Dutiability and Disclosure of Payments Made to a Buying Agent

HQ 544794 July 17, 1992 VAL CO:R:C:V 544794 ILK CATEGORY: Valuation xxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxx RE: Dutiability and Disclosure of Payments Made to a Buying Agent Dear xxxxxxxxxx: This is in response to your request, dated September 5, 1991 (hereinafter referred to as "request") for a ruling on the dutiability of payments made by xxxxxxxxxxxxxxxxxxxxxxxxxxxAAIx, a U.S. corporation, to its purported buying agent, xxxxxxxxxxx, xxxxxxAAJx, a Japanese corporation, and the appropriate disclosure of those amounts. We regret the delay in responding. FACTS: AAI and AAJ are both wholly owned companies of xxxxx Corporation, a Delaware corporation. AAI was formerly known as x xxxxxxxxxxxxxxxxxxxAATx.AAJ has been acting as AAI's buying agent for many years. In 1973, it was held that AAJ was AAT's bona fide buying agent, and had acted as such since 1955. A & A Trading Corp. v. United States, 71 Cust. Ct. 55, 56 (1973). It is represented that except for the name change, the association between AAI and AAJ has remained identical to the way it was described in the court decision. In summary, the court decision describes that in all respects AAJ was under the control of AAT, and AAJ performed the functions usually associated with the role of buying agent and was paid a commission for those services. Now AAI is preparing to implement a new method by which to compensate AAJ for its services. Instead of paying AAJ on a commission basis, AAI will compensate AAJ using a "cost-plus" method as described in subparagraph 2.2 of the draft agreement accompanying the request: 2.2 Such compensation will reimburse AAj for all expenses, as specified below, plus xxxxx percent (x%) of the total amount of such expenses. The expenses upon which the compensation will be based are described in subparagraph 2.3 of the draft agreement as including "any and all expenses which are recorded on AAJ's statutory accounts which are incurred by AAJ on behalf of AAI in the performance of the services enumerated in the attached schedule." According to the request, the covered expenses include salaries, incidental costs and other administrative expenses. The draft agreement provides that AAJ will invoice AAI for its services on a monthly basis, and that AAI will remit to AAJ the total amount payable within ten days of the invoice date. The services AAJ is to provide to AAI are limited to AAI's purchasing operations in Japan and are listed on a Schedule attached to the draft agreement. The services consist of obtaining quotations from manufacturers and vendors, providing information on market and commercial conditions, furnishing information on the availability of merchandise and prices of competitive merchandise, placing orders with manufacturers and vendors in the name of AAI, performing quality analysis of manufactured products per AAI specifications including outgoing inspection of merchandise prior to shipment, arranging delivery and shipment of the merchandise and preparation of all necessary shipping and customs documents and provision of such other purchasing or market information services as may be requested by AAI. Subparagraph 4.1 specifically limits AAJ's services to those listed in the Schedule, or any others upon which the parties may agree to in writing. The request states that AAI retains complete authority to decide what merchandise it will purchase and from which manufacturer, and that AAI retains the right to examine AAJ's books and records, since its payments are to be based on AAJ's costs. It is represented that usually the price of the merchandise will be paid to the manufacturer in AAI's name by AAJ, AAJ having obtained the funds by wire transfer from AAI's U.S. bank on an open account, as authorized by AAI. On other occasions AAI may pay the manufacturer directly by open account and letter of credit. In your supplemental submission dated May 29, 1992, it is stated that AAJ has no relationship or common ownership interests with any of AAI's vendors, other than as purchasing agent for AAI and none of the compensation received by AAJ from AAI is paid to or shared with the vendors from whom AAI purchases goods. Subparagraph 3.5 of the draft agreement provides that payments made to AAJ under the agreement "are not a condition of the sale for export of the imported goods being valued." AAI proposes disclosing the payments to AAJ by providing each Customs port through which it imports its merchandise a copy of the final, signed agreement and a copy of the ruling issued herein, assuming that it holds that the buying commission is not included in the transaction value of the merchandise. Thereafter, commission payment amounts would not be indicated with each importation, as the payments will not be made on a shipment-by-shipment basis, unless specifically requested by Customs. It is your position that the payments made by AAI to AAJ are not included in the transaction value of the imported merchandise, and that the proposed method of disclosing the buying commission payments to Customs is adequate. ISSUE: Whether the described services to be provided by the agent pursuant