RR:IT:VA 547058 RC
Sandra Liss Friedman, Esq.
Barnes, Richardson & Colburn
Attorneys & Counsellors at Law
475 Park Avenue South
New York, New York 10016
RE: Buying agent; related party; buying commission
Dear Ms. Friedman:
This is in response to your letter of April 3, 1998, on
behalf of MIL Apparel Limited (MIL) of Hong Kong, requesting a
prospective ruling concerning the appraisement of wearing apparel
imported from various manufacturers located in the Middle East
and Asia.
FACTS:
MIL intends to act as a buying agent for various buyers
seeking to import wearing apparel from various manufacturers
located in the Middle East and Asia. The transactions will
involve different manufacturers and/or sellers.
A copy of an undated and unsigned buying agency agreement
that reflects the relationship which MIL will enter into between
itself and prospective buyers/importers of the subject wearing
apparel was submitted for our review. Under the agreement, MIL's
duties, as agent, are to:
locate new manufacturers for the principal's consideration
as well as negotiate with manufacturers and other sellers
already known to the principal;
negotiate most favorable prices on behalf of the principal
and provide samples to the principal together with price
quotations from the manufacturers/sellers;
place orders with the manufacturers/sellers on behalf of the
principal;
act on behalf of the principal only upon the explicit
instructions of the principal and not vary any of the terms
of the purchase order without written authorization of the
principal;
visit manufacturers, subcontractors and/or sellers, as
appropriate, to inspect the quality, progress of production
and origin of merchandise to be shipped to the principal,
and notify the principal immediately if the laws or
regulations of the United States are being violated;
provide inspection certificates for each shipment certifying
that the goods conform to the specifications of the purchase
order as well as meet the requirements of U.S. laws and
regulations;
negotiate on behalf of the principal in the event defective
goods are shipped.
In addition, the agreement states that the agent will never
act as a seller in any transaction involving the principal and
will provide the principal in all cases with the seller's invoice
reflecting the fact that the principal is the buyer and showing
the price to be paid for merchandise purchased. The agreement
also states that the agent shall furnish the principal with
separate invoices reflecting the buying commission to be paid to
the agent for each transaction.
For its services MIL will be paid a buying agency
commission, ranging between 8% and 12%, depending upon the
negotiations with the principal.
MIL is related to one of the sellers, More's International,
Ltd. (More's), with whom it is anticipated that it will be
involved (as a buying agent) on behalf of its (MIL's) principals.
MIL is owned by one of the shareholders of More's. MIL claims
that the relationship will not affect the independence of MIL
from More's, nor will it interfere with the control to be
exercised by the principal over the activities of MIL. MIL will
maintain separate books and records of its activities as well as
separate finances.
Under the terms of the buying agency agreement, the
responsibility to select the merchandise, determine quantity, set
prices with the seller, execute purchase orders, and negotiate or
extend delivery terms, reside with the principal. The agreement
specifies that MIL is prohibited from engaging in such activity
absent express written authorization from the principal to do so.
The agreement also states that any obligation incurred by MIL
without the principal's prior authority is not binding on the
principal and that the principal retains final approval over
product, quantity, price and delivery.
According to counsel for MIL, the principal will be clearly
identified as the buyer and MIL will be clearly identified as the
agent; the risk of loss will lie with the principal.
Furthermore, with respect to defective merchandise, upon the
written request of the principal, MIL will be obligated, as the
buying agent, to pursue claims against the seller on behalf of
the principal; MIL, however, will be under no obligation to
reimburse the principal for defective goods.
Transaction documents were not submitted for our review.
ISSUE:
Whether payments made to the agent for services rendered
pursuant to the agreement constitute bona fide buying commissions
such that they are not in addition to the price actually paid or
payable under 19 U.S.C. 1401a(b).
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in
accordance with the provisions of Section 402 of the Tariff Act
of 1930, as amended by the Trade Agreements Act of 1979 (19
U.S.C. 1401a; TAA). The principal method of appraisement is
transaction value, defined as "the price actually paid or payable
for merchandise when sold for exportation to the United States."
19 U.S.C. 1401a(b)(1).
The "price actually paid or payable" is "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). As a general matter, bona fide buying
commissions are not added to the price actually paid or payable.
Pier 1 Imports, Inc. v. United States, 708 F. Supp. 351, 13 CIT
161, 164 (1989); Rosenthal-Netter, Inc. v. United States, 679 F.
Supp. 21, 23, 12 CIT 77, 78 (1988); Jay-Arr Slimwear, Inc. v.
United States, 681 F. Supp. 875,878, 12 CIT 133, 136 (1988).
