RR:IT:VA 546553 RSD
Alan H. Price, Esq.
Gregg L. Elias Esq.
Wiley, Rein & Fielding
1776 K Street, N.W.
Washington, D.C. 20006
RE: Bona Fide Sales of Imported Wire Drawing Equipment;
Transaction Value
Dear Messrs. Price and Elias:
This is in response to your letter dated November 8, 1996,
on behalf of Morgan-Koch Corp., regarding the appraisement of
imported wire drawing equipment. Accompanying your submission
were copies of documents from two different transactions. You
have informed a member of my staff that Morgan-Koch is requesting
a ruling in the spirit of informed compliance, to ensure that
they provide proper information to the Customs Service and to
avoid possible problems on future importations. This ruling
applies to future transactions.
FACTS:
The importer, Morgan-Koch Corp. (hereinafter Morgan-Koch),
based in Worcester, Massachusetts, is a majority-owned subsidiary
of a German company, Maschinenfabrik ERNST KOCH GmbH & Co. KG.
(hereinafter Koch). Koch is a diversified manufacturing concern
based in Germany. Morgan-Koch imports a variety of products from
both Koch and other suppliers. It is the exclusive importer of
Koch products in the United States, which typically consists of
wire drawing equipment and associated peripheral components used
to manufacture wire from wire rod. Although Morgan-Koch also
sells equipment produced by unrelated manufacturers, this ruling
only covers imports from Koch.
You state that Morgan-Koch has absolute discretion in the
selection of its customers, vendors, and setting prices. It
maintains a marketing and sales force and provides services to
its customers following their receipt of the imported machinery.
Morgan-Koch employees will frequently aid in the installation of
the wire drawing equipment at the client site. In dealing with
its customers, Morgan-Koch determines the prospective customer's
specific requirements for equipment. It will then generate a
calculation sheet that spells out the specifications of the
equipment. From these specifications, Morgan-Koch calculates the
price that it will charge its customer by taking a Koch
distributor price list and adding its own mark-up for service,
installation, and profit.
You note that Morgan-Koch is not required to purchase
equipment from Koch, and has made significant equipment purchases
from outside companies, when Koch's prices were not competitive.
Prices between Morgan-Koch and Koch are set independently from
the prices between Morgan-Koch and its customers. Morgan-Koch
often tries to negotiate a discount from the Koch prices.
Because of the semi-customized nature of these machines, each
order is individually transmitted.
Because the wire drawing machines are semi-customized, they
are shipped directly from Koch to the final customer or
consignee, but Morgan-Koch is always the importer of record.
Morgan-Koch keeps little inventory on hand, but on occasion
various parts and miscellaneous supplies are maintained in a
small inventory. Koch individually invoices Morgan-Koch for all
equipment. In turn, Morgan-Koch invoices its customers, the
final U.S. purchasers of the imported merchandise. Although Koch
is aware of the identity of Morgan-Koch's American customers,
Morgan-Koch assumes the risk of loss should a U.S. customer fail
to pay for the merchandise.
Morgan-Koch independently negotiates payment terms with each
customer. You state that these terms can differ substantially
from the terms between Koch and Morgan-Koch. Payment terms on
both ends of the transaction are subject to negotiation.
Typically, the Morgan-Koch and Koch transaction involves 10-30
percent down upon order and with the balance due against the
invoice, which is presented upon arrival in the United States.
In contrast, the terms between Morgan-Koch and its customers can
include; 20 percent down; 60-80 percent on delivery and 0-20
percent after commissioning (installation and startup).
Your letter indicates that the terms of sale in the
transactions between Morgan-Koch and Koch are "FOB German Seaport
or FOB German plant, or CIF U.S. port." Morgan-Koch is
responsible for insuring the goods and is responsible in the
event of loss. Morgan-Koch purchases insurance through Koch, in
order to obtain the most favorable pricing. Koch bills Morgan-Koch quarterly or semiannually for its share of the insurance and
any insurance proceeds under the policy are assigned to Morgan-Koch. You have informed a member of my staff via telephone that
the terms of sale between Morgan-Koch and its U.S. customers is
usually FOB U.S. Port and that Morgan-Koch pays Koch for the
imported merchandise out of its own funds through a wire
transfer. We note however, that none of documents that you have
submitted indicate the terms of sale in the transactions nor do
we have evidence of proof of payment.
