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HQ 545036

December 14, 1993

VAL CO:R:C:V 545036 DPS

CATEGORY: VALUATION

Michael P. Maxwell, Esq.
10100 Santa Monica Blvd.
Suite 250
Los Angeles, CA 90067

RE: Dutiability of Buying Commissions

Dear Mr. Maxwell:

This is in response to your ruling request on behalf of the importer, AST Research, Inc. (AST), concerning Customs treatment of certain commissions paid by AST to two of its wholly owned subsidiaries. This ruling request relates solely to the subsidiaries' procurement function on behalf of AST.

FACTS:

AST is a U.S. based importer, manufacturer and vendor of computers and related articles. It manufactures computers and related products in the United States from imported components and subassemblies, as well as importing completed computers and related products for sale in the U.S. AST purchases components and subassemblies in the Far East. Most of the imported components are used at AST's manufacturing facilities in Fountain Valley, California, to manufacture computers in the U.S.

To further its business interests, AST created two wholly owned subsidiaries: AST Taiwan Limited (ASTT) and AST (Far East) Limited (ASTFE). The subsidiaries' activities include the procurement of merchandise for themselves and as agents for AST and its affiliates, the manufacture of computers and subassemblies of computers, and the sale and servicing of AST products in the Far East.

AST has entered into buying agency agreements with each of its subsidiaries concerning their procurement activities on AST's behalf. According to the importer's submission, the subsidiaries are used by AST to identify new sources of merchandise, to place orders for merchandise, to provide inspection services, to arrange for necessary documentation, and to arrange for the shipping of merchandise.
AST is directly involved in the selection of its vendors in the Far East. When the importer determines it needs to source a component in the Far East, it provides its subsidiaries with engineering drawings, specifications and schematics for the component. The subsidiaries then identify potential vendors and have those vendors complete an initial questionnaire which relates to the component's specifications and expected demands on the vendor. The vendors' answers to the questionnaire are reviewed by the subsidiaries, who immediately eliminate unqualified vendors. If the vendor's responses to the questionnaire are satisfactory, then it is asked to provide sample drawings and a bill of materials. AST's subsidiary then prepares a report which compares the vendor's component specifications to AST's design specifications.

The report is submitted to AST. If deemed satisfactory, AST has its own personnel, or its agents' personnel, from purchasing, design, quality assurance and manufacturing engineering examine the vendor's facility. AST also reviews the vendor's financial statement and obtains a credit report to determine the vendor's financial stability.

Based on this review of the vendor's operation, AST prepares a Procurement Evaluation and Qualification Report ("PEQ") which summarizes the vendor's qualifications. The PEQ is submitted to AST's purchasing and quality director for approval. If approved, the vendor is added to AST's "Approved Vendor Listing". AST subsidiaries are not authorized to obtain price quotes or place orders on AST's behalf with any vendor other than those on AST's "Approved Vendor Listing".

The purchase process begins when AST determines that it needs additional components for its U.S. production facility. A list of components needed for inventory is generated by AST's inventory system. A master purchase order is then cut and forwarded to ASTT or ASTFE. The subsidiary examines the list of required components and determines which of the vendors on the "Approved Vendor Listing" can fill the orders for particular components at the lowest cost while meeting AST's scheduling demands. If a question arises concerning which vendor is most appropriate, the subsidiary will refer the matter to AST for resolution.

The subsidiary contacts the approved vendors and obtains price and delivery quotes. It forwards this information to AST, and if these terms are satisfactory, AST authorizes the subsidiary to write a purchase order to the vendor. Frequently, the subsidiaries do not indicate the identity of the vendor because the vendor must be selected from AST's "Approved Vendor Listing". However, this information is always available to AST. AST's purchase order confirmation specifies the product, quantity, price and delivery requirements. Upon receipt of AST's confirmation, the subsidiary writes a purchase order to the vendor which identifies AST as the ultimate consignee of the merchandise.

The invoices which accompany the goods at shipment identify AST as the ultimate consignee of the merchandise and identify the vendor. The subsidiaries remit payment to the vendors, so in many cases the subsidiary is identified as the payment party or purchaser. The invoices are always available to AST to advise of the purchase price of the merchandise and the identity of the vendor. Representative samples of transaction documents including: (1) AST's confirming authorization to write the purchase order; (2) subsidiary's purchase order to vendor identifying AST as ultimate consignee; and (3) an invoice from vendor to subsidiary stating the price and identifying AST as the "ship to" party, have been provided with the ruling request.

With regard to payment, the subsidiaries remit payment to the vendors, usually by wire transfer. AST reimburses the subsidiary for the amounts paid to AST's vendors for AST's merchandise. The commission earned by the subsidiaries is 4% of the FOB value of the merchandise. The importer states that this commission is consistent with industry standards for buying agents in the electronics industry. These commissions are only paid on merchandise which the subsidiary procures on behalf of AST. The commissions are unrelated to the subsidiaries' sales or manufacturing operations.

