VAL CO:R:C:V 544579 ML
District Director
Portland, OR
RE: Application for Further Review of Protest (AFR) No. 3126-
89-000001; Determination of which Sale is a Statutorily
Viable Transaction Value
Dear Sir:
The above-referenced protest and application for further
review is against your decision regarding the sale for
exportation, for purposes of transaction value, of oil well
casing imported by Ipsco Steel Inc.
FACTS:
The facts of this case have been set forth in a Headquarters
ruling memorandum dated January 7, 1991 (see HQ 544415). Those
facts are reiterated briefly as follows. IPSCO Steel, Inc.
(hereinafter referred to as "ISI") is a Canadian corporation
qualified to do business in the U.S. and the exclusive sales
distribution arm in the U.S. for IPSCO, Inc. (hereinafter
referred to as "Ipsco"), also a Canadian corporation. According
to the sales agreement between Ipsco and ISI, Ipsco agrees to
sell its products to ISI for subsequent sale to U.S. customers.
The merchandise is sold to ISI, F.O.B. Ipsco plant in Canada, at
which point ISI obtains title and risk of loss for the
merchandise. In HQ 544415, we determined that a bona fide sale
existed between Ipsco and ISI.
ISI sold the Ipsco pipe to Arco Alaska Inc. (hereinafter
referred to as "Arco"), a U.S. customer of ISI. ISI negotiated
with Arco to sell oilwell casing manufactured by Ipsco. ISI
confirmed with Ipsco that Ipsco would build the pipe according to
Arco's specifications. In addition, Ipsco was to ship the
merchandise, and the invoice for ISI, directly to Arco in Alaska.
ISI was the importer of record.
In a letter, dated October 30, 1987, from ISI to an import
specialist in Blaine, Washington ISI explained the formula
methodology used to arrive at the prices paid by ISI to Ipsco.
Transfer Price = Final Selling Price - Freight
1+ .04 + Duty & Brokerage & Surcharge
This formula resulted in a margin of 4% which was claimed to be
comparable to the margin received by independent third parties
providing similar services. Apart from minor errors or very
slight variations in the range of .1% due to anomalies in the
calculation of brokerage fees, all transfer prices were said to
result in a gross profit margin to ISI of about 4%.
The Pacific Region, Regulatory Audit Division (RAD)
performed an audit of ISI, the results of which are found in
Report of Importer Audit IPSCO Steel Inc., dated December 20,
1990. RAD reviewed 69 random entries during the period of March,
1986 through September, 1989. The entries involved in this AFR
were not the subject of the audit, however, there is every
indication that the methodology employed by the company in
arriving at its transfer prices remained constant.
ISSUE:
Whether the price paid by ISI to Ipsco or the price paid by
Arco to ISI should serve as the basis for determining transaction
value.
LAW AND ANALYSIS:
The method of appraisement is transaction value pursuant to
section 402(b) of the Tariff Act of 1930, as amended by the Trade
Agreements Act of 1979 (TAA; 19 U.S.C. 1401a). Section 402(b)(1)
of the TAA provides, in pertinent part, that the transaction
value of the imported merchandise is the "price actually paid or
payable for the merchandise when sold for exportation to the
United States."
In an April 15, 1991 submission, counsel for the importer
contended that the transaction value of the imported merchandise
should be based on the sale between Ipsco and ISI. In support of
this he cited E.C. McAfee Co. et al. v. United States et al., 842
f.2d 314 (Fed. Cir. 1988) and United States v. Getz Bros. & Co.,
55 CCPA 11 (1967) as establishing that "if the transaction
between the manufacturer and the middleman falls within the
statutory provision for valuation, the manufacturer's price,
rather than the price from the middleman to his customer is used
for appraisal." Further, counsel cites Orbisphere Corp. v.