The existence of a bona fide buying commission depends upon
the relevant factors of the individual case. J.C. Penney
Purchasing Corp. v. United States, 451 F. Supp. 973 (Cust. Ct.
1978). In this regard, the importer has the burden of proving
the existence of a bona fide agency relationship and that
payments to the agent constitute bona fide buying commissions.
Rosenthal-Netter, 679 F. Supp. 21, 23; New Trends, Inc. v. United
States, 645 F. Supp. 957, 960, 10 CIT 637 (1986).
In determining whether an agency relationship exists, the
primary consideration, is the right of the principal to control
the agent's conduct with respect to those matters entrusted to
the agent. J.C. Penney, 80 Cust. Ct. 84, 95. The degree of
discretion granted the agent is a further consideration. New
Trends Inc. v. United States, 645 F. Supp. 957 (1986). The
existence of a buying agency agreement, moreover, has been viewed
as supporting the existence of a buying agency relationship.
Dorco Imports v. United States, 67 Cust. Ct. 503, 512, R.D. 11753
(1971). In addition, the courts have examined such factors as:
whether the purported agent's actions were primarily for the
benefit of the principal; whether the principal or the agent was
responsible for the shipping and handling and the costs thereof;
whether the language used in the commercial invoices was
consistent with a principal-agent relationship; and whether the
agent was financially detached from the manufacturer of the
merchandise. New Trends, 645 F. Supp. 957.
Here, we note the existence of a buying agency agreement.
Under the terms of the agreement MIL will act on behalf of, and
subject to the control of the principal, and the principal will
delegate certain responsibilities to MIL and pay MIL a
commission. We note that, according to the agency agreement, the
agent will act on behalf of the principal only upon the explicit
instructions of the principal and not vary any of the terms of
the purchase order without the express written authorization of
the principal.
Although the agreement is silent as to whether the principal
has the ability to purchase directly from manufacturers or from
other agents, we find that the extent of control retained by the
principal under the terms of the buying agreement is indicative
that a bona fide buying agency relationship exists. The services
to be provided by the agent are those typically performed by a
bona fide buying agent.
Moreover, the agreement states that MIL, as agent, shall
never act as a seller in any transaction involving the principal
and, without exception, MIL shall provide the principal with the
seller's invoice reflecting the fact that the principal is the
"buyer" and showing the price to be paid for merchandise
purchased. Headquarters Ruling Letter (HRL) 542141, dated
September 29, 1980 (TAA #7).
Financial detachment between the agent and the foreign
seller is another factor that
supports the existence of an agency relationship. New Trends at
962. In this regard, the agreement states that the agent's
compensation will not be paid directly or indirectly, or inure in
any way, to the manufacturer/seller of merchandise.
You indicate that the agent and one of the foreign sellers
(More's) are related parties. We do not reach any conclusions
regarding the dutiability of the commissions in that situation.
The fact that the agent and the seller are related parties does
not in itself bar commissions from being non-dutiable. See,
Bushnell International, Inc. v. United States, 477 F.2d. 1402,
1406; 60 C.C.P.A. 157, 161 (1973). Nevertheless, this office has
ruled that such transactions will be subject to closer scrutiny.
See, HRL 544657, dated July 1, 1991; HRL 542756, dated May 13,
1982; HRL 545176, dated June 28, 1993. In several more recent
rulings, Customs has reviewed the evidence and found that
purported buying agents were not in fact bona fide buying agents
or that the evidence was inconclusive. See, HRL 545661, dated
March 3, 1995; HRL 545550, dated September 13, 1995; HRL 545938,
dated June 5, 1996; HRL 546262, November 29, 1997. Consequently,
while the fact that the agent and seller are related still does
not per se preclude the existence of a bona fide buying agency,
as part of the closer scrutiny described above, Customs will
require review of the relevant documentation before making any
findings. 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 bona fide buying commissions. As
long as the parties transact business in accordance with the
terms of the agreement, the commissions paid to MIL are bona fide
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 bona
fide 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.
In addition, this decision does not authorize the
acceptability of the proposed 8-12% buying agency agreement
commission rate. The appraising officer will determine whether
the percentage exceeds the normal rate in the trade.
HOLDING:
Where MIL is unrelated to the seller, commissions paid to
MIL pursuant to the submitted buying agency agreement are bona
fide buying commissions such that they are not added to the price
actually paid or payable provided the actions of the parties are
consistent with the terms of the agreement. We make no findings
with respect to transactions involving More's.
Sincerely,
Acting Director
International Trade Compliance
Division