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to be provided by ASAT, Ltd., petitioner's foreign parent.
Customers provided the product by drop shipment directly to ASAT,
Ltd., in Hong Kong, for assembly. Petitioner coordinated the
transaction, sometimes handling the freight forwarding. ASAT,
Ltd., invoiced petitioner, which then invoiced its customer for
the agreed upon purchase price (the contract price). After the
customer paid petitioner the contract price, petitioner paid the
invoice received from ASAT, Ltd., by remitting 94 percent of the
contract price to ASAT, Ltd., retaining 6 percent for itself.6
During the fiscal year immediately prior to the year in issue,
petitioner paid ASAT, Ltd., 100 percent of the amounts collected
from petitioner's customers.7 Petitioner reported its receipt of
the contract price on its 1991 Federal corporate income tax
return (tax return) as "Gross receipts or sales". Petitioner
reported its payments to ASAT, Ltd. for assembly services under
"Cost of goods sold".8
6 The 6-percent retained portion of the contract price will
sometimes be referred to as the "gross profit spread" for
convenience. Petitioner and respondent referred to the gross
profit spread as a "commission" and to the 6-percent amount as
the "commission rate" at trial and on brief for convenience.
Although the gross profit spread is similar to a commission, we
are dealing with respondent's determination of the proper amount
of petitioner's payments to its parent, not with the proper
amount of a commission paid by the parent to petitioner.
7 The reason petitioner remitted the entire contract price
to ASAT, Ltd., in the tax year ending Apr. 30, 1990, is not in
the record.
8 The characterization of the payments in question as cost
of goods sold rather than as a deduction does not affect the
(continued...)
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