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HQ 545624

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October 25, 1994

VAL CO:R:C:V 545624 LR

CATEGORY: VALUATION

District Director of Customs
San Juan, Puerto Rico

RE: Internal Advice Request; buying commissions; HRL 542621; HRL 544669

Dear Sir:

This is in response to your memoranda dated March 31 and July 19, 1994, forwarding a request for internal advice submitted by counsel on behalf of Hewlett-Packard Company (HP) and its Puerto Rican affiliate, Hewlett-Packard Puerto Rico Manufacturing (HPPR) regarding an appraisement issue which has arisen during the course of an audit of HPPR.

FACTS:

At your request, Regulatory Audit Division (RAD) initiated an audit of HPPR on December 1, 1992. The period under review was initially calendar years 1991 and 1992, but was later expanded to the period 1989 to the present. The audit is ongoing. An issue which has arisen concerns the status of certain International Procurement Organizations ("IPO's") through whom HPPR obtains the imported product; i.e., are they HPPR's bona fide buying agents or are they independent sellers. The status of the parties and whether certain payments from HPPR to the IPO's are non-dutiable buying commissions are the only issues that will be addressed in this ruling.

HP is a domestic manufacturer of computer systems and peripherals, medical diagnostic equipment, analytical equipment and electronic test and measurement equipment. In support of the manufacture of these various systems, the company maintains a substantial base of manufacture through its Puerto Rico Manufacturing Division, HPPR. According to HP's submission, HPPR relies on IPO's to assist in the acquisition of parts and components used by HPPR in the manufacture of higher level products in the Puerto Rican facility. HPPR relies on IPO's as an integral means of locating non-U.S. sources of supply that are able to provide high levels of quality and reliability at world- competitive prices. In many instances, the IPO acts as the primary contact between HPPR and a non-U.S. supplier.

According to HP, there are eleven IPO's currently in operation. Each is formed as a separate profit center within a HP subsidiary in a foreign host country. While most IPO's locate and source products from within the country of incorporation, an IPO can also locate vendors and acquire products ordered by a HPPR purchasing division from suppliers in other countries in the buying region. (We understand that the same arrangement exists with other HP Divisions; however, this ruling will address only HPPR's importations).

The specifics will be discussed below. Briefly, the arrangement works as follows: HPPR advises an IPO of the parts or materials it needs, the IPO identifies potential sources and purchases those materials from a foreign supplier pursuant to a purchase agreement (subject to HPPR's approval); and resells them to HPPR with a markup (usually 2.5%). The Customs invoices identify the markup as a buying commission. (There appears to be some discrepancy regarding the amount of the IPO's markup. While the IPO Procurement Manual specifies a 2% markup, the documents furnished by HP show a 2.5% markup and the entry documents show markups, labeled buying commissions, of varying amounts).

The issue that has arisen is whether these markups are dutiable. It is the position of counsel that the IPO's serve as bona fide buying agents for HPPR and that the IPO markups for such services are non-dutiable buying commissions. Although counsel acknowledges that the form of the transactions suggest that the IPO is a seller and not HPPR's agent, it contends that the substance of the relationship is clearly in the nature of an agency relationship. It is the position of your office and RAD that the IPO's serve as independent sellers, and not as bona fide buying agents, and that the so-called buying commissions are dutiable as part of the price actually paid or payable. You indicate that prior to 1990, the IPO's cost markups were dutiable and that no material changes have been made regarding the IPO's operations that would affect their dutiability. You note that the only change as of November 1989 was that now markups are called "buying commissions".

Your office indicates that even if we determined that the IPO's are HPPR's bona fide buying agents, the commissions are dutiable as part of the total price actually paid or payable because they are not separately invoiced by the IPO's.

If we determine that the IPO's are independent sellers rather than buying agents, counsel contends that based on the case Nissho-Iwai America Corp. v. United States, 982 F.2d 505 (Fed Cir. 1992), the sale for exportation to the United States is the sale from the foreign manufacturer to the IPO. Your office does not address this issue.

