HQ 544965

February 22, 1994

VAL CO:R:C:V 544965 ILK

CATEGORY: Valuation

Area Director

Kennedy Airport Area

Jamaica, New York

Re: Dutiability of Commissions Paid to Purported Buying Agent

Dear Sir:

This is in response to a letter of March 31, 1992 from John

Pellegrini on behalf of his client, Teximpor, Inc. (hereinafter

referred to as the \"importer\"), regarding whether a fee paid to

Epic Designers Ltd. (hereinafter referred to as \"EDL\"), a

purported buying agent, is dutiable. The request was followed by

a July 23, 1992 meeting between Mr. Pellegrini and members of my

staff in the Value and Marking Branch. Subsequently, Mr.

Pellegrini made an additional submission dated August 5, 1992,

and one dated October 5, 1993. Customs in the Kennedy Airport

Area and the importer agreed to submit this matter to

Headquarters for a ruling. Because this matter concerns ongoing

transactions and entries presently before Customs, we are

treating this matter as a request for internal advice and are

responding accordingly. The Regulatory Audit Division, New York

Region has made a submission to this office, dated December 16,

1993, which discusses various audit findings and concerns

regarding the issue presented herein. We have reviewed the

points raised in the submission, and find that they do not impact

this decision. We regret the delay in responding.

FACTS:

The importer, a U.S. corporation, imports wearing apparel

from numerous sources, including Hong Kong, the People\'s Republic

of China, India, Bangladesh, the United Arab Emirates, Turkey,

Indonesia, Oman and Bahrain. The request claims that EDL acts as

a buying agent for the importer in Bahrain, Bangladesh, Hong

Kong, Indonesia, Macau, Oman, the People\'s Republic of China and

the United Arab Emirates. The arrangement between the importer

and EDL is documented in a written \"Buying Agency Agreement\"

dated October 5, 1985 (hereinafter referred to as the

\"Agreement\"). The Agreement provides that EDL will represent the

importer \"to handle all purchases of wearing apparel from various

countries to USA,\" will send purchase orders to sellers and

assist the importer in selecting factories and/or exporters, will

process the orders, will obtain quotas where necessary and

inspect the merchandise and issue inspection certificates. The

agreement further provides that the importer will open letters of

credit in favor of the \"exporter\" and must make all claims for

defective merchandise within seven days of receipt of the

merchandise by the importer. The request claims that the

Agreement requires EDL to perform such services as identifying

reliable manufacturers, developing information about the general

level of market prices and market conditions, obtaining offers,

assisting in export and distribution of merchandise and

preparation of documentation. The importer pays EDL a commission

of ten percent of the FOB price of the imported merchandise.

According to the request, commission payments are made on a

periodic basis, based upon EDL\'s invoice. The request states

that EDL bears no risk for lost or defective merchandise, that

the importer could deal with the sellers directly, and that EDL

bears no responsibility for shipping or handling of the

merchandise.

The importer employs two methods of operation. Under the

first method (operation 1), the importer opens a blanket

transferable letter of credit naming EDL as beneficiary, and EDL

arranges for letters of credit naming the sellers of the

merchandise as beneficiaries. EDL\'s commission is not included

in the letters of credit. The request states that in these

instances the purchase order is also opened to EDL. Under the

second method of operation (operation 2), the importer opens the

letter of credit and the purchase order to the seller of the

merchandise. Attached to the request are copies of transaction

documentation reflecting each of the two methods of operation.

Exhibit B, for operation 1, contains the importer\'s purchase

order identifying EDL as the agent and not identifying any

foreign vendor, a letter of credit to EDL, and a commercial

invoice from the foreign seller to the importer. Exhibit C, for

operation 2, contains the importer\'s purchase order identifying a

foreign vendor and EDL as the agent, a letter of credit to the

foreign seller, and an invoice from the foreign seller to the

importer. In exhibits B and C the letters of credit are in

amounts significantly greater than the FOB price contained on the

invoice. In Exhibit B the invoice is for \$16,734.75 and the

letter of credit is for \$1,500,000.00. In Exhibit C the invoice

is for \$51,454.30, and the letter of credit is for \$161,400.00.

