VAL CO:R:C:V 545624 LR
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.
(4.2)
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