HQ 544510
January 9,1992
VAL CO:R:C:V 544510 DPS
District Director
Seattle, Washington
RE: Application for Further Review of Protest No. 3001-89-
000820; dutiability of commissions paid to purported
buying agent where buying agent is related to importer
Dear Sir:
The subject protest and application for further review
concerns the appraisement of approximately 33 entries of toy
products imported from the Far East by Buddy L Corporation,
(Buddy L), and the Customs Service's decision to assess duty
on commissions paid by Buddy L to its purported Hong Kong
buying agent, Buddy L (Hong Kong) Ltd. (BLHK). Information
in the file indicates that your office followed the advice of
the National Import Specialist in New York in rejecting the
existence of a bona fide buying agency relationship between
Buddy L and BLHK.
FACTS:
Based on counsel's submission, Buddy L has been active
in the toy industry since 1910. For many years, Buddy L
manufactured toys in the U.S. However, since 1975, all of
the actual manufacturing of Buddy L's products have been
performed by independent contractors located in the Far East.
The vast majority of Buddy L's product line consists of
stamped steel vehicles, always bearing the "Buddy L"
trademark, and in certain instances the trademark of another
company (e.g., Coca-Cola) for which Buddy L is the licensee.
In almost all instances, the toys which are the subject of
this protest have been designed by Buddy L, and are produced
using molds supplied to the contractors by Buddy L.
In 1981 Buddy L created Buddy L (Hong Kong) Ltd. (BLHK)
as a wholly owned subsidiary to inspect merchandise,
supervise quality control, coordinate order processing,
expedite shipping, and consolidate goods purchased by
Buddy L. Buddy L was then dealing with more than fifteen
(15) different contractors, and coordination/consolidation of
shipments, and allocation and coordination of customer orders
could no longer be efficiently be controlled from New York.
BLHK began operating on January 2, 1982. A formal buying
agency agreement was signed effective January 2, 1982,
setting the commission at ten percent (10%) (Exhibit 3 of
counsel's submission accompanying the protest). At that
time, counsel states, that Customs' officials agreed that the
commission paid to BLHK by Buddy L was a nondutiable buying
commission.
The buying agency agreement between Buddy L and BLHK
indicates that BLHK will perform the following services on
behalf of Buddy L: (1) secure current market information;
(2) render translation services; (3) supervise and follow up
on all orders placed by Buddy L at respective factories; (4)
assist with documentation; (5) meet with Buddy L employees
and assist them during their visits to Hong Kong; (6) render
all administrative services necessary and process orders
placed by Buddy L; (7) assist in setting up financial
arrangements with various factories; (8) inspect,
periodically, all goods ordered on behalf of Buddy L and
report any deficiencies or potential problems; and (9)
supervise production and shipping schedules with various
factories. The agreement further provides that BLHK has no
authority to bind or obligate Buddy L, except upon written
authorization from Buddy L.
Counsel states that from BLHK's inception in 1982 until
July 31, 1987, Customs officials at ports of entry throughout
the U.S. uniformly accepted the commission paid by Buddy L to
BLHK as a nondutiable buying commission. On several
occasions Import Specialists at ports other than New York
requested that Buddy L transmit actual manufacturers'
invoices to confirm the bona fides of the commission.
Exhibit 6 to counsel's submission is an example of such a
request and Buddy L's response thereto. The submitted
documentation consists of manufacturers' invoices issued to
Buddy L in care of BLHK.
On April 27, 1989, Buddy L replied to an additional
Request for Information from Customs officials at New York by
submitting a set of documents relating to 10 representative
entries. Exhibits 9-13 of counsel's submission consist of
documents relating to four of these entries. These documents
include the following: (1) Purchase Order (PO) issued by
Buddy L to BLHK specifying the contractor who actually will
produce the merchandise, and the price to be paid;
(2) confirmation of purchase from BLHK to Buddy L; and (3)
invoice from the manufacturer to BLHK, which references Buddy
L's original PO number, along with the name Buddy L.
In addition, certain suppliers' invoices expressly provide
that the merchandise is being sold to "Buddy L Corporation
c/o Buddy L (Hong Kong) Ltd."
Attached to protestant's submission as Exhibit 14 is an
affidavit of Buddy L's treasurer, attesting to the fact that
"BLHK has absolutely no authority to determine which
contractors will supply which merchandise or the price to be
paid by Buddy L" and that all decisions regarding
contractors, price and quantities purchased are made by Buddy
L personnel. In addition to the documents previously
submitted to Customs (exhibits 2-14 of protestant's
submission), the following additional documents relating to
the buying commissions were submitted with this protest:
Exhibit 15, Affidavit of Ronnie Soong, General
manager, BLHK, attesting to the fact that: (1) BLHK
acts as Buddy L's agent; (2) all decisions
regarding contractors' price and quantity are made
by Buddy L; and (3) actual risk of loss on all
merchandise purchased by Buddy L from its
contractors ultimately is borne by Buddy L;
Exhibit 16, Statements from several of Buddy L's
contractors confirming the fact that they would
gladly sell directly to Buddy L without having to
go through BLHK and that they sell through BLHK at
Buddy L's convenience; and
Exhibit 17, Representative examples of
correspondence between Buddy L and its contractors
confirming that there exists a direct relationship
between buyer and seller.
