VAL CO:R:C:V 545421 LR
Daniel J. Gluck, Esq.
Serko & Simon
One World Trade Center suite 2271
New York, N.Y. 10048
RE: Proposed Buying Agency Agreement
Dear Mr. Gluck:
This is in response to your ruling request submitted on
behalf Shonac Corporation ("the importer"), as to whether an
agreement it plans to enter into with a Hong Kong company is a
bona-fide agency agreement and whether commissions to be paid to
this company are non-dutiable buying commissions. We regret the
delay in responding.
Section 177.2(b), Customs Regulations, 19 CFR 177.2(b),
requires that a ruling request describe the Customs transaction
to which it relates in sufficient detail to permit the proper
application of the relevant laws. The only information provided
was an unsigned, undated buying agency agreement. You have
advised that the details regarding the Customs transaction have
not yet been finalized. Without specific details regarding the
Customs transaction, we do not have enough information to
determine whether the payments to be paid in accordance with the
proposed agreement would constitute non-dutiable buying
commissions. Therefore, this ruling will only address the issue
of whether the proposed agreement is consistent with a buying
agency. It is applicable only to prospective transactions.
FACTS:
A proposed buying agency agreement between the importer and
the agent was submitted. (The proposed agreement is not signed
or dated and the parties are unidentified). Under the terms of
this agreement, the agent is the importer's nonexclusive buying
representative in Hong Kong, China, Taiwan and Korea. The agent
agrees to perform the following duties: visit manufacturers,
collect samples, submit samples to the importer after determining
whether they infringe any valid trademark, patent, copyright,
etc., report on market conditions and the availability of
merchandise, obtain price quotes, expedite orders, verify price,
quantity, quality and condition of merchandise, inspect finished
products prior to packing, ensure merchandise is shipped in
accordance with the importer's directions, and settle any claims
that might arise at the importer's direction.
The proposed agreement further provides that the agent shall
place orders on the importer's behalf based upon those expressed
terms supplied by the importer, and shall not amend orders
without the importer's expressed written authorization.
In the agreement the agent attests: that it has neither
control over, nor ownership or financial interest in, the
manufacturers supplying merchandise; that these manufacturers
have neither financial nor ownership interest in the agent; and,
that the agent and manufacturers do not share in any commission.
Additionally, the proposed agreement provides that the agent
does not sell raw materials to the manufacturers on its own
account; that the agent will not fill any of the importer's
orders with merchandise in which it has a proprietary interest,
nor act as seller in transactions involving the importer; and
that the agent has no authority to bind or obligate the importer
without the importer's written authorization.
For its services, the agent will receive a commission of 10%
of the FOB value of all merchandise shipped to the importer, in
which the agent performed the above services. The commissions
are separately invoiced and are payable after the shipments are
received by the importer. The proposed agreement provides that
the agent will reimburse the importer for damages and other
claims incurred by the importer resulting from the agent's
failure to perform the requisite inspection services or its other
responsibilities. Such reimbursement shall not exceed the total
commissions paid or payable.
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in
accordance with section 402 of the Tariff Act of 1930, as amended
by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a). The
preferred method of appraisement under the TAA is transaction
value, defined as "the price actually paid or payable for the
merchandise when sold for exportation to the United States," plus
five enumerated statutory additions in 402(b)(i), including
selling commissions. The "price actually paid or payable" is
defined in 402(b)(4) as "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).
It has been determined that bona fide buying commissions are
not added to the price actually paid or payable. Pier 1 Imports,
Inc. v. United States, 13 CIT 161, 164, 708 F. Supp. 351, 353
(1989); Rosenthal-Netter, Inc. v. United States, 679 F. Supp. 21,
23; 12 CIT 77,78 aff'd., 861 F.2d 261 (Fed. Cir. 1988); Jay-Arr
Slimwear, Inc. v. United States, 681 F. Supp. 875, 878, 12 CIT
133,136 (1988). However, the importer has the burden of proving
that a bona fide agency relationship exists and that payments to
the agent constitute bona fide buying commissions. Rosenthal-
Netter, supra, New Trends, Inc. v. United States, 10 CIT 637, 645
F. Supp. 957, 960, (1986); Pier 1 Imports, Inc., supra. In
deciding whether a bona fide agency relationship exists, all
relevant factors must be examined and each case is governed by
its own particular facts. J.C. Penney Purchasing Corp v. United
States, 80 Cust. Ct. 84, 95, C.D. 4741, 451 F. Supp. 973, 983
(1978). 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.
See Jay-Arr Slimwear, Pier 1 Imports, Inc., J.C. Penney, and
Rosenthal-Netter, supra. The degree of discretion granted the
agent is a further consideration. See New Trends, supra.
In examining the control the importer had over the agent,
the court in Rosenthal-Netter considered the importer's control
over the choice of manufacturer, over the handling and shipment
of the imported merchandise and over the manner of payment. The
court found that the "failure to substantiate the names of
manufacturers is evidence that no agency relationship existed."
679 F. Supp. at 23. In J.C. Penney Purchasing Corp., the court
attributed significance to the fact that the importer actually
visited factories and participated in negotiations with the
factory. In New Trends, Inc., the importer's lack of involvement
with the manufacturers of merchandise was an indication that
there was no principal-agent relationship between the importer
and the agent, but that the agent was acting as a seller of the
imported merchandise.
