Application for Further Review of Protest 5501-97-100244; dutiability of alleged buying commissions; right of principal to control agent’s conduct

HQ 546874 August 17, 1999 RR:IT:VA 546874 KCC CATEGORY: Valuation Port Director U.S. Customs Service P.O. Box 619050 DFW Airport,, Texas 75261 RE: Application for Further Review of Protest 5501-97-100244; dutiability of alleged buying commissions; right of principal to control agent’s conduct Dear Port Director: This is in regard to the Application for Further Review of Protest 5501-97-100244 dated July 31, 1997, filed by Robert T. Givens, Givens and Associates, P.C., on behalf of Leather Imports, Inc., dba Exotic Leather Imports, regarding the appraisement of animal hides and skins pursuant to transaction value in §402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”), codified at 19 U.S.C. §1401a. Information provided in an additional submission and in a meeting with this office has been taken into consideration in reaching this decision. We regret the delay in responding. FACTS: Leather Imports, Inc., dba Exotic Leather Imports (“Exotic”) imported pangolin and common cobra leathers from Vientiane Tannery (“VT”) located in Vientiane Laos. At entry, Exotic did not inform Customs that it paid Thai companies a “buying commission” in connection with the purchase of the leather products. The alleged buying commissions for services rendered in the procurement of pangolin skins were paid to Kittiwatt and Wattsanee Trading Co. (“K&W”) located in Thailand. K&W is the parent company of Tropical Leather Tannery Co., Ltd, (“Tropical”), also located in Thailand. Tropical was formed specifically to handle K&W pangolin business. Additionally, Exotic paid a buying commission for services rendered in the procurement of common cobra leather and leather products to LP&P, Thailand. Exotic claims that the evidence establishes that the commissions paid to K&W and LP&P were buying commissions which are statutorily not part of the price actually paid or payable in determining transaction value pursuant to §402(b)(1)(B) of the TAA. Although there is no written buying agency agreement between Exotic and its alleged agents, Exotic claims that there is a verbal agreement and an evolved pattern of doing business that confirmed the oral terms of the principal/buying agent relationship. Exotic submitted an affidavit from Mr. Moses D. Hernandez, President of Exotic, which sets forth the relationship between the principal and agents. Pursuant to the Hernandez Affidavit, K&W and LP&P were responsible for the following duties: Market Surveys and Product Availability: Surveyed the Laotian market for respective types of leather and leather products. They advised and updated Exotic as to the market conditions, anticipated supply and availability of the leather, and the price of the leather. They visited the manufacturer and obtained samples to give Exotic and for Exotic to give to VT. Negotiating and Purchasing: Provided translation services in all dealings with VT and government officials in Laos. Pursuant to instructions for Exotic, the agents negotiated and arranged for the purchase of the leather from VT and shipment to the U.S. Supervision and Quality Control: After orders were placed, the agents provided onsite representatives to monitor the manufacturer, selection, grading, and packaging of the leather and assured quality and proper shipment of the leather to the U.S. in order to satisfy the terms of the contract. Export Arrangements from Laos and from Thailand: Arranged for international shipping. These costs were reimbursed within the commission amount. The leather was shipped from Laos to Thailand and then from Thailand to the U.S. The agents applied for and obtained the necessary Laotian government export authorizations and wildlife permits. Payments for the Merchandise: Exotic directed the agents to act as a conduit for payment and assume the responsibility for forwarding the payments for the leather to VT. Payment of the Commissions: Exotic paid the agents a substantial buying commission to perform the above services and to compensate the companies for their expenses. Exotic states that it is clear that the agents, either verbally or in writing, billed Exotic for their commissions separate from VT’s invoice price. Buying Agents were not related to the Manufacturer: The agents assured Exotic that no portion of the buying commission paid would inure, directly or indirectly to VT and that they were not related to VT. In support of the Hernandez Affidavit and in support of its claim that the amounts paid the agents are buying commissions, Exotic submitted voluminous correspondence between itself and Tropical and LP&P. Exotic claims that the correspondence shows a principal/agent relationship between the parties. The duties assumed and carried out by K&W and LP&P are those ordinarily expected of and performed by buying agents. Based on the information obtained from you and Exotic, the