HQ 545564 - Application for Further Review of Protest No. 1001-93-102985; Concerning the Dutability of buying Commissions - United States International Trade Commision Rulings

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HQ 545564

August 8, 1995

VAL CO:R:C:V 545564 RSD

CATEGORY: VALUATION

Area Director
John F. Kennedy Airport Area
Jamaica, New York

RE: Application for Further Review of Protest No. 1001-93-102985; Concerning the Dutability of buying Commissions

Dear Sir:

This is a decision on an application for further review of a protest filed on behalf of Jasmine Ltd., by the law firm of Singer and Singh, on May 17, 1993, against your decision concerning the valuation of women shoes. The entries were liquidated on February 2, 1993. We regret the delay in responding.

FACTS:

On October 26, 1992, Jasmine Ltd. (Jasmine) made two entries on shipments of women's shoes from China at JFK Airport. In procuring this merchandise Jasmine used the services of an agent McKowan Lowe & Co. Ltd. (McKowan). The record contains a buying agency agreement that Jasmine and McKowan entered into on October 1, 1992. The agreement sets up Jasmine as the principal who is engaged in the importation of women's footwear and handbags from the far east and appoints McKowan as its agent. McKowan as the agent agrees to provide services to Jasmine such as locating sources for the manufacture of products, negotiating the most favorable prices, placing orders with manufactures or sellers on behalf of Jasmine, making direct payments to the manufacturers or sellers, facilitating the preparation of documentation, visiting manufacturers or sellers to inspect the quality of merchandise, etc. For its services, McKowan will be compensated based on a percentage of the F.O.B. price of the merchandise according to a schedule specified in Exhibit A to the agreement. A copy of Exhibit A was not attached to the agreement in the file.

The record contains two sets of invoices for the two shipments. Each set of invoices contains an invoice from the manufacturer or seller in China prepared for McKowan, which shows the total number of pairs of shoes purchased, a unit price and the total price in U.S. dollars. The second invoice is from McKowan for Jasmine. It lists the quantity of merchandise purchased, a unit price and a total FOB Hong Kong price for the shipment. The invoice from McKowan also provides a cost breakdown list which contains and an ex factory price, and amounts for the buying commissions, export, packing inland freight and petties. The invoice further specifies that the buyer and seller are not related.

You indicate that a protest has been filed by this importer involving the same issue but with 95 different entries attached. You also state that none of the manufacturer's invoices were submitted with that protest, and that only two of the three manufacturer's invoices were submitted with this lead protest.

ISSUE:

Whether the buying commissions shown on the invoice prepared by the agent, McKowan, were part of the price actually paid or payable?

LAW AND ANALYSIS:

For the purpose of this prospective ruling request, we are assuming that transaction value will be applicable as the basis of appraisement.

Transaction value is defined in section 402(b)(1) of the TAA. This section provides, in the pertinent part, that the transaction value of imported merchandise is "the price actually paid or payable for merchandise when sold for exportation to the United States," plus amount for the items enumerated in section 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 section 402(b)(4)(A) 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. As stated in Headquarters Ruling Letter (HRL) 542141 (TAA #7), dated September 29, 1980, "...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 order to view the relationship of the parties as a bona fide buying agency, Customs must examine all the relevant factors. J.C. Penney Purchasing Corporation et al. v. United States, 80 Cust. Ct. 84, C.D. 4741 (1978), 451 F.Supp 973 (1978); United States v. Knit Wits (Wiley) et al., 62 Cust. Ct. 1008, A.R.D. 251 (1969). The primary consideration, however, "is the right of the principal to control the agent's conduct with respect to the matters entrusted to him." Dorf Int'l Inc., et al v. United States, 61 Cust. Ct. 604, A.R.D. 245, 291 F.Supp. 690 (1968). The degree of discretion granted to the agent is an important factor. New Trends Inc. v. United States, 10 CIT 637, 645 F.Supp. 957 (1986). The plaintiff bears the burden of proof to establish the existence of a bona fide buying commission. Monarch Luggage Company Inc., v. United States, 13 CIT_, Slip Op. 88-91 (1989).

The Court of International Trade in the case of New Trends Inc., supra, 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 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 Jay-Arr Slimwear Inc., v. United States, 12 CIT----, 681 F.Supp 875 (1988), the Court of International Trade cited examples of services which are characteristic of those rendered by a buying agent. These services include compiling market information, gathering samples, translating, placing orders based on the buyer's instructions, procuring the merchandise, assisting in factory negotiation, inspecting and packing merchandise and arranging for shipment and payment.

Evidence submitted to Customs must clearly establish the fact of a bona fide buying agency. Headquarters Ruling Letter (HRL) 544610 dated February 23, 1991. Moreover, "an invoice or other documentation from the actual foreign seller to the agent [is] required to established that the agent is not a seller and to determine the price actually paid or payable to the seller." HRL 542141 dated September 29, 1980, also cited as TAA No.7.

