Appraisement of Imported Apparel; Buying Agency

HQ W546370 March 28, 2000 RR:IT:VA W546370 EK CATEGORY: Valuation Robert Seiger, Esq. Donohue & Donohue 232 South Fourth Street Philadelphia, Pennsylvania 19106 RE: Appraisement of Imported Apparel; Buying Agency Dear Mr. Seiger: This is in response to your initial letter dated April 24, 1996, regarding the appraisement of wearing apparel imported by Outback Trading Company, Ltd. (hereinafter referred to as Outback). We received a copy of a proposed buying agency agreement on December 9, 1996. You have also made additional submissions that we have considered in this response. The most recent submission is dated March 1 1999, which provided information regarding overhead associated with total unit production. We regret the delay in responding. In this ruling response, we are only addressing the issue of whether a valid buying agency relationship exists between the parties, despite the method of payment. Without information regarding the actual transactions between the sellers and Outback, it is not possible to determine whether the items described would be included in the valuation of the merchandise. You indicate that Mr. Astin who initiated the ruling request is no longer with your law firm; however, you have taken over the file. FACTS: Outback operates retail outlets, which sell clothing such as coats, jackets, shirts, and hats based upon an Australian theme. Baltocome, S.p.A. (hereinafter referred to as Baltocome) is a wholly-owned subsidiary of Outback, organized under the laws of Costa Rica, and headquartered in San Jose, Costa Rica. Baltocome manufactures a small percentage of the garments that Outback obtains. Under a planned reorganization, Baltocome will be responsible for facilitation, quality control, and supervision of Outback's purchases from unrelated Costa Rican manufacturers. Baltocome provides the unrelated manufacturers with the raw materials (fabric) necessary to produce the wearing apparel. Baltocome also cuts the fabric to the specifications for the manufacturers and provides warehousing for the raw material and finished products prior to their importation. The finished products are packaged by Baltocome, and the merchandise is purchased through Baltocome for export to the United States. The merchandise is stored in Baltocome's Costa Rican warehouse for inventory purposes. Baltocome also purchases some of the merchandise for resale to European customers. You indicate that Baltocome carries all expenses, labor and overhead costs on its books in accordance with generally accepted accounting principles. Outback is the importer of record and imports through the port of Philadelphia and sells the products at retail in the United States. In the proposed buying agency agreement between Outback and Baltocome, Baltocome acknowledges that it is solely organized to serve as an agent to provide support services under the direction of the principal (Outback) for the manufacture, sale, transportation, packing, and warehousing primarily of Australian style garments. In transactions, you indicate that Baltocome acts under the exclusive control and at the sole direction and in the interest of Outback. Baltocome also warrants that it will not engage in conduct that is inconsistent with its status as an agent. For example, Baltocome will not accept payments, gifts, or gratuities from any manufacturer or seller in any transaction undertaken for the benefit of principal. Similarly, Baltocome will not hold itself out as having any status other than as a buyer's agent. In addition, Baltocome will not undertake any representation in conflict with or hostile to the interests of Outback. Some of the services that Baltocome will perform for Outback include: providing samples from manufacturers as directed; surveying the market for price and quality comparisons of merchandise; quoting ex-factory prices in U.S. dollars or in such other exchange; providing inspection certificates with each shipment; ensuring that the seller provides all documents and certification necessary to comply with the regulations of various government agencies. Under the buying agency agreement, Baltocome agrees to obtain merchandise on Outback's behalf only from such sellers, factories or manufacturing facilities that Outback approves in advance. In selecting a manufacturer, Outback has sole discretion to consider the quality of merchandise; the reputation of the manufacturer or seller; price; quantity; prior course of dealing; terms of sale; ability to meet orders and any other matter it deems appropriate under the circumstances. Outback as principal will have absolute discretion to accept or reject contracts for the purchase of merchandise from foreign vendors, and will not have to obtain prior consent or approval from Baltocome. Baltocome will negotiate for the benefit of Outback and Baltocome will not take title to the merchandise under any contract. In performing its responsibilities, Baltocome will periodically visit the manufacturing facilities of approved suppliers as directed and will inspect all aspects affecting the quality, delivery, and packaging of merchandise. Baltocome will promptly notify Outback of any defective or non-conforming merchandise and/or any shortages. Baltocome will not attempt or purport to commit Outback to any matters without Outback's prior written or oral authorization. Furthermore, under the agreement, Outback is not limited or restricted from directly negotiating with or purchasing from any manufacturer or seller. For the services performed on Outback's behalf, Outback has agreed to reimburse Baltocome for all its operating costs, general and administrative overhead, and actual expenses it incurs. Salaries of personnel employed on an account basis will be reimbursed provided that adequate proof of such costs is presented. Payment is made weekly by wire transfer to a bank in San Jose, Costa Rica. Payment is triggered by a weekly production and expense report that includes invoices from manufacturing contractors located off-site. Baltocome's operating and administrative costs are itemized as well. You have furnished a copy of a weekly production report and a cash request for the week ending February 22, 1997. The cash request form lists expenditure for various items including telephone and fax, plant maintenance, auto expenses, office stationary, soda subsidy, travel allowance, etc. There is also a list of subcontractors with the purchase order numbers and the amount of money owed to pay the subcontractors. ISSUE: Whether the method of payment of buying commissions precludes an otherwise valid bona fide buying agency relationship between Outback and Baltocome from being acceptable for purposes of determining the dutiability of buying commissions. LAW AND ANALYSIS: The preferred method of appraising merchandise imported into the United States is transaction value pursuant to section 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. Section 