RR:IT:VA 546953 KCC
Port Director
U.S. Customs Service
10 Causeway Street
Boston, Massachusetts 02222 1059
RE: Application for Further Review of Protest 0401 97 100504; J.L. Wood v. United States; HRL 544775; HRL 543633; Statement of Administrative Action; §402(f) of the TAA; Reasonably Adjusted Transaction Value; HRL 543628
Dear Port Director:
This is in regard to the Application for Further Review of Protest 0401 97 100504 filed on November 7, 1997, by Kirkland & Ellis on behalf of their client, AromaScan, Incorporated (“AromaScan U.S.”). AromaScan U.S. claims that the imported merchandise should be appraised pursuant to transaction value which takes into account the trade discount that AromaScan, plc of the United Kingdom (“AromaScan U.K.”) extends to its subsidiary AromaScan U.S. Additional information submitted by Counsel was taken into consideration in reaching this decision. We regret the delay in responding.
We have agreed to honor Counsel’s request to hold confidential information pertaining to distribution agreements, trade discounts and profit margin percentages which Counsel identified in their submissions. This protest decision omits specific reference to this information..
FACTS:
AromaScan U.S. is a wholly-owned subsidiary of AromaScan U.K. AromaScan U.S. imports lab equipment used to detect and measure odors. AromaScan U.S. acquires the merchandise from its parent company, AromaScan U.K. According to Counsel, the broker for AromaScan U.S. filed a protest of on September 20, 1996, claiming an erroneous invoice was used. Once Customs was provided with the correct invoice, Customs apparently agreed that the invoice originally filed contained a clerical error. In deciding the protest, however, Customs concluded that the discount AromaScan U.K. extends to AromaScan U.S. was not allowed since no transaction value exists. Accordingly, AromaScan U.S. now seeks further review of Customs
appraisement pursuant to §402(f) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”; 19 U.S.C. §1401(a)) based on AromaScan U.K.’s shipping unit invoice price plus the addition of the discounts.
AromaScan U.S. acquires goods from AromaScan U.K. based on a price list less an agreed upon percentage distributor’s discount. Counsel states that the percentage is within the range of discounts AromaScan U.K. grants to other distributors of identical or similar products. Copies of other distribution agreements were submitted for our examination. However, AromaScan U.S. is the sole supplier of AromaScan U.K. products to U.S. customers. Your office has questioned the use of transaction value based on the fact that AromaScan U.S. has “paid” for their purchases from AromaScan U.K. by borrowing from AromaScan U.K. This loan arrangement is memorialized by a promissory note which AromaScan U.S. executed in favor of AromaScan U.K. Your office discovered that since AromaScan U.S. was incorporated and began importing in 1994, AromaScan U.S. had not made any repayment of the loan that AromaScan U.K. has extended to them in exchange for their promissory note. Additionally, AromaScan, U.S. executed a new promissory note in December, 1996, increasing the face value of the promissory note. Copies of the promissory notes were submitted for our examination. Counsel did submit two proof of payments via bank notices dated November 18 and December16, 1998. Additionally, in the February 5, 1995 submission, Counsel states that AromaScan U.S. intends to make quarterly payments throughout the current (1999) calendar year.
Counsel has provided Customs a copy of their Distribution Agreement that AromaScan U.K. and AromaScan U.S. entered into May 28, 1996. The agreement stipulates that AromaScan U.S. is entitled to receive a discount from AromaScan U.K. list prices. §4.1 of the Distribution Agreement. In addition, §5.1 of the Distribution Agreement provides that risk of loss will pass to AromaScan U.S. upon the delivery of the merchandise to AromaScan U.K.’s carrier. Moreover, §5,2 of the Distribution Agreement states that, notwithstanding the passing of risk of loss, ownership of the property shall not pass to AromaScan U.S. until AromaScan U.K. “has received in cash or cleared funds payment in full of the price of the Products and of all sums due in connection with the supply of all goods and services. . ..” §5.3 of the Distribution Agreement also obligates AromaScan U.S. to hold the goods as AromaScan U.K.’s fiduciary agent and as their bailee. Also, all products supplied by AromaScan U.K. to AromaScan U.S. are presumed to belong to AromaScan U.K. unless AromaScan U.S. can prove otherwise. §5.4 of the Distribution Agreement. In addition, we have reviewed statements from AromaScan U.S. officials in response to a Customs Form (“CF 28"), Request for Information, which indicated that since AromaScan U.S. was incorporated and began importing in 1994, AromaScan U.S. had not remitted any payment against their outstanding balance of the loan that AromaScan U.K. has extended to them to acquire merchandise. As noted above, AromaScan U.S. has recently made two payments to AromaScan U.K.
ISSUE:
Whether the merchandise described above was properly appraised?
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in accordance with § 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 the merchandise when sold for exportation to the United States, plus amounts for certain enumerated additions, including any selling commissions incurred by the buyer. §402(b)(1) of the TAA.
