HQ 545036: Dutiability of Buying Commissions

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                            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