HQ 547117 - Request for binding ruling of Ex Officio, Inc., regarding the Dutiability of Buying Commissions Paid to Khira Corporation. - United States International Trade Commision Rulings

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HQ 547117

August 31, 1998

RR:IT: VA 547117 MWM

Category: VALUATION

David M. Murphy, Esquire
Grunfeld, Desiderio, Lebowitz & Silverman, L.L.P. 245 Park Avenue
33rd Floor
New York, NY 10167-3397

RE: Request for binding ruling of Ex Officio, Inc., regarding the Dutiability of Buying Commissions Paid to Khira Corporation.

Dear Mr. Murphy:

Thank you for your letter, with attachments, dated June 16, 1998, requesting a binding ruling on behalf of Ex Officio, Inc., (Ex Officio) pursuant to ?177.1(a)(1) Customs Regulations (19 C.F.R. ? 177.1(a)(1)), with regard to the dutiability of buying commissions paid to Khira Corporation (Khira).

FACTS:

You state that Ex Officio is an U.S.-based importer and vendor of wearing apparel and related articles. You further state that Ex Officio entered into an agreement with Khira to act as a buying agent in Korea and elsewhere in the Far East. A buying agency agreement was attached to your letter of June 16, as Exhibit A.

Pursuant to the agreement and on behalf of the principal, the agent will: survey potential markets, recommend manufacturers/sellers and assist in price negotiations; obtain samples; place orders; inspect the quality of merchandise to be shipped; assist in the return of defective merchandise; instruct the manufacturer/seller in the preparation of commercial invoices; periodically visit factories; arrange for laboratory testing, as required; periodically inspect merchandise in production; and provide inspection certificates, as required. The inspection services to be performed are generally to ensure that the quality and condition of the merchandise corresponds to the contract specifications. (See, Agency Agreement ?3).

You state that Ex Officio is directly involved in selecting vendors in the Far East, by having its employees (including buyers and designers) travel to the Far East to identify vendors and sources of production. In addition, Ex Officio provides Khira with specifications and designs for garments or fabric.

Khira identifies potential vendors and requests price quotes from these vendors for the production of fabrics or garments. If required, Khira will request sample garments (on behalf of Ex Officio) and then forward both the sample and the price quotation to Ex Officio (Agency Agreement ?2(b)). If Ex Officio is satisfied with the sample and the quotation, Ex Officio places an order with the vendor. Khira does not have the authority to place an order without the prior approval of Ex Officio. (See, Agency Agreement ?2(d))

In every and all instances, Ex Officio specifies the purchase price, product specifications, labeling, quantity and shipment dates. (Agency Agreement ?2(d)). Khira does not have the authority to deviate from the terms specified by Ex Officio. In addition, Khira must advise Ex Officio of the identity of the vendor with whom the order is placed so that Ex Officio may accept or reject the order. The agent shall act only upon the specific instructions of the principal, and the agent shall never act without such explicit instructions. In addition, the agent acknowledges that is does not have any right, power or authority to make any contract or incur any obligation or liability that shall be binding upon the principal, unless it has been specifically authorized (in advance) to do so by the principal. (See, Agency Agreement ? 2(e)).

You state that in the event that Ex Officio decides to purchase merchandise from a vendor, it cuts a purchase order, identifying the vendor, which is sent to Khira. Upon receipt of the Purchase order, Khira writes a Purchase order to that vendor identifying Ex Officio as the ultimate consignee of the merchandise. In addition, the Purchase order will include Ex Officio's terms and conditions, product specifications, labeling requirements, etc. You further state that the vendors are always aware that Khira is acting on behalf of Ex Officio. In addition, you state that the vendors must send production samples to Ex Officio (through Khira) for approval, prior to shipment of commercial quantities, thereby notifying both the vendor and Ex Officio of who plays the role of buyer and seller. You indicate that, Ex Officio opens a letter of credit, in almost all instances, to pay the vendor. The vendor invoices Ex Officio and uses the invoice to draw on a letter of credit. The vendor then issues an invoice for shipment to the United States. These invoices identify Ex Officio as the ultimate consignee of the merchandise, the relevant purchase order, and the FOB price of the goods. We note that neither the method of invoicing for the goods nor the method of payment for the goods is described in the Buying Agency Agreement.

