RR:IT:VA 546543 er
Peter Jay Baskin, Esq.
Sharretts, Paley, Carter & Blauvelt, P.C.
67 Broad Street
New York, NY 10004
RE: Request for a ruling regarding dual function of agent as buying agent and selling agent.
Dear Mr. Baskin:
This is in response to your submissions dated October 28, 1996 and May 7, 1997, on behalf of your client, Wolverine World Wide, Inc. (“WWI”), in which you request a ruling regarding the dutiability of certain commissions. We regret the delay in responding.
FACTS:
WWI, a U.S. corporation, intends to enter an agreement with J.C. Penney (“JCP”), a U.S. importer, whereby WWI will act as a buying agent in connection with certain JCP import transactions involving leather goods.
According to counsel, under the agreement, WWI will perform standard buying agency services for JCP such as placing orders with specified manufacturers/sellers in accordance with express instructions from JCP, visiting and otherwise maintaining contact with such manufacturers/sellers, obtaining and submitting to JCP samples and price quotes from prospective manufacturers/sellers, arranging for the inspections and shipment of merchandise purchased by JCP, pursuing claims related to the transactions that JCP may have against the manufacturers/sellers, and the like. As compensation for its services, WWI will receive a commission from JCP based on a fixed percentage of the F.O.B. price of the merchandise purchased. These commissions will be separately invoiced by WWI to JCP, and will be paid directly to WWI from JCP.
In conjunction with some of the transactions for which WWI acts as JCP’s buying agent pursuant to the above-described agreement, WWI may also perform certain incidental services for unrelated manufacturers/sellers of the subject merchandise. Those services include any or all of the following: (1) procurement services; (2) leather cutting advice; (3) inspection of materials; (4) inspection of products throughout the production process; (5) advice on U.S. Customs requirements; (6) consolidation services and freight forwarding; (7) rerunning laboratory tests (i.e., abrasion, pull-test, impact testing, etc.); and (8) training. For any services performed for the manufacturer/seller in a given transaction, WWI will receive separate compensation directly from the manufacturer/seller. All compensation received by WWI from the manufacturer/seller will be included as part of the F.O.B. price.
WWI proposes three situations for Customs to consider with regard to the dual function of buying agent and selling agent, the agent’s duty to disclose to the buyer the nature of the services to be performed on behalf of the seller and the amount of the compensation to be paid to the agent by the seller.
Under the first scenario, WWI proposes to inform JCP about the compensation it may receive from the manufacturers/sellers in connection with the subject transactions by including the following paragraph in its buying agency agreement with JCP:
Agent certifies and warrants that it will not accept any remuneration for its services rendered under this agreement, other than the commissions paid hereunder by Buyer pursuant to paragraph hereof, and that it will neither share nor split such commissions in any manner whether directly or indirectly, with the merchandise manufacturers, factories or sellers nor receive any compensation or commissions from those manufacturers, factories or sellers relative to services performed on behalf of Buyer hereunder. However, it is understood that Agent, with Buyer’s prior knowledge and approval, can receive limited separate compensation directly from those manufacturers, factories or sellers for incidental independent services rendered to those manufacturers, factories or sellers.
In its initial submission, with regard to the first scenario, counsel stated that JCP would not be informed of the amount of compensation that WWI might receive. In its subsequent submission, however, counsel agreed that JCP would be informed about the amount of the commission to be paid by the seller to the agent. The amount of the commission will not exceed 4 percent of the F.O.B. price of the imported merchandise. In its second submission, counsel also agreed to describe in the agreement between the agent and JCP the exact nature of the services to be performed by the agent on behalf of the seller. The following language describing the services to be performed by the agent for the seller will also be included in the buying agency agreement:
WWI will expect to furnish the seller with (a) leather cutting advice; (b) inspection of purchased raw materials; (c) advice covering document preparation needed for importation into the United States; (d) assistance in the procurement of certain raw materials; and (e) the training of additional employees that will be needed to expedite the buyer’s orders.
