VAL OT:RR:CTF:VS H051136 GG
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; Requests for Internal Advice
Dear Sir:
This is in response to your memorandum dated November 20, 2007, under cover of which you forwarded two internal advice requests, dated July 27, 2006 and January 11, 2007, respectively, filed by Follick & Bessich on behalf of [XX] (hereinafter, “the Importer”), concerning the dutiability of certain commission payments. Since the issues raised in both requests are substantially similar, we will address both requests in this letter. We regret the delay in responding.
Importer 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 Importer should note that U.S. Customs and Border Protection (“CBP”) 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:
Counsel for the Importer filed its first request for internal advice on July 27, 2006, in response to a proposed rate advance for certain payments made by the Importer in connection with shipments of [xx] (hereinafter, “the merchandise”) from Brazil. The Importer has consistently maintained that these payments amounted to non-dutiable buying commissions paid to its agent, [“A”], acting on its behalf. The proposed rate advance followed a Focused Assessment review by CBP’s Regulatory Audit Division of transactions by the Importer occurring between 1998 and 2004. The Focused Assessment Report, issued August 10, 2005, concluded that the failure to include dutiable commission payments of over $[XX] in the appraised value of the merchandise had resulted in lost revenue of over $[XX]. These payments were determined by CBP to have been made for the benefit of several individuals and entities, including an entity bearing the same name as the seller of the merchandise, [“S”]. Accordingly, CBP refused to treat the payments as non-dutiable buying commissions.
Counsel submitted a second request for internal advice on January 11, 2007, with respect to commissions paid by the Importer to agent [“B”] and on occasion to an entity affiliated to [“B’], [“C”], located in Taiwan (hereinafter, “the B and C agents”). The payments were made in connection with merchandise imported from China. At issue is the conclusion of CBP officials, reached following the same series of audits and reviews as above, that these payments are not buying commissions as asserted by the Importer but are amounts to be included in the transaction value of the imported merchandise. The Importer has been advised of CBP’s finding that between 2000 and 2004, the Importer paid over $[XX] to the Taiwan entities in dutiable commissions, which caused lost revenue to CBP of over $[XX].
On August 20, 2007, the Importer 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 involved the importation of merchandise from Brazil in which certain commission payments were made to [“A”]. The imported merchandise was appraised under the transaction value method and, as liquidated, included an amount in respect of the commission payments at issue. Importer disputed the inclusion of the amount of the commission payments, which it contended were bona fide buying commissions. The information submitted by counsel in connection with the first internal advice request, while not directly relevant to the protested entries, was taken into account in the resolution of the protest. A decision – HQ H020231 – was issued by this office on June 25, 2009, in which it was determined that the protest should be allowed.
With respect to the disposition of the two pending internal advice requests, we have also reviewed and considered the following to the extent they shed light on the appraised value of the merchandise: (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) Protest and Summons Information Report dated March 2, 2007; (5) samples of entry summaries, commercial invoices, commission invoices, purchase orders, bills of lading, agency agreements and payment documentation; and (5) supplements to the internal advice requests submitted by counsel dated June 9, 2008, August 29, 2008, and September 10, 2009.
The July 27, 2006 Internal Advice: The Brazilian Transactions
Based on our review of these materials we consider the following additional facts relevant to our assessment of commissions paid by the Importer in connection with purchases from Brazil:
The seller was [“S”], a Brazilian trading company that obtained the merchandise from various manufacturers in Brazil and sold to the Importer. [“S”] and the Importer are not related.
Each shipment examined was found to be accompanied by an invoice from the seller to the Importer. Shipments were made directly to the Importer for its account on FOB terms.
The Importer’s purported agent, [“A”], never took title to or assumed the risk of loss for the merchandise. Payments based on a percentage of the invoice price of the merchandise purchased by the Importer from the seller were made directly to the agent.
The Importer paid the seller directly for the invoiced merchandise.
The Importer entered into several agreements styled as “buying agency agreements” since 1994, as presented in Exh. D to the July 27, 2006, request for internal advice.
