VAL: OT:RR:CTF:VS H148196 RSD
Area Port Director
U.S. Customs and Border Protection
555 Battery Street
San Francisco, California 94111
RE: Internal Advice Concerning the Dutiability of Potential Buying Commissions Pursuant to a Buying Agency Agreement; Subagents
Dear Area Port Director:
This is in response your memorandum dated February 4, 2011, forwarding the request for internal advice by the law office of George R. Tuttle on behalf of their client, Company A concerning the dutability of certain potential payments that it may make to an alleged buying agent and its sub-buying agent for their services for procuring products that will be imported into the United States. A copy of a buying agency agreement was attached to your memorandum for our review.
FACTS:
The pertinent facts are as follows:
Company A is an importer and distributor of food products from Asia. It requests internal advice on whether payments it makes to Company B and to an alleged sub-buying agent Company C would be non-dutiable as buying commissions.
Company A sources certain of its food products from unrelated foreign suppliers. Those suppliers will issue invoices to Company A directly for these products. Company A will pay the amounts shown on the invoices directly to the foreign suppliers for the products it buys from them. However, in connection with the purchases of these products, Company A will often utilize the services of non-exclusive buying agents, and will compensate them separately through commissions.
Company A has entered into a buying agency agreement with Company B, an unrelated company located in Port Louis, Mauritius. According to the buying agency agreement, Company B will act as Company A’s non-exclusive buying agent in connection with its purchases of food products from Asia. For its services, in most transactions, Company A will pay to Company B a commission of 3.1 percent of the foreign vendor’s U.S. dollar sales price. However, in certain complex transactions that involve additional quality control services, the commissions that Company B receives may be increased to a maximum of 5 percent.
For purchases made in China as well as other Asian countries, the buying agency agreement includes an agreement with Company C, a Chinese company, to perform the services of a non-exclusive sub-buying agent for Company B and Company A. It has been revealed that Company A owns 50 percent of Company C. The remaining 50 percent is owned by an unrelated Swedish company. When Company C’s services are involved in a transaction, Company B pays Company C between .5 percent and 1.5 percent of the foreign vendor’s sales price based upon Company C’s participation in the transaction. Company B pays this amount to Company C from the 3.1 percent to 5 percent commissions that it receives from Company A in the transactions.
Company A intends to utilize both Company B and Company C to perform a number of tasks when sourcing its foreign products in Asian countries. These tasks include negotiating pricing and terms with Company A’s suppliers with its approval; performing quality assurance functions with Company A’s quality assurance manager; and communicating shipping priorities on behalf of Company A with facilities in Asia. The agents will also provide contract and current inventory status. Among the other services that the agents will perform is to insure that the foreign suppliers are properly packaging the imported food products and to inform Company A about Asian market conditions and government requirements.
When Company C’s services are utilized, Company B will invoice Company A for the whole amount of the buying commission to be paid and will than pay Company C from its share of the commission from the amount it receives from Company A. Neither Company B nor Company C is related to any of the foreign suppliers. However, the managing director and some of Company C’s employees are also on the payroll of Company B. This relationship does not affect the amount of commissions to be paid or the split of the commissions between them.
Company A has the sole discretion to place orders directly with vendors for the products it chooses. It will also continue to receive invoices from the foreign suppliers and it will make payments directly to the foreign suppliers. Although Company A can continue to purchase its imported products directly from the unrelated foreign food suppliers, it believes that it will be more efficient if it utilizes the buying agency services of Company B and/or Company C.
The submitted buying agency agreement indicates that Company B and Company C may acquire products for their own account or for the account of another company after which they may desire to sell the products to Company A, and Company A may choose to purchase them from Company B and Company C. In those limited circumstances, Company B and/or Company C will fully disclose their ownership or participation as a seller rather than as an agent. Company B will invoice Company A in its own name as a seller and will charge a price for such goods that includes their full markup or profit margin. In such transactions, Company B will not charge or be entitled to any commissions. However in most circumstances Company B and Company C will act primarily for the benefit of Company A under its control. Neither Company B nor Company C will receive any compensation from any of the sellers involved, and will not perform any services for them.
ISSUE:
Whether Company B and Company C will be acting as bona fide buying agents and/or sub-buying agents under the terms of the proposed buying agency agreement so that the commissions paid by Company A to Company B and/or Company C are non-dutiable as bona fide buying commissions.
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 preferred basis 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). Accordingly, we have assumed for the purposes of this ruling that transaction value is the appropriate basis of appraisement.
The term "price actually paid or payable" is defined 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. §402(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. U.S., 708 F. Supp. 351, 13 CIT 161, 164 (1989); Rosenthal-Netter, Inc. v. U.S., 679 F. Supp. 21, 12 CIT 77 (1988); Jay-Arr Slimwear, Inc. v. U.S., 681 F. Supp. 875, 12 CIT 133 (1988).
The existence of a bona fide buying commission depends upon the relevant factors of each particular case. J.C. Penney Purchasing Corp. v. U.S., 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, supra at 23, New Trends, Inc. v. U.S., 645 F. Supp. 957, 10 CIT 637 (1986); B.W. Wholesale Co., Inc. v. U.S., 462 F. Supp. 1399, 1403, 58 CCPA 92, C.A.D. 1010 (1971). The alleged agent performs duties on behalf of its principal, the buyer. It may not act as an independent seller, or as a representative of the manufacturer. United States v. Manhattan Novelty Corp., 63 Cust. Ct. 699, A.R.D. 263 (1969). A relevant factor in determining the relationship is the fact that none of the commission paid by the buyer inures to the benefit of the seller. As stated in Reliance International Corp. v. United States, 62 Cust. Ct. 845, 849, 305 F. Supp. 20, 24 (1969):
Commissions paid by the purchaser to agents for services rendered in procuring the merchandise, inspecting and packing goods, arranging for shipment and acting as a paymaster for account of the buyer, no part of which commissions inure to the benefit of the seller, are buying commissions.
