Request for Internal Advice; Transaction Value; Bona Fide Buying Commissions

HQ H125835 May 18, 2011 VAL OT:RR:CTF:VS H125835 HkP CATEGORY: Valuation Port Director Port of Norfolk U.S. Customs and Border Protection 101 E. Main Street Norfolk, VA 23510 RE: Request for Internal Advice; Transaction Value; Bona Fide Buying Commissions Dear Port Director: This is in response to the Request for Internal Advice filed by counsel on behalf of QVC, Inc. (QVC), on September 10, 2010. At issue is whether payments made by QVC pursuant to a buying agent agreement for purchase orders issued by QVC through May 2009 are dutiable. A copy of the Buying Agent Agreement executed by QVC and its purported agent was submitted for our review. In reaching our decision, we have also taken into consideration supplemental documents submitted to this office on March 1, 2011. QVC has asked that certain information submitted in connection with this Request for Internal Advice be treated as confidential. Inasmuch as their request conforms to the requirements of section 19, part 177.2 of the U.S. Customs and Border Protection Regulations (19 C.F.R. §177.2(b)(7)), QVC’s request for confidentiality is approved. The information contained within brackets and in the identified attachments to their submissions will not be released to the public and will be withheld from the published version of this ruling. FACTS: According to the information submitted, QVC entered into a buying agent agreement with Agent, by which Agent was appointed QVC’s nonexclusive buying representative and paid a commission based on the price of the ordered merchandise. Commissions and purchases were invoiced separately. Under the terms of the agreement, Agent’s services included: familiarizing itself with QVC’s needs and surveying potential markets; assisting QVC with negotiating favorable terms and prices; with QVC’s approval, placing orders on QVC’s behalf; visiting manufacturing facilities to inspect the quality of the ordered products and providing progress reports to QVC; obtaining supplier records necessary to secure the entry of ordered products into the U.S.; ensuring that the invoices contained accurate and complete descriptions of the products and names of suppliers; and, assisting QVC with the return of defective products. In addition, under the terms of the agreement, Agent was prohibited from receiving any form of compensation from any supplier in respect of any transaction undertaken for the benefit of QVC, and from sharing any commission received from QVC with any third party. However, Agent could be repaid by suppliers if Agent provided financial assistance to suppliers for the purchase of raw materials or to procure the quota of the ordered product for export. Agent also had to certify that it had no ownership/financial interest in or control of any entity supplying goods to QVC, and that no such entity had control of, interest in or ownership interest in Agent. In all transactions with Agent, QVC maintained the right to accept or reject merchandise, including where there were overshipments, quality concerns, or where products failed to meet specifications. For purchase orders issued through May 2009, QVC sourced merchandise marketed under Brand Name through Agent. Agent carried out many of its duties through Subagent, a related entity. For all Brand Name transactions, Subagent handled invoicing and facilitated payment between QVC and the vendor, and QVC and the owner of the Brand Name mark (TM Owner). QVC would contact Agent concerning goods that it wished to purchase, indicating the total price it would pay for the goods, which was comprised of the price QVC would pay for the good and the royalty payment for TM Owner. Agent would negotiate with the vendor and TM Owner to meet QVC’s price. QVC would then issue a purchase order to Subagent who would place the order at the agreed-upon price. In turn, Subagent would issue a purchase order to the vendor and/or manufacturer, identifying QVC as its client. After completing the order, the vendor and TM Owner would each issue an invoice to Agent on QVC’s behalf. Subagent would then issue an invoice to QVC for an amount equal to the sum of these invoices, that is, the cost of the goods plus the royalty payment, as well as an invoice for Agent’s commission. QVC would pay the invoiced amount to Subagent, who would in turn, pay the vendor and TM Owner, and would separately pay Agent. These sums were declared when the goods were entered. QVC has submitted the following documents to this office: Purchase Order (PO)[xxx], dated May 9, 2008, issued by QVC to Subagent for specified quantities of style A15774 leggings in different sizes and colors at a specified FOB unit price. PO [xxx], dated March 31, 2009, issued by Subagent to the vendor stating, among other things, that the client is QVC, the Client PO number is [xxx], and that the order is a repeat order for style A15774 leggings. An email from Agent to QVC, dated March 4, 2008, detailing, among other things, the negotiated per unit FOB price for style A15774 leggings in compliance with PO [xxx]. Invoice [xxx], issued by TM Owner to Agent for a royalty payment of US [$xx.xx] due for PO [xxx]. Invoice [xxx], dated June 17, 2009, issued by Vendor to Agent “acting as representative for QVC”, totaling US [$xx.xx] for a specified quantity of QVC style A15774 leggings at the FOB Hong Kong unit price certified as being “in strict