VAL-2 OT:RR:CTF:VS H025216 CMR
U.S. Customs and Border Protection
Port Director
1515 Poydras Street Suite 1700 New Orleans, LA 70112
RE: Internal Advice Request; Transaction Value; “Fallback” Method
Dear Mr. Merriam:
This is in response to a memorandum from the Port of New Orleans forwarding a request for internal advice submitted by Steven W. Baker, as counsel for [the importer]. The request is the result of a Pre-Assessment Survey and Focused Assessment First Follow-up Review by the Office of Regulatory Audit (hereinafter, Regulatory Audit). One objective of the reviews was to determine whether transaction value is the appropriate basis of appraisement of merchandise imported from [the seller]. Regulatory Audit found it to be unacceptable, but agreed to [the importer] seeking internal advice from this office on that issue. The internal advice request seeks a formal determination on a valuation methodology proposed by [the importer], which is not the methodology it was using at the time of the audit reviews.
FACTS:
The importer, [ ], was created by the merger in 2003 of two existing companies in the metals marketing industry, [Party A] and [Party B]. In 2006, the names [Party A] and [Party B] were formally replaced with that of [the importer]. Most of the import transactions which were the focus of the Regulatory Audit reviews were performed by [Party A].
In March 2004, [Party A] entered into an Exclusive Distribution Agreement with [Party C] whereby [Party A] was granted the exclusive right to purchase, market, distribute and resell [the product] and related products in the Western Hemisphere. [Party C] became part of [the seller], specifically becoming [the seller]. Through a Novation Agreement, dated January 8, 2005, [the seller] assumed the responsibilities of [Party C] to sell product to [Party A]. Effective April 1, 2006, [the seller] changed its name to [the seller]. Thus, the original exclusive distribution agreement entered into by [Party A] and [Party C] now applies to the successor parties, [the importer] and [the seller]. We note that [the seller] and [the importer] entered into a new Non-Exclusive Distribution Agreement in October 2008 which became effective on January 1, 2009. With regard to the calculation of the payment for merchandise, we note that there are no material differences affecting our analysis herein.
Although the territory of the distribution agreement is the Western Hemisphere, [the importer] has imported all of the shipments of the product in the transactions at issue under the distribution agreement into the United States. The product is imported in bulk and has been sold only in the United States.
The product is delivered to [the importer], CIF New Orleans. Based on the shipping terms, risk of loss passes to [the importer] when the product is loaded onto a vessel for exportation. However, title does not pass to [the importer] until [the seller] receives payment for the provisional invoice. The “provisional payment” to be paid by [the importer] to [the seller] is a percentage of the Ryan’s Notes low price for the particular product the Monday before the bill of lading date. The Ryan’s Notes price is used as the sales price on the purchase contract and the price on the commercial invoice. However, the commercial invoice indicates that the payment terms are:
[X]% of Invoice value upon presentation of documents under collection terms at sight. Balance upon final settlement.
The “settlement price” is the additional amount paid by [the importer] to [the seller] in addition to the provisional payment. It is the difference between the sales price obtained by [the importer] over and above the provisional payment when it sells the product less a deduction for [the importer]’ profit margin and certain reasonable costs incurred by [the importer] in the distribution of the product. The Exclusive Distribution Agreement provides that if [the importer] sells the product below the Ryan’s Notes low price used to calculate the provisional payment (without the written consent of the Principal ([the seller])), then [the importer] is disqualified from deducting its reasonable costs paid or incurred in distribution of the product.
Under certain conditions, [the importer] may be entitled to a refund of a portion of the provisional payment. If the price level of the product falls below the Ryan’s Notes pricing or if the product fails to meet the specifications set forth in the Agreement and thus cannot be sold at or above the provisional payment price, then [the seller] will refund the difference between the provisional payment and the price obtained by [the importer] at resale, plus [the importer’s] reasonable distribution costs.
