Buying Commissions; Requests for Internal Advice

HQ H051136 July 20, 2010 VAL OT:RR:CTF:VS H051136 GG CATEGORY: Valuation Area Director, JFK Airport U.S. Customs and Border Protection Attn.: Michael P. Mitchell Chief, Trade Operations Branch JFK International Airport Jamaica, NY 11430 RE: Buying Commissions; Requests for Internal Advice Dear Sir: This is in response to your memorandum dated November 20, 2007, under cover of which you forwarded two internal advice requests, dated July 27, 2006 and January 11, 2007, respectively, filed by Follick & Bessich on behalf of [XX] (hereinafter, “the Importer”), concerning the dutiability of certain commission payments. Since the issues raised in both requests are substantially similar, we will address both requests in this letter. We regret the delay in responding. Importer has advised that the disclosure of certain information relative to this matter could potentially cause substantial harm to the competitive position of the parties involved. Based on our review of the matter we have concluded that the information in question is eligible for confidential treatment under 19 C.F.R. § 103.12; accordingly, we have granted the request for confidentiality. Appropriate steps will therefore be taken to ensure that the information remains confidential and, to this end, the bracketed portions of this decision will be redacted from any published versions of this decision. A public version of this decision is enclosed for your files. However, the Importer should note that U.S. Customs and Border Protection (“CBP”) will be guided in this regard by the laws relating to confidentiality and disclosure, to include the Freedom of Information Act (FOIA), as amended (5 U.S.C. § 552), the Trade Secrets Act (FOIA) (18 U.S.C. § 1905) and/or the Privacy Act of 1974, as amended (5 U.S.C. § 552a). The provisions of the FOIA, the TSA and the Privacy Act will prevail in any conflict concerning the confidentiality and disclosure of information. Accordingly, any information submitted in connection with this matter will be disclosed, if requested, where, e.g., it is administratively determined that the information is not protected by the TSA, the Privacy Act or an exemption of the FOIA. FACTS: Counsel for the Importer filed its first request for internal advice on July 27, 2006, in response to a proposed rate advance for certain payments made by the Importer in connection with shipments of [xx] (hereinafter, “the merchandise”) from Brazil. The Importer has consistently maintained that these payments amounted to non-dutiable buying commissions paid to its agent, [“A”], acting on its behalf. The proposed rate advance followed a Focused Assessment review by CBP’s Regulatory Audit Division of transactions by the Importer occurring between 1998 and 2004. The Focused Assessment Report, issued August 10, 2005, concluded that the failure to include dutiable commission payments of over $[XX] in the appraised value of the merchandise had resulted in lost revenue of over $[XX]. These payments were determined by CBP to have been made for the benefit of several individuals and entities, including an entity bearing the same name as the seller of the merchandise, [“S”]. Accordingly, CBP refused to treat the payments as non-dutiable buying commissions. Counsel submitted a second request for internal advice on January 11, 2007, with respect to commissions paid by the Importer to agent [“B”] and on occasion to an entity affiliated to [“B’], [“C”], located in Taiwan (hereinafter, “the B and C agents”). The payments were made in connection with merchandise imported from China. At issue is the conclusion of CBP officials, reached following the same series of audits and reviews as above, that these payments are not buying commissions as asserted by the Importer but are amounts to be included in the transaction value of the imported merchandise. The Importer has been advised of CBP’s finding that between 2000 and 2004, the Importer paid over $[XX] to the Taiwan entities in dutiable commissions, which caused lost revenue to CBP of over $[XX]. On August 20, 2007, the Importer filed a protest and application for further review against the appraisement of merchandise covered by twenty-nine entries filed between October 11, 2005 and April 21, 2006, and liquidated on April 22, 2007. The protested entries involved the importation of merchandise from Brazil in which certain commission payments were made to [“A”]. The imported merchandise was appraised under the transaction value method and, as liquidated, included an amount in respect of the commission payments at issue. Importer disputed the inclusion of the amount of the commission payments, which it contended were bona fide buying commissions. The information submitted by counsel in connection with the first internal advice request, while not directly relevant to the protested entries, was taken into account in the resolution of the protest. A decision – HQ H020231 – was issued by this office on June 25, 2009, in which it was determined that the protest should be allowed. With respect to the disposition of the two pending internal advice requests, we have also reviewed and considered the following to the extent they shed light on the appraised value of the merchandise: (1) a Pre-Assessment Survey Report, dated August 1, 2003; (2) a Focused Assessment Follow-Up Report, dated August 10, 2005; (3) a Technical Assist Audit Report, dated March 2, 2007; (4) Protest and Summons Information Report dated March 2, 2007; (5) samples of entry summaries, commercial invoices, commission invoices, purchase orders, bills of lading, agency agreements and payment documentation; and (5) supplements to the internal advice requests submitted by counsel dated June 9, 2008, August 29, 2008, and September 10, 2009. The July 27, 2006 Internal Advice: The Brazilian Transactions Based on our review of these materials we consider the following additional facts relevant to our assessment of commissions paid by the Importer in connection with purchases from Brazil: The seller was [“S”], a Brazilian trading company that obtained the merchandise from various manufacturers in Brazil and sold to the Importer. [“S”] and the Importer are not related. Each shipment examined was found to be accompanied by an invoice from the seller to the Importer. Shipments were made directly to the Importer for its account on FOB terms. The Importer’s purported agent, [“A”], never took title to or assumed the risk of loss for the merchandise. Payments based on a percentage of the invoice price of the merchandise purchased by the Importer from the seller were made directly to the agent. The Importer paid the seller directly for the invoiced merchandise. The Importer entered into several agreements styled as “buying agency agreements” since 1994, as presented in Exh. D to the July 27, 2006, request for internal advice. The terms of these agreements were substantially the same, with all the agreements beginning in 2001 identical also in format. Counsel advises that at all times since 1994, the actual agent was [“A”], and that this individual carried out the agent responsibilities under these agreements. The agent operated under several business names. In 1994, the Importer executed a buying agency agreement in which the seller [“S”] was identified as the buying agent. This agreement was signed for the agent by [Mr. XX], President of the seller, but using an address in Massachusetts. The Importer insists that the agent [“A”] was actually the agent who carried out the agent responsibilities, and that its seller [“S”] was not the agent. A follow-on buying agency agreement executed in 2001 was entered into between the Importer and [“S”], but this time signed by [“A”] on behalf of the seller [“S”]. [“S”] is identified as the buying agent in the agreement, with an address in Brazil. In February of 2002, another buying agency agreement took effect, this time between the Importer and an entity named [“E”], with [“A”] signing on behalf of [“E”], using a Florida address. The Importer entered into yet another buying agency agreement in 2003, in which the buying agent was identified as [“F”], also of the same Florida address. This agreement superseded all previous agreements. Counsel’s submission identifies both Florida companies as being operated by [“A”]. The Importer states that notwithstanding the uses of various names, including one identical to the name of the seller in Brazil, these agreements are all effectively with [“A”] as the Importer’s buying agent. The Importer proposes that the names used for the agents be disregarded in favor of treating the agreements as actually between the Importer and the agent, [“A”]. Documentation examined at audit indicates that throughout the period of review the Importer made commission payments directly to the agent and, except as discussed below, made no other payments to the seller, beyond the FOB prices invoiced for the merchandise. In other words, the agent was paid a percentage of the invoice prices separately and directly by the Importer; no part of the commission was included in the payments to the seller for the merchandise. The agent’s functions under the agreements included finding companies in South America capable of manufacturing merchandise to the Importer’s specifications; determining the asking price for such production; obtaining samples; providing assistance to employees and representatives of the Importer when visiting South American manufacturers and suppliers; preparing and negotiating purchase contracts; monitoring the status of purchase orders; ensuring preparation of documentation for importation into the U.S.; inspecting merchandise and components; and arranging for shipping to the U.S. See [“A’s”] letter of February 25, 2003, annexed as Exh. C to the Importer’s July 27, 2006 request for internal advice. It is noted that pursuant