HQ 0544933 - Dutiability of Commissions Paid to Purported Buying Agent Your Reference: 91-2037-12(1)I - United States International Trade Commision Rulings

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HQ 544933
July 10, 1992
VAL CO:R:C:V 544933 ILK

CATEGORY: VALUATION

New York, NY 10017

RE: Dutiability of Commissions Paid to Purported Buying Agent Your Reference: 91-2037-12(1)I

This is in response to your letter of February 11, 1992 (hereinafter referred to as the "request"). On behalf of your "importer"), a United States corporation, you request a ruling on whether a fee paid to a purported buying agent ------- --------- ----. (hereinafter referred to as the "agent"), a Panamanian corporation, with offices in Nassau, Bahamas, is dutiable.

FACTS:

The importer imports footwear from Brazil and other foreign countries, from unrelated sellers, and uses the agent in connection with its purchases from Brazil. The agent currently serves as a buying agent for the importer, pursuant to an agreement, an unsigned copy of which you attached as Exhibit "A" (hereinafter referred to as the "existing agreement") to your request. Pursuant to the existing agreement the responsibilities of the agent include assisting the importer "in the design, styling and the building of lines of Products, including obtaining models, prototypes and samples...from manufacturers," selecting manufacturers, ensuring observance of the importer's styles, etc., ensuring timely delivery, providing product information to manufacturers, selecting manufacturers, placing orders and transmitting documents, maintaining order and product records, seeing that appropriate tests and inspections are carried out, and providing office space in Brazil for visiting importer personnel and assisting importers personnel on visits to such office and manufacturing facilities in Brazil. The importer pays the agent $------- per year, in monthly installments for such services. Currently other entities provide product consolidation, inspection, and preparation of export documentation services for the importer. For those services provided by the seller, the cost of the services are included in the dutiable f.o.b. price.

The importer has a proposed agreement (a copy of which was attached as Exhibit "B" and which will hereinafter be referred to as the "proposed agreement") pursuant to which the responsibilities of the agent would be expanded to include those which were previously provided by other entities. It is stated in the request and provided for in the proposed agreement, that the agent is not related to and has no financial interest in any of the sellers, and will not share its commission with any seller and will not solicit or accept remuneration from any seller. The request states that the importer would be able to purchase the merchandise without the agent, and that the agent is not permitted to buy and sell for its own account in transactions involving the importer. Pursuant to the proposed agreement the agent will not be paid any commissions for merchandise determined to be defective, and the agent and seller are responsible for any concealed shortages or overages greater than a certain number of units, and shall be charged or credited as appropriate. Pursuant to the proposed agreement, for its services the agent will be paid $--------- per year, in monthly installments, plus a fee equal to -% - -% of the f.o.b. price of the merchandise ordered and shipped pursuant to the agreement.

The responsibilities of the agent to the importer pursuant to the proposed agreement include those provided for in the existing agreement (with the exception of assisting the importer "in the design, styling and the building of lines of Products"), plus: assisting in locating manufacturers and obtaining models and samples, assisting in negotiating prices with manufacturers designated by the importer and obtaining quotes, compiling market information, placing orders and arranging payment terms based on the importer's instructions, assisting in the documentation necessary for the importation of merchandise, inspection of the quality of merchandise shipped and providing periodic production progress reports, assisting in the return of or obtaining compensation for defective merchandise, maintaining inventory records of material or finished products in the agent's possession, arranging for consolidation of shipments and inland freight at the direction of the importer, providing inspection certificates as required by the importer, and attempting to prevent the supplier's resale of rejected merchandise to others without removal of markings identifying importer.

Under the proposed agreement, each shipment will be accompanied by a seller's invoice to the importer, and the importer will make payment for the cost of the merchandise purchased directly to the seller based on the price on the commercial invoice. The agent will provide the importer with a separate invoice for the buying commissions. The separate invoice will also contain non-production related expenses incurred on behalf of the importer, such as inland freight, which expenses are to be incurred only with the consent of the importer.

ISSUE:

Whether the described services to be provided by the agent pursuant to the proposed agency agreement are those of a bona fide buying agent.

