VAL R:C:V 545272 RSD
Area Director of Customs
JFK Airport Area
Building 178
Jamaica, New York 11430
RE: Request for internal advice (IA #22/93) on the appraisement of xxxxxxx used in xxxxxxxx xxxxxxxxx xxxxxxx systems and which are involved in a three tiered sales transaction among related parties; Nissho Iwai American Corp. v. United States
Dear Sir:
This is in response to your memorandum dated March 10, 1993, forwarding the request for internal advice, IA number 22/93, submitted by counsel on behalf of xxxxxxxxxxxxxxx xxxxxxx (xxx) concerning the appraisement of xxxxxxx used in xxxxxxxx xxxxxxxxx xxxxxxx systems. Counsel made submissions to your office and submissions to our office, the most recent dated March 13, 1995. A meeting was held at the Office of Regulations and Rulings on March 16, 1995. This matter has also been analyzed as part of an ongoing audit being conducted on the import operations of the xxxxxxx xxxxx by the Office of Regulatory Audit. The Office of Regulatory Audit reviewed entries of xxxxxxx and analyzed 1991 entries of the xxxxxxx in detail. They have also made several submissions on this matter, the most recent being dated September 13, 1994. Included with the submissions from the Office of Regulatory Audit was an analysis of a sample entry of a magnet unit made April 3, 1991. We regret the delay in responding.
FACTS:
Xxx purchases and imports xxxxxxxx xxxxxxxxx xxxxxxx (xxx) systems from xxx xxx, a division of xxxxxxx xx, a xxxxxx company. Xxxxx purchase orders identify the basic major components, such as the type of xxxxxx, xxxxxxx xxxxxxxxx, xxxxxxx electronics, xxxxxxxxxx, interface equipments, software and other items and the "price" of each component of the system. xxxxxx, however, does not manufacture all of the xxxxxxx for the xxx systems, but at its sole discretion, may purchase them from other vendors. In the subject transactions, the xxxxxxx were manufactured by xxxxxx xxxxxx xxxxxxxxxx xxxxxxx (xxxxxx), xxxxxx, xxxxxxx, and shipped directly to xxx, the importer. According to counsel, the xxxxxxx were ordered from xxxxxx after receipt of the purchase orders from xxx. The shipments of xxxxxxx from xxxxxxx are accompanied by invoices issued by xxxxxx to xxxxxxx xx. The invoices set forth the amount
which xxxxxx will receive in payment for the xxxxxxx and entry was made based on this invoiced price. This price is substantially xxxxx than the price listed for the xxxxxxx on the invoice for the entire system which is the price apparently paid by xxx.
It appears that xxx and xxx xxx and xxx and xxxxxx are related companies, as defined in section 402(g), and for purposes of this decision we assume they are. (Briefly, the relationship is as follows: xxx is part of the xxxxxxx xxxxx. The parent company of the xxxxxxx xxxxx is xxxxxxx xx, a xxxxxxx company, and xx xxx is a division of xxxxxxs xx. A joint venture between xxxxxx and a subsidiary of xxxxxxx xx was formed in 1989. The xxxxxxx xx subsidiary owns xxx of xxxxxx. Prior to 1989, there was no corporate relationship between xxxxxx and the xxxxxxx companies.)
There is a lengthy sales agreement, dated December 19, 1986 ("1986 Agreement") between xxxxxx and xxxxxxx xx regarding the purchase and sale of xxxxx for xxxx systems. Section 3.5 provides that title to the products purchased by xxxxxxx xx from xxxxxx shall automatically pass to xxxxxxx xx immediately upon demonstration to xxxxxxx xx that the products meet the technical specifications. The agreement further provides that risk of damage or loss passes from xxxxxx to xxxxxxx xx at the time and point of shipment (namely, place of manufacture) to final point of destination (namely, customer site) requested by xxxxxxx xx. The agreement specifies the prices for the xxxxxxx to be paid by xxxxxxx xx.
When the joint venture between xxxxxxx xx and xxxxxx was formed in 1989, another sales agreement ("1989 Agreement") was executed with similar provisions regarding title and risk of damage or loss. With regard to price, Annex 2 provides that the prices and currency for all the products of the same type as those previously supplied (referred to as "existing products") would remain the same as they were under the 1986 agreement. However, the 1989 agreement also specifies the prices for products not covered by the 1986 agreement (referred to as "remaining products").