The second scenario contemplates those situations where WWI enters into buying agency relationships similar to the one with JCP and it later develops that the seller seeks certain incidental services from “WWI”. In this situation, WWI proposes to fully advise and obtain the permission of the buyer/principal before it accepts compensation from the seller. Furthermore, WWI expects that it will amend the existing buying agency agreement by exchanges of written (fax or letter) communications with its principals. WWI will also retain in its files written evidence of the amendment to the original buying agency agreement. It will be able to furnish, as needed or requested, this documentation to support the bona fide nature of its buying agent relationship with its principal.
The third scenario contemplates the same situation as that described in the second scenario, but WWI proposes not disclosing the possibility of its performing any services for the seller.
ISSUE:
Whether the commissions paid by the importer to the agent are bona fide 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 under the TAA is transaction value, defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus five enumerated statutory additions in section 402(b)(1), including selling commissions. The “price actually paid or payable” is defined in section 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.” 19 U.S.C. 1401a(b)(4).
Buying commissions are fees paid by the importer to its agent for the service of representing the importer abroad in the purchase of the goods being valued. It has been determined that bona fide buying commissions are not added to the price actually paid or payable. Pier 1 Imports, Inc. v. United States, 13 CIT 161, 164, 708 F. Supp. 351, 353 (1989); Rosenthal-Netter, Inc. v. United States, 679 F. Supp. 21, 23; 12 CIT 77, 78 aff’d., 861 F.2d 261 (Fed. Cir. 1988); Jay-Arr Slimwear, Inc. v. United States, 681 F. Supp. 875, 878, 12 CIT 133, 136 (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. Rosenthal-Netter, supra, New Trends, Inc. v. United States, 10 CIT 637, 645 F. Supp. 957, 960 (1986); Pier 1 Imports, Inc., supra.
In deciding whether a bona fide agency relationship exists, all relevant factors must be examined and each case is governed by its own particular facts. 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 the matters entrusted to him. See, Jay-Arr Slimwear, Pier 1 Imports, Inc., J.C. Penney, and Rosenthal-Netter, supra. In addition, the courts have examined such factors as: whether the purported agent’s actions are primarily for the benefit of the principal; whether the principal or the agent is responsible for the shipping and handling and the costs thereof; whether the language used in the commercial invoices is consistent with principal-agent relationship; and whether the agent is financially detached from the manufacturer of the merchandise. The degree of discretion granted the agent is a further consideration. See, New Trends, supra. The existence of a bona fide buying commission is to be determined by the totality of the circumstances. HRL 542141, September 29, 1990 (TAA No. 7). Whether a commission is a bona fide buying commission depends on the facts of each particular case.
In the situation you describe, the services to be provided by WWI on behalf of JCP are those typically performed by a bona fide buying agent. Because, however, the buying agency agreement has not been drafted, we are without a copy for review and cannot rule definitively regarding its content. Nevertheless, based on the description of the services to be performed by WWI for JCP it appears that WWI’s primary function is to find the best price/quality deals from prospective manufacturers. Once it is drafted, the buying agency agreement will purportedly specify that such services are to be performed under the direction and control of JCP. For example, as described by counsel, the agreement will specify that “WWI will perform standard buying agency services for JCP such as placing orders with specified manufacturer/sellers in accordance with express instructions from JCP...”
The means of invoicing JCP for the payment of the imported goods and for the commissions is also consistent with a bona fide agency relationship. According to counsel, WWI’s commission will be separately invoiced by WWI to JCP, and will be paid directly to WWI from JCP. Also, according to counsel, although WWI will make arrangements for the shipping and handling of the imported merchandise on JCP’s behalf, JCP, as principal, will be legally responsible for the shipping and handling and the costs thereof.
The remaining issue concerns the services WWI is to provide on behalf of the manufacturer for which it will be paid by the manufacturer. The issue to be resolved is whether WWI is precluded from being considered a bona fide buying agent for the importer under such circumstances.
When examining whether a purported agent is a bona fide buying agent, closer scrutiny is warranted where special circumstances exist. For example, closer scrutiny is required where the agent and the seller are related. Such a relationship does not, however, automatically preclude the existence of a bona fide buying agency. See HRL 545177, June 28, 1993 and HRL 544657, July 1, 1991.