ISSUE:

Whether, based on the information provided, bona fide buying agency relationships exist between AST and ASTT, and AST and ASTFE, such that the buying commissions paid by AST to ASTT and to ASTFE can be treated as nondutiable.

LAW & ANALYSIS:

For the purpose of this decision, we are assuming that transaction value is the proper basis of appraisement. Transaction value is defined in section 402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(b);TAA) as the "Price actually paid or payable for the merchandise" plus amounts for the five enumerated statutory additions in 402(b)(1). The "price actually paid or payable" is more specifically defined in 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." 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 a bona fide buying agency exists between an importer and an alleged "buying agent" is not determined by any single factor, but depends upon the relevant facts of each case. See J.C. Penney Purchasing Corp. v. United States, 451 F. Supp. 973 (Cust. Ct. 1978). The primary consideration in determining whether a bona fide buying agency relationship exists between an importer and an alleged buying agent is the right of the principal to control the agent's conduct with respect to matters entrusted to the agent. B & W Wholesale Co., Inc. v. United States, 58 CCPA 92, C.A.D. 1010, 436 F.2d 1399 (1971).

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, provided:

...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 New Trends Inc. v. United States, 10 CIT 637, 645 F. Supp. 957 (1986), the Court of International Trade 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 costs 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 manufacturer of the merchandise. In addition, the importer must show that "none of the commission inures to the benefit of the manufacturer." J.C. Penney, 80 Cust. Ct. at 97, 451 F. Supp. at 984.

More recently, in Pier 1 Imports, Inc. v. U.S., 708 F.Supp 351 (CIT 1989), the court reiterated the factors set forth in New Trends and J.C. Penney, and emphasized that control over the purchasing process was strong evidence that an agency relationship exists. The court found the manner of payment to establish that the agent purchased merchandise only at the direction of the importer. In Pier 1, the agent did not retain the discretion to deduct commissions, freight charges, or bear the risk of loss. In addition, none of the commissions inured to the benefit of the manufacturer/seller. The court found that the agent did not "purchase" the merchandise until after the importer ordered the merchandise, and forwarded the funds necessary for acquisition. Thus, in Pier 1, the agent operated only at the direction of the importer, not autonomously.

As the above cited court decisions make clear, any determination of whether a bona fide buying agency relationship exists, depends on the facts in each particular case. Here, we must determine the validity of the purported buying agency relationships, between AST and ASTT and AST and ASTFE, with specific regard to the procurement functions undertaken by the subsidiaries on behalf of AST.

The information submitted indicates that AST is active in selecting vendors, but relies on ASTT and ASTFE to find vendors, gather samples and obtain information about the vendors' products. The buying agency agreements between AST and its subsidiaries delegate, under the direction of the principal, AST, the performance of various duties relating to the procurement of parts and subassemblies, including: assisting in price negotiations, placing orders, inspecting merchandise, arranging freight, insurance, and storage, handling the return of defective merchandise and assisting in the recovery of monies due the principal from the manufacturers as a result of defective merchandise, shortages or late shipments. The agreements further provide that the principal shall reimburse the agent for expenses advanced by the agent on the principal's behalf, including the cost of merchandise and freight, provided the expenses are incurred with the consent of the principal. The agent shall retain invoices it receives for all such expenses incurred on behalf of the principal, and provide them to the principal upon request. Finally, the agents certify that they have no ownership interest in or control over the factories making the commodities purchased for AST; and that the factories have no ownership interest in, or any control over the agents.

Based on the information submitted with the ruling request, ie., the buying agency agreements, sample transaction documents and counsel's explanation, the arrangements between AST and its subsidiaries, ASTT and ASTFE, appear to satisfy the criteria of a bona fide buying agency relationship. As long as ASTT and ASTFE remain under the control of the principal, AST, with regard to the procurement function, and the transactions are documented in accordance with the legal requirements set forth above, the buying commissions at issue appear to qualify for non-dutiable status as bona fide buying commissions.

HOLDING:

If the actions of the parties conform to the descriptions provided by counsel regarding the subject prospective transactions, and the terms of the agency agreement are met to the extent that the importer will exercise the requisite degree of control over the buying agents as specified in the agreements, it is our conclusion that the commissions to be paid to ASTT and ASTFE by AST, to perform the described procurement services, are to be considered bona fide buying commissions.

Please note, however, that the degree of control asserted over the agents is factually specific and could vary with each importation. The actual determination as to the existence of a bona fide buying agency will be made by the appraising officer at the applicable port of entry upon the presentation of the proper documentation as described in TAA No. 7.

Sincerely,

John Durant, Director
Commercial Rulings Division

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