VAL CO:R:C:V 545456 CRS
District Director
U.S. Customs Service
55 East Monroe Street
Chicago, IL 60603-5790
RE: Internal advice; related parties; transfer pricing; additional payments made by the buyer to the seller; transaction value; computed value
Dear Sir:
This is in reply to a memorandum, dated October 12, 1993, from the Regional Director, Regulatory Audit Division (RAD), requesting internal advice (I/A) regarding the correct basis of appraisement for merchandise imported from Mexico by American Shizuki Corporation ("ASC"), a subsidiary of Shizuki Electric Company, a Japanese corporation. A submission dated July 13, 1993, from Stein Shostak Shostak & O'Hara, counsel for ASC, was attached to the I/A. We regret the delay in responding.
FACTS:
ASC, the buyer in this transaction, supplied U.S. materials and equipment free of charge to its wholly-owned Mexican subsidiary, Shizuki Electronica ("SE"), which used them to manufacture electrical capacitors. SE, the seller in the instant transaction, sold finished capacitors to ASC, its sole U.S. customer. Due to continuing losses, SE was closed on January 29, 1993.
The transfer price of the imported merchandise was negotiated between ASC and SE. However, in addition to the transfer price, ASC sent regular weekly payments to SE which were used to pay the latter's operating expenses, including labor, overhead and administrative costs. While the amounts in question were related to the imported merchandise, they were not identified with specific shipments. RAD advises that on ASC's books, the payments were recorded as a credit to cash and a debit to accounts payable. The latter account reflected the amount ASC owed for imported merchandise. Correspondingly, the payments were recorded by SE as a debit to cash and a credit to accounts receivable. This receivable account was the mirror image of ASC's payable account, and represented the amount SE was due from ASC for the capacitors. The payments were deposited in SE's checking account.
Counsel for ASC maintains that the payments in question should not be included in transaction value. In this regard counsel states that although the payments were included in the "open account" between the parties, they were not considered to be payments for the imported merchandise.
ISSUE:
The issue presented is whether the additional payments made by the buyer to the seller are part of the price actually paid or payable for 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 (19 U.S.C. § 1401a; TAA). The preferred method of appraisement under the TAA is transaction value, defined as the "price actually paid or payable for merchandise when sold for exportation to the United States," plus certain enumerated additions, including the value, apportioned as appropriate, of any assist. 19 U.S.C. § 1401a(b)(1). However, where the buyer and seller of the imported merchandise are related, transaction value is an acceptable basis of appraisement only if the circumstances of sale indicates that the relationship did not influence the price actually paid or payable, or the transaction value closely approximates certain test values. 19 U.S.C. § 1401a(b)(2)(B).
Section 402(g) of the TAA defines related persons as, inter alia, "any person directly or indirectly owning, controlling, or holding with power to vote, 5 percent of more of the outstanding voting stock of any organization and such organization." 19 U.S.C. § 1401a(g)(F). The seller is a wholly-owned subsidiary of the buyer. Accordingly, the buyer and seller are related within the meaning of section 402(g) of the TAA. In the instant case, apart from the question of the payments, no information has been presented to the effect that the relationship influenced the price actually paid or payable. Nevertheless, please note that this ruling is limited in scope to the issue presented. It does not address, and in no way validates, the SE-ASC transfer price.
Section 402(b)(4) of the TAA provides in relevant part that "the term 'price actually paid or payable' means the total payment (whether direct or indirect . . .) made, for imported merchandise by the buyer to, or for the benefit of, the seller." 19 U.S.C. § 1401a(b)(4)(A). In Generra Sportswear Co. v. United States, 905 F.2d 377 (1990), the court held in regard to quota payments that:
[a]s long as the . . . payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in trans action value, even if the payment represents something other than the per se value of the goods. The focus of transaction value is the actual transaction between the buyer and seller . . . .
Id. at 380. As a general matter, it is therefore Customs' position that all payments to a seller are part of the price actually paid or payable for imported merchandise. See also HRL 544640 dated April 26, 1991.
In the instant case RAD has established that ASC recorded the payments at issue as a credit to cash and a debit to accounts payable (goods), while SE treated them as a debit to cash and a credit to accounts payable (goods). Thus the buyer's and seller's own books establish that the payments in question were treated as part of the price of the imported capacitors. Consequently, it is our position that these amounts are part of the price actually paid or payable for the capacitors in accordance with Generra.
We also note that the materials, etc., furnished free of charge by ASC to SE, constitute an assist within the meaning of section 402(h)(1)(A) of the TAA. 19 U.S.C. § 1401a(h)(1)(A). Accordingly, the value of these items, apportioned as appropriate, should be included in the transaction value of the imported merchandise.
HOLDING:
The additional payments constitute part of the price actually paid or payable for the imported merchandise.
This decision should be mailed by your office to the internal advice requester no later than sixty days from the date of this letter. On that date the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS, and to the public via the Diskette Subscription Service, the Freedom of Information Act, and other public access channels.
Sincerely,
John Durant, Director
Commercial Rulings Division