sale must occur between the manufacturer and the
middleman and the sale must be a \"sale for exportation\" according to
the standard set forth in [Nissho Iwai]{.underline}.

In reviewing the documents presented to us, we note that, in our
opinion, they do not clearly establish that a sale exists between the
factories and the middlemen. Under 19 U.S.C. 1484(a)(1), it is the
importer of record\'s responsibility to use reasonable care in filing
the declared value with Customs. Accordingly, if Pioneer is able to
establish by evidence that a [bona]{.underline} [fide]{.underline} sale
to the middleman has occurred then the decisions reached in [Nissho
Iwai]{.underline} and [Synergy]{.underline} would be relevant. Purchase
orders, invoices, other agreements between the parties and proof of
payment would all be relevant to this determination.

Assuming Pioneer is able to substantiate a sale between the manufacturer
and the middleman, the following information would be relevant to the
determination of whether the sale was \"at arm\'s length\" and involved
goods \"clearly destined\" for the U.S. Counsel has declared that the
middlemen and Pioneer are not \"related\" to any of the knitwear
suppliers, as that term is defined by 19 U.S.C. 1401a(g). In light of
the fact that there is no evidence to the contrary, we will assume that
if there are sales between the middlemen and the factories they are at
\"arm\'s length\" and that, therefore, the first requirement set forth
in [Nissho Iwai]{.underline} has been met. In addition we note that
Pioneer will require statements from each middleman regarding the status
of the middleman\'s relationship with the factory and that should a
middleman ever be related to the factory, Pioneer will alert Customs to
this fact. Under these circumstances, counsel states that Pioneer
understands that the middleman may be required to substantiate the fact
that the factory sale was at arm\'s length, and that if the middleman
cannot so substantiate, the transaction between Pioneer and the
middleman will be used for purposes of appraisement.

Because this is a prospective transaction and we do not have actual
documents relating to the described transaction, no definite conclusions
can be reached regarding the second requirement in [Nissho
Iwai]{.underline} that the goods be \"clearly destined for the U.S.\" at
the time of sale. However, we note that the following information would
support a finding that the requirement has been met: (1) The factory
produces the garments to fulfill a pre-existing purchase order issued by
the U.S. retailer; (2) the factory places labels in the garments which
identify or represent the trademarks of U.S. retailers; (3) the factory
packs the garments in shipping cartons which identify the U.S. retailer,
by marks and numbers, as the ultimate destination; and (4) the export
licenses controlling the volume of garments shipped to the U.S. cover
specific garments. Customs will also require a copy of the factory
invoice.

[Buying Agent Commissions]{.underline}

[Bona]{.underline} [fide]{.underline} buying commissions are not an
addition to the price actually paid or payable. [Pier 1 Imports, Inc. v.
United States]{.underline}, 708 F.Supp. 351, 354, 13 CIT 161, 164
(1989); [Rosenthal-Netter, Inc. v. United States]{.underline}, 679
F.Supp. 21, 23 12 CIT 77, 78 (1988); [Jay-Arr Slimwear, Inc. v. United
States]{.underline}, 681 F.Supp. 875, 878, 12 CIT 133, 136 (1988).

The existence of a [bona]{.underline} [fide]{.underline} buying
commission depends upon the relevant factors of the individual case.
[Eg.]{.underline}, [J.C. Penney Purchasing Corp. v. United
States]{.underline}, 451 F.Supp. 973, 983 (Cust. Ct. 1978). The importer
has the burden of proving the existence of [bona]{.underline}
[fide]{.underline} buying commissions. [Rosenthal-Netter]{.underline},
679 F.Supp. at 23; [New Trends, Inc. v. United States]{.underline}, 645
F.Supp. 957, 960, 10 CIT 637 (1986).

In a general notice published in the Customs Bulletin on March 15, 1989,
Customs provided an explanation of its position on buying commissions.
The following excerpts illustrate that position:

> While [bona]{.underline} [fide]{.underline} buying commissions are
> nondutiable, evidence must be submitted to Customs which clearly
> establishes that fact. In this regard, Headquarters Ruling Letter
> 542141, dated September 29, 1980, also cited as TAA No. 7, provides:
>
> \...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]{.underline}
> [fide]{.underline} buying agent and not a selling agent or an
> independent seller.

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]{.underline} at 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]{.underline}, 67 Cust. Ct.
503, 512, R.D. 11753 (1971). In addition, the courts have examined such
factors as: Whether the purported agents\' 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]{.underline}, 679 F.Supp. 21, 23 (1988);
[New Trends]{.underline}, 645 F.Supp. 957, 960-962.