to the proposed agency agreement are those of a bona fide buying agent. LAW AND ANALYSIS: The services described above have long been considered characteristic of a buying agent. See e.g.., Jay-Arr Slimwear Inc. v. United States, 12 CIT 133, 681 F.Supp. 875 (1988); J.C. Penney Purchasing Corp. et al. v. United States, 80 Cust. Ct. 84, C.D. 4741, 451 F. Supp. 973 (1978). In addition, in Rosenthal- Netter, Inc. v. United States, 12 CIT 77, 679 F.Supp. 21, aff'd. 861 F.2d 261 (Fed. Cir. 1988), the court noted that the factors in deciding whether a bona fide agency relationship exists include: the right of the principal to control the agent's conduct, the transaction documents, whether the intermediary was operating an independent business primarily for its own benefits, and the existence of a buying agency agreement. 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." Headquarters Ruling Letter (HRL) 542141 dated September 29, 1980, also cited as TAA No. 7. 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. We note that the primary considerations in determining whether a bona fide buying agency exists pursuant to the proposed agreement are addressed in your request, with the exception of transaction documents, ie. entry documents, including invoices between the parties. Documents such as invoices between the parties are not specifically addressed in your request, however you state in your May 28, 1992 submission that "AAJ makes payments to these vendors out of funds received from AAI," and that merchandise charges including purchase price, storage and transportation charges are "included in the f.o.b. cost of the goods stated on AAJ's commercial invoice." From these statements it appears that AAJ is invoiced for the merchandise by the vendor and that AAJ in turn invoices AAI for the merchandise. This arrangement would be consistent with the requirement set forth in TAA No. 7: [A]n 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. In this case it appears that the seller is providing an invoice to the agent, AAJ, and this invoice would establish the price actually paid or payable. However, even if the seller were providing an invoice directly to the importer, as long as the agent will receive no remuneration from the seller, and the importer pays the seller directly, the invoice to the importer is sufficient for the purpose of establishing that the agent is not a seller and determining the price actually paid or payable to the seller. The services performed by the agent are those usually performed by a bona fide buying agent. If the terms of the proposed buying agency agreement and those outlined above are met, we are satisfied that the importer will exercise the requisite degree of control over the buying agent. Thus, on the basis of the information you have provided regarding the relationship between the importer, agent and seller, the totality of the evidence indicates that the agent is in fact a bona fide buying agent. In addition, the submission of the agent's invoice for the merchandise along with the seller's invoice would support that the agent is not an independent seller and that the commission is not part of the price paid or payable to the seller. Therefore, we conclude that the fees to be paid to the agent pursuant to the proposed agreement constitute bona fide buying commissions which are not included in the transaction value of the imported merchandise. This ruling is subject to the condition that the actual transaction between the importer and the agent is as characterized above and in the proposed agreement. 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, Inc. v. United States, 13 CIT 161, 708 F.Supp. 351 (1989); Jay-Arr Slimwear Inc., supra; and Rosenthal-Netter, supra. With regard to the disclosure to Customs of the costs incurred by AAJ and paid by AAI, the frequency of disclosure of these costs must be determined by each port. We agree that AAI must provide a copy of the executed agreement between it and AAJ to each port through which it imports its merchandise. It is in the discretion of each port to determine the frequency or method by which it would require disclosure of the amounts paid to AAJ. The appraising officer must be able to determine whether the total fee exceeds the commission rate that is customary in the trade for bona fide buying agents. Documentary evidence detailing the extent of services provided beyond those customarily performed by such agents would need to be presented to the appraising officer. Whether or not we are provided with actual amounts to be paid to AAJ, we are unable to authorize the acceptance of the amounts. Therefore this ruling does not authorize that the amounts to be paid to AAJ under the proposed agreement are acceptable. In addition, this ruling is limited to the proposed agreement, and is not applicable to any existing agency agreement. HOLDING: The fees to be paid to the agent pursuant to the proposed agreement for assisting in the purchase of merchandise from the foreign sellers are to be considered bona fide buying commissions as long as the factors discussed above are followed. Sincerely, John Durant, Director Commercial Rulings Division