HQ 546325 - Internal advice request; footwear; commissions - United States International Trade Commision Rulings

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HQ 546325

October 4, 1999

VAL RR:IT:VA 546325 LR
CATEGORY: VALUATION

U.S. Customs Service
Regulatory Audit Division
Florissant, Missouri 63033

RE: Internal advice request; footwear; commissions

Dear Sir:

This is in reply to your memorandum dated March 25, 1996 forwarding a Response to Audit Findings and Request for Internal Advice submitted by [xxxxxxxxxxxxxxxxxx] (“Importer”). The submission, dated April 6, 1995 (“1995 submission”), was prepared in response to the audit findings regarding the dutiability of commissions and assists identified during your audit. Another Importer submission, dated April 6, 1995, is a response to Information and Document Requests” (“document submission”). You asked that no decision be made in this matter until the issuance of the final audit report. The final audit report, dated June 26, 1996 (“Report”), was forwarded to our office on July 5, 1996. On April 1, 1997, a meeting was held at our office with counsel for the Importer and with representatives from your office. In response to our request for certain documentation, an additional submission from counsel was made on July 16, 1998 (“1998 submission”). We regret the delay in responding.

The Importer’s request for confidentiality as clarified in its August 10, 1999 letter has been granted. Pursuant to its request, the bracketed information will be deleted from the public version of the ruling.

FACTS:

The Audit covered the period from November 1, 1992 through October 31, 1993. Among other things, the Report indicates that commissions paid to the Importer’s Italian agent (Agent), and to the Importer’s Spanish subagent (Subagent) were dutiable selling commissions. The Importer disagree with this finding and raises this issue in the Internal Advice Request.

The Importer also disagrees with the findings in the Report that it failed to declare assists for molds, product development and design work, arguing that these items at issue do not meet the statutory definition of assists. It appears that both the existence and the value of the assists were determined on the basis of various miscellaneous payments recorded on the Importer’s books. However, the Report contains little information about the assists and it is not clear the exact nature of the assists in question. Although the Importer has provided a narrative description of the design and development work it claims was involved, there is no evidence that the payments on the Importer’s books were for the described design and development work. According, there is not enough information to determine whether the payments at issue relate to the described design work to some other expenses. In light of these problems, this ruling will only address the commission issue.

The facts noted below are those presented by the Importer in its three submissions, the Report and the evidence presented to support the facts. For the most part, your office does not dispute many of the facts, only the legal conclusions. The various parties involved in the transactions at issue are described below.

The Importer

The Importer is a wholesaler and retailer of women’s fashion footwear and accessories. It imports about 90% of its products. During the period of review, the company imported and sold women’s fashion footwear under such various trade names. The Importer also produced and imported footwear under various private label names for certain U.S. customers. In all of the transactions in question, the Importer purchased the footwear from unrelated manufacturers.

The Importer states that during the period covered by the audit, it directed the operations of a foreign buying office in Italy, to help facilitate the sourcing and production of marketable footwear for importation into the United States. The Importer states that it also utilized the services of a Subagent in Spain.

Agent - Function and Commission Arrangement

Audit Report

The Report states that the Importer operated “an unincorporated local buying office” in Italy and that the Agent performed buying agency functions for the Importer in the areas of sourcing, purchasing, and quality control of Italian footwear. In recent years, the Agent assisted in the purchase of footwear produced in Spain and the Far East. The operating expenses of the Agent were paid by the Importer under a buying commission arrangement.

The Report states that the Importer’s commissions to the Agent were accrued throughout the month in its general ledger with a credit to the “Accrued Buying Expense - Italy” account and paid at the beginning of the following month. The Agent sent two monthly statements (one for lira amount invoices and one for dollar amount invoices) to the Importer, referred to in the Report as the “buying expense detail” and was used by the Importer to determine the payment to be made to the Agent.

The “buying expense detail” provided a listing of the invoice commissions due for footwear invoices shipped the previous month. After each lira and dollar invoice commission listing, the Agent added or subtracted various expenses outside of the invoice commission to arrive at a “Total Due to Agent” for the month. The Importer paid this amount by either a wire transfer or check through a credit to “Cash” and a debit to the “Accrued Buying Expense - Italy” general ledger account.