In neither exhibit do the purchase orders indicate any unit price

or total price for the subject merchandise, and only in Exhibit C

does the letter of credit indicate a unit price. In Exhibit B

the letter of credit states that the unit price of the

merchandise \"will be as per contract issued by \[EDL\].\" With the

October 5, 1993 submission, the importer has provided us with a

copy of a contract issued by EDL which contains a unit and total

price, references the importer\'s purchase order and shows the

importer as the consignee of the merchandise.

Also attached to the request as exhibits are EDL\'s

registration in Hong Kong as an agent for the importer, an EDL

debit note showing the purchase of 1000 dozen permanent quota

purchased on behalf of the importer, EDL\'s statement of account

to the importer for its commissions, EDL\'s claim against a seller

for defective merchandise (which claim does not identify the

importer) and EDL\'s subsequent credit note to the importer for

the amount of the value of the defect, and the affidavit of a

manager of EDL. The affidavit states that when the importer

forwards purchase orders to EDL, the ultimate choice of vendor

lies with the importer, and EDL does not have authority to select

a seller, EDL does not operate a warehouse or hold inventory, EDL

is not affiliated with any of the vendors with whom it deals, and

EDL does not share its commissions with any of the vendors. The

affidavit also states that approximately twenty percent of EDL\'s

business is as a seller, however, never with respect to the

importer.

The August 5, 1992 submission contains documentation of

three transactions in which EDL is claimed to have acted as an

agent. The three sets of documents consist of 1) one or a series

of purchase orders from the importer, 2) a written confirmation

from EDL stating that the purchase order had been placed and the

unit price of the merchandise, 3) a letter of credit naming

either EDL or the seller (in the transaction in which EDL is

named as beneficiary the letter of credit was transferred from

EDL to the seller), 4) the importer\'s shipping instructions, 5)

the seller\'s invoice to the importer and 6) letter of credit

advice showing payment to the seller. None of the purchase

orders contain any price information. The price is stated by EDL

in its confirmation letter. With respect to one of the

transactions (identified as Transaction I), in its confirmation

letter EDL advises:

The price negotiated is US43.00 per dozen. We feel

this is the most competitive price and request you to

please accept same.

One of the letters of credit states that the unit price and

quantity will be \"as per contract issued by \[EDL\].\" Again, with

the October 5, 1993 submission the importer has provided us with

a copy of a contract issued by EDL which contains a unit and

total price, references the importer\'s purchase order and shows

the importer as the consignee of the merchandise.

The importer has been audited by Customs\' Regulatory Audit

Division with regard to its transactions with EDL. With respect

to the issues herein, Customs Audit Report 212-91-FRO-001, dated

May 26, 1992, found the following: 1) according to a Dun &

Bradstreet International Report, EDL is an independent exporter

of ladies and men\'s garments whose production process is

subcontracted to local manufacturers with raw material and

designs provided by EDL; 2) the importer\'s purchase orders to EDL

were silent as to the manufacturer\'s name and unit price, and

that EDL is not controlled by the importer; and 3) the importer

pays EDL for design expenses. It is the opinion of the

Regulatory Audit Division that the ten percent commission paid to

EDL is in excess of the standard buying commission.

It is the position of the importer that EDL is a bona fide

buying agent for the importer, and that the commissions paid to

EDL by the importer are not dutiable. With respect to the audit

finding that the importer pays EDL for design expenses, at the

meeting of July 23, 1992, on behalf of the importer it was

represented that the merchandise is \"designed\" in New Jersey, and

that the importer pays no design fees to EDL.

ISSUE:

Whether the described services provided by the agent are

those of a bona fide buying agent.

LAW AND ANALYSIS:

We are assuming, for the purposes of this ruling that

transaction value is the appropriate basis of appraisement.