to the commission agreements, the agent was authorized to “assist and advise Buyer in the preparation and negotiation of purchase contracts which shall remain subject to buyer’s final approval.” And the agent further was authorized “in strict conformity with instructions and terms issued by the Buyer… [to] place orders with and/or purchase for the account of the Buyer merchandise from export suppliers.” January 1, 2003 Buying Agency Agreement between the Importer and [“F”], Articles 2(f) and 2(g). In short, agents were entrusted to negotiate prices on behalf of the Importer, subject to the Importer’s approval, and to enter into transactions on behalf of the company, subject to the Importer’s final approval. Also under Article 8 of this Agreement, the Importer’s control over purchases is expressed in the following terms: “Buyer reserves the sole and exclusive power and right to accept or reject purchases proposed by the Buying Agent. Buying Agent is not authorized to, and shall not, enter bids which may bind Buyer; nor shall Buying Agent otherwise hold itself out as having power to bind Buyer, except as Buyer may specifically authorize in writing.” In its letter to CBP auditors of December 29, 2004 (annexed to the July 27, 2006 submission), the Importer explained its sourcing and pricing procedures as follows: The Company advises its buying agents to source suppliers for Company’s [merchandise] styles at the best possible prices. If a similar style is already made, the agent is aware of pricing and that the similar style must be comparable. Typically, the Company’s buying agents will report quoted prices to the Company, which the Company either accepts or rejects. If a price quote is rejected, the agent will attempt to negotiate a better price on behalf of the company. In those cases where acceptable prices cannot be secured in one market, other markets may be considered by the Company. For example, if a quoted price from Brazil is unacceptable, a price quote may be sought from the Chinese market… The Company generally negotiates prices through the offices of its buying agent. In certain cases, however, the company will negotiate with the manufacturer’s agent. The Importer recites these arrangements and practices in rebuttal to CBP auditors’ conclusion that it was not in control of price negotiations for merchandise so as to be considered in control of its agents. In response to CBP’s finding that the Importer did not show sufficient documentation of its control of price negotiations with the seller, the Importer states that this finding is based on a misunderstanding of the role of buying agents in negotiating prices. The Importer says it employed the agent knowing that this person already had successfully negotiated prices with the seller on behalf of other importers. The business between the Importer and the agent concerning pricing, particularly rejection of offered prices, was done largely by telephone. These dealings were within the scope of the buying agency, subject at all times to the Importer’s right of acceptance. The Importer therefore does not consider it unusual or proof of a lack of control that there was limited evidence of written instructions between the Importer and the agent concerning pricing and related matters. In several instances in 2002 and earlier, the agent directed the Importer to send part of his commission payments to employees of the seller to pay them for certain agency services performed on behalf of the Importer. The Importer advises that this practice, discontinued since 2002, involved paying employees of the seller for inspection, reviewing paperwork and arranging for shipping services, all of which the agent was in effect subcontracting to these employees. The payments evidently went from the Importer to the seller for distribution to its employees, and these sums were deducted from the commissions paid to the agent. The evidence shows that other than these payments, the only payments made by the Importer to the seller were for the merchandise, which was purchased on an FOB basis and delivered by air freight. Appraisement was on the basis of these FOB amounts paid for the merchandise using transaction value. The basis of appraisement is not at issue in this review. Email correspondence between the Importer and the agent submitted in connection with this matter show that the agent, inter alia, responded to the Importer’s inquiries and advised on the sources and prices of merchandise and the status of purchase orders. For example, in response to an inquiry regarding purchase order number [XX], the agent advised that the price was $[XX] and confirmed that the factory shipment was May 1st, 2005. In respect of another purchase order, the Importer requested that the order be canceled unless the merchandise was shipped that date. The agent replied, confirming that the goods would be shipped that day. On another occasion, the Importer advised that it wished