HQ 547058 - Buying agent; related party; buying commission - United States International Trade Commision Rulings

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HQ 547058

May 19, 1998

RR:IT:VA 547058 RC

CATEGORY: VALUATION

Sandra Liss Friedman, Esq.
Barnes, Richardson & Colburn
Attorneys & Counsellors at Law
475 Park Avenue South
New York, New York 10016

RE: Buying agent; related party; buying commission

Dear Ms. Friedman:

This is in response to your letter of April 3, 1998, on behalf of MIL Apparel Limited (MIL) of Hong Kong, requesting a prospective ruling concerning the appraisement of wearing apparel imported from various manufacturers located in the Middle East and Asia.

FACTS:

MIL intends to act as a buying agent for various buyers seeking to import wearing apparel from various manufacturers located in the Middle East and Asia. The transactions will involve different manufacturers and/or sellers.

A copy of an undated and unsigned buying agency agreement that reflects the relationship which MIL will enter into between itself and prospective buyers/importers of the subject wearing apparel was submitted for our review. Under the agreement, MIL's duties, as agent, are to:
locate new manufacturers for the principal's consideration as well as negotiate with manufacturers and other sellers already known to the principal;
negotiate most favorable prices on behalf of the principal and provide samples to the principal together with price quotations from the manufacturers/sellers;
place orders with the manufacturers/sellers on behalf of the principal;
act on behalf of the principal only upon the explicit instructions of the principal and not vary any of the terms of the purchase order without written authorization of the principal;
visit manufacturers, subcontractors and/or sellers, as appropriate, to inspect the quality, progress of production and origin of merchandise to be shipped to the principal, and notify the principal immediately if the laws or regulations of the United States are being violated;
provide inspection certificates for each shipment certifying that the goods conform to the specifications of the purchase order as well as meet the requirements of U.S. laws and regulations;
negotiate on behalf of the principal in the event defective goods are shipped.

In addition, the agreement states that the agent will never act as a seller in any transaction involving the principal and will provide the principal in all cases with the seller's invoice reflecting the fact that the principal is the buyer and showing the price to be paid for merchandise purchased. The agreement also states that the agent shall furnish the principal with separate invoices reflecting the buying commission to be paid to the agent for each transaction.

For its services MIL will be paid a buying agency commission, ranging between 8% and 12%, depending upon the negotiations with the principal.

MIL is related to one of the sellers, More's International, Ltd. (More's), with whom it is anticipated that it will be involved (as a buying agent) on behalf of its (MIL's) principals. MIL is owned by one of the shareholders of More's. MIL claims that the relationship will not affect the independence of MIL from More's, nor will it interfere with the control to be exercised by the principal over the activities of MIL. MIL will maintain separate books and records of its activities as well as separate finances.

Under the terms of the buying agency agreement, the responsibility to select the merchandise, determine quantity, set prices with the seller, execute purchase orders, and negotiate or extend delivery terms, reside with the principal. The agreement specifies that MIL is prohibited from engaging in such activity absent express written authorization from the principal to do so. The agreement also states that any obligation incurred by MIL without the principal's prior authority is not binding on the principal and that the principal retains final approval over product, quantity, price and delivery.

According to counsel for MIL, the principal will be clearly identified as the buyer and MIL will be clearly identified as the agent; the risk of loss will lie with the principal. Furthermore, with respect to defective merchandise, upon the written request of the principal, MIL will be obligated, as the buying agent, to pursue claims against the seller on behalf of the principal; MIL, however, will be under no obligation to reimburse the principal for defective goods.

Transaction documents were not submitted for our review.

ISSUE:

Whether payments made to the agent for services rendered pursuant to the agreement constitute bona fide buying commissions such that they are not in addition to the price actually paid or payable under 19 U.S.C. 1401a(b).

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. 1401a(b)(4). As a general matter, bona fide buying commissions are not added to the price actually 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.

Here, we note the existence of a buying agency agreement. Under the terms of the agreement MIL will act on behalf of, and subject to the control of the principal, and the principal will delegate certain responsibilities to MIL and pay MIL a commission. We note that, according to the agency agreement, the agent will act on behalf of the principal only upon the explicit instructions of the principal and not vary any of the terms of the purchase order without the express written authorization of the principal.

Although the agreement is silent as to whether the principal has the ability to purchase directly from manufacturers or from other agents, we find that the extent of control retained by the principal under the terms of the buying agreement is indicative that a bona fide buying agency relationship exists. The services to be provided by the agent are those typically performed by a bona fide buying agent.

Moreover, the agreement states that MIL, as agent, shall never act as a seller in any transaction involving the principal and, without exception, MIL shall provide the principal with the seller's invoice reflecting the fact that the principal is the "buyer" and showing the price to be paid for merchandise purchased. 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 agreement states that the agent's compensation will not be paid directly or indirectly, or inure in any way, to the manufacturer/seller of merchandise.

You indicate that the agent and one of the foreign sellers (More's) are related parties. We do not reach any conclusions regarding the dutiability of the commissions in that situation. The fact that the agent and the seller are related parties does not in itself bar commissions from being non-dutiable. See, Bushnell International, Inc. v. United States, 477 F.2d. 1402, 1406; 60 C.C.P.A. 157, 161 (1973). Nevertheless, this office has ruled that such transactions will be subject to closer scrutiny. See, HRL 544657, dated July 1, 1991; HRL 542756, dated May 13, 1982; HRL 545176, dated June 28, 1993. In several more recent rulings, Customs has reviewed the evidence and found that purported buying agents were not in fact bona fide buying agents or that the evidence was inconclusive. See, HRL 545661, dated March 3, 1995; HRL 545550, dated September 13, 1995; HRL 545938, dated June 5, 1996; HRL 546262, November 29, 1997. Consequently, while the fact that the agent and seller are related still does not per se preclude the existence of a bona fide buying agency, as part of the closer scrutiny described above, Customs will require review of the relevant documentation before making any findings. Accordingly, if you still would like a ruling on these transactions, transaction documents and other relevant evidence should be submitted.

However, where the agent is unrelated to the seller, we find that the agreement supports your contention that the commissions paid to the agent constitute bona fide buying commissions. As long as the parties transact business in accordance with the terms of the agreement, the commissions paid to MIL are bona fide buying commissions. Please note that the existence of a buying agency relationship is factually specific. The actual determination will be made by the appraising officer at the applicable port of entry and will be based upon 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.

In addition, this decision does not authorize the acceptability of the proposed 8-12% buying agency agreement commission rate. The appraising officer will determine whether the percentage exceeds the normal rate in the trade.

HOLDING:

Where MIL is unrelated to the seller, commissions paid to MIL pursuant to the submitted buying agency agreement are bona fide buying commissions such that they are not added to the price actually paid or payable provided the actions of the parties are consistent with the terms of the agreement. We make no findings with respect to transactions involving More's.

Sincerely,

Acting Director
International Trade Compliance

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