CLA-2 CO:R:C:V 544338 DHS
Warren E. Connelly, Esq.
Akin, Gump, Strauss, Hauer & Feld
1333 New Hampshire Avenue, N.W.
Suite 400
Washington, D.C. 20036
RE: Buying agency; fees paid to a subsidiary part of the price
actually paid or payable; 19 U.S.C. 1401a(b)
Dear Mr. Connelly:
This is in response to your letter of May 16, 1989,
regarding the effect of section 402(b) of the Tariff Act of 1930,
as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C.
1401a(b)), on certain contemplated transactions to be entered
into by your clients company. You request a binding ruling
regarding the dutiability of certain commissions to be paid to a
related foreign company in exchange for services in aiding in the
purchase of merchandise from foreign manufacturers. You also
inquire as to the dutiability of certain management fees paid to
a subsidiary in the Far East and Southeast Asia.
FACTS:
You state that your client, Pier One Imports and a Hong Kong
subsidiary have entered into an agreement with a related company
in the Far East and Southeast Asia to act as a buying agent.
Your client has also, entered into a separate agreement with the
Hong Kong subsidiary to provide services to manage the buying
agent and the buying operations. You state that the president of
the subsidiary which is to provide the management services is
also the president of the company which is to provide the buying
agency services.
The agreement with the purported buying agent provides that
the agent is to perform the services of arranging trips for the
importer; arranging appointments for the importer with the
foreign suppliers; assisting in the translation and other aspects
of communications with the manufacturers for the importer;
preparing a summary of purchases by each buyer for the importer;
receiving merchandise shipped to the subsidiary by the foreign
supplier and inspecting the quality and quantity; sorting
masterpacks of accepted merchandise by the U.S. or the canadian
port; arranging for delivery of merchandise to steamship lines
pursuant to instructions issued by the importer; warehousing
masterpacks of merchandise according to shipping priorities;
arranging for return of rejected merchandise to the supplier;
expediting settlement for claims arising from lost, damaged or
otherwise rejected merchandise on behalf of and at the direction
of the subsidiary.
The subsidiary is to open a letter of credit to
the agent in order to support a back-to-back letter of credit
opened by the agent which will be drawn up by the supplier. Once
the supplier has invoiced the agent for the account of the
subsidiary, the agent will invoice the subsidiary. The letter of
credit provided by the subsidiary may be acquired from loaned
funds from the importer.
The agent is to receive a 6 percent commission from the
subsidiary based on the cost of merchandise delivered in Hong
Kong. Actual warehouse handling expenses incurred by the agent
will be reimbursed by the subsidiary. The risk of loss and title
to the merchandise are to be held by the subsidiary or parent.
With respect to the contract for management services between
the importer and the subsidiary, the subsidiary is responsible
for the following activities: coordinating and facilitating the
importers buying operations in the Far East and Southeast Asia by
overseeing the purchase, packaging and delivery of the
merchandise on behalf of the importer; issuing packing lists,
invoices and bills of lading; issuing purchase orders for the
merchandise requested in the master purchase order from the
importer and obtaining all necessary documentation to be sent to
the supplier; managing any buying agency relationship established
by the importer; overseeing the day-to-day performance of the
buying agent; issuing the appropriate documents and selecting
shipping lines in accordance with the instructions provided by
the importer; contracting with the steamship lines in the
subsidiaries name for the delivery of the merchandise;
instituting measures to improve the quality control and
inspection of the merchandise including establishing procedures
regarding the fumigation and drying of wicker raw materials prior
to shipment and the insertion of silica gel in containers with
partially dry materials to prevent discoloration during shipment;
insuring effective inspection efforts on merchandise
consolidation, packaging and loading; insuring prompt
presentation and collection efforts on claims for damaged or lost
merchandise; assuring supplier compliance with purchase order
packaging procedures; assisting the importer with research and
development of new products.
All contracts by the subsidiary or the agent for the
purchase of merchandise will only become effective when signed by
a person authorized to sign in the name of the importer or by an
appropriate buyer for the importer. No other agreement or
commitment is binding on the importer without a confirmation in
writing by a person duly authorized by the importer.