The terms of these agreements were substantially the same, with all the agreements beginning in 2001 identical also in format. Counsel advises that at all times since 1994, the actual agent was [“A”], and that this individual carried out the agent responsibilities under these agreements. The agent operated under several business names. In 1994, the Importer executed a buying agency agreement in which the seller [“S”] was identified as the buying agent. This agreement was signed for the agent by [Mr. XX], President of the seller, but using an address in Massachusetts. The Importer insists that the agent [“A”] was actually the agent who carried out the agent responsibilities, and that its seller [“S”] was not the agent.
A follow-on buying agency agreement executed in 2001 was entered into between the Importer and [“S”], but this time signed by [“A”] on behalf of the seller [“S”]. [“S”] is identified as the buying agent in the agreement, with an address in Brazil. In February of 2002, another buying agency agreement took effect, this time between the Importer and an entity named [“E”], with [“A”] signing on behalf of [“E”], using a Florida address. The Importer entered into yet another buying agency agreement in 2003, in which the buying agent was identified as [“F”], also of the same Florida address. This agreement superseded all previous agreements. Counsel’s submission identifies both Florida companies as being operated by [“A”].
The Importer states that notwithstanding the uses of various names, including one identical to the name of the seller in Brazil, these agreements are all effectively with [“A”] as the Importer’s buying agent. The Importer proposes that the names used for the agents be disregarded in favor of treating the agreements as actually between the Importer and the agent, [“A”]. Documentation examined at audit indicates that throughout the period of review the Importer made commission payments directly to the agent and, except as discussed below, made no other payments to the seller, beyond the FOB prices invoiced for the merchandise. In other words, the agent was paid a percentage of the invoice prices separately and directly by the Importer; no part of the commission was included in the payments to the seller for the merchandise.
The agent’s functions under the agreements included finding companies in South America capable of manufacturing merchandise to the Importer’s specifications; determining the asking price for such production; obtaining samples; providing assistance to employees and representatives of the Importer when visiting South American manufacturers and suppliers; preparing and negotiating purchase contracts; monitoring the status of purchase orders; ensuring preparation of documentation for importation into the U.S.; inspecting merchandise and components; and arranging for shipping to the U.S. See [“A’s”] letter of February 25, 2003, annexed as Exh. C to the Importer’s July 27, 2006 request for internal advice.
It is noted that pursuant to the commission agreements, the agent was authorized to “assist and advise Buyer in the preparation and negotiation of purchase contracts which shall remain subject to buyer’s final approval.” And the agent further was authorized “in strict conformity with instructions and terms issued by the Buyer… [to] place orders with and/or purchase for the account of the Buyer merchandise from export suppliers.” January 1, 2003 Buying Agency Agreement between the Importer and [“F”], Articles 2(f) and 2(g). In short, agents were entrusted to negotiate prices on behalf of the Importer, subject to the Importer’s approval, and to enter into transactions on behalf of the company, subject to the Importer’s final approval. Also under Article 8 of this Agreement, the Importer’s control over purchases is expressed in the following terms: “Buyer reserves the sole and exclusive power and right to accept or reject purchases proposed by the Buying Agent. Buying Agent is not authorized to, and shall not, enter bids which may bind Buyer; nor shall Buying Agent otherwise hold itself out as having power to bind Buyer, except as Buyer may specifically authorize in writing.”
In its letter to CBP auditors of December 29, 2004 (annexed to the July 27, 2006 submission), the Importer explained its sourcing and pricing procedures as follows:
The Company advises its buying agents to source suppliers for Company’s [merchandise] styles at the best possible prices. If a similar style is already made, the agent is aware of pricing and that the similar style must be comparable. Typically, the Company’s buying agents will report quoted prices to the Company, which the Company either accepts or rejects. If a price quote is rejected, the agent will attempt to negotiate a better price on behalf of the company. In those cases where acceptable prices cannot be secured in one market, other markets may be considered by the Company. For example, if a quoted price from Brazil is unacceptable, a price quote may be sought from the Chinese market… The Company generally negotiates prices through the offices of its buying agent. In certain cases, however, the company will negotiate with the manufacturer’s agent.
