VAL CO:R:C:V 545422 IOR
Margaret R. Polito, Esq.
Neville, Peterson & Williams
80 Broad Street
New York, NY 10004
RE: Dutiability of commissions to be paid pursuant to a buying
agency agreement; international shipping costs
Dear Ms. Polito:
This is in response to your ruling request dated September
2, 1993, on behalf of your client xxxxxxx, xxx. (hereinafter
referred to as the "importer"), a U.S. corporation. You request
a ruling on whether the commissions paid to xxxxxx xx xxxxxxx
xxxxxxx (hereinafter referred to as the "agent"), a related Hong
Kong company, are included in the transaction value of the
imported merchandise. Initially your request raised issues
associated with the agent's production of samples to be provided
to the foreign manufacturers. Subsequent to the original ruling
request, on March 9, 1995 and March 10, 1995, you informed us
that the agent was never engaged in the activities giving rise to
the sample issues. We regret the delay in responding.
FACTS:
The imported merchandise consists of wearing apparel
produced in Hong Kong. The agent assists the importer in the
purchase of finished garments, piece goods and the negotiation of
prices with the various factories that produce finished garments
or garments on a cut-make-trim ("c.m.t.") basis. Previously the
agent marked up the price of the garments sourced on behalf of
the importer in order to cover its administrative expenses and
employee salaries.
The importer and agent have restructured their transactions
and the agent acts as a buying agent on behalf of the importer,
and is paid a commission. The importer and agent have entered
into a buying agency agreement ("Agency Agreement") dated
September 1, 1993. Your April 22, 1994 submission indicates that
the agency relationship has been implemented as of September 13,
1993, and that the concerned import specialist is aware of this
pending ruling request.
Pursuant to the Agency Agreement, the agent will assist in
price negotiation and obtaining samples, obtain price quotes for
the importer, locate manufacturers, place orders on behalf of the
importer, arrange for payment terms with the suppliers, arrange
for inland freight, international shipment to the U.S., storage,
consolidation, documentation of merchandise, acquisition of quota
and inspection of the merchandise. According to the Agency
Agreement, all of the foregoing responsibilities are carried out
by the agent only upon the instruction of the importer. One of
the importer's corporate officers will be in Hong Kong regularly
for the express purpose of negotiating prices with the factories.
In addition, upon instruction from the importer, the agent will
acquire fabric or piece goods, findings, trimmings, labels and
packaging materials and ensure their delivery to the
manufacturers. In the event defective or nonconforming
merchandise is shipped due to the negligence of the agent, the
agent will not receive its commission.
According to the submission, purchase orders placed with the
factories by the agent will state "As agent for Bellino." The
invoices submitted to Customs will be the agent's invoices and
will set forth the name of the seller of the garments and the
F.O.B. price of the merchandise or the sum of the cost of the
fabric and trim items utilized to produce the garments plus
assembly charges. According to the April 22, 1994 submission
from the importer, the manufacturer's invoices can be made
available to Customs upon request. According to additional
information received on behalf of the importer, the agent is not
related to any of the manufacturers, and the importer is able to
purchase merchandise from the manufacturer on its own. The
importer will pay for the merchandise by opening letters of
credit in favor of the agent for amounts sufficient to pay for
the cost of the merchandise, the agent's commission and shipping
costs. The Agency Agreement provides that the importer will pay
the agent a commission of 12% of the F.O.B. price of the goods,
or the constructed cost of goods purchased on a c.m.t. basis.
The importer agrees to reimburse the agent for all documented
disbursements made on behalf of the importer. The agent's
commission will be separately set forth on the invoices submitted
to Customs upon entry.
According to your March 1995 description of the agents
activities, the agent will produce sample garments, or purchase
samples from a sample manufacturer, based on designs created by
the importer. These samples will be shipped to the importer
either in a mutilated condition and entered under Harmonized
Tariff Schedule of the United States (HTSUS) subheading
9811.00.60 or as fully dutiable salesman samples. The importer
and agent have agreed that the costs incurred by the agent in
producing the samples will be paid for from the agent's
commission. The agent is otherwise reimbursed by the importer
for the costs incurred in purchasing samples.
You request a ruling that the commissions and international
shipping costs paid to the agent by the importer are not included
in the transaction value of the imported merchandise.
ISSUES:
1. Whether the described services to be provided by the
agent are those of a bona fide buying agent.
2. Whether international shipping costs paid to the agent by
the importer are included in the transaction value of the
imported merchandise.
