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HQ 547127





RR:IT:VA
547127 MWM
November 20, 1998

Laurence M. Friedman, Esquire
Grunfeld, Desiderio, Lebowitz & Silverman, LLP 245 Park Avenue, 33rd Floor
New York, New York 10167-3397

RE: Buying agency, related parties, dutiability of commissions.

Dear Mr. Friedman:

This is in reply to your letter dated July 7, 1998, in which you requested a binding ruling on behalf of X, Inc., (Agent) pursuant to ?177.1(a)(1) Customs Regulations (19 C.F.R. ? 177.1(a)(1)), regarding the dutiability of buying commissions paid to Agent even in those transactions where the Agent and the seller are related.

In your ruling request, you sought confidential treatment regarding certain business information contained within your brief. Pursuant to section 177.2(b)(7), Customs Regulations (19 C.F.R. 177.2(b)(7)), we grant your request for confidentiality. We have excised, in the public version of this decision, the bracketed confidential information.

FACTS:

You state that Agent has acted as a nonexclusive buying agent in the Far East for several United States importers since its establishment in 1995. A prototypical buying agency agreement between Agent, as agent and Company A, as Principal, was attached to your letter of July 7, 1998 as Exhibit A.

Pursuant to the agreement and on behalf of the Principal, Agent will: survey potential markets, recommend manufacturers/sellers and assist in price negotiations; advise of developments; 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; and provide inspection certificates as required.

You state that in all instances that the Agent's activities will be directed and controlled by the Principal. Agent will place orders with the manufacturer only after the Principal has approved the manufacturer. (? 1, Exhibit A). Agent will purchase merchandise for Principal only upon the explicit instructions of the principal. (? 3, Exhibit A). In addition, Agent will ensure that the manufacturers are aware that the Principal is the purchaser. (? 1, Exhibit A). In return, the Principal will compensate Agent in an amount equal to between A percent (A%) and B percent (B%) of the FOB Country of Origin price of the merchandise purchased pursuant to the agreement. (? 12, Exhibit A). According to counsel, the order size, delivery time, product type and availability will determine the commission rate. Agent will be responsible for all costs associated with the performance of its obligations as a buying agent. (? 15, Exhibit A).

According to counsel Agent does not maintain separate inventory. In addition, counsel claims that Principal will assume the risk for loss or damage to the merchandise, once delivered to the port of export by the seller. In addition, counsel claims that Agent will not take title to the merchandise. Further counsel claims that Principal will open a letter of credit, in favor of Agent, to pay for the merchandise. In addition, Agent will provide the Principal with a separate invoice for the payment of the buying commissions. Also, Agent will give Principal the manufacturers/sellers commercial invoices reflecting the cost of the merchandise in each transaction. Despite the fact that the above mentioned claims are not specifically stated in the agreement, they will be treated by Customs as part of the agreed upon facts.

Currently, Agent places orders only with sellers unrelated to both Agent and its various Principals, according to counsel. One such seller is a vendor in Doha, Qatar. This vendor has two factory locations and, to reduce operating costs and improve efficiency, is planning to merge the two. The factory owners suggested to Agent that it acquire an approximate X% equity interest in the new manufacturing facility.

You claim that the employees and operations of the manufacturing facility will be separate and apart from those of the Agent. In addition, the two "legally and distinct" entities will not share expenses or profits. You state that the commissions paid to Agent will not inure to the benefit of (nor be shared in any way with) the factory. Profits earned by the factory will not be shared with Agent. The terms of the submitted agreement will apply to the arrangement described. However, paragraph nine (? 9) of the agreement, regarding the relationship of the parties, will be changed to reflect the new arrangement.

You further claim that Agent will continue to place orders with other factories, including unrelated factories, after it makes the proposed investment. In addition, you indicate importers will not be required to utilize Agent exclusively to make purchases at the new, related, factory.

ISSUE:

(1) Whether payments made to Agent for services rendered pursuant to the Agency Agreement constitute buying commissions such that they are not additions to the price actually paid or payable under 19 U.S.C. 1401a(b).

(2) Whether the fact that Agent and a certain manufacturer are related affects the dutiability of the commissions.

LAW AND ANALYSIS:

For purposes of this prospective ruling request, we are assuming that transaction value will be applicable as a basis of appraisement.

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."

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. 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."

Buying commissions paid to buying agents are not included in dutiable value. Pier 1 Imports v. United States, 708 F. Supp. 351, 13 CIT 161 (1989); HQ 554234 (January 24, 1989). Customs must examine all the relevant factors to determine if a 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 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.

