VAL OT:RR:CTF:VS H020231 CRS
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; AFR of Protest No. 4701-07-100684
Dear Sir:
This is in response to your memorandum dated November 20, 2007, under cover of which you forwarded an application for further review of the above-referenced protest, dated August 20, 2007, filed by Follick & Bessich, on behalf of [************************] (hereinafter, the “protestant”), concerning the dutiability of certain commission payments. We regret the delay in responding.
The protestant 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 protestant should note that U.S. Customs and Border Protection 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:
Background
As a general matter, the protestant designs [**************], then seeks suppliers, negotiates prices and ultimately orders the goods, generally through its buying agents. The imported merchandise bears marks owned or claimed by the protestant, including federally registered trademarks. In certain cases, the protestant transacts business with agents employed by foreign sellers or manufacturers but advises that in such cases any commissions are included in the price of the goods. In contrast, the protestant advises that any commissions it pays to agents are separate and distinct from the purchase price of the imported merchandise. Separate commission invoices are issued in respect of these amounts.
On August 20, 2007, the protestant 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 involve the importation of [**********] from [***********] (hereinafter, “South America”) in which certain commission payments were made to an alleged buying agent. The imported merchandise was appraised under the transaction value method and, as liquidated, included an amount in respect of the commission payments at issue. The protestant disputes the addition of the amount of the commission payments which it contends are bona fide buying commissions rather than selling commissions. As such, the protestant maintains that the commission payments are not included in transaction value.
Prior to the filing of the protest and application for further review, the protestant filed two internal advice requests on the same issue as that covered by the protest, viz., the dutiability of certain commissions paid to an alleged buying agent. The first of these was submitted by letter dated July 27, 2006, in response to a proposed value advance in respect of payments made by the protestant to the alleged buying agent, Mr. [********************] (hereinafter, the “agent”), aka [*************] and/or [*******************], in connection with the importation of [***********] from South America. The proposed value advance followed a Focused Assessment conducted by the New York Field Office,
Regulatory Audit, of entries filed by the protestant between 1998 and 2004, and a determination by Regulatory Audit that the payments were included in transaction value as an addition to the price actually paid or payable for the imported merchandise. The protestant maintains that the payments constitute bona fide buying commissions and are not included in transaction value.
The second internal advice request, filed on January 11, 2007, concerns commissions paid by the protestant to [******************************], and/or to [*************************], both of which are alleged to be buying agents, in connection with the importation of [*********] from [*********]. The appraising officer at the port of JFK, determined that the payments to the alleged agents were not bona fide buying commissions and were included in the transaction value as an addition to the price actually paid or payable. However, given that the entries covered by the application for further review of the instant protest involve commissions in respect of importations from South America, we find that the information submitted in the second internal advice request, which involves a different agent and different sellers, is not relevant for purposes of this decision.
In contrast, the information submitted by counsel in connection with the first internal advice request, while not directly relevant to the protested entries, has been taken into account and forms part of the record herein. We have also reviewed and considered the following to the extent they shed light on the appraised value of the merchandise covered by the protested entries: (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) a Protest and Summons Information Report, dated October 26, 2007; (5) representative documentation, including entry summaries, commercial invoices, commission invoices, purchase orders, bills of lading, agency agreements and payment documentation; and (6) in addition to the submissions referenced above, numerous supplemental submissions to include submissions dated June 9, 2008, August 29, 2008, December 1, 2008, and December 29, 2008. While we have reviewed all the information submitted in connection with the South American transactions, this decision is issued, pursuant to Part 174, CBP Regulations, solely in response to the issue presented by the application for further review. Our response to the internal advice requests will be the subject of a separate decision.