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. Jay-Arr Slimwear, supra at 879. The degree of discretion granted the agent is a further consideration. New Trends, supra. The existence of a buying agency agreement, moreover, has been viewed as supporting the existence of a buying agency relationship. Dorco Imports v. U.S., 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 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; whether the agent bore the risk of loss for damaged, lost or defective merchandise; and whether the agent was financially detached from the manufacturer of the merchandise. New Trends, supra.
It is the position of CBP that "having legal authority to act as buying agent and acting as buying agent [are] two different matters" and that CBP is entitled to examine evidence that proves the latter. U.S. Customs Service General Notice, 11 Cust. Bull. & Dec. 15 (March 15, 1989).
In this instance, we note first that parties have submitted a buying agency agreement, which tends to support the existence of a buying agency relationship. You also contend that Company A will control both Company B’s and Company C’s actions as well as the transaction documents that are issued. The buying agency agreement indicates that Company A will appoint Company B as its non-exclusive buying agent, and that Company B may appoint Company C as a non-exclusive sub-buying agent to assist it in performing its duties. The agreement further specifies that Company B will search for, negotiate with and coordinate with Asian suppliers of food products on behalf of Company A. Company A at its sole discretion may place orders directly with any of the suppliers that it chooses. Company A will continue to receive invoices from the foreign suppliers so that it is billed directly by foreign suppliers for the merchandise it purchases and imports. Company A will continue to pay the suppliers directly for the food products that it imports. In other words, under the buying agency agreement, Company A can purchase its imported products directly from unrelated foreign food suppliers.
The services that Company B provides to Company A are characteristic of the types of services that a buying agent generally will perform. These services include compiling market information, translating, placing orders with suppliers, negotiating with suppliers, supervising the quality control of food products, obtaining samples, surveying potential markets, assisting with financial arrangements, shipping and inspecting merchandise, directing processes for defective merchandise, and preparing necessary shipping and Customs documents. These activities are consistent with that of a buying agent. See J.C. Penney Purchasing Corp., supra at 96-97. It supports a finding that Company B is acting as a bona fide buying agent. We also note that the control Company A exercises over Company B is demonstrated by the fact that Company B’s negotiation with foreign suppliers regarding prices and terms will be done only with Company A’s approval. Furthermore, the quality assurance functions will be done at the direction of Company A’s quality assurance manager.
We also note that the agents are not related to any vendor or manufacturer of the imported merchandise and will not receive any compensation from any of the suppliers. Company B’s sole compensation in the relevant transactions will be agent commissions that Company A pays to Company B. In addition, we find it significant that the commissions will be separately invoiced and not included in the price that Company A pays for the imported merchandise.
Although in limited circumstances, Company B may purchase merchandise on its own behalf with intent of reselling these products to Company A or others, the buying agency agreement makes clear that in such a transaction their role as a seller must be fully disclosed. This means that Company B will issue invoices to Company A which designate its role as the seller. In such transactions, the compensation that Company B receives will be the price that it charges for the goods and it will not be entitled to any commissions. In those dealings where Company B is acting as an independent seller rather than as a buying agent, the transaction value will be based on the sale between Company
A and Company B. However, in our judgment although Company B may be acting as an independent seller in a limited number of transactions, it will not
affect Company B’s designation as a buying agent in the other transactions provided the transactions are kept separate and the role of parties are reported accurately to CBP.
In certain transactions Company B will employ Company C as a sub-agent to assist it in carrying out its responsibilities as a buying agent to Company A. Company C will be compensated out of the commissions that Company A pays to Company B. The use of a sub-agent to help provide services does not affect the determination that Company B is a bona fide buying agent so long as the evidence demonstrates that they are not acting as an independent seller or on the seller’s behalf. See Headquarters Ruling Letter (HQ) 544304 dated March 20, 1989. We also note that the commissions earned by Company C as Company B’s sub-agent would remain non-dutiable even if Company C is related to the buyer.
Consequently, provided the designated parties follow the terms of the buying agency agreement, we are satisfied that Company B will be a bona fide buying agent for Company B. Therefore, it is our position that any commissions paid by Company A to the agent or the sub-agent are bona fide buying commissions and are not a part or an addition to the price actually paid or payable.
Please note, however, that the existence of a buying agency relationship is factually specific. The actual determination as to the existence of a buying agency will be made by the appraising officer at the applicable port of entry and will be based on the entry documentation submitted. The totality of the evidence must 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; HQ 545660 dated February 10, 1995.
HOLDING:
Based on the information submitted, we find that provided the parties' actions conform to the terms of the buying agency agreement, Company B would be acting as a bona fide buying agent of Company A. We conclude, therefore, that the agency commissions paid by Company A to Company B and/or Company C constitute bona fide buying agency commissions and would not be included in the transaction value of any merchandise imported into the United States. The buying commissions that Company B shares with Company C for services that it renders would also not be included in the transaction value of the imported merchandise.
You are to mail this decision to the internal advice requester no later than 60 days from the date of the decision. At that time, the Office of International Trade, Regulations and Rulings, will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Monika Brenner, Chief
Valuation and Special Programs Branch