Customs Ruling HQ 547672 - Bona Fide Sale For Export; Related Party Transaction; Transfer Pricing Study; Nissho Iwai American Corporation v. United States Dear Ms. Haage: This is in response to a letter of March 1, 2000 submitted by PriceWaterhouseCoopers (PWC) on behalf of Vol

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HQ 547672
May 21, 2002

Type : Valuation • HTSUS :
Related: 542261; 545800; 547332; 546998

RR:IT:VA 547672 LR

Kathleen M Haage
Area Director New York/Newark
U.S. Customs Service
1210 Corbin Street
Elizabeth, N.J. 07210

RE: Bona Fide Sale For Export; Related Party Transaction; Transfer Pricing Study; Nissho Iwai American Corporation v. United States Dear Ms. Haage: This is in response to a letter of March 1, 2000 submitted by PriceWaterhouseCoopers (PWC) on behalf of Volvo Cars of North America (VCNA) regarding the appraisement of imported vehicles (Model V/S 70). Specifically, PWC requests appraisement of the imported vehicles based on the alleged sale between Volvo Car Corporation (VCC) and Volvo Cars Europe Industry NV (VCEI).

Although the request was for a prospective ruling pursuant to 19 CFR §177.2, there are now current importations of the described merchandise in Newark, Los Angeles, Baltimore and Jacksonville. Accordingly, this request is being treated as a request for internal advice. With the assistance of VCNA's Account Manager, we have been in contact with each of these ports and informed them of the pending request. We have received some comments from Newark and Los Angeles regarding this matter.

According to PWC, although VCNA considers that appraisement should be based on the VCEI-VCC transaction, the imported vehicles at issue are being entered based on the transaction between VCNA and VCC. In many instances, liquidation has been suspended pending this decision. Where liquidation has not been suspended, VCNA has filed protests. In concert with our office, the ports decided that action on the protests would be withheld pending this decision.

On August 22, 2001, a meeting was held with representatives of PWC, VCC and VCNA's parent company, Ford Motor Company. In response to issues raised during the meeting, additional information was submitted by PWC in a letter dated October 23, 2001 and by Ford, in a letter dated December 19, 2001. This decision takes into account all the information submitted on behalf of VCNA along with comments received from the ports.

Confidential treatment has been requested by VCNA for certain information in its submission on the grounds that these materials contain confidential business information. This request has been granted. Therefore, the confidential information included in this ruling is bracketed and will be deleted from the published version.

FACTS: This case involves the importation of Volvo vehicles (Model V/S70) pursuant to a multi-tiered transaction between three related companies, Volvo Cars of North America (VCNA), Volvo Car Corporation (VCC) and Volvo Cars Europe Industry NV (VCEI).

Relationship of the Parties

According to PWC, from March 1, 2000 to the present, VCNA and VCC are wholly owned subsidiaries of Ford Motor Company and VCEI is a wholly owned subsidiary of VCC. Roles of the Parties VCNA is the U.S. importer and American distributor of finished automotive vehicles. PWC states that VCNA is responsible for placing vehicle orders with VCC based on projected dealer forecasts; for purchasing and importing the finished vehicles from VCC; and distributing said vehicles in the United States.

VCC is a distinct legal Swedish entity, primarily responsible for all product and market strategy efforts. PWC states that with respect to the imported vehicles at issue, VCC is responsible for coordinating the orders placed by sales subsidiaries and distributors worldwide (e.g. VCNA) and for the corresponding purchase of the vehicles from VCEI for resale to the distributors (e.g., it orders, pays for, and holds legal title to the finished vehicles prior to their resale to VCNA). With respect to the imported vehicles, it is claimed that VCC's responsibilities include:

research and development, design and technology; provision of technical advice to manufacturer and suppliers; coordinating production schedules based on vehicle orders; setting quality standards; developing delivery specifications; holding inventory stock of finished vehicles on its books until sold for worldwide distribution; bearing most of the financial risk, including credit risk, changes in price, foreign exchange fluctuations, warranty claims and inventory obsolescence; marketing and advertising