The Importer recites these arrangements and practices in rebuttal to CBP auditors’ conclusion that it was not in control of price negotiations for merchandise so as to be considered in control of its agents.
In response to CBP’s finding that the Importer did not show sufficient documentation of its control of price negotiations with the seller, the Importer states that this finding is based on a misunderstanding of the role of buying agents in negotiating prices. The Importer says it employed the agent knowing that this person already had successfully negotiated prices with the seller on behalf of other importers. The business between the Importer and the agent concerning pricing, particularly rejection of offered prices, was done largely by telephone. These dealings were within the scope of the buying agency, subject at all times to the Importer’s right of acceptance. The Importer therefore does not consider it unusual or proof of a lack of control that there was limited evidence of written instructions between the Importer and the agent concerning pricing and related matters.
In several instances in 2002 and earlier, the agent directed the Importer to send part of his commission payments to employees of the seller to pay them for certain agency services performed on behalf of the Importer. The Importer advises that this practice, discontinued since 2002, involved paying employees of the seller for inspection, reviewing paperwork and arranging for shipping services, all of which the agent was in effect subcontracting to these employees. The payments evidently went from the Importer to the seller for distribution to its employees, and these sums were deducted from the commissions paid to the agent. The evidence shows that other than these payments, the only payments made by the Importer to the seller were for the merchandise, which was purchased on an FOB basis and delivered by air freight. Appraisement was on the basis of these FOB amounts paid for the merchandise using transaction value. The basis of appraisement is not at issue in this review.
Email correspondence between the Importer and the agent submitted in connection with this matter show that the agent, inter alia, responded to the Importer’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 [XX], the agent advised that the price was $[XX] and confirmed that the factory shipment was May 1st, 2005. In respect of another purchase order, the Importer 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 Importer advised that it wished to order additional merchandise and instructed the agent to try to negotiate a lower price. The agent replied 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 Importer 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.
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 Importer 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 Importer 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 Importer 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 Importer. Regulatory Audit also remarked on the fact that the Importer made split payments to the agent and the seller, and that the seller performed certain services on the agent’s behalf, such as 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 Importer 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 Importer 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 Importer acknowledges that on occasion, at the request of the agent, it made certain periodic payments to the seller on behalf of the agent. The Importer 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 Importer asserts that these payments ceased before the end of 2002.
In a statement dated March 1, 2005, the President of [“S”] asserted that his company has supplied the merchandise to the Importer since 1994 and that in these transactions it dealt with the agent as the representative of the Importer. In addition, the seller noted that there was – and is – no relationship between [“S”] and the agent. The seller also affirmed that before the end of 2002 it had furnished certain services to the agent, as described above.
The January 11, 2007 Internal Advice: The Chinese Transactions
We consider the following additional facts to be relevant to our assessment of the commissions paid by the Importer to the agents [“B” and “C”] in connection with purchases from China:
The sellers were various manufacturers in China.
Shipment was made directly by the sellers to the Importer, but under invoices and using shipping arrangements prepared by the agents. Several of the commercial invoices examined were under the agent [“B’s”] letterhead and identified the same agent as the “shipper.” Apparently in 2003, these invoices began to be prepared using Chinese manufacturers’ letterhead, but still showed the agent as the shipper. During subsequent stages of the audit, invoices were submitted for CBP review prepared on letterhead of the manufacturers and that identified the merchandise as either for the Importer’s account or, at a minimum, as Importer styles. Exh. I, January 11, 2007 submission. The production of these invoices disposed of two objections noted by CBP audit officials: that original vendors’ invoices had not been provided; and that the merchandise was not produced for the Importer’s account.
The price negotiation process, according to the Importer, mostly took place by telephone, and involved the efforts of the agent [“B”] to secure the lowest possible prices for merchandise produced to the Importer’s designs. The Importer states that when prices were unacceptable, it did not accept them. The Importer was able to locate a limited amount of documentation concerning pricing and the placement of orders.
