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HQ 544894


May 4, 1992

VAL-CO:R:C:V 544894 GG

CATEGORY: VALUATION

Mr. Robert W. Nordness
Area Director, Western Great Lakes Area
U.S. Customs Service
110 S. Fourth Street
Minneapolis, Minnesota 55401

RE: IA 64/91; transaction value; existence of non-dutiable buying commission; xxxxxxx Chemical Company

Dear Mr. Nordness:

This is in response to the internal advice request referenced above, which originated in your office (CLA-1- GL:DU:CO:IS BAA, dated October 10, 1991) and asks whether payments made by xxxxxxx Chemical Company to three overseas affiliates were non-dutiable buying commissions.

FACTS:

The following facts are based on written statements made by counsel for xxxxxxx. Those statements were derived from affidavits of Mr. xxxxxxx xxxxxxxxxx, Vice President and Treasurer of xxxxxxx; of Mr. xxxxxxx xxxx xxxxxxxxx, a director of xxxxxxx UK; and of Mr. xxxx xxxxxxxxxxx, a financial officer of xxxxxxx Chemie. No documents were presented with the statements to verify their accuracy. Our response is based on the premise that these facts are accurate.
xxxxxxx Chemical Company, Inc. ("xxxxxxx") is a wholly owned U.S. subsidiary of xxxxx-xxxxxxx Corporation, a Delaware corporation. xxxxxxx develops, manufactures, purchases and sells chemicals and organic and inorganic compounds. It purchases many of the chemicals and compounds from suppliers located worldwide.

Approximately 90% of xxxxxxx's overseas purchases are made through three affiliates: xxxxxxx Japan, Inc. ("xxxxxxx Japan"), a Delaware corporation owned by xxxxxxx, with a branch in Tokyo; xxxxxxx Chemie GmbH K.G. ("xxxxxxx Chemie"), a wholly owned subsidiary of xxxxxxx organized under the laws of Germany; and xxxxxxx Chemical Co., Ltd. ("xxxxxxx UK"), an "indirectly wholly owned subsidiary" of xxxxx-xxxxxxx organized under the laws of England.
xxxxxxx Japan was established in 1978 to serve as xxxxxxx's marketing representative in Japan. It markets xxxxxxx's products as well as those made by other subsidiaries or affiliates of xxxxx-xxxxxxx, and assists independent dealers through whom products of such affiliates are sold in Japan. xxxxxxx claims that xxxxxxx Japan also acts as its buying agent in Japan.
xxxxxxx Chemie and xxxxxxx UK are distributors of xxxxxxx products in Europe. They also purchase, manufacture and sell chemicals and inorganic and organic compounds for their own account; on occasion, xxxxxxx buys their products. xxxxxxx states that xxxxxxx Chemie and xxxxxxx UK, for reasons both of convenience and economics, also serve as xxxxxxx's buying agents. xxxxxxx states that it is free to purchase directly from suppliers in Japan, Germany and the United Kingdom.

There is no written buying agency agreement between xxxxxxx and xxxxxxx UK or xxxxxxx Chemie; however, xxxxxxx reportedly pays xxxxxxx UK a 10%, and xxxxxxx Chemie a 5%, buying commission. xxxxxxx and xxxxxxx Japan signed a document entitled "Amendment to the Commission Agreement", dated December 31, 1986, in which xxxxxxx agreed to pay a 5% "purchasing services fee" for xxxxxxx Japan's services as a buying agent. The original commission agreement has not been produced by xxxxxxx.

Prior to 1990 all invoices from the affiliates to xxxxxxx omitted any reference to buying commissions. The invoices were on the affiliates' letterheads, and the affiliates were listed as the seller. xxxxxxx states that the price of the merchandise reflected on the invoices sent by all three affiliates to xxxxxxx was usually identical to the price reflected on the invoices for such goods from the supplier; occasionally, however, there were minor differences between the price reflected on the computer generated invoice sent by xxxxxxx Chemie and the actual price charged by the supplier, reportedly caused by out-of-date prices still being in the computer. In no instance, xxxxxxx asserts, was a profit or mark-up added to a buying affiliate's price. Invoices for payment of the commissions were never shown to Customs and were paid by xxxxxxx without notifying the agency. Since April 1990, xxxxxxx began to require the affiliates to disclose commissions as separate line items on each invoice, and on January 23, 1991, xxxxxxx made a prior disclosure to Customs in regard to the commissions.