PWC states that VCEI is an independent legal entity authorized under the laws of Belgium. PWC indicates that with respect to imported merchandise, VCEI operates as a contract manufacturer, producing finished vehicles in accordance with the designs and know-how provided by VCC. Specifically, PWC claims that VCEI is responsible for the following functions with respect to the production of the vehicles:

local control of costs and financial needs; ownership and maintenance of production tools and equipment; purchasing of raw materials and components required to assemble the cars flow and maintenance of materials and components stock necessary for an efficient manufacturing process; implementation and enforcement of VCC derived quality control procedures and standards; packing and labeling the finished vehicle, in a condition ready for export to the U.S.; coordinating shipment of the finished goods to the U.S. ordering, installing maintenance and repair of the machinery and equipment used to produce the vehicles.

It is claimed that VCEI possesses title to the merchandise, from components to the finished goods state (i.e., the point at which the vehicle is designated as "factory complete" during the production process).

PWC describes in detail the ordering process, the flow of goods and invoicing and payment process as follows:

The Ordering Process

All orders for finished vehicles are placed by the respective parties on a centralized electronic system developed and maintained by VCC known as the Order Management System (OMS). VCNA places its order for vehicles electronically under OMS Market code 31, which signifies that the vehicle is manufactured for the U.S. market. Once the order is electronically input into the system, it is assigned a retail order number and variant code. The OMS confirms acceptance of the order by assigning a corresponding Factory Order Number to the retail order.

VCC does not physically re-issue paper orders to VCEI for the orders placed by VCNA. Instead, it maintains the OMS, which processes VCNA's order information into a production order, and transmits it directly to VCEI's plant. PWC states that VCC ensures that the orders received do not exceed VCEI's production capacity and, if necessary, VCC delays or cancels the initial order.

Upon receipt of an order by VCEI, VCEI provides an order confirmation and status updates to VCC, via OMS, throughout the assembly process up until the point where the vehicle is loaded on the vessel for exportation. After the order is received by VCEI, the vehicle is then assembled and a Vehicle Identification Number (VIN) is assigned.

Flow of Goods and Invoicing

Once the vehicle is assembled a Factory Complete Signal (FC) is reported by VCEI on the OMS. The FC signal causes the vehicle to be invoiced to VCC in the Order Price System (OPS). Subsequently, VCEI delivers the vehicle to the port of exportation at Antwerpen, Belgium, for shipment to the U.S. It is claimed that ownership is transferred from VCEI to VCC when the FC is reported from VCEI on the OMS.

Once the vehicle is loaded on the vessel, VCC's Financial Department initiates the electronic invoice to VCNA. The invoice request is then sent from OMS to the OPS, which decides per country the specific content and layout for the invoice.

Payment Process

VCC processes the invoices it receives from VCEI through the use of an on-line netting process whereby a "Netting System Report" consolidates the invoices payable to VCEI, by VCC, during the particular period in question. When payment becomes due, the invoice payables are netted against the invoice receivables from VCEI, and the difference is then cleared on-line. Payment is made by VCC though a Swedish bank. VCNA uses the same on-line netting process to pay VCC. When payment becomes due, the invoice payables are netting against the invoice receivables from VCC, and the difference is the cleared-on-line. Payment is made by VCNA though a U.S. bank.

PWC submitted a complete paper trail pertaining to a representative VCEI-VCC and VCC-VCNA transaction. These documents are described on pages 24-26 of PWC's March 1, 2000 submission. In addition, a work study report which includes a flow chart of the process described above and a description of the ordering and billing process, was submitted.

PWC also provided a Car Assembly Agreement (Agreement) between VCEI and VCC which pertains to VCC's purchase of vehicles from VCEI. The Agreement describes in detail the obligations of VCEI and VCC, remuneration, and payment terms.

Finally, PWC submitted a Transfer Pricing Industry Comparability Report (Transfer Pricing Report) which it uses to support its claim that the alleged VCEI-VCC sale is an arm's length sale.

PWC claims that the totality of the facts reveal that bona fide sales occurred between VCEI and VCC; and, that this sale is an arm's length sale involving goods clearly destined for exportation to the U.S. Therefore, PWC claims that in accordance with the Nissho-Iwai decision, transaction value must be based on this sale.

