VAL-CO:R:C:V 544894 GG
Mr. Robert W. Nordness
Area Director, Western Great Lakes Area
U.S. Customs Service
110 S. Fourth Street
Minneapolis, Minnesota 55401
RE: IA 64/91; transaction value; existence of non-dutiable
buying commission; xxxxxxx Chemical Company
Dear Mr. Nordness:
This is in response to the internal advice request
referenced above, which originated in your office (CLA-1-
GL:DU:CO:IS BAA, dated October 10, 1991) and asks whether
payments made by xxxxxxx Chemical Company to three overseas
affiliates were non-dutiable buying commissions.
FACTS:
The following facts are based on written statements made by
counsel for xxxxxxx. Those statements were derived from
affidavits of Mr. xxxxxxx xxxxxxxxxx, Vice President and
Treasurer of xxxxxxx; of Mr. xxxxxxx xxxx xxxxxxxxx, a director
of xxxxxxx UK; and of Mr. xxxx xxxxxxxxxxx, a financial officer
of xxxxxxx Chemie. No documents were presented with the
statements to verify their accuracy. Our response is based on
the premise that these facts are accurate.
xxxxxxx Chemical Company, Inc. ("xxxxxxx") is a wholly owned
U.S. subsidiary of xxxxx-xxxxxxx Corporation, a Delaware
corporation. xxxxxxx develops, manufactures, purchases and sells
chemicals and organic and inorganic compounds. It purchases many
of the chemicals and compounds from suppliers located worldwide.
Approximately 90% of xxxxxxx's overseas purchases are made
through three affiliates: xxxxxxx Japan, Inc. ("xxxxxxx Japan"),
a Delaware corporation owned by xxxxxxx, with a branch in Tokyo;
xxxxxxx Chemie GmbH K.G. ("xxxxxxx Chemie"), a wholly owned
subsidiary of xxxxxxx organized under the laws of Germany; and
xxxxxxx Chemical Co., Ltd. ("xxxxxxx UK"), an "indirectly wholly
owned subsidiary" of xxxxx-xxxxxxx organized under the laws of
England.
xxxxxxx Japan was established in 1978 to serve as xxxxxxx's
marketing representative in Japan. It markets xxxxxxx's products
as well as those made by other subsidiaries or affiliates of
xxxxx-xxxxxxx, and assists independent dealers through whom
products of such affiliates are sold in Japan. xxxxxxx claims
that xxxxxxx Japan also acts as its buying agent in Japan.
xxxxxxx Chemie and xxxxxxx UK are distributors of xxxxxxx
products in Europe. They also purchase, manufacture and sell
chemicals and inorganic and organic compounds for their own
account; on occasion, xxxxxxx buys their products. xxxxxxx
states that xxxxxxx Chemie and xxxxxxx UK, for reasons both of
convenience and economics, also serve as xxxxxxx's buying agents.
xxxxxxx states that it is free to purchase directly from
suppliers in Japan, Germany and the United Kingdom.
There is no written buying agency agreement between xxxxxxx
and xxxxxxx UK or xxxxxxx Chemie; however, xxxxxxx reportedly
pays xxxxxxx UK a 10%, and xxxxxxx Chemie a 5%, buying
commission. xxxxxxx and xxxxxxx Japan signed a document entitled
"Amendment to the Commission Agreement", dated December 31, 1986,
in which xxxxxxx agreed to pay a 5% "purchasing services fee" for
xxxxxxx Japan's services as a buying agent. The original
commission agreement has not been produced by xxxxxxx.
Prior to 1990 all invoices from the affiliates to xxxxxxx
omitted any reference to buying commissions. The invoices were
on the affiliates' letterheads, and the affiliates were listed as
the seller. xxxxxxx states that the price of the merchandise
reflected on the invoices sent by all three affiliates to xxxxxxx
was usually identical to the price reflected on the invoices for
such goods from the supplier; occasionally, however, there were
minor differences between the price reflected on the computer
generated invoice sent by xxxxxxx Chemie and the actual price
charged by the supplier, reportedly caused by out-of-date prices
still being in the computer. In no instance, xxxxxxx asserts,
was a profit or mark-up added to a buying affiliate's price.