For purposes of this decision we assume that xxxx xxx, a division of xxxxxxx xx, is covered by the above agreements.
You have advised that the xxx systems imported by xxx were appraised under transaction value based on the price xxx paid to xx xxx. For purposes of this ruling we assume that they have been appraised correctly. The issue here concerns the proper appraised value of the imported xxxxxxx. It is the importer's position that transaction value should be based on the price reflected in xxxxxxxx invoices. Your office is of the opinion that the xxxxxxx should be appraised based on the xxxxxx prices reflected in xxxxx purchase orders for the xxx systems. As part of their audit, the Office of Regulatory Audit reviewed an entry for one magnet unit, which was made on April 13, 1991. Xxx presented a proforma invoice from xxxxxx to xxxxxxx xx dated March 26, 1991, to enter the xxxxxxx. The proforma invoice shows that the xxxxxx system and other components were to be delivered xxx in the United States.
ISSUE:
Whether the imported xxxxxxx used in the xxx systems should be appraised under transaction value based on the price xxx xxx paid xxxxxx?
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. ยง 1401a). The preferred method of appraisement is transaction value, which is defined as the "price actually paid or payable for merchandise when sold for exportation to the United States," plus certain enumerated additions. For purposes of determining transaction value in appraising imported merchandise, a sale for exportation to the United States must take place at some unspecified time prior to the exportation of the goods. HRL 545434, dated May 31, 1994.
In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit reviewed the standard for determining transaction value when there is more than one sale which may be considered as being for exportation to the United States. The court in Nissho reaffirmed the principle of E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that a manufacturer's price, for establishing transaction value, is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. In reaffirming the McAfee standard the court stated that in a three-tiered distribution system:
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 influence that affect the legitimacy of the sale price...[T]hat determination can be made on a case-by-case basis.
Id. at 509. See also, Synergy Sport International, Ltd. v. United States, 17 C.I.T.___, Slip Op. 93-5 (Ct. Int'l Trade January 12, 1993).
As a general matter in situations of this type, Customs presumes that the price paid by the importer is the basis of transaction value. However, in order to rebut this presumption, the importer must, in accordance with the court's standard in Nissho, provide evidence that establishes that at the time the middleman purchased, or contracted to purchase, the imported merchandise, the goods were "clearly destined for export to the United States" and that the vendor and middleman dealt with each other at "arm's length." Of course, the price the middleman pays the vendor can be the basis for transaction value only if there is a bona fide sale between these parties.
In the instant case, counsel argues that the imported xxxxxxx should be appraised based on the price xx xxx pays xxxxxx in accordance with the decision in the Nissho case. You contend that the xxxxxxx should be appraised based on the price xxx pays xx xxx.
You point out that there is no explanation as to why there is a difference in the price for the xxxxxxx on the invoices from xxxxxx and the price of the xxxxxxx listed on the invoices covering the entire xxx system. In your opinion, there is an element of value missing on the pro forma invoices used to enter the xxxxxxx, that of general expenses and profit. You also question whether there was a real sale for exportation from xxxxxxx to the United States. As you explain, xx xxx furnishes xxx invoices for the complete xxxxxxx machine, which include the xxxxxx system, at a value usually much xxxxxx than the value shown on invoices presented by xxx or the direct shipment of the xxxxxx because the parties are related, you believe that it would be inappropriate to appraise the xxxxxxx based on the lower price between xx xxx and xxxxxx.
Since transaction value is the price actually paid or payable when sold for exportation to the United States, the first question to be considered in determining transaction value of the xxxxxxx was whether there was a bona fide sale between xx xxx and xxxxxx. In the case of J.L. Wood v. U.S., 62 CCPA 25, 33 C.A.D. 1139 (1974), the court defined the term "sale" as the "transfer of property one party to another for consideration." Similarly, section 2-106(1) of the Uniform Commercial Code ("UCC") defines a "sale" as "the passing of title from the seller to the buyer for a price." Although the J.L. Wood case was decided under the appraisement statute prior to the TAA, Customs has applied this basic concept of what constitutes a sale under the TAA. See HRL 545447, May 12, 1994.