In its submission of December 29, 2008, the protestant provided entry and payment documentation with respect to twelve of the protested entries. For each of these entries, the protestant provided copies of: (1) entry documents, including CBP Forms 3461 and 7501, the air waybill, commercial invoices, packing lists, and interim invoices prepared by the seller; (2) payment documentation, including invoice payment request statements from the seller, the protestant’s summaries of the seller’s open and paid invoices, and bank statements listing wire transfer payments for merchandise from the protestant’s bank account to the seller’s bank account; and (3) commission invoices and payment documents, including commission invoices issued to the protestant by the agent, the protestant’s internal running account commission statements, the protestant’s wire transfer commission payment summaries and bank statements listing wire transfer payments from the protestant’s account to the agent’s account.
The Protested Entries
The seller of the merchandise covered by the protested entries was [***************************] (hereinafter, the “seller”), a South American trading company that secures manufacturers in South America to produce [************] styles ordered by the protestant through the agent. The protestant and the seller are not related, nor are the protestant and the agent, or the seller and the agent. The protestant pays the seller for the merchandise, typically via wire transfer. The merchandise is shipped by the seller directly to the protestant, or in certain instances to the ultimate U.S. consignee.
The record reflects that the protestant entered into several buying agency agreements in connection with the South American transactions. See Internal Advice Request, dated July 20, 2006, Exhibit D. There are four buying agency agreements that are pertinent to the South American transactions. The first is dated September 1, 1994, and is between the protestant and the seller, purporting to act as agent for itself. The agreement was signed by Mr. [**********], of [********], Massachusetts, at the time in question, the president of the seller. Under this agreement, the commission payments were based on a percentage of the invoice price (FOB port of export) of the [**********] and were paid directly to the agent. However, since the 1994 buying agency agreement was superseded by subsequent agreements, it is not relevant for purposes of this decision.
The protestant and the agent also entered into three other buying agency agreements. The terms of these agreements, dated January 1, 2001, February 1, 2002, and January 1, 2003, are substantially similar. The January 2001 agreement is between the protestant and the seller, but was signed by the agent on behalf of the seller. The February 2002 agreement is between the protestant and the agent, dba [******************] at the agent’s address in [************], Florida. The January 2003 agreement is between the protestant and the agent, dba [***********], of [******************]. The protestant asserts that the agent at all times acted as a buying agent, despite the fact that the agent transacted business under several various names, including the seller’s. The protestant advised that the agent provides buying agency services solely on behalf of the protestant and for no other principal.
Notwithstanding the use of the [***********] and [*************] names and the inconsistent South American and U.S. addresses in certain of the agreements, the protestant asserts that all the buying agency agreements are effectively between it and the agent. In this regard, the protestant notes that the record indicates that throughout the period covered by the protested entries – October 11, 2005 to April 21, 2006 – the protestant made commission payments directly to the agent and that except as discussed below, made no payments to the seller of the merchandise other than the FOB port of shipment prices indicated on commercial invoices. As compensation for the services rendered, the protestant paid the agent a percentage of the invoice prices. As previously noted, these payments were made directly to the agent, and were separate and apart for the payment for the goods.
The 2003 agreement was in force during the period covered by the protested entries. The agent’s duties, as set forth in the 2003 agreement include: advising the protestant on the sources and prices of merchandise; obtaining samples; preparing and negotiating purchase contracts; monitoring the status of purchase orders; ensuring the preparation of import documents; inspecting [**********] and components; and arranging for shipment. The protestant retained the right to accept or reject purchases proposed by the agent, and the agent’s authority to place orders with suppliers and/or purchase for the protestant’s account is subject to conformity with the protestant’s terms and instructions. Moreover, the agreement specifies that the agent has no authority to bind the protestant absent the protestant’s written consent. As compensation for the services rendered, the protestant agreed to pay the agent a commission based on a percentage of the F.O.B. port of export price of the merchandise. The percentage amount of the commission paid to the agent declines as the volume of merchandise purchased by the protestant increases.
