October 2, 1992
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.
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.
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.
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.
John Durant, Director