HQ 0544510 - Application for Further Review of Protest No. 3001-89- 000820; dutiability of commissions paid to purported buying agent where buying agent is related to importer - United States International Trade Commision Rulings

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HQ 544510

January 9,1992

VAL CO:R:C:V 544510 DPS

CATEGORY: VALUATION

District Director
Seattle, Washington

RE: Application for Further Review of Protest No. 3001-89- 000820; dutiability of commissions paid to purported buying agent where buying agent is related to importer

Dear Sir:

The subject protest and application for further review concerns the appraisement of approximately 33 entries of toy products imported from the Far East by Buddy L Corporation, (Buddy L), and the Customs Service's decision to assess duty on commissions paid by Buddy L to its purported Hong Kong buying agent, Buddy L (Hong Kong) Ltd. (BLHK). Information in the file indicates that your office followed the advice of the National Import Specialist in New York in rejecting the existence of a bona fide buying agency relationship between Buddy L and BLHK.

FACTS:

Based on counsel's submission, Buddy L has been active in the toy industry since 1910. For many years, Buddy L manufactured toys in the U.S. However, since 1975, all of the actual manufacturing of Buddy L's products have been performed by independent contractors located in the Far East. The vast majority of Buddy L's product line consists of stamped steel vehicles, always bearing the "Buddy L" trademark, and in certain instances the trademark of another company (e.g., Coca-Cola) for which Buddy L is the licensee. In almost all instances, the toys which are the subject of this protest have been designed by Buddy L, and are produced using molds supplied to the contractors by Buddy L.

In 1981 Buddy L created Buddy L (Hong Kong) Ltd. (BLHK) as a wholly owned subsidiary to inspect merchandise, supervise quality control, coordinate order processing, expedite shipping, and consolidate goods purchased by Buddy L. Buddy L was then dealing with more than fifteen (15) different contractors, and coordination/consolidation of shipments, and allocation and coordination of customer orders could no longer be efficiently be controlled from New York. BLHK began operating on January 2, 1982. A formal buying agency agreement was signed effective January 2, 1982, setting the commission at ten percent (10%) (Exhibit 3 of counsel's submission accompanying the protest). At that time, counsel states, that Customs' officials agreed that the commission paid to BLHK by Buddy L was a nondutiable buying commission.

The buying agency agreement between Buddy L and BLHK indicates that BLHK will perform the following services on behalf of Buddy L: (1) secure current market information; (2) render translation services; (3) supervise and follow up on all orders placed by Buddy L at respective factories; (4) assist with documentation; (5) meet with Buddy L employees and assist them during their visits to Hong Kong; (6) render all administrative services necessary and process orders placed by Buddy L; (7) assist in setting up financial arrangements with various factories; (8) inspect, periodically, all goods ordered on behalf of Buddy L and report any deficiencies or potential problems; and (9) supervise production and shipping schedules with various factories. The agreement further provides that BLHK has no authority to bind or obligate Buddy L, except upon written authorization from Buddy L.

Counsel states that from BLHK's inception in 1982 until July 31, 1987, Customs officials at ports of entry throughout the U.S. uniformly accepted the commission paid by Buddy L to BLHK as a nondutiable buying commission. On several occasions Import Specialists at ports other than New York requested that Buddy L transmit actual manufacturers' invoices to confirm the bona fides of the commission. Exhibit 6 to counsel's submission is an example of such a request and Buddy L's response thereto. The submitted documentation consists of manufacturers' invoices issued to Buddy L in care of BLHK.

On April 27, 1989, Buddy L replied to an additional Request for Information from Customs officials at New York by submitting a set of documents relating to 10 representative entries. Exhibits 9-13 of counsel's submission consist of documents relating to four of these entries. These documents include the following: (1) Purchase Order (PO) issued by Buddy L to BLHK specifying the contractor who actually will produce the merchandise, and the price to be paid; (2) confirmation of purchase from BLHK to Buddy L; and (3) invoice from the manufacturer to BLHK, which references Buddy L's original PO number, along with the name Buddy L.

In addition, certain suppliers' invoices expressly provide that the merchandise is being sold to "Buddy L Corporation c/o Buddy L (Hong Kong) Ltd."

Attached to protestant's submission as Exhibit 14 is an affidavit of Buddy L's treasurer, attesting to the fact that "BLHK has absolutely no authority to determine which contractors will supply which merchandise or the price to be paid by Buddy L" and that all decisions regarding contractors, price and quantities purchased are made by Buddy L personnel. In addition to the documents previously submitted to Customs (exhibits 2-14 of protestant's submission), the following additional documents relating to the buying commissions were submitted with this protest:

Exhibit 15, Affidavit of Ronnie Soong, General manager, BLHK, attesting to the fact that: (1) BLHK acts as Buddy L's agent; (2) all decisions regarding contractors' price and quantity are made by Buddy L; and (3) actual risk of loss on all merchandise purchased by Buddy L from its contractors ultimately is borne by Buddy L;

Exhibit 16, Statements from several of Buddy L's contractors confirming the fact that they would gladly sell directly to Buddy L without having to go through BLHK and that they sell through BLHK at Buddy L's convenience; and

Exhibit 17, Representative examples of correspondence between Buddy L and its contractors confirming that there exists a direct relationship between buyer and seller.