A prerequisite to concluding that there is a transaction value is finding that there is a sale. For Customs purposes, the word "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). While J.L. Wood was decided under the prior appraisement statute, Customs adheres to this definition under the TAA. The primary factors to consider in determining whether there has been a transfer of property or ownership are whether the alleged buyer has assumed the risk of loss, and whether the buyer has acquired title to the imported merchandise. See, Headquarters Ruling Letter (HRL) 544775 dated April 3, 1992; HRL 543633 dated July 7, 1987.
In this case, we can not determine that there has been a “sale for exportation.” Pursuant to §5.1 of the Distribution Agreement that AromaScan U.K. and AromaScan U.S. entered into on May 28, 1996, risk of loss will pass to AromaScan U.S. upon the delivery of the merchandise to AromaScan U.K.’s carrier. However, §5.2 of the Distribution Agreement states that, notwithstanding the passing of risk of loss, ownership of the property shall not pass to AromaScan U.S. until AromaScan U.K. “has received in cash or cleared funds payment in full of the price of the Products and of all sums due in connection with the supply of all goods and services. . ..” §5.3 of the Distribution Agreement also obligates AromaScan U.S. to hold the goods as AromaScan U.K.’s fiduciary agent and as their bailee. All products supplied by AromaScan U.K. to AromaScan U.S. are presumed to belong to AromaScan U.K. unless AromaScan U.S. can prove otherwise. §5.4 of the Distribution Agreement. In addition, AromaScan U.S. had not remitted any payment against their outstanding balance of the loan up until November and December 1998 when AromaScan U.S. made two payments. These payments appear to be lump sum payments which are untraceable to any particular shipment. We note that these payments were made after AromaScan U.S.’s meeting with this office on November 13, 1998.
Notwithstanding the existence of the promissory note AromaScan U.S. has executed in favor of AromaScan U.K., the fact remains that pursuant to the Distribution Agreement title to the merchandise rests with AromaScan U.K. until AromaScan U.K. has “received in cash or cleared funds payment in full of the price of the Products and of all sums due in connection with the supply of all goods and services. . .” The first such payment was made in November 1998 which is conceivably for merchandise that AromaScan U.S. began importing in 1994. Based on this information, we have no basis to conclude that a sale occurred in AromaScan U.S.’s transactions with AromaScan U.K. Therefore, transaction value is not an acceptable basis of appraisement.
Even if we found that a sale had occurred, imported merchandise is appraised under transaction value only if the buyer and seller are not related, or if related, the transaction value is deemed to be acceptable. In this situation, Counsel indicates that AromaScan U.K. and AromaScan U.S. are related parties pursuant to §402(g)(1) of the TAA. § 402(b)(2)(B) of the TAA, provides that transaction value between related parties is acceptable only if an examination of the circumstances of the sale indicates that the relationship between the parties does not influence the price actually paid or payable, or the transaction value of imported merchandise closely approximates the transaction value of identical or similar merchandise in sales to unrelated buyers in the U.S. or the deductive or computed value for identical or similar merchandise.
Under the circumstances of sales approach, if 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 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. Furthermore, the price will not be influenced if it is shown that the price is adequate to ensure recovery of all costs plus a profit that 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. 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; §152.103(j)(2), Customs Regulations (19 CFR 152.§103(j)(2)).
Counsel states that AromaScan U.K. and AromaScan U.S. buy and sell from one another as if they were unrelated. As evidence of this practice, Counsel provided a copy of their Distribution Agreement that AromaScan U.K. and AromaScan U.S. entered into May 28, 1996. §4.1 of the Distribution Agreement stipulates that AromaScan U.S. is entitled to receive a discount from AromaScan U.K. list prices. In addition, §5.2 of the Distribution Agreement provides that risk of loss will pass to AromaScan U.S. upon the delivery of the merchandise to AromaScan U.K.’s carrier. Moreover, §5.2 of the Distribution Agreement states that, notwithstanding the passing of risk of loss, ownership of the property shall not pass to AromaScan U.S. until AromaScan U.K. “has received in cash or cleared funds payment in full of the price of the Products and of all sums due in connection with the supply of all goods and services. . ..” §5.3 of the Distribution Agreement also obligates AromaScan U.S. to hold the goods as AromaScan’s fiduciary agent and as their bailee. All products supplied by AromaScan U.K. to AromaScan U.S. are presumed to belong to AromaScan U.K. unless AromaScan U.S. can prove otherwise. §5.4 of the Distribution Agreement.
As noted previously, AromaScan U.S. had not, until its two recent payments in November and December 1998, made any payment to AromaScan U.K.. for any of the imported merchandise even though AromaScan U.S. had begun importing merchandise from AromaScan U.S. in 1994. The absence of payment combined with evidence of AromaScan U.K. only attempting to recover payment for merchandise shipped subsequent to our November 13, 1998, meeting with Counsel leads to the conclusion, upon an examination of the circumstances of the “sale,” that AromaScan U.S. has not demonstrated that the relationship between AromaScan U.K. and AromaScan U.S. did not influence the price actually paid payable. These terms lead us to conclude that the relationship between AromaScan U.K. and AromaScan U.S. did influence the price actually paid or payable.
