VAL CO:R:C:V 545622 er
Melvin S. Schwechter, Esq.
LeBoeuf, Lamb, Leiby & MacRae
1875 Connecticut Avenue, NW
Washington, DC 20009-5728
RE: Revocation of HRL 544812, dated March 3, 1994; Applicability of Transaction Value to Electrical Submersible Pumping Units Manufactured in Russia; Bona fide Sale; Transfer of Title; Risk of Loss; Price Actually Paid or Payable; Price Formula Contracts; Section 625(c)(1) of the Customs Modernization Act (Pub. L. 103-182).
Dear Mr. Schwechter:
Upon subsequent review of HRL 544812, issued to you on March 3, 1994, it is apparent that certain modifications to the content of the ruling are necessary so as to be in conformity with Customs law. The effect of these modifications is to revoke the predecessor ruling and replace it with the subject ruling. In keeping with Section 625(c)(1) of the Customs Modernization Act (Pub. L. 103-182), this revocation is being issued within 60 days of the date of the predecessor ruling; accordingly, the public will not be extended an opportunity to comment on the correctness of the revisions. We regret any inconvenience that this revocation may have caused you or your client.
FACTS:
Your submissions dated May 30, 1991 and March 9, 1992, contain a substantial amount of information which is business confidential. Where such confidential information appears in this ruling it will be enclosed in brackets and will not be released to the public.
Your client, Ramco Alnas Limited ("Ramco Alnas"), imports electrical submersible pumping units. Ramco Alnas is a joint venture between Ramco Oil Services plc ("Ramco"), a British oilfield services company, and Almetyevsk Electrical Submersible Pumps Plant ("Alnas"), the Russian manufacturer of these units. The buyer, Ramco Alnas, is related to the manufacturer/seller, Alnas, of the merchandise within the meaning of section 402(g) of the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a). In your March 9, 1992, submission you additionally stated that while Ramco Alnas is the purchaser of the merchandise and acts as importer of record, in order to sell to U.S. customers who like to deal with a U.S. company, Ramco Alnas has created a wholly owned subsidiary, Ramco Alnas, Inc. ("RAI"), an Oklahoma corporation, which sells the imported merchandise to U.S. customers. RAI's sole purpose is to provide the legal vehicle by which Ramco Alnas can achieve its sales and marketing activities in the U.S. after importation.
You state that pursuant to a shareholders agreement between Ramco and Alnas, dated March 5, 1991, and a Distribution Agreement between Ramco Alnas and Alnas, dated November 18, 1990, Ramco Alnas has an exclusive distributorship in [] countries including the U.S., for the sale and leasing of 16 types of electrical submersible pumping units produced by Alnas.
[]
ISSUE:
Whether appraisement of the imported merchandise under transaction value is appropriate.
LAW AND ANALYSIS:
Transaction value is defined in section 402(b) of the Tariff Act of 1930, as amended by the Trade agreements Act of 1979 (TAA; 19 U.S.C. 1401a(b)) as "the price actually paid or payable for the merchandise when sold for exportation to the United States..." plus certain statutory additions. Thus, there must be a bona fide sale of the imported merchandise for it to be appraised under transaction value. The term "price actually paid or payable" is defined in section 402(b)(4)(A) of the TAA as the "total payment . . . made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller."
In 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 from one party to another for consideration." Similarly, section 2-106(1) of the Uniform Commercial Code ("U.C.C.") 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 544658 (March 26, 1991)
In previous decisions issued by Customs involving the question of whether a bona fide sale existed between a foreign seller and an importer in the U.S., Customs has examined whether there was a transfer of property or ownership. The primary factors considered are whether title has passed from the seller to the buyer, and whether the buyer has assumed the risk of loss. See
HRL 544775 dated April 3, 1992; HRL 544658 dated March 26, 1991; HRL 543708 dated April 21, 1988; HRL 543633 dated July 7, 1987; HRL 545544 dated November 26, 1985; HRL
543511 dated May 29, 1985; HRL 543441 dated March 15, 1985 and HRL 542673 dated June 19, 1982 (C.S.D. 82-137).
[] Counsel points out that despite this language in the Distribution Agreement, in light of U.C.C. section 2-401 and relevant case law, [] Customs agrees.
While Article II of the U.C.C. strives to minimize title concept under the law of sales, the drafters recognized that problems would arise which were not covered by Article II provisions, and that in such situations the question of title might be of continued importance. For this reason, section 2-401 was added to the Code. Under section 2-401(2), it is provided that, in general title passes from the seller to the buyer "at the time and place at which the seller completes his performance with reference to the physical delivery of the goods despite any reservation of a security interest...." Matter of Bosson, 432 F.Supp. 1013 at 1019 and 1020 (D.C. Conn. 1977)
Although section 2-401(2) begins with the phrase "[unless] otherwise explicitly agreed," the prior subsection places limits on the parties' contractual freedom. Specifically, section 2-401(1) negates any attempt to forestall passage of title beyond the moment of final delivery; contract language purporting to do so merely results in a security interest being retained. O'Donnell v. American Employers Insurance Co., 622 NW2d 570 (D. Ind. 1993) and cases cited therein. Similarly, section 2-401(1) prohibits the passage of title prior to the identification of the goods in question to the contract. In between these extremes, however, the parties may by contract specify the point at which title passes. Matter of Bosson, at 1020 n24; also see, In re Gull Air, Inc., 73 Bankr. 820 (D. Mass. 1987). [In view of the limitations placed on contracting parties by this section of the U.C.C., it is evident that the language in the Distribution Agreement which attempts to forestall passage of title after delivery of the goods and until payment, is invalid. Customs will interpret the remainder of the Distribution Agreement as though the invalid provision were non-existent.]
In HRL 543708 (April 21, 1988), Customs examined several provisions of the U.C.C. (2-319, 2-320, 2-401, 2-504 and 2-509) and the Official Comments to those sections, to determine whether title and risk of loss had passed between the Japanese parent and its subsidiary. The examination revealed that the determination of when title and risk of loss pass between a buyer and seller depends on whether the applicable contract is a "shipment" or "destination" contract. In the instant case, the terms of shipment are FOB point of shipment -- in other words, a shipment contract with title and risk of loss passing from the seller to the buyer when the merchandise is delivered to the carrier for shipment. []
While title and risk of loss for the merchandise pass in the manner discussed above, appraising the merchandise under transaction value is appropriate only if the "price actually paid or payable" to the seller is ascertainable. All monies paid to the foreign seller are generally part of the "price actually paid or payable" for the imported merchandise. Where the "price actually paid or payable" is not certain at the time of importation, appraisement under transaction value is still appropriate so long as a fixed formula or methodology exists for later determining the price, which formula must be determined prior to importation of the merchandise and which also must be based on a future event over which neither the seller nor the buyer has any control. See, HRLs 542701 (TAA #47 dated April 28, 1982); 543917 (August 27, 1987); and 544364 (October 9, 1990).
[] However, where the merchandise is not resold or leased after importation the "price actually paid or payable" under transaction value is not ascertainable under this formula. The uncertainty regarding payment under these circumstances precludes appraisement of the merchandise under transaction value.
In instances where transaction value cannot be determined, or cannot be used, the statute provides that the merchandise will be appraised by proceeding sequentially through the succeeding provisions of the statute to the first such provision under which the Customs value can be determined. In the absence of any specific information pertaining to the applicability of these succeeding provisions, we are unable to determine which means of appraisement is proper.
HOLDING:
Transaction value under section 402(b) does not exist where Customs is unable to determine the "price actually paid or payable" for the imported merchandise.
Sincerely,
John Durant, Director
Commercial Rulings Division