Application for further review; Protest 1001-01-100382; Buying commissions

HQ W548356 MAY 19 2004 RR:IT:VA W548356 EM Category: Valuation Area Director, JFK International Airport Area c/o Chief , Liquidation and Protest Branch Building 77 JFK International Airport Jamaica, New York 11430 Re: Application for further review; Protest 1001-01-100382; Buying commissions Dear Area Director: This is in response to your July 8, 2003 memorandum requesting application for further review ("AFR") of Protest Number 1001-01-100382, filed by Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt, LLP on behalf of their client, One Step Up, Ltd. ("OSU" or the "Importer"), on January 24, 2001. The protest takes issue with the valuation of women's knit wearing apparel imported under an entry made on August 30, 1999, liquidated on August 18, 2000, and reliquidated under 19 U.S.C. 1501 on November 13, 2000. In reviewing this matter, this office has evaluated your submissions and Counsel's memorandum in support of protest and application for further review and accompanying exhibits. Consideration was given to the method of calculating the commissions, invoicing, accounting records, and payment records. On December 19, 2003, Counsel met with this office to discuss these issues and Counsel later submitted additional information. FACTS: OSU, a company located in New York, manufactures and imports ladies' and children's sportswear. OSU purchases wearing apparel for importation from various vendors located throughout the world. In order to assist in sourcing merchandise, OSU employs the services of agents. In this lead protest, Great Union Corp. ("Great Union") is the alleged buying agent and the entry summary includes an invoice showing the seller as J & S Fashions (Pty) Ltd. ("J&S" or the "Seller") in Lesotho and the buyer as OSU. OSU placed the purchase order with the manufacturer through Great Union. OSU opened a single letter of credit ("L/C") for the purchase of the subject merchandise with Yung Sheng, a party related to the Seller. The Seller submitted two invoices: 1) a visaed invoice dated July 18, 1999, indicating only a total price; and 2) a commercial invoice dated July 18, 1999, indicating the seller's unit price per dozen, the total price for each style number, and the total price plus an unspecified “5%.” The negotiating bank paid the amount designated as the Seller's price to OSU and also paid the additional "5 percent" to Great Union. Paragraph 47 B of the L/C contains a clause requiring the negotiating bank to remit a 5% commission, which is included in the L/C amount, for the account of Great Union. Counsel claims that OSU instructed the Seller to indicate the commission amount on the Seller's commercial invoice. The electronic notification from the negotiating bank demonstrates that the bank negotiating on OSU's behalf paid the additional "5 percent" to the Great Union. Upon reliquidation, U.S. Customs and Border Protection ("CBP") appraised the subject merchandise using transaction value based on the total payment inclusive of the amount representing 5%. OSU protested, alleging that the 5% amount was a bona fide buying commission that is not part of the price actually paid or payable. Pursuant to your review of the available documentation, you determined that the 5% addition to the declared value on the seller's invoice is part of the price actually paid or payable for the subject merchandise. You conclude that there is insufficient evidence to show that Great Union is a bona fide agent. You believe that your conclusion is supported by a review of the import activities of OSU conducted during a compliance assessment audit, which indicated that commissions paid to OSU's alleged buying agents are part of the price paid or payable for the imported merchandise. Specifically, the New York Field Office's Regulatory Audit Division issued a Compliance Assessment Report dated July 24, 2001, which indicated that the commissions paid to OSU's agents during the 12 month period ending on July 31, 1997 did not constitute bona fide buying commissions. Counsel claims that the subject merchandise was improperly appraised due to the inclusion of the 5% payment in the appraised value. Counsel provided a copy of a Buying Agency Agreement ("Agreement"), signed by OSU and Great Union on May 15, 1995, which outlines the buying agency and established a formula for the calculation of the agent's commission. You conclude that the language of the Agreement does not support OSU's method of calculating the commission. Notwithstanding your contention, Counsel claims that the Agreement between OSU and Great Union is intended to demonstrate that OSU exercises control over the agent's actions to support the claim regarding the bona fides of the agency relationship. You counter that there is insufficient evidence to demonstrate a bona fide buying agency and that the relationship of Great Union and the Seller remains ambiguous and outside of the parameters of the Agreement. Counsel asserts, however, that Great Union acts solely at the discretion of OSU, and that only OSU can purchase the merchandise for which Great Union provides market information and gathers samples. ISSUE: Does the evidence presented establish that the 5% payment referenced in the Seller's invoice and ultimately paid to Great Union was a bona fide buying commission so that such amounts should not have been included in transaction value? LAW AND ANALYSIS: The preferred method of appraisement for customs purposes 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. That section 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 five enumerated statutory additions. Transaction value is the applicable basis of appraisement in the instant case. The five enumerated statutory additions to the price actually paid or payable include: 1) the packing costs incurred by the buyer with respect to the imported merchandise; 2) any selling commission incurred by the buyer with respect to the imported merchandise; 3) the value, apportioned as appropriate, of any assist; 4) any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States; and 5) the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller. The question in this case is whether the 5% payment to Great Union is included as an addition to the price actually paid or payable. While selling commissions are added to the price actually paid or payable, as a general matter, bona fide buying commissions are not added to the price actually paid or payable. Pier 1 Imports, Inc. v. United States, 708 F.Supp. 351, 13 CIT 161, 164 (1989). 