At the time of entry, [the importer] has been using the full invoice price, minus international freight, as the basis for appraisement of its entries. This price included costs such as U.S. inland freight, the profit for [the importer], warehousing and financing. This simplified approach did not provide for the proper appraised value of the product as it included amounts which are not part of the appraised value and excluded amounts which are, i.e., proceeds of subsequent sales (the amounts paid to [the seller] after sales of the product by [the importer] and the application of the payment formula agreed to by the parties).
Generally, [the importer] enters into long term contracts with its U.S. customers. Based on those contracts, [the importer] purchases product from [the seller]. When a vessel carrying a shipment arrives in the U.S., the product ordered by [the importer] in that shipment may be used to fill multiple orders from U.S. customers. In limited cases, 100% of a particular shipment may be delivered to a single end customer in the United States, but it is a very unusual situation. Shipments are inventoried usually until needed to fulfill domestic orders. “Spot” sales do occur between [the importer] and its U.S. customers based on the customer’s immediate need and the availability of appropriate product in inventory.
Where excess quantity remains from a purchase order used to fill domestic orders, the excess quantity may be placed in inventory as part of the “blending stock.” Product may be drawn from “blending stock” for purposes of domestic sales. [The importer] tracks the imported product purchases and sales by [the seller] purchase order number and the domestic sales invoice number in order to calculate the final price, i.e., the amount owed to [the seller] or owed to [the importer]. With regard to “blending stock,” when material is moved to blending stock, it becomes part of a new blending order and the import order from which it came is credited with the quantity. The blending orders entail blending the prices of the input products and may involve blending the chemical makeup. Blending occurs in order to use available inventory. However, “blending stock” orders are not the norm as most stock purchased from [the seller] is used to fill domestic orders without the need to “blend.” Therefore, imported stock which is used to fill domestic orders may be traced to the [importer’s] purchase contract with [the seller] and the vessel, and thus the entry, in which it was imported.
In addition to the imported product, [the importer] also obtains a relatively small percentage of product domestically. This domestically sourced product is added to the blending stock. As such, when blending stock is sold, [the seller] receives a portion of the resale price including a portion of the resale price of domestically purchased product.
Counsel for [the importer] argues that the provisional payment based on a percentage of the invoice at entry plus any additional proceeds from resale paid to [the seller] represent a transaction value for the product. However, it is argued that because of the time it takes to calculate the proceeds from sales of blending stock, a formula should be allowed for purposes of determining the transaction value of entries. This
proposed formula would use the invoice price for the imported entry from which the following deductions would be made: the cost of international freight for that transaction, the profit margin for [the importer], the financing costs (based on a written agreement with [the seller]) and an average cost calculated over a set period of time for the costs incurred for resale (consisting of the inland transportation, storage, handling and surveying procedures).
ISSUE:
Is the formula proposed by [the importer] acceptable under transaction value for appraisement of the imported product?
What method of appraisement under 19 U.S.C. § 1401a would be appropriate for ascertaining the dutiable value of the imported product?
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 as the "price actually paid or payable for the merchandise when sold for exportation to the United States" plus certain statutory additions. 19 U.S.C. § 1401a(b)(1). One of the statutory additions is “proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.” 19 U.S.C. § 1401a(b)(1)(E).
Based on the Exclusive Distribution Agreement, [the seller] and [the importer] base the sales prices of the imported product on a formula set forth in the Agreement. The formula utilizes the Ryan’s Notes price as a benchmark price for purposes of the provisional payment and as a measure against which the domestic sales price is judged to determine whether [the importer] may deduct certain distribution costs in calculating the settlement price, i.e, final sales price, between [the seller] and [the importer]. If [the importer] fails to resell the product domestically at or above the most recently published Ryan’s Notes price prior to the domestic sale, [the importer] faces a penalty in calculating the final sales price with [the seller].
Section 152.103(a)(1) states with regard to the “price actually paid or payable”:
General. In determining transaction value, the price actually paid or payable will be considered without regard to its method of derivation. It may be the result of discounts, increases, or negotiations, or may be arrived at by the application of a formula, such as the price in effect on the date of export in the London Commodity Market. The word “payable” refers to a situation in which the price has been agreed upon, but actual payment has not been made at the time of
importation. Payment may be made by letters of credit or negotiable instruments and may be made directly or indirectly. [Emphasis added.]