following description is of a typical transaction between Exotic, Tropical/K&W and LP&P, and VT. Exotic communicates with Tropical and LP&P by telephone and/or facsimile to make arrangement to place an order. Exotic sends Tropical and LP&P an advance for the order which is usually around 50% of the total price. Exotic and Tropical and LP&P often communicate by telephone and/or facsimile regarding the status of the order and any problems. Eventually, the order is shipped to Exotic and, upon receipt of the imported products, Exotic is required to pay any outstanding amounts. A typical document package submitted with the entry is as follows: -U.S. Declaration for Importation or Exportation of Fish or Wildlife showing the U.S. importer as Exotic of 350 pieces of NAJA NAJA, Common Cobra Vamps from Lao with a domestic value of US$1,925.00 dated July 12, 1996. -Invoice No. [no number] dated July 2, 1996, from Vientiane Tannery in Lao People’s Democratic Republic to Exotic showing shipment from Lao P.D.R. with a total invoice price of US$1,925.00 for 1,400 pieces or 350 sets (4 pierces per set) of Pre Cust Vamps, Common Cobra Snake (NAJA NAJA). -Ministry of Agriculture, Forestry, Irrigation and Cooperatives Vientiane Certificate Re: Export Permit No. 2858 referring to 350 sets of Pre-Cut Vamp, Common Cobra Leather NAJA NAJA from Lao P.D.R. with a date stamp for July 5, 1996. -Lao People’s Democratic Republic Export Permit No. 2858 with date stamps for July 3 and 5, 1996 showing the exporter as Vientiane Tunnery, Invoice Identification as 19/3/7/96, for Pre-Cut Vamp, Common Cobra Snake Leather (NAJA NAJA) for 1,400 pieces or 350 sets (1 set = 4 pieces) for US$525.00 from Laos direct to Exotic Leathers in U.S. -Airway bill dated July 3, 1996 from Cargo Marketing International Co., Ltd showing shipper as Vientiane in Lao and consignee as Exotic from Vientiane through Bangkok to Dallas with freight prepaid. -Airway bill dated July 9, 1996 from China Airlines showing shipper as Vientiane Tannery in Lao and consignee as Exotic showing cargo in transit via Bangkok to Dallas with freight prepaid. Exotic makes all its payments to LP&P and K&W or to other parties (VN Group and Orasa Srichawla) as directed by Tropical for advances and any outstanding balances after the leather is imported into the U.S. For K&W transactions, Tropical provides Exotic directions on who to pay and relevant account information for Exotic to make the wire transfers. No evidence, other than Exotic’s own statement, was provided to demonstrate that the price VT received for the goods was that listed on its invoices to Exotic. No payments are made by Exotic directly to Tropical or VT. It is your position that the values presented on the invoices are not the prices paid for the imported goods. The subsequent payments to LP&P and K&W are part of the price actually paid or payable. You state that the evidence establishes that LP&P and K&W are acting as independent sellers or are as limited partners of the vendor, VT. ISSUE: Whether the evidence submitted supports a finding that the commissions paid constitute bona fide buying commissions such that they are not included in the transaction value of the imported merchandise. LAW AND ANALYSIS: The preferred method of appraising merchandise imported into the United States is transaction value pursuant to §402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 ("TAA"), codified at 19 U.S.C. §1401a. §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 numerated statutory additions, including: (B) any selling commission incurred by the buyer with respect to the imported merchandise, The term “price actually paid or payable” is defined in §402(b)(4)(A) of the TAA 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...) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller. Buying commissions are fees paid by an importer to his agent for the service of representing him aborad in the purchase of the goods being appraised. Bona fide buying commissions are not added to the price actually paid or payable. Pier 1 Imports, Inc. v. United States, 708 F. Supp. 351, 13 CIT 161, 164 (1989); RosenthalNetter, Inc. v. United States, 679 F. Supp. 21, 23, 12 CIT 77, 78, aff'd, 861 F.2d 261 (Fed. Cir. 1988); JayArr Slimwear, Inc. v. United States, 681 F. Supp. 875,878, 12 CIT 133, 136 (1988). 