HQ 0545038 - Response to request for internal advice 35/92; dutiability of buying commission - United States International Trade Commision Rulings

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HQ 545038

February 17, 1993
VAL CO:R:C:V 545038 ILK

CATEGORY: VALUATION

Area Director
JFK Airport

RE: Response to request for internal advice 35/92; dutiability of buying commission

Dear Sir:

This is in response to your request for internal advice dated June 25, 1992 (and accompanying May 20, 1992 submission), pertaining to the dutiability of a commission paid by xxxxxxxxxx xxxxxxxxxx, Ltd. (hereinafter referred to as the "importer") to xxxxxxxxxxx, Ltd. (hereinafter referred to as the "agent") with respect to merchandise purchased from xxxxxxxxxxxx Ltd. (hereinafter referred to as the "seller"). The importer has submitted its position by its Request for Internal Advice dated February 27, 1992.

FACTS:

The importations consist of wearing apparel manufactured in India. The importer purchases merchandise from the seller. The importer claims in its submission that it has employed the agent as a buying agent for many years, and that the agent acts as its buying agent for purchases from Hong Kong, and other countries, as well as India. The agent is based in Hong Kong.

The importer has provided an agreement between itself and the agent, dated July 18, 1989. The agreement is stated to be effective from January 1, 1985 and provides that the agent will act as the exclusive buying agent for the importer and agrees to perform the services of 1) assisting in price negotiation, visiting the manufacturers and obtaining samples of merchandise for submission to the importer, 2) placing orders with manufacturers on behalf of the importer, acting only upon the specific instructions of the importer, 3) arranging inland freight, hauling, lighterage, insurance to steamer, storage, etc. 4) inspecting the quality of the merchandise, 5) forwarding acknowledgements from the manufacturer to the importer and 6) assisting in the return of merchandise deemed to be defective, and assisting in the recovery of any amounts due to the importer from the manufacturer as a result of defective merchandise, shortages, etc. The agreement provides that the agent shall never act as a seller in any transaction involving the importer, other than quota, which the agent may purchase on behalf of the importer.

The importer agrees to compensate the agent on the basis of 15% of the f.o.b. price of the merchandise purchased by the agent pursuant to the agreement. The importer agrees to reimburse the agent for all expenses incurred on behalf of the importer. The importer has the option of paying for the merchandise directly to the manufacturer or through the agent. In order to avoid quality problems that can arise as a result of the seller's subcontracting of the production, the importer has asked the agent to "perform an inspection function which is in its view substantially more comprehensive than is usual." In a November 16, 1992 conversation with a member of my staff, counsel for the importer stated that the agent monitors production throughout the entire production process, not just upon completion of production, and that the importer attributes its lack of quality problems to the inspection undertaken by the agent.

It was determined by Customs' interviews of the importer, that the principals of the importer and the agent are brothers, and the principal of the seller is a third brother's widow, who became principal of the company after her husband's death. In November, 1992 conversations with a member of my staff, counsel for the importer stated that the third brother had died in December, 1988 and the two brothers and the widow have no common businesses. According to Customs' May 20, 1992 submission the agent only orders from the seller or its subsidiaries. According to Customs, all of the subsidiaries are located at the seller's address, use the same phone, telex and fax numbers, and use similar invoice formats, which invoices are all signed by the same authorized signatory.

The Customs May 20, 1992 submission states that no evidence has been provided that the agent seeks out any unrelated suppliers in India, or that the agent provides any market or price information from unrelated suppliers in India. It is stated that there is no evidence that the importer participates in price negotiations, or ever returns merchandise to the agent.

The importer has submitted a representative set of transaction documents which include an entry summary, seven of the nine seller's invoices covered by the entry, representing shipment No.7032, an agent's inspection certificate covering shipment No.7032, a commission invoice issued in connection with shipment No.7032, a letter of credit from the account of the importer in the amount of 5,000,000.00 Indian Rupees(IRS), naming the seller as beneficiary, and a debit advice form showing payment for shipment Nos.7032 and 7029 in the amount of $45,552.68 (or IRS 741,900.38). The seven invoices amount to an F.O.B. value of IRS.269,400.00 and a C&F value of IRS.311,743.34. The entry summary shows the import date as July 8, 1989.

It is the importer's position that the agent and seller are not related parties within the meaning of the appraisement statute, and that the commission paid to the agent is a non- dutiable buying commission.

ISSUE:

Whether the services provided by the agent are those of a bona fide buying agent.

LAW AND ANALYSIS:

From the submissions, it appears that the only issue before Customs is whether a bona fide buying agency relationship exists between the importer and agent. We are able to determine the buying agency issue without reaching the issue of whether the buyer, seller and agent are related.

The services described above have long been considered characteristic of a buying agency. 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.

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. Evidence in addition to the agency agreement is particularly relevant in this case, as the representative entry summary submitted indicates an importation date prior to the execution of the agency agreement.

With respect to the transaction documents, we have required that:

[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; see also 23 Cust. Bull. & Dec. No.11 at 9 (March 15, 1989). The exhibits to the importer's submission contain invoices from the seller to the importer. Assuming that other factors support the finding of a bona fide buying agency, the seller's 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.

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). According to the importer's submission the agent does not bear the risk of loss, defective merchandise or price fluctuation.

In Jay-Arr Slimwear Inc. v. United States, the Court of International Trade held that "commissions representing services associated with the actual production of the merchandise are a component of selling price and thus, dutiable." The court further stated that "similarly, inspection commissions were considered part of the dutiable value of the goods where the agent was to inspect all component pieces at each stage of production," and that "the presence of this charge indicated that the goods were quality controlled and therefore, these expenses were incidental to placing the merchandise in condition packed ready for shipment to the United States." In this case, the importer states in its submission that the agent's inspection function is "substantially more comprehensive than is usual," takes place throughout the process in an effort to avoid quality problems, and in fact, the importer attributes its lack of quality problems to the inspection process.

Other than the extensive inspection services, the services performed by the agent appear to be those usually performed by a bona fide buying agent. If the terms of the buying agency agreement and those outlined above are met, we are satisfied that the importer exercises the requisite degree of control over the buying agent. However, based on the importer's statement of extensive quality inspections, and the commensurate 15% rate of commission paid to the agent, and lack of an agency agreement at the time the representative transactions occurred, we do not find that the totality of the evidence indicates that the agent is in fact a bona fide buying agent. Therefore, we conclude that the fees to be paid to the agent do not constitute bona fide buying commissions and the fees are to be included in the transaction value of the imported merchandise.

HOLDING:

Consistent with the foregoing, based on the information presented, we find that the relationship between the importer and agent do not meet the criteria of a bona fide buying agency relationship.

Sincerely,

John Durant, Director

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