To prove that a bona fide buying agency relationship existed between itself and the three affiliates, xxxxxxx states that it specified the type, quantities and price of the chemicals and compounds to be purchased, and indicated from which manufacturer or supplier they were to be acquired. The affiliates had no authority to go beyond xxxxxxx's instructions. xxxxxxx UK and xxxxxxx Chemie obtained most of xxxxxxx's orders from sole or historic source manufacturers, and were under standing orders from xxxxxxx to obtain sole or historic source items at the last price quoted. Price changes in every instance had to be approved by xxxxxxx. xxxxxxx states that the prices for the merchandise reflected on the invoices it received from the three affiliates were identical to the prices charged by the suppliers or manufacturers.

In addition to their purchasing duties, the affiliates conducted market research and provided information to xxxxxxx on the sources of supply of chemicals and compounds, gathered samples of merchandise at xxxxxxx's request, and generally kept xxxxxxx informed about chemical developments in their respective areas. They also acted as a liaison between manufacturers and suppliers and xxxxxxx and other subsidiaries, arranged for the packing and shipment of the chemicals and compounds to xxxxxxx, and on occasion helped xxxxxxx obtain replacements for non- conforming merchandise. xxxxxxx UK and xxxxxxx Chemie also performed initial quality control testing for xxxxxxx.
xxxxxxx states that the affiliates had no interest in, or received any remuneration from, any supplier or manufacturer from whom they purchased chemicals or compounds for xxxxxxx. No part of the commissions received by the affiliates from xxxxxxx was paid to, or directly or indirectly benefited, a supplier or manufacturer. In most instances the suppliers and manufacturers were aware that xxxxxxx Japan, xxxxxxx UK and xxxxxxx Chemie were buying for xxxxxxx's account.

The buying affiliates were not at risk with respect to the merchandise they purchased on xxxxxxx's behalf. xxxxxxx sent regular wire transfer payments to cover the affiliates' invoices; the affiliates then paid the suppliers and manufacturers out of these funds. The affiliates were reimbursed by xxxxxxx for any freight or Customs charges incurred upon the importation of xxxxxxx's purchases. xxxxx-xxxxxxx insurance covered the shipment of merchandise from the affiliates to xxxxxxx.
xxxxxxx sometimes bought from xxxxxxx UK chemicals and compounds made by xxxxxxx UK and the other affiliates. In such transactions, xxxxxxx paid a 10% handling or service fee, or commission, to xxxxxxx UK. Prior to April 1990, this charge was not included on the invoices and entry documentation. Since that time, xxxxxxx required its UK affiliate to disclose the 10% charge as a separate line item on each invoice for goods manufactured by xxxxxxx UK.

ISSUE:

1) Whether the three affiliates of xxxxxxx were bona fide buying agents of xxxxxxx? If so, were the commissions paid to them for their buying services includable in transaction value?

2) Whether the 10% handling and service fees paid by xxxxxxx to xxxxxxx UK on the sale of merchandise that was manufactured by xxxxxxx UK, xxxxxxx Chemie, or xxxxxxx Japan, were dutiable?

LAW AND ANALYSIS:

The primary method of valuing imported merchandise is transaction value. The transaction value of imported merchandise is the price actually paid or payable for the merchandise when sold for exportation, plus amounts for certain items enumerated in Section 402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(b)(1)). Selling commissions incurred by the buyer with respect to the imported merchandise are one of those enumerated additions (Section 402(b)(1)(B) TAA); bona fide buying commissions, however, are not a proper element of transaction value. See Pier 1 Imports, Inc. v. United States, 708 F. Supp. 351, 13 CIT 161, 164 (1989); Rosenthal-Netter, Inc. v. United States, 12 CIT 77, 78, 679 F. Supp. 21, 23 (1988), aff'd, No. 88-1294 (Fed. Cir. Nov. 10, 1988); Jay-Arr Slimwear, Inc. v. United States, 12 CIT 133, 136, 681 F. Supp. 875, 878 (1988).

A precondition for a finding that an amount in question is a non-dutiable buying commission is the existence of a buying agency relationship. The importer has the burden of proving that such a relationship exists, and that the charges paid were, in fact, bona fide buying commissions. See Rosenthal-Netter, 679 F. Supp. at 23; New Trends, Inc. v. United States, 645 F. Supp. 957, 960, 10 CIT 637 (1986).

