VAL CO:R:C:V 545087 CRS
District Director
U.S. Customs Service
U.S. Customhouse
1 East Bay Street
Savannah, GA 31401
RE: Internal Advice 51/92; transaction value; related parties;
circumstances of sale
Dear Sir:
This is in reply to your memorandum of July 27, 1992, under
cover of which you forwarded internal advice request 51/92 filed
by **************************** behalf of **************, Inc.
Inc. has requested and been granted confidential treatment with
respect to commercial and financial information contained in
submissions made pursuant to its internal advice request. We
regret the delay in responding.
FACTS:
Inc., a subsidiary of Parent Company, markets and processes
certain fiber products, including viscose, polyester and nylon
fibers (the industrial fibers) and aramid fibers, imported from its
related companies Related Company 1 and Related Company 2. The
imported fibers are used in the production of, e.g., mechanical
rubber goods, hoses, tires and bullet-proof vests. The merchandise
is entered through the ports of Savannah and Detroit.
Inc. acts as the importer of record in "direct" sales from
Related Company 1 and Related Company 2 to unrelated customers in
the United States and, in addition, imports for its own account
(the "indirect" sales). In the first scenario, Inc. is the
importer of record in direct sales of aramid fibers between its
related ********* manufacturers and their unrelated U.S. customers.
Inc. acts as an agent in these transactions and is responsible for
soliciting and forwarding orders, employing the broker, arranging
deliveries and depositing duties in order that merchandise can be
delivered to unrelated U.S. purchasers on a duty-paid delivered
basis. In addition, Inc. is responsible for quality control in
sales to all unrelated U.S. purchasers. As compensation for its
services, Inc. is paid a commission equal to *** percent of the net
f.o.b. sales price, or *** percent of the gross sales price. While
the price of the imported merchandise varies from product to
product, the difference between the direct sales price and the
indirect sales price is essentially the amount of the commission
that Inc. receives as compensation for its role as agent.
In the second scenario (the indirect sales), Inc. imports
industrial and aramid fibers on a speculative basis according to
the anticipated needs of its customers. The terms of sale are
c.i.f. with the risk of loss passing to Inc. at the f.o.b. point
in Europe. Inc. is responsible for import costs, brokerage and
duties.
Both you and the importer agree that the so-called "direct"
sales through Inc. as agent to unrelated parties at c.i.f. duty-
paid prices, including commissions, are properly appraised on the
basis of transaction value.
However, you contend that the relationship does affect the
price of the "indirect" sales and that transaction value is
therefore an unacceptable basis of appraisement. You state that
while the "indirect" sales are made at intercompany prices
determined by the foreign seller, the "direct" sale prices to
unrelated U.S. purchasers are determined on a negotiated basis.
Furthermore, you maintain that Inc. is simply an agent who
warehouses stock in order to fill orders. Consequently, you urge
that the "indirect" sales be appraised on the basis of transaction
value of identical or similar merchandise and that a commission
equal to that paid to Inc. in the direct sales be added to the
sales price.
ISSUE:
The issue presented is whether the relationship between the
buyer and the seller in the indirect sales influenced the price
actually paid or payable such that transaction value is not an
acceptable basis of appraisement.
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 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).
However, where the buyer and seller of imported merchandise
are related, appraisement under transaction value is acceptable
only under two conditions. First, it is acceptable provided the
circumstances of the sale indicate that the relationship between
buyer and seller did not influence the price actually paid or
payable. 19 U.S.C. 1401a(b)(2)(B). Alternatively, transaction
value is acceptable if it closely approximates either the
transaction value of identical or similar merchandise in sales to
unrelated buyers, or the deductive or computed value of identical
or similar merchandise. 19 U.S.C. 1401a(b)(2)(B)(i)-(ii).
Under the first approach, should the circumstances of sale
indicate that while related, the parties buy and sell from one
another as if they were unrelated, transaction value will be
considered acceptable. Thus, if the price is determined in a
manner that is consistent with normal industry pricing practice,
or with the way the seller deals with unrelated buyers, the price
actually paid or payable will be deemed not to have been influenced
by the relationship. Statement of Administrative Action, reprinted
in Customs Valuation under the Trade Agreements Act of 1979,
Department of the Treasury, U.S. Customs Service (October 1981),
at 54; Headquarters Ruling Letter (HRL) 543806 dated March 12,
1987, at 2; HRL 543984 dated February 22, 1988 at 3.
Counsel for Inc. contends that prices are set by the related
party seller in the same manner irrespective of whether the sales
are made directly through Inc. as agent for a third party, or
indirectly to Inc. for inventory and resale. In regard to the
former, Inc. notifies the seller what the unrelated buyer is
willing to pay for the merchandise, calculates the cost of
delivery, including the commission, in order to arrive at the net
amount that will accrue to the seller. The related party seller
then accepts or rejects the price, or suggests an adjustment to be
negotiated with the buyer.
Under the second scenario (indirect sales), Inc. advises the
related party seller of the approximate market price for specific
merchandise, and the amount Inc. expects to charge for it on
resale. From this Inc. deducts its expenses for freight, customs
and carrying costs. The balance is the amount Inc. offers the
related party.
Counsel maintains that the manner in which negotiations are
conducted, i.e., the circumstances of sale, indicates that the
relationship between the parties does not influence the price
actually paid or payable. We do not find this to be persuasive.
Nevertheless, information provided by counsel substantiates the
fact that the only difference in the price under both of the above
scenarios is the commission paid to Inc. as agent in the direct
sales. This information supports counsel's contention that the
relationship does not affect the price actually paid or payable;
accordingly, transaction value is the appropriate basis of
appraisement in the case of both the direct and indirect sales.
HOLDING:
The relationship between Inc. and its related party sellers
does not affect the price actually paid or payable. Transaction
value pursuant to section 401(b) of the TAA is the proper method
of appraisement.
This decision should be mailed by your office to the internal
advice requester no later than sixty days from the date of this
letter. On that date 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 through the
Diskette Subscription Service, Lexis, the Freedom of Information
Act, and other public access channels.
Sincerely,
John Durant, Director