• HQ 548273
• Apr 17, 2003

• Type : Valuation • HTSUS :
•  Related:   547168; 544314; 546953; 546941   

RR:IT:VA 548273 CC

Michael S. O’Rourke, Esq.
Rode & Qualey
55 West 39th Street
New York, NY 10018

RE: Price actually paid or payable; sale for exportation; fallback method

Dear Mr. O’Rourke:

This is in response to your letter of January 15, 2003, on behalf of Nokia, Inc., requesting a prospective ruling concerning the valuation of mobile phone handsets. FACTS:

According to your submission, Nokia manufactures mobile handsets throughout the world. In order to minimize the dollar value of inventory on its books, Nokia has developed a just-in-time inventory system. Under this system, parts, components, and subassemblies are shipped to the U.S. to warehouses operated by a third-party. Nokia refers to these warehouses as “i-HUBs.” Nokia withdraws merchandise from these i-HUBs when it is needed.

You have requested a prospective ruling based on Nokia’s desire to enter into agreements concerning the importation of goods into i-HUBs and the following information which you have provided.

Nokia, through its Nokia Mobile Phones business group (hereinafter “NMP”) will enter into a Product Purchase Agreement with various unrelated sellers. The terms of sale between NMP and the sellers will be “DDU production line, less freight.” On a quarterly basis, NMP will provide the seller with a Scheduling Agreement forecasting its needs for the quarter, and a Forecast/Demand Visibility Report, outlining NMP’s expected activity for a particular week within the quarter. It will be the seller’s responsibility to ship merchandise based on the above.

NMP will act as importer of record and the merchandise will be sent to an i-HUB. NMP will designate a Logistics Service Provider (hereinafter “LSP”), which will provide the seller with carrier, logistics and warehousing services for the seller’s products. The LSP will be Exel Global Logistics, Inc (“Exel”). Exel, acting on behalf of the seller, will receive imported merchandise.

NMP will enter goods at the price shown on the seller’s pro forma invoice, which is the price at the time of export. That price will represent the price agreed to by NMP and the seller for that quarter. However, that is not the price NMP will pay the seller for the goods. The price paid for the goods will be based on the quarterly price when the goods are withdrawn from the i-HUB. In addition, risk of loss and title for the goods will not pass from the seller to NMP until the goods are withdrawn from the i-HUB.

You state that in the majority of cases the price for merchandise withdrawn from the i-HUB will be the same price on the pro forma invoice. This is because of the just-in-time inventory method, in which you state that 84% of the goods are in an i-HUB for less than 60 days. In addition, you state that historically in this industry, prices have trended downwards. From time to time, there are rare exceptions where the price for a part may increase.

You believe that imported merchandise should be appraised using the transaction value method, with the pro forma invoice price serving as transaction value. If the merchandise cannot be appraised using transaction value, you believe the merchandise should be appraised using the pro forma invoice price under the fallback method.

ISSUE:

Whether the subject merchandise can be appraised using the transaction value method, and, if not, how should the subject merchandise be appraised.

LAW AND ANALYSIS:

Imported merchandise is appraised in accordance with section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA: 19 U.S.C. § 1401a), and the preferred method of appraisement is transaction valuation. Transaction value is the “price actually paid or payable for merchandise when sold for exportation to the United States,” plus five statutorily enumerated additions. The term “price actually paid or payable” is defined as the “total payment (whether direct or indirect…) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.”

Your position is that the price on the pro forma invoice represents the transaction value. Thus by definition, your position is that the pro forma invoice price is the price actually paid or payable. In addition, you argue that using the price on the pro forma invoice as the price actually paid or payable should not be affected by retroactive price changes after importation. In support of your position you contend that there is a sale for exportation from the sellers to NMP. Finally, you argue that although title and risk of loss do not pass to NMP until goods are withdrawn from the i-HUB, we have ruled that title passing after importation does not preclude the use of transaction value.

Concerning whether the pro forma invoice price represents the price actually paid or payable, 19 CFR § 152.103(a)(1) provides the following: 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 the actual payment has not been made at the time of importation (emphasis added). …

The pro forma invoice price is not the agreed upon price. The agreed upon price is not known until the merchandise is withdrawn from the i-HUB and payment is based on the price at time of withdrawal from the i-HUB. It is clear from the definition of payable in 19 CFR § 152.103(a)(1) that the price payable and the price ultimately paid are the same. The pro forma invoice price could not be considered the price payable since it does not always equal the price paid. We note that pursuant to 19 CFR § 152.103(a)(1), we have found that under certain circumstances a pre-determined formula agreed to by the parties prior to importation may be used to arrive at transaction value. See, e.g., TAA #47. However, neither the price paid for the goods withdrawn from the i-HUB nor the pro forma invoice price are based on a predetermined formula used to determine the amount paid for the subject goods. Consequently, it is clear that the pro forma invoice price does not represent the price payable for the subject merchandise.