LAW AND ANALYSIS:

The services described above have long been considered characteristic of a buying agent. See e.g.., Jay-Arr Slimwear Inc. v. United States, 12 CIT 133, 681 F.Supp. 875 (1988); J.C. Penney Purchasing Corp. et al. v. United States, 80 Cust. Ct. 84, C.D. 4741, 451 F. Supp. 973 (1978). In addition, in Rosenthal- Netter, Inc. v. United States, 12 CIT 77, 679 F.Supp. 21, aff'd. 861 F.2d 261 (Fed. Cir. 1988), the court noted that the factors in deciding whether a bona fide agency relationship exists include: the right of the principal to control the agent's conduct, the transaction documents, whether the intermediary was operating an independent business primarily for its own benefits, and the existence of a buying agency agreement. We have ruled that "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." Headquarters Ruling Letter (HRL) 542141 dated September 29, 1980, also cited as TAA No. 7. Although no single factor is determinative, the primary consideration is the "right of the principal to control the agent's conduct with respect to the matters entrusted to him." J.C. Penney Purchasing Corp., 451 F.Supp. at 983.

We note that the primary considerations in determining whether a bona fide buying agency exists pursuant to the proposed agreement are addressed in your request. With respect to the transaction documents, as you stated:

[A]n 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.

TAA No. 7. Under the agreement at issue here, the seller is providing an invoice directly to the importer. However, assuming that as stated in the request, the agent will receive no remuneration from the seller, and the importer pays the seller directly, the invoice to the importer is sufficient for the purpose of establishing that the agent is not a seller and determining the price actually paid or payable to the seller.

Your request did not address the issue of risk of loss. It has been held that an "agent's liability for lost or damaged goods would also tend to indicate a sale rather than an agency." New Trends, Inc. v. United States, 10 CIT 637, 645 F.Supp. 957, 961 (1986). It has also been held that it is "uncharacteristic of an agency relationship to allow the intermediary to bear the risk for damaged, lost, or defective merchandise." Rosenthal- Netter, Inc. v. United States, supra, 679 F.Supp. at 26. Under the subject proposed agreement the agent bears the risk of defective merchandise and concealed shortages or overages. Clearly the agreement by the alleged agent to accept risk of loss for defective goods and concealed shortages or overages undercuts the claim that the agreement describes an agency relationship.

The services performed by the agent are those usually performed by a bona fide buying agent. If the terms of the proposed buying agency agreement and those outlined above are met, we are satisfied that the importer will exercise the requisite degree of control over the buying agent. Thus, on the basis of the information you have provided regarding the relationship between the importer, agent and seller, the totality of the evidence indicates that the agent is in fact a bona fide buying agent. In addition, the submission of the agent's invoice along with the seller's invoice would support that the agent is not an independent seller and that the commission is not part of the price paid or payable to the seller. Therefore, we conclude that the fees to be paid to the agent pursuant to the proposed agreement constitute bona fide buying commissions which are not included in the transaction value of the imported merchandise.

One issue not addressed in your request is whether there is a relationship between the agent and the importer. For the purposes of this ruling, it is assumed that a relationship does not exist. If it does exist, it would need to be disclosed to the appraising officer, as such related party transactions are subject to close scrutiny. HRL 544396 dated May 14, 1990; Bushnell International, Inc. v. United States, 60 C.C.P.A. 157, 477 F.2d 1402 (1973).

This ruling is subject to the condition that the actual transaction between the importer and the agent is as characterized above and in the proposed agreement. It is the position of Customs that "having legal authority to act as buying agent and acting as buying agent [are] two different matters" and Customs is entitled to examine evidence which proves the latter. U.S. Customs Service General Notice, 11 Cus. Bull.& Dec. 15 (March 15, 1989). See also Pier 1 Imports, Inc. v. United States, 13 CIT 161, 708 F.Supp. 351 (1989); Jay-Arr Slimwear Inc., supra; and Rosenthal-Netter, supra.

Please note that this determination that the agreement is a factor that supports a finding that an agency relationship exists in no way authorizes the acceptance of an annual fee of $------- -- plus a -% - -% commission per shipment. The appraising officer will determine whether the total fee exceeds the commission rate that is customary in the trade for bona fide buying agents. Documentary evidence detailing the extent of services provided beyond those customarily performed by such agents would need to be presented to the appraising officer. In addition, this ruling is limited to the proposed agreement, and is not applicable to the existing agency agreement.

HOLDING:

The proposed agreement as presented in your ruling request would constitute a favorable factor supporting a finding that the services provided by the agent pursuant to the agreement may be considered the services of a bona fide buying agent, and thus the agreement would constitute a factor supporting a finding that the fees may be considered bona fide buying commissions.

Sincerely,

John Durant, Director
Commercial Rulings Division

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