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HQ 545129

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March 6, 1995

VAL CO:R:C:V 545129 er
CATEGORY: VALUATION

Mr. Peter J. Battaglioli
Regional Director
Regulatory Audit Division
Northeast Region
U.S. Customs

RE: Transaction value; buying agency; dutiability of commissions; sale for exportation.

Dear Mr. Battaglioli:

This is in response to your memorandum, dated October 23, 1992, forwarding the request for internal advice, dated July 24 and November 2, 1992, submitted by Ober, Kaler, Grimes & Shriver, on behalf of their client, Merry-Go-Round Enterprises ("MGRE"). An additional submission dated July 22, 1994, was also presented by counsel. We regret the delay in responding.

FACTS:

MGRE, the importer, entered into a written buying agency agreement with Mirage, a division of Elliot & Kastle, Inc., ("EK Inc.") a New York corporation, for services rendered in connection with the importation of certain merchandise from the Far East. EK Inc. also owns a subsidiary in Hong Kong, Elliot & Kastle Hong Kong ("EKHK"). A copy of the buying agency agreement, dated May 18, 1990, was submitted.

Mirage performs services for MGRE such as following MGRE's instructions regarding the purchasing of merchandise including selecting the merchandise and inspection. MGRE issues an order to Mirage. Mirage issues a purchase order to factories in Korea for the manufacture of the merchandise according to MGRE's specifications. For its services, Mirage invoices MGRE an agreed upon commission against an invoiced amount. It is MGRE's claim that the amounts paid by MGRE to Mirage represent non-dutiable buying commissions.

MGRE funds its purchase order overseas by opening a letter of credit to EKHK. The manufacturers bill EKHK at a price lower than the amount of the letter of credit from MGRE. EKHK transfers funds to the manufacturers from the MGRE letter of credit and retains the difference. EKHK issues an invoice to MGRE in the total amount of the letter of credit. It is MGRE's
claim that the transaction between the manufacturers and EKHK is the sale for exportation for purposes of appraisement.

Copies were submitted of MGRE's purchase orders to Mirage; MGRE's letters of credit to EKHK; commercial invoices from the Korean manufacturers to EKHK; EKHK invoices to MGRE; Mirage purchase orders to the Korean manufacturers; Mirage invoices to MGRE for the commissions; and bank confirmations that the MGRE letters of credit in the amount of the invoice from EKHK had been transferred to the manufacturer in the amount of the manufacturer's invoice.

ISSUE:

Whether the transaction between EKHK and MGRE constitutes a sale for exportation and whether the amounts paid by MGRE to Mirage represent non-dutiable buying commissions?

LAW AND ANALYSIS:

The primary method of appraising 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 to the United States, plus certain statutory additions, including selling commissions, described 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)).

The "price actually paid or payable" is defined in section 402(b)(4)(a) as: "[t]he total payment made, (whether direct or indirect ...) or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller."

In Nissho Iwai American Corporation v. United States, No. 92-1239, Slip Op. (Fed. Cir. Dec. 28, 1992) and Synergy Sport International, Ltd. v. United States, No. 93-5, Slip Op. (CIT Jan. 12, 1993), the U.S. Court of Appeals for the Federal circuit and the Court of International Trade, respectively, addressed the proper dutiable value of merchandise imported pursuant to a three-tiered distribution arrangement involving a foreign manufacturer, a middleman and a United States purchaser. In both cases the middleman was the importer of record. In each case the court held that the price paid by the middleman/importer was the proper basis for transaction value. Each court further stated that in order for a transaction to be viable under the valuation statute, it must be a sale negotiated at arm's length, free from any nonmarket influences and involving goods clearly destined for the United States.

We note that in the context of filing an entry, Customs Form 7501 (CF 7501), an importer is required to make a value declaration. As indicated by the language of CF 7501 and the language of the valuation statute, there is a presumption that such transaction value is based on the price paid by the importer.

When this request for internal advice was first submitted, the Nissho Iwai decision, discussed above, had not yet been handed down. Once the court ruled as it did in that decision, counsel for MGRE amended its first submission, in which EKHK was described as either a "selling agent" or a "seller" for purposes of appraisement, and claimed instead that the Korean manufacturers are "sellers" to EKHK and that this transaction constitutes a viable sale for exportation upon which transaction value may be based. Based on the evidence submitted we do not agree.

