Request for Internal Advice; Commissions

HQ H043842 March 31, 2009 OT:RR:CTF:VS H043842 GOB CATEGORY: Valuation Port Director U.S. Customs and Border Protection 1901 Cross Beam Drive Charlotte, NC 28217 RE: Request for Internal Advice; Commissions Dear Port Director: This is in response to your request for internal advice of October 1, 2008 with respect to [ ] (hereinafter, the “requester”). The National Commodity Specialist Division of U.S. Customs and Border Protection (“CBP”) forwarded your request to this office by memorandum of October 27, 2008. Pursuant to our request, the requester provided additional information to this office on January 7, 2009 and March 5, 2009. Please note that the requester has requested confidential treatment with respect to the information contained in the bracketed portion of this ruling. This information will be deleted in any published version of this ruling. FACTS: Counsel for the requester describes the pertinent facts as follows. By agreements entered into in 1999 and 2006, the requester has retained an unrelated company (“agent”), a Hong Kong Corporation, as its exclusive representative in sourcing furniture products throughout Asia. The requester agreed to pay the agent a commission based upon the FOB (“free on board”) value of the merchandise purchased and shipped. Under the agreements, the agent is to provide the requester with certain quality control analysis, audit and logistical support, and other services. The requester’s and the agent’s responsibilities include the following: (1) Factory and vendor identification – the agent and the requester are jointly tasked with identifying vendors and obtaining market knowledge; the agent is responsible for performing assessment of the factory qualifications and gathering data for the requester’s review; (2) The agent is responsible for knowledge of the product specifications for each product of the requester’s wholly-owned subsidiaries (the “subsidiaries”) and for consulting in bid package preparations. The subsidiaries exercise exclusive control over all aspects of product design and development; (3) The agent is responsible for the delivery of bid packages to prospective vendors and the facilitation of subsequent communications between the requester and the vendors. The requester is solely responsible for receiving bids from and providing notification of bid acceptance to prospective vendors; (4) The requester is solely responsible for issuing purchase orders directly to vendors. Copies of purchase orders are provided by the vendors to the agent, who is responsible for tracking production levels against purchase order quantities and expected completion date; (5) The agent is responsible for monitoring quality control against standards established and communicated directly by the requester to the agent and the vendors, providing statistical analysis reports summarizing quality control data, and conducting lab and product testing procedures; and (6) The agent randomly selects finished packaged goods for open carton inspections at the time of container loading. The agent identifies defects and notifies the requester of the results. As stated above, commissions due to the agent are calculated based on the actual FOB price paid by the requester directly to the vendor, supplier, or manufacturer. The requester requires the vendor to provide copies of bills of lading and commercial invoices for each shipment. The agent compiles shipping data on a monthly basis and provides the requester with invoices of commissions due to the agent. Counsel for the requester states that, in all cases, payments for the product are made directly by the requester to the vendor. Commissions are paid separately and directly by the requester to the agent after audit and verification of the invoices issued by the agent. Counsel for the requester has provided the agreement between the requester and the agent, as well as correspondence between the requester and the agent. Counsel has also provided the following documentation with respect to an entry of merchandise by a subsidiary of the requester: purchase orders; a commercial invoice; general ledger activity; a statement of account; a commission invoice; and invoices detailing freight forwarding charges. ISSUE: The issue presented is whether the commission paid by the requester to the agent is a bona fide buying commission or a dutiable selling commission. LAW AND ANALYSIS: Merchandise imported into the United States is appraised in accordance with the provisions of Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. §1401a; TAA). The preferred basis of appraisement is transaction value, defined as "the price actually paid or payable for merchandise when sold for exportation to the United States." 19 U.S.C. §1401a(b)(1). Accordingly, we have assumed for the purposes of this ruling as it regards the “first cost buying” program that transaction value is the appropriate basis of appraisement. The term "price actually paid or payable" is defined 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." 19 U.S.C. §402(b)(4). As a general matter, bona fide buying commissions are not added to the price actually paid or payable. Pier 1 Imports, Inc. v. U.S., 708 F. Supp. 351, 13 CIT 161, 164 (1989); Rosenthal-Netter, Inc. v. U.S., 679 F. Supp. 21, 12 CIT 77 (1988); Jay-Arr Slimwear, Inc. v. U.S., 681 F. Supp. 875, 12 CIT 133 (1988). The existence of a bona fide buying commission depends upon the relevant factors of each particular case. J.C. Penney Purchasing Corp. v. U.S., 451 F. Supp. 973 (Cust. Ct. 1978); Nelson Bead Co., 42 CCPA 175, 183 (1955). 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, Inc. v. U.S., 679 F.Supp. 21, 23, 12 CIT 77 (1988); New Trends, Inc. v. U.S., 645 F. Supp. 957, 10 CIT 637 (1986); B.W. Wholesale Co., Inc. v. U.S., 462 F. Supp. 1399, 1403, 58 CCPA 92, C.A.D. 1010 (1971). The alleged agent performs duties 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). A relevant factor in determining the relationship is the fact that none of the commission paid by the buyer inures to the benefit of the seller. As stated in Reliance International Corp. v. United States, 62 Cust. Ct. 845, 849, 305 F.Supp. 20, 24 (1969): Commissions paid by the purchaser to agents for services rendered in procuring the merchandise, inspecting and packing goods, arranging for shipment and acting as a paymaster for account of the buyer, no part of which commissions inure to the benefit of the seller, are buying commissions. 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. Jay-Arr Slimwear, 681 F. Supp. 875, 879. The degree of discretion granted the agent is a further consideration. New Trends Inc. v. U.S., 645 F. Supp. 957 (1986). The existence of a buying agency agreement, moreover, has been viewed as supporting the existence of a buying agency relationship. Dorco Imports v. U.S., 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 principal-agent 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. It is the position of CBP that "having legal authority to act as buying agent and acting as buying agent [are] two different matters" and that CBP is entitled to examine evidence that proves the latter. U.S. Customs Service General Notice, 11 Cust. Bull. & Dec. 15 (March 15, 1989). The requester makes the following assertions: all of the activities of the agent are subject to the direction and discretion of the requester; the requester maintains control and decision making authority over factory and vendor selection; the requester assumes the risk of loss for lost and damaged merchandise; the requester controls the manner of payment and absorbs the costs associated with shipping and handling; the requester retains the rights to purchase goods without using an agent; and the agent is not related to any vendor or manufacturer. The requester has submitted documentation which is supportive of these assertions. This documentation includes: a purchase order issued by the requester’s subsidiary directly to a foreign supplier; a commercial invoice issued by the foreign supplier for the account of the requester’s subsidiary; documentation reflecting payments made by the requester’s subsidiary to the foreign seller; documentation reflecting payment of the commission by the requester’s subsidiary to the agent; invoices reflecting freight forwarding charges paid by the requester’s subsidiary; and correspondence between: the requester’s subsidiary and the foreign seller; and the requester’s subsidiary and the agent. Based upon the information provided, we find that a bona fide buying agency exists between the requester and the agent. Therefore, it is our position that the above-described commissions paid by the requester to the agent are bona fide buying commissions and are not an addition to the price actually paid or payable. HOLDING: A bona fide buying agency exists between the requester and the agent. Therefore, the above-described commissions paid by the requester to the agent are bona fide buying commissions and are not an addition to the price actually paid or payable. Please promptly provide a copy of this ruling to counsel for the requester. Sixty days from the date of this ruling the office of Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Monika R. Brenner Chief Valuation and Special Programs Branch