Along with the invoice listing and total due, the “buying expense detail” provided the Importer with various statements of charges and expenses incurred by the Importer in the month. The value of the total due to the Agent for a particular month was matched to these statements of charges and expenses. The Report concludes that the “Total Due to the Agent” paid by the Importer for a particular month was actually payment of the operating expenses incurred by the Agent for that month.

The invoice commissions due to the Agent for Spanish and Hong Kong invoices were accrued separately throughout the year. Once a year, these commissions were paid by check in a lump sum to the Agent with a debit to the same “Accrued Buying Expense - Italy” general ledger account.

The Report states that there was no buying agency agreement between the Importer and the Agent during the audit period but that the parties executed a written buying agency agreement (“Agreement”) which took effect on June 1, 1994. The Agreement provides that the Agent would operate “as an independent buying agent, rather than as an unincorporated local representative of a foreign buyer (i.e., a local buying office).”

Importer Submissions

The Importer states that the Agent began operations in 1969 and has operated under various names. The Importer maintains that the Agent has always acted solely as the Importer’s overseas buying office with regard to the purchase of footwear in Italy, Spain and the Far East.

The Importer indicates that an Italian national (“Manager”) has run the Agent from its inception under a power of attorney. A copy of the power of attorney dated July 29, 1986, was furnished with the 1998 submission. Among other things, the Importer granted the Manager “the right to act as the Manager of the Agent of the Importer and in connection therewith, to do any and all things necessary in the operation of said business, pertaining to the buying of shoes for and on behalf of said corporation” and the “right to handle all necessary transactions or matters in order to keep the office functioning in an efficient manner...” and “the right to open checking accounts and savings accounts. . . as he may judge necessary in the name of (the Importer). . ..”

In exchange for the services performed by the Agent, the Importer paid the Agent a commission based on a percentage of the f.o.b. value of goods purchased and that out of this commission, the Agent is responsible for paying all of its operating expenses. The Importer reimburses the Agent for certain other itemized, pre-approved expenses incurred on its behalf.

The Importer indicates that from its inception, the Agent has been registered in Italy as the local buying office of a foreign corporation, namely the Importer. The operations and functions of the Agent are described in detail in the Manager’s May 25, 1994 affidavit (Exhibit B, 1995 submission). According to the affidavit, the Agent serves as a buying office for the Importer in connection with the purchase and exportation of shoes produced in Italy, Spain and the Far East. He states that during the audit period, the Agent was not incorporated under Italian law, and in its capacity as a local representative of a foreign purchaser, the Agent could not buy or sell goods for its own account or maintain an inventory. (A copy of the Italian registration statement for the Agent was provided). He states that throughout the entire time period of this relationship, he has managed the day-to-day activities of the Agent for the Importer pursuant to a verbal agreement. He states that the Agent and the Importer are in the process of memorializing all previous terms, conditions, understanding and course of dealings between he parties in the form of a written buying agency agreement.

According to the affidavit, the Agent has and will continue to perform various services on behalf of the Importer including: assisting the Importer in locating manufacturing sources; familiarizing itself with the Importer’s needs, surveying the potential markets to obtain the best available merchandise, advising the Importer of new development in the market and industry, using its best efforts to ensure that Importer approved samples (specifications) are observed in the manufacture of the imported footwear; recommending manufacturers and negotiating with manufacturer/sellers approved by the Importer; visiting manufacturers/ sellers, obtaining samples of merchandise, submitting samples to the Importer for approval, performing various inspection services, providing inspection certificates and facilitating the acquisition of the necessary documentation for exportation to the United States.

The affidavit further states that the Agent has always acted solely under the control of and at the direction of the Importer; that the Agent has never had discretion to purchase merchandise for the Importer or to execute any contract or otherwise incur any obligation or liability which would be binding upon the Importer unless specifically authorized to do so in advance by the Importer.

