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HQ 544965




February 22, 1994

VAL CO:R:C:V 544965 ILK

CATEGORY: VALUATION

Area Director
Kennedy Airport Area
Jamaica, New York

RE: Dutiability of Commissions Paid to Purported Buying Agent

Dear Sir:

This is in response to a letter of March 31, 1992 from John Pellegrini on behalf of his client, Teximpor, Inc. (hereinafter referred to as the "importer"), regarding whether a fee paid to Epic Designers Ltd. (hereinafter referred to as "EDL"), a purported buying agent, is dutiable. The request was followed by a July 23, 1992 meeting between Mr. Pellegrini and members of my staff in the Value and Marking Branch. Subsequently, Mr. Pellegrini made an additional submission dated August 5, 1992, and one dated October 5, 1993. Customs in the Kennedy Airport Area and the importer agreed to submit this matter to Headquarters for a ruling. Because this matter concerns ongoing transactions and entries presently before Customs, we are treating this matter as a request for internal advice and are responding accordingly. The Regulatory Audit Division, New York Region has made a submission to this office, dated December 16, 1993, which discusses various audit findings and concerns regarding the issue presented herein. We have reviewed the points raised in the submission, and find that they do not impact this decision. We regret the delay in responding.

FACTS:

The importer, a U.S. corporation, imports wearing apparel from numerous sources, including Hong Kong, the People's Republic of China, India, Bangladesh, the United Arab Emirates, Turkey, Indonesia, Oman and Bahrain. The request claims that EDL acts as a buying agent for the importer in Bahrain, Bangladesh, Hong Kong, Indonesia, Macau, Oman, the People's Republic of China and the United Arab Emirates. The arrangement between the importer and EDL is documented in a written "Buying Agency Agreement" dated October 5, 1985 (hereinafter referred to as the "Agreement"). The Agreement provides that EDL will represent the importer "to handle all purchases of wearing apparel from various countries to USA," will send purchase orders to sellers and assist the importer in selecting factories and/or exporters, will process the orders, will obtain quotas where necessary and inspect the merchandise and issue inspection certificates. The agreement further provides that the importer will open letters of credit in favor of the "exporter" and must make all claims for defective merchandise within seven days of receipt of the merchandise by the importer. The request claims that the Agreement requires EDL to perform such services as identifying reliable manufacturers, developing information about the general level of market prices and market conditions, obtaining offers, assisting in export and distribution of merchandise and preparation of documentation. The importer pays EDL a commission of ten percent of the FOB price of the imported merchandise. According to the request, commission payments are made on a periodic basis, based upon EDL's invoice. The request states that EDL bears no risk for lost or defective merchandise, that the importer could deal with the sellers directly, and that EDL bears no responsibility for shipping or handling of the merchandise.

The importer employs two methods of operation. Under the first method (operation 1), the importer opens a blanket transferable letter of credit naming EDL as beneficiary, and EDL arranges for letters of credit naming the sellers of the merchandise as beneficiaries. EDL's commission is not included in the letters of credit. The request states that in these instances the purchase order is also opened to EDL. Under the second method of operation (operation 2), the importer opens the letter of credit and the purchase order to the seller of the merchandise. Attached to the request are copies of transaction documentation reflecting each of the two methods of operation. Exhibit B, for operation 1, contains the importer's purchase order identifying EDL as the agent and not identifying any foreign vendor, a letter of credit to EDL, and a commercial invoice from the foreign seller to the importer. Exhibit C, for operation 2, contains the importer's purchase order identifying a foreign vendor and EDL as the agent, a letter of credit to the foreign seller, and an invoice from the foreign seller to the importer. In exhibits B and C the letters of credit are in amounts significantly greater than the FOB price contained on the invoice. In Exhibit B the invoice is for $16,734.75 and the letter of credit is for $1,500,000.00. In Exhibit C the invoice is for $51,454.30, and the letter of credit is for $161,400.00. In neither exhibit do the purchase orders indicate any unit price or total price for the subject merchandise, and only in Exhibit C does the letter of credit indicate a unit price. In Exhibit B the letter of credit states that the unit price of the merchandise "will be as per contract issued by [EDL]." With the October 5, 1993 submission, the importer has provided us with a copy of a contract issued by EDL which contains a unit and total price, references the importer's purchase order and shows the importer as the consignee of the merchandise.