In denying the protest the appraising officer reviewed the importer’s entry summaries and related audit reports, including the Pre-Assessment Survey, Follow-Up reviews, and the Technical Assist Audit Report. 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 protestant 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 protestant 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 protestant 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 protestant. Regulatory Audit also remarked on the fact that the protestant made split payments to the agent and the seller, and that the seller performed certain services on the agent’s behalf, viz., 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 protestant 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 protestant 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 protestant acknowledges that on occasion, at the request of the agent, it made certain periodic payments to the seller on behalf of the agent. The protestant 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 protestant asserts that these payments ceased before the end of 2002.
In a statement dated March 1, 2005, the seller asserted that it has supplied [**********] to the protestant since 1994 and that it in these transactions it dealt with the agent as the representative of the seller. In addition, the seller noted that there was – and is – no relationship between the seller and the agent. The seller also affirmed that before the end of 2002 it had furnished certain services to the agent, as described above.
Email correspondence between the protestant and the agent submitted in connection with this matter show that the agent, inter alia, responded to the protestant’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 [*****], the agent advised that the price was [*******] and confirmed that the factory shipment dated was May 1st. In respect of another purchase order, the protestant 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 protestant advised
that it wished to order additional merchandise and instructed the agent to try to negotiate a lower price. The agent advised 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 protestant 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.
ISSUE:
The issue presented is whether, in respect of the protested entries, the payments made to the alleged agent constitute bona fide buying commissions such that they are not included in the transaction value of the imported merchandise.
LAW AND ANALYSIS:
Initially, we note that the protest was timely filed in accordance with 19 U.S.C. § 1514, and that the matter in question – CBP’s decision as to the appraised value of the imported merchandise – is a protestable issue.
Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; codified at 19 U.S.C. § 1401a). The primary method of appraisement under the TAA is transaction value, defined as the price actually paid or payable for the merchandise when sold for exportation to the United States, plus amounts in respect of certain statutorily enumerated additions. The term “price actually paid or payable” is defined in pertinent part as “the total payment (whether direct or indirect . . . ) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C. § 1401a(b)(4). See Generra Sportswear Co. v. United States, 905 F.2d 377 (1990). Transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, an examination of the circumstances of sale indicates that the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain "test values." 19 U.S.C. § 1401a(b)(2)(B). Inasmuch as the evidence submitted indicates that the parties in this case are not related, we have assumed for purposes of this decision that transaction value is the appropriate basis of appraisement.
The enumerated additions to the price actually paid or payable include the value of any selling commissions incurred by the buyer with respect to the imported merchandise. A “selling commission” is any commission paid to the seller’s agent, who is related to or controlled by, or works for or on behalf of, the manufacturer or the seller. 19 C.F.R. § 152.102(b). Bona fide buying commissions, however, are not included in transaction value as part of the price actually paid or payable or as an addition thereto. Pier 1 Imports, Inc. v. United States, 708 F.Supp.351, 354 (Ct. Int’l Trade 1989); Rosenthal-Netter, Inc. v. United States, 679 F.Supp. 21, 23 (Ct. Int’l Trade 1988); Jay-Arr Slimwear, Inc. v. United States, 681 F.Supp 875, 878 (Ct. Int’l Trade 1988). The existence of a bona fide buying commission depends upon the relevant factors of the particular case. J.C. Penney Purchasing Corp. v. United States, 451 F.Supp. 973, 983 (Cust. Ct. 1978). However, the importer has the burden of proving the existence of a bona fide agency relationship and that the payments to the purported agent constitute bona fide buying commissions. Rosenthal-Netter, 679 F.Supp. at 23; New Trends, Inc. v. United States, 645 F.Supp. 957, 960 (Ct. Int’l Trade 1986).