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. RosenthalNetter, Inc, supra., New Trends, Inc. v. United States, 10 CIT 637, 645 F. Supp. 957 (1986); Pier 1 Imports, Inc, supra. Whether the relationship is one of agent-principal is to be determined by the substance of the transaction, not by the labels the parties attach to it. Pier 1 Imports, Inc. v. U.S., supra., and Monarch Luggage Co. v. U.S., 715 F. Supp. 1115, 13 CIT 523 (1989). The existence of a bona fide buying commission depends upon the relevant factors of the individual case. J.C. Penney Purchasing Corp. v. United States, 80 Cust. Ct. 84, 95, C.D. 4741, 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 to those matters entrusted to the agent. JayArr Slimwear, Pier 1 Imports, Inc., J.C. Penney, and Rosenthal-Netter, supra. In addition, the courts have examined such factors as whether the purported agent's actions were primarily for the benefit of the principal; whether the agent was responsible for the shipping and handling and the costs thereof; whether the language used in the commercial invoices was consistent with a principalagent relationship; whether the agent bore the risk of loss for damaged, lost or defective merchandise; and whether the agent was financially detached from the manufacturer of the merchandise. The degree of discretion granted the agent is a further consideration. New Trends, 645 F. Supp. 957. The existence of a bona fide buying commission is to be determined by the totality of the circumstances. See, Headquarters Ruling Letter (HRL) 542141 dated September 29, 1990 (TAA No.7). With respect to the instant case, Exotic concedes that no written buying agency agreement exists between itself and K&W or LP&P. In this regard, it has been held that while the existence of such an agreement lends support to a claim that a bona fide buying agency relationship exists, the absence of one is not fatal to such a claim, provided the available evidence, taken as a whole, establishes the existence of such a relationship. Mitsui & Co. (U.S.A.), Inc. v. United States, 66 Cust. Ct. 553, R.D. 11740 (1971); and Rosenthal-Netter, Inc., supra. It is our position that the evidence presented by Exotic is insufficient to show that K&W and LP&P actually performed the typical services of a buying agent. The primary consideration is the right of the principal to control the agent’s conduct. Exotic claims that there is a verbal buying agency agreement with K&W and LP&P and an evolved pattern of doing business that confirms the oral terms of the principal/buying agent relationship. As evidence of this claim, Exotic submitted an affidavit from Moses Hernandez attesting to the duties performed by K&W and LP&P and various correspondence between Exotic and K&W and LP&P. We are not persuaded. The facts and documentation available indicate that Exotic did not exercise control over either agent’s activities. Based on the correspondence between Exotic and the agents, it is apparent that Exotic discussed the terms of the price for the leather for each shipment with Tropical/ K&W and LP&P. Tropical/K&W and LP&P allocated the amount of different skins the importer could purchase and set the price and payment terms. There is no indication that Exotic directed either Tropical/K&W or LP&P to perform any functions listed in the Hernandez Affidavit. It does appear that Tropical/K&W and LP&P performed some of the services stated in the Hernandez Affidavit. The agents did monitor the manufacturing process at VT, acquired samples for Exotic, arranged for transportation, performed quality control, negotiated prices and accepted payments. However, these services were performed by Tropical/K&W and LP&P on behalf of themselves and VT, not at the direction of Exotic. The correspondence submitted indicates that LP&P and Tropical/K&W are acting as selling agents for VT or as VT’s partners. Both Tropical/K&W and LP&P letters/facsimiles to Exotic use the term “partner” in reference to VT. Numerous correspondence between the parties indicates that the agents primary responsibility lies with VT and not with Exotic. Additionally, information obtained by Customs indicates that Tropical/K&W is an agent for VT and that everything concerning buying and selling of exotic leathers produced by VT is done through Tropical/K&W in Bangkok Thailand. Additionally, there are no payments made to VT by Exotic. There are no invoices between Tropical/K&W or LP&P and Exotic establishing the exact amount for the agent’s buying commission or other expenses undertaken on behalf of Exotic. Exotic’s payments are made to LP&P and as directed by Tropical to K&W and other parties. No evidence was submitted to show that VT received the price stated on its invoices to Exotic. The evidence available does not indicated that Exotic had any control over K&W or LP&P. Accordingly, we do not find that a buying agency relationship existed between Exotic and LP&P or K&W. Thus, the transaction value for the imported leather includes all the payments made by Exotic to LP&P and as instructed by Tropical to K&W, the VN Group and Orasa Srichawla. HOLDING: The evidence submitted is insufficient to support a finding that K&W and LP&P are Exotic Leather Imports’ buying agents. Therefore, we conclude that the fees paid do not constitute bona fide buying commissions and are, therefore, included in the transaction value of the imported merchandise. This Protest should be DENIED. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065 dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on 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