HQ 545851 - Request for a ruling concerning whether commissions paid to an alleged buying agent would be dutiable; commissions paid for the procuring of assists - United States International Trade Commision Rulings

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HQ 545851

May 8, 1995

VAL R:C:V RSD

CATEGORY: VALUATION

Edward B. Ackerman, Esq.
Siegel, Mandel & Davidson
One Astor Plaza
1515 Broadway
43rd Floor
New York, New York 10036-8901

RE: Request for a ruling concerning whether commissions paid to an alleged buying agent would be dutiable; commissions paid for the procuring of assists

Dear Mr. Ackerman:

This is in response to your letter dated December 4, 1994, on behalf of United States Shoe Corporation requesting a ruling concerning whether amounts paid to it would be bona fide buying commissions and not dutiable in proposed transactions. On April 11, 1995, you faxed to our office a copy of a proposed buying agency agreement. We regret the delay in responding.

FACTS:

The United States Shoe Corporation (hereinafter U.S. Shoe) is an importer of footwear manufactured in Brazil. It also performs buying agency services in Brazil for other importers of privately branded shoes. You indicate that the manufacturers of the shoes are unrelated either to U.S. Shoe or the other importers. U.S. Shoe enters into a written purchasing agency with the principals (the other importers) in which it agrees to perform certain functions. You have indicated that in transactions where U.S. Shoe is acting as an agent for a principal, it will not be the importer of record for the imported merchandise.

You have submitted a sample copy of an agency agreement that will be utilized in the proposed transactions. The sample agency agreement provides that U.S. Shoe, at the direction of purchaser, agrees to perform a number of functions on the purchaser's behalf. These functions include: 1) negotiation with independent manufacturers, suppliers, and vendors with respect to price, terms, and deliveries for finished merchandise; 2) entering into purchasing contacts with independent manufacturers and vendors; 3) inspecting finished goods destined for shipment and delivery to the purchaser for quality control purposes; 4) when requested arranging for international transportation and/or appropriate insurance coverage. In addition, the other services that U.S. Shoe agrees to render for the purchaser will be engaging market research activities to keep the purchaser informed of market conditions, inspecting all documents covering shipments, and arranging for the performance of necessary laboratory tests. U.S. Shoe further agrees to treat all information specifications regarding merchandise as confidential.

If requested to do so, one of the additional duties of the agent is to procure components, materials, tooling, and design work for use in the production of the goods (procurement of design work to include arranging for production of prototypes) and to arrange for the delivery of such items to the manufacturing site. The agent is supposed to follow the purchaser's instruction regarding the disposition of non-conforming merchandise. The agent is supposed to make sure that the manufacturer does not ship non-conforming merchandise with the purchaser's name to other buyers or destinations. In addition, if it discovered after a shipment arrives that the merchandise is defective, the agent is supposed to help the purchaser in arranging for the return of such goods and recovery of any monies due from the manufacturer or vendor. When defective merchandise is shipped, the purchaser is not liable for any commissions due to the agent unless it is established that the shipment of defective merchandise was not made by reason of the negligence of the agent.

Under the agreement, as compensation for the services rendered by the purchasing agent, the purchaser is to pay to the purchasing agent a commission of ten percent (10%) of the FOB value of the goods inclusive of any procured components purchased by the purchaser through the agent. The title to the goods purchased by the purchasing agent on behalf of the purchaser shall immediately vest in the purchaser. The agent does not have authority to bind the purchaser except upon written order or authorization from the purchaser. The agent certifies in the agreement that it has no financial interest in or any control of the manufacturer(s) and/or vendor(s) from which the goods are purchased. It is specifically stated that no payments to the agent will inure to the benefit of the manufacturer or vendor. Similarly, no payment that goes to the manufacturer or vendor will inure to the benefit of the agent either through rebates, offsets or other means, and the agent will not receive any benefit from the manufacturers or vendors. The agent will maintain complete records of the transactions included vendor profiles, copies of purchaser's orders, copies of agent's orders and confirmations, vendors' invoices, shipping and payment records, merchandise inspection records, etc.