to order additional merchandise and instructed the agent to try to negotiate a lower price. The agent replied that the price of the merchandise would be adjusted accordingly. As previously noted, the record also contains copies of invoices from the seller to the Importer and separate commission invoices from the agent to the seller, as well as bank statements and other proof of payment documentation linking the payments to the invoices. Regulatory Audit reviewed seventeen transactions in the Pre-Assessment Survey on the basis of which it concluded that the payments at issue were selling commissions. Further, it was determined that the Importer did not have adequate internal controls to ensure that accurate information was being reported to CBP in order that it might fix the final appraisement of the imported merchandise. The Importer disagreed with this finding, maintaining that the payments were buying commissions and therefore not dutiable. Subsequently, in the Focused Assessment Follow-Up Report, which examined import transactions from 1999-2004, Regulatory Audit observed that the Importer was unable to show that it adhered to the terms of its buying agency agreements. Among other things, it was noted that: (1) the agent signed an agreement on behalf of the seller; (2) there was incomplete documentation on the negotiation of prices; (3) the purported agents did not provide the original vendor’s invoice; and (4) there was no evidence that the merchandise was produced for the account of, or was sold to, the Importer. Regulatory Audit also remarked on the fact that the Importer made split payments to the agent and the seller, and that the seller performed certain services on the agent’s behalf, such as preparing paperwork, inspecting merchandise and arranging for shipment. In the Technical Assist Audit Report, Regulatory Audit examined documentation related to six entries filed by the Importer along with related agreements and payment documentation. The findings were similar to those of the Focused Assessment Follow-Up Report. Among these were a lack of control over the entry transactions and purported buying agency agreements executed between the Importer and the seller rather than with the agent. Moreover, the report highlighted the fact that between 1999 and 2002, numerous commission payments were split between the agent and the seller. In particular, two payments made to the seller were reported on the agent’s income tax return in 2002. The Importer acknowledges that on occasion, at the request of the agent, it made certain periodic payments to the seller on behalf of the agent. The Importer avers that the payments were deducted from commissions owed to the agent, and were made in order to compensate the seller for services it performed on the agent’s behalf. The record contains a letter from the agent in which he advises that the seller assisted him in reviewing paperwork, inspecting the merchandise prior to shipment and arranging for shipping. The Importer asserts that these payments ceased before the end of 2002. In a statement dated March 1, 2005, the President of [“S”] asserted that his company has supplied the merchandise to the Importer since 1994 and that in these transactions it dealt with the agent as the representative of the Importer. In addition, the seller noted that there was – and is – no relationship between [“S”] and the agent. The seller also affirmed that before the end of 2002 it had furnished certain services to the agent, as described above. The January 11, 2007 Internal Advice: The Chinese Transactions We consider the following additional facts to be relevant to our assessment of the commissions paid by the Importer to the agents [“B” and “C”] in connection with purchases from China: The sellers were various manufacturers in China. Shipment was made directly by the sellers to the Importer, but under invoices and using shipping arrangements prepared by the agents. Several of the commercial invoices examined were under the agent [“B’s”] letterhead and identified the same agent as the “shipper.” Apparently in 2003, these invoices began to be prepared using Chinese manufacturers’ letterhead, but still showed the agent as the shipper. During subsequent stages of the audit, invoices were submitted for CBP review prepared on letterhead of the manufacturers and that identified the merchandise as either for the Importer’s account or, at a minimum, as Importer styles. Exh. I, January 11, 2007 submission. The production of these invoices disposed of two objections noted by CBP audit officials: that original vendors’ invoices had not been provided; and that the merchandise was not produced for the Importer’s account. The price negotiation process, according to the Importer, mostly took place by telephone, and involved the efforts of the agent [“B”] to secure the lowest possible prices for merchandise produced to the Importer’s designs. The Importer states that when pric