The sellers were paid by the agents on behalf of the Importer using funds forwarded to the agents by the Importer. The Importer states that it preferred this procedure for convenience and efficiency.
The agents operated under Buying Agency Agreements providing for them to be paid a percentage of the FOB port of export purchase price of the merchandise. These amounts were invoiced and paid separately from the payments for the merchandise.
In return for these commission payments, the agents advised the Importer with respect to sourcing of merchandise; solicited offers to sell to the Importer; procured samples; assisted the Importer with plant visits; prepared contracts and placement of orders; inspected goods; arranged for shipment and related services; and ensured the accuracy of invoices. The Importer insists that all these services were performed at its direction and under its control.
The terms of the Buying Agency Agreements between the Importer and the agents are substantially identical to the terms of the Importer-[“F”] Agreement. In particular, the agents were authorized to place orders, but subject at all times to the Importer’s right of refusal. With regard to payment of sellers, the Agreements contemplate the issuance of letters of credit in favor of vendors for each order or group of orders. As indicated above, in practice vendors were paid by the agents using funds forwarded by the Importer. The Importer states that it arranged for the agents to handle its payments to vendors as a matter of efficiency and convenience for the Importer.
There is no evidence that the agents received compensation from the sellers, that the agents were related to the sellers, or acted as agents for the sellers. Several instances in which the agent [“B”] was identified in the commercial invoices as the seller to the Importer are claimed to be clerical errors. There is no other evidence that the agent [“B”] took title to the merchandise that was delivered to the Importer, nor is there any other indication that the agent [“B”] acted as a seller of merchandise to the Importer.
In 1998, the agent [“B”] performed services for no charge in hopes of securing other business from the Importer. The Importer argues that these uncompensated services also were within the scope of a buying agency undertaking. The Importer argues further that because the arrangement for uncompensated agency services was by mutual agreement, it is not inconsistent with the terms of the buying agency agreement.
Regulatory Audit Findings of no Bona Fide Buying Agency Summarized:
In its findings of August, 2005, CBP Office of Regulatory Audit took exception to the Importer’s claims for buying commission treatment by noting the following:
Agency agreements were not followed;
Agreement was with [“S”], but signed by [“A”];
[“B”] paid sellers, was in control of payments;
Documentation of price negotiation is incomplete;
Agents did not provide original vendors’ invoices;
Manufacturers’ invoices did not show the Importer as the buyer;
The Importer wrongly represented [“S”] as the manufacturer, when it was merely the seller;
[“S”] furnished services to manufacturers in Brazil.
From 1994 to 2001, [Mr. XX] was both buying agent to Importer and President of [“S”];
From 2003 to the present, the buying agency agreement has been between the Importer and the purported agent [“A”] under the name of [“F”];
[“B”] provided agency services but received no commissions in 1998;
In sample transactions the entry summaries showed [“B”] as the manufacturer.
Following further consideration, CBP Regulatory Auditors, in March, 2007, again rejected Importer’s position with regard to commissions paid to [“A”], providing the following reasons:
The Importer did not demonstrate control over the agent or control over the transactions, such as by directly engaging in price negotiations with manufacturers;
Agency agreements were made with the seller, [“S”];
Commission payments were made to the seller, [“S”], in the form of split payments;
[“S”] benefited from payments to the purported agent [“A”], and the two are not shown to be financially independent.
ISSUE:
The issue presented is whether the payments made to the alleged agents constitute bona fide buying commissions such that they are not included in the transaction value of the imported merchandise.
LAW AND ANALYSIS:
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, the relationship did not influence the price actually paid or payable. 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 Headquarters Ruling Letter (“HQ”) 548222, dated February 27, 2003; HQ 544895, dated July 22, 1992; and HQ 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., HQ 544676, dated July 24, 1991; HQ 545660, dated February 10, 1995; and HQ 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 the scenarios presented by both internal advice requests, however, the record contains no evidence that there was a relationship between the agent and the seller, or 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 HQ 544610 dated February 23, 1991. CBP 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. HQ 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, CBP Informed Compliance Publication (ICP) “Buying and Selling Commissions” (October 2006 edition).
