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HQ 545465


April 6, 1994

VAL-CO:R:C:V 545465 GG

CATEGORY: VALUATION

Mr. John F. McKenzie
Baker & McKenzie
Two Embarcadero Center
San Francisco, CA 94111-3909

RE: The Rockford Group, Inc.

Dear Mr. McKenzie:

This is in reference to your ruling request, dated November 4, 1993, submitted on behalf of the Rockford Group, Inc. ("Rockford"), in which you request a ruling that commissions to be paid by importers to Rockford, in consideration for purchasing agency services performed by Rockford, are bona fide buying commissions and are, therefore, nondutiable.

FACTS:

Rockford, a newly formed California corporation, plans to perform purchasing agency services for various retail department store chains in the United States. The merchandise will be footwear from Hong Kong, Taiwan and the People's Republic of China. The principals of Rockford were formerly employed by the U.S. affiliate of Home Court Ltd., a Hong Kong-based supplier of footwear. These individuals have, however, terminated their employment with, and have no further affiliation with, or financial interest in, Home Court Ltd. Currently neither Rockford nor any of its principals owns, or has any financial interest in, any manufacturer or supplier of footwear in the three countries of manufacture.

In each instance, Rockford will enter into a written purchasing agency agreement with each of the U.S. department store chains for which Rockford performs buying agency services. Rockford has enclosed with its ruling request a copy of an unsigned proposed purchasing agency agreement that has been submitted to it by an unidentified department store chain. The purchasing agency services, and the degree of control exercised by the department store chain (the "importer") over the activities of Rockford, is typical of the relationship that Rockford contemplates having with each importer to which Rockford proposes to offer its purchasing agency services.

The type of services to be performed by Rockford include (i) providing reports on market conditions and availability of merchandise; (ii) obtaining samples of merchandise from prospective suppliers, and obtaining the approval of such samples by the importer; (iii) placing purchase orders with suppliers in accordance with the importer's instructions; (iv) monitoring quality control procedures with respect to the merchandise; (v) reviewing the supplier's invoices and shipping documents to assure compliance with the importer's policies and requirements; and (vi) advising the importer of any defects in the merchandise or noncompliance with the importer's policies and requirements.

Rockford states that all of the purchasing agency services it performs will be under the supervision and control of the importer. By way of example, Rockford's performance of such services must conform to various "Agent Policies" established by mutual agreement between the importer and Rockford. Purchase orders submitted by Rockford on behalf of the importer with specific vendors must conform to vendor policies established by the importer. All of Rockford's books, records and accounts relating to purchasing agency services performed by Rockford on behalf of any specific importer will be subject to review and audit by the importer, in order to permit the importer to verify Rockford's conformance with the importer's policies and procedures.

Although Rockford will submit purchase orders to manufacturers and suppliers of footwear in Hong Kong, Taiwan, and the PRC, all such purchase orders will be submitted on behalf of, and at the direction of, the importer. On the basis of information and samples provided to the importer by Rockford, the importer will select the manufacturer or supplier to which each purchase order will be issued.

Rockford will not take title to any merchandise, and will not bear any risk of loss if the merchandise is damaged or destroyed in transit from the manufacturers' or suppliers' facilities to the United States. Each manufacturer and supplier will issue its invoices directly to the importer, and all payments of such invoices will be made directly from the importer to the manufacturer or supplier. Rockford's role with respect to manufacturers' and suppliers' invoices will be limited to an initial review, in order to assure that such invoices conform to the vendor policies established by the importer.

In consideration for its purchasing agency services, Rockford will receive a commission from the importer, based upon a percentage of all purchases made by the importer utilizing Rockford's services. Each commission payment will be made directly by the importer to Rockford upon issuance by the carrier of a bill of lading for the goods in question and upon Rockford's issuance of an inspection certificate or similar quality control verification. Except for reimbursement of extraordinary expenses incurred by Rockford at the specific request of the importer, these commission payments constitute the sole compensation to Rockford for its purchasing agency services. Rockford will not receive a commission or any other compensation from any manufacturer or supplier in connection with any transaction for which Rockford performs purchasing agency services for the importer.

ISSUE:

Whether, based on the information provided, bona fide buying agency relationships exist between Rockford and the various importers, such that the buying commissions paid by the importers to Rockford can be treated as nondutiable.

LAW & ANALYSIS:

For the purpose of this decision, we are assuming that transaction value is the proper 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 Section 402(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 requirement that Rockford place purchase orders with suppliers in accordance with the importer's instructions, and that purchase orders submitted by Rockford on behalf of the importer conform to vendor policies established by the importer, is indicative of the importer's control over the purchasing process. The importer will select the manufacturer or supplier on the basis of samples and information provided by Rockford. 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 fact that Rockford's books and records are subject to review by the applicable importer is further evidence of importer control.

Compiling market information and inspecting goods are services typically performed by a bona fide buying agent. Jay- Arr Slimwear, 12 CIT 133 at 137; J.C. Penney, 451 F. Supp. at 984. Rockford intends to perform these functions.

Another characteristic of an agency relationship is that the risk of loss will not fall on the agent. Pier 1 Imports, 708 F. Supp. at 357; Rosenthal-Netter, 679 F. Supp. at 26; New Trends, 645 F. Supp. at 962. Rockford will not take title to any merchandise and will not bear the risk of loss.

The manufacturer or supplier will issue invoices directly to the importer, and all payments of such invoices will be made directly from the importer to the manufacturer or supplier. This indicates that the buyer of the merchandise is the importer, not Rockford.

The fact that Rockford will enter into written agency agreements with each importer weighs in favor of a finding that an agency relationship exists. This is because a buying agency agreement, if in existence, is another factor which supports an agency relationship. Rosenthal-Netter, 679 F. Supp. at 26; New Trends, Inc., 645 F. Supp. at 960.

An agent must be financially detached from the manufacturer of the merchandise, and must show that none of the commission inures to the benefit of the manufacturer. New Trends, Inc., 645 F. Supp. at 962. Rockford states that it will have no ownership or financial interest in any of the manufacturers or suppliers of the merchandise, and none of the commissions paid to the purchasing agent will inure to the benefit of any supplier of that merchandise. Further, Rockford will be prohibited from obtaining such a financial interest in any manufacturer or supplier by the terms of Rockford's purchasing agency agreement with each importer.

Based on the information submitted with the ruling request, i.e. counsel's explanation and the sample buying agency agreement, the proposed arrangements between Rockford and the various importers would appear to satisfy the criteria of a bona fide buying agency relationship. As long as Rockford remains under the control of the various importers/principals, and the transactions are documented in accordance with the legal requirements set forth above, the buying commissions at issue appear to qualify for non-dutiable status as bona fide buying commissions.

HOLDING:

If the actions of the parties conform to the descriptions provided by counsel regarding the subject prospective transactions, and the terms of the various agency agreements are met to the extent that the importers will exercise the requisite degree of control over the buying agents as specified in the agreements, it is our conclusion that the commissions to be paid to Rockford are to be considered bona fide buying commissions.

Please note, however, that the degree of control exerted over the agents is factually specific and could vary with each importation. The actual determination as to the existence of a bona fide buying agency will be made by the appraising officer at the applicable port of entry.

Sincerely,

John Durant
Director, Commercial

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