HQ 545465: The Rockford Group, Inc.

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

 



                            HQ 545465

                          April 6, 1994

VAL-CO:R:C:V 545465 GG

CATEGORY:  Valuation

Mr. John F. McKenzie
Baker & McKenzie
Two Embarcadero Center
San Francisco, CA 94111-3909

RE:  The Rockford Group, Inc.

Dear Mr. McKenzie:

     This is in reference to your ruling request, dated November
4, 1993, submitted on behalf of the Rockford Group, Inc.
("Rockford"), in which you request a ruling that commissions to
be paid by importers to Rockford, in consideration for purchasing
agency services performed by Rockford, are bona fide buying
commissions and are, therefore, nondutiable.

FACTS:

     Rockford, a newly formed California corporation, plans to
perform purchasing agency services for various retail department
store chains in the United States.  The merchandise will be
footwear from Hong Kong, Taiwan and the People's Republic of
China.  The principals of Rockford were formerly employed by the
U.S. affiliate of Home Court Ltd., a Hong Kong-based supplier of
footwear.  These individuals have, however, terminated their
employment with, and have no further affiliation with, or
financial interest in, Home Court Ltd.  Currently neither
Rockford nor any of its principals owns, or has any financial
interest in, any manufacturer or supplier of footwear in the
three countries of manufacture.

     In each instance, Rockford will enter into a written
purchasing agency agreement with each of the U.S. department
store chains for which Rockford performs buying agency services. 
Rockford has enclosed with its ruling request a copy of an
unsigned proposed purchasing agency agreement that has been
submitted to it by an unidentified department store chain.  The
purchasing agency services, and the degree of control exercised
by the department store chain (the "importer") over the
activities of Rockford, is typical of the relationship that
Rockford contemplates having with each importer to which Rockford
proposes to offer its purchasing agency services.

     The type of services to be performed by Rockford include (i)
providing reports on market conditions and availability of
merchandise; (ii) obtaining samples of merchandise from
prospective suppliers, and obtaining the approval of such samples
by the importer; (iii) placing purchase orders with suppliers in
accordance with the importer's instructions; (iv) monitoring
quality control procedures with respect to the merchandise; (v)
reviewing the supplier's invoices and shipping documents to
assure compliance with the importer's policies and requirements;
and (vi) advising the importer of any defects in the merchandise
or noncompliance with the importer's policies and requirements.

     Rockford states that all of the purchasing agency services
it performs will be under the supervision and control of the
importer.  By way of example, Rockford's performance of such
services must conform to various "Agent Policies" established by
mutual agreement between the importer and Rockford.  Purchase
orders submitted by Rockford on behalf of the importer with
specific vendors must conform to vendor policies established by
the importer.  All of Rockford's books, records and accounts
relating to purchasing agency services performed by Rockford on
behalf of any specific importer will be subject to review and
audit by the importer, in order to permit the importer to verify
Rockford's conformance with the importer's policies and
procedures.

     Although Rockford will submit purchase orders to
manufacturers and suppliers of footwear in Hong Kong, Taiwan, and
the PRC, all such purchase orders will be submitted on behalf of,
and at the direction of, the importer.  On the basis of
information and samples provided to the importer by Rockford, the
importer will select the manufacturer or supplier to which each
purchase order will be issued.

     Rockford will not take title to any merchandise, and will
not bear any risk of loss if the merchandise is damaged or
destroyed in transit from the manufacturers' or suppliers'
facilities to the United States.  Each manufacturer and supplier
will issue its invoices directly to the importer, and all
payments of such invoices will be made directly from the importer
to the manufacturer or supplier.  Rockford's role with respect to
manufacturers' and suppliers' invoices will be limited to an
initial review, in order to assure that such invoices conform to
the vendor policies established by the importer.

     In consideration for its purchasing agency services,
Rockford will receive a commission from the importer, based upon
a percentage of all purchases made by the importer utilizing
Rockford's services.  Each commission payment will be made
directly by the importer to Rockford upon issuance by the carrier
of a bill of lading for the goods in question and upon Rockford's
issuance of an inspection certificate or similar quality control
verification.  Except for reimbursement of extraordinary expenses
incurred by Rockford at the specific request of the importer,
these commission payments constitute the sole compensation to
Rockford for its purchasing agency services.  Rockford will not
receive a commission or any other compensation from any
manufacturer or supplier in connection with any transaction for
which Rockford performs purchasing agency services for the
importer.

ISSUE:

     Whether, based on the information provided, bona fide buying
agency relationships exist between Rockford and the various
importers, such that the buying commissions paid by the importers
to Rockford can be treated as nondutiable.