We must examine all relevant factors in deciding whether a

bona fide agency relationship exists. In Pier 1 Imports, Inc. v.

United States, 13 CIT 161, 708 F.Supp. 351 (1989) and Rosenthal-

Netter, Inc. v. United States, 12 CIT 77, 679 F. Supp. 21, aff\'d.

861 F.2d 261 (Fed. Cir. 1988), the court set forth factors to

consider in deciding whether a bona fide agency relationship

exists. The first factor is the right of the principal to

control the agent\'s conduct. In Rosenthal-Netter, in examining

the control the importer had over the agent, the court considered

the importer\'s control over the choice of manufacturers, over the

handling and shipment of the imported merchandise and over the

manner of payment. In this case the total price and unit price

is provided to the vendor by a contract from EDL which references

the importer\'s purchase order. Of the two purchase orders

attached to the request only one (exhibit C) identifies a vendor,

but the purchase orders contained in the August 5, 1992

submission do indicate the name of a manufacturer. In Rosenthal-

Netter the court held that \"failure to substantiate the names of

manufacturers is evidence that no agency relationship existed.\"

679 F.Supp. at 23. The August 5, 1992 submission contained

copies of explicit shipping instructions from the importer. EDL

does not appear to absorb the costs of shipping and handling,

which fact supports finding the existence of a buying agency

relationship. According to the documents attached to the request

and the request itself, EDL is given letters of credit from which

to pay the suppliers. The letters of credit are for amounts in

excess of the invoice amounts, leaving the importer with no

apparent control over the amount to be paid to the suppliers, but

the October 5, 1993 submission contained invoices from the

sellers to the importer, indicating the amounts to be paid.

Further, the August 5, 1992 submission contains letters of credit

issued in favor of the sellers as opposed to the agent. In

Rosenthal-Netter, where the importer had opened letters of credit

in favor of the intermediary from which the intermediary deducted

its commissions, handling charges, etc. the court found that the

importer had failed to control the manner of payment. In this

case however, according to the request, EDL does not deduct its

commissions from the letter of credit.

In J.C. Penney Purchasing Corp. et al. v. United States, 80

Cust. Ct. 84, C.D. 4741, 451 F. Supp. 973 at 983 (1978), the

court stated that in finding the existence of an agency

relationship, it attributed significance to the fact that the

importer actually visited factories and participated in

negotiations with the factory. In this case there is no evidence

that the importer had such contact with the vendors. It appears

from EDL\'s confirmation letters that EDL negotiates the prices of

the merchandise with the sellers. However, there is evidence

that the importer must give final approval to the price

negotiated by EDL in the language of EDL\'s confirmation of the

importer\'s purchase order, where EDL recommends that the importer

accept the negotiated price (Transaction I of August 5, 1992

submission). From the foregoing facts it appears that the

importer generally does have control over the selection of the

foreign vendor, shipment of the merchandise, the payment of

commissions to EDL and payment to the vendor for the merchandise.

The second factor to consider is the transaction documents.

In this case the debit note stating a claim for defective

merchandise, from EDL to a the vendor (exhibit G to the request),

does not identify the importer as the party making the claim

anywhere on the document. However, the remaining documentation

does identify the importer. With respect to the other documents,

an invoice or other documentation from the actual foreign seller

to the buying agent 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 U.S. Customs Service General Notice,

Customs Bulletin dated March 15, 1989, which cites Headquarters

Ruling Letter 542141 (HRL) dated September 29, 1980, also cited

as TAA No. 7. With its August 5, 1992 submission the importer

has submitted invoices from the sellers for the imported

merchandise, which invoices are to the importer. Assuming that

the weight of other factors supports the finding of a bona fide

buying agency, the seller\'s invoice to the importer is sufficient

for the purpose of establishing that the agent is not a seller

and determining the price actually paid or payable.

