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HQ 546135

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November 25, 1996

RR:IT:VA 546135 er
CATEGORY: VALUATION

Sandra Liss Friedman, Esq.
Barnes, Richardson & Colburn
475 Park Avenue South
New York, NY 10016

RE: Request for Ruling concerning the dutiability of commissions; buying agency.

Dear Ms. Friedman:

This is in response to your request for a ruling dated September 7, 1995 and amendment thereto dated April 16, 1996, submitted on behalf of your client, Newport News Inc. (“Newport”). By telephone conversation with counsel on November 14, 1996, we agreed to keep confidential the names of the agents but we did not agree to treat as confidential all parts of the buying agency agreement. Accordingly, portions of the buying agency agreement are described in the ruling but the names of the agents are bracketed and will be deleted from any published version of this decision. We regret the delay in responding.

FACTS:

In the original request for a ruling, the parties to the agreement included the importer, Newport; a purported buying agent, []; and a sub-agent, []. Counsel amended the ruling request and advised this office that the buying agency agreement between these parties had expired and had been superseded by a new agreement. The new agreement was executed on February 1, 1996, a copy of which was provided to this office.

Under the new agreement, Newport is still an importer of wearing apparel, accessories and related items from the Far East; however, [] is no longer the buying agent. Instead, [BA] is the buying agent and [SA] is the buying agent’s sub-agent. The new agreement is otherwise almost identical to the superseded agreement. At the time the new agreement was brought to our attention, counsel did not submit a new ruling request. For purposes of this ruling, we have been advised by counsel during the November 14, 1996, telephone conversation that the facts and arguments in the original ruling request apply equally to the parties in the new agreement.

The Agreement provides that [BA’s] duties include providing the following services: survey markets, obtain samples, translate Newport’s purchase orders into country of manufacture’s language, transmit purchase orders to seller, upon Newport’s instructions place orders with manufacturers, negotiate prices, obtain sales confirmations, inspect finished merchandise for quality control purposes, and visit manufacturers and certify that [BA] personnel observed the merchandise being produced by the manufacturers at the address and country shown on the shipping documents. [BA] ensures that Newport’s packing standards and shipping instructions are complied with and oversees the acquisition of all necessary documentation. When requested, [BA] also arranges for and books ocean freight for Newport’s account.

The Agreement also provides that [BA], or its sub-agent, on behalf of Newport “agrees to make payment or have payment made to manufacturers and sellers in its name.” In such instances, Newport establishes irrevocable letters of credit or other irrevocable credit sources to reimburse [Mags] within the time limits and upon the terms so agreed to by [BA] and Newport. The Agreement provides that when [BA] or its sub-agent pays the sellers on behalf of Newport for the quantities shipped at the prices specified in Newport’s purchase orders, [BA] invoices Newport separately for its commission. By the terms of the Agreement, [BA] will not fill any orders for Newport out of any inventory owned by [BA], share its commissions with sellers, possess any ownership interest in the sellers, accept any payments, rebates or other form of remuneration from the sellers nor furnish any raw materials to the sellers.

Newport retains full control over the purchase contracts negotiated with the sellers and agrees to pay [BA] a commission and reimburse [BA] for shipping expenses advanced by [BA] on behalf of Newport. The Agreement provides that [BA] shall act upon the explicit written instructions of Newport, and in no case shall [BA] act without explicit written instructions from Newport. According to counsel, at no time does [BA] take title to the imported merchandise, nor does [BA] bear risk of loss.

The role of the sub-agent is not described in much detail. The agreement does provide that either [BA] or [SA] will examine the merchandise during production for certification purposes, and, where requested, will pay the seller on behalf of Newport, as described above. However, the duties performed by [SA.] are not otherwise detailed. For purposes of this ruling, we will assume that [SA’s] duties may encompass any of the duties performed by [BA], but in no instance shall these duties extend beyond the scope of the duties described in the Agreement.

The Agreement does provide that [BA] may pay a compensation to the sub-agent, which consists of a fixed portion of the commission rate to be paid by Newport to [BA].