Invoices for payment of the commissions were never shown to
Customs and were paid by xxxxxxx without notifying the agency.
Since April 1990, xxxxxxx began to require the affiliates to
disclose commissions as separate line items on each invoice, and
on January 23, 1991, xxxxxxx made a prior disclosure to Customs
in regard to the commissions.
To prove that a bona fide buying agency relationship existed
between itself and the three affiliates, xxxxxxx states that it
specified the type, quantities and price of the chemicals and
compounds to be purchased, and indicated from which manufacturer
or supplier they were to be acquired. The affiliates had no
authority to go beyond xxxxxxx's instructions. xxxxxxx UK and
xxxxxxx Chemie obtained most of xxxxxxx's orders from sole or
historic source manufacturers, and were under standing orders
from xxxxxxx to obtain sole or historic source items at the last
price quoted. Price changes in every instance had to be approved
by xxxxxxx. xxxxxxx states that the prices for the merchandise
reflected on the invoices it received from the three affiliates
were identical to the prices charged by the suppliers or
manufacturers.
In addition to their purchasing duties, the affiliates
conducted market research and provided information to xxxxxxx on
the sources of supply of chemicals and compounds, gathered
samples of merchandise at xxxxxxx's request, and generally kept
xxxxxxx informed about chemical developments in their respective
areas. They also acted as a liaison between manufacturers and
suppliers and xxxxxxx and other subsidiaries, arranged for the
packing and shipment of the chemicals and compounds to xxxxxxx,
and on occasion helped xxxxxxx obtain replacements for non-
conforming merchandise. xxxxxxx UK and xxxxxxx Chemie also
performed initial quality control testing for xxxxxxx.
xxxxxxx states that the affiliates had no interest in, or
received any remuneration from, any supplier or manufacturer from
whom they purchased chemicals or compounds for xxxxxxx. No part
of the commissions received by the affiliates from xxxxxxx was
paid to, or directly or indirectly benefited, a supplier or
manufacturer. In most instances the suppliers and manufacturers
were aware that xxxxxxx Japan, xxxxxxx UK and xxxxxxx Chemie were
buying for xxxxxxx's account.
The buying affiliates were not at risk with respect to the
merchandise they purchased on xxxxxxx's behalf. xxxxxxx sent
regular wire transfer payments to cover the affiliates' invoices;
the affiliates then paid the suppliers and manufacturers out of
these funds. The affiliates were reimbursed by xxxxxxx for any
freight or Customs charges incurred upon the importation of
xxxxxxx's purchases. xxxxx-xxxxxxx insurance covered the
shipment of merchandise from the affiliates to xxxxxxx.
xxxxxxx sometimes bought from xxxxxxx UK chemicals and
compounds made by xxxxxxx UK and the other affiliates. In such
transactions, xxxxxxx paid a 10% handling or service fee, or
commission, to xxxxxxx UK. Prior to April 1990, this charge was
not included on the invoices and entry documentation. Since that
time, xxxxxxx required its UK affiliate to disclose the 10%
charge as a separate line item on each invoice for goods
manufactured by xxxxxxx UK.
ISSUE:
1) Whether the three affiliates of xxxxxxx were bona fide
buying agents of xxxxxxx? If so, were the commissions paid to
them for their buying services includable in transaction value?
2) Whether the 10% handling and service fees paid by
xxxxxxx to xxxxxxx UK on the sale of merchandise that was
manufactured by xxxxxxx UK, xxxxxxx Chemie, or xxxxxxx Japan,
were dutiable?