The Manager indicates that the Agent is solely responsible for paying all costs incurred in connection with the performance of its day-to-day activities. He indicates further that in order to meet its operating expenses, pursuant to the understanding between the parties, the Agent receives a commission from the Importer equal to a percentage of the f.o.b. value of merchandise shipped pursuant to orders placed with the assistance of the Agent. The Agent provides the Importer with separate invoices (monthly statements) for the payment of buying commissions and any reimbursable expenses incurred on behalf of the Importer. The Agent also provides the Importer with the manufacturer/sellers’ commercial invoices reflecting the cost of the merchandise in each transaction. These factory invoices identify the Importer as the purchaser. The commission paid by the Importer to the Agent covers all operating expenses incurred by the Agent in fulfilling its obligations as well as related incidental costs.

The Manager indicates that the Agent has never assumed the risk of loss for damaged, defective or late merchandise. However, by mutual agreement, the Agent assists the Importer in pursuing claims against factories for damaged or defective merchandise.

The Manager states that the vast majority of footwear purchased by the Importer with the assistance of the Agent bears trademarks owned or controlled by the Importer or one of its retail customers in the United States. Additional footwear purchased by the Importer bears certain Licensed Trademarks which are owned or controlled by a company related to the Importer and the Agent (the Licensor). The Manager states that the Agent performs the same production monitoring, quality control and export facilitation activities on behalf of the Importer and is compensated on the same commission basis regardless of which trademark is affixed to the footwear.

The Licensor

Audit Report

It is the relationship between the Agent and the Licensor and the latter’s roles in the subject importations that led to your conclusion that the Licensor was closely involved in the manufacture and sale of the imported footwear and that the Agent was operating as a selling agent for the Licensor and not a buying agent for the Importer. According to the Report, the Licensor is a trading company, manufacturer, and worldwide seller of footwear bearing their name. The Report concluded that there was substantial involvement of the Licensor in the operations of the Agent. First, it is noted that the day-to-day operations of the Agent were controlled, through the power of attorney discussed above, by a member of the Licensor (i.e., the Manager). The Report also notes that a little over one third of the commission paid by the Importer to the Agent during the audit period concerns commissions relating to merchandise with the trademarks owned by the Licensor (“Licensed Trademarks”).

The Report notes that the involvement of the Licensor in the subject transactions is evidenced by the language in a trademark agreement (“License Agreement”) between the Importer and the Licensor, permitting the Importer to sell footwear bearing the Licensor name in the United States, Canada and Puerto Rico. Under the terms of the agreement, the Licensor could give the final approval, on patterns, construction, leathers and the general quality of the products to be used for these footwear. The Report concludes that this language indicates that the Licensor had an interest in the manufacturers of the footwear bearing their name and that the agreement gave final control of the its footwear line to the Licensor, whose partner controlled the Agent.

The Report indicates that the involvement of the Licensor in the activities of the Agent is further evidenced by the fact that Agent used the services of another company (“Company A”) to perform quality control services for the Italian footwear. Company A is controlled by the partners of the Licensor. The Report notes that Company A, the Agent and the Licensor are located at the same address.

Finally, the Report indicates that the Licensor was selling the Importer’s damaged or defective footwear as an independent seller for its own account allegedly to recoup some of the factories’ losses on orders rejected by the Importer.

Importer Submissions

In its various submissions, the Importer acknowledges the involvement of the Licensor in the subject transactions, i.e., the Manager is a partner of the Licensor, that the Licensor’s trademark appears on some of the imported footwear, and that the Licensor purchased some damaged footwear from the manufacturers which was initially intended for purchase by the Importer. However, the Importer disagrees with your conclusion that the Agent is not a bona fide buying agent..

The 1995 submission states that the Licensor is a limited liability partnership organized under the laws of Italy. The partnership is comprised of four individuals, including the Manager, and is operated as a trading company. In its primary role as a trading company, the Licensor sells footwear bearing the Licensed Trademarks throughout the world, except for the United States. The License Agreement between the Importer and the Licensor granted the Importer exclusive use of the Licensed trademarks for merchandise sold in the U.S., Puerto Rico and Canada. A copy of the License Agreement was provided. (Exhibit 2, 1998 submission). The License Agreement provides for the payment of 3% royalties and states that “the final approval, on patterns, constructions, leathers and a general quality to be used for this footwear, will be given by the Licensor.” This decision does not address whether the subject royalties are dutiable.

