HQ 545423 - Request for a ruling on the dutiability of commissions to be paid pursuant to a proposed buying agency agreement - United States International Trade Commision Rulings

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HQ 545423

March 17, 1994

VAL CO:R:C:V 545423 RSD

CATEGORY: VALUATION

James P. Sullivan, Esq.
Sullivan & Lynch, P.C.
156 State Street
Boston, Massachusetts 02109

RE: Request for a ruling on the dutiability of commissions to be paid pursuant to a proposed buying agency agreement

Dear Mr. Sullivan:

This is in response to your letter dated August 30, 1993, 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 client, Thom McAn Shoe Company of Worcester, Massachusetts. You request a ruling regarding the dutiability of certain commissions to be paid by Thom McAn pursuant to a buying agency agreement. Thom McAn has revised its buying agency agreement by inserting an addendum which would reduce the amount of the agent's commissions, if merchandise is not delivered according to schedule. We regret the delay in responding.

FACTS:

You state that your client, Thom McAn, imports footwear from a variety of countries in the Far East. It uses agents to locate manufacturers, obtain price quotations and samples, transmit orders, inspect finished orders to verify that merchandise is in compliance with the buyer's specifications and to insure that the orders are produced and shipped in accordance with a schedule set forth in purchase orders.

Thom McAn has prepared an agreement to be entered into with its agents. Pursuant to this agreement, the agent has no independent authority to bind or obligate Thom McAn. The agent cannot pay the manufacturer, unless he has written instructions from Thom McAn. In the agency agreement, the agent certifies that it has no ownership interest in, or any control of or any financial interest in the factories making the commodities purchased with the assistance of the agent, and that it does not on its own account sell raw materials to the factories making such merchandise. The agent further certifies that it will accept no remuneration for its services other than the commissions paid by Thom McAn and it will not share such commissions in any manner with the manufacturer. The agent is also prohibited from acting as a seller or selling agent in any transaction involving Thom McAn. The agent is also precluded from fulfilling the buyer's orders with merchandise from the agent's inventory or with merchandise which the agent has a proprietary interest.

Under the agreement the agent's chief responsibilities are to visit manufacturers in its appointed area, collect samples, submit the samples to Thom McAn, regularly report to Thom McAn on the market situation and availability of merchandise, and obtain price quotes. Before submitting any samples, the agent has the additional responsibility of determining whether they infringe on any valid trademark, patent, copyright or other proprietary rights.

In payment for its services, the agent is paid a percentage of the net invoice cost, FOB port country of origin, on all merchandise shipped to Thom McAn. The commission will be separately invoiced by the agent and become payable upon receipt of the merchandise by Thom McAn.

The current agreement contains two penalty clauses which are intended to induce the agent to perform its duties. If as a result of the failure of the agent to perform the inspection services of the agreement, merchandise is received below the standards of the purchase order and purchase samples and a satisfactory adjustments cannot be obtained from the manufacturer, the agent agrees to assume liability for damages to the extent of the commissions paid.

Second, if as a result of the agent's failure to perform its inspection services, the buyer incurs any losses, damage liabilities, fines and penalties, the agent shall indemnify Thom McAn to the extent of the its commissions.

Thom McAn proposes to add an addendum to this buying agency agreement, whereby if the agent fails to ensure that the merchandise is produced and shipped on schedule in accordance with the terms of purchase order agreements, the commissions would be reduced. It is proposed that merchandise which is shipped late by 1-7 days will result in a reduction of the agent's commission by 5%, 8-14 days by 10% and 15 days or more by 15%.

You note that Thom McAn imposes similar but more severe penalties directly against the manufacturers if they fail to produce and export finished merchandise in accordance with the delivery schedule set forth in the purchase orders.

ISSUE:

Does the addition of a penalty clause for the late delivery of merchandise invalidate an otherwise bona fide buying agency agreement rendering any commissions paid to the agent to be treated as dutiable?

LAW AND ANALYSIS:

For the purpose of this prospective ruling request, we are assuming that transaction value will be applicable as the basis of appraisement.

Transaction value is defined in section 402(b)(1) of the TAA. This section provides, in the pertinent part, that the transaction value of imported merchandise is "the price actually paid or payable for merchandise when sold for exportation to the United States," plus amount 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 Headquarters Ruling Letter (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 (1978); 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 to the agent is an important factor. New Trends Inc. v. United States, 10 CIT 637, 645 F.Supp. 957 (1986). The plaintiff bears the burden of proof to establish the existence of a bona fide buying commission. 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 agent's 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 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 manufacturer of the merchandise.

In Jay-Arr Slimwear Inc., v. United States, 12 CIT----, 681 F.Supp 875 (1988), the Court of International Trade cited examples of services which are characteristic of those rendered by a buying agent. These services include compiling market information, gathering samples, translating, placing orders based on the buyer's instructions, procuring the merchandise, assisting in factory negotiation, inspecting and packing merchandise and arranging for shipment and payment.

You specifically ask whether the addition of an addendum to the buying agency agreement, which sets up penalties for the late delivery of merchandise, would invalidate the buying agency relationship between Thom McAn and its agents, and thus render the commissions paid by Thom McAn to be dutiable. 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 agency agreement, the importer will exercise the requisite degree of control over the buying agent. We find that if the agent's liability is limited to its commissions, the proposed penalty clause for the late delivery of merchandise, does not indicate that the agent has a proprietary interest in merchandise, and does not negate a buying agency relationship between Thom McAn and the agent. The penalty clauses in the agreement do not force the agent to bear the risk of loss for the merchandise if it is or delivered late. Rather, if such event occurs as a result of agent's failure to properly perform it duties, only the agent's commissions will be decreased. Moreover, it does not diminish the degree of control that Thom McAn will exercise over the agent. We are especially mindful that the proposed addendum, does not change the fact that the agent will still need the written authorization from Thom McAn to bind it.

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.

HOLDING:

In view of the foregoing, it is our conclusion that the addition of the penalty clause for late delivery of merchandise will not impact on the nondutiability of the buying commissions. The commissions to be paid by Thom McAn to the agent to perform the services specified above are to be considered bona fide buying commissions.

Sincerely,

John Durant, Director

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