RR:IT:VA 548163 CC
John B. Pellegrini, Esq.
Ross & Hardies
Park Avenue Tower
65 East 55th Street
New York, NY 10022-3219
RE: Review of HRL 547642/43/44; Transaction Value; Bona Fide Buying Commission
Dear Mr. Pellegrini:
This is in response to your request of March 29, 2002, on behalf of the Associated Merchandising Corporation (“AMC”), received in our office on June 25, 2002, for review of Headquarters Ruling Letter (HRL) 547642/43/44, a consolidated ruling issued on February 13, 2002. That ruling related to agreements detailing payments under three different programs: the First Cost Buying Agency (“First Cost”) Program, the Guaranteed Landed Cost (“GLC”) Program, and the Product Development Program. Your request for review concerns only the First Cost Program and our finding that fees paid pursuant to that program are not bona fide buying commissions.
We note that the holding and principles set forth in HRL 547642/43/44 were correct, based on the facts presented in that ruling. This request for review is being decided based on new information provided in your submission and, therefore, HRL 547642/43/44 is not subject to modification or revocation under 19 U.S.C. § 1625(c) and 19 CFR § 177.9. In addition, you have not presented any new facts concerning the GLC Program or Product Development Program, nor have you requested a review of HRL 547642/43/44 concerning those programs. Consequently, as stated above, this review concerns solely the First Cost Program.
Your request followed a meeting between you and members of the Value Branch on March 12, 2002. Also, in attendance at that meeting were representatives of AMC and Target Corporation. At that meeting, you submitted sample representative documents of a transaction, including purchase orders, invoices, cargo receipts, credit payments, and a sample agreement. You have asked that certain proprietary information contained in those documents be kept confidential. We have granted that request, and none of that information is contained in this ruling.
FACTS:
Facts in HRL 547642/43/44
The facts below are reproduced from the facts appearing in HRL 547642/43/44. Although slightly different, all three Agreements detail payments to AMC under three different programs: the First Cost Buying Agency (“First Cost”) Program, the Guaranteed Landed Cost (“GLC”) Program, and the Product Development Program. We note that the Agreements may not be actual agreements because two of the three programs appear to be incompatible. Under the First Cost Program AMC will supposedly act as a buying agent for AMC’s clients. Under the GLC Program, however, AMC will perform as an independent middleman buying and selling merchandise for its own account. Because you submitted three separate ruling requests that raise different valuation issues, we assume that these programs operate independently. Therefore, we addressed independently the dutiability of payments made under each of these programs.
AMC is one of three major U.S. apparel-sourcing companies with offices in over 50 countries. Until recently, the voting shares of AMC were owned by several different retail store chains. Recently, however, Target Corporation acquired a majority of AMC’s outstanding voting shares. According to your letter, AMC acts as buying agent on behalf of its U.S. clients which include retail department stores, specialty stores, mass merchandising organizations, and other entities (the “Clients”).
According to the Agreements, AMC will perform the following services for the Clients: place orders with vendors; expedite shipment of merchandise; prepare bills, invoices and documents related to shipment, payment to vendors, merchandise delivery, and purchase of samples; prepare reports on market conditions and special overseas merchandise offerings; assist buyers visiting AMC’s offices; and inspect merchandise.
In addition, your ruling requests describe the services that AMC may provide that are either not contained or fully detailed in the Agreements. According to your letters, AMC will negotiate with vendors that are known to the Clients; visit vendors and subcontractors to inspect quality, production progress, and origin of the merchandise; assist in the negotiation of prices; tender payment to the vendors at the express written consent of the Clients; prepare documents necessary for the importation of the merchandise; and assist Clients in presenting claims against vendors for compensation related to merchandise quality or late shipments.
You further state that AMC has no ownership interest in any of the suppliers or factories of the merchandise. Furthermore, according to your letters, after notice to—and approval from—the Clients, AMC may provide financial assistance to the suppliers or participate in the manufacture of the merchandise.
Under the Agreements, AMC may be compensated through one of the two previously mentioned purchasing programs—the Guaranteed Landed Cost Purchasing Program (“GLC”) and the First Cost Buying Agency Program (“First Cost”). In addition, AMC offers Clients various product development services through the “Product Development Program.”
Under the First Cost Buying Agency Program, AMC will receive a commission based on a percentage of the “selling” price, either FOB port of export or ex-factory price of the goods. The commission will be payable at the time the goods are shipped. The percentage varies depending on the dollar value of the merchandise. The percentages are apparently negotiable between AMC and the Clients on a case by case basis. In addition, in the event that the value of the merchandise purchased does not exceed a certain amount during a twelve month period, the Clients are required to pay AMC a minimum service charge, which is a flat fee regardless of the volume of merchandise shipped. This annual service charge service charge [sic] is also negotiable.