ISSUE:

Whether the evidence presented is sufficient to establish that transaction value of the imported vehicles should be based on the alleged sale between VCEI and VCC.

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the United States is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. §1401a. Section 402(b)(l) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for the enumerated statutory additions. In order for imported merchandise to be appraised under transaction value it must be the subject of a bona fide sale between the buyer and seller and it must be a sale for exportation to the United States.

In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed Cir. 1992) the Court of Appeals for the Federal Circuit addressed the method for determining transaction value in a three-tiered distribution system involving a middleman. The Court indicated 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 this regard, 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.

Id. at 509. See also, Synergy Sport International, Ltd. v. United States, 17 C.I.T. 18 (1993) .

In T.D. 96-87, Determining Transaction Value in Multi-Tiered Transactions, Cust. Bull 52/1, January 2, 1997, Customs clarified some of the issues that arise in multi-tiered transactions in determining which is the sale for exportation to the United States for the purposes of determining transaction value. Specifically, T.D. 96-87 states that:

in fixing the appraisement of imported merchandise, Customs presumes that the price paid by the importer is the basis of transaction value and the burden is on the importer to rebut this presumption. In order to rebut this presumption, . . . the importer must prove that at the time the middleman purchased, or contracted to purchase, the goods were 'clearly destined for export to the United States' and the manufacturer (or other seller) and middleman dealt with each other at 'arm's length.' In reaching a decision, Customs must ascertain whether the transaction in question falls within the statutory provision for valuation, i.e., that it is a sale, that it is a sale for exportation to the United States . . . , and that the parties dealt with each other at 'arm's length'.

T.D. 96-87 also sets forth the documentation and information needed to support a ruling request that transaction value should be based on a sale involving a middleman and the manufacturer or other seller than on the sale in which the importer is a party. First, a complete paper trail of the imported merchandise showing the structure of the entire transaction must be provided. Second, if the parties to the requested transaction are related, the importer must provide Customs with information which demonstrates that transaction value may be based on the related party sale as provided in 19 U.S.C. 1401a(b)(2)(B) (i.e., that the circumstances of sale indicate that the relationship did not influence the price or that the transaction value closely approximates certain test values). Finally, sufficient information must be provided with regard to the statutory additions set forth in 19 U.S.C. 1401a(b)(1) (i.e., packing costs, selling commissions, assists, royalty or license fees, and proceeds of any subsequent sale).

In this case, the presumption is that transaction value is based on the price the importer, VCNA, pays to VCC. In order to rebut this presumption, and to base transaction on the price VCC pays to VCEI, there must be sufficient evidence which shows: 1) that the VCEI-VCC transaction is a bona fide sale; 2) if so, that the imported vehicles were clearly destined for exportation to the United States when VCC purchased or contracted to purchase the vehicles from VCEI; 3) if so, that the sale between VCC and VCEI is an arm's length sale; and 4) the amounts to be added to the price actually paid or payable for assists, royalties, etc.

Bona Fide Sale

The term “sale,” as articulated in the case of J.L. Wood v. U.S., 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974), is defined as the transfer of property from one party to another for consideration. However, in considering whether a bona fide sale has taken place between a potential buyer and seller of imported merchandise, no single factor is determinative. Rather, the relationship is to be ascertained by an overall view of the entire situation, with the result in each case governed by the facts and circumstances of the case itself. Dorf International, Inc. v. United States, 61 Cust. Ct. 604, A.R.D. 245 (1968).

Several factors may indicate whether a bona fide sale exists between a potential buyer and seller. In determining whether property or ownership has been transferred, Customs considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, Customs may examine whether the potential buyer paid for the goods, and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. Based on the information provided, we conclude that the VCEI-VCC transaction constitutes a bona fide sale. First, the submitted Car Assembly Agreement between VCEI and VCC xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx] A detailed agreement such as this which specifies the roles of the parties must be given substantial weight.