The July 27, 2006 Internal Advice Request: The Brazilian Transactions
In the final set of findings CBP officials of the JFK Area office, relying on advice of Regulatory Auditors, rejected the Importer’s claim for treatment of the payments as buying commissions essentially for two reasons. First, CBP concluded that the Importer and its agents had not followed the terms of the various Buying Agency Agreements. In particular, the fact that the named agent until 2002 was the seller [“S”], yet payments went to the agent [“A”], clearly created doubts as to the identity of the agent, and suggested that [“A”] was actually an agent for the seller [“S”]. Also, CBP considered it a questionable deviation from the buying agency agreements that split payments had been made at the agent’s request by the Importer for the benefit of employees of the seller between 1999 and 2002.
The second basis for rejection of the Importer’s position was that CBP did not consider the Importer to be exercising control over the transactions arranged by its agent, which indicated that the Importer was not working with a bona fide buying agent. CBP concluded instead that the agent was working on behalf of the seller or on his own behalf, and not as a buying agent for the Importer. Based on this overall conclusion, CBP determined that throughout the entire period of review, commission payments to the agent [“A”] were part of the price actually payable for the merchandise under transaction value.
The record reflects that the Importer and the agent were operating under various buying agency agreements continuously from 1994 to 2006. The agreements were without question agreements that, by their formal terms defined the rights and obligations of a principal (the Importer) and a buying agent [“S”] 1994-2002, [“E”] 2002-2003, and [“F”] 2003-2006). In this inquiry there has never been doubt that these terms set forth the parameters of a buying agency. The question has been whether the parties in substance performed as buyer and buyer’s agent. “… [H]aving legal authority to act as buying agent and acting as buying agent are different matters,” and CBP is entitled to examine evidence that proves the latter. See, U.S. Customs Service General Notice, 11 Cust. Bull. & Dec. (March 15, 1989). See also, Pier 1 Imports, Jay-Arr Slimwear Inc., Rosenthal-Netter, and HQ 545421 (August 3, 1994).
Counsel for the Importer argues that CBP auditors and officials at JFK mistakenly insist on exact performance in accordance with the terms of the agreements. In particular, the Regulatory Audit reports had stated that the exceptions noted at audit were not authorized pursuant to written amendment as required, for example, under Article 15 of the 2003 Agreement. We think counsel’s broad point is well-taken, in that if the parties modify their conduct for mutual convenience, and ratify the modifications by subsequent conduct without dispute, there ordinarily would be no need for written amendment to an agreement. In the same vein, deviations from the agreed terms of a buying agency agreement are relevant to our inquiry only to the extent that they materially change the principal-agent relationship or affect the price actually paid or payable for the merchandise. There also will arise questions as to whether certain arrangements or practices are in fact deviations from a buying agency agreement. In sum, it is not merely whether the formalities of an agreement are followed, but whether in substance the parties are acting as buyer and buying agent that will determine the existence of a bona fide buying agency.
In this context we consider whether the deviations from the terms of the buying agency agreements affected the buying agency, recalling that it is the buyer/importer that has the burden of proving its existence. The first deviation concerns the split payments made between 1999 and 2002 by the Importer to the seller [“S”] and/or its employees at the instruction of the agent [“A”], and using funds deducted from the agent’s commission compensation. The practice stopped in 2002. These payments were made to the seller or its employees in compensation for export services for which the agent was responsible to the Importer under the agreement, such as quality control and preparation of export documentation. The Importer argues that these payments were not questionable because they were for services on its behalf and did not affect the prices paid to the seller for the merchandise. The Buying Agency Agreement, however, highlights the risk that such payments might be seen to impair the independence of the agent from the seller. In Article 12 of the 2001 Agreement, the agent warrants not to share his compensation with any manufacturer, vendor or export supplier. Over several years, the agent [“A”] did just that, and the Importer facilitated the payment. (The 1994 Agreement is not explicit on this point, but clearly requires the agent to be independent of sellers and manufacturers.)