Likewise, closer scrutiny is warranted where the purported buying agent also performs services on behalf of the manufacturer. See, HRL 545660, February 10, 1995. However, as determined in HRL 544676, July 24, 1991 and HRL 545660, supra, this fact does not automatically preclude the purported agent from being considered a bona fide buying agent. In those cases the agent was to perform certain functions on behalf of the buyer and the seller. We ruled that the services to be performed on behalf of the seller did not preclude the agent from being considered a bona fide buying agent based on the following considerations: the functions to be performed by the agent were primarily for the benefit of the buyer; the functions performed on behalf of the seller were ministerial functions (including locating materials needed by the manufacturer, providing quality control and inspection services, and advising the manufacturer about U.S. importing requirements); and, the buyer was aware of and acquiesced to its agent performing services on behalf of the seller.
Based on the information provided in the instant case it appears that with respect to the matters entrusted to WWI by the buyer, WWI’s services are primarily for the benefit of the buyer. WWI finds the best price/quality deal for the importer/buyer. With regard to the services WWI is to perform on behalf of the manufacturers, the services will be provided with the full knowledge and acquiescence of the buyer. Moreover, while the services to be performed for the seller are not as ministerial in nature as those described in HRLs 544676 and 545660, supra, they do not usurp the importer/buyer’s control with regard to the buying agency.
In the first situation, the buying agency agreement will contain language notifying the buyer about the nature of the services to be performed for the seller and the amount of compensation to be remitted by the seller to the agent. In the second situation, although the buying agency agreement will not contain the notification, WWI will nonetheless fully advise and obtain the permission of the buyer before it accepts compensation from the seller. You further advise that in the second situation, WWI and the buyer will amend the buying agency agreement by exchanges of written (fax or letter) communications. WWI will retain in its files this written evidence of amendment to the original buying agency agreement and will be able to furnish, as needed or requested, this documentation to Customs. Thus, scenarios one and two represent situations which appear to represent bona fide buying agencies in which the agent also performs services for the buyer.
We find that the third scenario, described above, is not an acceptable buying agency arrangement in view of the fact that the agent neither advises the buyer about the services to be performed for the seller nor does the agent seek the buyer’s approval before performing these services and accepting compensation from the seller. In the absence of the buyer/principal having knowledge of these factors, the buyer cannot be said to be exercising sufficient control over its agent, not can the buyer be sure that the agent is acting primarily for the benefit of the buyer.
In conclusion, we find the description of the buying agency agreement and arrangements in scenarios one and two to support the finding that the commission to be paid to the agent by the buyer constitutes a bona fide buying commission and the commission to be paid to the agent by the seller constitutes a dutiable selling commission. Providing the buying agency agreement, once drafted and finalized, contains the terms and language described above and the actions of the parties comport with the terms and language of the agreement, the commission to be paid to the agent by the buyer should not be added to the “price actually paid or payable”.
Please note, however, that the existence of a buying agency relationship is factually specific. The actual determination as to the existence of a buying agency will be made by the appraising officer at the applicable port of entry and will be based on the entry documentation submitted. The totality of the evidence must demonstrate that the purported agent is in fact a bona fide buying agent and not a selling agent nor an independent seller. See, 23 Cust. B. & Dec., No. 11, General Notice dated March 15, 1989 at 9; HRL 542141. In this case, the appraising officer must also be satisfied that the services performed by WWI are primarily for the benefit of the buyer; that the functions of WWI performed on behalf of the manufacturers do not exceed the functions described above, and that the buyer is fully aware that its agent provided services for the seller for compensation.
HOLDING:
Based on the facts presented and subject to the provisos set forth above, the commissions paid to WWI by the importer/buyer appear to be bona fide buying commissions notwithstanding the fact that WWI will, in some instances, as described above, receive compensation from unrelated manufacturers/sellers for services provided to the manufacturers/sellers. Accordingly, so long as WWI informs the importer/buyer about the nature of the services to be performed for the manufacturers/sellers and the amount of compensation to be received from the same, and the selling agent services do not exceed the functions described in this ruling, then only the commissions paid to WWI by the manufacturers/sellers, and not the buying commissions, will be added to the price actually paid or payable.
Sincerely,
Acting Director
International Trade Compliance Division