HP submitted a copy of an IPO procurement manual ("the Manual") which presents in detail the relationship between HP purchasing divisions and the IPO's and their respective responsibilities. (As indicated above, HPPR is one of HP's purchasing divisions). The document contains five sections and two Appendices. The provisions which are most pertinent to this case are included below, followed the section numbers.

Section 1 - Procurement Policies

1.3 Product Specification
The purchasing division has responsibility for specifying the items to be purchased. (1.3.1)

Engineering responsibility or product responsibility will remain with a purchasing division (1.3.2).

If changes are requested by the supplier, an IPO may recommend accepting or rejecting the change, but final authority will be with the division holding the engineering responsibility (1.3.4.1).

Change notices may also be requested and initiated by the purchasing division through an IPO to the suppler. (1.3.4.2).

1.4 Supplier Selection
Supplier selection is ultimately the responsibility of the purchasing division. The IPO assists by recommending suppliers it considers good and by developing and managing the business relationships between those suppliers and purchasing division. (1.4.1).

1.5 Obtaining Quotation
All purchasing activity must be initiated by a division which is required to send a request for quotation ("RFQ") to an IPO detailing a description of the product, quantity, contact person, shipping method, any special contractual requirements, information on present sourcing of the part, price expectations, and desired delivery frequencies. IPO's are required to acknowledge RFQs within 24 hours of initial receipt. (1.5.2 & 1.5.3)

It is the role of the IPO to find a supplier, target prices and obtain quotations at or below the target given by the buying division (see 1.5.4).

It is the obligation of IPO's to notify purchasing divisions of significant elements as the pricing in U.S. dollars, estimated freight costs and transit times, estimated times for prototype samples and first production runs, estimated lead times and estimated tooling costs. (1.5.5)

1.6 Contracts
A contract known as an International Purchase Agreement will be agreed upon between a supplier and an IPO. (1.6.1).

The contract is a legally binding document between a supplier and the IPO. (1.6.3)

During the negotiations process, IPO will act as negotiating agent for the purchasing division, and will be HP's spokesperson. The purchasing division will define limits of IPO's negotiating authority. The purchasing division may participate in the negotiation if it wishes. (1.6.2)

While the contract is a legally binding document between the supplier and the IPO, the IPO will receive permission from the purchasing division Materials Manager prior to signing the contract (1.6.3).

The IPO's host entity will serve only to pass on legal obligation between supplier and purchasing division. It will take on only legal obligations that are backed up by a corresponding obligation to it from either buyer or seller. (1.6.4).

1.8 Quality
The IPO will take responsibility for working with suppliers to make sure products conform to the specification provided by the purchasing division. The IPO may visit a supplier's plant periodically to witness both production techniques and inspection procedures. (1.8.1)

The supplier's warranty will be passed on to the purchasing division by the IPO. (1.8.2).

1.9 Shipment
Shipments will be sent freight collect directly from the suppliers, via freight forwarders to purchasing division. The buying division has final authority over the shipping methods. (1.9)

1.10 IPO Inventories
IPO's will not purchase materials from suppliers without established internal orders from HP divisions. In most cases, materials should flow directly to freight forwarder and not through IPO inventory. When freight consolidation processes require inventory at the IPO, material flows and billing through the IPO will be expedited to ensure less than one-week supply of inventory at the IPO. (1.10).

1.11 Payment
IPO will pay the suppliers in appropriate currency (US or local currency) depending on the practice in the IPO country. The purchasing division remits payment through the normal intracorporate invoice system in U.S. dollars. (1.11)

SECTION 4 - FUNDING

4.2 Markup on Purchased Materials
For all materials except tooling, there will be a markup of 2%, up to a cap of $100,000 per fiscal year to any one product with a minimum markup of $50 per line item shipped.

