VAL R:C:V EK
Leslie K. Thiele
Whiteman, Osterman & Hanna
One Commerce Plaza
Albany, New York 12260
RE: Buying Commissions - Protective Industrial Products, Inc.
Dear Ms. Thiele:
This is in reference to your request of February 8, 1995, on behalf of Protective Industrial
Products, Inc., (importer) in which you request a ruling on the valuation of work gloves and other
protective clothing items imported by your client. You state that this issue has risen in the past in
conjunction with other entries and has been successfully resolved with Customs accepting
importer's position. You further indicate that there are currently transactions pending before
Customs where this issue has been raised and you anticipate that the issue will be resolved to the
importer's satisfaction. We are treating this as a prospective ruling request. This ruling does not
apply to any entry that is currently pending and is only applicable to future importations.
FACTS:
The importer has entered into a buying agency agreement with Protective Industrial
Products Manufactory Ltd., (hereinafter referred to as buying agent). The importer and the
buying agent are related parties. You state that the importer solicits orders from distributors in the
United States and notifies the buying agent of the orders. The buying agent then places orders for
the merchandise on behalf of the importer with a manufacturer based where the best price,
delivery terms and quality can be obtained. The services provided by the buying agent vary with
the country where the merchandise is to be purchased. With respect to all the suppliers, the
buying agent arranges the purchase transaction, subject to the importer's approval. The importer
requests samples and quotations and the agent engages in negotiations on the importer's behalf.
The importer reviews the samples and requests revisions in the
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product. The buying agent is then given instructions regarding price negotiations and the agent
negotiates the purchase within the instructions given by the importer.
You further indicate that representatives of the importer travel overseas 2-4 times per year
to meet with the buying agent, to visit the factories that manufacture the
imported products, and to inspect other possible manufacturing facilities. No manufacturing
facility is accepted as a supplier without the express approval of the importer.
You have categorized the suppliers into three categories (A, B & C), with various levels
of service required for each. All the suppliers in Group A are located in or near Hong Kong.
With respect to these suppliers, the buying agent provides additional services with regard to the
shipment of the merchandise. Orders are placed in less-than-container-load sizes and the agent
consolidates the orders into container-load shipments. The buying agent also books vessel space
for the shipments and arranges freight forwarding.
Regarding the Group B suppliers, the buying agent deals with well-established,
experienced suppliers in countries such as Korea, Malaysia, the Philippines, China Pakistan and
Singapore. Orders are placed in full-container quantities and shipment is made directly by the
factory to the importer.
The third group of suppliers, Group C suppliers, are located in Bangladesh and Egypt.
You indicate that these are very difficult suppliers to deal with in countries where the banking
relationships, manufacturing infrastructure and transportation conditions are underdeveloped.
You state that quality problems in the production process require frequent travel to the factory.
Financing, shipping and payment issues require more time, effort and travel than with factories in
other countries. You indicate that due to the required effort that is necessary in procuring these
orders, the commission paid to the agent is higher with respect to the Group C suppliers than
Groups A & B.
The structure of the transactions with the Group C suppliers at times requires that the
buying agent act as "purchaser" of the merchandise from the factory. The buying agent opens a
letter of credit for payment to the factory, and the importer then pays the buying agent the factory
price plus the commission. You state that this is purely an administrative and financial
convenience for the importer. You indicate that it is more convenient for the agent to open the
letter of credit for payment of the goods and then to be reimbursed by the importer than it would
be for the importer to open letters of credit for each transaction. You claim that when the buying
agent performs these administrative services, the agent is acting exclusively on the importer's
behalf and does not sell for its own account. Generally, the buying agent does not take actual
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possession of the merchandise. However, the agreement states that, from time to time, the agent
temporarily holds the goods for the importer in its warehouse for inspection purposes or for
consolidation with later shipments. With respect to this merchandise, the agreement states that
the goods are marked and packaged as the goods of the importer. Although the agreement does
not address the issue of risk of loss, you
indicate that the buying agent bears no risk of loss in these transactions. This is merely done to
simplify certain payment difficulties for the importer.
