HQ 546341 - 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 546341

November 12, 1996
RR:IT:VA 546341 RSD

CATEGORY: VALUATION

Charles P. Deem, Esq.
Stedina & Deem
1850 Elizabeth Avenue
Rahway, New Jersey 07065

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

Dear Mr. Deem:

This is in response to your letter dated April 9, 1996, on behalf of Jimlar Corporation (hereinafter Jimlar), requesting a prospective ruling on the dutiability of commissions that it will receive from J.C. Penney Purchasing Corporation (hereinafter JCPPC) for assistance in the purchase of imported footwear. A copy of a proposed buying agency agreement was enclosed with your submission.

FACTS:

Under the proposed buying agency agreement between Jimlar and JCPPC, Jimlar will perform certain services for JCPPC. Although the agreement does not indicate the merchandise that will be purchased or the geographical territory where Jimlar will perform the services, you state that Jimlar intends to act as a buying agent for JCPPC in sourcing footwear from Asia and Brazil. The agreement specifies that JCPPC will pay Jimlar a commission for its services. The amount of the commission is not stated, but it will be based on a percentage of the contract price that JCPPC pays. In addition, the agreement allows Jimlar to be reimbursed for any charges and expenses that it incurs in obtaining and shipping samples of merchandise.

The agreement provides that Jimlar will perform the following services for JCPPC:
a. investigate buying possibilities with respect to footwear using its best efforts to verify that potential suppliers are reputable, have acceptable credit ratings, and are able to meet the requirements set forth in the purchase contract;
b. obtain market intelligence and information on trends in footwear and provide such information to JCPPC;
c. prepare for and assist JCPPC or its designees in connection with meetings and negotiations with suppliers;
d. upon JCPPC's request, obtain samples of footwear, which JCPPC has advised Jimlar that it wishes to purchase;
e. assist JCPPC in preparation of purchase contracts, letter of credit applications and/or other paper necessary for export of the footwear from Brazil or Asia and import into the United States;
f. assist JCPPC in the development of product specifications reflecting instruction to the supplier or manufacturers as to what to produce;
g. inspect on a test basis based on a JCPPC's standard of no less than 10% and approve the footwear and packaging of the footwear in accordance with procedures established by JCPPC to ensure that the footwear conforms to JCPPC's specifications, is not defective (concealed or latent defect excluded) and is packaged, labeled and invoiced in accordance with purchase contract and meets the requirements of the laws and regulations specified in the purchase contract or other documentation provided by JCPPC, or of which Jimlar should be aware;
h. use its best efforts to obtain satisfaction from suppliers JCPPC concerning defective or rejected footwear; and
i. expedite shipment of the footwear from the supplier or manufacturer's factory to JCPPC's consolidator or ocean carrier.

Under the terms of the agreement, in all transactions, JCPPC will direct and control Jimlar's conduct. For example, Jimlar will not have the right, power, or authority to make any contract or incur any obligation or liability which would be binding on JCPPC, unless JCPPC specifically authorizes it to do so. In addition, the agreement states that JCPPC shall directly place orders with the supplier, and Jimlar shall not make any payment on behalf of JCPPC. Also, Jimlar has no authority to vary any terms of the purchase contract without JCPPC's written authorization. Finally, the agency agreement states that neither Jimlar nor any of its owners are or will be related to or will have any financial interest in an any of the foreign suppliers or manufacturers whom Jimlar may do business with as an agent for JCPPC.

You indicate that on occasion, Jimlar may source footwear in Asia, Brazil or elsewhere, import goods for its own account, and resell merchandise to various unrelated purchasers in the U.S. You also indicate that Jimlar on occasion may sell its own imported footwear domestically to JCPPC's affiliate, J.C.D. Penney Company, Inc. Jimlar, however, will not sell merchandise to JCPPC, and its only relationship with JCPPC will be as a buying agent.

You point out that in a previous decision, Customs determined that Jimlar acted as a selling agent. See HRL 545661 March 3, 1996. You explain that the factual situation in that case was different and that Jimlar is disputing the findings of HRL 545661 by seeking judicial review of the decision in the Court of International Trade.

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 which are not included in the transaction value of the imported merchandise?

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 generally one should 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.

Under the proposed buying agency agreement, Jimlar will be performing many of the services on behalf of the purchaser, JCPPC, that the court said in Jay-Arr Slimwear Inc., v. United States, supra., a bona fide buying agent typically performs. Examples of the services to be performed include investigating buying possibilities, checking acceptability of potential suppliers, obtaining market intelligence, assisting with supplier meetings and negotiations, obtaining samples, assisting in preparation of documents, inspecting merchandise, and expediting shipment of merchandise. Although these services are to be performed on behalf of JCPPC, JCPPC will make all final decisions regarding ordering of merchandise and the price paid for merchandise.

The control that JCPPC will exercise over the agent is demonstrated by the way that the agent must conduct itself in handling transactions. The agent can solicit quotations for export from prospective suppliers but only in accordance with the terms and conditions outlined in the buying agency agreement. Only JCPPC has the authority to place orders with a supplier, and the agent does not have any authority to accept or reject price quotations on behalf of JCPPC. JCPPC will directly pay the suppliers for merchandise. In addition, Jimlar warrants that it has no interest in or control of any suppliers and/or manufacturers of merchandise. Similarly, no manufacturer or supplier will have any interest in the Jimlar. We note that Jimlar as an agent also would be detached from manufacturers and vendors because its sole source of compensation in the transactions will be the commissions that it earns from the purchaser. The agent will not receive reimbursements from JCPPC or any third party with regard to the merchandise except as provided for in the agreement. The fact that Jimlar will not take title to the merchandise further shows that it will not be acting as a seller in these transactions.

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 that the parties comply with the terms of the proposed buying agency agreement, the commissions that JCPPC pays Jimlar for its services would be considered non-dutiable bona fide buying commissions. Customs' decision in HRL 545661 that Jimlar had acted as a selling agent, rather than a buying agent, in a particular transaction involving a different purchaser and a different set of facts would not negate the existence of a bona fide buying agency relationship in this case. In HRL 545661, Customs took notice of the close relationship between Jimlar and the seller, the fact that there was no written agency agreement, the fact that Jimlar trades for its own account, and finally the fact that the buyer did not control the actions of Jimlar. Accordingly, the determination of HRL 545661 would not control the outcome of this case. If Jimlar follows the proposed buying agency agreement, it would be performing a very different role in this case than it was in HRL 545661, where the buyer failed to exercise control over the agent, and there was a close relationship between the seller and the agent, and no written buying agency agreement existed.

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 available evidence. 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 General Notice dated March 15, 1989, HRL 542141 September 29, 1986 (TAA #7). In addition, the analysis and the determinations of this ruling apply only to the factual situation presented and not to other factual situations.

HOLDING:

Based on the information submitted, we are satisfied, that Jimlar would be a bona fide buying agent provided that the parties' actions conform to the terms of the submitted proposed buying agency agreement. In such case, the agency commissions paid to Jimlar would constitute bona fide buying agency commissions and are not included in the transaction value of the imported merchandise.

Sincerely,

Acting Director

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