Second, as evidenced by the document trail, the parties carry out the intent of the Car Assembly Agreement. The submitted documentation demonstrates that VCC orders the vehicles from VCEI and pays VCEI for the imported vehicles. In addition, evidence was submitted which shows that after the vehicle is complete, it is placed on VCC's inventory records until delivery to VCNA. This is consistent with the claim that title transfers to VCC. Although there was some question regarding the applicable terms of sale relating to the VCC-VCVEI transaction, based on the explanation provided by PWC in its March 1, 2000, and further clarified in its October 23, 2001 submission, we are satisfied that VCC acquires title to the vehicles.

Based on the totality of the evidence, we find that the described VCC-VCEI transactions constitute bona fide sales.

Clearly Destined

The next question to be addressed is whether the imported vehicles are clearly destined for exportation to the United States when VCC purchases them from VCEI. We find that they are.

In this case, a complete paper trail pertaining to both the VCNA-VCC and the VCC-VCEI transactions was submitted as required by T.D. 96-87. The submitted documentation indicates that the imported vehicles are destined for exportation to the U.S. throughout the ordering process. As explained by PWC, the process begins with VCNA ordering vehicles which are intended only for distribution to U.S. dealers. Prior to production by VCEI, each vehicle is designated by a manufacturing/market code that specifies the end market in which the vehicle is to be sold. MC 31 is applied to vehicles produced and labeled for the U.S. market. According to PWC, MC 31 vehicles are only sold for export to the United States. In particular, MC 31 vehicles are designed to meet the U.S. Department of Transportation and U.S. Environmental Protection Agency standards and other relevant requirements for the U.S. market (e.g., left-hand steering). PWC claims that only VCNA's dealers can order vehicles produced under MC 31. The MC 31 designation is readily apparent within Volvo's Order Management System (OMS) and appears on all corresponding invoices.

The document trail also shows that the imported vehicles are custom manufactured by VCEI in accordance with the specifications indicated by VCNA when its order is placed. In addition, the vehicles are transported by truck from VCEI's factory to the port of exportation where they are shipped directly to VCNA.

Based on the evidence presented, we conclude that throughout the process, the imported vehicles are clearly destined for exportation to the United States.

Arm's Length

The next and more difficult issue to be addressed is whether the VCEI-VCC sale is an arm's length sale which can serve as the basis for transaction value. Pursuant to 19 U.S.C. §1401(b)(2)(B), a transaction value between a related buyer and seller is acceptable if an examination of the circumstances of sale indicates that the relationship does not influence the price paid or payable. The statute also provides for another method of establishing the acceptability of a related party price (test value method), but no evidence was provided regarding this method. Therefore, our analysis is limited to the former.

Under the circumstances of sale test, the transaction value between related parties will be considered acceptable if the parties buy and sell from one another as if they were unrelated. Customs examines the manner in which the buyer and seller organize their commercial relations and the way they derive a price to determine whether the relationship influenced the price. To meet the circumstances of sale test, VCEI may demonstrate that its transfer price has been settled in a manner consistent with the normal pricing practices of the industry in question. 19 CFR §152.103(l)(1)(ii). Alternatively, VCEI may demonstrate that its price is adequate to ensure recovery of all costs plus a profit which is equivalent to the firm's overall profit realized over a representative period of time (e.g., on an annual basis), in sales of merchandise of the same class or kind. 19 CFR §152.103(l)(1)(iii).

PWC claims that the circumstances of sale test is satisfied because the price between VCEI and VCC is settled in a manner consistent with normal pricing practices of the industry. PWC states that it is generally accepted that the most appropriate indicator of the normal pricing practices of any given industry is provided by comparing the range of uncontrolled (i.e., unrelated) Profit Level Indicators ("PLI") within an industry.

It is PWC's contention that so long as the results of the related party transactions are consistent with the results realized by uncontrolled entities within the industry that are engaged in comparable transactions under comparable circumstances, they would have to be considered consistent with the normal pricing practices of the industry.

The particular methodology utilized by PWC to make these comparisons is set forth in a detailed Transfer Pricing Report. A brief summary is provided below.

