HQ 0544452 - Request for Ruling on Nondutiability of Buying Agency Commissions. - United States International Trade Commision Rulings

United States International Trade Commision Rulings And Harmonized Tariff Schedule

faqs.org Rulings By Number Rulings By Category Tariff Numbers

faqs.org > Rulings and Tariffs Home > Rulings By Number > 1991 HQ Rulings > HQ 0222493 - HQ 0544452 > HQ 0544452

HQ 544452

September 11, 1990

VAL CO:R:C:V 544452 ML

CATEGORY: VALUATION

New York, N.Y. 1----

RE: Request for Ruling on Nondutiability of Buying Agency Commissions.

This is in response to your letter dated August 31, 1990, referencing your written request made on January 24, 1990, 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 client. You request a ruling regarding the dutiability of certain commissions to be paid by importers to their agent, Teen Distribution Company (hereinafter referred to as "Teen"), in view of Teen's contemplated receipt of certain rebates from the manufacturers of the imported merchandise.

FACTS:

You state that your client, Teen, sources goods for numerous importing entities. Typical services provided by Teen might include obtaining the best available merchandise that will comport with the importer's needs; visiting and placing orders with factories designated by the importers; arranging for payment terms as per specific instructions; arranging for inland freight, hauling, lighterage, storage consolidation when instructed by the importer; facilitating acquisition of necessary documentation when importing into the United States; acquisition of necessary quota, fabric, piece goods, findings, trimmings, labels and packaging materials in the manner dictated by the importer; visiting manufacturers where orders are placed to inspect the quality of the merchandise shipped to importers; and assisting in the return of defective merchandise.

Teen is paid a buying agent's commission calculated as a percentage of the "free on board" ("FOB") price of the goods purchased. The commissions are not included in the manufacturers' sales price of the goods and will either be separately broken out on invoices issued by Teen which report the FOB prices charged by the manufacturers, or, separate invoices will be issued by Teen directly to the importers. Either way, payment for the commissions or FOB prices plus commissions will be made directly to Teen, and would not be shared with any of the manufacturers.

Teen wishes to participate in rebate programs with the manufacturers. Teen would receive rebates from the U.S. importers' designated manufacturers in exchange for its performance of supplemental quality control and inspection activities at the factories, its provision of U.S. Customs compliance advice services, and other ministerial services designed to facilitate procurement of goods. While the importers would, in all instances, be made aware of the rebate program, none of the rebates received by Teen would be passed on to them.

Additionally, Teen notes that they have no independent financial interest in the business of any of the manufacturers, and have no intention of acquiring a financial interest in any of them. Should disputes between the importer and the manufacturer arise, Teen states that it would most definitely assist the importer in resolving disputes regarding the quality of the merchandise.

ISSUE:

Will buying agency commissions be treated as nondutiable when the agent participates in manufacturers' rebate programs?

LAW AND ANALYSIS:

For the purpose of this prospective ruling request, we are assuming that transaction value will be applicable as the basis of appraisement.

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 when sold for exportation to the United States," 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 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. 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 637, 645 F. Supp. 957 (1986). 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 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 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 manufacturer 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, 12 CIT , 681 F. Supp. 875 (1988), Rosenthal- Netter,Inc. v. United States, 12 CIT , Slip Op. 88-9 (1988), 679 F. Supp. 21 (1988).

Under the facts provided, the services to be performed by Teen 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. It appears that Teen is acting primarily at the specific direction of the importers, as is necessary in an agency relationship. In keeping with the principles of an agency relationship, the importers will, in all instances, be apprised of any rebates to be paid to Teen by the manufacturers of their merchandise. The Restatement (Second) of Agency 14K (1958). Additionally, Teen 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, 12 CIT at , 679 F. Supp. at 26.

Whether a commission is a bona fide 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. In the instant case, a buying agency is further supported by Teen's separately breaking out the amounts for commissions on the invoices or, by their preparing separate invoices which they will issue directly to the importers.

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 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.

An additional point to be addressed is the matter of the rebate programs between the agent and the manufacturers. As the rebates will not impact on the importer's " price actually paid or payable", it will have no effect on the nondutiability of the agent's commissions. This will continue to be the case as long as the agent works primarily for the benefit of the importer, finding the best price/quality deal as designated by the importer.

HOLDING:

In view of the foregoing, it is our conclusion that the commissions to be paid to Teen to perform the services of purchasing merchandise from manufacturers are to be considered bona fide buying commissions; and therefore, not to be added to the price actually paid or payable.

We further conclude that any rebates received by the agent from the manufacturers will not impact on the nondutiability of buying commissions as long as the agent continues to work at the direction of his importers with the importers maintaining the requisite degree of control over the actions of it's agent.

Sincerely,

John Durant, Director

Previous Ruling Next Ruling