In none of the submissions presented by counsel is EKHK's role clearly defined. For example, as noted above, in the first submission EKHK is described as "either a selling agent or an independent seller and duties are paid on its full invoice price which includes its markup to MGRE over the factory invoice price it pays." In the same submission EKHK is also described by counsel as performing certain duties while acting in the capacity of a sub-agent to the buying agent, Mirage. In their last submission, counsel characterize EKHK as a buyer/reseller but offer no information as to why EKHK is no longer a possible selling agent, as originally suggested in the first submission. We also note that no explanation regarding why purchase orders for the imported merchandise were submitted to the factories but payment made through EKHK. Because none of counsel's submissions provide an adequate explanation of EKHK's role, and because the remainder of the documentation submitted does not prove that EKHK acted as an independent buyer/reseller of the merchandise, we cannot conclude that a sale for exportation occurred between EKHK and the manufacturers.

In view of the fact that EKHK's role is not clearly described and because there is a presumption that transaction value is based on the price paid by the importer, under the instant circumstances, the price actually paid or payable is the invoiced amount paid by MGRE which includes the amount remitted to the manufacturers and the markup retained by EKHK.

Regarding the monies paid to Mirage, we note that bona fide buying commissions, however, are not added to the price actually paid or payable. See, Pier 1 Imports, Inc. v. United States, 708 F.Supp. 351, 254, 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). To determine whether a bona fide buying agency exists between an importer and an alleged "buying agent", the primary consideration is the right of the principal to control the agent's conduct with respect to matters entrusted to him. See, Pier 1 Imports, Inc. (quoting J.C. Penney Purchasing Corp. v. United States, 80 Cust. Ct. 84, 95, C.D. 4741, 451 F.Supp. 21, 24 (1988), aff'd, No. 88-1294 (Fed. Cir. Nov. 10, 1988); HRL 543837, dated February 18, 1987; HRL 543911, dated November 1, 1988; HRL 544008, dated August 17, 1988. The agreement describes the services to be performed by Mirage and the control reserved by MGRE. MGRE directs the purchasing process, selecting the merchandise, determining its quality and negotiating the purchase price. Control over the purchasing process is strong evidence that an agency relationship exists. See, Rosenthal- Netter, 12 CIT at 77, 708 F.Supp at 354; J.C. Penney, 80 Cust. Ct. at 95-96, 451 F.Supp at 983. Mirage locates manufacturers able to produce the merchandise, inspects merchandise, follows MGRE's instructions regarding the purchase of the merchandise, and performs other duties consistent with the role of a buying agent. Jay-Arr Slimwear Inc., 12 CIT 133, 137, 681 F. Supp. 875, 878 (1988).

Other indicia of an agency relationship are outlined in New Trends v. United States, 10 CIT 637, 645 F. Supp 957 (1986). They are: 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. The agreement provides that MGRE is responsible for handling and shipping the merchandise, negotiating the terms for delivery, and bearing the risk of loss. Mirage does not take title to the goods. On the basis of the evidence submitted we are satisfied that none of the commission inures to the benefit of the manufacturers.

Based on the above considerations, we conclude that the terms of the buying agency arrangement are consistent with a bona fide buying agency. However, it is the position of Customs that "having legal authority to act as buying agent and acting as buying agent are different matters" and Customs is entitled to examine evidence which proves the latter. See, U.S. Customs Service General Notice, 11 Cust. Bull & Dec. (March 15, 1989). See also, Pier 1 Imports, Jay-Arr Slimwear Inc., Rosenthal-Netter, and HRL 545421 (August 3, 1994). Therefore, despite the existence of the agency agreement, the appraising officer must make a case-by-case determination regarding whether the agent acts as a bona fide buying agent.

HOLDING:

Transaction value is based on the price paid by the importer, MGRE, which includes the amount remitted to the manufacturers and the markup retained by EKHK. Additionally, the terms of the buying agency agreement are consistent with a buying agency. So long as the appraising officer is satisfied that Mirage acts in accordance with the terms of the buying agency agreement, commissions paid to the agents by the importer will not represent dutiable buying commissions.

The Office of Regulations and Rulings will take steps to make this decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Lexis, Freedom of Information Act and other public access channels 60 days from the date of this decision.

Sincerely,

John Durant, Director
Commercial Rulings Division

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