The primary consideration in an agency relationship is the right of the principal to control the agent's conduct with respect to those matters entrusted to the agent. J.C. Penney, 451 F. Supp. 973, 983. The existence of a buying agency agreement 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: the transaction documents; whether the purported agent's actions were primarily for the benefit of the principal; whether the importer could have purchased the merchandise directly from the manufacturers without employing an agent; whether the intermediary was operating an independent business, primarily for its own benefit; and whether the purported agent was financially detached from the manufacturer of the merchandise. Rosenthal-Netter, 679 F. Supp. at 23; New Trends, 645 F. Supp. at 960-962.
As a general matter, a relationship between the agent and the seller will not necessarily preclude the finding of a bona fide buying agency; however, closer scrutiny will be accorded the related party transaction in determining whether in fact a bona fide buying agency exists. Bushnell International, Inc. v. United States, 477 F.2d 1402 (CCPA 1973); see also HRL 548222, dated February 27, 2003; HRL 544895, dated July 22, 1992; and HRL 544657, dated July 1, 1991. Similarly, closer scrutiny is warranted in situations where the purported buying agent also performs services on behalf of the seller of the merchandise, but the mere fact that the agent does so will not automatically preclude it from being considered a bona fide buying agent. See, e.g., HRL 544676, dated July 24, 1991; HRL 545660, dated February 10, 1995; and HRL 548135 dated July 30, 2002 (ministerial services such as locating materials, providing quality control and inspection services, providing advice on U.S. import requirements and assisting in facilitating the importation of merchandise into the U.S. did not invalidate a bona fide buying agency where the buyer was aware of and acquiesced in the provision of such services). In this case, however, the record contains no evidence that during the period covered by the protested entries there was a relationship between the agent and the seller, nor that the agent performed any services on the seller’s behalf.
In determining whether an agency relationship exists, the evidence submitted to Customs must clearly establish the fact of a bona fide buying agency. See Headquarters Ruling Letter (HRL) 544610 dated February 23, 1991. Customs has consistently held that an invoice or other documentation from the actual foreign seller is required in order to establish that the agent is not the seller, as well as to determine the price actually paid or payable to the seller. HRL 542141 dated September 29, 1980; also published as TAA No. 7, Dep’t. of the Treasury, U.S. Customs Service, Customs Valuation Rulings under the Trade Agreements Act of 1979, SuDoc. No. T 17:2:C 96/15 (1984). While the absence of a buying agency agreement does not necessarily preclude the existence of a buying agency relationship, it is difficult to establish an agency relationship without one. See U.S. Customs and Border Protection, Informed Compliance Publication, What Every Member of the Trade Community Should Know About: Buying and Selling Commissions (Oct. 2006), available at http://www.cbp.gov/linkhandler/cgov/trade/legal/informed_compliance_pubs/icp004r2.ctt/icp004r2.pdf (Nov. 20, 2008). In this case, the record reflects that during the period covered by the protested entries the protestant and the agent were operating under a buying agency agreement, i.e., the 2003 agreement. This supports the existence of a buying agency agreement. Dorco Imports, 67 Cust. Ct. at 512.
Moreover, the record reflects that during the period covered by the protested entries the protestant controlled the purchasing process. For example, email correspondence contained in the record show the protestant instructing the agent to cancel an order if the goods were not shipped that very day. There are numerous communications from the agent to the protestant requesting instructions regarding shipment terms and prices, as well as messages canceling orders and advising that the agent had rejected goods on the basis of poor quality. Price approval forms list the name of the factory, indicating that the protestant was aware of the manufacturers of the merchandise. Rosenthal-Netter, 679 F.Supp. at 23 (Noting, inter alia, that quote sheets that did not indicate the name of the manufacturer were indicative of the principal’s lack of control over the agent); Rosenthal-Netter, 679 F.Supp. at 23 (In contrast, the failure to substantiate the names of the manufacturers is evidence that no agency relationship existed). Indeed, the record reflects that the protestant routinely instructed the agent to seek confirmation of shipment dates and to change production dates. In other correspondence the protestant directs the agent to cancel or amend certain orders. Thus, the record reveals the protestant’s active involvement in the purchasing process and confirms that the agent only negotiates and places orders based on the protestant’s direction and approval. See, e.g., HRL 548222 at 12. As noted above, the primary characteristic of an agency relationship is the right of the principal to control the agent’s conduct with respect to the matters entrusted to the agent. Id. at 24, quoted in Pier 1 Imports, 708 F.Supp. at 354 (“Control over the purchasing process is strong evidence that an agency relationship exists.”). In contrast, a buying agency relationship will not be found to exist in situations where an importer accords too much discretion to the alleged buying agent and assumes a passive role in the purchasing process. Rosenthal-Netter at 24. However, the evidence presented shows that the protestant was actively directing the agent in the course of the purchasing process. Based on the communications between the protestant and the agent, we find that the protestant was in control of the purchasing process.