The first document you submitted is a purchase order dated
July 30, 1996, from Morgan-Koch to Koch for a number of different
items. The document shows the payment terms and provides a cost
calculation including the amount of Morgan-Koch's profit. The
second document is Koch's reply to Morgan Koch's July 30, 1996
order, in which Koch indicates that it does not agree with the
price of the merchandise that Morgan-Koch specified in its order.
Instead, Koch made a counter proposal on the price of some of the
merchandise. The apparent purpose of this letter is to show that
there is negotiation between Koch and Morgan-Koch. The third
document
which is apparently unrelated to the prior two documents, is an
invoice from Koch to Morgan-Koch dated March 23, 1996. This
invoice refers to a previous order number for a Morgan-Koch
customer and gives a description of the merchandise and the price
charged. It also gives the
terms of payment. The final document is an invoice from Morgan-Koch to a U.S. customer, Leggett & Platt, Inc. of Carthage,
Missouri. The invoice provides a description of the merchandise
and its price in U.S. dollars.
You are specifically inquiring about whether the
transactions between Morgan-Koch and Koch constitute bona fide
sales for purposes of determining transactions value.
ISSUE:
For purposes of determining transaction value, whether there
are bona fide sales between Koch and Morgan-Koch in the
previously described transactions?
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 which
is defined by Section 402(b)(1) of the TAA (19 U.S.C.
1401a(b)(1)) as the "price actually paid or payable for
merchandise when sold for exportation to the United States," plus
certain enumerated additions.
(emphasis added).
The transaction between Morgan-Koch and Koch can serve as
the basis for transaction value only if it constitutes a bona
fide sale. This ruling addresses that question. It should be
noted however, because the parties are related, pursuant to
402(b)(2)(B) of the TAA, transaction value is acceptable only if
an examination of the circumstances of the sale indicates that
the relationship between Morgan-Koch and Koch did not influence
the price actually paid or payable or if the transaction value of
the imported merchandise approximates the transaction value of
identical or similar merchandise in sales to unrelated buyer in
the U.S. or the deductive or computed value for identical or
similar merchandise. Although we have assumed for purposes of
this ruling that transaction value is the appropriate basis of
appraisement, no evidence has been provided to justify its use.
In determining transaction value of imported merchandise, a
sale for exportation to the United States must take place at some
unspecified time prior to the exportation of the goods. For
Customs purposes, a "sale" generally is defined as a transfer of
ownership in property from one party to another for a
consideration. J.L. Wood v. United States, 62 CCPA 25, 33;
C.A.D.
1139 (1974). Although J.L. Wood was decided under the prior
appraisement statute, Customs recognizes this definition under
the TAA. Several factors may indicate whether a bona fide sale
exists between potential seller and buyer. In determining
whether property or ownership has
been transferred, Customs considers whether the alleged buyer has
assumed the risk of loss and acquired title to the imported
merchandise. In addition, Customs may examine 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 Headquarters Ruling
Letter (HRL) 545705 dated January 27, 1995.
In examining the transactions between the Morgan-Koch and
Koch, we first consider whether the terms of sales indicate sales
between these parties. In HRL 543708, dated April 12, 1988, we
stated in regard to the transfer of title and the assumption of
the risk of loss:
[A] determination of when title and risk of loss pass from
the seller to the buyer in a particular transaction depends on
whether the applicable contract is a "shipment" or "destination"
contract.... FOB point of shipment contracts and all CIF and C&F
contracts are "shipment" contracts, while FOB place of
destination contracts are "destination" contracts.... Unless
otherwise agreed by the parties, title and risk of loss pass from
the seller to the buyer in "shipment" contracts when the
merchandise is delivered to the carrier for shipment, and in
"destination" contracts when the merchandise is delivered to the
named destination.
