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HQ 544843

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October 31, 1994

VALCO:R:C:V 544843 GG

CATEGORY: VALUATION

Mr. Joseph Sparano
U.S. Customs Service
Regulatory Audit Division,
6 World Trade Center, Room 345
New York, New York 10048

RE: Play Knits, Inc.

Dear Mr. Sparano:

This is in response to a November 7, 1991 request, submitted by counsel for Play Knits, for a reconsideration of Headquarters Ruling Letter (HRL) 544423, which addressed commissions paid by Play Knits Inc. to Elgin (H.K.) Co. Ltd. and Alfa Bay Ltd. Specifically, we were asked to reevaluate our holdings that 1) commission payments made to Alfa Bay should be dutiable because sufficient evidence had not been provided to prove their bona fides: and 2) payments made to Elgin should be included in the cost of assists supplied by Play Knits to its vendors, because these "commissions" were part of the costs of acquiring the materials, components, and parts incorporated in the imported merchandise. We will examine each of these situations separately. We regret the delay in responding.

I. Commission payments made to Alfa Bay should be dutiable because sufficient evidence had not been provided to prove their bona fides.

FACTS:

HRL 544423 discussed the general legal requirement that for commissions to be nondutiable, they had to arise out of a bona fide buying agency relationship between the importer and the, agent. The ruling listed the factors which help determine whether the agency relationship is bona fide.

Customs ruled that a bona fide agency relationship did not exist between Play Knits and Alfa Bay because of the lack of evidence to support the agency claim. We stated in pertinent part that

With regard to [Alfa Bay], which is stated to act as a buying agent for [Play Knits], only a copy of a buying agency agreement between the two parties was presented.

2

Not one shred of documentation evidencing instructions and directions by [Play Knits] to [Alfa Bay] during the normal course of business was presented to support the existence of the purported buying agency relationship. No invoices or other documentation reflecting merchandise ordered on behalf of [Play units] by [Alfa Bay], or payment on behalf of [Play Knits] to the particular manufacturers involved was presented. In discussions by members of the OR&R staff with the Office of Regulatory Audit concerning these documents, regulatory audit advised that such documents had been requested from the importer, but were told by [Play . Knits] that such documents were simply not available . . . Without substantial evidence apart from an agreement, we are simply not convinced that [Alfa Bay] operates under the direction and control of [Play Knits].

No other documentation on this issue has been submitted. We would expect to see invoices from manufacturers to Play Knits as well as invoices from Alfa Bay for commissions owed by Play Knits.

To rebut the conclusion that no agency relationship existed, counsel has submitted various documents with your reconsideration request, which were not submitted with the original internal advice request. They are:

1) A notarized statement made on October 31, 1991 by Shelley Rindner, Play Knits' Vice President, which attests to the fact that Play Knits utilizes Alfa Bay as its buying agent to ensure that its merchandise is delivered on time and conforms to sample and specification. Ms. Rindner states that Alfa Bay always acts on behalf of Play Knits and is under its direction and control; that all decisions as to the price paid, the quantity ordered, the nature of the merchandise etc., are made by Play Knits; and that Alfa Bay does not have the authority to make any decisions on its own without Play Knits' approval.

2) Facsimile messages, purportedly between Alfa Bay and Play Knits, regarding merchandise purchased by Play Knits from manufacturers in the Philippines. The messages relate to Alfa Bay's functions of ensuring that merchandise purchased by Play Knits conforms to specifications and that shipments will be made in a timely manner.

3) An invoice from Alfa Bay to Play Knits, setting forth the F.O.B. value of merchandise purchased from several factories overseas. The invoice has columns labeled "invoice #", "quantity", "date shipped", and "F.O.B. value". In each of these columns numerous transactions are recorded.

The F.O.B. values are combined to reach a total value, from which Alfa Bay's commission is calculated.

Also included is proof of payment of the commission by Play Knits to Alfa Bay in an amount equal to the commission listed on the invoice.

4) Invoices from foreign factories to Play Knits for the merchandise sold to Play Knits. These invoice numbers are the same as those appearing in the "invoice #" column on the invoice from Alfa Bay to Play Knits. The F.O.B. values also correspond.

Proof of payment, in the form of debit notices from Play Knit's bank, from Play Knits to the factories in amounts equaling the invoice F.O.B. values.

ISSUE:

Whether commissions paid by Play Kits to Alfa Bay are dutiable?

LAW AND ANALYSIS:

An affidavit by a party attesting to its status as a buying agent or a principal thereof has some evidentiary weight in determining the existence of an agency relationship. See J.C. Penney Purchasing Corp .v United States, 80 Cust. Ct. 84, 97, C.D. 4741, 451 F. Supp. 973, 984 (1978); HRL 544894, dated May 4, 1992. Therefore, we may take Ms. Rindner's statement into consideration. Of particular significance is her assertion that Alfa Bay always acts on behalf of Play Knits and is always under its direction and control. Decisions as to the price paid, the quantity ordered, the nature of the merchandise etc., she states, are made by Play Knits alone. This is important because, as the ruling being reconsidered noted, the primary consideration in determining whether a bona fide agency relationship exists between an importer and an alleged buying agent is the right of the principal to control the agent's conduct with respect to matters entrusted to the agent.

