RR:IT: VA
547127 MWM
Laurence M. Friedman, Esquire
Grunfeld, Desiderio, Lebowitz & Silverman, LLP
245 Park Avenue, 33rd Floor
New York, New York 10167-3397
RE: Buying agency, related parties, dutiability of commissions.
Dear Mr. Friedman:
This is in reply to your letter dated July 7, 1998, in which
you requested a binding ruling on behalf of X, Inc., (Agent)
pursuant to 177.1(a)(1) Customs Regulations (19 C.F.R.
177.1(a)(1)), regarding the dutiability of buying commissions
paid to Agent even in those transactions where the Agent and the
seller are related.
In your ruling request, you sought confidential treatment
regarding certain business information contained within your
brief. Pursuant to section 177.2(b)(7), Customs Regulations (19
C.F.R. 177.2(b)(7)), we grant your request for confidentiality.
We have excised, in the public version of this decision, the
bracketed confidential information.
FACTS:
You state that Agent has acted as a nonexclusive buying agent in
the Far East for several United States importers since its
establishment in 1995. A prototypical buying agency agreement
between Agent, as agent and Company A, as Principal, was
attached to your letter of July 7, 1998 as Exhibit A.
Pursuant to the agreement and on behalf of the Principal, Agent
will: survey potential markets, recommend manufacturers/sellers
and assist in price negotiations; advise of developments; place
orders; inspect the quality of merchandise to be shipped; assist
in the return of defective merchandise; instruct the
manufacturer/seller in the preparation of commercial invoices;
periodically visit factories; arrange for laboratory testing, as
required; and provide inspection certificates as required.
You state that in all instances that the Agent's activities will
be directed and controlled by the Principal. Agent will place
orders with the manufacturer only after the Principal has
approved the manufacturer. ( 1, Exhibit A). Agent will purchase
merchandise for Principal only upon the explicit instructions of
the principal. ( 3, Exhibit A). In addition, Agent will ensure
that the manufacturers are aware that the Principal is the
purchaser. ( 1, Exhibit A). In return, the Principal will
compensate Agent in an amount equal to between A percent (A%) and
B percent (B%) of the FOB Country of Origin price of the
merchandise purchased pursuant to the agreement. ( 12, Exhibit
A). According to counsel, the order size, delivery time, product
type and availability will determine the commission rate. Agent
will be responsible for all costs associated with the performance
of its obligations as a buying agent. ( 15, Exhibit A).
According to counsel Agent does not maintain separate inventory.
In addition, counsel claims that Principal will assume the risk
for loss or damage to the merchandise, once delivered to the port
of export by the seller. In addition, counsel claims that Agent
will not take title to the merchandise. Further counsel claims
that Principal will open a letter of credit, in favor of Agent,
to pay for the merchandise. In addition, Agent will provide the
Principal with a separate invoice for the payment of the buying
commissions. Also, Agent will give Principal the
manufacturers/sellers commercial invoices reflecting the cost of
the merchandise in each transaction. Despite the fact that the
above mentioned claims are not specifically stated in the
agreement, they will be treated by Customs as part of the agreed
upon facts.
Currently, Agent places orders only with sellers unrelated to
both Agent and its various Principals, according to counsel. One
such seller is a vendor in Doha, Qatar. This vendor has two
factory locations and, to reduce operating costs and improve
efficiency, is planning to merge the two. The factory owners
suggested to Agent that it acquire an approximate X% equity
interest in the new manufacturing facility.
You claim that the employees and operations of the manufacturing
facility will be separate and apart from those of the Agent. In
addition, the two "legally and distinct" entities will not share
expenses or profits. You state that the commissions paid to
Agent will not inure to the benefit of (nor be shared in any way
with) the factory. Profits earned by the factory will not be
shared with Agent. The terms of the submitted agreement will
apply to the arrangement described. However, paragraph nine (
9) of the agreement, regarding the relationship of the parties,
will be changed to reflect the new arrangement.
You further claim that Agent will continue to place orders with
other factories, including unrelated factories, after it makes
the proposed investment. In addition, you indicate importers
will not be required to utilize Agent exclusively to make
purchases at the new, related, factory.
ISSUE:
(1) Whether payments made to Agent for services rendered pursuant
to the Agency Agreement constitute buying commissions such that
they are not additions to the price actually paid or payable
under 19 U.S.C. 1401a(b).
(2) Whether the fact that Agent and a certain manufacturer are
related affects the dutiability of the commissions.
LAW AND ANALYSIS:
For purposes of this prospective ruling request, we are assuming
that transaction value will be applicable as a basis of
appraisement.
Transaction Value is defined in 402, Tariff Act of 1930, as
amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C.
1401a), as the price actually paid or payable for the merchandise
when sold for exportation to the United States, plus amounts for
the items specifically enumerated in 402(b)(1) of the TAA.
Buying commissions are not included as an item to be added to the
price actually paid or payable.
The term "price actually paid or payable" is defined in
402(b)(4)(A) as:
"...the total payment (whether direct or indirect, and
exclusive of any costs, charges, or expenses incurred for
transportation, insurance, and related services incident to the international shipment of the merchandise from the country
of exportation to the place of importation in the United States)
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 Headquarters Ruling Letter (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."
Buying commissions paid to buying agents are not included in
dutiable value. Pier 1 Imports v. United States, 708 F. Supp.