Customs has also stated in previous rulings that several factors may indicate whether a bona fide sale exists between a potential seller and buyer. In determining whether property or ownership has been transferred, a primary factor to consider was whether the alleged buyer acquired the title and assumed the risk of loss for the merchandise from the seller. In addition, Customs may examine other factors including whether the alleged buyer paid for the goods, whether such payments are linked to specific importations of merchandise, and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HRL 545542, December 9, 1994. In determining whether the purported buyer acquired title and assumed the risk of loss for the merchandise, Customs will first examine the documents related to the sale transactions including the shipping terms.
We first note that xx xxx is a division of xxxxxxx xx. For purposes of this decision, we assume that xx xxx and xxxxxxx xx are not separate entities and that the terms of a purchase and sales agreement entered into by xxxxxxx xx would also pertain to xxxxxx. The 1986 agreement between xxxxxx and xxxxxxx xx regarding the purchase and supply of xxxxxxx is a lengthy one and discusses the aspects of such sales. According to section 3.5 of the sales contract, title to the contract products purchased by xxxxxx xx from xxxxxx shall automatically pass to xxxxxxx xx immediately upon demonstration to xxxxxxx xx that the products meet the technical acceptance specifications relevant to such products. Until the shipment of the products, xxxxxx shall safely and separately store, label, and adequately insure the products for xxxxxxx xx at xxxxxxxx expense. Risk of damage or loss for the products passes from xxxxxx to xxxxxx xx at the time and the point of shipment (namely the place of manufacture) to the final point of destination (namely the customer site) requested by xxxxxxx xx. The terms of the sales contract and the fact that xxxxxx issues separate invoices to xxxxxxx xx for the xxxxxx which are paid for by xx xxx, indicate that xx xxx, as a division of xxxxxxx xx, is purchasing the imported xxxxxxx from xxxxxx. Based on the evidence presented, we find that there was a bona fide sale of the xxxxxxx between these parties.
The next matter that must be determined is whether the xxxxxxx were clearly destined for the United States at the time xxx xx purchased them from xxxxxx. Here, counsel for xxxx claims that xx xxxx knew that the xxxxxxx were manufactured for a specific xxx configuration purchased by xxx and that the xxxxxxx could have no other alternative destination. Furthermore, counsel points out that xxxxxxxx commercial invoices show that it shipped the xxxxxxx directly from xxxxxxx to the United States for delivery to xxxx, at the directions of xxxxxxx xx. In addition, xxxxxxxx did not order the xxxxxxx from xxxxxx until it had received a purchase order from xxx. Based on this evidence, we find that when xxxxxx ordered the products from xxxxxx, they were destined for exportation to the United States in order to fulfil the purchase orders from xxxx to xxxxxx. Therefore, the first part of the Nissho test is met.
The second part of the Nissho test was that the transaction must be at arm's length. In this instance, as already noted above, xxxxxx and xxxxxxxxxxxxxxxxx are related. Section 402(b)(2)(B) of the TAA sets forth two conditions under which a transaction value between related parties will be deemed acceptable. The first is where an examination of the circumstances of sale indicates that the relationship between the parties did not influence the price actually paid or payable. The second is where the transaction value closely approximates certain "test" values. 19 U.S.C. 1401a(b)(2)(B). In order for a sale between related parties to be acceptable as an "arm's length" sale under Nissho, it must satisfy the statutory requirements noted above. See HRL 544579 and memorandum dated March 8, 1993, from Director, Office of Trade Operations, Regarding Effect of Nissho Iwai and Related Cases on Field Operations.
Under the first approach, if 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 to be acceptable. In this respect, Customs will examine the manner in which the buyer and seller organize their commercial relations and the way in which the price in question was derived in order to determined whether the relationship influenced the price. If it can be shown that the price was settled in a manner consistent with normal pricing practices of the industry in question, or with the way in which the seller settles prices with unrelated buyers, this will demonstrate that the price has not been influenced by the relationship. 19 C.F.R. 152.103(l)(1)(i)-(ii). In addition, Customs will consider the price not to have been influenced, if the price was adequate to ensure recovery of all costs plus a profit equivalent to the firm's overall profit realized over a representative period of time. 19 C.F.R. 153.103(l)(1)(iii).