Under the proposed agreement, it appears that the importer
will not have any direct involvement with the manufacturer; it is
the agent who will visit the manufacturers and obtain price
quotes. Since the agreement does not specify the manufacturers
or factories from which the agent is to make purchases it appears
that the importer does not control this aspect of the
transaction. However, the importer will have control over most
other aspects of the transaction. For example, the agent cannot
disburse any funds, or make advances on behalf of the importer
without written authorization. The agent has no authority to
bind or obligate the importer except upon receipt of the
importer's written authorization. Although the agent will
negotiate directly with the vendor to attain satisfactory
adjustments for all substandard goods, the agent must get prior
written approval from the importer. Other indications that the
importer will control the agent's conduct are that the agent must
ensure that the goods conform to the importer's specifications,
that they are shipped according to schedule and in accordance
with the importer's directions. Thus, it appears that the
importer will determine the shipping arrangement. Finally,
amendments to orders may not be made without the written
authorization of the importer.
With regard to manner of payment, the proposed agreement
specifies that the commission shall be separately invoiced by the
agent and shall become payable after each shipment has been
completed in accordance with the importer's written instructions.
The proposed agreement indicates that payment will be by
irrevocable and assignable letters of credit, or other means that
are mutually acceptable to the importer and agent. While the
importer has some control over the manner of payment, it is not
yet clear how much control it will have.
With regard to the amount of discretion, under the agreement
the agent is granted little discretion as evidenced by the fact
that it must obtain written authorization before binding the
importer in any way. Except for the choice of potential
manufacturers, the actions of the agent are to be controlled by
the importer.
Based on the above considerations, we conclude that under
the terms of the proposed agreement, the degree of control the
importer has over the agent is consistent with a buying agency
relationship.
However, in New Trends, Inc. and Rosenthal-Netter, supra,
the court indicated that in addition to the issue of control, it
must be determined whether an agency relationship exists between
the alleged buying agent and the importer/buyer i.e., whether the
alleged agent was acting primarily for the benefit of the buyer.
In New Trends, the court indicated that a factor which supports
an agency relationship is the agent's financial detachment from
the manufacturers of the merchandise. An indication which does
not support an agency relationship is that the agent bears the
risk of loss for damaged, lost, or defective goods. In
Rosenthal-Netter, the court considered the transaction documents,
whether the intermediary was operating an independent business
primarily for its own benefit, whether the importer could
purchase the goods directly from the manufacturer without the
agent, and whether there is a buying agency agreement.
Regarding the financial relationship between the agent and
the manufacturer, in the agreement, the agent attests that the
agent and the manufacturer have no common control, ownership or
financial interest and that they do not share in any commission.
This supports a existence of a buying agency relationship.
Regarding the risk of loss, the proposed agreement does not
indicate that the agent will generally be held liable for lost or
damaged goods. However, it does indicate that the agent will
reimburse the importer for damages and other claims incurred by
the importer resulting from the agent's failure to perform the
requisite inspection services or other responsibilities. Such
reimbursement shall also not exceed the total commissions paid or
payable. Because the agent's liability stems from its failure to
perform its inspection and other responsibilities under the
proposed agreement and is limited to the total commissions paid
or payable, we do not believe that this is inconsistent with a
buying agency relationship.
With regard to the transaction 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. U.S. Customs Service General Notice, 11 Cus. Bull. & Dec.
15 (March 15, 1989) which cited Headquarters Rulings Letter (HRL)
542141, September 29, 1980, also cited as TAA No. 7. However,
even if the manufacturer's invoice is provided, "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." Id. No information has been provided
regarding the transaction documents other than the language in
the proposed agreement that the agent shall instruct the
manufacturers to prepare commercial invoices listing the price
paid for each shipment of merchandise.
Similarly, there is no indication whether the importer can
purchase directly from the manufacturers without employing the
agent.
The next factor is whether the agent is operating an
independent business primarily for its own benefit. In
Rosenthal-Netter, 679 F. Supp. at 25, 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 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.
Although it is not clear from the proposed agreement whether the
agent operates an independent business primarily for its own
benefit, it does state that the agent shall never act as a seller
or selling agent in any transaction involving the buyer and that
the agent shall not fulfill any of the buyer's orders for
merchandise under this agreement with merchandise from the
agent's inventory or with merchandise in which the agent has a
proprietary interest. While such language indicates that the
agent could operate an independent business in buying and selling
similar property, this is of limited significance because under
the proposed agreement the agent has little discretion regarding
the import transactions and is precluded from using its own
inventory to fulfill the importer's orders.
Based on the above considerations, we conclude that the
terms of the proposed buying agency agreement are consistent with
a buying agency. However, it is the position of Customs that
"having legal authority to act as buying agent and acting as
buying agent are different matter" 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, Jay-Arr Slimwear Inc., and Rosenthal-
Netter, supra. Therefore, despite the existence of an agency
agreement, we are still required to determine whether the agent
acts as a bona fide buying agent.
HOLDING:
The terms of the proposed buying agency agreement are
consistent with a buying agency.
Sincerely,
John Durant, Director
Commercial Rulings Division