·Dutiability of alleged buying commission paid to a related party

HQ W546035 July 11, 1996 RR:IT:VA W546035 KCC CATEGORY: Valuation Field Director Regulatory Audit Division U.S. Customs Service 423 Canal Street Room 309 New Orleans, Louisiana 70130-2341 RE· Dutiability of alleged buying commission paid to a related party Dear Field Director: This is in regard to your memorandum (AUD-8-ST:NO:RA JR) dated June 13, 1995, 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. §140 l a. Counsel for the importer, Smith & Nephew Richards, contends that the commission paid to its affiliate, Smith & Nephew Richards Medizintechnik GmbH, is a bona fide buying commission such that it is not included in the price actually paid or payable. A letter from Counsel for Smith & Nephew Richards to this office dated July 1 1, 1995, and the attached Affidavit of Smith & Nephew Richards Medizintechnik GmbH's Managing Director were taken into consideration in rendering this decision. We regret the delay in responding. FACTS: Since the early l 970's, Smith & Nephew Richards ("Richards USA") contends to have had a buying agency relationship with its German affiliate, Smith & Nephew Richards Medizintechnik GmbH ("Richards GmbH") with regard to the purchase of surgical instruments from Germany. Richards USA states that in Germany there are over 250 small companies that manufacture surgical instruments ("third party suppliers"). The third party suppliers are unrelated to, and financially detached from both Richards USA and Richards GmbH. Richards GmbH maintains service contracts or purchase contacts with various third party suppliers which outline the business relationship between Richards GmbH and the third party supplier. An example of a service contract with an English translation, an invoice from a third party supplier to Richards GmbH, and a product invoice from Richards GmbH to Richards USA was provided for our review. There is no written buying agency agreement because, according to the Managing Director of Richards GmbH, "such an agreement was unnecessary given the parent-subsidiary relationship." See, §3 of the Affidavit. Once Richards GmbH procures the surgical instruments, it is responsible for the etching, ebonizing, inspection, packaging, shipping, and handling of the products. The etching process involves laser marking the surgical instruments with Richards worldwide trademark, i.e., R, the catalog number of the item and the country of origin, i.e., Germany. Ebonizing is a process that colors or stains the surgical instrument's surface with a flat black finish. The glare reducing finish minimizes eye fatigue, reduces light reflection and provides a darker, more durable finish to the surgical instruments. The ebonizing process involves cleaning the surgical instruments to remove dirt or any cutting oils, drying, submerging the surgical instruments which are attached to a rack in a 800 degree heating tank of Sodium Bichromate for 40 minutes, drip drying for I 0 minutes, submerging in a 180 degree tank of hot water for 20 minutes, air drying and then removing the surgical instruments from the rack. Richards GmbH is responsible for handling and shipping arrangements, but the shipping costs are paid directly by Richards USA. Richards GmbH adds or marks up, on average, ten (I 0) percent ("%") to the price it pays the third party suppliers, exclusive of the value added tax ("VAT"), to its bill to Richards USA in order to cover the etching, ebonizing, and individual packaging of the surgical instruments. Richards GmbH receives a refund of the VAT from the German government on the surgical instruments exported to the U.S. At the beginning of each year, Richards USA and Richards GmbH agree on a price for the various products Richards USA acquires from Richards GmbH. During the year the actual prices Richards GmbH pays the third party suppliers may be higher or lower because of changes in the third party suppliers or their prices. Price adjustments by the third party suppliers are not passed on to Richards USA when the products are acquired by Richards GmbH. Richards GmbH only adjusts its price list to Richards USA to reflect the increase or decrease in the price of the products at the beginning of each year. Additionally, we note that the service contracts between the third party suppliers and Richards GmbH provide for discounts if the invoice price is paid by Richards GmbH to the third party supplier within a certain time period. This discount is not passed on to Richards USA, if earned by Richards GmbH. A few days after the surgical instruments are shipped with a commercial invoice to Richards USA, Richards GmbH sends Richards USA a second commercial invoice for the products requesting payment of a commission and a packaging fee. Richards USA states that the commission services rendered by Richards GmbH include procurement, inspection, shipping, and handling of the surgical instruments. The commission is twenty (20) percent of the value of the imported merchandise, i.e., 20% of the actual price paid by Richards USA to Richards GmbH or 20% of the first invoice. Richards USA states that the third party suppliers do not receive any portion of the commission paid by Richards USA to Richards GmbH. Additionally, a one (1) percent packaging fee is charged by Richards GmbH to Richards USA to cover the cost of repackaging, i.e., boxing for transport, the goods prior to shipment to Richards USA. The packaging fee is one percent of the actual price paid by Richards USA to Richards GmbH or one percent of the first invoice. Upon receipt of either the merchandise commercial invoice or the commission/packaging commercial invoice, Richards USA pays Richards GmbH through an intercompany netting procedure. Thus, Richards USA states that Richards GmbH's