RR:IT:VA 547239 DWS
Mr. Lawrence M. Friedman
Grunfeld, Desiderio, Lebowitz & Silverman LLP
245 Park Avenue
New York, NY 10167
RE: Buying Agency; Related Parties
Dear Mr. Friedman:
This is in response to your facsimile letter dated December 2, 1998, on behalf of [X] (Agent), concerning HQ 547127, dated November 20, 1998, specifically regarding the dutiability of buying commissions paid to Agent in those transactions where Agent and Seller are related. Our holding in HQ 547127, pertaining to the situation where Agent is unrelated to the seller, is not under reconsideration and is not at issue in this ruling. It is our understanding that your request concerns prospective transactions.
In HQ 547127, we granted your request for confidentiality for certain information. For the purposes of this ruling, we will continue to treat the information as confidential, and that information is bracketed in this ruling and will not be disclosed in copies of this ruling made available to the public.
FACTS:
As we detailed the relationship between Principal and Agent in HQ 547127, and declared such an agency to be proper, we will not reiterate that relationship in this ruling and will concentrate on the relationship between Agent and related Seller.
In HQ 547127, we stated the pertinent facts as follows:
Seller is a vendor in Doha, Quatar. Seller 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 Agent. In addition, the two “legally and distinct” entities will not share expenses or profits. You state that the commissions paid to Agent by Principal 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 *** 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.
We note that you have not submitted any new documentation concerning the new relationship between Agent and Seller, and you have stated that, to your knowledge, none exists.
ISSUE:
Whether the described relationship between Agent and Seller negates our determination in HQ 547127 that payments made to Agent by Principal constitute buying commissions such that they are not additions to the price actually paid or payable under 19 U.S.C. 1401a(b).
LAW AND ANALYSIS:
Merchandise imported into the U.S. 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 (19 U.S.C. 1401a; TAA). 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 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). As a general matter, bona fide buying commissions are not added to the price actually paid or payable. Pier 1 Imports, Inc. v. U.S., 708 F. Supp. 351, 13 CIT 161, 164 (1989); Rosenthal Netter, Inc. v. U.S., 679 F. Supp. 21, 12 CIT 77 (1988); Jay Arr Slimwear, Inc. v. U.S., 681 F. Supp. 875, 12 CIT 133 (1988).
The existence of a bona fide buying commission depends upon the relevant factors of the individual case. J.C. Penney Purchasing Corp. v. U.S., 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. Rosenthal Netter, supra; New Trends, Inc. v. U.S., 645 F. Supp. 957, 10 CIT 637 (1986); B.W. Wholesale Co., Inc. v. U.S., 462 F. Supp. 1399, 1403, 58 CCPA 92, C.A.D. 1010, (1971).
In HQ 547127, in making no findings with respect to transactions when Agent is related to Seller, we stated, in part, the following:
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.
*****
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.
Although it is well settled that closer scrutiny of documentation is warranted when an agent and a seller are related, in the instant case, which involves prospective transactions, you state that the documentation with regard to the new relationship between Agent and Seller does not yet exist.
You state the following with regard to the relationships involved in this case: Agent and related Seller are, and will continue to be, legally and financially distinct entities; Principal will control Agent; in all purchase transactions, Agent will hold itself out as the buying agent of Principal; Agent will not be permitted to share its commission with any vendor/supplier, nor will Agent be permitted to solicit or accept renumeration from any supplier; Agent will not be permitted to buy and sell for its own account; Agent may act as a buying agent for several purchasers and will deal with unrelated sellers in addition to related Seller; Agent will invoice Principal for commissions earned in connection with purchases made on behalf of Principal; Principal will be notified of Agent’s relationship with Seller and manufacturing facility; Agent will transmit Seller’s invoices to Principal for payment; the commissions of Agent will not be shared with Seller or with any of the factories which will be producing the merchandise; no portion of the buying commissions will inure to the benefit of Seller or any unrelated Seller; and Agent will hold only a minority interest in Seller, only one of several sellers with which orders are placed.
In light of the foregoing, and provided that the actions of the parties comport to the foregoing and any future agreements specifically document such actions, the information submitted supports a finding that commissions paid to Agent constitute bona fide buying commissions when Agent and Seller are related. Consequently, the commissions would not form part of the price actually paid or payable. See HQ 545177, dated June 28, 1993; and HQ 544657, dated July 1, 1991.
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; and HQ 542141, dated September 29, 1980 (TAA #7).
HOLDING:
Based upon the statements made by Agent, the described relationship between Agent and Seller does not negate our determination in HQ 547127 that payments made to Agent by Principal constitute buying commissions such that they are not additions to the price actually paid or payable under 19 U.S.C. 1401a(b). 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 upon the documentation and evidence submitted at that time.
Sincerely,
Thomas L. Lobred
Chief, Value Branch