Having concluded that the relationship between AromaScan U.K. and AromaScan U.S. influences the price actually paid or payable, transaction value may still be the proper method of appraisement “if the transaction value of the imported merchandise closely approximates-- (i) the transaction value of identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United States; or (ii) the deductive value or computed value for identical merchandise or similar merchandise. . ..” §402(b)(2)(B) of the TAA. Since AromaScan U.S. is the only U.S. importer of AromaScan U.K. products, we do not have evidence of identical or similar importations that were appraised at transaction value. Furthermore, Counsel has not provided previously accepted importations that were appraised using deductive or computed value of identical or similar merchandise which may be used to determine if such a value closely approximates the purported transaction value. Thus, AromaScan U.S. has not established the acceptability of the price under transaction value and we cannot appraise the merchandise under protest pursuant to §402(b) of the TAA.
Since we have concluded that transaction value is not the proper basis of appraisement, we must examine whether there is a transaction value of identical or similar merchandise pursuant to §402(c) of the TAA. Transaction value of identical or similar merchandise refers to a previously accepted and adjusted transaction value of identical and similar merchandise which was exported at or about the same time as the goods being valued. Merchandise is not regarded as identical or similar unless it was produced in the same country as the merchandise being valued. See HRL 543628, dated November 4, 1995. As stated above, AromaScan U.S. is the only U.S. importer of AromaScan U.K. products. We do not have information regarding a previously accepted transaction value of identical or similar merchandise that was exported at or about the same time as the goods subject to the protest. Accordingly, appraisement of the goods under protest cannot be determined pursuant to transaction value of identical or similar merchandise.
Since there is no indication that the importer has elected to apply the computed value method set forth in §402(e) of the TAA before applying the deductive value method of appraisement, the next applicable basis of appraisement is deductive value pursuant to §402(d) of the TAA. No information is available or was submitted to establish appraisement pursuant to
the deductive value method or the computed value method. Thus, we will address the accuracy of your appraisement of the merchandise under §402(f) of the TAA.
Using §402(f) of the TAA, your office appraised the merchandise under protest by adding back the applicable trade discount that AromaScan U.K. extended to AromaScan U.S. The result was appraisement at the value set forth in the price list. If merchandise cannot be appraised under §402(b) - (e) of the TAA, its value is to be determined in accordance with §402(f) of the TAA, which provides that merchandise should be appraised on the basis of a value derived from one of the previous methods, reasonably adjusted to the extent necessary to arrive at a value. §402(f)(1) of the TAA. To the greatest extent possible, values determined under §402(f) of the TAA should be based on previously determined values. SAA at pg. 63. §402(f) of the TAA precludes the use of certain methods such as, methods based on minimum values, arbitrary values or fictitious values.
Trade discounts are routinely given to customers in the normal flow of commerce. In fact, Counsel has provided documentation which details discounts that were extended to AromaScan U.S.’s corporate and government customers. Since discounts from the price list are extended to AromaScan U.S. customers, we find that in the absence of compelling information to the contrary, appraising the imported merchandise at a value in excess of the price AromaScan U.S. charges its customers is arbitrary and is unacceptable pursuant to §402(f)(2)(G) of the TAA.
Pursuant to §402(f)(1) of the TAA, a reasonably adjusted transaction value may be the basis of appraisement. Under §402(f) of the TAA, it is our position that a reasonable adjustment to transaction value would be to recognize that there was a “sale” between AromaScan U.K. and AromaScan U.S. and to find that the circumstances of the sale did not influence the price actually paid or payable, thereby allowing the trade discount extended to AromaScan U.S. Counsel submitted evidence in the form of other distribution agreements to show that AromaScan U.K. grants other distributors discounts that are both less than and greater than the trade discount accorded to AromaScan U.S. so that the discount does not appear to be inappropriate. Appraisement should be based on the AromaScan U.K. invoice price to AromaScan U.S. as a reasonably adjusted transaction value pursuant to §402(f) of the TAA.
HOLDING:
In this case, the rejection of transaction value as the basis of appraisement is correct. Based on the evidence available, we are unable to appraise of the imported merchandise pursuant to the transaction value of identical or similar merchandise set forth in §402(c) of the TAA, the deductive value set forth in §402(d) of the TAA, or the computed value set forth in §402(e) of the TAA. If such information is available, appraisement should proceed pursuant to the hierarchy established in §402(b) of the TAA. Based on the evidence presented, appraisement should be based on the AromaScan U.K.. invoice price to AromaScan U.S. as a reasonably adjusted transaction value pursuant to §402(f) of the TAA. To appraise the merchandise at the price list is an arbitrary value and is precluded from serving as the basis of appraisement under §402(f) of the TAA.
The protest should be GRANTED. In accordance with §3A(11)(b) of Customs Directive 099 3550 065, dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision. Sixty days from the date of the decision, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Thomas L. Lobred
Chief, Value Branch