OT:RR:CTF:VS H315944 RMC
Center Director
Automotive and Aerospace Center of Excellence and Expertise
U.S. Customs and Border Protection
477 Michigan Ave., Rm 281
Detroit, MI 48226
RE: Application for Further Review of Protest No. 4601-19-106281; Buying Agency; Commissions
Dear Center Director:
This is in response to the Application for Further Review ("AFR") of Protest No. 4601-19-106281, timely filed by counsel for Leviathan Corporation, contesting the appraised value of truck tires imported from China.
FACTS:
The transaction under review involves three parties: (1) Leviathan Corporation ("Leviathan"), a U.S. entity and the importer of record; (2) Tianjin Leviathan Corporation ("Tianjin"), a wholly-owned subsidiary of Leviathan Corporation organized under the laws of China; and (3) Shandong Haohua Tire Co. ("Shandong"), an unrelated Chinese tire manufacturer. The proper appraisement of the imported truck tires at issue in this case turns on whether Tianjin acted as a buyer and seller of the merchandise, as the Center of Excellence and Expertise ("Center") contends, or as a buying agent on behalf of Leviathan, as counsel asserts.
On October 12, 2018, Tianjin issued a purchase order to Shandong for 254 tires at a FOB unit price of $121.00, for a total of $30,734.00. The buyer is listed is Leviathan, while Tianjin is listed as the finance affiliate in China. The purchase order states that the tires are to be shipped from Qingdao, China to New York, NY. The purchase order was stamped by both Shandong and Tianjin.
On that same day, Shandong issued a corresponding sales contract. The terms are identical to those listed in the purchase order except that the "buyer" is listed as Tianjin, rather than Leviathan. The commercial invoice submitted with the entry was issued by Tianjin and dated October 22, 2018. It lists Tianjin as the "supply/finance" party, Shandong as the "manufacturer/exporter," and Leviathan as the "purchaser." The FOB value is listed as $30,734.00, with separately listed commissions for $2,151.36, with $32,885.38 as the "amount payable at due date on 120 days from the Bill of Lading."
The bill of lading lists Shandong as the shipper and the "consigned to" party as Leviathan. The document indicates direct shipment from Qingdao, China, to New York, NY. The arrival notice/freight bill lists the "notify and bill to" party as Leviathan.
Based on the documents submitted to it, and particularly the sales contract listing Tianjin Leviathan as the "buyer" and the commercial invoice that was issued by Tianjin, the Center concluded that Tianjin was acting as a buyer/seller of merchandise, rather than as a buying agent on behalf of Leviathan. As a result, it disallowed the deductions for commissions that Leviathan and liquidated the entries with an appraised value of $32,885.38.
In this AFR, Leviathan provided additional documentation and argues that the Center improperly added legitimate buying commissions to the declared value of its imported goods. According to Leviathan, listing of Tianjin as a "buyer" on the commercial invoices was done solely to facilitate the favorable financing arrangement described in further detail below. In fact, Leviathan argues, the parties acted in accordance with the written buying agency agreement, which outlines roles and responsibilities typical of buying agents. In sum, Leviathan asserts that the substance of the transactions and conduct of the parties, rather than the labels used on the commercial invoice and sales contract, demonstrate that Tianjin Leviathan was, in fact, a legitimate buying agent. Therefore, it argues that the declared value was correct.
According to the information provided, the Chinese government issued a "Certificate of Approval for the Establishment of Enterprises with Foreign Investment" to Tianjin on July 16, 2005. The sole investor listed on the document is Brian David Cohn, the owner of Leviathan. The authorized "business scope" is described as "international trade and related simple processing, bonded goods storage services, and consulting services related to business scope." By an authority letter signed by Brian Cohn as President of Leviathan on November 23, 2005, Mr. Sun Bao Dong was appointed as vice president of Tianjin and was "delegate[d] [Brian Cohn's] power to transact all business in China."
In December of 2013, Leviathan and Tianjin entered into a "Buying Agency/Financing Agreement" ("Agreement") that was signed by both parties and provided for our review. The Agreement contains the following relevant terms:
1) Tianjin Leviathan Corporation will act as an exclusive Buying Agent for Leviathan Corporation in connection with the latter's purchase of tires in China, Korea, India, and other territories ("the Territories")
2) The Agent agrees to perform the following services on behalf of the Principal:
a. The Agent shall familiarize itself with the Principal's needs and survey the potential markets to obtain the best available merchandise;
b. The Agent will assist in the negotiation of the most favorable prices for the Principal. In this connection, the agent shall visit manufacturers/sellers, quoting prices at which the merchandise can be purchased;
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 buying commissions;
d. The Agent shall place orders with manufacturers/sellers on behalf of the Principal. The Agent shall act only on the specific instructions of the Principal and in no case shall the Agent act without such explicit instruction. . . .
e. The Agent shall make periodic visits to manufacturers/sellers where orders are placed in order to inspect the quality of the merchandise shipped to the Principal and to provide production progress reports to the Principal. . . .
f. The Agent shall arrange for the consolidation of shipments and, at the direction of the Principal, arrange for all inland freight, hauling, ligherage, insurance and/or storage. Moreover, the agent shall facilitate the acquisition of the documentation necessary for importation into the United States;
g. The Agent shall assist the Principal in the return of any merchandise deemed to be defective. . . .
h. The Agent shall familiarize itself with export restrictions in the Territories, and insure that the manufacturer provides all necessary licenses, permits, and other documents . .
