HQ 0544338 - Buying agency; fees paid to a subsidiary part of the price actually paid or payable; 19 U.S.C. 1401a(b) - 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 > 1993 HQ Rulings > HQ 0453024 - HQ 0544680 > HQ 0544338

HQ 544338
September 13, 1989

CLA-2 CO:R:C:V 544338 DHS

CATEGORY: VALUATION

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,

Previous Ruling Next Ruling