RR:IT:VA 548135er


Gail T. Cumins, Esq.
Sharretts, Paley, Carter & Blauvelt, P.C.
Seventy-Five Broad Street
New York, NY 10004

RE: Dutiability of Buying Agency Commissions; purported buying agent also performs some services on behalf of manufacturer.

Dear Ms. Cumins:

This is in response to your submission dated April 30, 2002, requesting a ruling on behalf of your client, Bernardo Fashions LLC (“Bernardo”), regarding a proposed buying agency agreement.

FACTS:

Bernardo plans to perform purchasing agency services for various retail department store chains in the United States, such as J.C. Penney, seeking to import wearing apparel from manufacturers located in the Far East.

Bernardo will enter into a written buying agency agreement with each of the department store chains for which it performs the services. No written drafts of the proposed agreements exist. According to your submission, the services to be performed by Bernardo and the degree of control exercised by the department store-importer over the activities of purported buying agent include the following activities: providing reports on market conditions and availability of merchandise; obtaining samples of merchandise from prospective suppliers and obtaining approval of such samples by the importer; assisting in the negotiations of the most favorable price for the buyer; placing orders with specified manufacturers/sellers in accordance with the instructions from the importer at FOB prices exclusive of purported buying commission with agent certification that it is not “related” to the seller and will act only pursuant to buyer’s written instructions; monitoring quality control procedures with respect to the merchandise purchased by the importer; advising the importer of any defects in the merchandise; assisting the buyer in negotiating a reduction in price from the seller in the event of late delivery, shortages, or defective goods discovered after receipt; as requested, arranging for international shipping of the merchandise; as required, providing inspection certificates for shipments; and when ordered merchandise is refused or not shipped, the agent will assist in ensuring that the seller does not dispense of the merchandise until all labels and markings identifying the buyer have been removed.

Bernardo will not take title to any merchandise and will not bear any risk of loss if the merchandise is damaged or destroyed in transit from the manufacturers’ or suppliers’ facilities to the United States. Each seller will issue its invoice directly to the purchaser and all payments of such invoices will be made directly from the importer to its seller.

According to counsel, as compensation for its services, Bernardo will receive a commission from its “principal” based upon a fixed percentage of the FOB price of the purchased merchandise. Presumably the “principal” is the buyer. The percentage of the commission is not disclosed. The commissions will be separately invoiced by Bernardo to the buyer/importer who will make direct payment to Bernardo.

Counsel also indicates that in addition to the services performed for the buyer, Bernardo may also perform certain services for the unrelated sellers of the merchandise purchased by the importer. In return, Bernardo will receive, with the full knowledge and consent of the importer, compensation from these sellers. These services will consist of the following activities: locating materials needed by the manufacturer to meet the requirements of the buyer; advising the manufacturer of United States requirements for importing the merchandise, such as invoicing requirements, quota requirements and the like; providing assistance in preparing the documents required by the United States Customs as a condition of allowing entry; and providing advice regarding freight arrangements and similar activities intended to facilitate the importation of the merchandise into the United States.

In order to disclose to the buyer the nature of the services to be performed on behalf of the seller and the amount of the compensation it will receive for these services, the buying agency agreement will contain the following paragraph:

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 of commissions from these manufacturers, factories or sellers relative to the services performed on behalf of Buyer hereunder. However, the Agent can receive limited separate compensation, not exceeding – percent of the FOB price, directly from the manufacturers, factories or sellers for incidental indirect services rendered to those manufacturers, factories or sellers. Before undertaking such activities, the Agent will provide the Buyer with a description of the services to be rendered and the compensation to be received. Agent will not undertake these activities without the prior consent of the Buyer.

ISSUE:

Whether Bernardo will be acting as a bona fide buying agent under the terms of the proposed agency agreement notwithstanding the fact that it will, in some instances, receive compensation from the manufacturer for services provided to the manufacturer.