According to the Manager’s affidavit, the purpose of the License Agreement was to provide Italian authorities with evidence of the Importer’s right to affix the Licensed Trademarks to footwear purchased by the Importer.

The 1995 submission states that pursuant to this License Agreement, the Licensor issued royalty invoices to the Agent on selected shipments of footwear with the Licensed Trademarks, calculated on the basis of 3% of the FOB value of such merchandise. The Manager states in his affidavit that the payments made to the Agent pursuant to the royalty invoices issued by the Licensor do not affect the overall structure of the commissions intended to cover the Agent’s operating expenses. He states that any such royalty payments are made out of such commission proceeds and the total of such commission proceeds did not increase upon execution of the License Agreement. He states that the Agent received the same level of reimbursement from the Importer both prior to and subsequent to the License Agreement.

The 1995 submission states that the Licensor has never acted as a buying agent for the Importer or bought and sold footwear to the Importer, except for a limited number of sample shipments. While it acknowledges that the Agent and the Licensor share office space, the Importer states that each pays a pro-rata share of rent. It is also claimed that the Agent and the Licensor are operated as entirely separate entitles, do not commingle income and are not responsible for each other’s expenses.

An affidavit of the President of the Licensor (Exhibit C, 1995 submission) corroborates this account. It states that:

1) The Licensor purchases and sells footwear bearing its trademarks to wholesale customers throughout the world, except within the territory of the U.S. At present, the Importer has the exclusive right to sell footwear bearing its trademarks within the U.S.;

2) The Importer purchases merchandise bearing either of the Licensed Trademarks directly from factories unrelated to the Licensor;

3) With the exception of occasional sample shipments, the Licensor never purchases and sells shoes for its own account in transaction involving the Importer;

4) The sale of footwear for export to the U.S. by the Licensor to parties other than the Importer has been sporadic and has only involved small quantities of damaged or second quality merchandise;

5) Although the License Agreement permits the Licensor approval over patterns, construction leathers and general quality with respect to shoes bearing the Licensed Trademarks, in practice the Importer retained complete control and discretion over the entire process and the Licensor has never withheld its “approval” with respect to any style ordered by the Importer.

6) No compensation has ever been due or paid by the Importer to the Licensor under the terms of the License Agreement. Rather, the Licensor has issued monthly invoices to the Agent in amounts equal to 3% of the FOB value of selected shipments bearing the Licensed Trademarks.

7) The Licensor does not receive or share remuneration with any factories producing merchandise for the Importer.

With regard to the Licensor’s sale of merchandise in the United States, the Importer states in the Documents Submission that it understands that the Licensor and others sell out-of-season or damaged footwear to a single jobber in the United States. It states that these sales pertain exclusively to orders canceled by the Importer prior to exportation to the United States. Generally, such shoes were delivered so late that the Importer anticipated being unable to resell them to any of its customers in the United States. Inasmuch as the orders are canceled, the Importer never obtains title to this footwear. The Importer indicates that it is aware of the sale of such rejected merchandise to a third party and does not object so that the factories producing it do not have to bear the full financial burden of canceled orders. The Importer indicates that it understands that the factories sell this merchandise at a considerable loss. It states that it is not directly involved in these transactions and cannot provide details with respect to the ultimate disposition of the shoes subsequent to its rejection of the merchandise.

Commissions paid to Subagent

In connection with footwear from Spain, the Importer paid the Agent a commission for quality control activities and an additional commission to another Subagent in Spain for additional services performed by the Subagent.

In December 1994, the Importer produced a copy of a 1979 buying agency agreement with its Subagent. It describes the services to be performed on behalf of the principal including seeking out new sources of supply and reporting on market conditions, visiting manufacturers to obtain samples to be submitted to the Principal with prices at which they may be purchased; placing orders with manufacturers selected by the Principal on behalf of the Principal and upon the specific instruction of the Principal, negotiating prices on behalf of the Principal; arranging for inland freight hauling, lighterage, insurance, storage, etc.; quality inspection of merchandise; and, assisting in the return of defective merchandise.

