VAL CO:R:C:V 544965 ILK
Area Director
Kennedy Airport Area
Jamaica, New York
Re: Dutiability of Commissions Paid to Purported Buying Agent
Dear Sir:
This is in response to a letter of March 31, 1992 from John
Pellegrini on behalf of his client, Teximpor, Inc. (hereinafter
referred to as the "importer"), regarding whether a fee paid to
Epic Designers Ltd. (hereinafter referred to as "EDL"), a
purported buying agent, is dutiable. The request was followed by
a July 23, 1992 meeting between Mr. Pellegrini and members of my
staff in the Value and Marking Branch. Subsequently, Mr.
Pellegrini made an additional submission dated August 5, 1992,
and one dated October 5, 1993. Customs in the Kennedy Airport
Area and the importer agreed to submit this matter to
Headquarters for a ruling. Because this matter concerns ongoing
transactions and entries presently before Customs, we are
treating this matter as a request for internal advice and are
responding accordingly. The Regulatory Audit Division, New York
Region has made a submission to this office, dated December 16,
1993, which discusses various audit findings and concerns
regarding the issue presented herein. We have reviewed the
points raised in the submission, and find that they do not impact
this decision. We regret the delay in responding.
FACTS:
The importer, a U.S. corporation, imports wearing apparel
from numerous sources, including Hong Kong, the People's Republic
of China, India, Bangladesh, the United Arab Emirates, Turkey,
Indonesia, Oman and Bahrain. The request claims that EDL acts as
a buying agent for the importer in Bahrain, Bangladesh, Hong
Kong, Indonesia, Macau, Oman, the People's Republic of China and
the United Arab Emirates. The arrangement between the importer
and EDL is documented in a written "Buying Agency Agreement"
dated October 5, 1985 (hereinafter referred to as the
"Agreement"). The Agreement provides that EDL will represent the
importer "to handle all purchases of wearing apparel from various
countries to USA," will send purchase orders to sellers and
assist the importer in selecting factories and/or exporters, will
process the orders, will obtain quotas where necessary and
inspect the merchandise and issue inspection certificates. The
agreement further provides that the importer will open letters of
credit in favor of the "exporter" and must make all claims for
defective merchandise within seven days of receipt of the
merchandise by the importer. The request claims that the
Agreement requires EDL to perform such services as identifying
reliable manufacturers, developing information about the general
level of market prices and market conditions, obtaining offers,
assisting in export and distribution of merchandise and
preparation of documentation. The importer pays EDL a commission
of ten percent of the FOB price of the imported merchandise.
According to the request, commission payments are made on a
periodic basis, based upon EDL's invoice. The request states
that EDL bears no risk for lost or defective merchandise, that
the importer could deal with the sellers directly, and that EDL
bears no responsibility for shipping or handling of the
merchandise.
The importer employs two methods of operation. Under the
first method (operation 1), the importer opens a blanket
transferable letter of credit naming EDL as beneficiary, and EDL
arranges for letters of credit naming the sellers of the
merchandise as beneficiaries. EDL's commission is not included
in the letters of credit. The request states that in these
instances the purchase order is also opened to EDL. Under the
second method of operation (operation 2), the importer opens the
letter of credit and the purchase order to the seller of the
merchandise. Attached to the request are copies of transaction
documentation reflecting each of the two methods of operation.
Exhibit B, for operation 1, contains the importer's purchase
order identifying EDL as the agent and not identifying any
foreign vendor, a letter of credit to EDL, and a commercial
invoice from the foreign seller to the importer. Exhibit C, for
operation 2, contains the importer's purchase order identifying a
foreign vendor and EDL as the agent, a letter of credit to the
foreign seller, and an invoice from the foreign seller to the
importer. In exhibits B and C the letters of credit are in
amounts significantly greater than the FOB price contained on the
invoice. In Exhibit B the invoice is for $16,734.75 and the
letter of credit is for $1,500,000.00. In Exhibit C the invoice
is for $51,454.30, and the letter of credit is for $161,400.00.
In neither exhibit do the purchase orders indicate any unit price
or total price for the subject merchandise, and only in Exhibit C
does the letter of credit indicate a unit price. In Exhibit B
the letter of credit states that the unit price of the
merchandise "will be as per contract issued by [EDL]." With the
October 5, 1993 submission, the importer has provided us with a
copy of a contract issued by EDL which contains a unit and total
price, references the importer's purchase order and shows the
importer as the consignee of the merchandise.
Also attached to the request as exhibits are EDL's
registration in Hong Kong as an agent for the importer, an EDL
debit note showing the purchase of 1000 dozen permanent quota
purchased on behalf of the importer, EDL's statement of account
to the importer for its commissions, EDL's claim against a seller
for defective merchandise (which claim does not identify the
importer) and EDL's subsequent credit note to the importer for
the amount of the value of the defect, and the affidavit of a
manager of EDL. The affidavit states that when the importer
forwards purchase orders to EDL, the ultimate choice of vendor
lies with the importer, and EDL does not have authority to select
a seller, EDL does not operate a warehouse or hold inventory, EDL
is not affiliated with any of the vendors with whom it deals, and
EDL does not share its commissions with any of the vendors. The
affidavit also states that approximately twenty percent of EDL's
business is as a seller, however, never with respect to the
importer.
