Validity of buying agency; payments to foreign nationals; commissions paid to suppliers/ sellers.

HQ W544423 June 3, 1991 VAL CO:R:C:V W544423 DPS CATEGORY: Valuation DARC, Regulatory Audit Division New York Region 6 World Trade Center, Suite 716 New York, N.Y. 10048-0945 RE: Validity of buying agency; payments to foreign nationals; commissions paid to suppliers/ sellers. Dear Sir: This is in response to your request for Internal Advice dated November 7, 1989, relating to importations of finished garments by Play Knits, Inc., of New York, New York. You request guidance on three issues: the dutiability of commissions paid to a purported buying agent for obtaining piece goods and trim; whether activities of a purported buying agent meet the criteria of a bona fide buying agency; and (3) the dutiability of “unsubstantiated payments to foreign nationals.” FACTS: The importations of finished garments at issue occurred between 1984 and 1988. During that period, the importer, Play Knits, Inc. (P/K), imported the bulk of its finished garments from M. Greenfield of Manila, Philippines, Star Garments Ltd. of Sri Lanka, and Confecciones Transcontinentales S.A. and Modas Y Confecciones of Guatemala. P/K utilizes the services of Elgin Co. Ltd. (Elgin) for the purpose of acquiring trim, piece goods, accessories and production supplies to the above mentioned offshore manufacturers for products that are subsequently imported by P/K. However, no written buying agency agreement between Elgin and P/K exists. Two sets of representative invoices from Elgin to P/K for various piece goods and accessories, along with backup invoices from the manufacturers of the piece goods, were produced by P/K’s counsel in their “Memorandum with respect to dutiable value of merchandise imported by Play Knits Inc. from 1984 through 1988,” which counsel provided in response to Customs auditors suggestion that certain importations were undervalued. The representative invoices reflect the price paid for the piece goods, freight to the Philippines, plus a five percent buying commission to Elgin for procuring the components. The Office of Regulatory Audit asserts the position that the commission paid to Elgin is not a bona fide buying agency commission, and therefore should be included in the price of the assists. Counsel for P/K argues that the so called buying commission payments should be considered assist procurement costs, not includable in the cost of the assist. P/K has a written buying agency agreement with Alpha Bay Ltd. (ABL), of Kowloon, Hong Kong. The agreement provides that Alpha Bay will be responsible for the following activities: (a) investigation of sources of supply which might be of interest to P/K; (b) acquisition of samples as may be requested ; (c) submission of samples, designs and specifications to ascertain the price at which such merchandise can be acquired; (d) the use of its best efforts skill and judgement in negotiating the best prices on behalf of P/K; (e) the coordination of the delivery of goods to P/K at the designated port in the U.S. and the examination of all documentation prepared in connection with the deliveries; (f) the arranging for the transportation of merchandise (or fabrics) from the seller’s factory to the designated delivery point and the insurance of goods until proper delivery has been made; (g) providing assistance in the enforcement of any claims which P/K may have against the manufacturers arising out of defective or otherwise unacceptable goods; (h) acting as P/K’s representative in endeavoring to obtain reimbursement from the manufacturer for any defective goods; (i) placing orders based upon instructions given by authorized P/K personnel; (j) inspection and examination of all merchandise ordered by P/K during all phases of production; (k) inspection of manufacturing facilities of each manufacturer with whom an order is placed and inspection of raw materials being used by the manufacturer; (1) periodic inspection during manufacture of goods being manufactured for P/K to insure conformity with purchase order; (m) final sampling and inspection of goods at the time of packing at the manufacturing premises (note: premises at time of agreement were in the Philippines and Sri Lanka, however, agreement covers any other locations as well); (n) determination that merchandise conforms to specifications of purchase order, is not defective and meets all requirements in connection with compliance with U.S. laws and regulations relating to the importation of wearing apparel; (o) inspection of merchandise to assure that the merchandise is packaged, labelled and invoiced in accordance with purchase orders; and (p) arranging and coordinating payment for the goods. With regard to compensation, the agreement between Alpha Bay and P/K specifically provides that Alpha Bay will not mark-up merchandise as an intermediate seller or obtain remuneration from the manufacturer as a selling agent. It provides that all commissions to be paid to Alpha Bay will be billed separately to Play Knits and will not be included in the invoiced price for the merchandise. According to the agreement, there will be two transactions always: one with Alfa Bay for a commission; and one with the factories for the purchase price of the merchandise. Not a single invoice bearing the name of Alpha Bay Ltd. has been produced by either the auditors or P/ K in support of their positions. According to the auditors, during the audit, auditors requested copies of telex’s, fax’s, and other evidence of communications between P/ K and ABL. Representatives of P/ K advised the auditors that such communications were not available for their review. The auditors report indicates that entries in P/ K’s books reflect payments by P/ K to ABL during the period at issue, in amounts in excess of $8 million. No other documentation on this issue has been submitted. We would expect to see invoices from manufacturers to P/ K as well as invoices from ABL for commissions owed by P/K. The only information reflecting payments by P/K to ABL are statements in the auditors’ report concerning the consumption entry fraud audit of P/K (audit no. 212-88-CE0-006). According to the report, “Alpha Bay Ltd. has received $7,912,870 in commissions from Play Knits during the period 1984 through 1988. These amounts were posted to an H.K. Commission account in the General Ledger. It represents the 5% buying commission paid by Play Knits to Alpha Bay Ltd. for finished goods manufactured by foreign manufacturers.” (See audit report for 212-88-CE0-006, p. 4). The final issue presented in the internal advice request concerns the dutiability of payments made by P/ K to individuals in the Philippines, identified as Q. Santiago and D. Greenfield, for services rendered in connection with “safeguarding” the fabric and raw materials in the Philippines prior to production. Counsel submitted an affidavit from an officer of P/ K explaining the payments to the individuals in the Philippines. According to the affidavit, P/K paid the two individuals for allowing P/K to use their bonds to import piece goods and trim into the Philippines without paying duty, and for providing security to ensure the integrity of P/K’s merchandise while in the Philippines. P/K’s counsel has advised this office that the individuals receiving these payments are not related to the seller, as defined by section 402(g) of the TAA. Regulatory Audit has indicated that these costs were recorded as “Operating Expenses, Manila” on the financial records, and included in the “Cost of Goods Sold” section on the financial statements. LAW AND ANALYSIS: For the purpose of this response, we assume that transaction value is the proper basis of appraisement. Transaction value, the preferred method of appraisement is defined in section 402(b) (1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(b); TAA) as the “price actually paid or payable for the merchandise” plus five enumerated statutory additions. One of the statutory additions is “the value, apportioned as appropriate, of any assist .... “ The term “assist” is defined in section 402(h) of the TAA as follows: any of the following if supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the United States of the merchandise: Materials, components, parts, and similar items incorporated in the imported merchandise. Tools, dies, molds, and similar items used in the production of the imported merchandise. Merchandise consumed in the production of the imported merchandise. Engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise. Buying Commissions A portion of the buying commissions at issue are paid by P/K to Elgin for services rendered in acquiring piece goods which are incorporated into the finished garments that are imported into the U.S. by P/ K. Based on the limited information provided about ABL, it receives a buying commission from P/K for its purported “buying agency” services in obtaining finished goods, mostly from manufacturers in the Philippines and Sri Lanka. We first consider whether the purported buying commissions paid to ABL meet the legal criteria for bona fide buying commissions. Whether or not a bona fide buying agency exists between an importer and an alleged “buying agent” is not determined by any single factor, but depends upon the relevant facts of each case. See J.C. Penney Purchasing Corp. v. United States, 451 F. Supp. 973 (Cust. Ct. 1978). The primary consideration in determining whether a bona fide buying 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. B & W Wholesale Co., Inc. v. United States, 58 CCPA 92, C.A.D. 1010, 4 36 F. 2d 1399 (1971). In a general notice published in the Customs Bulletin on March 15, 1989, Customs provided an explanation of its position on buying commissions. The following excerpts illustrate that position: While bona fide buying commissions are nondutiable, evidence must be submitted to Customs which clearly establishes that fact. In this regard, Headquarters Ruling Letter 542141, dated September 29, 1980, also cited as TAA No. 7, provided: ... an invoice or other documentation from the actual foreign seller to the agent would be required to establish that the agent is not a seller and to determine the price actually paid or payable to the seller. Furthermore, the totality of the evidence must demonstrate that the purported agent is in fact a bona fide buying agent and not a selling agent or an independent seller. In New Trends Inc. v. United States, 10 CIT 637, 645 F. Supp. 957 (1986), the Court of International Trade set forth several factors upon which to determine the existence of a bona fide buying agency. These factors include: whether the agent’s actions are primarily for the benefit of the importer, or for himself; whether the agent is fully responsible for handling or shipping the merchandise and for absorbing the costs of shipping and handling as part of its commission; whether the language used on the commercial invoices is consistent with the principal-agent relationship; whether the agent bears the risk of loss for damaged, lost, or defective merchandise; and whether the agent is financially detached from the manufacturer of the merchandise. In addition, the importer must show that “none of the commission inures to the benefit of the manufacturer.” J.C. Penney, 80 Cust. Ct. at 97, 451 F. Supp. at 984. As the above cited court decisions make clear, any determination of whether a bona fide buying agency relationship exists, depends on the facts in each particular case. Here, we must determine the validity of the purported buying agency relationship, between P/ K and ABL. With regard to ABL, which is stated to act as a buying agent for P/ K, only a copy of a buying agency agreement between the two parties was presented. Not one shred of documentation evidencing instructions and directions by P/K to ABL 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 P/ K by ABL, or payment on behalf of P/ K 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 P/ K that such documents were simply not available. Based upon the lack of evidence to support the claimed buying agency relationship between P/ K and ABL, we have