. . . .
m. The Agent shall never act as a seller in any transaction involving the
Principal.
(3) The Principal agrees to compensate the Agent for any efforts to ensure the quality of the merchandise in an amount equal to four percent (4%) of the f.o.b. price of the merchandise which is ordered and shipped pursuant to this agreement.
. . .
(5) The principal shall open irrevocable letter(s) of credit in favor of the manufacturer/seller of the merchandise for the f.o.b. price of the merchandise.
(6) The Principal agrees to compensate the Agent an amount equal to three percent (3%) of the f.o.b. price of the merchandise which is ordered and shipped pursuant to this agreement as the cost for financing merchandise for up to ninety days (90).
In terms of payment, Tianjin paid Shandong the purchase price of $30,734.00 with financed funds that it obtained on behalf of Leviathan. According to Leviathan, having a Chinese domestic entity (i.e., Tianjin) obtain the necessary financing from the Bank of Tianjin allows the purchase to be financed at rates that are more favorable than those offered to foreign companies. Leviathan then paid Tianjin $32,885.38, which presents the purchase price of $30,734.00 plus Tianjin's 7% commission, which Tianjin retained.
To further explain this transaction structure, Leviathan submitted an affidavit from Zoe Wang, the sales manager for Shandong. The affidavit explains that:
. Shandong has previously met with both Brian Cohn and Tianjin and understands that the latter serves as local finance and buying agent for Leviathan but bears no personal responsibility for payment due from Leviathan Corp;
. Shandong does not sell nor physically ship tires to Tianjin, and its interpretation of the FOB sales terms is that title to all goods transfers directly from Shandong to Leviathan;
. All orders are for the account of Leviathan, and Shandong receives a Chinese VAT refund based on this export sale to Leviathan;
. All sales transactions must occur between Shandong and Leviathan, as Shandong is restricted under Chinese law from selling merchandise domestically to another Chinese entity; and
. Although Tianjin may assist with language differences and translations, purchase decisions, pricing, payment and warranty issues are often addressed directly with Leviathan.
Leviathan also submitted copies of emails between Brian Cohn, President of Leviathan, and Mr. Sun Bao Dong of Tianjin. In these emails, which are dated several days before Tianjin issued a purchase order to Shandong for the transaction under review, Mr. Sun Bao Dong asks for details of any new orders to be placed with suppliers. Mr. Cohn then directs Mr. Sun Bao Dong to purchase the merchandise. Regarding the price, Mr. Sun Bao Dong notes that Shandong will still keep the "old price" and that there is "really no negotiation room," as other suppliers had already increased prices due to the increased costs of raw materials and exchange rate fluctuations.
ISSUE:
Whether Tianjin acted as a buying agent whose commissions should be excluded from the transaction value of the imported merchandise.
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised for customs purposes in accordance with Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a). The primary method of appraisement is transaction value, which is defined as "the price actually paid or payable for the merchandise when sold for exportation to the United States," plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. 1401a(b)(1). For purposes of this decision, it is undisputed that transaction value is the appropriate method of appraisement.
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). As a general matter, bona fide buying commissions are neither part of the price actually paid or payable nor an addition thereto. Pier 1 Imports, Inc. v. United States, 708 F. Supp. 351, 13 CIT 161, 164 (1989); Rosenthal-Netter, Inc. v. United States, 679 F. Supp. 21, 12 CIT 77 (1988); Jay-Arr Slimwear, Inc. v. United States, 681 F. Supp. 875, 12 CIT 133 (1988).
The existence of a bona fide buying commission depends upon the relevant factors of each particular case. J.C. Penney Purchasing Corp. v. United States, 451 F. Supp. 973 (Cust. Ct. 1978); Nelson Bead Co., 42 CCPA 175, 183 (1955). However, the importer has the burden of proving that a bona fide agency relationship exists and that payments to the agent constitute bona fide buying commissions. Pier 1 Imports, 13 CIT at 164; Rosenthal-Netter, 12 CIT at 78; and New Trends, Inc. v. United States, 645 F. Supp. 957, 960, 10 CIT 637, 640 (1986). 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 Headquarters Rulings ("HQ") 542141, dated September 29, 1980, also cited as TAA No. 7.
In determining whether an agency relationship exists, the primary consideration is the right of the principal to control the agent's conduct with respect to those matters entrusted to the agent. Jay-Arr Slimwear, 681 F. Supp. at 879. The degree of discretion granted the agent is a further consideration. New Trends, 645 F. Supp. at 960. The existence of a buying agency agreement, moreover, has been viewed as supporting the existence of a buying agency relationship. Dorco Imports v. United States, 67 Cust. Ct. 503, 512, R.D. 11753 (1971). In addition, the courts have examined such factors as whether the purported agent's actions were primarily for the benefit of the principal; whether the agent was responsible for the shipping and handling and the costs thereof; whether the language used in the commercial invoices was consistent with a principal-agent relationship; whether the agent bore the risk of loss for damaged, lost or defective merchandise; and whether the agent was financially detached from the manufacturer of the merchandise. New Trends, 645 F. Supp. at 961-62.
