Internal Advice 21/97; buying commissions; Pier 1 Imports, Inc. v. United States; RosenthalNetter, Inc. v. United States; JayArr Slimwear, Inc. v. United States; New Trends, Inc. v. United States; J.C. Penney Purchasing Corp. v. United States; Dorco Imports v. United States; related party; 19 U.S.C. 1401a(g)(1); T.D. 85111; Generra Sportswear Co. v. United States; Moss Mfg. Co. v. United States; HRL 542141; HRL 544965

HQ 546981 February 8, 1999 RR:IT:VA 546981 DEC CATEGORY: Valuation Area Port Director U.S. Customs Service Hemisphere Center, Room 200 Newark, NJ 07114 RE: Internal Advice 21/97; buying commissions; Pier 1 Imports, Inc. v. United States; RosenthalNetter, Inc. v. United States; JayArr Slimwear, Inc. v. United States; New Trends, Inc. v. United States; J.C. Penney Purchasing Corp. v. United States; Dorco Imports v. United States; related party; 19 U.S.C. 1401a(g)(1); T.D. 85111; Generra Sportswear Co. v. United States; Moss Mfg. Co. v. United States; HRL 542141; HRL 544965 Dear Area Port Director: This is in regard to your memorandum of November 25, 1997, under cover of which you forwarded a request for Internal Advice (“IA 21/97"), dated June 24, 1997 submitted by Lubell and Koven on behalf of Ducson, Co. Inc., concerning whether a commission is included in the price actually paid or payable in determining transaction value under §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. Counsel for Ducson contends that the commission paid to its alleged agent, Tulip Limited, is a bona fide buying commission such that it is not included in the price actually paid or payable. Additional information obtained at a meeting with Ducson on June 11, 1998, in an additional submission dated September 2, 1998, and in a memorandum from Chief, Textiles & Apparel Branch, National Commodity Specialist Division, dated January 23, 1998, was taken into consideration in reaching this decision. We regret the delay in responding. FACTS: Beginning in 1986, Ducson Co., Inc. (“Ducson”), the importer, states that it began purchasing slippers manufactured by China Fujian Nanping Hongli Garment Footwear & Headwear Co., Ltd (“Fujian”). For these transactions, Ducson states that it utilized the services of a buying agent. Ducson states that its relationship with the buying agent was terminated in 1992 after the buying agent started dealing directly with Ducson’s U.S. customers. Thereafter, Ducson entered into an oral agreement in July 1992 with Tulip Limited (“Tulip”) in which Tulip was to act as Ducson’s purchasing agent to secure the procurement of goods as instructed by Ducson. Ducson states that in establishing Tulip as its agent, Ducson virtually taught the footwear business to Tulip and introduced Tulip to the Fujian factory. Ducson states that Tulip acted as Ducson’s liaison with the Fujian factory. Ducson provided Tulip with designs or prototypes of the footwear that Ducson wished to purchase from Fujian, as well as the pricing that Ducson had negotiated with the factory. Ducson’s principal, Mr. Young Son, negotiated pricing and production with Fujian during his eight (8) annual trips to China. Ducson states that it was Tulip’s responsibility as buying agent to regularly inspect the factory’s performance both as to quality and timeliness of production. Tulip would obtain production samples from the factory; submit the samples to Ducson for approval; relay purchase orders received from Ducson, inspect finished products and arrange for shipment of the finished footwear to the U.S. via Hong Kong. Ducson notes that Tulip also was responsible for procuring certain marketing accessories on behalf of Ducson for use by Fujian in its production, i.e., tags, labels, J-hooks, and price tickets. Additionally, Tulip also provided packing materials to Fujian and arranged and paid for inland freight charges from Fujian to Hong Kong, and arranged for shipment to the U.S. Ducson paid for the imported footwear by opening one letter of credit in favor of Tulip, which included its commission and expenses for marketing accessories and freight. Tulip would thereafter forward payment to Fujian. Ducson states that in the spring of 1996, Tulip began to solicit Ducson’s U.S. customers in violation of its oral arrangement of principal-agent. Once Ducson became aware of these activities, in June 1996, Ducson terminated its relationship with Tulip. Ducson states that it has consulted with Hong Kong counsel for appropriate redress from Tulip’s actions. Thus, Ducson states that Tulip has not cooperated in providing information to support Ducson’s contentions in this request for Internal Advice. Tulip did acknowledge that it did pay inland freight charges and purchase marketing accessories on behalf of Ducson. Submitted as evidence is a memorandum from Tulip to Ducson’s Counsel dated December 18, 1996, with relevant attachments such