no choice but to rule that a bona fide buying agency relationship does not exist between P/K and ABL. Without substantial evidence apart from an agreement, we are simply not convinced that ABL operates under the direction and control of P/K. Assist Costs With regard to Elgin, the purported buying agent that procures piece goods and trim on behalf of P/K and receives a commission, regulatory audit takes the position that such commissions are not bona fide buying agency commissions; counsel for P/ K argues that the so-called buying commission payments should be considered assist procurement costs, not includable in the cost of the assist. Because the items provided by Elgin to the manufacturers meet the definition of assists set forth in section 402(h) (1) (A) (i) of the TAA and are considered to be assists, the issue is whether the amount paid to Elgin in addition to the price of the merchandise, which amount is labelled by P/ K as a buying commission, is part of the cost of furnishing the assist. We believe it is. The TAA defines what materials or services are considered assists. Accordingly, we must address whether the activities P/K claims to be assist procurement costs are considered to be assists, part of the value of an assist within the definition in section 402(h) (1) (A) of the TAA, or neither, as counsel argues. In support of its position that the purported buying commission paid by P/ K to Elgin is a non-dutiable assist procurement cost, counsel cites TAA No. 20, HQ 542412 of March 7, 1981, and HQ 542367 of June 18, 1981. After reviewing the rulings counsel cited, it is our position that they are clearly distinguishable from the situation involving P/K. Information describing the actual acquisition costs at issue was provided by the importers concerned in both cases. In TAA No. 20 such costs included: purchasing, receiving, inspection, warehousing and transporting component parts from the importer’s plant in Illinois to its assembly plant in Mexico, tasks which were undertaken at the corporate headquarters in Illinois by individuals domiciled within the United States. Here, P/ K captures the purported costs of procuring the assists in one category, buying commissions, which according to the auditor’s report, is reflected in the importer’s books in the “Cost of Goods Sold” section. Customs recently modified TAA No. 20, in Headquarters Ruling Letter 544323, dated March 8, 1990, by recognizing that the term “procurement assist” is not a term defined in the TAA. Rather the TAA simply defines what materials or services are considered assists. The proper inquiry is whether the particular item or activity is considered to be an assist or part of the value of an assist within the definition in section 402(h) (1) (A) of the TAA. Based on the information provided by the importer’s counsel, and that provided by the Office of Regulatory audit, it is our determination that the commissions paid by P/K to Elgin for obtaining various piece goods/assists, are part of the costs of acquiring the materials, components, and parts incorporated in the imported merchandise. Therefore, the payments to Elgin characterized as “buying commissions” by the importer for acquiring piece goods, should be considered part of the cost of the assist. Payments to 3d Parties in Philippines Finally, we address the issue concerning the dutiability of payments made by P/K to individuals in the Philippines for allowing P/K to use their bonds to import piece goods and trim into the Philippines without paying duty, and for providing security to ensure the integrity of P/K’s merchandise while in the Philippines. Regulatory Audit seeks advice as to whether these payments to Philippine nationals are dutiable based on the fact that the importer treated these expenses as purchase costs in its accounting records and is unable or unwilling to produce any evidence as to the exact nature of those expenses. P/K’s counsel argues that these payments are not dutiable because they were not made to the seller of the merchandise, are not tied to the sale of any particular product and do not fall within any of the five permissible additions to the “price paid or payable” set forth in Section 402 (b)(1)(A)-(E), of the Tariff Act. Based upon the affidavit of P/K’s vice-president, it appears that the activities for which the individuals in the Philippines are paid do not constitute dutiable assists, nor any of the other permissible additions to transaction value. In fact, they are payments to what are represented by counsel to be unrelated third parties, which, based on the information presented, are not part of the price actually paid or payable for the imported merchandise. These payments are made to the individuals regardless of whether any particular products are exported to the United States. Accordingly, these payments cannot be included as part of the transaction value of the imported merchandise because the Tariff Act and amendments thereto grant us no legal authority to do so. See Generra Sportswear Co. v. U.S., Slip Op. 89- 1652, dated May 22, 1990. HOLDING: The purported buying commission to ABL is not a bona fide buying commission in accordance with the parameters set forth by the courts in the decisions cited above and TAA No. 7; The commissions paid to Elgin for procuring materials, components and parts to be incorporated in the imported merchandise, i.e., assists, are part of the cost of acquiring the assist, and therefore, should be considered part of the cost of the assist; and P/K’s payments to individuals in the Philippines for services rendered in providing bonds and safeguarding fabric and raw materials constitute payments to what are represented to be third parties, are not part of the price actually paid or payable for the imported merchandise, do not meet the definition of assists, nor do they fall within any of the additions to the “price actually paid or payable” as set forth in Section 402(b) (1) (A) - (E) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 140la(b)). Sincerely, John Durant, Director Commercial Rulings Division