In addition, to be exempt from appraised value, the importer must show 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. The courts have applied the above-stated factors to determine the existence of a buying agency relationship in New Trends, Inc., supra, Jay-Arr Slimwear Inc., v. United States, 12 CIT 681 F. Supp. 875 (1988), Rosenthal- Netter, Inc., supra.

You indicate that the submitted buying agency agreement is prototypical of the described transaction. Under the terms of the agreement, the services to be performed by the agent are indicative of those generally provided in a buying agency relationship. The agent might be visiting factories, negotiating favorable prices, arranging for shipping, inspecting the goods, but all at the behest of the importer. Based on the terms of the agreement it appears that the agent is acting primarily at the specific direction of the Principal, as is necessary in an agency relationship. You also state that the agent will not bear the risk of loss of the goods as "it is uncharacteristic of an agency relationship to allow the intermediary to bear the risk for damaged, lost, or defective merchandise." Rosenthal-Netter, Inc., 12 CIT at, 679 F. Supp. at 26. However, whether a commission is a buying commission depends in each instance on the facts of each particular case. J.C. Penney, 80 Cust. Ct. at 95, 451 F. Supp. at 983; Nelson Bead Co., 42 CCPA at 183.

Assuming it would be consistent with that memorialized in the buying agency agreement, the services you state will be conducted by Agent are characteristic of a buying agent. However, here we must examine whether the dutiability of the buying commissions is affected by Agent's relationship with the manufacturer. When examining whether a purported agent is a buying agent, closer scrutiny is warranted where special circumstances exist. For example, closer scrutiny is required where the agent and the seller are related. Such relationship does not, however, automatically preclude the existence of a buying agency. See HRL 545177, June 28, 1993, HRL 544657, July 1, 1991.

Likewise, closer scrutiny is warranted where the purported buying agent also performs services on behalf of the manufacturer. However, as determined in HRL 544676, July 24, 1991, this fact does not automatically preclude the purported agent from being considered a buying agent. In that case, the agent was to perform certain functions on behalf of the buyer and the seller. We ruled that the services to be performed on behalf of the seller did not preclude the agent from being considered a buying agent based on the following considerations: the functions to be performed by the agent were primarily for the benefit of the buyer; the functions performed on behalf of the seller were ministerial functions (they included locating materials needed by the manufacturer; providing quality control and inspection services, advising the manufacturing of U.S. importing requirements); and, the buyer was aware of and acquiesced to its agent performing services on behalf of the seller. The decision indicates that as long as the payment by the manufacturer does not impact on the importer's "price actually paid or payable," it will not affect the nondutiability of the agents' commissions. See also HRL 544452, September 11, 1990. In citing Bushnell Int'l, Inc., v. United States, 60 CCPA 157, C.A.D. 1104, 477 F.2d 1402 (1973) and Jay-Arr Slimwear, Inc., Supra, Customs recognized that a relationship or business tie between the parties to a transaction was not dispositive, per se, of the bona fides of an agency relationship, but rather such questions were to be resolved in light of the totality of the evidence presented. See HRL 544345, June 30, 1995.

You indicate that the agent and one of the foreign sellers may be related parties. This does not in itself bar commissions from being non-dutiable. Bushnell International, Inc. v. United States, 477 F.2d 1402, 1406; 60 CCPA 157, 161 (1973). However, such transaction will be subject to closer scrutiny. In several more recent rulings, involving a purported buying agency relationship, Customs has reviewed the evidence and found that purported buying agents were not in fact buying agents or that the evidence was inconclusive. See, HRL 545661, March 3, 1995; HRL 545550, September 13, 1995; HRL 545938, June 5, 1996; and HRL 546262, November 29, 1997. Consequently, as part of the closer scrutiny described above, Customs will require review of the relevant documentation before making any findings. See, HRL 547058, May 19. 1998. 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 buying commissions. As long as the parties transact business in accordance with your representations and the terms of the agreement, the commissions paid to Agent are 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 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 dated September 29, 1980 (TAA #7).

HOLDING:

Where Agent is unrelated to the seller, the amounts paid to Agent may constitute buying commissions such that the payments are not additions to the price actually paid or payable of the imported merchandise, based on the facts presented and information currently available. As provided above, this finding remains subject to any determinations that may be made by the appraising officer at the applicable port of entry, based on the documentation and evidence submitted at that time. Once a non-dutiable buying agency arrangement exists, it is plausible that circumstances between the parties may change and that it could still be found that the roles of the parties are quite different from what they were agreed or purported to be. We make no findings with respect to transactions where Agent is related to the seller.

Sincerely,

Thomas L. Lobred
Chief, Value Branch


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