351, 13 CIT 161 (1989); HQ 554234 (January 24, 1989). Customs
must examine all the relevant factors to determine if a buying
agency exists. 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 "is the
right of the Principal to control the agent's conduct with
respect to the matters entrusted to him." Rosenthal-Netter, Inc.
v. United States. 12 CIT 77, 679 F. Supp 21 (1988).
In New Trends, Inc. v. United States, 10 CIT 637, 645 F. Supp.
957 (1986) the Court of International Trade set forth several
factors upon which to determine the existence of a buying
agency, including:
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
manufacturers of the merchandise;
Whether the agent's duties are ministerial or
discretionary; and
Whether the parties have entered into a buying agency
agreement.
In addition, to be exempt from appraised value, the importer must
show that "none of the commission inures to the benefit of the
manufacturer." J.C. Penney, supra; United States v. Manhattan
Novelty Corp., 63 Cust. Ct. 699, A.R.D. 263 (1969), Knit Wits
(Wiley), supra; and Rosenthal-Netter, Inc., supra. The courts
have applied the above-stated factors to determine the existence
of a buying agency relationship in New Trends, Inc., supra,
Jay-Arr Slimwear Inc., v. United States, 12 CIT 681 F. Supp. 875
(1988), Rosenthal- Netter, Inc., supra.
You indicate that the submitted buying agency agreement is
prototypical of the described transaction. Under the terms of
the agreement, the services to be performed by the agent are
indicative of those generally provided in a buying agency
relationship. The agent might be visiting factories, negotiating
favorable prices, arranging for shipping, inspecting the goods,
but all at the behest of the importer. Based on the terms of the
agreement it appears that the agent is acting primarily at the
specific direction of the Principal, as is necessary in an agency
relationship. You also state that the agent will not bear the
risk of loss of the goods as "it is uncharacteristic of an agency
relationship to allow the intermediary to bear the risk for
damaged, lost, or defective merchandise." Rosenthal-Netter,
Inc., 12 CIT at, 679 F. Supp. at 26. However, whether a
commission is a buying commission depends in each instance on
the facts of each particular case. J.C. Penney, 80 Cust. Ct. at
95, 451 F. Supp. at 983; Nelson Bead Co., 42 CCPA at 183.
Assuming it would be consistent with that memorialized in the
buying agency agreement, the services you state will be conducted
by Agent are characteristic of a buying agent. However, here we
must examine whether the dutiability of the buying commissions is
affected by Agent's relationship with the manufacturer. When
examining whether a purported agent is a 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 relationship does not, however,
automatically preclude the existence of a buying agency. See
HRL 545177, June 28, 1993, HRL 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 544676, July 24, 1991, this fact
does not automatically preclude the purported agent from being
considered a buying agent. In that case, 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 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 (they included locating materials needed by
the manufacturer; providing quality control and inspection
services, advising the manufacturing of U.S. importing
requirements); and, the buyer was aware of and acquiesced to its
agent performing services on behalf of the seller. The decision
indicates that as long as the payment by the manufacturer does
not impact on the importer's "price actually paid or payable," it
will not affect the nondutiability of the agents' commissions.
See also HRL 544452, September 11, 1990. In citing Bushnell
Int'l, Inc., v. United States, 60 CCPA 157, C.A.D. 1104, 477 F.2d
1402 (1973) and Jay-Arr Slimwear, Inc., Supra, Customs recognized
that a relationship or business tie between the parties to a
transaction was not dispositive, per se, of the bona fides of an
agency relationship, but rather such questions were to be
resolved in light of the totality of the evidence presented. See
HRL 544345, June 30, 1995.
You indicate that the agent and one of the foreign sellers may be
related parties. This does not in itself bar commissions from
being non-dutiable. Bushnell International, Inc. v. United
States, 477 F.2d 1402, 1406; 60 CCPA 157, 161 (1973). However,
such transaction will be subject to closer scrutiny. In several
more recent rulings, involving a purported buying agency
relationship, Customs has reviewed the evidence and found that
purported buying agents were not in fact buying agents or that
the evidence was inconclusive. See, HRL 545661, March 3, 1995;
HRL 545550, September 13, 1995; HRL 545938, June 5, 1996; and
HRL 546262, November 29, 1997. Consequently, as part of the
closer scrutiny described above, Customs will require review of
the relevant documentation before making any findings. See, HRL
547058, May 19. 1998. Accordingly, if you still would like a
ruling on these transactions, transaction documents and other
relevant evidence should be submitted.
However, where the Agent is unrelated to the seller, we find that
the agreement supports your contention that the commissions paid
to the Agent constitute buying commissions. As long as the
parties transact business in accordance with your representations
and the terms of the agreement, the commissions paid to Agent are
buying commissions.
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. The totality of
the evidence must therefore demonstrate that the purported agent
is in fact a 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 dated September
29, 1980 (TAA #7).
HOLDING:
Where Agent is unrelated to the seller, the amounts paid to Agent
may constitute buying commissions such that the payments are not
additions to the price actually paid or payable of the imported
merchandise, based on the facts presented and information
currently available. As provided above, this finding remains
subject to any determinations that may be made by the appraising
officer at the applicable port of entry, based on the
documentation and evidence submitted at that time. Once a
non-dutiable buying agency arrangement exists, it is plausible
that circumstances between the parties may change and that it
could still be found that the roles of the parties are quite
different from what they were agreed or purported to be. We make
no findings with respect to transactions where Agent is related
to the seller.
Sincerely,
Thomas L. Lobred
Chief, Value Branch