The other deviation from the terms of the buying agency agreements is that while the 1994 and 2001 (valid to 2002) buying agency agreements were between the Importer and the seller [“S”], the commission payments under review were made only to the agent [“A”]. The unrebutted evidence is that none of the payments to the agent, with the exception of the split payments discussed above, were shared with the seller [“S”]. Thus the essential facts are that the Importer had buying agency agreements with the seller [“S”] that were signed for [“S”] by its president using a Massachusetts address for the company (the 1994 agreement); and signed for [“S”] in 2001 by the agent [“A”] using a Brazilian address for the company. From February 2002 onwards, the buying agency agreements were with the agent’s companies [“E” and “F”], both located in Florida. [“A”] executed these agreements as agent.
The Importer now asks for the pre-2002 agreements to be read as having been executed between it and the agent [“A”]. It is the Importer’s position that
The mere confusing of names by the buying agent in question and minor documentary shortcomings do not nullify the contractual agreement between [Importer] as principal and [“A”] as agent, do not transform [“A”] into a selling agent, and do not transform the commissions paid by the company to its agent into payments for the imported merchandise.
This is asking CBP to accept the existence of a bona fide buying agency agreement from 1994 to 2002 between the Importer and the agent [“A”] when the agreements named another company, [“S”], as the agent. The agent [“A”], according to all available evidence, was not an employee or officer of [“S”], had no authority to bind it, and received no payment from it. At the same time, the Importer is also in effect asking that the terms of these agreements, which are consistent with buying agency arrangements, be accepted as governing.
CBP will not accept these agreements as evidence of buying agency arrangements between the Importer and [“A”], since [“A”] is not a party to them. CBP is evaluating the dutiability of payments made to [“A”], but under the 1994 and 2001 agreements [“S”] was the party named as the buying agent. There is no effective buying agency agreement covering the years 1994 through 2002 covering the payments to [“A”]. If the validity of these agreements is to be accepted at all, it would be on the basis that [“A”] was working on behalf of [“S”], which the Importer vigorously denies. In the case of the 1994 agreement, [“A’s”] name does not appear at all. The 2001 agreement still names [“S”] as the party that will provide buying agency services, and [“A”] signed on its behalf. Since the importer has the burden to show the existence of a bona fide buying agency, CBP is not obligated to interpret confusing, even contradictory circumstances such as these in a light most favorable to the Importer.
Under CBP’s rulings and court precedent, the absence of a buying agency agreement is not determinative of whether a bona fide buying agency exists. See, ICP “Buying and Selling Commissions” (October 2006 edition). Here, however, the Importer is in the posture of denying that there is an agency agreement with [“S”], yet wishing to apply the terms of its agreements naming [“S”] as agent to a nonexistent written agreement with [“A”]. Nowhere has the Importer explained whether it intended to engage [“S”] as an agent, or how this could merely be a clerical error – twice. We conclude that until February 2002, when the Importer and the agent [“A”] executed an agreement correctly naming principal and agent, there was not an agreement defining a bona fide agency between the two.
If the agent was intended from the beginning to be [“A”], and the relationship was to be governed by the buying agency agreements, the 1994 and 2001 [“S”] agreements were legally insufficient to establish such a relationship. Accordingly, we find that the commission payments made to [“A”] during this period are included in transaction value as part of the price actually paid or payable as proposed by CBP auditors and import specialists.
A different set of circumstances was created following correction of this defect beginning in February 2002, by the execution of new buying agency agreements that name the proper entities as buying agents [“A’s” companies, “E” and “F”]. CBP reviewed the new arrangement in its protest decision HQ H020231, and determined that there was a bona fide agency relationship between the Importer and the agents. As such, the commissions paid pursuant to these agreements were properly excluded from the price actually paid or payable for the imported merchandise. HQ H020231 is hereby incorporated by reference.