4.5 Invoices
On intercorporate (IC) invoices, markups are included as material cost. Electronic invoices consist of only one charge, the material plus the markup (4.5.1)

Customs Invoices - To avoid paying duty on the IPO markup, the following additional information is required on the invoice used to clear customs:
a. Cost of the imported merchandise without the markup charge.
b. The IPO markup charge added to the merchandise is itemized separately and called out as a "Buyer's Agent Commission"
c. The name of the manufacturer of the goods.
d. The total of the cost of the goods plus markup. This total must match the Intercorporate (IC) invoice. (4.5.2)

The International Purchase Agreement set forth in Appendix A, is a sample agreement between the IPO and the foreign supplier. The terms and conditions are specified in the agreement. The most pertinent ones are set forth below, followed by the section number.

SECTION 1 - PURCHASE OF MATERIALS
IPO shall purchase and Seller shall sell the Products specified on the attached exhibit(s) ("Products"). (1.1)

IPO intends to resell Products to other divisions and subsidiaries (Customer Division) of Hewlett-Packard Company (HP). However, IPO may assign its rights under this Agreement to any Customer Division listed on an exhibit attached to this Agreement. (1.2)

SECTION 3 - SHIPMENT AND DELIVERY
Unless otherwise specified in writing by IPO, shipments shall be F.O.B. Seller's place of shipment. Title to Products and risk of loss or damage shall pass from Seller to IPO upon Seller's delivery of Products to carrier (3.9).

SECTION 5 - QUALITY AND WARRANTY
IPO shall have the right to inspect, at Seller's plant Products and non-proprietary manufacturing processes for the Products....Acceptance by IPO of any Products inspected shall be final only after final inspection of the Products at the Customer Division. (5.2)

The documentation relating to five specific transactions was submitted by HPPR. For each of these transactions, HPPR has submitted the manufacturer's invoice for the imported product. Such documentation appears to be consistent with the responsibilities of the parties specified in the IPO procurement manual. The documentation shows that HPPR places an international "buy" order specifying the product that it is interested in purchasing along with other relevant information, including in some cases, the name of the particular vendor. The IPO then issues an acknowledgement form issued to a foreign vendor. The IPO prepares both a Customs invoice and a billing invoice for HPPR. Only the Customs invoice was submitted to Customs at entry. While the Customs invoice shows a 2.5% buying commission, the billing invoice does not. On the billing invoice, the total price includes a 2.5% markup. The billing invoice specifies the IPO's accounting entries to which the cost and fee elements were booked. It shows that 2.5% of the total invoiced amount was booked into an account 3734, designated "International Procurement Agent Fees".

Your office furnished copies of several HPPR entry packages for the years 1991 - 1994. They include invoices from the IPO's to HPPR which identify buying commissions in various amount (no charge; 2.5%; 4%; 5%; and in some cases, a minimum charge of $100). The entered values do not include the amounts for the amounts identified as buying commissions. The entry packages do not include manufacturer's invoices or the IPO's billing invoices.

ISSUES:

In the circumstances described, whether the IPO's function as HPPR's bona fide buying agents in the purchase of the imported products and if so, whether payments for such services are non- dutiable buying commissions.

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 in section 402(b)(1), 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).

Buying commissions are fees paid by an importer to his agent for the service of representing him abroad in the purchase of the goods being valued. It has been determined that bona fide buying commissions are not added to the price actually paid or payable. 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). 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. 957, 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 a further consideration. See New Trends, supra. The existence of a bona fide buying commission is to be determined by the totality of the circumstances. HRL 542141, September 29, 1990 (TAA No. 7).

Customs Service General Notice, 11 Cus. Bull. & Dec. 15, March 15, 1989, citing TAA No. 7, provides that certain documents must be submitted to Customs to clearly establish the existence of a bona fide buying agency:

[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.

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.

