VAL RR:IT:VA 546211 CRS
Port Director
U.S. Customs Service
477 Michigan Avenue
Detroit, MI 48226
RE: AFR of Protest No. 3801-94-10793; related persons;
acceptability of transaction value; circumstances of sale
Dear Sir:
This is in reply to an application for further review (AFR) of
the above-referenced protest, dated December 29, 1994, and filed by
Briger & Associates on behalf of [*********, Inc.] (hereinafter
"Company X" or the "protestant"), concerning the acceptability of
transaction value in respect of merchandise imported by the
protestant from its wholly-owned subsidiary, [*************]
(hereinafter "Company Y"). Counsel for protestant filed an
additional submission with your office under cover of a letter
dated February 14, 1995. The AFR and your memorandum of November
20, 1995, were received by this office on December 11, 1995. We
regret the delay in responding.
The documentation submitted in connection with this matter
contains confidential financial information. Any such information
that appears in this decision has been bracketed and will not be
disclosed in copies or versions of this decision made available to
the public.
FACTS:
The instant protest concerns the liquidation or reliquidation
of multiple entries of residential [****************] equipment and
parts thereof, purchased by Company X from Company Y. Your office
contends that transaction value is unacceptable because of the
relationship between the parties and that, instead, the imported
merchandise should be appraised in accordance with the fallback
method. However, the merchandise was actually appraised at the
invoice value plus fifteen percent. In contrast, protestant
maintains that transaction value is indeed the appropriate basis of
appraisement; but, if transaction value is found to be
unacceptable, protestant submits that the imported merchandise
should be appraised in accordance with the computed value method.
The entries in question range from October 1993 to October 1994;
the entries were liquidated/reliquidated between September 1994 and
December 1994.
Company Y sells to Company X based on a transfer pricing
formula established in 1989. Counsel for protestant states that
this formula assumes that certain cost differences are inherent in
domestic sales which are not present in export market sales. For
example, sales in the domestic market must support the maintenance
of a warehousing and dealer distribution network, which in turn
gives rise to significant sales, advertising, warranty, credit and
other administrative costs relative to that market. In contrast,
in export sales these costs would typically be borne by the buyer.
After adjusting for such differences, the formula establishes
a reciprocal arrangement pursuant to which the related companies
buy from and sell to each other at a price equal to standard
manufacturing cost plus [****] percent, which in this instance
corresponds to a standard gross margin of [****] percent. At the
time the transfer pricing policy was adopted it was anticipated
that domestic sales would achieve a standard gross margin of [****]
percent, with the difference between the two rates of return
reflecting the cost differences between domestic and export sales
discussed above. Thus, it was intended that domestic sales would
yield the same net margin as would related-party export sales.
The pricing formula of standard cost plus [****] percent has
been used by the related companies for all merchandise imported
into the United States. In support of this, counsel for Company X
submitted as attachments to the AFR, copies of Company Y's 1993
audited financial statements and the internal management accounts
from which the financial statements were derived. The auditor's
report concludes that the statements were prepared in accordance
with generally accepted accounting principles and present fairly,
in all material respects, the position of the company as at
December 31, 1993. The internal management accounts provide detail
with respect to the individual components of the general expense
category.
In addition, counsel for Company X submitted a detailed
summary of the allocation of costs and expenses as between related
party and non-related party sales in accordance with the formula
agreed to by the parties. Certain costs, such as domestic
warehouse operations, warranty costs and salesmen's commissions
were identified as being directly attributable to domestic sales
and were allocated accordingly. Other costs were identified as
supporting both domestic and export sales and were so allocated.
For example, labor costs were allocated based on the amount of time
devoted to domestic and export sales, respectively. Costs which
could not be allocated on the basis of management estimates were
allocated on the basis of the ratio of net domestic sales to net
export sales. For 1993, domestic sales represented [****] percent
of net sales, while export sales to Company X represented [****]
percent of net sales.
In the submission of February 14, 1995, counsel furnished
additional information in respect of related party sales. Included
in the submission was a schedule showing the calculation of Company
Y's related party pricing, by model number, beginning with the
total manufacturing cost of each model, less an adjustment for duty
rebate, plus the addition for profit. This was supplemented by
more specific calculations in respect of eight models that account
for a significant portion of Company Y's sales to Company X. These
calculations provide detail regarding the components of direct
manufacturing cost and general expenses and profit. The
calculations were supported by Company Y's internal standard cost
calculations. In addition, counsel provided invoices for selected
products showing that those products were actually sold at the
prices derived pursuant to the transfer pricing formula.
Prior to the liquidations/reliquidations that are the subject
of the AFR, imported merchandise purchased Company X from Company
Y was appraised at all ports of entry on the basis of transaction
value. Based on the information submitted, Company Y does not sell
to any unrelated parties in the U.S.
ISSUE:
The issue presented is whether transaction value is an
acceptable basis of appraisement in respect of merchandise imported
by the protestant from its wholly-owned subsidiary.
LAW AND ANALYSIS:
Initially, we note that the protest and application for
further review was timely filed under the statutory and regulatory
provisions for protests (19 U.S.C. 1514; 19 C.F.R. part 174). We
also note that the issues protested are protestable issues (19
U.S.C. 1514).