The January 11, 2007 Internal Advice Request
CBP Regulatory Auditors and JFK Area officials declined to accept Importer’s position that [“B” and “C”] were acting as buying agents for two principal reasons. First, the CBP auditors concluded that the parties were not acting in accordance with the Buying Agency Agreements. In particular, the practice of using [“B”] to make payments for the merchandise was thought to show that [“B”], and not the Importer, was in control of the transactions. Second, CBP was not satisfied by the evidence submitted that the Importer was in control of price negotiations, and thus did not believe that the Importer had met its burden to show that [“B”] was acting as a buying agent. Finally, CBP found it questionable that [“B”] for a period in 1998 had provided agency services to the Importer at no charge.
The agency agreements with [“B”] and its affiliate, [“C”] contain terms defining the duties of a buying agent and are consistent with the existence of a buying agency. The agreements are substantially the same in form as the post-2001 agreements used by the Importer for its agent transaction business in Brazil. Because of these similarities, our discussion of the arrangements in China is streamlined.
The CBP auditors were concerned that although the buying agency agreement with [“B”] does not call for it, [“B”] sent payments for the merchandise to the sellers on behalf of the Importer (using funds advanced for this purpose by the Importer). This raises the suggestion that [“B”], rather than the Importer, might have been controlling the purchases from the Chinese manufacturers, or even that [“B”] was an independent seller. We do not agree with this finding for several reasons. First, we do not read the agreements (e.g., Article 3 of the Agreement dated May 17, 2001) as excluding payment to vendors via [“B”]; Article 3 appears to contemplate such an arrangement. Second, even if payment of vendors by the agent (using funds forwarded by the principal) was contrary to the terms of the agreement, the parties were free to act otherwise by mutual agreement. Finally, we do not view this payment arrangement as diminishing the Importer’s control over the flow of purchases. The fact that an agent might make payments on behalf of a principal does not undermine the principal’s authority. So long as the conduct of the agent is not inconsistent with the agreement, and is acquiesced to by the principal and is for his benefit, there is no change in the principal-agent undertaking. Thus we do not find that strict adherence to the terms of the agency agreement is a prerequisite to treatment of commission payments as buying commissions. Nor, as a factual matter, do we believe there was such a deviation here in any case. Consequently, based on the evidence provided, we find that the method of payment does not preclude the existence of a bona fide agency relationship. See HQ 545422 (March 13, 1995) (agent is acting within his scope when he makes payment on behalf of the principal); HQ W563617 (September 14, 2007) (method of payment does not preclude existence of bona fide buying agency where seller received correct amounts and no commissions inured to seller’s benefit).
The CBP auditors’ other finding of deviation from commission agreements concerns the fact that in 1998 [“B”] offered the Importer agency representation without compensation. Because we find that [“B”] was acting at all times as a buying agent, it is of no consequence to the transaction value of the merchandise whether it was paid or not, as such payment, if made, would have been excluded from transaction value. Also, we believe that this was a detail in carrying out the agency relationship that the parties apparently undertook by agreement. That is, [“B”] performed agency services for a consideration, which was not a percentage of invoiced purchases, but in exchange for favorable evaluation of future engagement possibilities. For these reasons we believe that the provision of free representation for a period in 1998 is without consequence to the overall principal/agent arrangement.
CBP auditors and JFK Area officials were not satisfied that the Importer had a degree of sale-by-sale involvement to conclude that it was a principal acting in control of its purchases, particularly with respect to price negotiations. In our opinion, the Importer supplied specific evidence of its control over its agent. As early as its submission to CBP of February 28, 2003, the Importer provided considerable documentation of the day-to-day communications during 2001 between its employees and [“B”]. See Exhibit B to the June 9, 2008 submission. These exchanges show the Importer rejecting “confirmation” samples offered by a prospective seller; subsequently approving such samples; approving orders negotiated by [“B”]; canceling orders; modifying volumes and distribution of styles within orders; changing shipping dates; changing vessels; and revising acceptable pricing on purchase orders.