Ex Officio will reimburse Khira for all expenses incurred for the cost of freight, hauling lighterage, etc. However, these expenses may only be incurred with the consent of Ex Officio. Khira is required to provide an accounting of all such charges and expenses no later than thirty days after the end of each quarter. In addition, Khira must issue a separate invoice that identifies the commissions payable to Khira, as well as other reimbursable charges (Agency Agreement ? 3,6).

Counsel states that Ex Officio will remit payment to Khira by wire transfer to cover these charges. Although the commissions payable to Khira are equal to a specified percentage of the FOB value of the merchandise that it orders on behalf of Ex Officio (Agency Agreement ?3), the agreement provides that the commission amount can be changed by agreement of the parties. Counsel states that conditions may dictate that the commissions may be adjusted in the future.

ISSUE:

Whether the commissions disbursed by Ex Officio to Khira pursuant to the terms of the buying agency agreement are bona fide buying commissions.

LAW AND ANALYSIS:

For purposes of this decision, we assume that the imported merchandise will be appraised using the transaction value method. Transaction Value is defined in ?402, Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a), as the price actually paid or payable for the merchandise when sold for exportation to the United States, plus amounts for the items specifically enumerated in ?402(b)(1) of the TAA. Buying commissions are not included as an item to be added to the price actually paid or payable.

The term "price actually paid or payable" is defined in

"...the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller."

Bona fide buying commissions paid to an agent are not a proper element of dutiable value. Pier 1 Imports v. United States, 708 F. Supp. 351, 354, 13 CIT 161 (1989); HQ 554234 (January 24, 1989). Customs views the totality of the evidence to determine whether the purported agent is in fact a bona fide buying agent and not a selling agent or independent seller. Id.

Customs must examine all the relevant factors to determine if a bona fide buying agency exists. J.C. Penney Purchasing Corporation, et al. v. United States, 80 Cust. Ct. 84, C.D. 4741 (1978), 451 F. Supp. 973 (1983): United States v. Knit Wits (Wiley) et al., 62 Cust. Ct. 1008, A.R.D. 251 (1969). The primary consideration "is the right of the principal to control the agent's conduct with respect to the matters entrusted to him." Rosenthal-Netter, Inc. v. United States. 12 CIT 77, 679 F. Supp 21 (1988).

In New Trends, Inc. v. United States, 10 CIT 637, 645 F. Supp. 957 (1986) the Court of International Trade set forth several factors upon which to determine the existence of a bona fide buying agency, including:
? Whether the principal controls the agent's activities and conduct;
? Whether the principal is aware of the price paid to the supplier, or does the principal simply pay the agent a fixed price;
? Whether the agent has a separate identity as an independent seller of merchandise;
? Whether the principal is able to purchase merchandise directly from suppliers;
? 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 his commission; ? Whether the language used on the commercial invoice is consistent with the principal-agent relationship; ? Whether the agent bears the risk of loss for damaged, lost or defective merchandise;
? Whether the agent is financially detached from the manufacturers of the merchandise;
? Whether the agent's duties are ministerial or discretionary; and
? Whether the parties have entered into a buying agency agreement.

An important mark of a buying agency is the fact that "none of the commission inures to the benefit of the manufacturer." J.C. Penney, supra; United States v. Manhattan Novelty Corp., 63 Cust. Ct. 699, A.R.D. 263 (1969), Knit Wits (Wiley), supra; and Rosenthal-Netter, Inc., supra.

