VAL CO:R:C:V 544887 CRS
Mr. H.T. Curtis
Lexmark International, Inc.
740 New Circle Road
Lexington, KY 40511
RE: Buying commissions; 19 U.S.C. 1401a; services typical of
bona fide buying agency; ministerial function; engineering and
manufacturing engineering support; translation services.
Dear Mr. Curtis:
This is in reply to your letter of May 7, 1992, and that of
Mr. L.R. Vincent dated December 11 1991, concerning the dutiable
status of certain payments made by Lexmark International, Inc.,
to its agents in Canada, Hong Kong, Japan, Korea, Singapore, the
Philippines and Taiwan.
FACTS:
Lexmark International, Inc. is a manufacturer and seller of
typewriters, printers and related supplies. Lexmark was formed
on March 27, 1991, when International Business Machines (IBM)
Corporation sold its subsidiary, IBM Information Products
Corporation to Clayton & Dubilier, a New York investment firm.
Lexmark subsequently negotiated a service agreement (the
"Agreement") with the international procurement offices (IPOs) of
the following IBM subsidiaries: IBM, Japan, Ltd.; IBM Korea,
Inc.; IBM Taiwan Corp.; IBM China/Hong Kong Corp.; IBM Singapore
Pte. Ltd.; IBM Philippines, Inc.; and IBM Canada Limited - IBM
Limitee.
Under the Agreement, the IBM subsidiaries are to perform
through the IPOs, and on behalf of Lexmark, certain services as
set forth in Section 2(b) of the Agreement, and more fully in
Schedule 1 to the Agreement. These include: providing market
information; compiling lists of potential suppliers; negotiating,
or assisting in negotiating, contracts with potential suppliers;
conducting supplier surveys and audits; assisting in handling
requests for information and requests for price quotations;
forwarding purchase orders to suppliers.
In addition to the above, the IPOs will provide engineering
and quality assurance support pursuant to section 2(b)(v) of the
Agreement, and quality engineering and manufacturing engineering
support, to suppliers on Lexmark projects. Furthermore, the IPOs
interface with suppliers on all engineering activities. In your
letter of December 11, 1991, you state the "engineering support"
provided by the IPOs is "restricted to interpretation and
communication assistance by the IPOs to assure language barriers
do not impede the understanding of manufacturing specifications
and requirements." This includes explaining blueprints, designs,
etc. Engineering support in the form of such matters as
development, design, artwork, and plans is not provided by the
IPOs.
Lexmark has the option, under the Agreement, of purchasing
directly from foreign suppliers or indirectly through the IPOs.
At any time, Lexmark may cancel or alter a request for service,
but must reimburse the IPO for any costs incurred. Unless
otherwise provided for, the IPOs do not hold legal title to goods
delivered by foreign suppliers. In return for their services,
the IPOs charge Lexmark a "buying commission". The commissions
may change from time to time and are invoiced separately from
other amounts due from Lexmark. The commissions range from 2-6
percent, but typically are on the order of 2-3 percent.
In addition to the buying commissions, Lexmark pays the IPOs
for what in section 4(b) of the Agreement are described as
"additional charges," as compensation for requests other than
those referenced in section 2(b) of the Agreement, and in
Schedule 1. Accordingly, the additional payments described in
section 4(b) of the Agreement do not include compensation for the
performance of engineering support. These amounts are invoiced
separately from buying commissions.
ISSUE:
The issue presented is whether certain payments made by
Lexmark to the IPOs, including those for engineering support,
constitute buying commissions such that they do not form part of
the price actually paid or payable under 19 U.S.C. 1401a(b).
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in
accordance with the provisions of Section 402 of the Tariff Act
of 1930, as amended by the Trade Agreements Act of 1979 (19
U.S.C. 1401a; TAA). The principal method of appraisement is
transaction value, defined as "the price actually paid or payable
for merchandise when sold for exportation to the United States."
19 U.S.C. 1401a(b)(1). Accordingly, we have assumed for the
purposes of this ruling that transaction value is the appropriate
basis of appraisement.
The "price actually paid or payable" is defined 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. 402(b)(4). As a general matter, bona
fide buying commissions are not added to the price actually paid
or payable. Pier 1 Imports, Inc. v. United States, 708 F. Supp.