You state that the Clients will control the actions of AMC. Although the Agreements state that AMC will act as a buying agent for the Clients, the Agreements contain no provisions detailing how the Clients will exercise such control. In addition, although you state AMC will instruct vendors to provide the Clients with detailed commercial invoices—indicating the tariff category, country of origin, first cost of the merchandise, and name and address of the manufacturer—there is no comparable language in the Agreements.
Furthermore, according to your letters, the Clients will pay a “Service Charge as outlined in Exhibit B.” Exhibit B was not included with any of your three ruling requests. According to paragraph 2.a. of the Agreements, however, the Service Charge is the sum of three marginal percentage rates applied on an incremental basis to the total value of the merchandise. Finally, the Agreements prohibit the Clients from selling seven categories of goods in certain geographic areas.
Revised Facts
Concerning AMC’s discretion to determine whether a principal’s goods will be sourced under the First Cost Program or the GLC Program, you state that AMC has no discretion to determine under which program a particular merchandise order received from a principal will be handled. From the moment a principal engages AMC to assist it in procuring merchandise, the type of service is specified by the principal. AMC has no discretion to change the form of service provided. The nature and extent of the services which the principal wants may dictate its choice of programs, but the choice is solely the principal’s.
Under the First Cost Program, AMC does not assume title and risk of loss, and act as an independent reseller of the merchandise. Specifically, you state that “[a]lthough, on occasion, AMC might take title to goods on behalf of, at the request of, and for the convenience of the principal, it is not correct to state that it assumes risk of loss in these cases for acts as an independent reseller.”
You characterize the differences in the First Cost Program and the GLC Program as follows: 1) Under the First Cost Program the principal acts as the importer of record; under the GLC Program AMC is the importer of record; 2) Under the First Cost Program the principal has contractual privity with the foreign producer/seller; under the GLC Program the principal has contractual privity with AMC; 3) Under the First Cost Program the principal transmits purchase commitment to AMC, which deal with the vendor as the agent; under the GLC Program the principal transmits purchase commitment to AMC, which deals with the vendor as the purchaser; 4) Under the First Cost Program, AMC bills the principal for service charges and first cost of the merchandise, under the GLC Program AMC invoices the principal for goods at landed cost (including international transportation, U.S. Customs duties, etc.); 5) Under the First Cost Program AMC has no title to goods or risk of loss; under the GLC Program, AMC has title to goods and risk of loss during transport and subsequent handling; 6) Under the First Cost Program goods are entered at the value shown in the invoice from the vendor to the principal; under the GLC Program goods are entered at the value shown in the invoice from the vendor to AMC; and 7) Under the First Cost Program AMC deals with the vendor on the principal’s behalf, and pays on the principal’s behalf; under the GLC Program AMC deals with the vendor on its own behalf, and pays on its own behalf.
You state that the principal’s control over AMC is evident from various sources, including the sample agreement you submitted. You cite the following provisions in the agreement as evidence that the principal exercises control over AMC: 1) AMC negotiates “at the direction of the Principal”; 2) AMC places orders with vendors “when instructed”, “in Principal’s name, for Principal’s account”; 3) AMC acknowledges “that it does not have the right, power or authority to make any contract or incur any obligation or liability that shall be binding upon Principal unless it has been specifically authorized to do so in advance by Principal”; 4) AMC expedites shipments “as may be requested by principal”; 5) “Principal directs” AMC to bill, prepare invoices, etc.; and 6) AMC may not provide any raw materials to a vendor except at Principal’s direction.
Commission rates are determined on a principal-by-principal basis, and are always negotiated in advance. Certain large-volume principals will have their commission rates set according to a “sliding scale.” Under these arrangements, when the total “first cost” of the merchandise which AMC sources on the principal’s behalf exceeds a stated annual level, the percentage commission is reduced for additional purchases. The commission is not negotiated on a case-by-case or transaction-by-transaction basis.
You state that AMC will not furnish financial assistance to the vendors or otherwise participate in the manufacture of goods without providing notice to the principal and receiving the principal’s approval. Finally, concerning the provision preventing the principal from selling or reselling certain merchandise in Canada, you state that AMC at one time had an agreement to act exclusively in Canada as the buying agent for a retailer headquartered there. The restriction on the principal’s disposition of goods in Canada was intended only to ensure that AMC did not violate the Canadian customer’s guarantee of exclusivity.
ISSUE:
Whether fees paid to AMC under the First Cost Buying Program are bona fide commissions and therefore not part of the price actually paid or payable.
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in accordance with the provisions of Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”; codified at 19 U.S.C. § 1401a). The preferred basis of appraisement is transaction value, defined as “the price actually paid or payable for merchandise when sold for exportation to the United States.” 19 U.S.C. § 1401a(b)(1). Accordingly, we have assumed for the purposes of this ruling letter that transaction value is the appropriate basis of appraisement.