In the instant case, the duties performed by the McKowan are those typically performed by bona fide agents. The buying agency agreement specifies that the agent shall locate sources for the manufacture of products; assist in the negotiation of favorable prices; place orders with manufacturers only upon the explicit and specific instructions of the principal; facilitate the preparation of documentation necessary for the importation of the merchandise into the United States and Canada; visit manufacturers or sellers where orders are placed in order to inspect the quality of the merchandise. In this regard the agent shall obtain samples of merchandise and submit samples and quote prices at which the merchandise could be purchased. The agreement also states that the agent shall also arrange consolidation of shipments and at the direction of the principal arrange for all inland freight, hauling, lighterage, insurance and/or storage. It also requires that unless specifically authorized in writing by the principal, the agent will not act in the name of the principal with third parties. The agent in executing the agreement, certified that other than those disclosed to the principal, it has no ownership or financial interest in, nor any control of, the factories making the commodities purchased with the assistance of agent; and that the factories who produce the merchandise have no ownership or financial interest in, or any control over the agent.

In addition to a buying agency agreement, another consideration in determining whether there is a bona fide buying agency between the parties is whether the importer could have purchased directly from the manufacturers without employing the agent. The file contains a letter from Jasmine which claims that it could purchase directly from the factory with out the use of McKowan's services or the payment of a commission to McKowan if it so desired. Jasmine also states that it has the right to refuse to deal with any factory that McKowan chooses and it has the right instruct McKowan to deal with any factory of its own choosing. The fact that the importer has the opportunity to purchase merchandise directly supports a finding of the existence of a buying agency. See HRL 544965 February 22, 1994.

An additional factor to consider is the transaction documents themselves. An invoice or other documentation from the actual foreign seller to the buying agent is required in order to establish that the agent is not a seller and to determine the price actually paid or payable to the seller. See HRL 544965 (February 22, 1994). The record contains two invoices from foreign sellers for shipments of the merchandise. These were issued to McKowan but lists Jasmine as the importer of the merchandise. Assuming the weight of the other factors supports a finding of a bona fide buying agency, this would usually be sufficient for the purpose of establishing that the agent is not a seller and determining the price actually paid or payable.

In Monarch Luggage Company Inc., v. United States, Supra., the Court of International Trade found that the evidence submitted established that 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 invoice FOB price of the merchandise. The court found that because the amounts attributable to the buying commissions were part of the price actually paid or payable for the merchandise they were properly included in the dutiable value of the imported merchandise. For other entries made after late 1981, a different invoicing method was used, whereby the commissions were calculated by multiplying in 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 HRL 545519 June 30, 1994, we applied the holding in the Monarch case and determined that because the subject buying commissions were calculated by deducting an amount from the invoice FOB total, the commissions must be included in the dutiable value of the merchandise. However, we pointed out that if the 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 were satisfied. As noted by the court in Monarch, a mere change in the method 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. 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 commission in the price actually paid or payable, may serve to render non-dutiable 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 are non-dutiable. Where those commissions are deducted from the total FOB invoiced value of the goods, they are dutiable and Customs does not have the authority to treat them as anything other than as a dutiable as part of the price actually paid or payable for the imported merchandise. In this case, the invoice from the agent to the buyer shows that the buying commissions were calculated by adding an amount to the price paid or payable to the foreign seller. Accordingly, these commissions were not part of the price paid to seller by buyer and are not dutiable. However, this would apply only for entries in which the importer has presented two separate invoices; i.e. one invoice from the foreign seller showing a FOB price and a second invoice from the agent showing the commissions as an addition to the price paid or payable to the foreign seller. For entries where only one invoice is presented, the full amount shown must be considered the price paid or payable to the seller and as explained above any commissions paid cannot be deducted from the dutiable value.

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 non-dutiable.

The importer has a second alternative argument that under the Federal Circuit's decision in Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the correct dutiable value is the amount paid by McKowan to the manufacturer in China. In the Nissho case, the court held that the transaction value is represented by the price between the manufacturer and the middleman, so long as the sale was at arm's length and the goods were sold for export to the United States. However, McKowan did not act as a middle man by separately purchasing the merchandise on its own behalf, but rather, as noted above, McKowan acted as an agent working under the control of a buyer in the United States in accordance with the terms of a buying agency agreement. Because McKowan actions do not constitute a sale for exportation to the United States, the Nissho case is not applicable to facts of this case.

HOLDING:

You are directed to grant the protest for those entries where the importer has presented separate invoices from the manufacturer and the agent; so that the manufacturer's invoices show a price paid or payable for the merchandise and the agent's invoices show that the buying commissions were added to the price paid or payable from the seller. Those commissions are non-dutiable. However, where the importer presents only one invoice, the buying commissions cannot be deducted from the price paid or payable for the merchandise shown on that invoice. You therefore are directed to deny the protest for those entries.

In accordance with Section 3A(11)(b) of Customs Directive 099 3550-65, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision, the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module, ACS, and to the public via the Diskette Subscription, the Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director

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