HQ 545038: Response to request for internal advice 35/92; dutiabilityof buying commission

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 545038

                        February 17, 1993
VAL CO:R:C:V 545038 ILK

CATEGORY: Valuation

Area Director
JFK Airport

RE:   Response to request for internal advice 35/92;  dutiability
of buying commission

Dear Sir:

     This is in response to your request for internal advice
dated June 25, 1992 (and accompanying May 20, 1992 submission),
pertaining to the dutiability of a commission paid by xxxxxxxxxx
xxxxxxxxxx, Ltd. (hereinafter referred to as the "importer") to
xxxxxxxxxxx, Ltd. (hereinafter referred to as the "agent") with
respect to merchandise purchased from xxxxxxxxxxxx Ltd.
(hereinafter referred to as the "seller").  The importer has
submitted its position by its Request for Internal Advice dated
February 27, 1992.

FACTS:

     The importations consist of wearing apparel manufactured in
India.  The importer purchases merchandise from the seller.  The
importer claims in its submission that it has employed the agent
as a buying agent for many years, and that the agent acts as its
buying agent for purchases from Hong Kong, and other countries,
as well as India.  The agent is based in Hong Kong.  

     The importer has provided an agreement between itself and
the agent, dated July 18, 1989.  The agreement is stated to be
effective from January 1, 1985 and provides that the agent will
act as the exclusive buying agent for the importer and agrees to
perform the services of 1) assisting in price negotiation,
visiting the manufacturers and obtaining samples of merchandise
for submission to the importer, 2) placing orders with
manufacturers on behalf of the importer, acting only upon the
specific instructions of the importer, 3) arranging inland
freight, hauling, lighterage, insurance to steamer, storage, etc.
4) inspecting the quality of the merchandise, 5) forwarding
acknowledgements from the manufacturer to the importer and 6)
assisting in the return of merchandise deemed to be defective,
and assisting in the recovery of any amounts due to the importer
from the manufacturer as a result of defective merchandise,
shortages, etc.  The agreement provides that the agent shall
never act as a seller in any transaction involving the importer,
other than quota, which the agent may purchase on behalf of the
importer.  

     The importer agrees to compensate the agent on the basis of
15% of the f.o.b. price of the merchandise purchased by the agent
pursuant to the agreement.  The importer agrees to reimburse the
agent for all expenses incurred on behalf of the importer.  The
importer has the option of paying for the merchandise directly to
the manufacturer or through the agent.  In order to avoid quality
problems that can arise as a result of the seller's
subcontracting of the production, the importer has asked the
agent to "perform an inspection function which is in its view
substantially more comprehensive than is usual."  In a November
16, 1992 conversation with a member of my staff, counsel for the
importer stated that the agent monitors production throughout the
entire production process, not just upon completion of
production, and that the importer attributes its lack of quality
problems to the inspection undertaken by the agent.

     It was determined by Customs' interviews of the importer,
that the principals of the importer and the agent are brothers,
and the principal of the seller is a third brother's widow, who
became principal of the company after her husband's death.  In
November, 1992 conversations with a member of my staff, counsel
for the importer stated that the third brother had died in
December, 1988 and the two brothers and the widow have no common
businesses.  According to Customs' May 20, 1992 submission the
agent only orders from the seller or its subsidiaries.  According
to Customs, all of the subsidiaries are located at the seller's
address, use the same phone, telex and fax numbers, and use
similar invoice formats, which invoices are all signed by the
same authorized signatory.

     The Customs May 20, 1992 submission states that no evidence
has been provided that the agent seeks out any unrelated
suppliers in India, or that the agent provides any market or
price information from unrelated suppliers in India.  It is
stated that there is no evidence that the importer participates
in price negotiations, or ever returns merchandise to the agent.

     The importer has submitted a representative set of
transaction documents which include an entry summary, seven of
the nine seller's invoices covered by the entry, representing
shipment No.7032, an agent's inspection certificate covering
shipment No.7032, a commission invoice issued in connection with
shipment No.7032, a letter of credit from the account of the
importer in the amount of 5,000,000.00 Indian Rupees(IRS), naming
the seller as beneficiary, and a debit advice form showing
payment for shipment Nos.7032 and 7029 in the amount of
$45,552.68 (or IRS 741,900.38).  The seven invoices amount to an
F.O.B. value of IRS.269,400.00 and a C&F value of IRS.311,743.34. 
The entry summary shows the import date as July 8, 1989.