The fee to be paid to the subsidiary for its services will
be periodically assessed in a method which is unrelated to the
value of the merchandise and invoiced separately from the
merchandise. The fee is based upon the value of the services
rendered by the prospective manager. You state that the costs
accruing to the importer before and after the establishment of
the managers role will be compared to determine the value of each
of the services performed. Included within these costs
comparisons will be the expenses of damaged merchandise, returns
for failure to meet specifications, misrouting, and claim
resolution. No specific figures as to the amount of the fee have
been presented.
At the time of submission of your request, there had not
been any importations into the U.S. under these agreements. The
merchandise is anticipated to be imported into the U.S. in Los
Angeles, Baltimore, Savannah, Chicago, and Fort Worth.
ISSUES:
(a) Are the activities performed by an agent who is related to
the importer and the subsidiary sufficient to conclude that a
buying agency exists?
(b) Are fees paid a subsidiary to manage buying operations part
of the price actually paid or payable for the imported
merchandise?
LAW AND ANALYSIS:
For the purpose of this prospective ruling request, we are
assuming that transaction value will be applicable as the basis
of appaisement.
Transaction value is defined in section 402(b)(1) of the
TAA. This section provides, in pertinent part, that the
transaction value of imported merchandise is the price actually
paid or payable for the merchandise plus amounts for the items
enumerated in section 402(b)(1). Buying commissions are not
specifically included as one of the additions to the "price
actually paid or payable." The "price actually paid or payable"
is more specifically defined in section 402(b)(4)(a) 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.
It is clear from the statutory language that in order to
establish transaction value one must know the identity of the
seller and the amount actually paid or payable to him. As stated
in HRL 542141 (TAA #7), dated September 29, 1980, "...an invoice
or other documentation from the actual foreign seller to the
agent would be required to establish that the agent is not a
seller and to determine the price actually paid or payable to the
seller. Furthermore, the totality of the evidence must
demonstrate that the purported agent is in fact a bona fide
buying agent and not a selling agent or an independent seller."
In order to view the relationship of the parties as a bona
fide buying agency, Customs must examine all the relevant
factors. J.C. Penney Purchasing Corporation et al. v. United
States, 80 Cust. Ct. 84, C.D. 4741 (1978), 451 F. Supp. 973
(1983); United States v. Knit Wits (Wiley) et. al., 62 Cust. Ct.
1008, A.R.D. 251 (1969). The primary consideration, however, "is
the right of the principal to control the agent's conduct with
respect to the matters entrusted to him." Dorf Int'l Inc., et
al. v. United States, 61 Cust. Ct. 604, A.R.D. 245, 291 F. Supp.
690 (1968). The degree of discretion granted the agent is an
important factor. New Trends Inc. v. United States, 10 CIT _,
645 F. Supp. 957 (1986). The fact that the buyer and the agent
are related does not preclude the existence of a buying agency
however, the circumstances surrounding such related party
transactions are subject to close scrutiny in determining whether
a commission is a bona fide buying commission. Bushnell v.
United States, C.A.D. 110 (1973). The plaintiff bears the burden
of proof to establish the existence of a bona fide agency
relationship and that the charges paid were bona fide buying
commissions. Monarch Luggage Company., Inc., v. United States,
13 CIT ___, Slip. Op. 88-91 (1989).
The Court of International Trade in the case of New Trends
Inc., supra, set forth several factors upon which to determine
the existence of a bona fide buying agency. These factors
include: whether the agents 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 its
commission; whether the language used on the commercial invoices
is consistent with the principal-agent relationship; whether the
agent bears the risk of loss for damaged, lost or defective
merchandise; and whether the agent is financially detached from
the manufacturers of the merchandise.
The above-stated factors have been determining factors
applied by the courts to deny the existence of a buying agency
relationship in New Trends, Inc., supra, Jay-Arr Slimwear Inc.,
v. United States, _CIT_, Slip Op. 88-21 (1988), Rosenthal-Netter,
Inc. v. United States, _CIT_, Slip Op. 88-9 (1988).