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 enumerated statutory additions. Buying commissions are fees paid by an importer to its agent for the service of representing the importer abroad in the purchase of imported merchandise. Bona fide buying commissions are not added to the price actually paid or payable in determining transaction value. Pier I Imports, Inc. vs. United States, 13 CIT 161, 164, 708 F.Supp. 351, 353 (1989); Rosenthal-Netter, Inc. vs. United States, 670 F.Supp. 21, 23; 13 CIT 77, 78, aff’d. 861 F.2d 261 (Fed. Cir. 1988); Jay-Arr Slimwear Inc., vs. United States, 12 CIT 133, 681 F.Supp. 875 (1988). The importer has the burden or proving that a bona fide buying agency relationship exists and that payments made to the agent constitute bona fide buying commissions. See, Monarch Luggage Company Inc., vs. United States, 13 CIT 523, 715 F.Supp. 1115 (1989). As stated in Headquarters Ruling Letter 542141 (TAA #7), dated September 29, 1980, an invoice or other documentation from the actual foreign seller 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 order to view the relationship of the parties as a bona fide buying agency, Customs must examine all the relevant factors. Each case is governed by its own set of particular facts. J.C. Penney Purchasing Corporation, et. al. vs. United States, 80 Cust. Ct. 84, C.D. 4741 (1978), 451 F.Supp. 973 (1978). Although no single factor is determinative, the primary consideration, however, "is the right of the principal to control the agent's conduct with respect to the matters entrusted to him." Dorf International Inc. et. al. vs. United States, 61 Cust. Ct. 604, A.R.D. 245, 291 F.Supp. 690 (1968). The degree of discretion granted to the agent is an important factor. New Trends Inc. vs. United States, 10 CIT 637, 645 F.Supp. 957 (1986). The Court of International Trade in the case of New Trends, supra, 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 commissions; 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 Jay-Arr Slimwear, supra, the Court of International Trade cited examples of services which are characteristic of those rendered by a buying agent. These services include compiling market information, gathering samples, translating, placing orders based on the buyer's instructions, procuring the merchandise, assisting in factory negotiation, inspecting and packing merchandise and arranging for shipment and payment. In the present case, Outback and Baltocome are related parties. Please note that the fact that an imported and a purported buying agent are related does not necessarily negate an otherwise legitimate buying agency relationship. See, HQ Ruling No. 545988 dated May 18, 1995. In reviewing the buying agency agreement in this case, we note that the agreement provides that the agent will not engage in conduct inconsistent with its status as Outback's agent and will not undertake any representation in conflict with or hostile to the interests of Outback. Under the agency agreement, Baltocome will perform services on behalf of the importer that are typically performed by a bona fide buying agent. The agent is responsible for providing samples from the manufacturer, surveying the market for price and quality comparison, quoting ex-factory prices in U.S. dollars, providing inspection certificates with shipments as needed or directed, and ensuring that the sellers provide documents and certifications necessary to comply with U.S. government regulations. The control that Outback exercises over Baltocome is demonstrated by the fact that Baltocome agrees to obtain merchandise on Outback's behalf only from sellers that Outback approves of in advance. Furthermore, Baltocome is to provide all information reasonably requested by Outback and has exclusive authority to accept or reject contracts for the purchase of merchandise from foreign sellers and without having to obtain prior from Baltocome. Baltocome is obligated under the agreement to negotiate for the benefit of Outback the price, quantity, quality packing requirements, warranties, and returns on the terms most commercially favorable to Outback. Baltocome also agrees that it will not attempt or purport to commit Outback to any matters without Outback's prior written or oral authorization. Outback is also free to negotiate with or purchase from any manufacturer or seller. Baltocome does not take title to any merchandise that it obtains from contracts manufacturers for Outback. The situation with Baltocome is somewhat different from a typical buying agency relationship in that Baltocome does not receive commissions, but rather, is reimbursed for expenses it incurs for performing the services. To be compensated, Baltocome files an expenditure report with Outback. Nevertheless, based on the above considerations, we find that the terms of the proposed buying agency agreement are consistent with a bona fide buying agency. Therefore, provided the actions of the parties comply with the terms of the agreement, the funds Outback pays to Baltocome to reimburse the cost of its services constitute non-dutiable bona fide buying commissions. Please note that the existence of a buying agency relationship is factually specific. The actual determination as to the existence of a buying agency must be made by the appraising officer at the applicable port of entry and will be based upon the entry documentation submitted. 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. APPRAISEMENT OF BALTOCOME PRODUCED GARMENTS Although Baltocome functions as a buying agent, in a few transactions, Baltocome produces a small percentage of the garments that Outback imports. Baltocome will do the assembly on about 5 percent of the imported garments. Of the 5 percent of these garments manufactured onsite, 70 percent are produced for resale and 30 percent are produced as samples and prototypes. All garments manufactured onsite, like those produced as subcontractors, are shipped to the United States. Consequently, there is an issue as to how to appraise these garments. As indicated, Outback and Baltocome are related parties. Essentially, we do not have enough information available to determine how the merchandise that Baltocome produces should be appraised. In a telephone conversation with Mr. Astin of your firm, he indicated that transaction value would most likely be inapplicable due to the relationship of the parties and the influence this has on the price. Mr. Astin indicated that a very small percentage of the goods are produced by Baltocome. Therefore, this ruling does not address the appraisement of merchandise that may be imported by Outback that is produced by Baltocome. HOLDING: Provided the parties' actions adhere to the terms of the agency agreement submitted, we are satisfied that Baltocome is a bona fide buying agent. Therefore, the funds that Outback pays to Baltocome to reimburse it for its expenses is not included in the transaction value of the imported merchandise. Sincerely, Thomas L. Lobred, Chief Value Branch