The industry selected by PWC for comparison purposes is European Automotive Contract Manufacturers during the period 1996-1998 (Comparable Industry Set). PWC contends that VCEI's responsibilities are consistent with that of a contract manufacturer. According to PWC, a contract manufacturer is merely a service provider that earns a service fee and bears no direct financial or market risk with respect to the products it produces. In this case, PWC indicates that it is VCC, not VCEI, that bears the market risk.

It is important to point out that the focus of the Transfer Pricing Report is on the contract manufacturing industry generally, not on the Automotive Contract Manufacturing Industry. PWC extrapolates the results from the Transfer Pricing Report and applies them to the European Contract Automotive Industry. Of the 372 Worldwide Contract Manufacturer referenced in the Transfer Pricing Report, PWC indicates that 98 are European Automotive Contract Manufacturers. A list of these companies was provided.

The PLI selected by PWC for comparison purposes is Return On Capital Employed (ROCE). According to PWC, ROCE is represented by the ratio of operating income to the sum of the capital employed. Capital employed is described as the firm's operating assets, less non-interest bearing liabilities. (See March 1, 2000 submission, page 19).

According to PWC, under transfer pricing methodology the ROCE is the preferred method to test the arm's length character or operating results of contract manufacturers because it is the measure which most reliably and accurately captures the direct and indirect costs, expenses and profits associated with the provision of the specific services provided.

In this case, PWC claims that during the period 1996-1998, the middle 50% ROCE range for the Comparable Industry Set of European Automotive Contract Manufacturers was 7.23% - 21.82%, with a median of 12.87%. PWC states that VCEI's ROCE percentage during 1998 was [xxxxxx] which falls within this range and is above the median. Based on these results, PWC claims that the VCEI-VCC transfer price was settled in a manner consistent with the normal pricing practices of the industry in question.

PWC also states that although the ROCE is the preferred method to test the arm's length character of the operating results of contract manufacturers, this ROCE percentage can be translated into a full cost markup percentage. In its March 1, 2000 submission (p. 20) PWC states that VCEI's ROCE of [xxxxx] is the equivalent of a [xxxxx] full cost markup. PWC claims that this figure indicates that the VCEI-VCC price is adequate to ensure recovery of all costs plus a profit consistent within the industry in question, another indication that the VCEI-VCC price is acceptable.

In analyzing PWC's claim that the VCEI-VCC transaction is an acceptable transaction value, the first question we must address is whether the information presented by PWC regarding the company to industry comparison is sufficient to establish that the price between VCEI and VCC is settled in a manner consistent with normal pricing practices of the industry. We conclude that it is not.

In order to establish a normal pricing practice in the industry, objective evidence is needed regarding how prices are set in the industry in question. For example, in Headquarters Ruling Letter (HRL) 542261, March 11, 1981 (TAA No. 19), Customs determined that where the transfer price was defined with reference to prices published in a trade journal (the posted price) and the posted price was commonly used by other buyers and sellers as the basis of contract price, the transfer price was acceptable. In such case, a determination could be made that the transfer price was settled in a manner consistent with normal pricing practice in the industry.

However, Customs reached the opposite conclusion in HRL 545800, June 28, 1996. There, a pricing formula was utilized to determine the transfer price; i.e., the transfer price shall equal a specified percentage of the buyer's resale price. In order to show that transaction value was acceptable, the importer submitted information regarding its gross profit realized along with information about the normal profit in the men's and boys' apparel industry, the Standard Industrial code classification into which the seller's business activities fell. Even though the gross profit realized by the importer through the application of the pricing formula was similar to the normal gross profit in the men's and boy's industry Customs concluded that the information provided did not establish that the price was settled in a manner consistent with the normal pricing practices in the industry:

no evidence has been presented to establish that the pricing formula employed by the parties is a normal practice among unrelated parties in the industry in question, presumably the men's and boys' sweater industry. The information provided on the gross profit of the men's and boys' apparel industry also fails to show that the circumstances of sale between the parties indicate that the price actually paid or payable for the imported merchandise was not influenced by the relationship of the parties. Even if the general expenses and profit realized by (the seller) are within the range of what constitutes the usual general expenses and profits of the relevant industry, this would not show that price between (the buyer and the seller) was settled in a manner consistent with normal pricing practice in the industry. (emphasis added)