The factual scenario provided is similar to that presented
in J.C. Penney Purchasing Corporation, supra. J.C. Penney
established a wholly owned subsidiary (Purchasing) in the Far
East which provided services of acquiring merchandise for Penney.
In order to handle the volume of purchases required of Penney,
Purchasing entered into a agreement with an agent to provide
buying services in Japan and Hong Kong. Upon the receipt of
orders from Penney, Purchasing would advise the agent of the
specified merchandise and the agent would in turn research the
market, contact the manufacturers and order the merchandise on
behalf of Purchasing. Payment was made to the agent through a
letter of credit drawn on Purchasing's bank upon the presentation
of the proper documentation. Purchasing held title to the
merchandise until such time as it was delivered to the U.S. and
transferred to Penney upon the payment of the invoice price.
The services to be performed by the agent are indicative of
those generally provided in a buying agency relationship. This
coupled with other factors sustain the notion that the importer
has control over the agent. This is substantiated by the fact
that the prospective agent is not to act in behalf of the
importer without the written authority of the importer. The
commissions are to be invoiced and paid for separately. The
handling and freight charges are to be reimbursed to the agent.
The agent can only place an order with a factory after receiving
instructions from the importer or subsidiary from the master
purchase order. The invoices are to provide that the merchandise
is purchased by the agent on behalf of the account of the
subsidiary. Further, in Pier 1 Imports, Inc. v. United States,
_CIT_, Slip Op. 89-25 (1989), the court gave validity to the
finding that a bona fide buying commission existed, in a fact
situation identical to those presented, when a master letter of
credit was issued for each purchase payable to the agent and then
a back to back letter of credit was set up between the agent and
the manufacturers invoiced in the exact amount of the importers
purchase order and letter of credit.
On the basis of the information you have provided regarding
the prospective transactions in question, if the actions of the
parties conform to your letter and the terms of the buying agency
agreement the importer will exercise the requisite degree of
control over the buying agent. Note however, that the degree of
control asserted over the agent is factually specific and could
vary with each importation. The actual determination as to the
existence of a buying agency will be made by the appraising
officer at the applicable port of entry upon the presentation of
the proper documentation as described in TAA No. 7. Based upon
these considerations, we conclude that the commissions to be paid
to the buying agent constitute bona fide buying commissions which
will not be dutiable under transaction value.
You have distinquished this factual situation from C.S.D.
89-30. In that case, a foreign subsidiary was established by the
U.S. importer to procure jewelry from foreign manufacturers. The
merchandise was shipped from the manufacturers to the subsidiary.
The invoices from the manufacturers to the subsidiary indicated
that the subsidiary was purchasing the jewelry for its own
account. Further, instead of the customary 5 to 7 percent
commission stated separately on the invoice as a buying
commission, the subsidiary charged 30 percent of the invoice
price to the importer and added it to the price of the jewelry.
We concluded under these facts that the subsidiary was acting as
a buyer of the merchandise and reselling it to the importer.
Based upon the facts you have presented, the fee assessed
for the management services will be unrelated to the value of the
merchandise and a separate invoice will be provided for the
services. Therefore, it appears that C.S.D. 89-30 is not
controlling.
With regard to the management services, the activities
undertaken by buyer on his own account, other than those for
which an adjustment is provided in proposed Section 402(b)(1),
are not considered to be part of the price actually paid or
payable, and payments for such services would not be added to the
price actually paid or payable.
HOLDING:
In view of the foregoing, it is our conclusion that the
commissions to be paid to the prospective company to perform the
services of assisting in the purchase of the merchandise from the
foreign manufacturers are to be considered bona fide buying
commissions as long as the considerations discussed above are
followed.
Additionally, payments for the management services provided
by the subsidiary are not considered to be part of the
transaction value.
Sincerely,
John Durant, Director,
Commercial Rulings Division