According to the Report, the invoice commissions paid to the Subagent were accrued throughout the year to the general ledger account “Accrued Buying Expense - Spain”. Every three to four months, the Subagent sent the Importer a statement of commissions due along with other expenses it incurred on the Importer’s behalf. The Importer issued a check for the total amount of invoice commissions plus these expenses and made a debit to the “Accrued Buying Expense - Spain” general ledger account.

ISSUE:

Whether the commission the Importer paid to the Agent and the Subagent are bona fide buying commissions.

LAW AND ANALYSIS:

The primary basis of appraisement of imported merchandise is “Transaction Value” 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(b)). Transaction value is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States....” plus certain additions specified in §402(b)(1)(A) through (E). Buying commissions are not among the items to be added to the price actually paid or payable. The term “price actually paid or payable” is defined in section 402(b)(4)(A) as “the total payment whether direct 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 from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C. 1401a(b)(4)(A).

Customs has ruled that in order to establish transaction value, the identity of the seller and the amount paid or payable to the seller must first be determined. Customs requires an invoice or other documentation from the foreign seller to the buying agent or to the buyer to establish the identify of the actual seller. TAA #7, Headquarters Ruling Letter (HRL) 542141, September 29, 1980. In the 1995 submission, Exhibit D, representative factory invoices were provided. The Importer has also provided the auditors with manufacturers’ invoices and the Agent’s consolidated invoice for every import transaction selected for review.

Buying commissions are fees paid by an importer to an agent for the service of representing the importer abroad in the purchase of the goods being valued. The importer has the burden of proving that a bona fide agency relationship exists and that payments to the agent constitute bona fide buying commissions. Rosenthal-Netter, Inc. v. United States, 12 CIT 77,78 679 F. Supp 21,22 aff’d 861 F.2d 261 (Fed. Cir. 1988). 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. TAA#7.

In order to view the relationship of the parties as a bona fide buying agency, Customs must examine all the relevant factors and each case is governed by its own particular facts. J.C. Penney Purchasing Corporation v. United States, 80 Cust. Ct. 84, 451 F. Supp. 973 (1978). Although no single factor is determinative, the primary consideration “is the right of the principal to control the agent’s conduct with respect the matters entrusted to him.” Dorf Intl. Inc. 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 also an important factor in viewing the relationship of the parties. New Trends Inc. v. United States, 10 CIT 637, 645 F. Supp. 957 (1986). The existence of a buying agency agreement is another factor to consider. While the lack of a formal agency agreement is not a bar to a finding that a bona fide buying agency existed, it is more difficult to establish such a relationship without one. While an affidavit by a party attesting to its status as a buying agent has some evidentiary weight, sufficient evidence must be presented to clearly establish it. See J.C. Penney at 984.

In this case, you do not dispute the fact that the Agent in fact performed certain buying agency functions on behalf of the Importer. Nonetheless, your determination that the Agent was not acting as a bona fide buying agent is based primarily on the role of the Licensor in the subject transactions. Your concerns stem from the close relationship between the Agent and the Licensor. For example, you note that they are located at the same address; that one of the partners in the Licensor is responsible for the day-today operations of the Agent; that the Licensor owns one of the trademarks that appear on some of the imported footwear; that the License Agreement gives the Licensor some control over the manufacture of the footwear; that the Licensor sells some of the damaged footwear originally ordered by the Importer; and, that the Licensor purchases some materials used in the production of the imported footwear. You conclude that the Licensor is closely involved in the sale of the subject merchandise and thus, that the Agent is not a bona fide buying agent.

We find that the Licensor’s role in the subject transactions referenced in the Report does not preclude a finding that the Agent was the Importer’s bona fide buying agent. While the Licensor’s involvement could be problematic if it were the seller of the imported merchandise, or a party related to the seller of the imported merchandise, this is not the case If the Licensor were the seller of the imported merchandise or a party related to the seller, its close relationship with the Agent might suggest that the Agent was not the Importer’s buying agent but rather a selling agent.. It is undisputed that except for a few shipments of samples, the sellers of the imported footwear are companies that are not related to the Importer, the Agent, or to the Licensor. There is no indication that the Licensor is performing any functions on behalf of these unrelated sellers. Despite the language in the License Agreement authorizing the Licensor to exercise some quality control over the imported merchandise, there is no indication that the Licensor exercised significant control over the manufacture and sale of the imported footwear. Moreover, In HRL 547226, July 27, 1999, regarding the dutiability of a trademark royalty, we noted that quality control clauses are standard in trademark license agreement.