351, 13 CIT 161, 164 (1989); Rosenthal-Netter, Inc. v. United
States, 679 F. Supp. 21, 23, 12 CIT 77, 78 (1988); Jay-Arr
Slimwear, Inc. v. United States, 681 F. Supp. 875,878, 12 CIT
133, 136 (1988).
The existence of a bona fide buying commission depends upon
the relevant factors of the individual case. J.C. Penney
Purchasing Corp. v. United States, 451 F. Supp. 973 (Cust. Ct.
1978). In this regard the importer has the burden of proving the
existence of a bona fide agency relationship and that payments to
the agent constitute bona fide buying commissions. Rosenthal-
Netter, 679 F. Supp. 21, 23; New Trends, Inc. v. United States,
645 F. Supp. 957, 960, 10 CIT 637 (1986); B.W. Wholesale Co.,
Inc. v. United States, 462 F. Supp. 1399, 1403, 58 CCPA 92,
C.A.D. 1010, (1971).
In determining whether an agency relationship exists, the
primary consideration, is the right of the principal to control
the agent's conduct with respect to those matters entrusted to
the agent. Jay-Arr Slimwear, 681 F. Supp. 875, 879. The degree
of discretion granted the agent is a further consideration. New
Trends Inc. v. United States, 645 F. Supp. 957 (1986). The
existence of a buying agency agreement, moreover, has been viewed
as supporting the existence of a buying agency relationship.
Dorco Imports v. United States, 67 Cust. Ct. 503, 512, R.D. 11753
(1971). In addition, the courts have examined such factors as
whether the purported agent's actions were primarily for the
benefit of the principal; whether the agent was responsible for
the shipping and handling and the costs thereof; whether the
language used in the commercial invoices was consistent with a
principal-agent relationship; whether the agent bore the risk of
loss for damaged, lost or defective merchandise; and whether the
agent was financially detached from the manufacturer of the
merchandise. New Trends, 645 F. Supp. 957.
The Agreement between Lexmark and the IBM subsidiaries, or
IPOs, provides that orders are to be placed at the direction of
Lexmark. Lexmark specifies the supplier, the quantities required
and the dates and mode of shipment. Pursuant to the Agreement,
Lexmark makes payments directly to its suppliers. Factors such
as these have been considered to be indicative of control by a
principal over the purchasing process and thus as evidence of the
existence of an agency relationship. J.C. Penney, 451 F. Supp.
at 983; Rosenthal-Netter, 679 F. Supp. at 24.
Furthermore, the bulk of the services provided by the IPOs
are typical of those performed by a buying agent. For example,
the IPOs identify qualified suppliers, conduct supplier audits,
obtain price and quantity quotes, and monitor supplier capacity.
Moreover, under the Agreement Lexmark has the right to purchase
directly from its suppliers without employing the services of an
agent.
The payments for engineering support under Section 2(b) of
the Agreement and paragraph 14 of Schedule 1 thereto, represent
compensation to the IPOs for services rendered in connection with
the explanation of manufacturing specifications and requirements
to Lexmark's suppliers. The engineering support provided by the
IPOs does not represent product development, design work, plans
and sketches or artwork. Instead the work performed involves the
explanation of blueprints, designs or drawings in order to insure
that language barriers do not impede or interfere with the full
understanding of manufacturing specifications. As such the
engineering support is similar to translation services which the
courts have found to be a service typical of the type performed
by buying agents. J.C. Penney, 451 F. Supp. at 983. In essence,
therefore, the engineering support constitutes an administrative
or ministerial function. Furthermore, it is one performed at the
behest and for the benefit of Lexmark, and is undertaken for the
procurement of the merchandise to be imported.
On the basis of the facts presented, Lexmark exercises the
requisite degree of control over the IPOs to warrant a finding
that a bona fide buying agency exists, provided that the actions
of parties conform to the terms of the Agreement, However, the
actual determination as to the existence of a buying agency will
be made by the appraising officer at the port of entry upon the
presentation of the proper documentation.
HOLDING:
The commissions paid by Lexmark to its agents for services,
including amounts for engineering support, constitute bona fide
buying commissions and therefore, do not form part of the price
actually paid or payable.
Sincerely,
John Durant, Director