The NIS takes the position that BLHK performs services which extend beyond those which are normally associated with buying agents, to the extent that the relationship should not be considered a bona fide buying agency relationship. This opinion is based upon information that the CEO of BLHK also acts as President and Chairman of the Board of Buddy L, and the existence of an intercompany account in which all charges and/or credits between BLHK and Buddy L are recorded. This intercompany account is described in Exhibit 7 of protestant's submission which is a letter to Customs in New York dated September 9, 1987. It provides, in pertinent part:

BLC [Buddy L] purchases all of its merchandise requirements from its suppliers through BLHK. On delivery the suppliers invoice BLHK, and in turn, BLHK re-invoices BLC for the exact amount of the suppliers invoice plus commission. A running account (the intercompany account) is maintained to record all charges and /or credits between BLHK and BLC. From time to time BLC remits funds to BLHK These transfers are usually in large, whole dollar amounts, and are credited to the intercompany account. For your easy reference, we have attached sample pages of the intercompany account together with copies of intercompany fund transfers.

LAW & ANALYSIS:

For the purpose of this response, we are assuming that transaction value is the appropriate basis of appraisement. Transaction value is defined in section 402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(b);TAA) as the "Price actually paid or payable for the merchandise" plus amounts for the five enumerated statutory additions in 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 402(b)(4) 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 a bona fide buying agency exists between an importer and an alleged "buying agent" is not determined by any single factor, but depends upon the relevant facts of each case. See J.C. Penney Purchasing Corp. v. United States, 451 F. Supp. 973 (Cust. Ct. 1978). The primary consideration in determining whether a bona fide buying agency relationship exists between an importer and an alleged buying agent is the right of the principal to control the agent's conduct with respect to matters entrusted to the agent. B & W Wholesale Co., Inc. v. United States, 58 CCPA 92, C.A.D. 1010, 436 F.2d 1399 (1971).

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 fide 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, provided:

...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.

In New Trends Inc. v. United States, 10 CIT 637, 645 F. Supp. 957 (1986), the Court of International Trade 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 manufacturer of the merchandise. In addition, the importer must show that "none of the commission inures to the benefit of the manufacturer." J.C. Penney, 80 Cust. Ct. at 97, 451 F. Supp. at 984. More recently, in Pier 1 Imports, Inc. v. U.S., 708 F.Supp 351 (CIT 1989), the court reiterated the factors set forth in New Trends and J.C. Penney, and emphasized that control over the purchasing process was strong evidence that an agency relationship exists. The court found the manner of payment to establish that the agent purchased merchandise only at the direction of the importer. In Pier 1, the agent did not retain the discretion to deduct commissions, freight charges, or bear the risk of loss. In addition, none of the commissions inured to the benefit of the manufacturer/seller. The court found that the agent did not "purchase" the merchandise until after the importer ordered the merchandise, and forwarded the funds necessary for acquisition. Thus, in Pier 1, the agent operated only at the direction of the importer, not autonomously.

As the above cited court decisions make clear, any determination of whether a bona fide buying agency relationship exists, depends on the facts in each particular case. Here, we must determine the validity of the purported buying agency relationship, between Buddy L and BLHK.

Based on the information submitted, which consists of purchase orders issued by Buddy L, confirmation orders from BLHK, manufacturers' invoices, correspondence between the parties, Buddy L's responses to Customs information requests, and the affidavits submitted along with the subject protest and application for further review, we are satisfied that BLHK is under the control of Buddy L. Representations made by counsel along with the documentation submitted indicates that BLHK has no authority to choose the contractors who produce merchandise for Buddy L, to set prices, to establish quantities purchased or to designate the merchandise to be produced. All of these decisions appear to be made by Buddy L.

The services performed by BLHK for Buddy L which are described in the buying agency agreement between the parties consist primarily of consolidating shipments, arranging for payment, translating, placing orders on Buddy L's instructions, and assisting in negotiations. BLHK has no financial interest in any of the manufacturers, nor does it receive compensation from the factories. BLHK is compensated for its services relating to merchandise imported by Buddy L solely through a commission paid by Buddy L. BLHK does not share commissions with the factories.

The submitted information indicates that Buddy L communicates directly with its foreign manufacturers and visits them to negotiate prices and discuss their business endeavors. Buddy L submits manufacturers invoices and proof of payment to Customs when requested. And finally, it appears from the documentation provided that Buddy L bears all risk of loss for the merchandise after it is purchased from the factories.

HOLDING:

Consistent with the foregoing, based on the information presented, we are satisfied that the relationship between Buddy L and BLHK meets the criteria of a bona fide buying agency relationship. Accordingly, you are hereby directed to grant the subject protest. A copy of this decision should be attached to the Customs Form 19, and mailed to the protestant as part of the notice of action on the protest.

Sincerely,

John Durant, Director

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