HQ 547806 - Buying commissions, price actually paid or payable; related parties - United States International Trade Commision Rulings

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HQ 547806

January 31, 2001

RR:IT:VA: 547806KDW

James Caffentzis
Fitch, King and Caffentzis
116 John Street
New York, NY 10038

RE: Buying commissions, price actually paid or payable; related parties

Dear Mr. Caffentzis:

This is in response to your letter dated August 18, 2000, on behalf of your client, Dress Barn, Inc. (“Dress Barn”), requesting a ruling concerning the dutiability of certain commissions paid by it to Doko (Hong Kong) Ltd. (“Doko”), for products imported into the United States. We regret any delay in response.

FACTS:

Dress Barn imports garments produced by various manufacturers throughout the Far East. In March 1990, Dress Barn entered into an agreement with Doko whereby, Doko was charged with negotiating favorable prices; visiting manufacturers; obtaining samples; assisting in price negotiations; purchasing merchandise; surveying potential markets; assisting with financial arrangements; shipping, inspecting merchandise for quality control; and directing processes for defective merchandise. You state that all of the above activities are directed and controlled by Dress Barn and performed on its behalf. Dress Barn’s buyers work with Doko to arrive at a target price per garment from the manufacturers. For its services, Doko is paid a commission ranging from 3% to 10% of the FOB country of origin price for the merchandise. The average commission is 6%. Dress Barn issues a letter of credit to Doko to pay the factories, and Doko invoices Dress Barn separately for its commission. You state that Customs previously reviewed the relationship between Dress Barn and Doko, and determined that the parties act as principal and agent. Further, you state that the commissions paid to Doko were determined to be nondutiable buying commissions.

Recently, Doko acquired a controlling interest in PT. Eight Oh Two (“PT”), one of the factories producing merchandise for Dress Barn. Doko has advised Dress Barn of its relationship to the factory. You state that Doko’s responsibilities to Dress Barn have not been affected by this change of circumstances. Dress Barn’s buyers continue to work with Doko to arrive at a price per garment from the factories, including PT. You state that Doko continues to be bound by the terms of its agreement with Dress Barn, and that it does not share its commissions in any manner with the manufacturers or accept other remuneration for its services. Additionally, you state that Doko will neither share any portion of its commission nor share its expenses or profit with PT. Accordingly, you claim that the commissions paid by Dress Barn to Doko remain nondutiable, regardless of Doko’s interest in PT.

ISSUES:

Are the commissions paid by Dress Barn to Doko part of the price actually paid or payable for the imported merchandise?

LAW AND ANALYSIS:

The preferred method of appraisement for customs purposes is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 1401a. That section provides, in pertinent part, that the transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States, plus five enumerated statutory additions. For the purpose of this prospective ruling request, we assume that transaction value is the applicable basis of appraisement.

The five enumerated statutory additions to the price actually paid or payable include: 1) the packing costs incurred by the buyer with respect to the imported merchandise; 2) any selling commission incurred by the buyer with respect to the imported merchandise; 3) the value, apportioned as appropriate, of any assist; 4) any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States; and 5) the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.

The question in this case is, whether the commissions paid by Dress Barn to Doko are included as additions to the price actually paid or payable. While selling commissions are included in the price actually paid or payable, as a general matter, bona fide buying commissions are not added to the price actually paid or payable. Pier 1 Imports, Inc. v. U.S., 708 F. Supp. 351, 13 CIT 161, 164 (1989) citations omitted. The existence of a bona fide buying commission depends upon the relevant factors of the individual case. J.C. Penney Purchasing Corp. v. U.S., 451 F.Supp. 973 (Cust. Ct. 1978). The importer bears the burden of proving the existence of an agency relationship and that the payments to the agent are bona fide buying commissions. Rosenthal-Netter, Inc. v. U.S., 679 F.Supp. 21, 12 CIT 77 (1988).

The primary consideration in determining whether an agency relationship exists is the right of the principal to control the agent’s conduct with respect to those matters entrusted to the agent. J.C. Penney, supra. As evidence of a buying agency the courts have considered such factors as: the existence of an agency agreement, whether the stated agent’s actions were primarily for the benefit of the principal; whether the principal or agent is responsible for the shipping and handling costs; whether the importer could have purchased directly from the manufacturers without the agent; whether the agent operates an independent business primarily for its own benefit; and whether the agent is financially detached from the manufacturer of the merchandise. Dorco Imports v. United States, 67 Cust. Ct. 503, 512, R.D. 11753 (1971); see also Rosenthal-Netter, supra and New Trends, Inc. v. U.S., 645 F. Supp. 957, 10 CIT 637 (1986).

In support of its claim, Dress Barn submits a copy of the Agency Agreement signed by it and Doko on November 15, 1995. Assuming the terms of the agreement between the parties have not changed and that you can substantiate this fact with a writing signed by both parties, as required by the agreement in clause 17, then we find that Doko’s role is as buying agent on behalf of Dress Barn. The services to be provided by Doko are typical of a bona fide buying agent. A written buying agency agreement evidences the parties’ intent to form a buying agency relationship, and that Dress Barn maintains control over the purchasing process. In addition, the agreement indicates in the first numbered paragraph that Dress Barn shall approve all manufacturers and in paragraph three, the agreement expressly states that purchase shall be made only upon the explicit instructions of Dress Barn.

Dress Barn, as principal, is responsible for its own shipping and handling costs as evidenced by the FOB sale terms between it and the seller. See Headquarters Ruling Letter (HRL) 542141 dated September 29, 1980. Nothing in the agreement prevents Dress Barn from purchasing directly from the manufacturers without Doko. You confirm in your request that Dress Barn’s buyers work with the agent in negotiating prices and contacting overseas factories, including PT.

Lastly, we consider the factor of financial detachment between the agent and the foreign seller. New Trends Inc, at 962. You state that Doko operates an independent business primarily for its own benefit. However, you state that Doko owns a controlling interest in the foreign seller, and thus the two are related. Nevertheless, the fact that profits realized by an agent may indirectly benefit the manufacturer does not in itself bar commissions from being non-dutiable. Bushnell International, Inc. v. United States, 477 F.2d 1402 , 1406; 60 C.C.P.A. 157, 161 (1973). Further, we have previously found that the fact that an agent and a seller are related does not preclude the existence of a bona fide buying agency, although such transactions may be subject to closer scrutiny. See HRL 544657 dated July 1, 1991; HRL 542756 dated May 13, 1982. In this case, you state that Doko will not share its expenses or profits with PT, nor will it share its commissions with PT.

In light of the foregoing, and provided that the actions of the parties comport with the terms of the buying agency agreement, we conclude that the commissions paid to Doko, as agent, constitute bona fide buying commissions. Consequently, the commissions would not form part of the price actually paid or payable.

Please note, however, as we have stated in previous rulings, the existence of a buying agency relationship is factually specific, and the actual determination will be made by the appraising officer at the port of entry based upon the entry documentation submitted. See HRL 545176 dated June 28, 1993, and 23 Cust. B. & Dec., No. 11, General Notice dated March 15, 1989, at 9.

HOLDING:

Commissions paid to Doko pursuant to the buying agency agreement are bona fide buying commissions that are not part of the price actually paid or payable for the imported merchandise.

Sincerely,

Virginia L. Brown
Chief, Value Branch

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