payment to the third party suppliers is not contingent upon having first received payment from Richards USA. Richards GmbH not only buys from third party suppliers for Richards USA, but also buys the same products from the third party suppliers for its own sale to non-U.S. customers. Pursuant to §6 of the Affidavit, the products Richards GmbH buys for its own resale and inventory are handled separately from the products procured for Richards USA. On the infrequent occasions, i.e., perhaps five or six times a year, that Richards GmbH simultaneously orders the same product for Richards USA and for its own resale/inventory, Richards GmbH sends separate purchase orders to the third party suppliers. See, §6 of the Affidavit. Thus, Richards GmbH states that the products for its own resale and inventory are processed separately from the products for Richards USA. Richards GmbH does on rare occasions use its own inventory to fulfill an order from Richards USA. §7 of the Affidavit states that "...if...there is an emergency requiring immediate shipment of an item to Memphis [Richards USA], we may send items from our inventory. But this happens very infrequently." It is Richards USA's contention that Richards GmbH procures products from third party suppliers solely at the request and direction of Richards USA. Although no purchase orders were examined by this office, Richards USA states that it places purchase orders with Richards GmbH for various surgical instruments. The purchase orders include the type of product, quantity, and the specifications and standards for the product. Based on the products ordered and the specifications and standards, Richards GmbH decides where to place the order. Richards USA states that the third party suppliers generally know that Richards GmbH is acting as Richards USA buying agent. See, §5 of the Affidavit. §12 of the Affidavit states that the third party suppliers know of the agency relationship because Richards GmbH's Managing Director has been Richards USA's buying agent for over twenty years and because if there is a problem with the product after it is sent to Richards USA, the third party supplier receives the product from Richards USA through Richards GmbH for replacement or repair. Richards USA is not restricted from directly purchasing from the third party suppliers without Richards GmbH's services. Although Richards USA states that this is true, they contend that it is not economical or practical to function in this manner. Richards USA states that it would be impractical or uneconomical for Richards USA to deal directly with the third party suppliers because of distance, number of third party suppliers, difference in language, and the third party supplier's changing production schedule, price list, quality control procedures, etc. Richards USA states its relationship with Richards GmbH also enables it to deal more rapidly and efficiently with quality problems as the products are inspected in Germany. Finally, Richards USA states that Richards GmbH is a company with a good reputation. Thus, Richards USA receives a higher level of service and responsiveness than it would from other companies. See, §15 of the Affidavit. Richards GmbH takes title to the products purchased from the third party suppliers to fill orders from Richards USA. After processing the products, Richards GmbH ships the surgical instruments to Richards USA. After shipment to Richards USA, Richards GmbH is responsible for the products rejected by Richards USA. The rejected products are returned to Richards GmbH, who pursues the third party supplier for repair or replacement of the products pursuant to the service contracts. The service contracts typically allow Richards GmbH to inspect and return any goods that do not meet the specifications or standards set forth and also typically contain a warranty for the returned products within a specified period of time for prompt repair or replacement. Richards USA pursues Richards GmbH for damaged or defective products, not the third party suppliers. However, pursuant to the service contracts, Richards USA contends that risk of loss is borne by the third party suppliers, not Richards GmbH. ISSUE: Whether the 20% 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. Accordingly, we have assumed for the purposes of this ruling that transaction value is the appropriate basis of appraisement. 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 l Imports. Inc. v. United States, 708 F. Supp. 351, 13 CIT 161, 164 (1989); Rosenthal-Netter, Inc. v. United States, 679 F. Supp. 21, 23, 12 CIT 77, 78 (1988); Jay-Arr 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. In c., 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. Jay-Arr 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 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. When examining whether a purported agent is a bona fide buying agent, closer scrutiny is warranted where special circumstances exist. For example, closer scrutiny is required where the purported agent and the seller are related. Such relationship does not, however, automatically preclude the existence of a bona fide buying agency. See, HRL 545660 dated February l 0, 1995, HRL 545177 dated June 28, 1993, and HRL 544657 dated July 1, 1991. With respect to the instant case, Richards USA concedes that no written buying agency agreement existed between itself and Richards GmbH. 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. 