The importer has not provided any evidence to establish whether the prices that xxxx charged xxxxxx for the xxxxxxx were consistent with normal pricing practice of the industry in question or whether it charged the same prices to unrelated buyers. In addition, the importer did
not furnish any evidence as to whether xxxxxx recovered all costs plus a profit equivalent to its overall profit in its sales of the xxxxxxx to xxxxxx. Similarly, no test values for the xxxxxxx were presented.
Nevertheless, counsel contends that the sale between xxxxxx and xxxxxx should be used for determining the transaction value of the imported xxxxxxx because the parties allegedly dealt with each other at arm's length as though they were unrelated. In support of this position, counsel points to the fact that the 1986 sales agreement between xxxxxx and xxxxxxx xx was negotiated at a time when the parties were not related and that the pricing of the xxxxxx remained in effect subsequent to 1989 even after the parties became related.
As explained below, we are not satisfied that this evidence sufficiently demonstrates that the price that xxxxxx charged xx xxx was consistent with normal pricing practices of the industry or with the way it settles prices with unrelated buyers. The provisions regarding the prices and currency terms of the xxxxxxs for the entries in question were delineated in Annex 2 of the 1989 agreement which states:
For all Existing Products the relevant price and currency are those set out in the corresponding annex to the Previous Agreement. (1986 Agreement) For Remaining Products the relevant prices and currency, on the assumption that the provisional specifications therefor are those attached hereto in Annex 1, shall be the prices and currency attached hereto and initialed for the purposes of identification. Payment terms for all Contract Products are 30 days net from date of shipment.
Based on the above, it appears when that the joint venture was formed, the corporate relationship between xxxxxx and xxxxxxxxxxxxxx may not have immediately effected the price of the existing products. However, for a transaction to be truly arm's length, a pricing scheme cannot stay in effect indefinitely because market conditions can change over time. The original sales contract was negotiated in 1986 and 1987, but the actual sales of the xxxxxxx occurred several years later, such as in the sample entry provided by the Office of Regulatory Audit, where the transaction occurred in 1991. To ensure that prices of the products are kept current, the parties may have to review the prices and make adjustments. At some point, the parties may even have to renegotiate with each other. In other words, we believe that even though the prices for some the xxxxxxx were initially set when they were unrelated, it does not necessarily establish that the relationship between xxxxxx and xxxxxx did not influence the price of the xxxxxxx over an indefinite period of time. The fact that the prices remained unchanged over a period over several years is some indication that the relationship may have influenced the price. In order for Customs to accept the transfer price, additional evidence of its validity is needed.
In addition, the prices for the "Remaining Products" not covered by the 1986 Agreement were determined at the same time that the parties entered into their joint venture. Therefore, the prices for "Remaining Products" were not the result of arm's length negotiations between unrelated parties.
Therefore, whether the importations involved "existing" or "remaining" products, insufficient evidence has been presented to establish that the price that xxxxxx paid to xxxxxx was an acceptable transaction value. Thus, the importer has not met the second requirement of the Nissho decision, i.e. that the transaction between xxxxxx and xxxxxx was at arm's length. Accordingly, Customs presumes that the price paid by the import is the basis of transaction value.
Accordingly, based on the evidence presented, the transaction value of the xxxxxxx should be based on the price paid by xxx as shown on the invoices that xxxxxx prepared for the xxx systems. If the transaction value between xxx and xxxxxx is not acceptable, another method of appraisement would be required.
HOLDING:
Although the importer has established that there was a bona fide sale between xxxxxx and xxxxxxxxxxxxxxxxx and that the xxxxxxx were clearly destined for exportation to the United States when sold by xxxxxx to xxxxxxxxxxxxxxxxx, it has not shown that the transactions were at arm's length and that the relationship between xxxxxxxxxxxxxx xx and xxxxxx did not effect the price. Consequently, based on the evidence presented the transaction value of the xxxxxxx should be based on the price actually paid or payable by xxx as shown on the invoices that xxxxxxx prepared for the xxx systems.
Please provide counsel with a copy of this decision. The Office of Regulations and Rulings will take steps to make this decision available to Customs personnel via the Customs Ruling Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act, and other public access channels 60 days from the date of this decision.
Sincerely,
John Durant, Director
Commercial Rulings Division