Non-dutiable buying commissions

HQ 544119 May 25, 1988 CLA-2 CO:R:CV:V 544119 DH CATEGORY: Valuation John P. Donohue, Esq. Donohue and Donohue 421 Chestnut Street Fifth Floor, The Bank Building Philadelphia, Pennsylvania 19106 RE: Non-dutiable buying commissions Dear Mr. Donohue: This is in response to your letters of December 16, 1987 and May 13, 1988 (your file 151-01), requesting a ruling as to whether an agreement to be entered into between two companies is a bona-fide buying agency agreement and whether commissions to be paid to the foreign corporation are non-dutiable buying commissions. FACTS: You state that your client is contemplating entering into a buying agency agreement with a domestic corporation. The responsibilities described below are those encountered in the prospective buying agency agreement received on May 13, 1988. Although this agreement is unsigned, we have assumed these to be the applicable facts. The agent is to locate manufacturers of tile in several countries. The agent may only obtain merchandise from factories and manufacturing facilities as are approved by the importer. They have the additional responsibility of negotiating for the benefit of the importer, the price, supply, product quality, packing requirements, and product warranties on terms most commercially favorable to the importer. The importer will have the exclusive authority to accept or reject contracts for the purchase of the merchandise. The agent is to keep the importer informed of the shipping schedules of approved suppliers and other information regarding shipping, transportation, insurance and related costs in the supplier's country. They are responsible for negotiating with steamship lines and airlines on behalf of the principal. The agent agrees to assign to the principal those product warranties which it receives from the manufacturers, to the extent not already granted by the manufacturer. The agent is to use its best efforts to settle any product claim for the benefit of the principal. Any claim amount which is not honored by the manufacturers, together with costs, is to be shared equally between the principal and agent. However, the portion to be paid by the agent is not to exceed in -2- any one calendar year, an amount equal to 10% of the compensation payable to the agent. Periodic visits to the manufacturing facilities are to be made by the agent. It is the additional responsibility of the agent to inspect all aspects affecting the quality, production, delivery, packaging and transportation of the merchandise from the port of export to the port of arrival in the United States. Preparation of all documents required for export from the country of origin are the responsibility of the agent. The agent will invoice the principal promptly for all transactions. All invoices are to confirm that agency status of the agent by stating directly, or in substance, that the consummated sale is between the principal and the foreign supplier, with the agent acting as a buyer's agent. The agent is to act under the control and direction of the principal. It will engage in no conduct which is inconsistent with its status as an agent. ISSUE: Does a bona-fide buying agency relationship exist between the alleged principal and agent? LAW AND ANALYSIS: As you may know, transaction value is defined in section 402, Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA:19 U.S.C. 1401a), as the price actually paid or payable for the merchandise when sold for exportation to the United States, plus amounts for the items specifically enumerated in section 402(b)(1) of the TAA. Although selling commissions are one of the items listed therein, buying commissions are not included as an item to be added to the price actually paid or payable. The term "price actually paid or payable" is defined in section 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. -3- It is clear from the statutory language that in order to establish transaction value one must know the identity of the seller and the amount actually paid or payable to him. Whether or not the purported agent is the seller is to be determined by the documents presented. 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. See TAA No. 7, dated September 29, 1980 (542141). The Restatement (Second) of Agency section 12K(1958) defined an agent as: One who contracts to acquire property from a third person and convey it to another is the agent of the other only if it is agreed that he is to act primarily for the benefit of the other and not for himself. In order to continue to view the relationship of the parties as a bona fide buying agency, Customs must examine all the relevant factors. J. C. Penney Purchasing Corporation et al. v. United States, 80 Cust. Ct. 84, C.D. 4741 (1978), 451 F. Supp. Ct. 1008, A.R.D. 251 (1969). The primary consideration, however, "is the right of the principal to control the agent's conduct with respect to the matters entrusted to him." Dorf Int'l, Inc., et al. v. United States, 61 Cust. Ct. 604, A.R.D. 245, 291 F. Supp. 690 (1968). The degree of discretion granted the agent is an important factor. New Trends Inc. v. United States, 10 CIT_, 645 F. Supp. 957 (1986). The Court of International Trade in the case of New Trends Inc., supra, set forth several factors upon which to determine the existence of a bona fide buying agency. These factors include: whether the agent's actions are primarily for the benefit of the importer, or for himself; whether the agent is fully responsible for handling or shipping the merchandise and for absorbing the cost of shipping and handling as part of its commission; whether the language used on the commercial invoices is consistent with the principal-agent relationship; whether the agent bears the risk of loss for damaged, lost or defective merchandise; and whether the agent is financially detached from the manufacturers of the merchandise. These have been the determining factors applied by the Courts to deny the existence of a buying agency relationship in New Trends, Inc., supra, Jay-Arr Slimwear Inc. v. United States, _CIT_, Slip Op. 88-21 (1988), Rosenthal-Netter, Inc. v. United States, _CIT_, Slip Op. 88-9 (1988). -4- On the basis of the information you have provided regarding the prospective transactions in question and the prospective buying agency agreement, we believe that the responsibilities to be assumed by the parties portray those type of activities which are indicative of a buying agency relationship. If the actions of the parties conform to the buying agency agreement, the importer will exercise the requisite degree of control over the buying agent. HOLDING: In view of the foregoing, it is our conclusion that the commissions to be paid to the prospective company to perform the services of assisting in the purchase of merchandise are to be considered bona fide buying commissions; and therefore, not to be added to the price actually paid or payable. Sincerely, John Durant, Director Commercial Rulings Division