In this case, the only invoice furnished to Customs at entry was the Customs invoice from the IPO to HPPR. On this invoice, a portion of the total price is designated as a buying commission. Although no manufacturer's invoice was provided at the time of entry, HPPR has provided such invoices for each of the five representative transactions discussed in its submission. For purposes of this decision we assume that manufacturers' invoices are available for all the entries in question. Therefore, the issue to be addressed is whether the totality of the evidence demonstrates that the IPO's are acting as HPPR's bona fide buying agents and not as independent sellers.

HPPR acknowledges that some of the documentation indicates that the IPO's are sellers rather than buying agents. Specifically, the International Purchase Agreement, the contract between the IPO and the foreign supplier, designates the IPO as the "purchaser" and specifies that it will "resell" the goods to HPPR and other divisions. (See 1.1 and 1.2, Appendix A). The International Purchase Agreement is a legally binding document between a supplier and the IPO. (See 1.6.3, Manual). Despite these designations, counsel claims that the Agreement and the Manual taken as a whole make clear that the true party in interest is HPPR and that the IPO is functioning as its agent.

We agree that the terms of the Manual are generally consistent with a buying agency. HPPR controls the actions of the IPO's regarding most aspects of the subject transactions and the IPO's retain little discretion. As stated in the Manual, it the role of the IPO's to find a supplier, target prices, obtain quotations at or below the target given by HPPR, and make sure that the products conform to HPPR's specifications. However, HPPR initiates all purchasing activity, and specifies the product, quantity and shipping methods. Shipping costs are paid by HPPR. In some cases, it specifies the vendor and in all cases it has ultimate responsibility for supplier selection. The IPO will act as the negotiating agent for HPPR, but HPPR defines the limits of the IPO's negotiating authority. While the contract is a legally binding document between the supplier and the IPO, the IPO must receive permission from the HPPR's Materials Manager prior to signing and HPPR must approve all changes.

Although the International Purchase Agreement specifies that the IPO's are purchasing the goods and that title and risk of loss or damage shall pass from the seller to the IPO upon the seller's delivery of the product to the carrier, it does not appear that the IPO has control regarding the disposition of the goods. First, we note that the IPO's generally do not have possession of the goods. The Manual provides that goods from the foreign supplier are usually shipped directly to HPPR and not to the IPO's. ("the goods will sent freight collect directly from the supplier, via freight forwarders to HPPR." (1.9)). Second, when freight consolidation processes require inventory at the IPO, it is limited to a less than one-week supply. ("When freight consolidation processes require inventory at the IPO, material flows and billings through the IPO will be expedited to ensure less than one-week supply of inventory at the IPO. Inventory shall be debited/credited to account 1365, inventory in transit at cost." (1.10)). Finally, the Manual provides that "the IPO's host entity will serve only to pass on legal obligation between supplier and purchasing division and that it will take on legal obligations that are backed up by a corresponding obligation to it from either buyer or seller" (1.6.4).

Based on the above, we conclude that from the time HPPR specifies the items to be purchased to the time the goods are ultimately shipped to HPPR, the IPO's act under the direction and control of HPPR. The question to be addressed is whether the apparent sale to the IPO's as set forth in the International Purchase Agreement precludes a finding that the IPO's are HPPR's buying agents.

Counsel cites two decisions, HRL 542621, January 4, 1982 and HRL 544669, August 15, 1991, in which Customs found that an intermediary was a bona fide buying agent despite an apparent sale. HRL 542621, January 4, 1982, was a case in which the documents showed that the intermediary was a seller, but the circumstances indicated that its actions were that of a bona fide buying agent. In that case, the importer of wearing apparel initiated each transaction by placing a purchase order with its Hong Kong subsidiary. The subsidiary transmitted the purchase order, along with the importer's specifications, to the Chinese manufacturer. The subsidiary performed traditional buying agency functions such as locating manufacturing sources, performing quality control, etc. While a sale takes place between the manufacturer and the intermediary, the importer argued that the "sale" is not a traditional sale for Customs proposes in that the mark-up related to buying agency services, and that commercial reality requires that the Intermediary be considered analogous to a buying agent and its mark-up not dutiable. Customs agreed. Relying on HRL 542418, June 25, 1981, the ruling concludes that:
it is apparent that Intermediary similarly acts upon the direction and control of Importer, and that the relationship Importer and Intermediary is, in reality, one of principal and agent. Accordingly, the "profit" made by Intermediary upon sale of the merchandise to Importer is in fact a buying commission which, under the statute, is non-dutiable.

