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HQ 545519
June 30, 1994
VAL CO:R:C:V 545519 er

CATEGORY: VALUATION

District Director
Seattle District

RE: Request for Internal Advice 105/93 Concerning the Dutiability of Certain Commissions.

Dear Sir:

This is in response to your memorandum dated December 10, 1993, forwarding a request for internal advice dated July 27, 1993, submitted by Billy J. Gwin of Geo. S. Bush & Co., Inc. on behalf of their client, Ace Novelty Co. ("Ace"). We regret the delay in responding.

FACTS:

The dutiability of the buying commissions paid by Ace to various buying agents has been a matter of disagreement between Customs' offices at Seattle, Los Angeles and Chicago. It is Seattle's position that the buying commissions are not dutiable; however, both Los Angeles and Chicago disagree, believing that the monies paid to the buying agents are dutiable as part of the price actually paid or payable for the imported merchandise.

It is the practice of the buying agents to prepare the invoices itemizing the imported merchandise. The invoices identify ACE as the purchaser and consignee, and specify that the merchandise was shipped on purchaser's account and risk. The invoices also identify the manufacturer from whom the merchandise is purchased and the number of the purchase order originally issued from ACE that initiated the sale between the manufacturer and ACE. Next to each merchandise itemization, a unit price appears, which price includes the x percent (x%) buying commission payable to the buying agent responsible for preparing the invoice. The last page of the invoice reveals a total FOB (country of exportation) value, commission included. Below the total FOB value, the amount for the buying commission is identified and is calculated at x percent (x%) of the total FOB (country of exportation) value. Underneath the amount for the buying commission is the figure representing the FOB value less the buying commission, which amount is described on the invoice as the total Ex-factory value.

Because the amounts for the commissions are included in the itemized unit value amounts listed on the invoice prepared by the buying agent, and are deducted from the total FOB invoiced value, it is Los Angeles' and Chicago's position that the buying commissions constitute part of the price actually paid or payable for the merchandise. Seattle's position is that before any commission may be considered nondutiable, the bona fides of the claimed agency relationship between the buyer and the agent must be examined, and that if Customs is satisfied that the buying commissions are bona fide, then the fact that the commission amounts are included in the invoiced unit values, and deducted from the total FOB invoiced value, does not disqualify them from nondutiable status.

ISSUE:

Whether buying commissions calculated based on a percentage of the total invoiced FOB value, and deducted from the total invoiced FOB value, are deductible from the price actually paid or payable.

LAW AND ANALYSIS:

We assume the merchandise is appraised under transaction value as provided for under 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 director 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."

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

The existence of a bona fide buying commission depends upon the relevant factors of the individual case. Eg., J.C. Penney Purchasing Corp. v. United States, 451 F.Supp. 973, 983 (Cust. Ct. 1978). The importer has the burden of proving the existence of bona fide buying commissions. Rosenthal-Netter, 679 F.Supp. at 23; New Trends, Inc. v. United States, 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 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, 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 fide 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, 451 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, 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, 679 F.Supp. 21, 23 (1988); New Trends, 645 F.Supp. 957, 960-962.

In the instant case, Seattle is satisfied that the duties performed by the agents are those typically performed by bona fide buying agents. In reaching this conclusion, Seattle examined the buying agency agreements between the parties, copies of manufacturers' invoices and payment records. The buying agency agreements specify that the agent will arrange for shipment of the merchandise, visit manufacturers and/or other agents of the buyer, collect samples, submit the samples to the buyer, report regularly to the buyer about the market situation and availability of merchandise and obtain price quotes. Upon receipt of written instructions from the buyer, the agent places orders on behalf of the buyer, verifies that the quantity, quality and condition of merchandise conform to specifications and inspects finished products prior to packing. The agreement further states that the agent will never act as a seller in the transactions involving ACE.

As noted above, the invoices identify the manufacturer of each unit of merchandise listed.

Neither Chicago nor Los Angeles discussed whether the agency relationship appeared to be bona fide in any or all respects, aside from the method of invoicing. In a memorandum dated January 4, 1994, the National Import Division agrees with Seattle's position that the buying commission should not be considered dutiable when the only factor that would cause Customs to find otherwise is an invoicing practice.

The facts in the instant case are very similar to those in Monarch Luggage Co., Inc. v. United States, Slip Op. 89-91 (June 28, 1989). There the court found that the evidence submitted did establish that the agents were bona fide buying agents. However, with respect to certain entries, the invoices submitted indicated that the commissions were calculated by dividing the FOB price by a specific figure. The commissions were then deducted from the invoiced FOB price of the merchandise. Citing to BBR Prestressed Tanks, Inc., et al. v. U.S., 64 Cust. Ct. 787, 788, A.R.D. 265 (1970), the court found that because the amounts attributable to the buying commissions were part of the price actually paid or payable for the merchandise, the amounts were properly included in the dutiable value of the imported merchandise. For the other entries made after late 1981, a different invoicing method was used whereby the commission was calculated by multiplying the FOB price by a certain amount, and remitting the commission amount separately by check from the buyer to the agent. Under these circumstances the court found that the commissions became an amount separate from and in addition to the price for the merchandise. Thus, these commissions were properly excluded from the dutiable value of the merchandise.

In the instant case, as in Monarch, there appears to be no question, as far as Seattle is concerned, that the agents are bona fide agents. However, in view of the court's decision in Monarch, because the subject buying commissions are calculated by deducting an amount from the invoiced FOB total, the commissions must be included in the dutiable value of the merchandise. If these amounts were calculated by adding an amount to the invoiced total it would appear that the commissions would not be dutiable, because in all other respects, the bona fides of the agency relationship are satisfied. As noted by the court in Monarch, a mere change in the method of invoicing, if it is only in form and really not in substance, would not suffice to change [the party] from a selling agent, if it had been one, to a buying agent." Monarch at 525. However, where the form follows the actual substance, then the change in invoicing techniques from a previously unacceptable method to a method which does not include the commissions in the price actually paid or payable, may serve to render nondutiable those commissions which are bona fide.

The "form" of the invoicing is a significant factor in deciding whether the commissions paid to bona fide buying agents are nondutiable. Where those commissions are deducted from the total FOB invoiced value of the goods, they are dutiable and Customs has no authority to treat them as anything other than dutiable as part of the price actually paid or payable for the imported merchandise. See, TAA 7; HRLs 542362, 542176, 542358,, 542785, 543023, 543292, and 544426.

As a reminder concerning the determination regarding the existence, or not, of a bona fide buying agency relationship, such a decision is always factually specific. Thus, the actual determination concerning the agency 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 fide buying agent and not a selling agent nor an independent seller. See, 23:11 Cust. Bull. & December 9, General Notice dated March 15, 1989; HRL 542121 (September 29, 1991). The manner of invoicing is an issue which is separate from the determination regarding the bona fides of an agency relationship, but, nonetheless, must be properly performed if bona fide buying commissions are to be nondutiable.

HOLDING:

Where buying commissions are calculated by deducting an amount from the total FOB invoiced value, such commissions are dutiable as part of the price actually paid or payable, regardless of whether the buying agency relationship is bona fide in all other respects.

Sincerely,

John Durant, Director
Commercial Rulings Division

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