1 1740 (1971); and Rosenthal-Netter, Inc., 679 F. Supp. 21. It is our opinion that, on balance, the available evidence in this case establishes that Richards GmbH acted as an independent seller rather than as Richard s USA's buying agent. The primary consideration is the right of the principal to control the agent's conduct. The Affidavit from Richards GmbH's Managing Director indicates that Richards GmbH performed some functions on behalf of Richards USA which are typical of those rendered by buying agents. These include placing orders pursuant to Richards USA instructions with regard to product, quantity and specifications and inspecting and handling of the ordered products. Additionally, there is no evidence that Richards USA was restricted from purchasing on its own from the third party suppliers. However, this appears to be the only evidence before us that supports the existence of a buying agency relationship between Richards USA and Richards GmbH. It does not appear that Richards USA had any control over Richards GmbH. At the beginning of each year, Richards USA and Richards GmbH established prices for the surgical instruments. During a year, Richards USA places orders with Richards GmbH indicating product, quantity and specification/standard for its purchase. At its own discretion, Richards GmbH can approach any third party supplier capable of fulfilling the order regardless of the set price between Richards USA and Richards GmbH. The order is shipped to Richards GmbH where it is subject to etching, ebonizing, inspection, packaging before shipment to Richards USA. The invoice accompanying the products to Richards USA includes a mark-up for Richards GmbH etching, ebonizing and packaging services. Additionally, the product invoice from Richards GmbH to Richards USA shows Richards GmbH as seller with all payments going to Richards GmbH. We note that any VAT refunds received by Richards GmbH and any discounts it receives from the third party suppliers for early payment pursuant to the service contracts are not passed along to Richards USA. Richards USA does not have any control over whom Richards GmbH purchases. Moreover, Richards USA does not know the actual price Richards GmbH paid for the products, nor does the price matter because Richards USA has set prices pursuant to its yearly pricing agreement with Richards GmbH. Increases or decreases in product prices due to changes in third party suppliers or their prices are not passed along to Richards USA. Additionally, Richards USA does not control of the shipping or handling process of Richards GmbH. Richards USA merely places its order with Richards GmbH and allows Richards GmbH to arrange all the shipping and handling. The shipping costs are paid directly by Richards USA. Richards USA's only control over Richards GmbH is its order for a specific product, quantity and specifications/standards. It is our position that Richard s GmbH is acting primarily for its own benefit and not for the benefit of its purported principal, Richards USA. Richard s GmbH not only buys from third party suppliers for Richards USA, but also buys the same products from the third party suppliers for its own sale to non-U.S. customers and its own inventory. Richards GmbH maintains that its purchases for its resale and inventory are handled separately from the products procured for Richard s USA. On the occasions that Richards GmbH simultaneously orders the same product for Richards USA and for its own resale/inventory, Richards GmbH sends separate purchase orders to the third party suppliers. However, we note that Richards GmbH does occasionally use its own inventory to fulfill an order from Richards USA. Additionally, as previously stated , Richard s GmbH receives a fixed price for the products from Richards USA irrespective of the price it paid the third party manufacturers . Thus, Richard s GmbH is free to choose the lowest price from among the numerous third party suppliers in order to gain the greatest profit. Richards GmbH also gains from receiving third party supplier discounts and VAT refunds which are not passed on to Richards USA. Richards GmbH takes title to the products purchased from third party suppliers while it further manufactures the products, i.e., etching and ebonizing. Although Richards USA maintains that the third party suppliers are ultimately responsible for damaged or defective products, Richards USA returns any damaged or defective goods to Richards GmbH for repair or replacement. Richards GmbH may, thereafter, pursue its return and warranty rights for the damaged or defective products with the third party suppliers. However, Richards USA pursues Richards GmbH for this service, not the third party suppliers. Based on this evidence, Richards GmbH does not act primarily for the benefit of Richards USA. Richards USA contends that the third party suppliers had knowledge of the buying agency relationship. However, no supporting evidence was submitted in this regard. Richards GmbH's service contracts with the third party suppliers do not reference Richards USA or the purported buying agency relationship between Richards GmbH and Richards USA. Moreover, the third party supplier invoice to Richards GmbH does not mention or reference Richards USA. The evidence available does not indicate that Richards GmbH was purchasing for anyone other than itself. Accordingly, we do not find that a buying agency relationship existed between Richards USA and Richards GmbH. Thus, price actually paid or payable for the imported merchandise includes the 20% additional payment made by Richards USA to Richards GmbH. HOLDING: On the basis of the information presented, it is our opinion that the Richards GmbH acted as an independent seller of the surgical instruments and that the price actually paid or payable for the imported surgical instruments includes the 20% additional payment. The Office of Regulations and Rulings will take steps to make this decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels 60 days from the date of this decision. Sincerely,  Acting Director International Trade Compliance Division