In HRL 544669, August 15, 1991, Customs ruled that a buying agency relationship is not negated merely by the fact that the intermediary takes title to the merchandise for a brief time and bears the risk of loss for the imported merchandise. Customs determined that the intermediary was performing these and other functions on behalf of the principal based in part on the fact that the principal maintains control over the disposition of the imported goods.

The same analysis applies here. Despite the apparent sale between the foreign supplier and the IPO, the totality of the circumstances indicate that the IPO's function as HPPR's bona fide buying agents and not as independent sellers. From the time HPPR specifies the items to be purchased to the time the goods are ultimately shipped to HPPR, the IPO's act under the direction and control of HPPR. Assuming HPPR and the IPO's act in the manner specified above, we find that the IPO's function as HPPR's bona fide buying agents.

The next question to be addressed is whether the amount HPPR pays the IPO's for its services are non-dutiable buying commissions or whether they are dutiable as part of the price actually paid or payable. While bona fide buying commissions are not added to the price actually paid or payable, where the payment made to the seller for imported merchandise includes a buying commission, there is no authority to deduct the amount from the price actually paid or payable. HRL 542141, September 29, 1980 (TAA No. 7). See also, Moss Manufacturing Co., Inc. v. United States, 896 F. Supp. 1223, 13 CIT 420 (1989); aff'd 896 F.535 (Fed. Cir. 1990)(total payment by buyer to seller is properly part of the price actually paid or payable where payment included an amount to be paid by the seller to the buyer's agent who had assisted in the sale). The question here is whether the payment made to the seller for the imported merchandise includes the buying commissions. If so, there is no authority to deduct them.

It is the position of your office and RAD that the payment for the imported merchandise includes the buying commissions. In this regard, you note that the IPO's billing invoices to HPPR include the "buying commissions" in the total price. You also note that in accordance with the Manual the markups are included in the total material costs. Finally, you indicate that the price actually paid or payable by HPPR was recognized in the company accounting books without the "buying commission" as an identifiable expenditure.

We disagree with your conclusion. Having determined that the IPO's are HPPR's bona fide buying agents, the seller of the imported goods is the foreign supplier, not the IPO's. As provided in 19 U.S.C. 1401a(b)(4), the price actually paid or payment is the total payment made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller." In this case, this is the price HPPR pays (through its agent) to the foreign supplier. This price is reflected in the manufacturers' invoices. The manufacturers' invoices that were submitted by HPPR do not include an amount for commissions and there is no indication that the additional amounts HPPR pays to the IPO's for its services are for the benefit of the seller. As provided in TAA # 7, buying commissions are not to be added to the price actually paid or payable. Since the payments made to the seller do not include an amount for the commissions, the buying commissions are not dutiable. The fact that the IPO's billing invoice to HPPR does not separately indicate an amount for commissions or that HPPR's books do not show the buying commission as an identifiable expenditure is not determinative.

HOLDING:

In the circumstances described above, the IPO's function as HPPR's bona fide buying agents in the purchase of the imported products. Provided you are satisfied that with regard to the subject importations, the actions of the parties are consistent with the terms of the Manual and HPPR presents manufacturers' invoices which do not include an amount for the buying commissions, IPO's markups for such services are non-dutiable buying commissions

The Office of Regulations and Rulings will take steps to make this decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels 60 days from the date of this decision.

Sincerely,

John Durant, Director
Commercial Rulings Division

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