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). The importer bears the burden of proving the existence of an agency relationship and that the payments to the agent are bona fide buying commissions. Rosenthal-Netter, Inc. v.United States, 679 F. Supp. 21 12 CIT 77 (1988). The primary consideration in determining whether an agency relationship exists is the right of the principal to control the agent's conduct with respect to those matters entrusted to the agent. J.C. Penney, supra. As evidence of a buying agency, the courts have considered such factors as: the existence of an agency agreement; whether the stated agent's actions were primarily for the benefit of the principal; whether the principal or agent is responsible for the shipping and handling costs; whether the importer could have purchased directly from the manufacturers without the agent; whether the agent operates an independent business primarily for its own benefit; and whether the agent is financially detached from the manufacturer of the merchandise. Dorco Imports v. United States, 67 Cust. Ct. 503, 512, R.D. 11753 (1971); see also Rosenthal-Netter, supra, and New Trends, Inc. 'v. United States, 645 F.Supp. 957, 10 CIT 637 (1986). In support of its claim, OSU submits a copy of the Agreement signed by Great Union and by itself as proof of an agent-principal relationship. Under the Agreement, the services to be provided by the Agent are typical of a bona fide buying agent. You contend, however, that the parties do not abide by the terms of the Agreement. First, you claim that OSU's de facto calculation of the agent's commission violates the terms of the Agreement. You state that the methodology OSU uses to calculate the commissions paid to all its purported buying agents is to multiply the negotiated price by the commission percentage and to deduct that amount from the total to arrive at the vendor's price. In contrast, the Agreement states that the agent will negotiate prices that do not include the buying commission: (2)(c) The Agent shall negotiate free on board (f.o.b.) prices on behalf of the Principal. The Agent shall quote f.o.b. prices, which shall not include the buying commission. The Agreement specifies that the commission is calculated as a percentage of the f.o.b. price with no mention of "gross" or "net" prices. Counsel alleges that, irrespective of the terms of the Agreement, OSU "derives" the total payment only after the determination of a Seller's price for the merchandise. Subsequently, the total payment is then calculated with the Seller's price representing ninety-five percent and the commission representing the remaining five-percent of the payment. Next, you claim that OSU's performance is inconsistent with the Agreement with respect to its invoicing. The Agreement requires the agent (Great Union) to provide the principal (OSU) with a separate invoice for payment of the buying commission: (7) The Agent shall provide the Principal with a separate invoice for the payment of buying commissions and non- production related expenses incurred on the Principal's behalf, such as quota charges, inland freight, hauling, lighterage, etc., in addition to the manufacturer's/seller's commercial invoice for the cost of merchandise. The importer's documentation that was submitted to our office does not satisfy this provision. Specifically, we note that Counsel did not provide a separate invoice from Great Union. Finally, you claim that OSU's method of compensating Great Union through its payments to the Seller, as demonstrated above, is inconsistent with the terms of the Agreement. The Agreement provides, in relevant part, that: (8) None of the sums set forth above for the Agent's compensation or reimbursement shall be paid, directly or indirectly, to the manufacturer/seller or inure to the benefit of the manufacturer/seller in any way. Furthermore, the Agent, its officers, directors shareholders, and/or employees shall not solicit or accept any payment, rebate, or other form of compensation or remuneration from any manufacturer/seller in transactions involving the Principal. The present payment structure, as described above, is inconsistent with the terms of the Agreement, because the Seller's invoice contains a separately identifiable amount that is equivalent to the commission, and the UC between OSU and the Seller provides for payment of the commission. We find that OSU and Great Union act in a manner inconsistent with the Agreement. Specifically, we note the de facto calculation of the commission, the failure of Great Union to provide the principal with a separate invoice for payment of the buying commission, and OSU's method of compensating Great Union through UC payments to the Seller. However, while the method of compensating Great Union is clearly inconsistent with the terms of payment stipulated in the Agreement, this alone does not negate the existence of a buying agency relationship. Whether the relationship is one of agent-principal "is to be determined by the substance of the transaction-not by the labels the parties attach to it." Pier 1 Imports, 13 CIT 161, Slip Op. 89-25 at 13 (quoting Dorf Int'l, Inc. v. United States, 61 Cust. Ct. 604, 610, A.R.D. 245, 291 F.Supp. 690, 694 (1986)). Thus, "having legal authority to act as a buying agent and acting as a buying agent are two separate matters and Customs is entitled to examine evidence which proves the latter." General Notice, 23:11 Cust. B. & Dec. 9 (March 15, 1989). See also, HRL 544965, dated February 22, 1994. With respect to the buying agency, the Agreement also indicates that the Agent is to act as a non-exclusive