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 19979 (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 an importer to his agent for the service of representing him 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’dl, 861 F.2d 261 (Fed. Cir. 1988); Jay0Arr 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 Trands, 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 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 a 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 542121, 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 instant matter, the services to be provided by Bernardo on behalf of the buyer are typical of those performed by a bona fide buying agent. Bernardo will visit factories, negotiate favorable prices, arrange for shipping, inspect the goods, all on behalf of the buyer/importer. The agent will be acting primarily at the specific direction of the importer. Moreover, the agent will not bear the risk of loss of the goods.

Additionally, the importer is able to deal directly with the sellers as is evidenced by the fact that the sellers invoice the buyer directly, and not through the agent. Payment for the merchandise is made directly from the importer to the seller. Bernardo separately invoices the buyer for its commissions and the buyer makes direct payments to Bernardo for these commissions. For purposes of this decision, we also assume that the buyer, and not the agent, is responsible for shipping and insurance costs. In sum, the nature of the services provided by Bernardo on behalf of the buyer and the method of invoicing and payment are all consistent with a bona fide buying agency.

The remaining issue to be addressed concerns the services Bernardo will provide on behalf of the manufacturer for which it will be compensated by the manufacturer. The issue to be resolved is whether Bernardo is precluded from being considered a bona fide buying agent 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 HRLs 545660, February 10, 1995; 545177, June 28, 1993; and 544657, July 1, 1991.

Likewise, closer scrutiny is warranted where the purported buying agent also performs services on behalf of the manufacturer. However, as determined in HRL 545660, supra, and HRL 544676, July 24, 1991, this fact does not automatically preclude the purported agent from being considered a bona fide buying agent. In those cases, the agents were to perform certain functions on behalf of the buyer and 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 (the included locating materials needed by the manufacturer; providing quality control and inspection services; advising the manufacturers about United States importing requirements); and, the buyer was aware of and acquiesced to its agent performing services on behalf of the seller. Those decisions indicate that as long as the payment by the manufacturer does not impact on the importer’s “price actually paid or payable”, it will have no effect on the nondutiability of the agents’ commissions.

In the instant matter, based on the information provided, the services to be performed by Bernardo are primarily for the benefit of the buyer: that is, to find the best price/quality deal as designated by the importer. The services Bernardo is to perform on behalf of the manufacturers are similar to those described in HRL 545660, supra, in which Customs characterized as “ministerial” (locating materials, providing quality control, assisting in importation requirements, etc.). Likewise, counsel’s submission indicates that Bernardo will provide such services with the full knowledge and acquiescence of the buyer. Under these circumstances, we find that the services Bernardo is to provide to some of the manufacturers does not preclude us from considering it a bona fide buying agent. We find that the evidence presented supports the finding that the commission to be paid to Bernardo by the importer/buyer constitutes a bona fide buying commission. Provided the actions of the parties comply with the description of the services contained in counsel’s submission, and provided that the payment by the manufacturer does not impact on the importer’s “price actually paid or payable”, the commission to be paid to the agent by the buyer is not added to the “price actually paid or payable”. Nonetheless, because counsel’s submission does not indicate the specific percentages of the FOB price of the imported merchandise to be paid to Bernardo both by the importer and by the manufacturer, officials at the port of entry may request such information at the time of entry. If the officials at the port of entry conclude that the percentages of both payments are reasonable in relation to each other and in keeping with what is ordinary, then the amounts remitted to Bernardo by the importer/buyer will not be added to the “price actually paid or payable”, as described above.

Please further 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, 34 Cust B. & Dec., No. 25, General Notice dated June 21, 2000.

In this case, the appraising officer must also be satisfied that the services performed by Bernardo are primarily for the benefit of the buyer; that the functions of Bernardo performed on behalf of the manufacturers do not exceed the ministerial functions described in counsel’s submission, 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, Bernardo will act as a bona fide buying agent under the terms as described above and in counsel’s submission, notwithstanding the fact that it will, in some instances, receive compensation from unrelated manufacturers for ministerial services provided to the manufacturers.

Sincerely,

Virginia L. Brown, Chief
Value Branch