LAW AND ANALYSIS:
1. Buying Agency
We are assuming, for the purposes of this ruling, that
transaction value is the appropriate basis of appraisement for
the imported merchandise. Transaction value is defined by
402(b)(1) of the Tariff Act of 1930, as amended by the Trade
Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(b)) as "the price
actually paid or payable for the merchandise when sold for
exportation to the United States..." plus certain additions
specified in 402(b)(1)(A) through (E). In order to find that
the importer's payments to the agent are not included in the
transaction value of the imported merchandise, we must examine
all relevant factors in deciding whether a bona fide buying
agency relationship exists. 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. 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. 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.
In this case, the agent produces and procures sample
garments for the importer. The procurement of samples is
frequently cited as a typical responsibility of a buying agent.
See e.g. Jay-Arr Slimwear Inc. v. United States, 12 CIT at 137.
However, the production of sample garments by a buying agent has
not been identified as a responsibility of a buying agent. We do
not find that under these facts the agent's production of sample
garments is inconsistent with the responsibilities of a buying
agent and the importer's control over the acts of the agent.
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 it appears that the importer has control over such
matters. The agent does not absorb the costs of shipping and
handling, which fact supports finding the existence of a buying
agency relationship. According to the ruling request the agent
is given letters of credit from which to pay the suppliers. The
letters of credit are for amounts sufficient to cover the
manufacturer's invoice amounts, shipping and the agent's
commission leaving the importer with no apparent control over the
amount to be paid to the suppliers. 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 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 it appears that the
importer has similar contact with the manufacturers. From the
foregoing analysis it appears that the importer generally does
have control over the agent's conduct.
The second factor to consider is the transaction documents.
In this case the purchase order identifies that the purchase is
made for the importer by the agent. The invoice to be submitted
to Customs will be the agent's invoice. The manufacturer's
invoice will be available if requested by Customs. 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. In HRL 544510 dated January 9, 1992, we found that
submission of the manufacturer's invoices upon request was
sufficient.
The third factor to consider is whether the importer could
have purchased directly from the manufacturers without employing
the agent. According to the importer, it is able to purchase
directly from the manufacturer. 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 agent is
operating an independent business primarily for its own benefits.
There is no evidence that in this case the agent is operating an
independent business primarily for its own benefits.
The fifth factor is the existence of a buying agency
agreement. A buying agency agreement exists in this case. 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. Therefore, despite the
existence of an agency agreement, we are still required to
determine whether the agent acts as a bona fide buying agent.
In New Trends Inc. v. United States, 10 CIT 637, 645 F.Supp.
957, in addition to the above factors, the Court of International
Trade considered whether the agent bears the risk of loss for
damaged, lost or defective merchandise. In this case, the agent
is liable for defective or nonconforming merchandise due to its
own negligence, and its liability is limited to its commission.
We find that such liability does not negate the existence of a
buying agency relationship between the importer and the agent.
Based on the foregoing analysis we are satisfied that the
importer exercises a sufficient degree of control over the agent,
and find that the totality of the evidence demonstrates that the
agent is in fact a bona fide buying agent. The approval of this
buying agency relationship does not authorize the acceptability
of the proposed 12% buying agency commission rate. The
appraising officer will determine whether the percentage exceeds
the normal rate in the trade.
2. International Shipping Costs
According to the facts, the agent arranges for the shipment
of the merchandise to be imported, but the importer opens a
letter of credit in favor of the agent for the shipping costs (in
addition to the cost of the merchandise and the agent's
commission). As stated above, transaction value is defined in
TAA 402(b)(1) as "the price actually paid or payable for the
merchandise when sold for exportation to the United States..."
plus certain additions specified in 402(b)(1)(A) through (E).
The term "price actually paid or payable" is defined in TAA
402(b)(4)(A) as:
...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.
We stated in HRL 542206 dated March 23, 1981 that it is the
"actual " charges which are deductible.
In accordance with the foregoing, the actual freight paid is
not included in the price actually paid or payable for the
imported merchandise, and is not part of the transaction value of
the imported merchandise. It is in the discretion of the
appraising officer to require evidence of the actual shipping
charges incurred to verify that the agent is not receiving
payments in addition to those described herein.
HOLDING:
1. Provided that the actions of the parties conform to the
evidence submitted, and the terms of the Agency Agreement are
met, we are satisfied that the agent is a bona fide buying agent
and we conclude that an agency fee paid to the agent constitutes
a bona fide buying commission, and is not included in the
transaction value of the imported merchandise.
2. The international shipping charges paid by the importer
to the agent for actual shipping costs incurred are not part of
the transaction value of the imported merchandise.
Sincerely,
John Durant, Director
Commercial Rulings Division
cc: Mary Franklin, FNIS
J.F.K. International Airport