Here, objective evidence is lacking regarding how the transfer prices at issue are set and the normal pricing practice in the industry in question. Even assuming the industry in question is the automotive contract industry, here, the submitted information merely provides a broad range regarding the chosen price level indicator, i.e., the ROCE. It does not provide any objective criteria regarding how the industry sets its prices. A review of the ROCE for the listed 98 European Auto Suppliers shows a wide range from 0.65% to 154.75%. Even if we look only at the middle 50 percent, the range is still considerable (7.23% - 21.82%,). Based on these figures, we cannot conclude that there are any normal pricing practices in the industry.

Thus, the mere fact that VCEI's ROCE falls within the range of the ROCE for other Automotive Contract Manufacturers does not, in our view, establish either the manner VCEI used to establish its prices or that its prices are established in a manner consistent with the normal pricing practices in the industry.

In addition, based on the evidence presented, we cannot ascertain whether the data presented actually pertains to the pricing practices of the "industry in question." The transactions at issue involve the sale of the imported Volvo vehicles. VCEI is the manufacturer of these vehicles. As such, Customs is of the view that the industry in question would consist of other manufacturers of comparable vehicles. Since no information (other than the names) of the companies comprising the PWC's Comparable Industry Set were provided, it is impossible to reach any definite conclusions about whether the pricing practices of these companies are relevant.

There are other problems with using the conclusions in the Transfer Pricing Report to establish that the VCC-VCEI is an acceptable transaction value. First, as noted in HRL 547332, January 22, 2002, if the parties do not set their transfer prices based on the method described in the transfer pricing study, the study has no relevance. There is no indication here how VCEI and VCC determine the transfer prices or that VCEI actually used the methods discussed in its submissions. Second, that ruling provides that the study must be contemporaneous with the importations at issue. Here, the study covers the period 1996-1998. Even if it were contemporaneous for some of the transactions at issue, it would have not have any relevance to any future VCNA importations or other importations which fall outside of this time period.

Also, the profit level indicator comparisons for the Comparable Industry Set were determined based on company function and risk, rather than on product sold. Even when PWC narrowed the comparison to include only European Automotive Contract Manufacturers, the focus was still on function and risk rather than on product sold. This is not how the circumstances of sale test has been applied by Customs. Finally, the methodology employed in the transfer pricing report takes into account the ROCE for each company on an aggregate, rather than product-by-product, basis. Absent a determination that the other companies manufacture only merchandise of the same class or kind, these comparisons are not particularly relevant for purposes of applying the circumstances of sale test set forth in the Customs Regulations.

Based on the above considerations, we find that the company to industry comparisons submitted by PWC do not establish that the VCEI-VCC transfer prices are acceptable arm's length transactions.

Although PWC indicates that Customs previously approved a similar company to industry comparison in HRL 546998, January 19, 2000, involving Seiko Corporation, there were material differences in the underlying facts of that case.

First, in Seiko, the Comparable Industry Set consisted only of 6 companies and detailed information about each of these companies was provided to Customs. Based on the descriptions it appeared that these companies were engaged in the sale of similar merchandise as Seiko. In the instant case, the Comparable Industry Set consists of 98 companies and no detailed information was provided for any of these companies. All that we know is that the companies were characterized as European contract manufacturers in the automotive industry. Based on the information provided, we cannot determine whether the 98 European contract manufacturers sell only goods of the same class or kind as VCEI.

More importantly, in Seiko, comparison information on full cost markup was available for the manufacturer's parent company. Specifically, the ruling states that:

among the figures and analyses provided to Customs concerning the full cost markup between the various companies’ figures, we find the comparison between SLHK’s 2.1% markup and SCJ's 1.2% markup most relevant for consideration pursuant to the TAA. These amounts show that SLHK’s price adequately ensures its recovery of all costs plus profit equivalent to SCJ’s, or the firm’s, overall profit, over an appropriate time period, for sales of timepieces and clocks, that is, merchandise of the same class or kind. Moreover, the markup comparison between SLHK to SCJ, as well as to the other companies selling merchandise of the same class or kind, indicate that SLHK’s cost and profit figures are consistent with the market as a whole. Such consistency demonstrates that the price between SLHK to SCJ also has been settled in a manner consistent with the normal pricing practices of the industry. Accordingly, the evidence demonstrates that the price has not been influenced by the relationship.