A buying agent represents the buyer in the purchase of goods abroad. The principal must exercise considerable control over the actions of the buying agent in the matters entrusted to the agent. In this case, there is every indication that the Agent was performing this function for the Importer. The Agent was established so that it could assist in the purchase of footwear in Italy. The power of attorney which the Importer granted to the Manager of the Agent authorizing him to take certain actions on the Importer’s behalf is consistent with the finding of a buying agency. The power of attorney authorizes the Manager to act as the manager of the Agent on the Importer’s behalf and to do any and all things necessary in the operation of the business, pertaining to the buying of shoes for and on behalf of the Importer. While the power of attorney grants considerable authority to the Manager, the power of attorney specifically states that any actions taken by the Manager in this capacity are on behalf of the Importer. Moreover, the submitted affidavits are convincing in establishing that the Importer was the buyer of the goods and that it exercised control over the purchase of the footwear.

The Importer maintains that the Agent operated solely as its buying agent in the purchase of footwear under the its complete control and solely at its direction. It claims that the Agent does not buy and sell for its own account, never takes title to or assumes risk of loss for any merchandise purchased on behalf of the Importer, and does not maintain its own inventory. The transaction documents are consistent with this claim since the factory invoices identify the Importer as the buyer in all cases. The Importer claims that the Agent does not have discretion to place orders with factories without first receiving a purchase order from the Importer. The Importer claims that it is free to purchase shoes directly from any such factory and utilize the services of a local buying office solely for its own convenience. Affidavits of the Importer’s Chairman of the Board and the Manager corroborate this account. Even though the transaction documents do not specify the particular factory, the affidavits make clear that it was the Importer that decided what factory was to produce the footwear.

Evidence of the Importer’s control over its agents

The 1998 submission presents a series of documents that evidence the Importer’s extensive involvement in the selection and approval of the factories prior to the placement of the order. According to the 1998 submission, the Importer, with the assistance of the Agent, selects the styles (or “patterns”) that will be manufactured by each factory. This process occurs in person while the Importer’s personnel are in Italy, with follow-up by telephone or occasionally by fax, as necessary. The Agent then prepares a document, in the form of a price quotation list, indicating those styles which the Importer has assigned to each factory and the tentative prices offered by the factory. The quoted prices are often subject to further negotiation. These documents are reviewed by the Importer long before the placement of any commercial orders. An affidavit of The Manager, (Exhibit 3), and a declaration of the Importer’s Chairman of the Board (Exhibit 4) corroborate this account.

According to the Manager, executives of the Importer determine which factories will be used for the production of merchandise. He states that all pre-production samples are examined by the Importer for approval, either in Italy or in the United States. If the Importer decides to have a shoe produced, the Agent solicits price and delivery terms from the factory that produced the sample at the Importer’s price and delivery requirements, the order is placed with the factory that produced the approved sample. He states that this method has been followed for 20 years and thus the Importer’s management knows the identity of the factory producing the shoes for export to the United States. He states that on occasion, due to extenuating circumstances, an order will not be placed with the factory that made the pre-production sample and the Agent’s personnel will inform the Importer that the order will have to be placed with a different factory. In such cases, the Importer must always approve use of the new factory prior to placement of the order. He states that only after the Importer approves the use of a particular factory will the Agent contact the factory and place the order. Finally, the Manager states that his communications with the Importer concerning factory selection are generally with two Importer executives, the Chairman of the Board and the Chairman’s son.

