HQ 545177 - Buying agency; related parties; dutiability of commissions - United States International Trade Commision Rulings

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HQ 545177

June 28, 1993

VAL CO:R:C:V 545177 CRS

CATEGORY: VALUATION

Frank J. Desiderio, Esq.
David M. Murphy, Esq.
Grunfeld, Desiderio, Lebowitz & Silverman 12 East 49th Street
New York, NY 10017

RE: Buying agency; related parties; dutiability of commissions

Dear Messrs. Desiderio and Murphy:

This is in reply to your letter dated December 9, 1992, on behalf of of certain payments to be made to your client as the foreign representative of U.S. apparel importers.

FACTS:
apparel importers. An unsigned draft buying agency agreement contemplated for use by the agent when acting for U.S. importers was attached to your letter of December 9th as Exhibit A.

Pursuant to the agreement, and on behalf of the principal, the agent will: survey potential markets; recommend manufacturers/sellers and assist in price negotiations; obtain samples; place orders; inspect the quality of merchandise to be shipped; assist in the return of defective merchandise; procure quota; open irrevocable letters of credit in favor of the manufacturer/seller; arrange for inland freight and/or storage; instruct the manufacturer/seller in the preparation of commercial invoices; and provide inspection certificates as required.

Orders for merchandise will only be placed upon the specific instructions of the principal. The agent has no power or authority to contract, or incur any binding obligations for the principal without specific authorization. In all circumstances the agent will be directed and controlled by the principal. The agent will not purchase merchandise for its own account, nor act as seller of merchandise to the principal.

The buying agency agreement provides that the principal will pay a commission of up to ***** percent of the f.o.b. price of merchandise ordered and shipped under the agreement. The actual commission will be determined at the time specific merchandise is ordered. The agent will pay all costs associated with performing its obligations under the agreement and will be reimbursed by the principal for all reasonable expenses.

In addition, you state that the agent is related to two firms that will operate as trading companies (the "trading companies") under the laws of Hong Kong in that they share common ownership. These companies will purchase and resell merchandise on an f.o.b. basis for export to the U.S. to principals of the agent as well as to third parties. The operations of the agent and the trading companies will be separate and distinct the one from the other. Commissions paid to the agent will not inure to the benefit of the trading companies, nor will trading company profits be shared with the agent.

The agent anticipates acting as buying agent for unrelated principals. The principals will place orders through the agent with the aforementioned trading companies and with unrelated vendors. The principals will retain the discretion to purchase directly with unrelated sellers and with the trading companies related to the agent.

ISSUE:

The issues presented are: (1) whether payments made to the agent for services rendered pursuant to the agreement constitute bona fide buying commissions such that they do not form part of the price actually paid or payable under 19 U.S.C. 1401a(b); and (2) whether the fact the agent and certain trading companies are related affects the dutiability of the buying commissions.

LAW AND ANALYSIS:

Merchandise imported into the United States is appraised in accordance with the provisions of Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. ?1401a; TAA). The principal method of appraisement is transaction value, defined as "the price actually paid or payable for merchandise when sold for exportation to the United States." 19 U.S.C. ?1401a(b)(1).

The "price actually paid or payable" is "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." 19 U.S.C. paid or payable. Pier 1 Imports, Inc. v. United States, 708 F. Supp. 351, 13 CIT 161, 164 (1989); Rosenthal-Netter, Inc. v. United States, 679 F. Supp. 21, 23, 12 CIT 77, 78 (1988); Jay-Arr Slimwear, Inc. v. United States, 681 F. Supp. 875,878, 12 CIT 133, 136 (1988).

The existence of a bona fide buying commission depends upon the relevant factors of the individual case. J.C. Penney Purchasing Corp. v. United States, 451 F. Supp. 973 (Cust. Ct. 1978). In this regard the importer has the burden of proving the existence of a bona fide agency relationship and that payments to the agent constitute bona fide buying commissions. Rosenthal-Netter, 679 F. Supp. 21, 23; New Trends, Inc. v. United States, 645 F. Supp. 957, 960, 10 CIT 637 (1986).

In determining whether an agency relationship exists, the primary consideration, is the right of the principal to control the agent's conduct with respect to those matters entrusted to the agent. J.C. Penney, 80 Cust. Ct. 84, 95. The degree of discretion granted the agent is a further consideration. New Trends Inc. v. United States, 645 F. Supp. 957 (1986). The existence of a buying agency agreement, moreover, has been viewed as supporting the existence of a buying agency relationship. Dorco Imports v. United States, 67 Cust. Ct. 503, 512, R.D. 11753 (1971). In addition, the courts have examined such factors as: whether the purported agent's actions were primarily for the benefit of the principal; whether the principal or the agent was responsible for the shipping and handling and the costs thereof; whether the language used in the commercial invoices was consistent with a principal-agent relationship; and whether the agent was financially detached from the manufacturer of the merchandise. New Trends, 645 F. Supp. 957.

In the situation you describe, the services to be provided by the agent are those typically performed by a bona fide buying agent. In addition, as set forth in paragraph 2(d) of the draft buying agency agreement, the agent will place orders only upon the specific instructions of the principal. The principal also has the ability to purchase directly from manufacturer or from other agents. Accordingly, the principal retains control of the purchasing process.

The principal is also responsible for and controls the costs of shipping and handling of merchandise. Moreover, you state that the manufacturer/seller will provide commercial invoices or other documentation to the agent that will establish that the agent is not the seller. Headquarters Ruling Letter (HRL) 542141 dated September 29, 1980 (TAA #7).

Financial detachment between the agent and the foreign seller is another factor that supports the existence of an agency relationship. New Trends at 962. In this regard, the draft agreement states at paragraph 7 that the agent's compensation will not be paid directly or indirectly, or inure in any way, to the manufacturer/seller of merchandise.

However, in the instant situation the agent and potential foreign sellers, i.e., the trading companies are related in that they share substantially common ownership. Nevertheless, the fact that profits realized by an agent benefit the manufacturer does not in itself bar commissions from being non-dutiable. Bushnell International, Inc. v. United States, 477 F.2d. 1402, 1406; 60 C.C.P.A. 157, 161 (1973). This office has previously ruled that while the fact that the agent and the seller are related does not preclude the existence of a bona fide buying agency, such transactions will be subject to closer scrutiny. HRL 544657 dated July 1, 1991; HRL 542756 dated May 13, 1982.

In this instance you have provided the draft buying agency agreement, under the terms of which it would appear that the principal will retain the requisite control over the actions of the agent. You have also stated, and the draft agreement so provides, that any commission will inure solely to the benefit of the agent. In light of the foregoing, and provided that the actions of the parties comport with the terms of the buying agency agreement, the evidence submitted supports a finding that the commissions paid to the agent constitute bona fide buying commissions. Consequently, the commissions would not form part of the price actually paid or payable.

Please note, however, that the existence of a buying agency relationship is factually specific. The actual determination as to the existence of a buying agency will be made by the appraising officer at the applicable port of entry and will be based on the entry documentation submitted. The totality of the evidence must therefore demonstrate that the purported agent is in fact a bona fide buying agent and not a selling agent nor an independent seller. See 23 Cust. B. & Dec., No. 11, General Notice dated March 15, 1989 at 9; HRL 542141.

HOLDING:

Commissions paid to the agent pursuant to the buying agency agreement are bona fide buying commissions such that they do not form part of the price actually paid or payable.

The common ownership position of the agent and the trading companies (sellers) does not alter the fact that the commissions are bona fide buying commissions, provided the parties adhere to the terms of the agency agreement.

Sincerely,

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