RR:IT:VA 547027 GOB
Area Director
Port of New York, JFK Airport
U.S. Customs Service
Building #77
Jamaica, NY 11430
RE: Internal advice request; Transaction value of imported merchandise; Retroactive price adjustment
Dear Sir:
This in reply to your memorandum of March 4, 1998, which forwarded the request for internal advice submitted on behalf of Fownes Brothers & Co., Inc. (“Fownes”). We regret the delay in responding.
FACTS:
The internal advice request arose in the context of a letter of October 6, 1997 from counsel for Fownes advising your office of a retroactive price increase covering gloves imported from the Philippines.
The documentation of record, which consists of information provided by counsel for Fownes and information provided by your office, indicates the following facts.
The subject merchandise was purchased by Fownes from Pulido Apparel Company, Inc. (“Pulido”) during 1996. Prior to purchasing gloves from Pulido, Fownes had purchased gloves from its wholly-owned subsidiary, Phil Gloves, Inc. (“Phil Gloves”; this entity is also known as “Fownes Asia”).
Counsel has provided a “Purchasing Agency Agreement” dated October 28, 1997 between Fownes and Fownes Asia. By its terms, the agreement was effective on October 1, 1997.
In an affidavit dated September 29, 1997, Thomas Gluckman, president of
Fownes, states:
Commencing in the second quarter of 1996, Pulido began to voice discontentment with the negotiated prices. In late August of the year, PGI [Phil Gloves] personnel, acting as our liaison, reviewed Pulido’s financial condition and agreed with it that it had accepted prices which were insufficient to cover its expenses. What had apparently happened was that Pulido’s negotiating position and ultimate agreement as to prices were based on cost estimates that were overly optimistic on its part as to overhead ... Pulido requested that we retroactively increase the prices of the merchandise by 15%, retroactive to January, 1996 ...
I strongly resisted the idea of any retroactive price increase as we had negotiated firm and binding prices ... However, I also had my long term strategy for Fownes to consider, and a key part of this strategy was to increase the amount of orders to Pulido and have it ... remain our key source of supply of gloves from the Philippines.
Matters reached a crisis point in the last month of 1996, when after discussions with Pulido management, it was clear that Pulido would rather go out of business than sustain the significant loss for 1996 that it was incurring ... Under the circumstances, I agreed that Pulido could have a retroactive price increase of $200,000 ...
To summarize, at the end of 1996 I agreed to a retroactive price adjustment covering styles imported from Pulido ... in that year.
Counsel has submitted a letter of August 23, 1996 to Mr. Gluckman from the president of Phil Gloves in which a 15% price increase dating back to January 1, 1996 was discussed and deemed necessary. That letter reflects that the matter was discussed during Mr. Gluckman’s “April visit.” The record also includes an undated correspondence to Mr. Gluckman from the Phil Gloves president that is a follow-up to the August 23, 1996 letter. The undated correspondence states that Pulido “would rather close up than incur substantial losses such as in 1996.”
Counsel has also submitted a Fownes “adjusting journal entry” for the period December 1996 which was prepared on March 14, 1997 “to record [the] price adjustment.” The entry reflects a Pulido receivable of $200,000. Counsel has further provided a document of June 17, 1997 entitled “Details of Pul[ido] Price Adjustments” which indicates the revised prices of the many style numbers pursuant to the price adjustment at issue. A schedule of Pulido job orders, shipments, and advances dated May 29, 1997 and sent from Pulido to Fownes refers to a $200,000 “adjust. in 1996 billing prices.”
Counsel claims that “[t]he terms of sale gave neither party the right to a price increase or decrease, or any increase or decrease in compensation of any other nature, under any circumstances ... While Fownes was under no obligation to do so, and had not agreed to any retroactive price increase in the past, it ultimately agreed to the price increase - after the merchandise had been exported.”
In response to our request for additional information, counsel provided a memorandum of Mr. Gluckman dated June 30, 1999 in which he states:
... when I received the August 23 letter from Helmut Dosch regarding Pulido’s price adjustment, I advised him that this was out of the question. When I went to Manila at the end of October and met with him at our main office on October 29-31, 1996, I was forced to reconsider given the facts our C.F.O. and others presented to me. I knew I would have to make some adjustment if we continued doing business with Pulido. The amount of the adjustment wasn’t finalized until the end of December.