compliance with all the terms and conditions of Purchase Order [xxx].” Invoice [xxx], dated June 17, 2009, issued by Subagent to QVC, totaling US [$xx.xx] for a specified quantity of QVC style A15774 leggings at the FOB unit price specified in PO [xxx], per PO [xxx]. Credit Advice issued by Citibank to Subagent on July 23, 2009, advising that QVC had made a payment of US [$xx.xx] concerning invoice [xxx]. Debit Note [xxx], dated June 25, 2009, issued by Subagent to QVC for invoice [xxx], in an amount reflecting a specified percentage of the total FOB price for QVC style A15774 leggings, stated to be the amount of the commission. A copy of a check, dated August 10, 2009, payable to TM Owner in the amount of royalty invoice [xxx]. Payment Advice, dated August 27, 2009, issued by QVC to Subagent for the amount specified in Debit Note [xxx], among others. Arrival Notice and Invoice Summary for ladies’ pants, dated July 14, 2009, issued by the shipper to the broker, naming QVC as consignee. ISSUE: Whether Agent acted as a bona fide buying agent for QVC, such that the payments made by QVC to Agent were non-dutiable buying commissions. LAW AND ANALYSIS: Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. § 1401a). The preferred method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. 19 U.S.C. § 1401a(b)(1). Selling commissions incurred by the buyer with respect to the imported merchandise are statutory additions to transaction value. See 19 U.S.C. § 1401a(b)(1)(B). Bona fide buying commissions, however, are not identified as additions to the price actually paid or payable, and the courts have construed that they are not an element to be included in transaction value. See Pier 1 Imports, Inc. v. United States¸13 Ct. Int’l Trade 161, 164, 708 F. Supp. 351, 354 (1989); Rosenthal-Netter, Inc. v. United States, 12 Ct. Int’l Trade 77, 78, 679 F. Supp. 21, 23 (1988), aff’d, 861 F.2d 261 (Fed. Cir. 1988); and Jay-Arr Slimwear, Inc. v. United States, 12 Ct. Int’l Trade 133, 136, 681 F. Supp. 875, 878 (1988). The importer has the burden of proving that a bona fide agency relationship exists and that payments to the agent constitute bona fide buying commissions. Pier 1 Imports, Inc., 13 Ct. Int’l Trade at 164; Rosenthal-Netter, Inc., 12 Ct. Int’l Trade at 78; and New Trends, Inc. v. United States, 10 Ct. Int’l Trade 637, 640, 645 F. Supp. 957, 960 (1986). The existence of a bona fide buying commission depends upon the relevant factors of the individual case. J.C. Penney Purchasing Corp. v. United States, 80 Cust. Ct. 84, 95, C.D. 4741, 451 F. Supp. 973, 983 (1978). Although no single factor is determinative, the primary consideration is the right of the principal to control the agent’s conduct with respect to those matters entrusted to the agent. Id.; Pier 1 Imports, Inc., 13 Ct. Int’l Trade at 164; Rosenthal-Netter, Inc., 12 Ct. Int’l Trade at 79; and Jay-Arr Slimwear, 12 Ct. Int’l Trade at 138. The alleged agent performs duties on behalf of its principal, the buyer. It may not act as an independent seller, or as a representative of the manufacturer. United States v. Manhattan Novelty Corp., 63 Cust. Ct. 699, A.R.D. 263 (1969). In addition, the courts have examined such factors as the existence of a buying agency agreement; whether the importer could have purchased directly from the manufacturers without employing an agent; whether the agent was financially detached from the manufacturer of the merchandise; and the transaction documents. See J.C. Penney Purchasing Corp., 80 Cust. Ct. at 95-98. The courts have also examined whether the purported agent's actions were primarily for the benefit of the principal; whether the agent bore the risk of loss for damaged, lost or defective merchandise; whether the agent was responsible for the shipping and handling and the costs thereof; and whether the intermediary was operating an independent business, primarily for its own benefit. See New Trends, Inc.,10 Ct. Int’l Trade 640-643. Counsel claims that the commissions paid to Agent by QVC were bona fide buying commissions and are not part of the dutiable value of the goods. In support of this position, counsel highlights the agency agreement and the business practices of the two companies, as reflected in the sample transactional documents submitted that are claimed to detail a standard transaction between the two parties. Counsel states that, in the course of business, QVC would issue a purchase order detailing the terms of the transaction and authorize Agent to place an order with the vendor on QVC’s behalf. Throughout the purchasing process, QVC maintained control of the transaction by identifying the product to be purchased, setting the price to be paid for the goods, and maintaining final approval of the goods, including the right to reject the goods. QVC owned the goods and maintained the risk of loss and was responsible for shipping and handling costs as well as customs clearance. In addition, QVC could deal directly with vendors and was not obligated to purchase goods through Agent. On the other hand Agent, on behalf of QVC, negotiated prices and royalties, oversaw quality control and facilitated payments for the imported goods. Agent was not allowed to receive financial compensation from the vendor or TM Owner or to share the commission it received from QVC with any other party. Counsel states that CBP has previously found that transactions structured similarly to the one under