In the instant case the duties performed by the agents are those
typically performed by [bona]{.underline} [fide]{.underline} buying
agents, and include compiling market information, obtaining samples,
placing orders on Pioneer\'s instructions, inspecting the merchandise
and arranging for shipment. The agents will not accept title to the
merchandise, nor will they assume any risk of loss. The agents will
place production orders with the factories designated by Pioneer and
only at the direction of Pioneer. Moreover, Pioneer will also control
the manner of payment, either deciding to pay the factory/vendor
directly and paying the agent separately on the commission invoice, or
by remitting funds to the agent sufficient to cover the cost of goods
and commission with instructions to remit the cost of goods to the
factory. Additionally, the buying agreement requires Pioneer's written
authorization with regard to most matters including setting prices,
granting allowances, changes to specifications, extending delivery and
entering into binding commitments.

Regarding the means of payment, Pioneer will be billed by, and pay, the
factories/middlemen vendors for the manufacturing of the garments. With
most of its suppliers in Hong Kong and China, Pioneer will work on an
open account basis \-- this means that the vendor (factory or middleman)
will issue an invoice to Pioneer for the goods and Pioneer will remit
payment by cheque or telegraphic transfer. In such cases, payments will
generally be on a periodic lump sum basis in part settlement of the
seller\'s account. Letters of credit will be used primarily for F.O.B.
purchases in Indonesia, India, Dubai, Korea, Taiwan, South America, etc.
where each payment will correspond to a specific invoice.

Because the buying agency agreements are neither signed nor dated we are
unable to rule on their sufficiency as regards the specific transactions
described. However, based on the remaining information submitted with
the ruling request, the arrangements between Pioneer and its agents
appear to satisfy the criteria of a [bona]{.underline}
[fide]{.underline} buying agency relationship. So long as the agents,
Prospector and Primeasia, remain under the control of the principal,
Pioneer, with regard to the procurement function, and the transactions
are carried out as described above and documented in accordance with the
legal requirements, the buying commissions at issue appear to qualify
for non-dutiable status.

In addition, you state that Pioneer will ship a substantial portion of
its merchandise by air and that very often, the supplier\'s commercial
invoice to Pioneer will not be available at the time the goods depart
the foreign port. In order that Customs clearance not be delayed for
want of the invoice from the supplier, Pioneer proposes that the buying
agent prepare an \"agent\'s invoice\" showing the value for Customs
clearance. Upon receipt of the factory/middleman invoice you state that
Pioneer would be able to verify the amounts of the two invoices against
each other, if so requested by Customs. As discussed above, Customs
ordinarily requires that the importer present the invoice or other
documentation from the actual foreign seller to the agent to establish
that the agent is not the seller. Because, however, there is otherwise
sufficient evidence that the agent is a [bona]{.underline}
[fide]{.underline} buying agent, so long as Pioneer is able to present
Customs with the seller\'s invoice as a means of verification shortly
after the time of importation, in this case the failure to present the
factory invoice at the time of importation will not result in the denial
of non-dutiable treatment of the buying commissions. It is up to the
import specialist to determine an acceptable time frame in which the
actual factory invoice must be presented.

Please note 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]{.underline}
[fide]{.underline} buying agent and not a selling agent nor an
independent seller. 23:11 Cust. Bull. & December 9, General Notice dated
March 15, 1989; HRL 542121 (September 29, 1991)

[Quota Payments]{.underline}

Pioneer proposes to obtain quota from third parties unrelated to the
manufacturers, [where possible]{.underline}. Under the three-tiered
sales arrangement when Pioneer obtains quota from third parties
unrelated to the seller/manufacturer the quota payments will not be
included in transaction value so long as the quota charges are
identified separately from the price actually paid or payable. However,
in instances where quota payments are made to parties related to the
manufacturer/seller, the payments will be dutiable. Customs has
consistently held that in cases where quota payments are paid to the
seller, or a party related to the seller, then the amount of the
payments is part of the total payment to the seller, and, accordingly,
is included in the transaction value of the merchandise.
[See]{.underline}, HRLs 542169 (TAA #6), dated September 18, 1980;
542150 (TAA #14), dated January 6, 1981; and 543913, dated February 22,
1988. This position was affirmed by the U.S. Court of Appeals for the
Federal Circuit in [Generra Sportswear Co. v. U.S.]{.underline}, 905
F.2d 377 (Fed. Cir. 1990).

Similarly, under the four-tiered sales arrangement where Pioneer pays
the middleman a price which includes quota, and the middleman procures
quota from a third-party related to the factory, the quota payments will
be dutiable. Where the quota is obtained from a third-party unrelated to
the seller, the payments will not be dutiable.

Under both the three and four-tiered sales arrangements, where the
non-dutiability of quota payments is claimed, it is incumbent upon
Pioneer to be able to confirm the validity of such claim with
appropriate documentation and that the imported merchandise is entitled
to entry in accordance with Treasury Decision (T.D.) 86-56, dated March
6, 1986.

[Management Services Fees]{.underline}

Tillsonburg performs certain management services for Pioneer, some of
which involve the procurement of assists. The term \"assist\" refers to
materials, components, parts and similar items incorporated in imported
merchandise, and supplied free of charge or at a reduced cost by the
buyer in

connection with the production or sale for export to the U.S. of the
merchandise. 19 U.S.C. 1401a(h)(1)(A)(i).