The third factor to consider is whether the importer could

have purchased directly from the manufacturers without employing

the agent. The request asserts that the importer could deal with

the sellers directly. The fact that the importer has the

opportunity to purchase merchandise directly supports a finding

of the existence of a buying agency.

The fourth factor to consider is whether the intermediary

was operating an independent business primarily for its own

benefits. In Rosenthal-Netter the court cites the Restatement

(Second) of Agency section 14K comment a (1958) for \"factors to

assist in determining when one is selling to, as opposed to

acting as an agent for, the alleged principal\":

\(1\) That he is to receive a fixed price for the property,

irrespective of the price paid by him. This is the most

important. (2) That he acts in his own name and receives

the title to the property which he thereafter is to

transfer. (3) That he has an independent business in buying

and selling similar property.

Rosenthal-Netter, 679 F.Supp. at 25. With respect to the third

factor of the Restatement (Second), according to the request and

the audit report, at least 20% of EDL\'s business consists of

selling mens and ladies apparel, thus EDL has an independent

business in buying and selling property similar to the subject

merchandise. However there is no evidence of the first two

factors, therefore there is little indication that EDL is acting

for its own benefit in transactions involving the importer.

The fifth factor is the existence of a buying agency

agreement. A buying agency agreement exists in this case,

however, from the documentation submitted on behalf of the

importer it appears that EDL\'s actions are not entirely

consistent with the terms of the Agreement. For example in

operation 1 the importer opens the letter of credit in favor of

EDL as opposed to the exporter as provided in the Agreement.

This is evidenced in Exhibit B. It is the position of Customs

that \"having legal authority to act as buying agent and acting as

buying agent \[are\] two different matters\" and Customs is entitled

to examine evidence which proves the latter. U.S. Customs

Service General Notice, 11 Cus. Bull. & Dec. 15 (March 15, 1989).

See also Pier 1 Imports, supra; Jay-Arr Slimwear Inc. v. United

States, 12 CIT 133, 681 F. Supp. 875 (1988); and Rosenthal-

Netter, supra. In this case, although the parties do not adhere

strictly to the terms of the Agreement, we are still required to

determine whether the agent acts as a bona fide buying agent.

We have ruled that \"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.\"

HRL 542141 dated September 29, 1980. Although no single factor

is determinative, the primary consideration is the \"right of the

principal to control the agent\'s conduct with respect to the

matters entrusted to him.\" J.C. Penney Purchasing Corp., 451

F.Supp. at 983. Based on the facts before us we are satisfied

that the importer has exercised a sufficient degree of control

over the agent, and find that the totality of the evidence

demonstrates that EDL is in fact a bona fide buying agent and not

a selling agent or an independent seller. Therefore, we conclude

that the fees paid to EDL constitute bona fide buying

commissions, and are not included in the transaction value of the

imported merchandise.

One issue not addressed in the importer\'s submissions and in

the audit is whether there is a relationship between the importer

and EDL. For the purposes of this ruling, it is assumed that a

relationship does not exist. If it does exist, it must be

disclosed to the appraising officer, as such related party

transactions are subject to close scrutiny, and it may be

determined that a bona fide buying agency relationship does not

exist. HRL 544396 dated May 14, 1990; Bushnell International,

Inc. v. United states, 60 C.C.P.A. 157, 477 F.2d 1402 (1973).

HOLDING:

Based on the totality of the evidence presented it is our

conclusion that the commissions paid to EDL to perform the

services in conjunction with the purchase of the imported

merchandise are bona fide buying commissions, and the commissions

are not included in the transaction value of the imported

merchandise.

This decision should be mailed by your office to the

internal advice requester no later than 60 days from the date of

this letter. On that date the Office of Regulations and Rulings

will take steps to make the decision available to Customs

personnel via the Customs Rulings Module in ACS and the public

via the Diskette Subscription Service, Lexis, Freedom of

Information Act and other public access channels.

Sincerely,

John Durant, Director

Commercial Rulings Division