buying agent for the principal and, in its dealings on behalf of the principal, the Agent will act only as the principal's agent and that the Agent is not related to the Seller. Counsel claimed that Great Union has certified that it does not share commissions with the sellers of the merchandise. Accordingly, it is OSU's position that the payments to the Seller for commissions are not additions to the price actually paid or payable because Great Union is a bona fide buying agent and none of the commission inures to the benefit of the Seller. As mentioned above, however, the actions of the parties will determine whether they have a bona fide agency relationship. Counsel has also provided documents intended to illustrate that Great Union acts under OSU's control. Notably, Counsel provided a copy of the purchase order issued for the transaction in question, which contains, inter alia, the following: agent's name, __7 7factory name, price actually paid or payable, commission rate, style and color of the garment, quota category, quantity, fiber content, packaging and labeling instructions, and other information related to the imported garments. Counsel claims that Great Union transmitted this order information to the factory, J & S Fashions, on behalf of OSU. Counsel also provided copies of facsimiles, where Great Union is seeking instructions, comments and clarifications from OSU for issues such as quality control, specifications, shipping schedules and delays. The facsimiles were not, however, tied to the transaction in question. Counsel does not provide any proof of OSU's control over Great Union beyond the Agreement's stipulations, the aforementioned representations, and these facsimiles. Even affording significant weight to the documentation submitted by Counsel, 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. See HRL 545744 dated January 19, 1995. Here, the circumstances of this transaction are substantially muddled by the existence of two separate and distinct invoices. The Seller issues two invoices: (1) a visaed invoice to OSU, indicating only the price actually paid or payable; and (2) a commercial invoice issued directly to OSU, which separately indicates the Seller's price, the total payment, and an additional five-percent payment. It is noteworthy that the "itemized" invoice does not designate the purpose or origin of the 5% payment. Despite an acceptable method of calculating the 5% payment, the methods of invoicing and disbursement militate against finding a bona fide buying commission in this case. In an Informed Compliance publication entitled "Buying and Selling Commissions". U.S. Customs and Border Protection (CBP) explained that the method of invoicing and the method of payment can either facilitate a determination of non-dutiable buying commissions or make such a finding more difficult: The method of invoicing and the method of payment is [sic] Part of the total evidence that must be considered before a determination can be made regarding the status of so-called buying commissions. For example, the easiest way to show ... that the payments to the middleman represent buying commissions is for the seller to invoice the buyer for the purchase price of the imported merchandise and for the middleman to invoice the buyer separately for its commissions. The buyer would then pay the seller for the goods and separately pay the middleman for its services. This method clearly shows the price paid for the imported merchandise and the amount of the commission. The Court of International Trade has held that "where the payment for goods was made to the seller with instructions to disburse part of such funds to the buyer's agent, and where the agent assisted in ringing about the sale, the disbursement constituted monies expended for the benefit of the seller within the meaning of 19 U.S.C. § 1401 a(b)." See Moss, supra. Yet, "[i]n order for the disbursement from the seller to the buyer's agent to be exempt from dutiable value, the importer must additionally 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. The L/C lists a party related to the Seller as its beneficiary and the Seller's invoice includes an amount designated for the alleged commission. Specifically, you note that OSU pays Great Union's commission to the Seller's bank in this L/C transaction. The Seller's commercial invoice to OSU for negotiating the L/C, separately indicated the following: the seller's price, the total payment, and the additional 5 percent. The copy of the negotiating bank's electronic notification submitted by Counsel confirms that the negotiating bank acting on OSU's behalf paid the additional "5 percent" to Great Union. Counsel claims that this procedure is intended to facilitate payment difficulties encountered by OSU and its negotiating bank. In Moss, the importer also argued that the banks issuing Moss' L/C requested Moss to make its payments to its buying agents in this fashion and apparently Moss routinely employed this procedure [wherein the L/C]...included the buying commission and the cost of the goods and instructed the vendor to remit the buying commission to the agent...with Moss arguing that the bank wanted [Moss] to do it that way [all costs included in the seller's invoice]." Moss Mfq. Co., Inc. v. United States, 714 F.Supp. 1223, 1227 (CIT 1989). Similarly, in the instant case, Counsel claims that the banks preferred that the seller's invoice include the amount for the alleged buying agent's commission. The court in Moss cautioned against engaging in formidable fact-finding, and in heeding this council, we conclude that the alleged buying commission is part of the price actually paid or payable. Moss Mfg. Co., inc. v. United States, 896 F.2d 535, 539 (Fed Cir. 1990). HOLDING: The evidence presented is insufficient to establish that the 5% payment at issue constituted a bona fide buying commission. In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2002, pp. 18 and 21), you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision 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, Virginia L. Brown Chief, Value Branch