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 is transaction value, defined as the
"price actually paid or payable for the merchandise when sold for
exportation to the United States," plus five statutorily enumerated
additions thereto. 19 U.S.C. 1401a(b)(1)(D)-(E). However,
transaction value is an acceptable basis of appraisement only if,
inter alia, the buyer and seller are not related, or if related,
the relationship did not influence the price actually paid or
payable, or the transaction value of the merchandise closely
approximates certain "test values." 19 U.S.C. 1401a(b)(2)(B).
The term "test value" refers to values previously determined
pursuant to actual appraisements of imported merchandise. Thus,
for example, a deductive value calculation can only serve as a test
value if it represents an actual appraisement of merchandise under
section 402(d) of the TAA. Headquarters Ruling Letter (HRL) 543568
dated May 30, 1986. See also 19 C.F.R. 152.103(l) in regard to
establishing the acceptability of transaction value.
If imported merchandise cannot be appraised on the basis of
transaction value, it will be appraised in accordance with the
remaining methods of valuation, applied in sequential order. 19
U.S.C. 1401a(a)(1). The alternative bases of appraisement, in
order of precedence, are: the transaction value of identical
merchandise or the transaction value of similar merchandise (19
U.S.C. 1401a(c)); deductive value (19 U.S.C. 1401a(d));
computed value (19 U.S.C. 1401a(e)); and the "fallback" method
(19 U.S.C. 1401a(f)).
Company Y is a wholly-owned subsidiary of Company X;
accordingly, the companies are related persons within the meaning
of section 402(g)(1)(F). Although the fact that the buyer and
seller are related is not in itself grounds for regarding
transaction value as unacceptable, where Customs has doubts about
the acceptability of the price and is unable to accept transaction
value without further inquiry, the importer will be given an
opportunity to supply such further detailed information as may be
necessary to support the use of transaction value pursuant to the
methods outlined above. In the instant case, however, there are no
previously accepted test values. Consequently, the circumstances
of sale approach is the only available means of determining the
acceptability of transaction value.
Under this approach, if the circumstances of sale indicate
that while related, the parties buy and sell from one another as if
they were unrelated, transaction value will be considered to be
acceptable. In this respect, Customs will examine the manner in
which the buyer and seller organize their commercial relations and
the way in which the price in question was derived in order to
determine whether the relationship influenced the price. If it can
be shown that the price was settled in a manner consistent with the
normal pricing practices of the industry in question, or with the
way in which the seller settles prices with unrelated buyers, this
will demonstrate that the price has not been influenced by the
relationship. 19 C.F.R. 152.103(l)(1)(i)-(ii). In addition,
Customs will consider the price not to have been influenced if the
price was adequate to ensure recovery of all costs plus a profit
equivalent to the buyer's overall profit realized over a
representative period of time. 19 C.F.R. 152.103(l)(1)(iii).
Counsel for protestant has submitted information that shows
how the price in question was derived. The information establishes
that the transfer price was calculated according to a formula of
standard cost plus [****] percent. Furthermore, the information
details the allocation of costs between domestic sales and sales to
Company X in accordance with the formula agreed to by the parties.
Pursuant to this formula, costs were allocated between domestic
sales and U.S. sales. Certain costs, such as domestic warehouse
operations, warranty costs and salesmen's commissions were
identified as being directly attributable to domestic sales and
were allocated accordingly. Other costs were identified as
supporting both domestic and export sales and were so allocated.
For example, labor costs were allocated based on the amount of time
devoted to domestic and export sales, respectively. Costs which
could not be allocated on the basis of management estimates were
allocated on the basis of the ratio of net domestic sales to net
export sales. In 1993, domestic sales represented [****] percent
of net sales, while export sales to Company X represented [****]
percent of net sales.
Taking these cost allocations into account, the information
presented establishes first, that Company Y intended to settle
prices with Company X in the same fashion that it settled prices to
unrelated buyers since, to the extent reasonably allocable, the
same costs are reflected in both prices and the same return was
anticipated. Furthermore, the information presented establishes
that while Company Y recorded a pre-tax loss equivalent to [****]
percent of net sales and a loss of [****] percent on domestic
sales, it recorded a profit of [****] percent in its sales to
Company X. Company Y's related party sales were therefore the most
profitable part of its operation. Thus, based on the information
provided, the transfer price was sufficient to recover all costs
plus a profit that exceeded Company Y's overall profit based on the
company's 1993 financial statements. It is therefore our position
that transaction value is an acceptable basis of appraisement.
Finally, we note that the imported merchandise was actually
appraised at the invoice value plus fifteen percent. However,
under section 402(f) of the TAA, the value of imported merchandise
is to be appraised on the basis of a method derived from one of the
methods set forth in sections 402(b)-(e), reasonably adjusted to
the extent necessary. It may not be appraised on the basis of
minimum values or arbitrary or fictitious values. Accordingly,
there is no authority under the TAA to appraise on the basis of
invoice value plus fifteen percent.
HOLDING:
In conformity with the foregoing, the protest should be
allowed in full. The evidence presented demonstrates that
transaction value is an acceptable basis of appraisement in respect
of merchandise imported by the protestant from its wholly-owned
subsidiary.
In accordance with section 3A(11)(b), Customs Directive 099
3550-065, dated August 4, 1993, this decision should be mailed by
your office to the protestant no later than sixty days from the
date of this letter. Any reliquidation of the entry in accordance
with this decision must be accomplished prior to the mailing of the
decision. Sixty days from the date of the decision 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,
Acting Director
International Trade Compliance Division