Proposed Buying Agency Agreement.

DEPARTMENT OF THE TREASURY U.S. CUSTOMS SERVICE HQ W545601 October 13, 1994 CO:R:C:V W545601 er CATEGORY: Valuation Daniel K. Astin Donohue and Donohue 232 South Fourth Street Philadelphia, PA 19106 RE: Proposed Buying Agency Agreement. Dear Mr. Astin: This is in response to your ruling request, dated March 21, 1994, submitted on behalf of the importer, Alco Industries, Inc. (“Alco”), as to whether an agreement it plans to enter into with certain parties is a bona fide agency agreement and whether commissions to be paid to these parties are non-dutiable buying commissions. We regret the delay in responding. FACTS: A proposed buying agency agreement between the importer and five “agents” was submitted. (The proposed agreement is not signed or dated.) The agents are identified as follows: FungLee/Well Packed Gifts in Tsuen Wan, N.T. Hong Kong; Handok Industrial Co. in Fotan, Shatin, N.T. Hong Kong; Shina International in Hong Kong; Sellot Co. Ltd. in Taipei, Taiwan; and Eastern crafts Ltd. in Tuen Mun, N.T. Hong Kong. Under the·terms of the agreement between the importer and each agent, the agent is the importer’s non-exclusive buying representative in Asia with regard to the importation of housewares and giftware. The agent agrees to perform the following services: visit manufacturers; collect samples; submit samples to the importer; survey the market for price and quality comparison; negotiate price, supply, quantity, merchandise quality, packing requirements, and merchandise warranties in accordance with importer’s instructions; quote ex-factory prices under terms as importer directs; provide inspection certificates with each shipment; ensure that seller provides all documents necessary to comply with U.S. laws; obtain merchandise on importer’s behalf only from such sellers as the importer shall approve; advise importer of status of unshipped orders and current shipping schedules of approved suppliers; advise importer about shipping, transportation, insurance and related costs in the supplier’s country; and prepare all documents required for export from the country of origin and send copies of such documents to importer. The agent, including its officers, directors, employees and shareholders, shall not have any ownership interest in any seller or manufacturer supplying the importer under the agreement. The agent will accept no payments, gifts, or gratuities from any manufacturer or seller in respect of any transaction undertaken for the benefit of the importer nor in any such transaction will the agent hold itself out as having any status other than the importer’s agent. The agent shall not furnish any assists to any manufacturer or seller without the advance approval of the importer. In consideration for the agent’s services, the importer agrees to pay the agent an amount equal to ten percent (10%) of the ex­factory price of any merchandise purchased by the importer through the agent pursuant to the agreement. The importer also agrees to reimburse the agent for any costs authorized by the importer and incurred on its behalf. The agent will invoice the importer for all transactions and payments will be made to the agent by wire transfer to the agent’s bank, unless other payment terms are prearranged. The agent remits the ex-factory price to the seller by check, wire transfer or other negotiable instrument and shall not commingle said amount with any other payments to the seller, whether or not such other payments are remitted on behalf of the importer. The value in the invoices will be determined by taking the ex-factory price as identified on the foreign seller’s invoice and adding thereto, but separately identifying, any buying agents’ commissions and other reimbursable expenses. ISSUE: Whether the commissions to be paid to the agent pursuant to the terms of the proposed buying agency agreement are bona fide buying commissions and are not an addition to the price actually paid or payable of the imported merchandise. 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 statutory additions, including selling commissions. The “price actually paid or payable” is defined in section 402(b)(4) 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). If separately identified from the price actually paid or payable, bona-fide buying commissions are not dutiable. Monarch Luggage Co., Inc. v .United States, 715 F. Supp. 1115, 13 CIT 523 (1989); Pier 1 Imports, Inc. v. United States, 13 CIT 161, 164, 708 F. Supp. 351, 353 (1989); Rosenthal-Netter, Inc. v. United States, 679 F. Supp. 21, 23, 12 CIT 77, 78 aff’d, 861 F.2d 261 (Fed. Cir. 1988); Jay-Arr Slimwear, Inc. v. United States, 681 F. Supp. 875, 878, 12 CIT 133, 136 (1988). However, the importer has the burden of proving that a bona-fide agency relationship exists and that payments to the agent constitute bona-fide buying commissions. Rosenthal-Netter, supra; New Trends, Inc. v. United States, 10 CIT 637, 645 F. Supp. 9957, 960 (1986); Pier 1 Imports, Inc., supra. In deciding whether a bona-fide agency relationship exists, all relevant factors must be examined and each case is governed by its own particular facts. J.C. Penney Purchasing Corp. v. United States, 80 Cust. Ct. 84, 95, C.D. 4741, 451 F. Supp. 973, 983 (1978). 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. See, Jay-Arr Slimwear, Pier 1 Imports, Inc., J.C. Penney, and Rosenthal-Netter, supra. The degree of discretion granted the agent is the consideration. New Trends, supra. In examining the control the importer had over the agent, the court in Rosenthal-Netter considered the importer’s control over the choice of manufacturer, over the handling and shipment of the imported merchandise and over the manner of payment. The court found that the “failure to substantiate the names of manufacturers is evidence that no agency relationship existed.” 