Counsel for [the importer] has argued that the invoice price at the time of entry, that is, the Ryan’s note price of which the importer pays a set percentage, plus proceeds represents transaction value for purposes of appraisement. However, rather than following the formula set forth in the Distribution Agreement, counsel for [the importer] argues for using the invoice price for the imported entry and deducting: the cost of international freight for that transaction, the profit margin for [the importer], the financing costs (based on a written agreement with [the seller]) and an average cost calculated over a set period of time for the costs incurred for resale (consisting of the inland transportation, storage, handling and surveying procedures).
The proposed formula for calculating the transaction value for purposes of appraisement is not a written formula agreed to by the parties to the transaction, but a proposed methodology for purposes of calculating transaction value for appraisement and determination of duties owed. As it is not the actual practice of the parties in ascertaining the sales prices of the imported merchandise, consideration of such a formula would not be proper for determining transaction value.
If we consider the transaction not as subject to a formula, but as a base payment with additional proceeds to be paid upon the domestic sale by the importer, then we are able to appraise the merchandise under transaction value. In HQ 542746, dated March 30, 1982 and HQ 542701, dated April 28, 1982 (we note that both decisions were in response to Internal Advice Request 182/81), Customs determined that transaction value was the appropriate method of appraisement for a chemical imported in bulk for which proceeds of subsequent resale were paid in addition to a specific base price. If we consider the provisional payment paid to [the seller] by [the importer] to be akin to
the base price in HQ 542746 and HQ 542701, and the additional payments sent to [the seller] by [the importer] after it sells the product in the U.S. as proceeds of a subsequent sale, then transaction value is the proper method of appraisement. In cases where [the importer] receives a refund of a portion of the provisional payment from [the seller], as in HQ 542746 and 542701, we will disregard the decrease for the same reason stated in the cited rulings. Volume 19 U.S.C § 1401a(b)(4)(B) states that:
Any rebate of, or other decrease in, the price actually paid or payable that is made or otherwise effected between the buyer and seller after the date of the importation of the merchandise into the United States shall be disregarded in determining the transaction value under paragraph (1).
As for concerns expressed about the time it takes to complete the domestic sales of product and calculate the additional amounts sent to [the seller], this should not preclude the use of transaction value to appraise the imported merchandise. Additions for proceeds should be made prior to liquidation. Mechanisms exist by which the importer may submit the proceeds information relevant to the appraisement of the imported product prior to the liquidation of the entries, such as by requesting an extension of the liquidation under 19 U.S.C. § 1504(b)(2). Paragraph (b)(1) of § 1504 is directly on point and provides CBP with the ability to extend the liquidation period. It states:
The Secretary may extend the period in which to liquidate an entry if –
(1) the information needed for the proper appraisement or classification of the imported or withdrawn merchandise, or for determining the correct drawback amount, or for insuring compliance with applicable law, is not available to the Customs Service[.]
As liquidation may be extended for a period of 4 years, absent a showing that the importer would be unable to provide the information with regard to proceeds within that time frame, there is no bar to the use of transaction value in this case.
The Reconciliation Program, of which the importer has not availed itself, would seem the best method by which the importer and the port could deal with the appraisement of the imported merchandise. However, we cannot impose the program on an importer; it is a voluntary program. We do ask that this importer consider Reconciliation as we believe it may work best for them and for CBP.
HOLDING:
With regard to the entries at issue, the methodology proposed by [the importer] to appraise the product imported from [the seller] is not an acceptable method of appraisement under 19 U.S.C. § 1401a. Transaction value under 19 U.S.C. § 1401a(b) is the most appropriate method for appraisement of the product at issue.
Sixty days from the date of this letter, Regulations and Rulings of the Office of International Trade will take steps to make this decision available to Customs and Border Protection ("CBP") personnel and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch