VAL RR:IT:VA 545938 LPF
Director, Houston Field Office
Regulatory Audit Divsion
U.S. Customs Service
2323 Shepherd - Room 1239
Houston, TX 77019
RE: Internal Advice concerning dutiability of commissions; HRLs 543503, 544958, 544945, 545794, 545550
Dear Director:
This is in response to your memorandum received by our office on
March 16, 1995, requesting internal advice on behalf of J.C. Penney
Purchasing Company (JCPPC), concerning the dutiability of commissions
paid to twenty-eight (28) of its alleged buying agents. This matter
emanates not only from an audit conducted by your office, but also
from a request for internal advice submitted from JCPPC to the former
district director, Dallas/Fort Worth Airport. We regret the delay in
responding.
FACTS:
Documentation and evidence concerning twenty-eight (28) of
JCPPC's alleged buying agents has been submitted for our review. The
merchandise at issue includes footwear, wearing apparel, handbags and
similar items. Of particular concern to your office is the agents'
ownership and control over the design of the merchandise and JCPPC's
apparent lack of control over the purchasing process due to their
limited involvement in the modification of such designs or styles. In
this regard, you submit that JCPPC often could not obtain the
merchandise without the agent's design, style or pattern and that the
agent (or their foreign subagent) often selected the factory.
Furthermore, your office questions the bona fides of the agents due to
the large number of other major retailers/importers they represent and
the significant amount of transactions conducted by the agents as
importer of record. In sum, when examining the totality of
circumstances, you question the level of control exercised by JCPPC
over the alleged buying agents. Specific comments in the form of
separate narratives accompanied, in some cases, by supporting
documents concerning the twenty eight agents was submitted for our
review.
On the other hand, JCPPC believes they assert the requisite
degree of direction and control over the buying agents at issue.
JCPPC describes the agents' design activities as involving style
adaption and market intelligence which, through samples obtained from
department stores, trade shows, etc., enable them to keep JCPPC
current on products and styles available in the marketplace. The
design work undertaken by the agents is described as "linebuilding"
and normally to represent a collaboration between the agent and JCPPC,
with JCPPC as the final arbiter and authority. Furthermore, JCPPC
stresses that in accordance with prior Headquarters Ruling Letters
(HRLs), the nondutiable status of the agents' buying commissions is
not affected by the fact that the agents may act as a seller and
importer of record to JCPPC in unrelated transactions. JCPPC submits
that the buying agency services provided under the current buying
agency agreements reflect those generally provided by buying agents.
Along with its responses to each of the individual narratives, JCPPC
submitted documentation concerning one of the buying agents,
consisting of a purchase contract, letter of credit and seller and
agent's invoices, which it claims is representative of all the
transactions at issue.
ISSUE:
Based on the evidence submitted, whether the payments made by
JCPPC to the alleged agents constitute bona fide buying commissions.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the
United States is transaction value pursuant to section 402(b) of the
Tariff Act of 1930, as amended by the Trade Agreements Act of 1979
(TAA) codified at 19 U.S.C. 1401a. Section 402(b)(1) of the TAA
provides, in pertinent part, that the transaction value of imported
merchandise is the "price actually paid or payable for the merchandise
when sold for exportation to the United States" plus the enumerated
statutory additions.
The "price actually paid or payable" is defined in section
402(b)(4)(A) of the TAA as the "total payment (whether direct or
indirect, and exclusive of any costs, charges, or expenses incurred
for transportation, insurance, and related services incident to the
international shipment of the merchandise...) made, or to be made, for
the imported merchandise by the buyer to, or for the benefit of, the
seller."
Bona fide buying commissions are not an addition to the price
actually paid or payable. Pier 1 Imports, Inc. v. United States, 13
CIT 161, 164, 708 F. Supp. 351, 354 (1989); Rosenthal-Netter, Inc. v.
United States, 12 CIT 77, 78, 679 F. Supp. 21, 23 (1988); Jay-Arr
Slimwear, Inc. v. United States, 12 CIT 133, 136, 681 F. Supp. 875,
878 (1988).