Activities characteristic of those rendered by a buying agent include compiling market information, gathering samples, translating, placing orders based on the buyer's instructions, procuring the merchandise, assisting in factory negotiation, inspecting and packing merchandise and arranging for shipment and payment. See id.
Here, according to the information provided, including the Agreement and the uncontradicted statements in the affidavit from Shandong, Tianjin carried out activities consistent with a bona fide buying agency. Specifically, it surveyed the market, identified a supplier, inquired about and attempted to negotiate prices, assisted with translations, placed orders on Leviathan's instructions, and arranged for payment. Under the Agreement, Tianjin was authorized to act "only on the specific instructions" of Leviathan to make purchases on its behalf, and the email correspondence demonstrates that Tianjin placed the purchase order only after Leviathan directed it to do so. Shandong also understood that Tianjin was the local finance and buying agent for Leviathan and that all orders placed by Tianjin were for Leviathan, which had sole liability for payment. Furthermore, as evidenced by the bill of lading and freight documents, Leviathan paid for international freight and received the goods directly from Shandong.
Moreover, there is no evidence that Tianjin Leviathan accepted title or risk of loss for the goods. As noted in paragraph (m) of the Agreement, "[Tianjin Leviathan] shall never act as a seller in any transaction involving [Leviathan]." As detailed in the affidavit, Shandong's understanding and interpretation "of the FOB sales terms is that title to all goods transfers directly from [Shandong] to Leviathan." The affidavit also states that Shandong was prohibited under Chinese law from selling to other domestic firms such as Tianjin.
Although the Center expressed concerns that Tianjin issued the commercial invoice provided at entry and was listed as the "buyer" on the sales contract, these facts alone do not void a legitimate buying agency. In HQ 545988, dated May 18, 1995, Customs considered a buying agency in which "the structure of the transactions . . . at times require[d] that the [related] buying agent act as 'purchaser' of the merchandise from the factory." In such cases, the buying agent opened a letter of credit for payment to the factory, the buying agent paid the seller the purchase price, and the importer then paid the buying agent the purchase price plus its commission. The importer stated that this was "purely an administrative and financial convenience" for the importer, and that the agent was acting exclusively on the importer's behalf. The buying agent generally did not take actual possession of the merchandise, although that it would occasionally hold goods for the importer in its warehouse either for inspection or for consolidation with later shipments.
Customs emphasized that neither the relationship between the importer and the purported agent nor the method of payment negated an otherwise legitimate buying agency. Furthermore, we noted that:
Finally, Customs has consistently held that an invoice or other documentation from the actual foreign seller to the agent 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. Headquarters Ruling No. 542141 dated September 29, 1980 (TAA No. 7). In this regard, the buying agency commissions should be shown separately from the price actually paid or payable for the imported merchandise. Documentation showing the identity of, and the price charged by the seller, is required.
Here too the importer and the purported agent are related, and the purported agent is listed as the "buyer" on the sales contract. As in HQ 545988, listing the purported agent as the "buyer" on the transaction documents was for the financial convenience of the importer-namely, to obtain more favorable financing terms available only to domestic Chinese firms. In neither case was there any evidence that the purported agent actually took title and risk of loss for the merchandise, and here the purported agent never took physical possession of the goods.
The transaction documents also show that the flow of payments worked similarly: the agent obtained financing on behalf of the principal, the agent paid the factory the purchase price, and the importer paid the agent the purchase price plus the agent's commission. This is evidenced by the sales contract concluded with Shandong clearly indicating the total price of $30,734.00. The commercial invoice submitted with the entry, which was issued by Tianjin, lists the FOB value as $30,734.00, with separately listed commissions for $2,151.36, and $32,885.38 as the "amount payable at due date on 120 days from the Bill of Lading." The payment information indicates that Tianjin paid Shandong the purchase price $30,734.00 and was subsequently reimbursed by Leviathan for $32,885.38, representing the purchase price plus Tianjin's commission of $2,151.36.
Accordingly, based on the totality of the evidence, we are satisfied that Tianjin Leviathan was acting as a bona fide buying agent on behalf of Leviathan, rather than as a buyer and seller of merchandise.
HOLDING:
The protest should be granted. Tianjin acted as a buying agent whose commissions should be excluded from the transaction value of the imported merchandise.
You are instructed to notify the importer, through the importer's counsel, of this decision no later than 60 days from the date of this decision. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to this notification. Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel and the public on the Customs Rulings Online Search System (CROSS) at https://rulings.cbp.gov/, or other methods of public distribution.
Sincerely,
For Yuliya A. Gulis, Director
Commercial and Trade Facilitation Division
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U.S. Department of Homeland Security
Washington, DC 20229
U.S. Customs and Border Protection