The August 5, 1992 submission contains documentation of
three transactions in which EDL is claimed to have acted as an
agent. The three sets of documents consist of 1) one or a series
of purchase orders from the importer, 2) a written confirmation
from EDL stating that the purchase order had been placed and the
unit price of the merchandise, 3) a letter of credit naming
either EDL or the seller (in the transaction in which EDL is
named as beneficiary the letter of credit was transferred from
EDL to the seller), 4) the importer's shipping instructions, 5)
the seller's invoice to the importer and 6) letter of credit
advice showing payment to the seller. None of the purchase
orders contain any price information. The price is stated by EDL
in its confirmation letter. With respect to one of the
transactions (identified as Transaction I), in its confirmation
letter EDL advises:
The price negotiated is US43.00 per dozen. We feel
this is the most competitive price and request you to
please accept same.
One of the letters of credit states that the unit price and
quantity will be "as per contract issued by [EDL]." Again, with
the October 5, 1993 submission the importer has provided us with
a copy of a contract issued by EDL which contains a unit and
total price, references the importer's purchase order and shows
the importer as the consignee of the merchandise.
The importer has been audited by Customs' Regulatory Audit
Division with regard to its transactions with EDL. With respect
to the issues herein, Customs Audit Report 212-91-FRO-001, dated
May 26, 1992, found the following: 1) according to a Dun &
Bradstreet International Report, EDL is an independent exporter
of ladies and men's garments whose production process is
subcontracted to local manufacturers with raw material and
designs provided by EDL; 2) the importer's purchase orders to EDL
were silent as to the manufacturer's name and unit price, and
that EDL is not controlled by the importer; and 3) the importer
pays EDL for design expenses. It is the opinion of the
Regulatory Audit Division that the ten percent commission paid to
EDL is in excess of the standard buying commission.
It is the position of the importer that EDL is a bona fide
buying agent for the importer, and that the commissions paid to
EDL by the importer are not dutiable. With respect to the audit
finding that the importer pays EDL for design expenses, at the
meeting of July 23, 1992, on behalf of the importer it was
represented that the merchandise is "designed" in New Jersey, and
that the importer pays no design fees to EDL.
ISSUE:
Whether the described services provided by the agent are
those of a bona fide buying agent.
LAW AND ANALYSIS:
We are assuming, for the purposes of this ruling that
transaction value is the appropriate basis of appraisement.
We must examine all relevant factors in deciding whether a
bona fide agency relationship exists. In Pier 1 Imports, Inc. v.
United States, 13 CIT 161, 708 F.Supp. 351 (1989) and Rosenthal-
Netter, Inc. v. United States, 12 CIT 77, 679 F. Supp. 21, aff'd.
861 F.2d 261 (Fed. Cir. 1988), the court set forth factors to
consider in deciding whether a bona fide agency relationship
exists. The first factor is the right of the principal to
control the agent's conduct. In Rosenthal-Netter, in examining
the control the importer had over the agent, the court considered
the importer's control over the choice of manufacturers, over the
handling and shipment of the imported merchandise and over the
manner of payment. In this case the total price and unit price
is provided to the vendor by a contract from EDL which references
the importer's purchase order. Of the two purchase orders
attached to the request only one (exhibit C) identifies a vendor,
but the purchase orders contained in the August 5, 1992
submission do indicate the name of a manufacturer. In Rosenthal-
Netter the court held that "failure to substantiate the names of
manufacturers is evidence that no agency relationship existed."
679 F.Supp. at 23. The August 5, 1992 submission contained
copies of explicit shipping instructions from the importer. EDL
does not appear to absorb the costs of shipping and handling,
which fact supports finding the existence of a buying agency
relationship. According to the documents attached to the request
and the request itself, EDL is given letters of credit from which
to pay the suppliers. The letters of credit are for amounts in
excess of the invoice amounts, leaving the importer with no
apparent control over the amount to be paid to the suppliers, but
the October 5, 1993 submission contained invoices from the
sellers to the importer, indicating the amounts to be paid.
Further, the August 5, 1992 submission contains letters of credit
issued in favor of the sellers as opposed to the agent. In
Rosenthal-Netter, where the importer had opened letters of credit
in favor of the intermediary from which the intermediary deducted
its commissions, handling charges, etc. the court found that the
importer had failed to control the manner of payment. In this
case however, according to the request, EDL does not deduct its
commissions from the letter of credit.
In J.C. Penney Purchasing Corp. et al. v. United States, 80
Cust. Ct. 84, C.D. 4741, 451 F. Supp. 973 at 983 (1978), the
court stated that in finding the existence of an agency
relationship, it attributed significance to the fact that the
importer actually visited factories and participated in
negotiations with the factory. In this case there is no evidence
that the importer had such contact with the vendors. It appears
from EDL's confirmation letters that EDL negotiates the prices of
the merchandise with the sellers. However, there is evidence
that the importer must give final approval to the price
negotiated by EDL in the language of EDL's confirmation of the
importer's purchase order, where EDL recommends that the importer
accept the negotiated price (Transaction I of August 5, 1992
submission). From the foregoing facts it appears that the
importer generally does have control over the selection of the
foreign vendor, shipment of the merchandise, the payment of
commissions to EDL and payment to the vendor for the merchandise.