LAW AND ANALYSIS:
The primary method of valuing imported merchandise is
transaction value. The transaction value of imported merchandise
is the price actually paid or payable for the merchandise when
sold for exportation, plus amounts for certain items enumerated
in Section 402(b)(1) of the Tariff Act of 1930, as amended by the
Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(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 detailed and binding instructions which xxxxxxx claims it
gave to the affiliates on the types, quantities, prices, and
suppliers of the chemicals and compounds to be purchased, would
indicate that xxxxxxx to a great extent controlled the purchasing
process. 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 manner of payment can also illustrate which party
controls the transaction. See Pier 1 Imports, 708 F. Supp. at
354; Rosenthal-Netter, 679 F. Supp. at 24. In Pier 1 Imports,
where an agency relationship was found to exist, the
importer/principal paid for the merchandise by opening a letter
of credit for each purchase order in favor of its agent, which
the agent in turn used to set up a back-to-back letter of credit
between itself and the manufacturer in the exact amount of the
importer's purchase order and letter of credit. Rosenthal-
Netter differed in that the intermediary, who the court found not
to be an agent, retained the discretion to deduct its commission,
handling charges, freight charges, and banking costs from master
letters of credit. Clearly, the importer in Pier 1 exercised
greater control over payment methods than its Rosenthal-Netter
counterpart. Unfortunately, a comparison cannot be drawn between
xxxxxxx's payment system and those in these two cases, because
although xxxxxxx states that it sent regular wire transfer
payments to cover the affiliates' invoices, it does not mention
what discretion, if any, the affiliates had to use the money for
miscellaneous expenses before paying the manufacturers. We are
unable to determine which party controlled the manner of payment.
xxxxxxx states that it had the option of purchasing directly
from manufacturers. The ability to purchase merchandise
directly, without going through intermediaries, has been held to
support the existence of an agency relationship. See Pier 1
Imports, 708 F. Supp. at 355 (quoting J.C. Penney, 451 F. Supp.
984).
It is also characteristic of an agency relationship that the
risk of loss will not fall on the agent. See Pier 1 Imports, 708
F. Supp. at 357; Rosenthal-Netter, 679 F. Supp. at 26; New
Trends, 645 F. Supp. at 962. In this regard, xxxxxxx's claim
that xxxxx-xxxxx paid for the insurance covering the shipments of
chemicals and compounds to xxxxxxx, implies that the risk of loss
was on xxxxxxx's parent, not on the three affiliates.
Compiling market information, inspecting and packing the
goods, and arranging for shipment and payment are other services
performed by a bona fide buying agent. See Jay-Arr Slimwear, 12
CIT 133 at 137; J.C. Penney, 451 F. Supp. at 984. xxxxxxx
indicates that its affiliates were responsible for these tasks.
And since the principal usually is required to absorb any
shipping and handling costs in a bona fide agency relationship,
and xxxxxxx claims to have reimbursed the affiliates for freight
and Customs' charges that were incurred, this would be a sign
that the affiliates were serving in the capacity of xxxxxxx's
agents. See Rosenthal-Netter, 679 F. Supp. at 24; New Trends,
Inc., 645 at 960.
A buying agency agreement, if in existence, is another
factor which supports an agency relationship. See Rosenthal-
Netter, 679 F. Supp. at 26; J.C. Penney, 451 F. Supp. at 985.
The December 31, 1986 xxxxxxx - xxxxxxx Japan Amendment to the
Commission Agreement suggests that an agency agreement existed
between those two parties; while not as convincing as the actual
agreement itself, the amendment certainly lends credence to
xxxxxxx's argument that xxxxxxx Japan was a buying agent.
However, the lack of formal agreements between xxxxxxx and
xxxxxxx U.K., and xxxxxxx and xxxxxxx Chemie, is not necessarily
fatal to their agency claims, for while it is true that a buying
agency agreement supports the notion of a bona fide agency
relationship, it is not dispositive of the issue. See Rosenthal-
Netter, 679 F. Supp. at 26; J.C. Penney, 451 F. Supp. at 985.
All relevant factors must be examined in deciding whether an
agency relationship exists; no single factor is determinative.
See Pier 1 Imports, 708 F. Supp. at 354.