679 F. Supp. at 23. In J.C. Penney Purchasing Corp., the court attributed significance to the fact that the importer actually visited factories and participated in negotiations with the factory. In New Trends. Inc., the importer’s lack of involvement with the manufacturers of merchandise was an indication that there was no principal-agent relationship between the importer and the agent, but that the agent was acting as a seller of the imported merchandise. Under the proposed agreement, it appears that the importer will not have any direct involvement with the manufacturers; rather, it is the agent who will visit the manufacturers and obtain price quotes. Nonetheless, the agreement indicates that the importer retains control over which manufacturers will be selected, the price and quantity of the merchandise, and bases this selection on the information gathered by the agent. The importer has the exclusive authority and absolute discretion to accept or reject contracts for the purchase of merchandise from the foreign seller without having obtained prior consent or approval from the agent. The agreement prohibits the agent from accepting any payments, gifts, etc. from any manufacturer or seller and forbids the agent from possessing any ownership interest in any manufacturer or seller supplying the importer under the agreement. Any assists or financial assistance provided to the manufacturer or seller by or through the agent shall be at the discretion and for the account of the importer. The export documents prepared by the agent shall identify the name and address of the foreign seller, the agent and the importer and shall identify the importer as the buyer. For purposes of this ruling we will assume that if the seller and manufacturer are not the same, that the export documentation shall also identify the manufacturer. The agent will not attempt or purport to commit the importer to any matters without the importer’s prior written or oral authorization. Oral authorization by the importer shall be followed by written ratification. It is unclear whether the agent arranges for the shipment of the merchandise, although it does keep the importer regularly informed of shipping, transportation, insurance and related costs in the supplier’s country. Moreover, the agent must ensure that the goods conform to the importer’s specifications, which, presumably includes that the goods are shipped according to schedule and in accordance with the importer’s directions. Regardless of who arranges for shipping, the agreement is clear that it is the importer who decides whether the seller has the ability to meet order demands. The agreement provides that the agent will invoice the importer and payments will be made by wire transfer to the agent’s bank, unless other payment terms are prearranged. The agent thereafter remits the ex-factory price to the seller by check, wire transfer or other negotiable instrument and shall not commingle said amount with any other payments to the seller. The values in the invoices shall be determined by taking the ex-factory price as identified on the foreign seller’s invoice and adding thereto, but separately identifying, any buying agent’s commissions and other reimbursable expenses. In addition to all other information provided for on its invoices, the agent will supply the following information: The name and address of the foreign seller; The amount ex-factory to be paid to the foreign seller for the merchandise; The amount ( separately listed) of the commission payable to Agent for said sale; A statement by Agent disclaiming any security or ownership interest in or title to the merchandise; A statement by Agent that no amounts other than the buying commission identified on the invoice has inured to his benefit and that no monies have been received from the manufacturer or seller of the merchandise whether directly or indirectly; The port of entry to which the merchandise is destined; The time and date when, the place from where, the person by whom and the person to whom the merchandise is sold or agreed to be sold, or if to be imported otherwise than in pursuance of a purchase, the place from which shipped, the time and date when and the person to whom and the person by whom it is shipped; A detailed description of the merchandise, including the name by which each item is known, the grade or quality, and the marks, numbers, and symbols under which sold by the seller or manufacturer to the trade in the country of exportation, together with the marks and numbers of the packages in which the merchandise is packed; The quantities in the weights and measures of the country or place from which the merchandise is shipped, or in the weights and measures of the United States; The purchase price of each item in U.S. dollars or if the agreed upon currency is not U.S. dollars, then the agreed upon currency of the transaction; If the merchandise is shipped otherwise than in pursuance of a purchase or an agreement to purchase, the value for each item, in the currency in which the transactions are usually made, or, in the absence of such value, the price in such currency that the manufacturer, seller, shipper, or owner would have received, or was willing to receive, for such merchandise if sold in the ordinary course of trade and in the usual wholesale quantities in the country of exportation; All