Also attached to the request as exhibits are EDL's registration in Hong Kong as an agent for the importer, an EDL debit note showing the purchase of 1000 dozen permanent quota purchased on behalf of the importer, EDL's statement of account to the importer for its commissions, EDL's claim against a seller for defective merchandise (which claim does not identify the importer) and EDL's subsequent credit note to the importer for the amount of the value of the defect, and the affidavit of a manager of EDL. The affidavit states that when the importer forwards purchase orders to EDL, the ultimate choice of vendor lies with the importer, and EDL does not have authority to select a seller, EDL does not operate a warehouse or hold inventory, EDL is not affiliated with any of the vendors with whom it deals, and EDL does not share its commissions with any of the vendors. The affidavit also states that approximately twenty percent of EDL's business is as a seller, however, never with respect to the importer.

The August 5, 1992 submission contains documentation of three transactions in which EDL is claimed to have acted as an agent. The three sets of documents consist of 1) one or a series of purchase orders from the importer, 2) a written confirmation from EDL stating that the purchase order had been placed and the unit price of the merchandise, 3) a letter of credit naming either EDL or the seller (in the transaction in which EDL is named as beneficiary the letter of credit was transferred from EDL to the seller), 4) the importer's shipping instructions, 5) the seller's invoice to the importer and 6) letter of credit advice showing payment to the seller. None of the purchase orders contain any price information. The price is stated by EDL in its confirmation letter. With respect to one of the transactions (identified as Transaction I), in its confirmation letter EDL advises:

The price negotiated is US43.00 per dozen. We feel this is the most competitive price and request you to please accept same.

One of the letters of credit states that the unit price and quantity will be "as per contract issued by [EDL]." Again, with the October 5, 1993 submission the importer has provided us with a copy of a contract issued by EDL which contains a unit and total price, references the importer's purchase order and shows the importer as the consignee of the merchandise.

The importer has been audited by Customs' Regulatory Audit Division with regard to its transactions with EDL. With respect to the issues herein, Customs Audit Report 212-91-FRO-001, dated May 26, 1992, found the following: 1) according to a Dun & Bradstreet International Report, EDL is an independent exporter of ladies and men's garments whose production process is subcontracted to local manufacturers with raw material and designs provided by EDL; 2) the importer's purchase orders to EDL were silent as to the manufacturer's name and unit price, and that EDL is not controlled by the importer; and 3) the importer pays EDL for design expenses. It is the opinion of the Regulatory Audit Division that the ten percent commission paid to EDL is in excess of the standard buying commission.

It is the position of the importer that EDL is a bona fide buying agent for the importer, and that the commissions paid to EDL by the importer are not dutiable. With respect to the audit finding that the importer pays EDL for design expenses, at the meeting of July 23, 1992, on behalf of the importer it was represented that the merchandise is "designed" in New Jersey, and that the importer pays no design fees to EDL.

ISSUE:

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

LAW AND ANALYSIS:

We are assuming, for the purposes of this ruling that transaction value is the appropriate basis of appraisement.

We must examine all relevant factors in deciding whether a bona fide agency relationship exists. In Pier 1 Imports, Inc. v. United States, 13 CIT 161, 708 F.Supp. 351 (1989) and Rosenthal- Netter, Inc. v. United States, 12 CIT 77, 679 F. Supp. 21, aff'd. 861 F.2d 261 (Fed. Cir. 1988), the court set forth factors to consider in deciding whether a bona fide agency relationship exists. The first factor is the right of the principal to control the agent's conduct. In Rosenthal-Netter, in examining the control the importer had over the agent, the court considered the importer's control over the choice of manufacturers, over the handling and shipment of the imported merchandise and over the manner of payment. In this case the total price and unit price is provided to the vendor by a contract from EDL which references the importer's purchase order. Of the two purchase orders attached to the request only one (exhibit C) identifies a vendor, but the purchase orders contained in the August 5, 1992 submission do indicate the name of a manufacturer. In Rosenthal- Netter the court held that "failure to substantiate the names of manufacturers is evidence that no agency relationship existed." 679 F.Supp. at 23. The August 5, 1992 submission contained copies of explicit shipping instructions from the importer. EDL does not appear to absorb the costs of shipping and handling, which fact supports finding the existence of a buying agency relationship. According to the documents attached to the request and the request itself, EDL is given letters of credit from which to pay the suppliers. The letters of credit are for amounts in excess of the invoice amounts, leaving the importer with no apparent control over the amount to be paid to the suppliers, but the October 5, 1993 submission contained invoices from the sellers to the importer, indicating the amounts to be paid. Further, the August 5, 1992 submission contains letters of credit issued in favor of the sellers as opposed to the agent. In Rosenthal-Netter, where the importer had opened letters of credit in favor of the intermediary from which the intermediary deducted its commissions, handling charges, etc. the court found that the importer had failed to control the manner of payment. In this case however, according to the request, EDL does not deduct its commissions from the letter of credit.