Finally, a buying agent must be financially detached from
the seller for the agency relationship to be bona fide. See New
Trends, 645 F. Supp. at 962; Jay-Arr Slimwear, 12 CIT at 137;
J.C. Penney, 451 F. Supp. at 984. xxxxxxx's claim, if accurate,
that the affiliates' invoice prices to xxxxxx matched those on
the manufacturers' invoices to the affiliates, would indicate
that the requisite financial detachment did exist. See
Rosenthal-Netter, 679 F. Supp. at 26. Also, xxxxxxx states that
the three affiliates received no remuneration from, and had no
interest in, any supplier from whom they purchased chemicals or
compounds on xxxxxxx's behalf. While this may be accurate with
respect to those purchases that were made from unrelated
manufacturers, it cannot be said that there was financial
detachment in those instances when xxxxxxx UK sold xxxxxxx its
own products. There, xxxxxxx UK was an independent seller, not
an agent. However, apparently this is not an issue, because
xxxxxxx acknowledges that the handling and services fees paid as
a result of sales that occurred under those circumstances, were
dutiable. xxxxxxx also considers xxxxxxx UK's 10% handling and
service fee to have been includable in transaction value in those
instances where the UK affiliate supplied xxxxxxx with chemicals
and compounds manufactured by xxxxxxx Chemie or xxxxxxx Japan.
There is insufficient information in the file on the affiliates'
financial relationships with each other for us to be able to
comment on the correctness of this last position.
In summary, xxxxxxx's control over the purchasing process,
its ability to purchase directly from manufacturers, and its
reimbursing the affiliates for freight and Customs charges paid,
are indicative of a bona fide agency relationship. Furthermore,
the various other services performed by the affiliates for
xxxxxxx, such as compiling market information, inspecting and
packing the merchandise and arranging for its shipment, suggest
that the relationship was one of agency. So does the fact that
xxxxxxx's parent, xxxxx-xxxxxxx Corporation, assumed the risk of
loss of the shipments. These factors, when viewed together,
support Aldrich's position that the three affiliates were its
buying agents. The lack of a formal agency agreement is not a
legal bar to a finding that an agency relationship may exist; all
of the relevant factors are considered in reaching that decision.
There was no agency relationship between xxxxxxx and xxxxxxx
UK when the UK affiliate sold its own products to xxxxxxx. And
we are unable to determine from the evidence presented whether an
agency relationship existed in situations where the chemicals and
compounds sold to xxxxxxx by xxxxxxx UK had been manufactured by
the other two affiliates. In any event, it is our understanding
that this last issue is not in contention because xxxxxxx has
stated that it considers the 10% "service and handling fees" to
be dutiable.
The conclusion that the affiliates were xxxxxxx's buying
agents for sales of merchandise produced by unrelated
manufacturers, is based on statements of fact made in writing in
affidavits, by counsel for xxxxxxx, and by your office in its
internal advice request. While it should be noted that an
affidavit by a party attesting to its status as a buying agent
has some evidentiary weight in determining a buying agency
question (see J.C. Penney, 451 F. Supp. at 984), sufficient
evidence must be submitted to clearly establish the existence of
an agency relationship. See New Trends, 645 F. Supp. at 961; A &
A Trading Corp. v. United States, 65 Cust. Ct. 785, 791-92,
A.R.D. 276 (1970); General Notice on Buying Agency Commissions,
Vol. 23, No. 11 Customs Bulletin, March 15, 1989. You should be
satisfied that these factual statements are accurate - perhaps by
requesting copies of the invoices and buying instructions -
before reaching a final decision in this matter.
HOLDING:
1) Based on the facts as presented by counsel, the three
affiliates were bona fide buying agents of xxxxxxx,
notwithstanding the lack of formal agency agreements. As such,
the buying commissions were not dutiable; and
2) The 10% handling and service fees paid by xxxxxxx to
xxxxxxx UK for merchandise produced by xxxxxxx UK, were
includable in transaction value. There is insufficient evidence
for us to be able to determine whether such fees paid to xxxxxxx
UK by xxxxxxx for merchandise made by the other two affiliates
were dutiable.
Sincerely,
John Durant
Director, Commercial