The term “price actually paid or payable” is defined 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. § 402(b)(4). Transaction value, however, does not include buying commissions provided a bona fide buying agency relationship exists between the buyer and the agent. See Pier 1 Imports, Inc. v. United States, 708 F. Supp. 351 (Ct. Int’l Trade 1989).
The existence of a bona fide buying commission depends upon the relevant factors of each particular case. See J.C. Penney Purchasing Corp. v. United States, 451 F. Supp. 973 (Cust. Ct. 1978). In this regard, the importer has the burden of proving the existence of a bona fide agency relationship and that payments to the agent constitute bona fide buying commissions. New Trends, Inc. v. United States, 645 F. Supp. 957 (Ct. Int’l Trade 1986); B.W. Wholesale Co. v. United States, 462 F. Supp. 1399, (C.C.P.A. 1971).
To determine whether a bona fide buying relationship exists Customs examines the totality of the evidence. In New Trends, the Court of International Trade set forth several factors for determining whether a bona fide buying agency relationship exists. These factors include:
Whether the principal controls the agent’s activities and conduct;
Whether the principal is aware of the price paid to the supplier, or does the principal simply pay the agent a fixed price;
Whether the agent has a separate identity as an independent seller of merchandise;
Whether the principal is able to purchase merchandise directly from suppliers;
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 his commission;
Whether the language used on the commercial invoice is consistent with the principal-agent relationship;
Whether the agent bears the risk of loss for damaged, lost or defective merchandise;
Whether the agent is financially detached from the manufacturer of the merchandise;
Whether the agent’s duties are ministerial or discretionary; and
Whether the parties have entered into a buying agency agreement.
You claim the commissions to be paid pursuant to AMC’s buying agency program—the First Cost Agency Buying Program—are buying agency commissions under the TAA and therefore not dutiable. You state that the Clients will fully control AMC’s conduct and that the foreign vendors will be advised of the identity of the Clients.
The services to be provided by AMC on behalf of the buyer are those typically performed by a bona fide buying agent. There will exist a buying agency agreement, and the services to be provided by AMC are detailed in this agreement, a sample copy of which you have submitted. Under the terms of the agreement, the services provided by AMC will be performed under the direction and control of the buyer. This is evident by numerous provisions in the agreement, which you have identified and which have been listed in the Revised Facts portion of this ruling. For example, the agreement provides that AMC negotiates “at the direction of the Principal” and places order with vendors “when instructed”, “in Principal’s name, for Principal’s account.” An important function of AMC is to find the best price and quality for the principal (the agreement states that “AMC shall, at the direction of the Principal, assist in the negotiation of the most favorable prices for the Principal”), which is consistent with the role of a buying agent. See HRL 545660, dated February 10, 1995.
Other factors support a finding that AMC is acting as a buying agent. On the sample invoices and purchase orders you have submitted, the manufacturer, rather than AMC is listed as the vendor. Neither is AMC listed as the purchaser. Instead, it states on a sample purchase order that AMC is acting as agent for the purchaser. A sample commercial invoice shows the principal/buyer as the importer. In your submission, you indicate a charge for the commission that is separate from the purchase price for the merchandise. AMC does not assume risk of loss for damaged, lost or defective merchandise. Generally, AMC does not take title to merchandise. You state, on occasion, when it does, AMC takes title only at the request of, and on behalf of the buyer.
Concerning payment, the sample documentation submitted shows that AMC pays the seller for the costs of the goods, by a letter of credit. The buyer pays AMC for the costs of the goods and the commission by a letter of credit. In New Trends, supra, the court found that a similar arrangement was evidence negating the existence of a bona fide agency relationship. In that case, however, the court stated that the method of payment to the manufacturer was not produced. Here, the documentation you presented shows payment by letter of credit from AMC to the manufacturer for the cost of goods. Consequently, the method of payment does not negate the existence of a bona fide agency relationship.
Based on the totality of the evidence, and provided that the actions of the parties comport to the foregoing, the information submitted supports a finding that commissions paid to AMC constitute bona fide buying commissions. Consequently, the commissions would not be added to the price actually paid or payable.
Please note that the existence of a buying agency relationship is factually specific. The actual determination will be made by the appraising officer at the applicable port of entry and will be based upon the entry documentation submitted. Further, the manufacturer’s/seller’s invoices must be made available upon request.
HOLDING:
For the reasons discussed above, we determine that fees paid pursuant to the First Cost Buying Program are bona fide buying commissions.
As provided above, these findings remain subject to any determinations that may be made by the appraising port officer based on documentation provided at the time of entry.
Sincerely,
Virginia L. Brown
Chief, Value Branch