While HRL 546998 did take into account the company to industry comparisons in determining that the related party price was an arm's length price, this conclusion was based primarily on the fact the manufacturer's price adequately ensures its recovery of all costs plus profit equivalent to SCJ’s, or the firm’s, overall profit, over an appropriate time period, for sales of timepieces and clocks, that is, merchandise of the same class or kind. Taking into account the figures regarding SCJ's markup, Customs also concluded that this information showed that the manufacturer's costs and profit figures were consistent with the market as a whole.

In the instant case, no such comparison information regarding VCC's full cost markup was provided. Therefore, it is not possible to determine whether VCEI's price adequately ensures its recovery of all cost plus a profit equivalent to the firm's overall profit for sales of merchandise of the same class or kind. Moreover, without this data we cannot ascertain whether, as stated in Seiko, "taking into account the markup comparison between the (subsidiary and parent), as well as to the other companies selling merchandise of the same class or kind, the (subsidiary's) cost and profit figures are consistent with the market as a whole." In conclusion, we find that the evidence presented is insufficient to establish that the VCEI-VCC transfer price is settled in a manner consistent with the normal pricing practices in the industry or that VCEI's price is adequate to ensure recovery of all costs plus a profit equivalent to the firm's overall profit realized . . in sales of merchandise of the same class or kind. Therefore, the evidence does not establish that the VCEI-VCC sales is an arm's length sale which can serve as the basis for transaction value. Statutory Additions

As indicated above, in T.D. 96-87, Determining Transaction Value in Multi-Tiered Transactions, Customs delineated the evidence that must be provided in a ruling request that transaction value should be based on a sale involving a middleman and the manufacturer or other seller rather than on the sale in which the importer is a party. Among other things, T.D. 96-87 states that in order to determine whether a particular transaction may be the basis for transaction value, the requestor must provide Customs with sufficient information regarding the amounts, if any, of the statutory additions set forth in 19 U.S. C. 1401a(b)(1). For example, if the importer claims that transaction value should be based on the sale between the middleman and the manufacturer, the importer must inform Customs whether the middleman provided any assists to the manufacturer and if so, the value of the assists and how the value was determined. If the importer does not have this information, transaction cannot be based on this sale.

In this case, we note that VCC's invoice price to VCNA is [xxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx]

The Transfer Pricing Report places much weight on the fact that VCEI operates only as a contract manufacturer and that all the costs (and risks) relating to research and product development and other intangibles, (patent and trademarks) are borne by VCC. [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx].

Clearly, the appraised value of the imported vehicles must incorporate VCC's research and development costs and other intangibles relating to such vehicles and if not already included in VCEI's price, they would have to be added. Although PWC acknowledges that certain additions must be made to the first sale price including research and engineering costs incurred during the development process which are attributable to the imported vehicles and costs for equipment and tools provided to external suppliers which are used for the production of components contained by the imported vehicles, no details about the value of these additions were provided as required T.D. 96-87. In addition, no information was provided regarding the other statutory additions (i.e., royalties, proceeds, etc). The lack of this information is another reason why the VCEI-VCC sale cannot be used as the basis for transaction value.

In summary, we find that the information submitted does not establish that transaction value can be based on the VCEI-VCC sale. The information does not demonstrate that the relationship between the parties did not affect the price; nor was sufficient information provided regarding the statutory additions.

HOLDING: Based on the evidence presented, the transactions described between VCEI and VCC constitute bona fide sales of Volvo vehicles clearly destined for exportation to the United States. However, these sales cannot be used as the basis for transaction value because the evidence is not sufficient to show that the sale was an arm's length sale. In addition, sufficient information has not been provided regarding the statutory additions.

Please notify VCNA through its representative, PWC, of this 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.treas.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Virginia L. Brown
Chief, Value Branch