charges upon the merchandise itemized by name and amount, including freight, insurance, commission, cases, containers, coverings, and cost of packing; and if not included above, all charges, costs, and expenses incurred in bringing the merchandise from alongside the carrier at the port of exportation and placing it alongside the carrier at the first United States port of entry. The cost of packing, cases, containers, and inland freight to the port of exportation need not be itemized by amount if included in the invoice price, and so identified. Where the required information does not appear on the invoice as originally prepared it shall be shown on an attachment to the invoice; The country of origin of the merchandise; All goods or services furnished for the production of the merchandise (e.g., assists such as dies, molds, tools, engineering work) not included in the invoice price including but separately listing goods and services of U.S. origin; Name and address of Agent; and Name and address of Principal [importer]. In the event U.S. Customs increases the dutiable value of the merchandise by including an amount representing the commission paid to the agent, and it is determined by the importer that said increase was due to the failure of the agent to supply the information specified in the agreement, or the failure of the agent to disclose information material to the transaction on account of agent’s negligence, the agent agrees to indemnify the importer in an amount equal to the additional duty paid by virtue of the agent’s failure to perform. Based on the above considerations, we conclude that under the terms of the proposed agreement, the degree of control the importer has over the agent is consistent with a buying agency relationship. In New Trends Inc. and in Rosenthal-Netter, supra, the courts indicated that in addition to the issue of control, it must be determined whether an agency relationship exists between the alleged buying agent and the importer/buyer i.e., whether the alleged agent was acting primarily for the benefit of the buyer. In New Trends, the court indicated that a factor which supports an agency relationship is the agent’s financial detachment from the manufacturers of the merchandise. An indication which does not support an agency relationship is that the agent bears the risk of loss for damaged, lost, or defective goods. In Rosenthal-Netter, the court considered the transaction documents, whether the intermediary was operating an independent business primarily for its own benefit, whether the importer could purchase the goods directly from the manufacturer without the agent, and whether there is a buying agency agreement. Regarding the financial relationship between the agent and the manufacturer, in the agreement, as previously quoted above, the agent attests that the agent has no ownership interest in the manufacturer or seller. This supports the existence of a buying agency relationship. Regarding the risk of loss, the proposed agreement does not indicate that the agent will generally be held liable for lost or damaged goods. However, it does indicate that if the importer determines that a duty increase, in an amount representing the commission paid to the agent, is due to the failure of the agent to conform to some aspect of the agreement, the agent must reimburse said amount to the importer. Because the agent’s liability stems from its failure to perform services in accordance with the terms of the proposed agreement and is limited to the total commissions paid or payable, we do not believe that this is inconsistent with a buying agency relationship. With regard to the transaction documents, an invoice or other documentation from the actual foreign seller to the buying agent is required in order to establish that the agent is not a seller and to determine the price actually paid or payable to the seller. See, U.S. Customs Service General Notice, 11 Cust. Bull. & Dec. 15 (March 15, 1989), citing to HRL 542141, September 29, 1980, also published as TAA 7. However, even if the manufacturer’s invoice is provided, “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.” Id. The agreement provides that the agent will provide the seller/manufacturer’s invoice, bill of lading, agent’s invoice in addition to any other required documentation as specified by the importer. The agreement also indicates that the importer can purchase and deal directly with the manufacturers/sellers without employing the agent. Based on the above considerations, we conclude that the terms of the proposed buying agency agreement are consistent with a buying agency. However, it is the position of customs that “having legal authority to act as buying agent and acting as buying agent are different matters” and customs in entitled to examine evidence which proves the latter. See, U.S. Customs Service General Notice, 11 Cust. Bull & Dec. (March 15, 1989). See also, Pier 1 Imports, Jay-Arr Slimwear Inc., Rosenthal-Netter, and HRL 545421 (August 3, 1994). Therefore, despite the existence of the agency agreement, the appraising officer must make a case-by-case determination regarding whether the agent acts as a bona fide buying agent. HOLDING: The terms of the proposed buying agency agreement are consistent with a buying agency. So long as the appraising officer is satisfied that the agents act in accordance with the terms of the buying agency agreement, commissions paid to the agents by the importer will not be added to the price actually paid or payable of the imported merchandise. Sincerely, for John Durant, Director Commercial Rulings Division