as purchase orders, proof of payment and freight bill for a transaction between Ducson and Tulip designated by invoice #TL96662A. Additionally, Ducson submitted a “Certification” from the Director of Fujian dated January 28, 1997, stating: Fujian has been manufacturing and selling to Ducson since 1986; From July 1992 to June 1996, sales to Ducson were arranged by Ducson’s purchasing agent, Tulip; Prices were negotiated either by Ducson or Tulip; Tulip communicated and visited Fujian to inspect goods prior to shipment, make payment and establish delivery terms for Ducson; Fujian entered into purchasing contracts with Tulip for the sale of goods to Ducson; Fujian sales to Ducson were made ex-factory with Tulip arranging transportation and insurance to Ducson; Fujian received payment via wire transfer from Tulip; Fujian understood that the its sales were made to Ducson and that ownership and title to the goods remained with Ducson; Fujian never transferred title to the goods to Tulip; Tulip had no financial or personal relationship with Fujian and was not paid by Fujian for any reason nor did Fujian receive any of the commissions paid by Ducson to Tulip; and Fujian did not require Ducson to employ an agent in order to purchase goods. We have reviewed various documents which illustrate the type of transactions that occur between Ducson, Tulip and Fujian. The following documents demonstrate a typical transaction between the parties: 1. Ducson’s Purchase Orders (10) to Tulip dated October 12, 1996. The purchase orders indicated Make Up Numbers of T1118, T1119, T1120, T1121, T1122, T1123, T1124, T1125, T1126 and T1127, which indicate New York, NY as port of entry and that the merchandise is Made in China. Additionally, there are instructions as to the correct packing and to the number of confirmation samples. Payment is indicated as by Ducson Letter of Credit; 2. Tulip’s Invoice to Ducson dated May 17, 1996, which indicates that the merchandise was to be shipped on May 2, 1996, by vessel from Hong Kong to New York. The terms of sale were F.O.B. Hong Kong. All of the Make Up Numbers cited in the purchase order were accounted for on the invoice with the exception of Make Up Number T122; and 3. Tulip’s packing list which is dated May 17, 1996, and indicates that and corresponding packing list for the merchandise. All of the Make Up Numbers cited in the packing list were accounted for on the invoice with the exception of Make Up Number T122. We note that during the June 11, 1998, meeting Mr. Son indicated that the letter of credit is not negotiable until the goods arrive at the vessel in Hong Kong and that Ducson is not responsible for the merchandise until its arrival in Hong Kong. It is your position that the totality of the evidence does not establish Tulip as a bona fide buying agent for Ducson. Thus, all the payments made to Tulip are included in the price actually paid or payable for the imported merchandise. You note that there is no written buying agency agreement between Ducson and Tulip. However, you are aware that other importers in the U.S. treat Tulip as a seller and utilize Ducson as their buying agent. Moreover, you state that the transaction documents, i.e. purchase orders and invoices between Ducson-Tulip and Tulip-Fujian are not indicative of a buying agency transaction. ISSUE: Whether the evidence submitted indicates that the commission in question constitutes a bona fide buying commission such that it is not included in the price actually paid or payable for 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 additions. 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. As a general matter, 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 (1988); JayArr Slimwear, Inc. v. United States, 681 F. Supp. 875,878, 12 CIT 133, 136 (1988). Where the existence of an agency relationship is not clearly established, the legal relationship is not that of agency. New Trends, Inc. v. United States, 10 CIT 637, 645 F. Supp. 957 (1986). The commissionaire performs the duties of an agent acting on behalf of its principal, the buyer. It may not act as an independent seller, nor as a representative of the manufacturer. United States v. Manhattan Novelty Corp., 63 Cust. Ct. 699, A.R.D. 263 (1969) and Headquarters Ruling Letter (HRL) 542141 (TAA #7) dated September 29, 1980. Where the relationship between the parties is that of buyer and seller rather than principal and agent, an item claimed to be a "buying commission" is not deductible from appraised value. B & W Wholesale Co., Inc. v. United States, 462 F. Supp. 1399, 58 CCPA 92, C.A.D. 1010 (1971). 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, 451 F. Supp. 973 (Cust. Ct. 1978). In this regard the importer has the burden of proving the existence of a bona fide agency relationship and that payments to the agent constitute bona fide buying commissions. Rosenthal Netter, 679 F. Supp. 21, 23; New Trends, Inc., 645 F. Supp. 957, B.W. Wholesale Co., Inc., 462 F. Supp. 1403. 