     It is the importer's position that the agent and seller are
not related parties within the meaning of the appraisement
statute, and that the commission paid to the agent is a non-
dutiable buying commission.

ISSUE:

     Whether the services provided by the agent are those of a
bona fide buying agent.

LAW AND ANALYSIS:

     From the submissions, it appears that the only issue before
Customs is whether a bona fide buying agency relationship exists
between the importer and agent.  We are able to determine the
buying agency issue without reaching the issue of whether the
buyer, seller and agent are related.    

     The services described above have long been considered
characteristic of a buying agency.  See e.g.., Jay-Arr Slimwear
Inc. v. United States, 12 CIT 133, 681 F.Supp. 875 (1988); J.C.
Penney Purchasing Corp. et al. v. United States, 80 Cust. Ct. 84,
C.D. 4741, 451 F. Supp. 973 (1978).  In addition, in Rosenthal-
Netter, Inc. v. United States, 12 CIT 77, 679 F.Supp. 21, aff'd.
861 F.2d 261 (Fed. Cir. 1988), the court noted that the factors
in deciding whether a bona fide agency relationship exists
include: the right of the principal to control the agent's
conduct, the transaction documents, whether the intermediary was
operating an independent business primarily for its own benefits,
and the existence of a buying agency agreement.  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."  Headquarters Ruling
Letter (HRL) 542141 dated September 29, 1980, also cited as TAA
No. 7.  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.  

     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,
Inc. v. United States, 13 CIT 161, 708 F.Supp. 351 (1989); Jay-
Arr Slimwear Inc., supra; and Rosenthal-Netter, supra.  Evidence
in addition to the agency agreement is particularly relevant in
this case, as the representative entry summary submitted
indicates an importation date prior to the execution of the
agency agreement.

     With respect to the transaction documents, we have required
that:

     [A]n invoice or other documentation from the actual
     foreign seller to the agent would be required to
     establish that the agent is not a seller and to
     determine the price actually paid or payable to the
     seller.

TAA No. 7; see also  23 Cust. Bull. & Dec. No.11 at 9 (March 15,
1989).  The exhibits to the importer's submission contain
invoices from the seller to the importer.  Assuming that other
factors support 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 to the seller.

      It has been held that an "agent's liability for lost or
damaged goods would also tend to indicate a sale rather than an
agency."  New Trends, Inc. v. United States, 10 CIT 637, 645
F.Supp. 957, 961 (1986).  According to the importer's submission
the agent does not bear the risk of loss, defective merchandise
or price fluctuation.

     In Jay-Arr Slimwear Inc. v. United States, the Court of
International Trade held that "commissions representing services
associated with the actual production of the merchandise are a
component of selling price and thus, dutiable."  The court
further stated that "similarly, inspection commissions were
considered part of the dutiable value of the goods where the
agent was to inspect all component pieces at each stage of
production," and that "the presence of this charge indicated that
the goods were quality controlled and therefore, these expenses
were incidental to placing the merchandise in condition packed
ready for shipment to the United States."  In this case, the
importer states in its submission that the agent's inspection
function is "substantially more comprehensive than is usual,"
takes place throughout the process in an effort to avoid quality
problems, and in fact, the importer attributes its lack of
quality problems to the inspection process.  

     Other than the extensive inspection services, the services
performed by the agent appear to be those usually performed by a
bona fide buying agent.  If the terms of the buying agency
agreement and those outlined above are met, we are satisfied that
the importer exercises the requisite degree of control over the
buying agent.  However, based on the importer's statement of
extensive quality inspections, and the commensurate 15% rate of
commission paid to the agent, and lack of an agency agreement at
the time the representative transactions occurred, we do not find
that the totality of the evidence indicates that the agent is in
fact a bona fide buying agent.  Therefore, we conclude that the
fees to be paid to the agent do not constitute bona fide buying
commissions and the fees are to be included in the transaction
value of the imported merchandise.
     
HOLDING:

     Consistent with the foregoing, based on the information
presented, we find that the relationship between the importer and
agent do not meet the criteria of a bona fide buying agency
relationship.

                                   Sincerely,


                                   John Durant, Director