Play Knits has furnished copies of the facsimiles as proof that it did indeed exercise control over Alfa Bay. As noted above, the messages relate to Alfa Bay's functions of ensuring that merchandise purchased by Play Knits conforms to specifications and that shipments will be made in a timely manner. Although inspecting goods and arranging for their shipment are services performed by bona fide buying agents (see JayArr Slimwear Inc. v. United States, 12 CIT 133; 136, 681 F. Supp. 875, 878 (1986); J.C. Penney, 80 Cust. Ct. 84 at 95, 451 F. Supp. 973 at 983, and is a duty required of Alfa Bay in its buying agency agreement with Play Knits, the facsimiles are not altogether convincing because they are addressed to persons whose affiliation with either Play Knits or Alfa Bay is not disclosed.

The invoices and proof of payments offer more persuasive proof that Alfa Bay was Play Knit's bona fide buying agent. They directly address the statement made in the ruling currently being reconsidered that "we [Customs] would expect to see invoices from manufacturers to Playknits as well as invoices from Alfa Bay owed by Playknits." The various manufacturers invoiced and received payment from Play Knits, while Alfa Bay, in turn, invoiced Play Knits for commissions that were based on the manufacturers' prices to Play Knits. These documents suggest that the manufacturers were the sellers of the merchandise and that Alfa Bay was an agent of the buyer. There is no evidence that Alfa Bay was an independent seller.

HOLDING:

The buying agency agreement, the affidavit, to some extent the facsimiles, the invoices, and the payments, provide enough evidence to show that there was a bona fide buying agency relationship between Play Knits and Alfa Bay. Consequently, the buying commissions are not dutiable.

This decision was made based on new facts submitted with Play Knit's reconsideration request. Consequently, our position now does not represent a revocation or modification of HRL 544423. The pertinent holding in that ruling remains in effect with regard to the particular set of facts presented therein.

II. Payments made to Elgin should be included in the cost of assists supplied by Play Knits to its vendors, because these "commissions" were part of the cost of acquiring the materials, components and parts incorporated in the imported merchandise.

FACTS:

In HRL 544843, Play Knits paid Elgin a commission for its assistance in acquiring assists. We determined that these costs were includable in the cost of assists supplied by Play Knits to its vendors, because these commissions were part of the costs of acquiring the materials, components, and parts incorporated in the imported merchandise.

Subsequent to HRL 544843, Headquarters issued HRL 544976, dated March 17, 1993, and HRL 545266, dated June 30, 1993. These rulings followed the conclusion set forth in HRL 544843.

Counsel for Play Knits cites the following decisions to support its position that the commissions paid to Elgin to procure assists are not dutiable: HRL 542367, dated June 18, 1981; HRL 542365, dated April 13, 1981 (TAA No. 24); HRL 542412, dated March 27, 1983; HRL 543971, dated July 22, 1987; HRL 544396, dated May 14, 1990 (C.S.D. 9077). These rulings concluded that where an assist is purchased from an unrelated party, the cost of acquiring the assist is the purchase price plus transportation costs to the place of production. Any expenses associated with procuring the assist, such as purchasing, receiving, inspection and warehousing costs, are not part of the purchase price of an assist, therefore are not included in the assist's value. HRL 544323, dated March 8, 1990, reaffirmed that procurement costs are not dutiable, but did hold that certain activities undertaken by the employees of the importer's shipping department are dutiable because they'are incidental to the transportation of the assists to the place of production.

ISSUE:

Whether commissions paid by Play Knits to Elgin to procure assists are dutiable?

LAW AND ANALYSIS:

Section 152.103(d)(1) of the Customs Regulations (19 CFR 152.103(d)(1)) provides, in pertinent part, that if the assist consists of materials, components, parts or similar items incorporated in the imported merchandise, acquired by the buyer from an unrelated seller, the value of the assist is the cost of its acquisition.

We have carefully reviewed this issue as part of the case reconsideration. As a preliminary matter, concerning the accuracy of the decision that payments made to Elgin for its assistance in acquiring assists were dutiable, we note that the issue of whether Elgin was an agent of Play Knits was not scrutinized. The "commission" paid to Elgin is dutiable if Elgin was an independent seller and the commission represents the markup; or alternatively, the commission is dutiable if Elgin was an agent whose sole responsibility was procuring assists, rather than procuring assists and the finished merchandise.

It is the position of the Customs Service that buying commissions paid to a bona fide buying agent for acquiring merchandise to be imported are not dutiable. Where the agent has the dual role under an agency agreement of procuring assists as well as the finished merchandise, any commissions paid to the agent arising out of such an agreement will not be dutiable. However, commissions paid to an agent whose sole obligation is to acquire assists for the buyer, are part of the cost of acquiring an assist and will be added to the price actually paid or payable. Elgin performed no services other than supplying trim, piece goods, accessories and production supplies to the manufacturers of the finished products. Consequently, the "commissions" paid by Play Knits to Elgin are dutiable, either as part of the price to an independent seller, or, if Elgin was Play Knit's bona fide agent, as part of the cost of acquiring the assists.

It should be noted that Headquarters intends to revoke all rulings to the contrary. While the provisions of section 625(c)(1) of Title VI of the North American Free Trade Implementation Act (Pub.L. 103182, 107 Stat 2057) do not apply to your particular scenario, we will follow the procedures set forth therein to any revocations.

HOLDING:

The commissions paid by Play Knits to Elgin for acquiring assists will be included in the value of the assist, and therefore, are dutiable.

In summary, the new evidence presented with this reconsideration request supports your contention that Alfa Bay was a bona fide buying agent of Play Knits. Any commissions that resulted from this relationship are therefore not dutiable. However, upon review, we reaffirm our decision that "commissions" paid to Elgin for procuring assists were dutiable.

Sincerely,

Harvey B. Fox
Director
Office of Regulations and Rulings

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