You argue that a change in the pro forma invoice price and the price upon withdrawal from the i-HUB should not prevent the use of transaction value. You cite 19 U.S.C. § 1401a(b)(4)(B), which provides that “[a]ny 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 importation of the merchandise into the United States shall be disregarded in determining the transaction value.” In addition, you cite the Statement of Administrative Action (SAA), H.R. Doc. No. 153 96 Cong., 1st Sess., reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981) at 46, which states that “[c]hanges in a price actually paid or payable which are arrived at subsequent to the time of importation shall not be taken into account in determining a transaction value.”

As stated above, the pro forma invoice price is not the price actually paid or payable. A change in the pro forma invoice price and the price upon withdrawal from the i-HUB, therefore, does not represent a change in the price actually paid or payable. Consequently, we do not find your argument concerning 19 U.S.C. § 1401a(b)(4)(B) relevant in this matter.

Another argument you raise is that there are sales for exportation for i-HUB-bound merchandise represented by the pro forma invoice price which is fixed at the time of exportation. You cite J.L. Wood v. United States, 62 CCPA 25, 33; C.A.D. 1139, 505 F.2d 1400, 1406 (1974) in support of this position.

In determining whether a bona fide sale takes 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, 61Cust. Ct. 604, A.R.D. 245 (1968). Customs recognized the term "sale," as articulated in the case of J.L Wood, supra, to be defined as: the transfer of property from one party to another for consideration.

However, several factors may indicate whether a bona fide sale exists between a potential buyer and producer. In determining whether property or ownership has been transferred, Customs considers whether the potential buyer has assumed 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.

There are several factors that indicate that ownership of the subject merchandise rests with the sellers until it is withdrawn from the i-HUB. NMP’s not having ownership of the subject merchandise is evidenced by the fact that title does not pass until the merchandise is withdrawn from the i-HUB. In addition, you state, and the terms of sale confirm, that risk of loss does not pass to NMP until the merchandise is withdrawn from the i-HUB. A requirement that NMP must withdraw and pay for merchandise that has been imported into an i-HUB is not present. Thus NMP does not have ownership of the merchandise until it is withdrawn from the i-HUB. In addition, just as NMP does not have ownership of the merchandise until it is withdrawn from the i-HUB, there is no consideration transferred until that time. This is evidenced by the fact that a price is not set, and payment is not made, until the merchandise is withdrawn. Consequently, a sale does not take place until merchandise is withdrawn from the i-HUB. J.L. Wood, therefore, does not support your contention that there is a sale for exportation. Based on all the above factors, there is no sale for exportation for the subject merchandise.

You argue that we have ruled that title passing after importation does not disqualify a sale from being a sale for exportation. You cite Headquarters Ruling Letter (HRL) 547168, dated April 12, 1999, in support of this contention. We have found that the mere fact that title passes to the U.S. purchaser after importation, is not enough to disqualify a sale from being a sale for exportation to the United States. See HRL 544314, dated April 15, 1991, and TAA #59. Those rulings found that the title passing after importation by itself, when all other factors led to the conclusion that there was a sale, would not disqualify a sale from being a sale for exportation. For example, in HRL 544314 “the only element of the sale that occurs in the U.S. is passage of title.” In all of the above rulings, HRL 547168, 544314, and TAA #59, the price was agreed to and set prior to importation. Thus, the facts of those rulings are different from this matter in which the price is not agreed to until after importation and there are other factors, discussed above, which indicate there is not a sale for exportation. Thus, the above rulings do not support your position that there is a sale for exportation.

Based on the foregoing, there is no sale for exportation. Consequently, the subject merchandise cannot be appraised on the basis or transaction value, pursuant to 19 U.S.C. § 1401a(b).

When imported merchandise cannot be appraised on the basis of transaction value, it is 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 or 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)).

The transaction value of identical or similar merchandise is based on sales, at the same commercial level and in substantially the same quantity, of merchandise exported to the United States at or about the same time as that being appraised. (19 U.S.C. § 1401a(c)). We assume for purposes of this ruling there will be no sales of similar or identical merchandise made at or about the same time as the merchandise imported. Consequently, it is not possible to appraise on the basis of the transaction value of identical or similar merchandise. However, we note that if sales of identical or similar merchandise do exist, then transaction value of identical or similar merchandise could be the appropriate basis of appraisement.