At any time until the end of December I could have decided not to make any price adjustment and Pulido would not have had any legal recourse and would have had to accept this decision.
The record does not reflect any other retroactive price increases by Fownes. At oral conference, counsel stated that aside from the subject price increase, Fownes has never retroactively increased the prices it has paid.
There is certain information in the file to the following effect. Phil Gloves and Pulido have the same address and telephone number, and they have common employees. One official who is president, director, shareholder of Pulido is corporate secretary and a major shareholder of Phil Gloves. A second official who is a director and shareholder of Pulido is a director of Phil Gloves.
Counsel for Fownes states as follows with respect to the relationship between the parties and the roles of two individuals. Neither Fownes nor Phil Gloves is related to Pulido within the meaning of the customs laws. One individual, Orfelia Fernando, was appointed a director of Phil Gloves in 1996 “solely because the Phillippines laws require the company, being foreign owned, to have a minimum of five directors and because of her prior and long term connection to the company.” Ms. Fernando was a private secretary (not corporate secretary) at Phil Gloves until approximately 1984. From 1984 until 1993, when she retired, Ms. Fernando was an administrative manager of Amoy Fashion Gloves, Inc., a Fownes’ affiliate in China. Ms. Fernando owns 20 shares of Pulido stock, of which there are 3,060 shares issued. Jose Villanueva is the president of Pulido. He was legal counsel, corporate secretary, and a member of the board of directors of Phil Gloves until resigning in 1994.
Counsel for Fownes states that Phil Gloves and Pulido have different business addresses. Phil Gloves permits Pulido to use its Manila office “from time to time as necessary for obtaining visas and in dealing with Philippines Customs and other administrative authorities located in the capital.” Counsel further advises that in 1997 Phil Gloves rented one building at Pulido’s headquarters for limited production and warehousing operations.
ISSUE:
Whether $200,000 paid by Fownes to Pulido is part of the transaction value of the imported merchandise?
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 primary basis of appraisement under the TAA is transaction value, which is defined as "the price actually paid or payable for the imported merchandise when sold for exportation to the United States," plus certain enumerated additions thereto to the extent they are not otherwise included in the price actually paid or payable. 19 U.S.C. 1401a(b)(1). Transaction value is an acceptable basis of appraisement, however, only if, inter alia, the buyer and seller are not related, or if related, the circumstances of sale indicate that the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain "test values," i.e., previously accepted values of identical or similar merchandise. 19 U.S.C. 1401a(b)(2)(B).
In Ruling 542315 dated May 13, 1981 (TAA #25), we stated that “retroactive price adjustments would not negate previously established transaction values.”
In Ruling 542797 dated May 19, 1982 (TAA #48), we cited Ruling 542315 and stated:
... if the transfer price submitted to Customs properly reflects the agreement between the parties, and the relationship is found not to influence the price charged, then transaction value as represented by that price without subsequent adjustment, is applicable. The retroactive payments are not considered part of the price paid or payable for the merchandise and therefore are not dutiable.
Similarly, in Ruling 544628 dated March 11, 1992, where the importer and the manufacturer renegotiated a price reduction of 25% subsequent to exportation, we held that the price reduction was not to be taken into account in determining transaction value.
In the subject case, there is no evidence upon which we may conclude that Fownes and Pulido are related parties within the meaning of section 402(g) of theTAA (19 U.S.C. 1401a(g)).
Additionally, there is no documentation of record upon which we may conclude that the price adjustment of $200,000 with respect to the subject merchandise was agreed to prior to the sale for exportation of the merchandise.
Accordingly, based upon the above-stated facts and administrative precedent, we determine that the $200,000 price adjustment is not part of the transaction value of the subject merchandise.
HOLDING:
The $200,000 paid by Fownes to Pulido is a retroactive price adjustment which is not part of the transaction value of the merchandise.
You are to mail this decision to the internal advice applicant no later than 60 days from the date of this letter. On that date, 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