The Importer argues that much of such discussions was oral or by email that has not been retained, and that in any case, it need not show moment-by-moment involvement to prove that it was in control of its agents’ conduct. This office believes that the Importer meets it burden of showing control over the transactions without necessarily documenting all of its pricing decisions. There is ample indication by context and circumstance that Importer personnel were in overall control of price negotiations with the manufacturers and sellers. The ultimate proof is that the Importer paid the prices arrived at, and by all indications was free not to agree to such prices or not to pay.
The Importer asserts that it could have purchased directly from the factories, had it so chosen, but for convenience and efficiency chose to deal mostly through its agent [“B”]. We find no indication that the Importer could not have purchased without the agent, and no indication that the agent could dictate pricing to the Importer. To the contrary, it is clear that the Importer paid only prices that were acceptable to it, which had been agreed or arranged under its overall control. As described by the company, the agents were authorized to act within parameters set by the Importer, and the evidence is that the agents did so, inasmuch as the Importer agreed to pay the prices arrived at. We find upon reviewing the materials that the Importer was in control of its agents and was in overall control of the transactions with which the agents provided assistance. The Importer’s overall control over its agents suggests the existence of a bona fide buying agency arrangement.
Another factor to consider is the transaction documents. An invoice or other documentation from the actual foreign seller to the buyer is required in order to establish that the agent is not a seller and to determine the price actually paid or payable to the seller. See HQ 544965 (February 22, 1994). CBP Regulatory Auditors reviewed sample transaction documents on the Importer’s Chinese purchases during the years 2000 through 2004. These documents included entry summaries, commercial invoices, waybills, banking remittances and invoices for agency services. This office has also reviewed these documents, and concludes that they were sufficient to show that the Chinese suppliers were the sellers and that the agents were not acting as sellers. See, e.g., Invoice of October 21, 2003 from [Factory X] for the account of the Importer; Invoice of October 22, 2003 from [Factory Y] for the account of [XXX] Division of the Importer; Invoice from October 28, 2003 from [Factory Z] for the account of the Importer.
In this regard the agent would not typically take title to the merchandise. Also, an agent typically will not bear the risk of loss for imported merchandise. J.C. Penney Purchasing Corp., 451 F. Supp. at 986. Finally, another factor indicating that the purported agent may be an independent seller is whether the importer absorbs the costs of shipping and handling of the merchandise. New Trends, Inc., 645 F. Supp at 960. The transaction documents support Importer’s position that it paid all shipping and handling costs from the seller’s door to the U.S. location. Therefore, the agents did not absorb the cost of shipping and handling of the merchandise. With respect to passage of title and risk of loss, the invoices reviewed designate the term of sale as FOB Hong Kong. “FOB” or “Free on Board” is a term of sale, which means that the “seller must deliver the goods…at the named port of shipment and in the manner customary at the port on board the vessel nominated by the buyer.” See Incoterms 2000, 50 (1999). Consequently, the seller assumes the risk of loss of or damage to the goods until the goods pass the ship’s rail at the named port of shipment. Id. Therefore, it appears that the Importer bore the risk of loss for the merchandise from the time of delivery to the conveyance at the place of export. In sum, the available transaction documents show that the agents in these transactions were not independent sellers.
HOLDING:
The importer has met its burden to demonstrate the existence of a bona fide buying agency with respect to commissions paid to its Brazilian agent beginning with the 2002 agency agreement between the Importer and [“E” (and later, “F”)]. These commissions are not included in transaction value. The Importer’s Brazilian commission payments that were made prior to February 2002 are dutiable because they were paid while defective buying agency agreements were being used. Commissions paid by the Importer in connection with its purchases from China are not included in transaction value because they were incurred as the result of services provided under the terms of a bona fide buying agency agreement.
This decision should be mailed by your office to the party requesting Internal Advice no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to CPB personnel, and to the public on the CPB 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,
Monika R. Brenner,
Chief
Valuation and Special Programs Branch