The existence of a bona fide buying commission depends on the
relevant factors in light of the individual case. See J.C. Penney
Purchasing Corp. v. United States, 80 Cust. Ct. 84, 95, C.D. 4741, 451
F. Supp. 973, 983 (1978). The importer has the burden of proving the
existence of a bona fide agency relationship and that the payments to
the agent constitute bona fide buying commissions. New Trends, Inc.
v. United States, 10 CIT 637, 640, 645 F. Supp. 957, 960 (1986);
Rosenthal-Netter, supra, at 78.
In determining whether an agency relationship exists, the primary
consideration has been the right of the principal to control the
agent's conduct with respect to those matters entrusted to the agent.
J.C. Penney, supra, at 95. The existence of a buying agency agreement
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 considered such
factors as: whether the purported agent's actions were primarily for
the benefit of the principal; whether the principal or the agent was
responsible for the shipping and handling and the costs thereof;
whether the importer could have purchased directly from the
manufacturers without employing an agent; whether the intermediary was
operating an independent business, primarily for its own benefit; and
whether the purported agent was financially detached from the
manufacturer of the merchandise. Rosenthal-Netter, supra, at 79; New
Trends, supra, at 640-644.
The substantial documentation and information provided concerning
agent # 9, E.S. Originals (E.S.), enables us to assess whether a bona
fide agency relationship existed between E.S. and JCPPC. Initially,
an examination of the buying agency agreement between JCPPC and E.S.
reveals that the parties contemplated that E.S. would perform the
functions traditionally associated with a buying agent, while JCPPC
would perform those associated with a principal controlling such an
agent. Specifically, we note that E.S.' services, including
investigating buying possibilities, obtaining market information and
samples at JCPPC's request, and assisting JCPPC in developing its
product specifications is consistent with its role as an agent.
Moreover, the conditions of the transactions, to wit, that orders are
placed by JCPPC who shall accept or reject any quotations, payments
are made directly by JCPPC to the supplier, delivery is made to JCPPC,
and E.S. may not vary the conditions of the Purchase Contract nor hold
itself out as seller/buyer also are indicative of a principal-agent
relationship. However, in all such cases, it still is necessary to
ascertain whether the actions of the parties are consistent with that
provided in the agreement.
With regard to JCPPC's control over E.S.' conduct, we agree the
agent's ownership and control over the design process, resulting in
the principal's diminished involvement in the formation or
modification of designs or styles, may indicate that the principal
lacked the requisite control over the purchasing process and the
agent, in general. However, we do recognize that when only incidental
"design" work (i.e., linebuilding or market intelligence) is conducted
by an agent, such work is part of a collaborative process between the
parties, and the principal serves as the final authority concerning
such matters, the principal may be found to have been exercising an
adequate level of control over its agent.
In the case of E.S. it is our understanding that E.S. does not
own any of the designs or styles incorporated into the footwear
purchased by JCPPC, does not employ any designers nor provide original
work, and only enhances the appearance of the merchandise in an
attempt to create a lower priced version of the samples they buy. We
find such services to exemplify line-building consistent with a
finding that JCPPC may exercise appropriate control over the
purchasing process and over E.S., generally.
With regard to additional factors which may be indicative of
JCPPC's control over E.S. we find as follows. The portion of JCPPC's
submission pertaining to E.S. does include some evidence by way of
JCPPC's purchase contracts with the foreign supplier indicating that
JCPPC substantially may have been involved in choosing the
manufacturers, although it has not been shown that JCPPC actually
visited the factories and participated in negotiations with the
factory.
However, it is unclear whether the agent, as opposed to the
principal, absorbs the costs for shipping and handling, which would be
a factor against the finding of a principal-agent relationship. On
the other hand, JCPPC's control over the manner of payment is made
evident through a debit notice sent to JCPPC from its bank referencing
its letter of credit as well as by a telex sent from JCPPC to its bank
requesting the issuance of its irrevocable letter of credit in favor
of the foreign supplier. It is our understanding that the letters of
credit are not opened in favor of E.S. from which E.S. would then
deduct its commissions, handling charges, and the like.
Moreover, the transaction documents consist of invoices and
purchase order contracts between JCPPC and the foreign supplier with
consistent unit prices, merchandise amounts, and total contract costs
which do not include amounts for E.S.' commissions. Additionally,
separate invoices between JCPPC and E.S. reflect amounts owed to the
latter for the commission, based on a percentage of the merchandise
amounts reflected on the JCPPC-supplier invoices. Supported by proof
of payment for the JCPPC-supplier invoice amounts, these documents in
their entirety serve as evidence that the price actually paid or
payable did not include the commissions and that the agent acted on
behalf of the principal and not as an independent seller. Further,
this serves as evidence that none of the commissions enured to the
benefit of the seller.
We also recognize that the purchase contracts from the foreign
supplier to JCPPC, E.S.' questionnaire responses, and their seemingly
limited involvement in the designing process provide some evidence
that JCPPC could have purchased directly from the suppliers without
employing E.S. On the other hand, the fact that in many cases E.S.
imports for its own account from such suppliers and considers itself
to be a "manufacturer and importer of fashion footwear and apparel,"
as stated on its invoice, indicates that E.S. likely has substantial
ties to, and connections with, the suppliers.
However, evidence does indicate that E.S., when working with
JCPPC, does not operate as an independent business primarily for its
own benefit. In this regard, based in part on the purchase contracts,
invoices, and proof of payment it is our understanding that E.S. does
not receive a fixed price for the merchandise but commissions for the
services it provides, and does not act in its own name nor receive
title to the goods. Although E.S. imports, buys and sells such
merchandise independently, it is submitted that such transactions
occur in separate and distinct situations apart from those where JCPPC
procures E.S.' services. See Rosenthal-Netter, supra, at 81 citing
the Restatement (Second) of Agency section 14K comment a (1958).
Finally, it is our position that the dutiability of the buying
commissions in general is not affected by the fact that in some
instances an agent, such as E.S., does in fact import for its own
account and resell the imported merchandise to parties other than its
principal. See HRL 543503, issued July 11, 1983, where buying
commissions were non-dutiable although a U.S. corporation purchased
imported merchandise for its own account and acted as purchasing agent
for other major domestic importers of the same type of merchandise.
Moreover, the status of a party operating as a bona fide buying agent
is not necessarily affected by its role as an importer and domestic
seller for the same U.S. customers for which it also acted as buying
agent in unrelated transactions. HRL 544958, issued June 8, 1992. In
such situations Customs recognizes that a relationship or business
ties between the parties to a transaction, although an important
consideration, is not dispositive, per se, of the bona fides of an
agency relationship. Instead, such questions are to be resolved in
light of the totality of the evidence presented. See HRL 544945,
issued June 30, 1995 and HRL 545794, issued August 9, 1995.
Similarly, it is our position that the fact an agent provides its
services to a large number of retailers or importers is not
determinative of the status of the agency relationship.
In sum, the totality of the evidence presented with regard to
E.S., without information or documentation to the contrary, adequately
demonstrates that JCPPC exercised the requisite control over E.S.,
supporting the finding of a bona fide agency relationship. See HRL
545550, issued September 13, 1995, also employing such an analysis.
However, due to the insufficient evidence available regarding the
other agents at issue, we are unable to conclude whether a bona fide
agency relationship existed between those parties and JCPPC.
First, in many cases the submitted buying agency agreements
merely consist of three paragraphs generally explaining the services
which the alleged agent is to provide and how orders will be placed.
See Yes Clothing Co.; Sam & Libby, Inc.; Markon Footwear; Warson
Group; and BBC Imports. In some cases the imported commodity is not
even disclosed within the agreement. See Wolfpax, Inc.; Bag Bazaar;
Elan-Polo, Inc.; Double K Footwear; Bright Star Products, Inc.; Kimko
International, Inc.; and B\W\A International.