The question of whether the transactions involved in the protest
are shipment contracts or destination contracts depends on the
shipment terms specified in the documentation.
Although we have no documents verifying the terms of terms
of sale in the transactions being examined, for the purposes of
this ruling, we will accept your statement in your letter that
the terms of sale between Morgan-Koch and Koch are FOB German
Seaport or FOB German plant, or CIF U.S. port. These terms of
sale indicate that the transactions are shipment contracts, where
title and risk of loss pass from the manufacturer to Morgan-Koch
at the time the merchandise is delivered to the carrier at the
port of shipment or at the manufacturer's plant. In addition,
you have informed our office that the terms of sale between
Morgan-Koch and its U.S. customers are FOB U.S. Port. This means
that the Morgan-Koch holds title to and assumes the risk of loss
in the merchandise from the time it is shipped from Germany until
it arrives at the U.S. port. When the merchandise arrives at the
port of importation in the United States, Morgan-Koch's U.S.
customers will take title and assume the risk of loss.
Accordingly, the terms of sale in the relevant transactions
support a sale between Morgan-Koch and Koch.
In HRL 545709 May 12, 1995, Customs outlined some factors
for determining whether the relationship of the parties to the
transaction in question is that of a buyer-seller, where the
parties maintain an independence in their dealings, as opposed to
that of a principal-agent, where the former controls the actions
of the latter. Customs will consider whether the potential
buyer:
a. provided (or could provide) instructions to the seller;
b. was free to sell the items at any price he or she
desired;
c. selected (or could select) his or her own customers
without consulting the seller; and
d. could order the imported merchandise and have it
delivered for his or her own inventory.
In the transactions being analyzed, it appears that Morgan-Koch and Koch negotiate with each other on prices and payment
terms. This is demonstrated by the Morgan-Koch's purchase order
and Koch's response. These documents include a counter-proposal
regarding the price of the merchandise, and indicate that Morgan-Koch also provides instructions to Koch regarding the
merchandise. You also explain that Morgan-Koch is free to select
its customers and set its own prices in selling the merchandise
to its U.S. Customers. We note that Morgan-Koch is not required
to buy merchandise only from Koch and allegedly buys merchandise
from other vendors. Although merchandise is usually directly
delivered to the U.S. customers and Morgan Koch keeps very little
inventory on hand, Morgan-Koch provides the instruction on where
the merchandise is delivered. In addition, Morgan Koch on
occasion does keep a quantity of spare parts and miscellaneous
supplies on hand.
We also note that it appears that Morgan-Koch and Koch are
acting in a way that a buyer and seller would normally function.
Morgan-Koch orders the merchandise from Koch by issuing purchase
orders to Koch for merchandise. After merchandise is shipped,
Koch individually invoices Morgan-Koch for all equipment
purchased. In turn, Morgan-Koch issues invoices to its
customers, which indicate that the merchandise is sold to the
U.S. customer. From Morgan-Koch invoices, it can be inferred
that the U.S. customer is buying the merchandise from Morgan-Koch
not from Koch. Morgan-Koch maintains it own sales and marketing
staff and provides service and support to its U.S. customers.
Finally, you have informed us that Morgan-Koch directly pays Koch
for the imported merchandise out of its own funds through wire
transfers.
Based on your description of the transactions, which we
assume is accurate and can be verified, we are satisfied that
there are bona fide sales between Morgan Koch and Koch. However,
because the parties are related, and we have no evidence
regarding the acceptability of transaction value, we cannot rule
whether such sales should serve as the basis of transaction value
of the imported merchandise.
HOLDING:
Based on the preceding description, and provided
documentation supporting this description is furnished upon
request by Customs, transactions between Morgan-Koch and Koch
constitute bona-fide sales for purposes of determining
transaction value.
Sincerely,
Acting Director
International Trade Compliance Division