Various factors are taken into account in determining whether an agency relationship exists. However, the primary consideration is "the right of the principal to control the agent's conduct with the matters entrusted to him". See Pier 1 Imports, 13 CIT at 164 (quoting J.C. Penney Purchasing Corp. v. United States, 80 Cust. Ct. 84, 95, C.D. 4741, 451 F. Supp. 973, 983 (1978)); Rosenthal-Netter, 12 CIT at 79, 679 F. Supp. at 23. The detailed and binding instructions which xxxxxxx claims it gave to the affiliates on the types, quantities, prices, and suppliers of the chemicals and compounds to be purchased, would indicate that xxxxxxx to a great extent controlled the purchasing process. Control over the purchasing process is strong evidence that an agency relationship exists. See Rosenthal-Netter, 12 CIT at 80, 679 F. Supp. at 24; J.C. Penney, 80 Cust. Ct. at 95-96, 451 F. Supp. at 983; Jay-Arr Slimwear Inc. v. United States, 12 CIT 133 at 137 (1988).

The manner of payment can also illustrate which party controls the transaction. See Pier 1 Imports, 708 F. Supp. at 354; Rosenthal-Netter, 679 F. Supp. at 24. In Pier 1 Imports, where an agency relationship was found to exist, the importer/principal paid for the merchandise by opening a letter of credit for each purchase order in favor of its agent, which the agent in turn used to set up a back-to-back letter of credit between itself and the manufacturer in the exact amount of the importer's purchase order and letter of credit. Rosenthal- Netter differed in that the intermediary, who the court found not to be an agent, retained the discretion to deduct its commission, handling charges, freight charges, and banking costs from master letters of credit. Clearly, the importer in Pier 1 exercised greater control over payment methods than its Rosenthal-Netter counterpart. Unfortunately, a comparison cannot be drawn between xxxxxxx's payment system and those in these two cases, because although xxxxxxx states that it sent regular wire transfer payments to cover the affiliates' invoices, it does not mention what discretion, if any, the affiliates had to use the money for miscellaneous expenses before paying the manufacturers. We are unable to determine which party controlled the manner of payment.
xxxxxxx states that it had the option of purchasing directly from manufacturers. The ability to purchase merchandise directly, without going through intermediaries, has been held to support the existence of an agency relationship. See Pier 1 Imports, 708 F. Supp. at 355 (quoting J.C. Penney, 451 F. Supp. 984).

It is also characteristic of an agency relationship that the risk of loss will not fall on the agent. See Pier 1 Imports, 708 F. Supp. at 357; Rosenthal-Netter, 679 F. Supp. at 26; New Trends, 645 F. Supp. at 962. In this regard, xxxxxxx's claim that xxxxx-xxxxx paid for the insurance covering the shipments of chemicals and compounds to xxxxxxx, implies that the risk of loss was on xxxxxxx's parent, not on the three affiliates.

Compiling market information, inspecting and packing the goods, and arranging for shipment and payment are other services performed by a bona fide buying agent. See Jay-Arr Slimwear, 12 CIT 133 at 137; J.C. Penney, 451 F. Supp. at 984. xxxxxxx indicates that its affiliates were responsible for these tasks. And since the principal usually is required to absorb any shipping and handling costs in a bona fide agency relationship, and xxxxxxx claims to have reimbursed the affiliates for freight and Customs' charges that were incurred, this would be a sign that the affiliates were serving in the capacity of xxxxxxx's agents. See Rosenthal-Netter, 679 F. Supp. at 24; New Trends, Inc., 645 at 960.

A buying agency agreement, if in existence, is another factor which supports an agency relationship. See Rosenthal- Netter, 679 F. Supp. at 26; J.C. Penney, 451 F. Supp. at 985. The December 31, 1986 xxxxxxx - xxxxxxx Japan Amendment to the Commission Agreement suggests that an agency agreement existed between those two parties; while not as convincing as the actual agreement itself, the amendment certainly lends credence to xxxxxxx's argument that xxxxxxx Japan was a buying agent. However, the lack of formal agreements between xxxxxxx and xxxxxxx U.K., and xxxxxxx and xxxxxxx Chemie, is not necessarily fatal to their agency claims, for while it is true that a buying agency agreement supports the notion of a bona fide agency relationship, it is not dispositive of the issue. See Rosenthal- Netter, 679 F. Supp. at 26; J.C. Penney, 451 F. Supp. at 985. All relevant factors must be examined in deciding whether an agency relationship exists; no single factor is determinative. See Pier 1 Imports, 708 F. Supp. at 354.