United states, 726 F.Supp. 1344, 13 CIT 866 (1989), after remand
to Customs, 765 F.Supp. 1087, Slip Op. 91-39 (May 14, 1991),
entry of judgment after second remand Slip Op. p. 91-69 (August
9, 1991), in support of his contention that the sale between ISI
and Arco cannot be a "sale for export" because it is a domestic
sale (i.e., title and risk of loss pass to Arco upon delivery in
Alaska).
Additionally, in a January 8, 1993 submission, counsel for
the importer noted the recent decision of the Court of Appeals
for the Federal Circuit in Nissho Iwai American Corp. v. United
States, Appeal 92-1239 decided December 28, 1992. That case
involved a three-tiered distribution system for the sale of
subway cars manufactured in Japan by Kawasaki, sold to a
middleman, Nissho Iwai Corporation/Nissho Iwai America
Corporation ("Nissho"), and from Nissho to the New York
Metropolitan Transit Authority ("MTA"). On the authority of
McAfee and Getz, the Appellate Court reversed the Court of
International Trade and held that once it is determined that both
the manufacturer's price and the middleman's price are
statutorily viable transaction values, the rule is
straightforward: the manufacturer's price, rather than the price
from the middleman to the purchaser, is used as the basis for
determining transaction value (emphasis added). The court noted,
that determination can only be made on a case-by-case basis.
The Court of Appeals in Nissho also stated that the
mechanical application of the above rule whenever there is a
three-tiered distribution system could lead to inequitable
results where the manufacturer's price is set artificially low.
However, the rule applies where there is a legitimate choice
between two statutorily viable transaction values. The
manufacturer's price constitutes a viable transaction value when
the goods are clearly destined for export to the United States
and when the manufacturer and the middleman deal with each other
at arm's length, in the absence of any non-market influences that
affect the legitimacy of the sales price (emphasis added).
In the Nissho case the court found that the merchandise was
clearly destined for the United States with no possible
alternative destination. Additionally, the parties were not
"related parties" within the meaning of section 402(g) of the
TAA. Therefore, Kawasaki and Nissho dealt with each other at
arm's length.
The facts in the instant case are similar to those in Nissho
yet there is a critical difference. Here, the parties are
"related" as defined in 402(g) of the TAA. The relevant
provision with regard to related parties states the following:
The transaction value between a related buyer and seller is
acceptable...if an examination of the circumstances of the
sale of the imported merchandise indicates that the
relationship between such buyer and seller did not influence
the price actually paid or payable. See, section
402(b)(2)(B) of the TAA.
In determining whether the relationship between the parties
influences the price of imported merchandise, section
152.103(j)(2)(i), Customs Regulations (19 CFR 152.103(j)(2)(i)),
provides that if it is shown that the buyer and seller, albeit
related, buy and sell from one another as if they are not
related, this indicates that the price is not influenced by the
relationship between the parties, and appraisement pursuant to
transaction value is proper. If the price has been settled in a
manner consistent with the normal pricing practice of the
industry, or with the way the seller settles prices for sales to
unrelated buyers, then it is considered not to have been
influenced by the relationship between the parties. Also, if it
is shown that the price is adequate to ensure recovery of all
costs plus a profit which is equivalent to the firm's overall
profit realized over a representative period of time in sales of
merchandise of the same class or kind, this would demonstrate
that the price has not been influenced. (See the Statement of
Administrative Action "SAA" p.54; and section 152.103(l)(2)(ii)
and (iii), Customs Regulations (19 CFR 152.103(l)(2)(ii) and
(iii)).
On April 19, 1993 a member of my staff requested that
counsel submit material that would demonstrate the acceptability
of the transfer price as between the related parties,
particularly in light of the "margin" that was used to determine
that price. Counsel responded with a submission dated May 7,
1993 wherein it was again stated that the related party price was
based upon ISI's arms-length prices to unrelated U.S. buyers with
deductions for freight, duty, brokerage, processing and carrying
costs in the U.S. where applicable, and a negotiated margin for
ISI.