ISSUE:

Whether the commissions paid by Newport to [BA] are added to the price actually 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 additions including any selling commissions incurred by the buyer with respect to the imported merchandise. 19 U.S.C. 1401a(b)(1).

Pursuant to section 402(b)(4) of the TAA, the term “price actually paid or payable” is defined in pertinent part 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). Bona fide buying commissions, however, are not an addition to the price actually paid or payable. Pier 1 Imports, Inc. v. United States, 708 F.Supp. 351, 354, 13 CIT 161, 164 (1989); Rosenthal-Netter, Inc. v. United States, 679 F.Supp. 21, 23, 12 CIT 77, 78 (1988); Jay-Arr Swimwear, 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. See e.g., J.C. Penney Purchasing Corp. v. United States, 451 F.Supp. 973, 983 (Cust. Ct. 1978) The importer has the burden of proving the existence of a bona fide agency relationship and that the 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 a general notice published in the Customs Bulletin on March 15, 1989, Customs provided an explanation of its position on buying commissions. The following excerpts illustrate that position:

While bona fide buying commissions are nondutiable, evidence must be submitted to Customs which clearly establishes that fact. In this regard, Headquarters Ruling Letter 542141, dated September 29, 1980, also cited as TAA No. 7, provides:

...an invoice or other documentation from the actual foreign seller to the agent would be required to establish that the agent is not a seller and to determine the price actually paid or payable to the seller. Furthermore, 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.

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 at 983. The existence of a buying agency agreement 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 agents' 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 importer could have purchased directly from the manufacturers without employing an agent; whether the intermediary was operating an independent business, primarily for its own benefit; and whether the purported agent was financially detached from the manufacturer of the merchandise. Rosenthal-Netter, 679 F.Supp. 21, 23 (1988); New Trends, 645 F.Supp. 957, 960-962.

In the instant case, the duties performed by [BA], as described in the Agreement and by counsel, are those typically performed by bona fide buying agents, and include compiling market information, obtaining samples, placing orders on Newport’s instructions, inspecting the merchandise and arranging for shipment. [BA] has no financial interest in the factories and acts only upon explicit written instructions from Newport.

While counsel asserts that [BA] neither takes title to the goods nor assumes risk of loss, we cannot verify this statement because we have not reviewed any transaction documents. Presumably, such transaction documents, if requested, will be consistent with counsel’s assertion. Also, the fact that [BA] or its sub-agent may pay the purchase price agreed to by Newport and then receive reimbursement from Newport is some evidence that [BA] is an independent seller rather than a buying agent. Nevertheless, under the terms of the Agreement, Newport clearly controls the actions of [BA] as evidenced by the fact that [BA] can act only upon Newport’s express written instructions. In view of how the parties otherwise deal with each other and because Newport always remains the party who is ultimately responsible for the payment of the goods, we are persuaded that the arrangement is a bona fide buying agency. See, HRL 544584 dated December 9, 1992. While no sample invoices were presented with this ruling request, we presume that if asked the importer could provide invoices to Customs which demonstrate that [BA] is distinct from the sellers and that the commissions paid to [BA] are separate from the price actually paid or payable.

Under the circumstances, so long as [BA], as buying agent, and [SA], as sub-agent to [BA], remain under the control of Newport with regard to their procurement duties, and the transactions are carried out as described above and documented in accordance with the legal requirements, the amounts remitted to [BA] appear to qualify as bona fide buying commissions and, as such, are non-dutiable. Please note, however, that the existence of a buying agency relationship is factually specific. The actual determination will be made by the appraising officer at the port of entry and will be based on the entry documentation submitted. The totality of the evidence must therefore demonstrate that the purported agent is in fact bona fide buying agent and not a selling agent nor an independent seller. 23:11 Cust. Bull. & December 9, General Notice dated March 15, 1989, H.L. 542121 (September 29, 1991).

HOLDING:

Assuming the above conditions are satisfied, we find that the commissions paid by Newport to [BA] appear to be bona fide buying commissions and, as such, are not an addition to the price actually paid or payable for the imported merchandise.

Sincerely,

Acting Director, International
Trade Compliance Division

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