consideration are consistent with buying agent relationships. In Headquarters Ruling Letter (HQ) H098419, dated October 26, 2010, CBP reviewed sample transactions in which the Target Corporation placed purchase orders with its affiliate, TSSL, which then placed orders with the vendor. TSSL’s purchase order to the foreign vendor reflected Target’s specific instructions, and the quantity and unit price stated on the Target to TSSL purchase order matched those on the TSSL to vendor purchase order, which demonstrated to CBP that TSSL ordered the merchandise at the direction of and for the benefit of Target. Moreover, the price on the invoice issued by the vendor to TSSL was identical to the price on the invoice issued by TSSL to Target. We found that this demonstrated that TSSL was acting on behalf of Target and not for its own benefit. Additionally, the charge for the commission was separately indicated from the purchase price of the merchandise on the purchase order and the invoice between TSSL and Target. This indicated to CBP that TSSL was financially detached from the vendors and was not receiving any benefit from the vendors, because the sole source of compensation was the commissions earned from Target. The services performed by Agent on behalf of QVC are typical of those performed by a bona fide buying agent. For example, Agent surveys potential markets based on QVC’s needs, negotiates prices and terms on QVC’s behalf, visits manufacturing facilities, inspects ordered merchandise, reports its findings to QVC, and assists QVC with the return of defective products. In addition, the agency agreement indicates that Agent’s procurement activities are always subject to QVC’s directions and requirements. Under its terms, Agent places purchase orders with the approval of QVC, and is required to disclose to any supplier that it is acting as an agent for QVC, and that the sale is between the supplier and QVC. We find that the June 17, 2009, invoice issued by Vendor to Agent is evidence that Agent adhered to these terms. The invoice stated that Agent was “acting as representative for QVC” and that the order was “in strict compliance with all the terms and conditions of Purchase Order [xxx]”, which was the client purchase order number for QVC’s order placed with Agent on May 9, 2008, for specified quantities of style A15774 leggings. Based on this fact, we find that Agent never held title to the merchandise. The control that QVC exercised over Agent is shown in the provisions of the agency agreement. For example, the sole and exclusive right to accept or reject sample products proffered by Agent and ordered products was reserved to QVC. Upon termination of the agreement, Agent was required to turn over to QVC all originals and copies of contracts and other information in the Agent’s files relating to arrangements made by QVC with suppliers. In addition, Agent was required to be financially detached from the manufacturers and vendors of the merchandise. Under the terms of the agreement, Agent’s sole source of compensation for the relevant transactions was the commissions it earned from QVC. Based on the record, Agent was invoiced by TM Owner for the amount of the royalty payment and by Vendor for the ordered merchandise. In turn, Subagent invoiced QVC for the combined amount of the invoices received by Agent, and separately invoiced QVC for its commission. QVC paid all the invoiced amounts to Subagent, which would then pay the parties. These transactions indicate that Agent was financially detached from the vendor and was not receiving any benefit from it, because the sole source of Agent’s compensation was the commission earned from QVC. These facts are similar to those described in HQ H098419. Moreover, because the commission was a certain percentage of the FOB price, and invoiced and remitted separately, we find that the commission was “an amount separate from and in addition to the price paid for the merchandise, and is therefore not properly included in the dutiable value of the merchandise.” Monarch Luggage Co. v. United States, 715 F. Supp. 1115, 1117 (citations omitted), (Ct. Int’l Trade 1989); See also HQ H050895 (Dec. 6, 2010). Based upon the buying agent agreement and the other documents in the record, we are satisfied that Agent was a bona fide buying agent for QVC. Therefore, it is our position that any commissions paid by QVC to Agent that comport to the described transaction were bona fide buying commissions and are not a part of or an addition to the price actually paid or payable. See HQ H109699, dated July 19, 2010. HOLDING: Based on the information submitted, we find that the parties’ actions in the described transaction conformed to the terms of the buying agent agreement and that Agent was a bona fide buying agent for QVC. We conclude, therefore, that the payments made by QVC to Agent constituted bona fide buying agency commissions and should not be included in the transaction value of merchandise imported into the United States pursuant to 19 U.S.C. § 1401a(b). You are to mail this decision to the internal advice requester no later than 60 days from the date of the decision. At that time, the Office of International Trade, Regulations and Rulings, will make the decision available to CBP personnel and to the public on the CBP Home Page at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Monika R. Brenner, Chief Valuation and Special Programs Branch