The NIS takes the position that BLHK performs services
which extend beyond those which are normally associated with
buying agents, to the extent that the relationship should not
be considered a bona fide buying agency relationship. This
opinion is based upon information that the CEO of BLHK also
acts as President and Chairman of the Board of Buddy L, and
the existence of an intercompany account in which all charges
and/or credits between BLHK and Buddy L are recorded. This
intercompany account is described in Exhibit 7 of
protestant's submission which is a letter to Customs in New
York dated September 9, 1987. It provides, in pertinent
part:
BLC [Buddy L] purchases all of its merchandise
requirements from its suppliers through BLHK. On
delivery the suppliers invoice BLHK, and in turn,
BLHK re-invoices BLC for the exact amount of the
suppliers invoice plus commission. A running
account (the intercompany account) is maintained to
record all charges and /or credits between BLHK and
BLC. From time to time BLC remits funds to BLHK
These transfers are usually in large, whole dollar
amounts, and are credited to the intercompany
account. For your easy reference, we have attached
sample pages of the intercompany account together
with copies of intercompany fund transfers.
LAW & ANALYSIS:
For the purpose of this response, we are assuming that
transaction value is the appropriate 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 402(b)(1).
Buying commissions are not specifically included as one
of the additions to the "price actually paid or payable."
The "price actually paid or payable" is more specifically
defined in 402(b)(4) as: "The total payment (whether direct
or indirect...) made, or to be made, for imported merchandise
by the buyer to or for the benefit of, the seller." It is
clear from the statutory language that in order to establish
transaction value one must know the identity of the seller
and the amount actually paid or payable to him.
Whether or not a bona fide buying agency exists between
an importer and an alleged "buying agent" is not determined
by any single factor, but depends upon the relevant facts of
each case. See J.C. Penney Purchasing Corp. v. United
States, 451 F. Supp. 973 (Cust. Ct. 1978). The primary
consideration in determining whether a bona fide buying
agency relationship exists between an importer and an alleged
buying agent is the right of the principal to control the
agent's conduct with respect to matters entrusted to the
agent. B & W Wholesale Co., Inc. v. United States, 58 CCPA
92, C.A.D. 1010, 436 F.2d 1399 (1971).
In a general notice published in the Customs Bulletin on
March 15, 1989, Customs provided an explanation of its
position on buying commissions. The following excerpts
illustrate that position:
While bona fide buying commissions are nondutiable,
evidence must be submitted to Customs which clearly
establishes that fact. In this regard,
Headquarters Ruling Letter 542141, dated September
29, 1980, also cited as TAA No. 7, provided:
...an 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. Furthermore, 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.
In New Trends Inc. v. United States, 10 CIT 637, 645 F.
Supp. 957 (1986), the Court of International Trade set forth
several factors upon which to determine the existence of a
bona fide buying agency. These factors include: whether the
agent's actions are primarily for the benefit of the
importer, or for himself; whether the agent is fully
responsible for handling or shipping the merchandise and for
absorbing the costs of shipping and handling as part of its
commission; whether the language used on the commercial
invoices is consistent with the principal-agent relationship;
whether the agent bears the risk of loss for damaged, lost,
or defective merchandise; and whether the agent is
financially detached from the manufacturer of the
merchandise. In addition, the importer must show that "none
of the commission inures to the benefit of the manufacturer."
J.C. Penney, 80 Cust. Ct. at 97, 451 F. Supp. at 984. More
recently, in Pier 1 Imports, Inc. v. U.S., 708 F.Supp 351
(CIT 1989), the court reiterated the factors set forth in New
Trends and J.C. Penney, and emphasized that control over the
purchasing process was strong evidence that an agency
relationship exists. The court found the manner of payment
to establish that the agent purchased merchandise only at the
direction of the importer. In Pier 1, the agent did not
retain the discretion to deduct commissions, freight charges,
or bear the risk of loss. In addition, none of the
commissions inured to the benefit of the manufacturer/seller.
The court found that the agent did not "purchase" the
merchandise until after the importer ordered the merchandise,
and forwarded the funds necessary for acquisition. Thus, in
Pier 1, the agent operated only at the direction of the
importer, not autonomously.
As the above cited court decisions make clear, any
determination of whether a bona fide buying agency
relationship exists, depends on the facts in each particular
case. Here, we must determine the validity of the purported
buying agency relationship, between Buddy L and BLHK.
Based on the information submitted, which consists of
purchase orders issued by Buddy L, confirmation orders from
BLHK, manufacturers' invoices, correspondence between the
parties, Buddy L's responses to Customs information requests,
and the affidavits submitted along with the subject protest
and application for further review, we are satisfied that
BLHK is under the control of Buddy L. Representations made
by counsel along with the documentation submitted indicates
that BLHK has no authority to choose the contractors who
produce merchandise for Buddy L, to set prices, to establish
quantities purchased or to designate the merchandise to be
produced. All of these decisions appear to be made by Buddy
L.
The services performed by BLHK for Buddy L which are
described in the buying agency agreement between the parties
consist primarily of consolidating shipments, arranging for
payment, translating, placing orders on Buddy L's
instructions, and assisting in negotiations. BLHK has no
financial interest in any of the manufacturers, nor does it
receive compensation from the factories. BLHK is compensated
for its services relating to merchandise imported by Buddy L
solely through a commission paid by Buddy L. BLHK does not
share commissions with the factories.
The submitted information indicates that Buddy L
communicates directly with its foreign manufacturers and
visits them to negotiate prices and discuss their business
endeavors. Buddy L submits manufacturers invoices and proof
of payment to Customs when requested. And finally, it
appears from the documentation provided that Buddy L bears
all risk of loss for the merchandise after it is purchased
from the factories.
HOLDING:
Consistent with the foregoing, based on the information
presented, we are satisfied that the relationship between
Buddy L and BLHK meets the criteria of a bona fide buying
agency relationship. Accordingly, you are hereby directed to
grant the subject protest. A copy of this decision should be
attached to the Customs Form 19, and mailed to the protestant
as part of the notice of action on the protest.
Sincerely,
John Durant, Director