Customs has ruled that certain management services are not considered to
be assists. [See]{.underline}, HRL 543992 (September 10, 1987) and HRL
543820 (December 26, 1986) HRL 543512 (April 9, 1985) and HRL 542122
(TAA #4). Some of the services provided by Tillsonburg are analogous to
the services described in these rulings. Based on those rulings, the
portion of the fee related to arranging financing, accounting,
administration, clerical activities and international transportation of
the assembled merchandise to the U.S., would be non-dutiable.

In support of its position that the management service fees related to
assist procurement, storage and inspection are non-dutiable, counsel
cites to TAA #20 and HRL 544323 dated March 8, 1990. In TAA #20
acquisition costs included: purchasing, receiving, inspection,
warehousing and transporting component parts from the importer\'s plant
in Illinois to its assembly plant in Mexico, tasks which were undertaken
at the corporate headquarters in Illinois by individuals domiciled
within the United States. [See]{.underline} [also]{.underline}, HRL
544423 dated June 3, 1990. TAA #20 was modified in HRL 544323 where
Customs recognized that the term \"procurement assist\" is not a term
defined in the TAA. Rather the TAA simply defines what materials or
services are considered assists. The proper inquiry is whether the
particular item or activity is considered to be an assist or part of the
value of an assist within the definition in section 402(h)(1)(A) of the
TAA.

Subsequently, in HRL 544423 dated June 3, 1991, Customs addressed
whether commissions paid to a buying agent for obtaining piece goods
supplied to apparel manufacturers and used in the production of imported
garments should be considered part of the cost of the assist. Having
first determined that a [bona]{.underline} [fide]{.underline} agency
relationship did not exist, we held that commissions paid by an importer
to an \"agent\" for procuring materials to be incorporated into imported
merchandise were part of the cost of acquiring the assist and were
therefore dutiable.

In HRL 544976 dated March 17, 1993, Customs found that commissions paid
by an importer to an agent for procuring assists were part of the cost
of acquiring an assist and were part of the price actually paid or
payable. However, Customs also noted that where a buying agency
agreement existed, and the role in procuring fabric assists was
incorporated as part of the buying agency agreement, the commissions
would be non-dutiable, assuming the existence of a [bona]{.underline}
[fide]{.underline} buying agency.

In the instant case, there is no buying agency relationship, or written
agreement to that effect, between Tillsonburg and Pioneer. Therefore, in
accordance with HRLs 544423 and 544976 the costs of services performed
by Tillsonburg which relate to the procurement of assists are dutiable.
Costs associated with inspection services are dutiable inasmuch as they
are regarded as part of the procurement function. [See]{.underline} TAA
#20.

In your most recent submission you state that Pioneer intends to modify
its management services agreement with Tillsonburg to exclude
responsibility for fabric procurement services, while retaining
responsibility for fabric financing. The procurement services will be
performed by Pioneer\'s buying

agents.

Inasmuch as the buying agency agreements make no mention of assist
procurement, such services if performed by the buying agents, will also
be dutiable. We note, however, that in its latest submission counsel
states that the agreements will be modified to include assist
procurement in the buying agent duties.

Warehousing services which occur while the assists are in transit are
generally regarded as part of the procurement function and are dutiable.
[See]{.underline}, HRL 544323 dated March 8, 1990. In the instant case,
it is unclear from the facts when the warehousing of assists occurs. We
are therefore unable to rule on whether the costs associated with
warehousing assists are dutiable.

As conceded by counsel, and as required by law, the fees relating to
delivery/transportation of the fabric to the factory will be included in
the appraised value of the merchandise.

**HOLDING:**

1\. Transaction value may be based on the price paid to the middleman in
instances where Pioneer purchases the imported merchandise directly, or
through its agents, from the manufacturers. So long as Pioneer is able
to establish that a sale for exportation occurred between the
manufacturer and a middleman, transaction value may be based on the
price paid

to the manufacturer for merchandise purchased by Pioneer through a
middleman.

2\. The commissions paid by Pioneer to its agents appear to be
[bona]{.underline} [fide]{.underline} buying commissions and as such are
not dutiable as part of the transaction value of the merchandise.

3\. In instances where Pioneer or its buying agents make quota payments
to parties unrelated to the seller and the quota charges are identified
separately from the price actually paid or payable, quota charges will
not be included in transaction value. Where payment for quota is made to
a party related to the seller, the payment is dutiable.

4\. The fees relating to Tillsonburg\'s procurement and
delivery/transportation of the fabric to the factory will be included in
the appraised value. The remaining fees relating

to the management services are non-dutiable providing certain
conditions, discussed above, are met.

> Sincerely,
>
> John Durant, Director
>
> Commercial Rulings Division