In J.C. Penney Purchasing Corp. et al. v. United States, 80 Cust. Ct. 84, C.D. 4741, 451 F. Supp. 973 at 983 (1978), the court stated that in finding the existence of an agency relationship, it attributed significance to the fact that the importer actually visited factories and participated in negotiations with the factory. In this case there is no evidence that the importer had such contact with the vendors. It appears from EDL's confirmation letters that EDL negotiates the prices of the merchandise with the sellers. However, there is evidence that the importer must give final approval to the price negotiated by EDL in the language of EDL's confirmation of the importer's purchase order, where EDL recommends that the importer accept the negotiated price (Transaction I of August 5, 1992 submission). From the foregoing facts it appears that the importer generally does have control over the selection of the foreign vendor, shipment of the merchandise, the payment of commissions to EDL and payment to the vendor for the merchandise.

The second factor to consider is the transaction documents. In this case the debit note stating a claim for defective merchandise, from EDL to a the vendor (exhibit G to the request), does not identify the importer as the party making the claim anywhere on the document. However, the remaining documentation does identify the importer. With respect to the other documents, an invoice or other documentation from the actual foreign seller to the buying agent is required in order to establish that the agent is not a seller and to determine the price actually paid or payable to the seller. See U.S. Customs Service General Notice, Customs Bulletin dated March 15, 1989, which cites Headquarters Ruling Letter 542141 (HRL) dated September 29, 1980, also cited as TAA No. 7. With its August 5, 1992 submission the importer has submitted invoices from the sellers for the imported merchandise, which invoices are to the importer. Assuming that the weight of other factors supports 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.

The third factor to consider is whether the importer could have purchased directly from the manufacturers without employing the agent. The request asserts that the importer could deal with the sellers directly. The fact that the importer has the opportunity to purchase merchandise directly supports a finding of the existence of a buying agency.

The fourth factor to consider is whether the intermediary was operating an independent business primarily for its own benefits. In Rosenthal-Netter the court cites the Restatement (Second) of Agency section 14K comment a (1958) for "factors to assist in determining when one is selling to, as opposed to acting as an agent for, the alleged principal":

(1) That he is to receive a fixed price for the property, irrespective of the price paid by him. This is the most important. (2) That he acts in his own name and receives the title to the property which he thereafter is to transfer. (3) That he has an independent business in buying and selling similar property.

Rosenthal-Netter, 679 F.Supp. at 25. With respect to the third factor of the Restatement (Second), according to the request and the audit report, at least 20% of EDL's business consists of selling mens and ladies apparel, thus EDL has an independent business in buying and selling property similar to the subject merchandise. However there is no evidence of the first two factors, therefore there is little indication that EDL is acting for its own benefit in transactions involving the importer.

The fifth factor is the existence of a buying agency agreement. A buying agency agreement exists in this case, however, from the documentation submitted on behalf of the importer it appears that EDL's actions are not entirely consistent with the terms of the Agreement. For example in operation 1 the importer opens the letter of credit in favor of EDL as opposed to the exporter as provided in the Agreement. This is evidenced in Exhibit B. 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, supra; Jay-Arr Slimwear Inc. v. United States, 12 CIT 133, 681 F. Supp. 875 (1988); and Rosenthal- Netter, supra. In this case, although the parties do not adhere strictly to the terms of the Agreement, we are still required to determine whether the agent acts as a bona fide buying agent.

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." HRL 542141 dated September 29, 1980. 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. Based on the facts before us we are satisfied that the importer has exercised a sufficient degree of control over the agent, and find that the totality of the evidence demonstrates that EDL is in fact a bona fide buying agent and not a selling agent or an independent seller. Therefore, we conclude that the fees paid to EDL constitute bona fide buying commissions, and are not included in the transaction value of the imported merchandise.

One issue not addressed in the importer's submissions and in the audit is whether there is a relationship between the importer and EDL. For the purposes of this ruling, it is assumed that a relationship does not exist. If it does exist, it must be disclosed to the appraising officer, as such related party transactions are subject to close scrutiny, and it may be determined that a bona fide buying agency relationship does not exist. HRL 544396 dated May 14, 1990; Bushnell International, Inc. v. United states, 60 C.C.P.A. 157, 477 F.2d 1402 (1973).

HOLDING:

Based on the totality of the evidence presented it is our conclusion that the commissions paid to EDL to perform the services in conjunction with the purchase of the imported merchandise are bona fide buying commissions, and the commissions are not included in the transaction value of the imported merchandise.

This decision should be mailed by your office to the internal advice requester no later than 60 days from the date of this letter. On that date the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Lexis, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director
Commercial Rulings Division

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