These executives filed their own detailed affidavits which are consistent with the Manager’s account. According to the Chairman’s statement, he and his son are principally involved in selecting and approving the factories that will be used for the production of merchandise for the Importer. They travel to Italy five to six times per year on average and during their visits they continue the process of reviewing prototypes and selecting styles for possible production and select or approve the factories that will be used to produce each style (much of this work is started at the Importer’s premises). During these trips, they visit the factories to review current production and gather information that will assist them in deciding whether to place future orders with such factories. Executives of the Importer review prototypes, pre-production samples and other resources for the purpose of determining which styles initially will be included in their footwear line for each season. If a decision is made to include a particular style, then a factory is selected to make a pre-production sample. The Importer reviews and approves all pre-production samples. In each case, the Importer knows which factory prepared the pre-production sample and makes the final decision as to whether that factory or another factory will produce each style of footwear. He states that at his and his son’s direction, based upon their personal dealings with and knowledge of the factories, the Agent provides them with a list indicating the styles that the Importer has initially selected for production which is then used to solicit orders from the Importer’s customers. When an order is received, it is sent to the Agent, which translates the order into Italian and places the order with the factory previously selected to produce that style. He states that the Importer must approve any factory or price changes.

In addition to these detailed affidavits, the Importer submitted various faxes between the Agent and the Importer reflecting the Importer’s knowledge and control over the selection process and the fact that the Importer makes the final decision concerning factory selection and prices. Exhibit 5 is a three-page fax from the Manager to an employee of the Importer which identifies a new price quotation list for a particular factory for certain styles and explains the basis for the prices negotiated in connection with certain patterns. Exhibit 7 is a fax dated October 8, 1993 from the Agent to the Importer’s employee which refers to a style that the Importer’s Chairman sent to the Agent for the factory to remake with a particular heel selected by the Chairman. Exhibit 8 is a March 30, 1994 fax from the Agent to the Importer’s employee which states that the Agent spoke with a particular factory and that it is willing to make certain orders that the Agent is holding. The fax goes on to state that the Agent was able to get better prices than originally quoted and sets forth the styles, quantities and prices agreed to by that factory. The Agent then asks the Importer to confirm that the Agent can go ahead and process those orders. Also included in Exhibit 8 is a fax from the Agent to the Importer which references price negotiations between the Importer and the factories. An Importer executive annotated the documents showing his approval of the quoted prices (in one case lowering the price), prior to faxing it back to the Agent.

Exhibit 9 includes copies of a series of communication between the Importer and its Subagent. In the initial transmission, the Importer advised the Subagent that it needed to revise prices with the factory on certain patterns, and identifies the particular factory. The Subagent responded on the next day regarding the results of his follow-up negotiations with the factory. The Importer then annotated the Subagent fax and sent it back to the Subagent with comments. Exhibit 9 also includes a fax from the Importer to the Subagent stating that the prices are acceptable and thanking the agent for his efforts.

The Importer also claims that the Licensor has never acted as its buying agent or bought and sold footwear to the Importer, except for a limited number of sample shipments. The Importer claims that while certain partners of the Licensor have periodically performed services for the Agent, they have done so in their individual capacities rather than on behalf of the Licensor. The Importer claims that the Licensor’s President makes clear in his affidavit that the Agent and the Licensor are operated as entirely separate entities.

Based on the evidence presented, we conclude that the Agent and the Subagent acted as the Importer’s bona fide buying agent during the period under review; they performed the functions of buying agents, i.e., they acted on the Importer’s behalf in the purchase of the imported footwear, and the Importer maintained the necessary control over the matters entrusted to them. The evidence establishes that the Importer selected the factories to produce the footwear and had the final control over the price, quality, etc. of the imported footwear.

The transaction documents and the method of payment are consistent with this finding. The manufacturers issued invoices for the imported merchandise to the Importer and the Agent and Subagent separately issued commission invoices to the Importer. The Importer paid the manufacturers for the imported merchandise and separately paid the commissions to the Agent and the Subagent.

HOLDING:

The commissions that the Importer paid to the Agent and the Subagent for performing the above described services are bona fide buying commissions which should not be added to the price actually paid or payable in determining transaction value.

You are to mail this decision to the internal advice applicant no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will made the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information act, and other methods of public distribution.

Sincerely,

Thomas L. Lobred
Chief, Value Branch

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