LAW & ANALYSIS:

     For the purpose of this decision, we are assuming that
transaction value is the proper basis of appraisement. 
Transaction value is defined in Section 402(b)(1) of the Tariff
Act of 1930, as amended by the Trade Agreements Act of 1979 (19
U.S.C. 1401a(b); TAA) as the "price actually paid or payable for
the merchandise" plus amounts for the five enumerated statutory
additions in Section 402(b)(1).  Selling commissions incurred by
the buyer with respect to the imported merchandise are one of
those enumerated additions (Section 402(b)(1)(B) TAA); bona fide
buying commissions, however, are not a proper element of
transaction value.  See Pier 1 Imports, Inc. v. United States,
708 F. Supp. 351, 13 CIT 161, 164 (1989); Rosenthal-Netter, Inc.
v. United States, 12 CIT 77, 78, 679 F. Supp. 21, 23 (1988),
aff'd, No. 88-1294 (Fed. Cir. Nov. 10, 1988); Jay-Arr Slimwear,
Inc. v. United States, 12 CIT 133, 136, 681 F. Supp. 875, 878
(1988).

     A precondition for a finding that an amount in question is a
non-dutiable buying commission is the existence of a buying
agency relationship.  The importer has the burden of proving that
such a relationship exists, and that the charges paid were, in
fact, bona fide buying commissions.  See Rosenthal-Netter, 679 F.
Supp. at 23; New Trends, Inc. v. United States, 645 F. Supp. 957,
960, 10 CIT 637 (1986).

     Various factors are taken into account in determining
whether an agency relationship exists.  However, the primary
consideration is "the right of the principal to control the
agent's conduct with the matters entrusted to him".  See Pier 1
Imports, 13 CIT at 164 (quoting J.C. Penney Purchasing Corp. v.
United States, 80 Cust. Ct. 84, 95, C.D. 4741, 451 F. Supp. 973,
983 (1978)); Rosenthal-Netter, 12 CIT at 79, 679 F. Supp. at 23. 
The requirement that Rockford place purchase orders with
suppliers in accordance with the importer's instructions, and
that purchase orders submitted by Rockford on behalf of the
importer conform to vendor policies established by the importer,
is indicative of the importer's control over the purchasing
process.  The importer will select the manufacturer or supplier
on the basis of samples and information provided by Rockford. 
Control over the purchasing process is strong evidence that an
agency relationship exists.  See Rosenthal-Netter, 12 CIT at 80,
679 F. Supp. at 24; J.C. Penney, 80 Cust. Ct. at 95-96, 451 F.
Supp. at 983; Jay-Arr Slimwear Inc. v. United States, 12 CIT 133
at 137 (1988).  The fact that Rockford's books and records are
subject to review by the applicable importer is further evidence
of importer control.

     Compiling market information and inspecting goods are
services typically performed by a bona fide buying agent.  Jay-
Arr Slimwear, 12 CIT 133 at 137; J.C. Penney, 451 F. Supp. at
984.  Rockford intends to perform these functions.

     Another characteristic of an agency relationship is that the
risk of loss will not fall on the agent.  Pier 1 Imports, 708 F.
Supp. at 357; Rosenthal-Netter, 679 F. Supp. at 26; New Trends,
645 F. Supp. at 962.  Rockford will not take title to any
merchandise and will not bear the risk of loss.
     
     The manufacturer or supplier will issue invoices directly to
the importer, and all payments of such invoices will be made
directly from the importer to the manufacturer or supplier.  This
indicates that the buyer of the merchandise is the importer, not
Rockford. 

     The fact that Rockford will enter into written agency
agreements with each importer weighs in favor of a finding that
an agency relationship exists.  This is because a buying agency
agreement, if in existence, is another factor which supports an
agency relationship.  Rosenthal-Netter, 679 F. Supp. at 26; New
Trends, Inc., 645 F. Supp. at 960.

     An agent must be financially detached from the manufacturer
of the merchandise, and must show that none of the commission
inures to the benefit of the manufacturer.  New Trends, Inc., 645
F. Supp. at 962.  Rockford states that it will have no ownership
or financial interest in any of the manufacturers or suppliers of
the merchandise, and none of the commissions paid to the
purchasing agent will inure to the benefit of any supplier of
that merchandise.  Further, Rockford will be prohibited from
obtaining such a financial interest in any manufacturer or
supplier by the terms of Rockford's purchasing agency agreement
with each importer.

     Based on the information submitted with the ruling request,
i.e. counsel's explanation and the sample buying agency
agreement, the proposed arrangements between Rockford and the
various importers would appear to satisfy the criteria of a bona
fide buying agency relationship.  As long as Rockford remains
under the control of the various importers/principals, and the
transactions are documented in accordance with the legal
requirements set forth above, the buying commissions at issue
appear to qualify for non-dutiable status as bona fide buying
commissions.

HOLDING:

     If the actions of the parties conform to the descriptions
provided by counsel regarding the subject prospective
transactions, and the terms of the various agency agreements are
met to the extent that the importers will exercise the requisite
degree of control over the buying agents as specified in the
agreements, it is our conclusion that the commissions to be paid
to Rockford are to be considered bona fide buying commissions.

     Please note, however, that the degree of control exerted
over the agents is factually specific and could vary with each
importation.  The actual determination as to the existence of a
bona fide buying agency will be made by the appraising officer at
the applicable port of entry.

                               Sincerely,



                               John Durant
                               Director, Commercial
                               Rulings Division