Also indicative of the protestant’s control over the purchasing process is the fact that the protestant controlled the payment process. Rosenthal-Netter at 24-25. The evidence presented includes invoices from the actual seller of the merchandise as well as separate commission invoices from the agent. U.S. Customs and Border Protection, Buying and Selling Commissions, at 12 (separate commission invoices support the finding of a buying agency). Wire transfer payments made by the protestant against purchase orders placed with the seller were made to the seller’s bank and identified the seller as beneficiary. Commission payments were made against separate commission invoices via wire transfer to the agent’s bank. Further, we note that the invoices from the seller not only reference the protestant’s name, but also indicate the name of the actual manufacturer. Thus, the protestant, a large publicly traded company, was presumably aware of the actual manufacturers. This fact, in addition to the factory names on the price approval forms, suggests that the protestant could have purchased directly from the manufacturers had it so wished. The evidence therefore supports a finding that the protestant was in control of the payment process and that commission payments were made separately from the payment for the goods and in consideration of services performed by the agent on behalf of the protestant.
In asserting that the payments at issue were included in transaction value as selling commissions, Regulatory Audit noted that the protestant did not adhere fully to the terms of the buying agency agreement. Admittedly, the record does not contain evidence that the agent performed all of the services enumerated in the agreement. For example, there is no evidence that the agent assisted the protestant with visits to manufacturers or suppliers, or that he acted as translator in such meetings. Similarly, there is no evidence that the agent arranged for shipment or represented the protestant in claims against vendors. Nevertheless, on balance the evidence establishes that the agent represented the protestant in respect of the procurement of merchandise from South America and that the protestant controlled the actions of the agent with regard to those matters that it entrusted to the agent.
On the other hand, we concur with Regulatory Audit that there is considerable ambiguity in the record with respect to the dealings between the parties. As noted above, for example, the seller signed the 1994 agreement and identified itself therein as the agent. Similarly, in the 2001 agreement the agent, Mr. [**********], used the [**************] name. As a further example, the record shows that between 1999 and 2002, numerous payments were made by the protestant to the seller who then split them with the agent. The evidence in the record therefore suggests that the relationship between [*********] and [**********] was not always one of principal and agent. Nevertheless, the question here presented is confined to whether, with respect to the protested entries, the payments by the protestant constitute bona fide buying commissions. On that point, as discussed above, we find that the protestant has met its burden of proof. Accordingly, the payments by the protestant to the agent are not included in transaction value as part of the price actually paid or payable or as an addition thereto.
HOLDING:
In conformity with the foregoing, the protest should be allowed. The commissions paid to the agent in connection with the protested entries constitute bona fide buying commissions and are not included in transaction value.
In accordance with the Protest/Petition Processing Handbook (HB 3500-08A, December 2007) you are to mail this decision together with CBP Form 19, to the protestant no later than sixty days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to the mailing of the decision. No later than sixty days from the date of the decision, the Value and Special Programs Branch, Office of International Trade, will make the decision available to CBP personnel and to the public via the CBP home page at www.cbp.gov, the Freedom of Information Act, and other means of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division
Enclosure