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HQ 544244


June 16, 1989

CLA-2 CO:R:CV:V 544244 VLB

CATEGORY: VALUATION

Frank J. Desiderio, Esquire
Grunfeld, Desiderio, Lebowitz & Silverman 12 East 49th Street
New York, New York 10017

RE: Request for Ruling on Valuation of Wearing Apparel Purchased Through a Related Buying Agent

Dear Mr. Desiderio:

This is in response to your letter dated September 7, 1988, requesting a prospective ruling that payments by L.Y.N.S. Corporation (hereinafter referred to as the "importer") to Seaphone Company Limited, a Hong Kong entity (hereinafter referred to as "Hong Kong company") are not includable in the transaction value of imported merchandise under section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA).

FACTS:

The importer is purchasing wearing apparel from the Far East. It has entered into a contract with the Hong Kong company entitled "Buying Agency Agreement". Under the agreement, the Hong Kong company receives commissions based on the factories' sale price to the importer, in consideration for performing enumerated services on behalf of the importer.

You state that eighty percent of the importer's stock is owned by Mr. Wah Lau. The remaining twenty percent is owned by Mr. Louis Shen. Additionally, you indicate that Mr. Lau owns a minority of the Hong Kong company's stock. The remainder of the stock is owned by an unrelated third party. You also point out that neither Messrs. Lau, Shen or the other party interested in the Hong Kong company possess any financial interest in, or exercise any control over the factories which supply merchandise to the importer.

Further, you state that Mr. Lau's family, including certain distant relatives, owns a number of denim factories which may sell piece goods to the importer. However, Mr. Lau does not control or derive any financial benefit from the operation of the factories. Moreover, the Hong Kong company will use office space in the same building used by a spinning mill company owned by Mr. Lau's father and a company controlled by a relative of Mr. Lau. However, the Hong Kong company maintains its own books, records and payroll. In addition, the Hong Kong company pays its pro rata share of the telex, telecopy and rental expenses.

The documentation for the transaction consists of all manufacturers invoicing the Hong Kong company for the merchandise. The Hong Kong company then forwards the invoices to the importer. The Hong Kong company also sends a separate invoice for its commission and for the expenses incurred in connection with the purchase and exportation of merchandise on behalf of the importer. The importer in turn forwards full payment to the Hong Kong company which remits payments for the merchandise to the manufacturer.

Finally, you indicate that the Hong Kong company advances part of its permanent quota to the importer or purchases quota from time to time, as conditions in the quota market permit, on behalf of the importer. The importer pays for the quota as used or reimburses the Hong Kong company for the quota sums advanced from its permanent quota.

ISSUES:

(1) Whether the amounts paid to the Hong Kong company under the agreement with the importer are includable in the transaction value of the merchandise.

(2) Whether the quota charges paid to the Hong Kong company by the importer are includable in the transaction value of the merchandise.

LAW AND ANALYSIS:

The preferred method of appraising merchandise is transaction value which is defined in 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)) as the "price actually paid or payable" for merchandise when sold for exportation to the United States, plus certain enumerated additions. There appears to be no dispute that transaction value is the proper basis of appraisement in this case.

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 defined in section 402(b)(4)(A) as:

The total payment (whether direct or indirect . . .) made, for imported merchandise by the buyer to, or for the benefit of, the seller.

The importer and the Hong Kong company are related persons under section 402(g) of the TAA. However, the mere fact that the parties are related does not preclude a finding that a bona fide buying agency relationship exists.

To determine whether a bona fide buying agency exists between an importer and an alleged "buying agent", the primary consideration is the right of the principal to control the agent's conduct with respect to matters entrusted to the agent. B & W Wholesale Co. v. United States , 58 CCPA 92, C.A.D. 1010, 436 F.2d 1399 (1971). Customs also considers the nature of the services performed by the agent giving rise to the payment to determine whether the costs should be included in the transaction value of the merchandise. Jay-Arr Slimwear, Inc. v. United States, ____ CIT ____, Slip Op. 88-21 (Feb. 18, 1988). As the court stated in Slimwear, if the expenses are associated with selling or producing the merchandise, rather than ministerial functions in procuring the goods, the costs are dutiable.

Customs published a general notice in the Customs Bulletin dated March 15, 1989, reminding interested parties what evidence is required to establish a bona fide buying agency relationship. In the notice, Customs quoted from Headquarters Ruling letter 542141, dated September 29, 1980 (TAA No. 7) establishing that:

. . . 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.

On the basis of the information you have provided regarding the transactions in question, we are satisfied that the importer will exercise the requisite degree of control over the Hong Kong company. However, you have indicated that the Hong Kong company may be purchasing merchandise from certain factories in which
some of the agent's family members have an interest. This again is not an absolute bar to finding a buying agency relationship, but the importer must demonstrate conclusively that it exercises absolute control over the buying agent with respect to the transactions. It is essential that no portion of the commissions paid to the Hong Kong company inure to the benefit of those factories in which a family member has an interest.

Paragraph 8 of the Agreement states that the Agent does not have any financial interest in the factories, and there is no evidence submitted to the contrary. Therefore, we conclude, based on the totality of the evidence, that the commissions paid to the Hong Kong company constitute bona fide buying commissions which are not includable in the transaction value of the merchandise.

You have informed us that the importer has begun to enter merchandise under the proposed arrangement. The import specialist has notified us that she has requested information to confirm the entered value of the merchandise. This ruling is based solely on the information contained in your letter dated September 7, 1988. Should the import specialist find information that is inconsistent with the representations in the letter, she may take the appropriate action.

The second issue you have raised involves whether the quota charges paid to the Hong Kong company by the importer are includable in the transaction value of the merchandise. As you may know, a proposal requiring the dutiability of all quota charges paid as a prerequisite to the exportation of merchandise to the U.S. is currently under review. The notice was published in the Federal Register (53 FR 46626) on November 18, 1988. Under Customs regulation 19 CFR 177.7(a) "no ruling letter will be issued . . . in any instance in which it appears contrary to the sound administration of the Customs and related laws to do so." Pursuant to this regulation and in light of the outstanding notice, we have determined that it is inappropriate to issue a ruling on the quota issue at this time.

HOLDING:

(1) In light of the foregoing, the payments made to the Hong Kong company are buying commissions under a bona fide buying
agency agreement. Therefore, the payments are not part of the transaction value of the merchandise.

(2) In addition, Customs currently is reviewing comments concerning the dutiability of quota charges. Therefore, it would be contrary to sound administration of the Customs laws for us to issue a prospective ruling regarding the dutiability of quota charges at this time.

Sincerely,

John Durant, Director

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