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. JayArr Slimwear, 681 F. Supp. 875, 879. The degree of discretion granted the agent is a further consideration. New Trends Inc., 645 F. Supp. 957. The existence of a buying agency agreement, moreover, 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 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. New Trends, 645 F. Supp. 957. According to counsel for Ducson, Tulip and Ducson had an oral agreement whereby Ducson retained the services of Tulip to act as its purchasing agent. Counsel states that Tulip represented Ducson as a purchaser’s representative and has acted on Ducson’s behalf in locating, identifying, and dealing with manufacturers of footwear doing business in China. Tulip has entered into purchasing contracts with the manufacturers after disclosing to Ducson all the terms of a specific transaction. Tulip has also inspected finished goods prior to shipment to the U.S., arranged for international transportation of the merchandise, arranged for adequate insurance, ensured appropriate shipment and entry documents were available in connection with the importation into the U.S. In addition, Tulip would periodically inspect the manufacturer’s performance both as to quality and timeliness of production. Tulip arranged for the payment to the manufacturers with letters of credit that Ducson opened in Tulip’s favor so that Tulip could pass on payment for the goods to the proper manufacturer. Ducson paid Tulip a commission of 10% of the FOB cost of the goods. The Director of Fujian stated that Tulip did not take title to the goods Tulip ordered on Ducson’s behalf. While a buying agent may typically perform these types of activities, the fact remains that no written agency agreement existed between Tulip and Ducson. While this fact does not preclude a finding that Tulip was operating as a buying agent, it is also interesting to note that your office discovered through its investigation that other importers use a separate buying agent in their transactions with Tulip which lends credibility to your position that Tulip is an independent buyer and seller of merchandise. We are not persuaded that Tulip was operating merely as an agent for Ducson. Contrary to the statements of the Director of Fujian that Tulip did not hold title or bear risk of loss for the merchandise, we found compelling evidence that Tulip is an independent buyer and seller of merchandise in the documentation between Tulip and Ducson. On invoices our office has reviewed, the terms of sale between Tulip and Ducson are FOB Hong Kong. The New Trends court concluded that the agent’s liability for lost or damaged goods would also tends to indicate a sale rather than an agency relationship. New Trends, 10 CIT at 643. The existence of terms of sale between Ducson and Tulip is evidence that Tulip is not operating as an agent on Ducson’s behalf, but rather Tulip is operating as an independent seller who has title to the goods and bears the risk of loss until the goods are laden aboard a vessel in Hong Kong. See HRL 559934, dated January 27, 1999. Another factor cited in New Trends to support our finding that Tulip is not a buying agent is that in the course of Customs’ investigation, it was established that other importers used a buying agent in their transactions with Tulip which supports our finding that Tulip conducted independent business. Based on this evidence, we are not persuaded that Tulip has overcome its burden that their relationship with Ducson is a bona fide agency relationship and that the payments it receives are bona fide buying commissions. The documentation we have reviewed leads us to conclude that Tulip was an independent buyer and seller of the merchandise who had title and bore the risk of loss of the merchandise. Customs has found in very limited circumstances a principal may direct an agent to retain title and bear the risk of loss for the imported merchandise for a brief time without precluding a finding that a bona fide agency exists (see HRL 544669, dated August 15, 1991, and HRL 545624, dated October 25, 1994), but the totality of the circumstances present in our review of the IA request do not justify such a finding in this case for the reasons discussed above. HOLDING: On the basis of the information presented, it is our opinion that the evidence submitted is insufficient to support a finding that Tulip is Ducson’s buying agent. Therefore, we conclude that the fees paid by Ducson do not constitute bona fide buying commissions and are, therefore, included in the transaction value of the imported merchandise. 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 make 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