The second factor to consider is the transaction documents.
In this case the debit note stating a claim for defective
merchandise, from EDL to a the vendor (exhibit G to the request),
does not identify the importer as the party making the claim
anywhere on the document. However, the remaining documentation
does identify the importer. With respect to the other documents,
an invoice or other documentation from the actual foreign seller
to the buying agent is required in order to establish that the
agent is not a seller and to determine the price actually paid or
payable to the seller. See U.S. Customs Service General Notice,
Customs Bulletin dated March 15, 1989, which cites Headquarters
Ruling Letter 542141 (HRL) dated September 29, 1980, also cited
as TAA No. 7. With its August 5, 1992 submission the importer
has submitted invoices from the sellers for the imported
merchandise, which invoices are to the importer. Assuming that
the weight of other factors supports the finding of a bona fide
buying agency, the seller's invoice to the importer is sufficient
for the purpose of establishing that the agent is not a seller
and determining the price actually paid or payable.
The third factor to consider is whether the importer could
have purchased directly from the manufacturers without employing
the agent. The request asserts that the importer could deal with
the sellers directly. The fact that the importer has the
opportunity to purchase merchandise directly supports a finding
of the existence of a buying agency.
The fourth factor to consider is whether the intermediary
was operating an independent business primarily for its own
benefits. In Rosenthal-Netter the court cites the Restatement
(Second) of Agency section 14K comment a (1958) for "factors to
assist in determining when one is selling to, as opposed to
acting as an agent for, the alleged principal":
(1) That he is to receive a fixed price for the property,
irrespective of the price paid by him. This is the most
important. (2) That he acts in his own name and receives
the title to the property which he thereafter is to
transfer. (3) That he has an independent business in buying
and selling similar property.
Rosenthal-Netter, 679 F.Supp. at 25. With respect to the third
factor of the Restatement (Second), according to the request and
the audit report, at least 20% of EDL's business consists of
selling mens and ladies apparel, thus EDL has an independent
business in buying and selling property similar to the subject
merchandise. However there is no evidence of the first two
factors, therefore there is little indication that EDL is acting
for its own benefit in transactions involving the importer.
The fifth factor is the existence of a buying agency
agreement. A buying agency agreement exists in this case,
however, from the documentation submitted on behalf of the
importer it appears that EDL's actions are not entirely
consistent with the terms of the Agreement. For example in
operation 1 the importer opens the letter of credit in favor of
EDL as opposed to the exporter as provided in the Agreement.
This is evidenced in Exhibit B. It is the position of Customs
that "having legal authority to act as buying agent and acting as
buying agent [are] two different matters" and Customs is entitled
to examine evidence which proves the latter. U.S. Customs
Service General Notice, 11 Cus. Bull. & Dec. 15 (March 15, 1989).
See also Pier 1 Imports, supra; Jay-Arr Slimwear Inc. v. United
States, 12 CIT 133, 681 F. Supp. 875 (1988); and Rosenthal-
Netter, supra. In this case, although the parties do not adhere
strictly to the terms of the Agreement, we are still required to
determine whether the agent acts as a bona fide buying agent.
We have ruled that "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."
HRL 542141 dated September 29, 1980. Although no single factor
is determinative, the primary consideration is the "right of the
principal to control the agent's conduct with respect to the
matters entrusted to him." J.C. Penney Purchasing Corp., 451
F.Supp. at 983. Based on the facts before us we are satisfied
that the importer has exercised a sufficient degree of control
over the agent, and find that the totality of the evidence
demonstrates that EDL is in fact a bona fide buying agent and not
a selling agent or an independent seller. Therefore, we conclude
that the fees paid to EDL constitute bona fide buying
commissions, and are not included in the transaction value of the
imported merchandise.
One issue not addressed in the importer's submissions and in
the audit is whether there is a relationship between the importer
and EDL. For the purposes of this ruling, it is assumed that a
relationship does not exist. If it does exist, it must be
disclosed to the appraising officer, as such related party
transactions are subject to close scrutiny, and it may be
determined that a bona fide buying agency relationship does not
exist. HRL 544396 dated May 14, 1990; Bushnell International,
Inc. v. United states, 60 C.C.P.A. 157, 477 F.2d 1402 (1973).
HOLDING:
Based on the totality of the evidence presented it is our
conclusion that the commissions paid to EDL to perform the
services in conjunction with the purchase of the imported
merchandise are bona fide buying commissions, and the commissions
are not included in the transaction value of the imported
merchandise.
This decision should be mailed by your office to the
internal advice requester no later than 60 days from the date of
this letter. On that date the Office of Regulations and Rulings
will take steps to make the decision available to Customs
personnel via the Customs Rulings Module in ACS and the public
via the Diskette Subscription Service, Lexis, Freedom of
Information Act and other public access channels.
Sincerely,
John Durant, Director
Commercial Rulings Division