HQ 545708 - 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 545708

May 25, 1995

VAL R:C:V 545708 RSD

CATEGORY: VALUATION

Edwin C. Bullock, Esq.
Kuhn and Muller
The Chrysler Building, 32nd Floor
405 Lexington Avenue
New York, New York 10174

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

Dear Mr. Bullock:

This is in response to your letter dated June 29, 1994, on behalf Erez Fashions Inc. (hereinafter Erez), requesting a prospective ruling on the dutiability of commissions to be paid to a buying agent in China. In your letter you describe three different factual situations and request a ruling on each of these factual situations. When you were advised that in order to prepare a ruling, we required additional information on two of the three fact situations, you transmitted a second letter to our office dated May 19, 1995, by fax. In this second letter, you indicate that you only want a ruling on the first fact scenario and that you want to withdraw your request for a ruling on the other fact scenarios. Accordingly, this ruling will only address the questions by the portion of ruling request you have labeled "Fact Situation No. 1".

FACTS:

Erez Fashions is an importer of wearing apparel into the United States from the Far East. A related company, E&L Fashions Co., Ltd. (hereinafter E&L), located in Shen Zhen, China will act as a buying agent for Erez in connections with merchandise imported from China. E&L and Erez are under common ownership, and they have entered into a buying agency agreement. A copy of the buying agency agreement accompanied your letter requesting a ruling.

According to the agency agreement, E&L shall on the behalf of and at the direction of Erez enter into purchasing contracts with manufacturers and sellers. The other responsibilities it has under the agreement are to inspect finished goods, arrange shipments, pay for purchases, and generally execute the purchasing agent functions for Erez. Among the other functions that E&L
will perform include offering advice on new items, locating vendors, submitting samples, and from time to time collecting payment from Erez for the shipped goods as necessary as per terms of payment agreed upon.

If during the course of its inspections of finished goods, E&L determines that the merchandise does not conform to the specifications for the merchandise or in quality, E&L shall notify Erez. In addition after importation, if it is discovered that the merchandise is defective, E&L will assist Erez in arranging for the return of such goods and shall also assist in the recovery of any monies that are due to Erez from the manufacturer as a result of defective merchandise, shortages, etc. Erez shall not be liable for any commissions ordinarily due to E&L if it is found that the shipment of defective merchandise was due to E&L's negligence.

As compensation for the services to be rendered under the agreement, Erez shall pay E&L a buying commission equivalent to ten percent (10%) of the FOB price of the goods purchased through the agent on behalf of the purchaser. It is also agreed and understood by the parties that absolute title to all goods purchased through the agent on behalf of Erez shall immediately vest in Erez, and that at all times during the continuance of the agreement, the agent shall use its best effort to protect the interests of Erez in the event of claims by and in behalf of or against it. In addition, the agent will have no authority to bind the purchaser except upon written order or authorization.

The agreement also specifies that it is understood that the agency is not exclusive. The agent also certifies that it has no ownership, financial interest in, or any control of, the manufacturers from which goods subject to the agreement are purchased. No part of any commission paid or payable under the agreement shall inure to the benefit of any vendor or manufacturer. You state that in most instances, Erez will directly place orders for merchandise with the Chinese factories, and it will normally open a letter of credit to the factories to pay for the merchandise. However, under terms of the agency agreement, E&L may also, at times, arrange for the collection of the purchase price from Erez and transmit it to the seller and receive the ten percent commission in connection with these transactions.

ISSUE:

Whether the commissions to be paid to the agent for performing the described services pursuant to the terms of the proposed buying agency agreement are bona fide buying commissions and are not included in the transaction value?

LAW AND ANALYSIS:

For the purpose of this 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 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 the amount for the five additions 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.

Buying commissions are fees paid by an importer to his agent for the service of representing him abroad in the purchase of the goods being valued. 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. It has been determined that bona fide buying commissions are not added to the price actually paid or payable. Pier I Imports, Inc. V. Untied States, 13 CIT 161, 164, 708 F.Supp. 351. 353 (1989); Rosenthal-Netter, Inc. V. United States 670 F.Supp. 21, 23; 13CIT 77,78 Aff'd., 861 F.2d 261 (Fed. Cir. 1988); Jay-Arr Slimwear Inc., v. United States, 12 CIT 133, 136, 681 F.Supp 875, 878 (1988). The importer has the burden of proving that a bona fide agency relationship exists and that payments to the agent constitute bona fide buying commissions. Monarch Luggage Company Inc., v. United States,, 13 CIT 523, 715 F.Supp 1115 (1989). 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 and each case is governed by its own particular facts. 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). Although no single factor is determinative, 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 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 133, 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.

In the proposed transactions you have described, as outlined in the proposed buying agency agreement, E&L will be performing services on behalf of the purchaser, Erez, that are typically performed by a bona fide buying agent. Erez's primary function is to find and negotiate the best deal in terms of price and quality for the purchaser. It will also perform other functions such as locating vendors, submitting samples, advising the purchaser on new items, collecting payment, and arranging for the shipping of the merchandise. Significantly, the agreement also provides that E&L will perform these services on the behalf and at the direction of the purchaser. In addition, E&L will inspect the finished goods; and if it finds the goods to be non-conforming, it has the duty to notify the purchaser. Erez also has the responsibility to assist the purchaser in returning merchandise and recovering money, if goods are discovered to be defective or if there is a shortage in a shipment.

The control that the purchaser exercises over the agent is shown by the provision in the agency agreement whereby the agent does not have the authority to bind the purchaser except upon the written order or authorization of the purchaser. Moreover, the agreement states that the agent will use its best efforts to protect the interest of the purchaser in the event of claims by and in behalf of or against, the purchaser. Another important factor establishing that E&L would be acting as a bona fide buying agent and not an independent seller is that it never holds title to the merchandise. Title to the merchandise immediately vests with the purchaser upon the purchase of the merchandise. We note that the agent would be detached from the manufacturer and vendor of the merchandise because its sole source of compensation in the transaction is the commissions it earns from the purchaser. The agent will receive no part of the payments that the purchaser makes to the manufacturers or vendors, nor will it receive any payment from the manufacturers or vendors.

Based on the above considerations, we find that the terms of the proposed buying agency agreement are consistent with a bona fide agency. Therefore, provided the actions of the parties comply with the terms of the buying agency agreement, the commissions to be paid to E&L by the purchaser for it services constitute non-dutiable bona fide buying commissions.

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 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. In addition, the analysis and the determinations of this ruling regarding buying agents will apply only to the factual situation presented and not to other factual situations such as when E&L is the seller of the imported merchandise.

HOLDING:

Based on the information submitted, we are satisfied, provided that the parties' actions conform to the terms of the proposed agency agreement submitted, E&L would be a bona fide buying agent. We conclude, therefore, that the agency commissions paid by Erez to E&L constitute bona fide buying agency commissions and are not included in the transaction value of the imported merchandise.

Sincerely,

John Durant, Director

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