Finally, a buying agent must be financially detached from the seller for the agency relationship to be bona fide. See New Trends, 645 F. Supp. at 962; Jay-Arr Slimwear, 12 CIT at 137; J.C. Penney, 451 F. Supp. at 984. xxxxxxx's claim, if accurate, that the affiliates' invoice prices to xxxxxx matched those on the manufacturers' invoices to the affiliates, would indicate that the requisite financial detachment did exist. See Rosenthal-Netter, 679 F. Supp. at 26. Also, xxxxxxx states that the three affiliates received no remuneration from, and had no interest in, any supplier from whom they purchased chemicals or compounds on xxxxxxx's behalf. While this may be accurate with respect to those purchases that were made from unrelated manufacturers, it cannot be said that there was financial detachment in those instances when xxxxxxx UK sold xxxxxxx its own products. There, xxxxxxx UK was an independent seller, not an agent. However, apparently this is not an issue, because xxxxxxx acknowledges that the handling and services fees paid as a result of sales that occurred under those circumstances, were dutiable. xxxxxxx also considers xxxxxxx UK's 10% handling and service fee to have been includable in transaction value in those instances where the UK affiliate supplied xxxxxxx with chemicals and compounds manufactured by xxxxxxx Chemie or xxxxxxx Japan. There is insufficient information in the file on the affiliates' financial relationships with each other for us to be able to comment on the correctness of this last position.

In summary, xxxxxxx's control over the purchasing process, its ability to purchase directly from manufacturers, and its reimbursing the affiliates for freight and Customs charges paid, are indicative of a bona fide agency relationship. Furthermore, the various other services performed by the affiliates for xxxxxxx, such as compiling market information, inspecting and packing the merchandise and arranging for its shipment, suggest that the relationship was one of agency. So does the fact that xxxxxxx's parent, xxxxx-xxxxxxx Corporation, assumed the risk of loss of the shipments. These factors, when viewed together, support Aldrich's position that the three affiliates were its buying agents. The lack of a formal agency agreement is not a legal bar to a finding that an agency relationship may exist; all of the relevant factors are considered in reaching that decision.

There was no agency relationship between xxxxxxx and xxxxxxx UK when the UK affiliate sold its own products to xxxxxxx. And we are unable to determine from the evidence presented whether an agency relationship existed in situations where the chemicals and compounds sold to xxxxxxx by xxxxxxx UK had been manufactured by the other two affiliates. In any event, it is our understanding that this last issue is not in contention because xxxxxxx has stated that it considers the 10% "service and handling fees" to be dutiable.

The conclusion that the affiliates were xxxxxxx's buying agents for sales of merchandise produced by unrelated manufacturers, is based on statements of fact made in writing in affidavits, by counsel for xxxxxxx, and by your office in its internal advice request. While it should be noted that an affidavit by a party attesting to its status as a buying agent has some evidentiary weight in determining a buying agency question (see J.C. Penney, 451 F. Supp. at 984), sufficient evidence must be submitted to clearly establish the existence of an agency relationship. See New Trends, 645 F. Supp. at 961; A & A Trading Corp. v. United States, 65 Cust. Ct. 785, 791-92, A.R.D. 276 (1970); General Notice on Buying Agency Commissions, Vol. 23, No. 11 Customs Bulletin, March 15, 1989. You should be satisfied that these factual statements are accurate - perhaps by requesting copies of the invoices and buying instructions - before reaching a final decision in this matter.

HOLDING:

1) Based on the facts as presented by counsel, the three affiliates were bona fide buying agents of xxxxxxx, notwithstanding the lack of formal agency agreements. As such, the buying commissions were not dutiable; and

2) The 10% handling and service fees paid by xxxxxxx to xxxxxxx UK for merchandise produced by xxxxxxx UK, were includable in transaction value. There is insufficient evidence for us to be able to determine whether such fees paid to xxxxxxx UK by xxxxxxx for merchandise made by the other two affiliates were dutiable.

Sincerely,

John Durant
Director, Commercial

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