Under the deductive value method, merchandise is appraised on the basis of the price at which it is sold in the U.S. in its condition as imported and in the greatest aggregate quantity either at or about the time of importation, or before the close of the 90th day after the date of importation. 19 U.S.C. § 1401a(d)(2)(A)(i)-(ii). This price is subject to certain enumerated deductions. 19 U.S.C. § 1401a(d)(3). You have not chosen to utilize the superdeductive method to appraise the imported parts, components, and subassemblies used to manufacture mobile handsets. The merchandise cannot be appraised, therefore, under the deductive value method.

Under the computed value method, merchandise is appraised on the basis of the material and processing costs incurred in the production of imported merchandise, plus an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind, and the value of any assists and packing cost. 19 U.S.C. § 1401a(e)(1). Since there is no information on which to base computed value, this method is also unavailable.

When merchandise cannot be appraised under the methods set forth in 19 U.S.C. § 1401a(b)-(e), its value is to be determined in accordance with the “fallback” method set forth in section 402(f) of the TAA. The fallback method provides that merchandise should be appraised on the basis of a value derived from one of the prior methods reasonably adjusted to the extent necessary to arrive at a value. 19 U.S.C. § 1401a(f)(1).

You request that if not allowed to be used as the transaction value, the pro forma invoice price be used under the fallback method. In certain circumstances, we have permitted the use of a reasonably adjusted transaction value under the fallback method. In HRL 546953, dated May 5, 1999, and HRL 546941, dated August 11, 1999, we found there was no sale for exportation and thus transaction value was not applicable. In HRL 546953, we found there was no sales for exportation because of the absence of a transfer of ownership, the lack of payment, and the existence of a relationship which influenced the price. In both rulings we found that although transaction value could not be used to appraise the merchandise, under the fallback method a sale could be deemed to have occurred to arrive at a reasonably adjusted transaction value. In HRL 546953, appraisement under the fallback method was based on the invoice price from the foreign seller to the importer.

NMP employs a just-in-time inventory operation so that merchandise does not remain in the i-HUB for a long period of time. Thus, you assert that it is likely that most of the time the pro forma invoice price would be the same as the price paid upon withdrawal from the i-HUB. In addition, based on the facts as presented, the unit price for the imported i-HUB-bound merchandise as it appears on the pro forma invoice prepared at the time of exportation should always be the same as the unit price paid by NMP for the identical product being pulled from the i-HUB. Consequently, there is a method for auditing NMP’s importations, and there is a clear and definite relationship between the pro forma invoice price and the price upon withdrawal from the i-HUB. We also note that you have stated that due to the nature of the business, most times the cost of products will decrease after importation. Consequently, based on these factors, we find the pro forma invoice price acceptable under the fallback method.

Please note that 19 CFR § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.”

This ruling is based on the presented facts. You have stated that the price contained in the pro forma invoice is typically the same price paid for the merchandise when it is withdrawn from the i-HUB. Although some prices paid for merchandise withdrawn from the i-HUB may decline from the price on the pro forma invoice, it is a rare exception that the price would increase. If the price paid on withdrawal from the i-HUB increases from the price in the pro forma invoice, then this ruling may not be applicable in accordance with 19 CFR § 177.9(b)(1). Consequently, when the price paid on withdrawal from the i-HUB increases from the price on the pro forma invoice, NMP should notify Customs of this fact, so that Customs is able to verify that a price increase indeed is only occurring rarely and whether the ruling is applicable. In addition, this ruling is being issued based on the assumption that the unit price for the imported i-HUB-bound merchandise as it appears on the pro forma invoice prepared at the time of exportation matches the unit price paid by NMP for the identical product being pulled from the i-HUB on the date of exportation, which could be verified by Customs.

Finally, you state that Nokia will enter into Product Purchase Agreements with the sellers. No such draft agreements were provided for our review. The applicability of this ruling is subject to review of such agreements by the ports to ensure that the terms of the agreements are consistent with the facts as presented in this ruling. HOLDING:

The subject merchandise cannot be appraised using the transaction value method. Because none of the other methods of appraisement apply, the subject merchandise should be appraised under the fallback method. The pro forma invoice price represents a reasonably adjusted transaction value under the fallback method.

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.gov, by means of the Freedom of Information Act, and other methods of public distribution.


Sincerely,

Virginia L. Brown
Chief, Value Branch