You state that in a typical transaction U.S. Shoe will quote the principal the total cost figure for a given item of footwear. The figure would be comprised of the vendor's factory price, plus an additional amount to cover the costs of the assists provided to the manufacturers on behalf of the principal by U.S. Shoe and/or its foreign subagent, U.S. Shoe do Brasil. The commercial invoice to the principal would identify the manufacturer of the footwear, set forth the factory charge, as well as the charge for the assists. In compensation for its services as buying agent, U.S. Shoe will receive from the principal a 10% commission based upon the full invoice price of the shoes including the assists. You reiterate that under the contemplated transactions, neither U.S. Shoe nor U.S. Shoe do Brasil will receive any compensation from the factories.

ISSUES:

Whether the describe services to be provided by U.S. Shoe are those of a bona fide buying agent?

Whether the commissions paid to U.S. Shoe would be partially dutiable because they were used to procure assists?

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, U.S. Shoe will perform services on behalf of a purchaser that are typically performed by a bona fide buying agent. U.S. Shoe'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 quality control inspection, arrange for transportation and insurance for the merchandise, engage in market research activities to better advise the purchaser, and prepare necessary documents. The agency agreement states explicitly that these functions are performed on behalf of and at the direction of the purchaser. The agent does not have the authority to bind the purchaser except upon the written order or authorization of the purchaser. Section 8 of the agreement further indicates that it is understood that the agent should use its best effort to protect the interest of the purchaser in the event of claims by and on behalf of, or against, purchaser.

Another important factor establishing that U.S. Shoe would be acting as a bona fide buying agent and not an independent seller is that the agent never holds title to the merchandise nor does it bear the risk of loss. 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. You state in your submission that all documents, including the invoices to the principal, will set forth the identities of the vendor factories as well as all actual charges paid thereto.

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 U.S. Shoe by the purchaser for it services constitute bona fide buying commissions.

An additional issue that must also be addressed in this case is whether the buying agency relationship is affected if U.S. Shoe performs the additional function of procuring and furnishing assists to the manufacturer on behalf of the purchaser or if a portion of commission would become dutiable. Section 3(e) of the buying agency agreement states that agent, when requested, should procure components, materials, tooling, and design work for use in the production of the goods. In HRL 544423 dated June 3, 1991, this office addressed the issue of whether commissions paid to a buying agent for obtaining piece goods supplied to apparel manufacturers and used in the production of imported garment should be considered part of the cost of an assist. Having first determined a bona fide agency relationship did not exist, we held that commissions paid by an importer to an "agent" for procuring materials (piece goods to be incorporated into imported merchandise), i.e. assists, were part of the cost of acquiring the assist and were, therefore, dutiable. Customs reaffirmed this position in HRL 545266 June 30, 1993, that payments to an agent for procuring assists are part of the cost of acquiring an assist and should be added to the price actually paid or payable. In that ruling, Customs was also asked what the duty consequences would be for commissions paid if the agent's role in procuring fabric assists were incorporated as part of the buying agency agreement related to the purchase of finished garments. We stated that assuming the existence of a bona fide buying agency, it is Customs' view that the commissions would be non-dutiable, but we specifically indicated that this response was for informational purposes only.

This position was formalized in HRL 544843, dated October 31, 1994, where we stated that:

It is the position of the Customs Service that buying commissions paid to bona fide buying agent for acquiring merchandise to be imported are not dutiable. Where the agent has the dual role under an agency agreement of procuring assists as well as the finished merchandise, any commissions paid to the agent arising out of the such an agreement will not be dutiable. However, commissions paid to an agent whose sole obligation is to acquire assists for the buyer, are part of the cost of acquiring an assist and will be added to the price actually paid or payable.

In this case as explained above, if the parties follow the proposed buying agency agreement, U.S. Shoe would be a bona fide buying agent, and under the proposed agency agreement, it would have the dual role of procuring both finished goods and the assists used to make the goods. Accordingly, based on the analysis articulated in HRL 544843, no portion of the agency commissions it receives from purchasers arising out of the agency agreement would be dutiable.

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 not apply when U.S. Shoe is the importer of record and is buying imported merchandise on its own behalf.

HOLDING:

Based on the information submitted, we are satisfied, provided that the parties' actions conform to the terms of the proposed agency agreement submitted, U.S. Shoe would be a bona fide buying agent. We conclude, therefore, that the agency commissions paid by purchasers to U.S. Shoe constitute bona fide buying agency commissions and are not included in the transaction value of the imported merchandise. This determination is not affected by the fact that U.S. Shoe may procure and furnish assists to the manufacturers on behalf of the purchasers of the imported merchandise.

Sincerely,

John Durant, Director
Commercial Rulings Divisions

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