Counsel stated the margin amount was originally set on the
basis of negotiations and discussions between the two companies
with consideration given to the pricing structure in comparable
situations involving independent distributors and the industry in
general in the U.S. Ipsco knew this information, stated counsel
due to its commercially acquired knowledge and through trade
associations. Therefore, by 1984-1985, the companies experience
re: operating costs for an efficient distribution business had a
high degree of reliability. Therefore, with a 4 percent margin
ISI would make a profit on some transactions and realize a loss
on others if one could quantify general and administrative
overhead costs on a sale-by-sale basis. However, the only way
for a margin to be reasonably set is on an aggregate basis and
the companies never intended to assure ISI of a profit on every
transaction.
Counsel stated that the 4 percent margin must be viewed as
reasonable and conservative given ISI's performance of selling,
marketing, promotion and account servicing. Counsel stated that
there was no chance that the transaction values involved here
were lower than those private parties would have negotiated yet
no proof by counsel has been offered.
While we appreciate counsel's reliance upon it's client's
business acumen, no evidence has been provided to support
2counsel's claim that through trade associations or elsewhere the
general industry contained a profit similar to that of ISI.
Additionally, counsel has stated that the prices determined by
Ipsco and ISI always allowed for certain profit percentages.
Again, no evidence was submitted which suggests that during the
time of the entries in question the industry was always
guaranteed to make at least a 4% profit comparable to that of ISI
guarantee from Ipsco. Certainly, a guarantee of profit for ISI
regardless of industry variations could lead to "artificially low
transfer prices" as described by the court in Nissho.
Consequently, we are unable to verify that the price inclusive of
this profit margin is consistent with the normal pricing practice
of the industry in question. The fact that the parties were able
to manipulate profit amounts with no reference to the industry as
a whole leads us to conclude that the relationship indeed
influenced the price actually payable.
The prices between the related parties were not established
to have been negotiated at arm's length, nor shown to be
consistent with the industry in question nor was there any
evidence submitted showing that the prices contained all costs
plus a profit equivalent to the firm's overall profit as a whole
for the same class or kind of merchandise. Therefore, we
conclude that the examination of the circumstances of the sale of
the imported merchandise indicates that the relationship between
ISI and Ipsco influenced the price actually paid or payable.
Additionally, no evidence was presented showing that the parties
met the alternative test for acceptability (i.e., that the
transfer price closely approximated test values). In sum, the
transaction value between Ipsco and ISI was not acceptable under
section 402(b)(2)(B) of the TAA.
As stated above, the court in Nissho observed that the rule
only applies where there is a legitimate choice between two
statutorily viable transaction values. In order for the
manufacturer's price to constitute a viable transaction value two
essential elements must exist. First, the goods must be clearly
destined for export to the United States and second, the
manufacturer and the middleman must deal with each other at arm's
length.
Here, the imported merchandise was made for a specific U.S.
customer, Arco. Therefore, the merchandise was clearly destined
for export to the United States. As for the second criteria, we
believe the parties did not deal with each other at arm's length
and that the price was influenced by the relationship. As a
consequence, this case is not like Nissho so that case does not
apply. Here, there is only one statutorily viable transaction
value and there is no choice to made as there was in Nissho. The
ISI price to Arco is the only statutorily viable transaction
value which is acceptable under section 402(b) of the TAA. The
merchandise was clearly destined for the United States and ISI
and Arco dealt with each other at arm's length. The two were not
related parties, none of the restrictions on the use of
transaction value as may be found in section 402(b)(2)(A) or
elsewhere occurred.
HOLDING:
In the instant case, no legitimate choice existed between
two statutorily viable transactions as propounded by the court in
Nissho. In the instant transactions only the sale between ISI
and Arco represents a statutorily acceptable transaction value.
Accordingly, you are directed to deny the protest in full.
A copy of this decision should be attached to the Customs Form 19
and mailed to the protestant as part of the notice of action on
the protest.
Sincerely,
John Durant, Director