In this case, based on your representations and under the terms of the buying agency agreement, it appears that the principal controls the agent's activities and conduct. Ex Officio controls the selection of suppliers via the procurement process, and its oversight process. In addition, Ex Officio negotiates its contracts with suppliers through Khira. Khira is prohibited from issuing any purchase order on behalf of Ex officio without prior approval from Ex Officio. Further, Ex officio retains ultimate control of the terms of purchase and of the negotiation process. Based upon the above-mentioned facts, along with the Buying Agency Agreement, Ex Officio controls all aspects of Khira's activities and conduct.

The Restatement (Second) of Agency ?14K (1958) states that one who contracts to acquire property from a third person and convey it to another is the agent of the other only if it is agreed that he is to act primarily for the benefit of the other and not for himself. The comments to this section provide, in pertinent part, that a person is not acting as an agent, but rather an independent seller, if he (1) is to receive a fixed price for the property, irrespective of the price paid by him; (2) acts in his own name and receives the title to the property which he thereafter is to transfer; and (3) has an independent business in buying and selling similar property. Applying this to the matter presented, Ex Officio is the principal and Khira is the agent. Ex Officio buyers have complete control over the price paid for the merchandise, not Khira. In addition, Khira does not conduct any independent selling operation in the type of merchandise procured for Ex Officio. Khira acts solely as an agent on behalf of Ex officio and does not sell apparel or textiles on the open market.

Next, based on your representations and the terms of the agency agreement, Khira acts for the benefit of Ex Officio. In the matter presented, Khira cannot act without the express authority of Ex Officio and under Ex officio's direct instructions. The Buying Agency Agreement specifically prohibits Khira from acting as a seller in the transactions. (Agency Agreement ? 2(k)). In addition, Khira certified that it does not have a financial interest or ownership in any of the vendors. (Agency Agreement

Khira never bears the risk of loss for damaged, lost or defective merchandise. However, Ex Officio may request assistance from Khira in recovering monies from vendors for late shipments, and shipments of defective merchandise and non-conforming goods. (Agency Agreement ?2(j)). The only time Khira is liable for loss is if it negligently issues inspection certificates, fails to properly police against textile transshipment, or fails to police other violations of law by the vendors. (Agency Agreement ?5). The risk of loss for the shipment of non-first quality merchandise is not on Khira, but Ex Officio.

Because Ex Officio is the originator of the purchase order and is the sole entity with the discretion to originate and approve a purchase order, it appears that Khira's duties are primarily ministerial. Khira does not have discretion to do anything on behalf of Ex Officio without prior approval. In addition, all order filling problems are referred to Ex Officio.

Finally, as evidenced by the executed Buying Agency Agreement, it is clear that the parties have entered into a buying agency agreement. However, it is well settled that a bona fide agency agreement is not dispositive of the determination that a bona fide buying agency exists. New Trends, Inc., Id. The buying agency agreement is only evidence that the parties intend to create an agency relationship. The agreement must be supported by sufficient evidence.

The "form" of invoicing is a significant factor in deciding whether commissions paid to buying agents are non-dutiable. See General Notice dated March 15, 1989, HRL 542141 September 29, 1986 (TAA #7). In order to determine the transaction value, it is necessary to know the identity of the seller and the amount paid or payable to him. An invoice or other documentation from the actual foreign seller to the agent or to the buyer would rebut the presumption that the agent is the seller. In addition, this information is required to determine the price actually paid or payable. In this case, the agreement specifies that Khira shall ensure that all invoices and documentation specify the names of the actual manufacturers and /or sellers and meet all other requests of the United States Customs laws and regulations (Agency Agreement ? 4). In addition, Khira is obligated to provide Ex Officio with an invoice for commission with each shipment (Agency Agreement ? 3).

HOLDING:

The terms of the buying agency agreement are consistent with the existence of a bona fide buying agency. Assuming the parties transact business according to the representations made by counsel and the terms of the agreement, the commissions paid to Khira constitute bona fide buying agency 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 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 independent seller.

Sincerely,

Acting Director
International Trade Compliance
Division

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