You indicate that the buying agent acts exclusively on the importer's behalf. All goods are
made specifically for the importer to its specifications, with the importer identified throughout the
manufacturing process as the buyer of the goods. As an example, you indicate that the factories
mark all cartons with importer style numbers and with the importer's Federal Trade Commission
RN number. The goods are shipped directly to the importer, and the importer is listed on the
commercial invoices
as the buyer of the goods. The importer is responsible for the costs of insurance for the shipment
from the port of departure.
ISSUE:
Whether the commissions paid to the agent constitute bona fide buying commissions such
that they are not included in the transaction value of the imported merchandise.
LAW AND ANALYSIS:
For the purposes of this ruling request, we are assuming that transaction value is the
proper method 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 (TAA), as the "price actually paid
or payable for the merchandise" plus amounts for five enumerated statutory additions. Bona fide
buying commissions are not a proper element of transaction value. Pier 1 Imports, Inc. v. United
States, 708 F.Supp. 351, 13 CIT 161 (1989); Rosenthal-Netter, Inc. v. United States, 679
F.Supp. 21, 12 CIT 77 (1988); Jay-Arr Slimwear, Inc. v. United States, 681 F.Supp. 875, 12 CIT
133 (1988).
The existence of a bona fide buying commission depends upon the relevant factors of each
individual case, and 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.
Rosenthal-Netter, supra. New Trends, Inc. v. United States, 645 F.Supp. 957 (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
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control the agent's conduct with the matters entrusted to him. In addition, the courts have
examined the following factors: whether the purported agent's actions are primarily for the benefit
of the principal; whether the principal or the agent is responsible for shipping and handling;
whether the importer may purchase directly from the manufacturers without utilizing the services
of the agent; whether the purported
agent is financially detached from the manufacturer of the merchandise; and whether the
intermediary is operating an independent business, primarily for its own benefit. Rosenthal-Netter, New Trends, supra.
An agent must be financially detached from the manufacturers of the merchandise, and
must show that none of the commission inures to the benefit of the manufacturer. New Trends,
supra. The buying agency agreement states that the buying agent does not share his commission
with the manufacturer and does not receive any remuneration from the manufacturer for the
services on importer's behalf.
The fact that the importer and the purported buying agent are related does not negate an
otherwise legitimate buying agency relationship. From the information provided, it appears as if
the buyer exercises sufficient control over the actions of the agent. The buying agent performs
the services described for the account of the importer and at the importer's instructions. The
agent only orders merchandise when it is so instructed and upon the conditions specified by the
importer. As indicated, the importer travels overseas to meet with the various factories that
produce the imported merchandise and to inspect other possible facilities. No factory is accepted
as a supplier without the approval of the importer. Also, counsel has adequately explained the
relatively high commission amount owed to the agent with respect to merchandise purchased from
Group C Suppliers. The extra efforts required in purchasing merchandise from these countries
account for the higher commission amount. Also, the method of payment with respect to Group
C suppliers described does not negate the existence of a buying agency relationship. As indicated,
this is merely done to facilitate payment difficulties encountered by the importer. The buying
agent is not buying or selling for its own account and the goods are clearly marked and packaged
as the goods of the importer by the manufacturer.
Finally, Customs has consistently held that an invoice or other documentation from the
actual foreign seller to the agent is required in order to establish that the agent is not the seller, as
well as to determine the price actually paid or payable to the seller. Headquarters Ruling No.
542141 dated September 29, 1980 (TAA No. 7). In this regard, the buying agency commissions
should be shown separately from the price actually paid or payable for the imported merchandise.
Documentation showing the identity of, and the price charged by the seller, is required.
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Accordingly, based upon the buying agency agreement dated December 16, 1994,
between the parties, and counsel's representations, it is our position that the commissions paid by
the buyer to the agent constitute bona fide buying commissions and do not form part of the price
actually paid or payable. However, please note that the existence of a buying agency relationship
is factually specific. The actual determination is made by the appraising officer at the port of entry
and is based on the
entry documentation submitted. The totality of the evidence must demonstrate that the purported
agent is a bona fide buying agent and not a selling agent nor an independent seller. 23:11 Cust. B.
& Dec. 9, General Notice dated March 15, 1989; HRL 542141.
HOLDING:
Provided the parties adhere to the terms of the buying agency agreement and the
representations made by counsel, the commissions paid to the agent constitute bona fide buying
commissions and do not form part of the price actually paid or payable.
Sincerely,
John Durant, Director
Commercial Rulings Division