Next, evidence concerning the alleged agents' roles with regard
to the designing of the merchandise is inconclusive. In some cases it
is our understanding that the alleged agents may actually own the
designs and/or the trademark incorporated into the imported
merchandise and, thus, may control certain aspects of the purchasing
process. See York East Merchandise, Inc.; Yes Clothing Co.; Bag
Bazaar; Bright Star Products; Europe Crafts Imports, Inc.; M. Julian
Division of Firenze Design; Mia Shoes, Inc; Samuel Brilliant Co.; and
Tandem Imports Corp. Although the alleged agents may not own the
designs, in several instances it appears, based on the evidence
submitted, that the alleged agents may exercise substantial control
over the design and style of the merchandise, in some cases employing
designers, possibly resulting in limited involvement and control on
the part of JCCPC. See Tristar International Footwear Ltd.; Wolfpax,
Inc.; Sam & Libby, Inc.; Ipanema Shoe; Double K Footwear; Kimko
International, Inc.; Pelle Leather, Ltd.; Tandem Imports Corp.; B\W\A
International; and LJ Simone, Inc.
Furthermore, no transaction documents such as purchase orders,
invoices or proof of payment have been made available concerning any
of the alleged agents other than E.S. Without such documents, we are
unable to determine whether JCPPC was substantially involved in
choosing the manufacturers, participated in negotiations with the
factory, could have purchased directly from the suppliers, absorbed
the shipping and handling costs or controlled the manner of payment.
Likewise, we are unable to determine whether the alleged agents
operated as independent businesses primarily for their own benefit.
In light of these concerns, the fact that nearly all the alleged
agents import on their own account and resell the imported merchandise
further obfuscates the issue. In many cases we understand the
merchandise sold is identical, or at least similar, to that purchased
by JCPPC. See York East Merchandise, Inc.; Yes Clothing Co.; Kowa
American Corp.; M Julian Division of Firenze Design; Mia Shoes; Samuel
Brilliant Co.; and Tandem Imports Corp. Some of the alleged agents
likewise act as an importer/domestic seller for JCPPC, often selling
from their inventory. See Sam & Libby, Inc.; Bag Bazaar; Markon
Footwear Inc.; Bright Star Products, Inc.; Samuel Brilliant Co.;
Warson Group Inc.; and BBC Imports. In addition, several agents have
indicated that they are related to the suppliers or that the majority
of all the suppliers' sales are conducted through the agent. See
Tristar International Footwear Ltd.; Wolfpax, Inc.; Bag Bazaar; and
Double K Footwear.
For these reasons, the totality of evidence presented with regard
to the alleged agents other than E.S. does not enable us to reach a
finding regarding the bona fides of the agency relationships. To
reach a determination it is necessary, in conjunction with the
importer, to obtain all relevant purchase, supply, and agency
agreements between the parties as well as other transaction documents
including invoices, purchase orders, and proof of payment (for the
merchandise and shipping/ handling). Further evidence regarding the
roles of the parties throughout the design process likewise may be
warranted. We suggest that, at your discretion, JCPPC have the
opportunity to submit samples of the products initially made available
for JCPPC's consideration for comparison with samples of the finalized
merchandise as modified and eventually purchased by JCPPC and that
both samples be compared to the merchandise sold by the alleged agents
in other transactions. In reaching a final determination, it would be
appropriate for your office to analyze all such evidence and
documentation in a manner consistent with that employed above for E.S.
HOLDING:
Based on the evidence submitted, we only are able to conclude
that the payments made by JCPPC to E.S. constitute bona fide buying
commissions. Therefore, the payments made to E.S. are not to be
included in the transaction value of the imported merchandise.
However, further evidence, analyzed as set forth above, is warranted
in order to reach a determination concerning the other alleged agents.
This decision should be mailed by your office to the internal
advice requester no later than sixty 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, Freedom of Information Act and other public
access channels.
Sincerely,
Acting Director,
International Trade Compliance Division