VAL:RR:IT:VA 548503 jsj
Mr. Robert S. Strauss
Schoenberg, Fisher, Newman & Rosenberg, Ltd.
222 South Riverside Plaza
Suite 2100
Chicago, Illinois 60606-6101
Re: Transaction Value; Related Parties; Circumstances of Sale.
Dear Mr. Strauss:
The purpose of this correspondence is to respond to your request dated March 3, 2004. The correspondence in issue requested, on the behalf of Ringspann Corporation (Ringspann), a binding valuation ruling concerning the appraisement of merchandise pursuant to the transaction value method when the sales transaction involves related parties.
This ruling letter is being issued subsequent to a review of the following: (1) Submissions dated August 1, 2003, August 18, 2003, March 3, 2004 and May 28, 2004; (2) The Ringspann GmbH resale discount schedule, [xxxxxxxxxx], identified by Ringspann as Exhibit 1, and the Ringspann GmbH resale discount schedule, [xxxxxxxxxx], identified by Ringspann as Exhibit 2 attached to the submission of August 18, 2003; (3) The “License and Know-How Agreement By and between Ringspann GmbH and Ringspann Corporation;” (4) The response of Ringspann Corporation to electronic correspondence sent to counsel on October 24, 2003; (5) Seven Ringspann GmbH invoices, one issued to [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx], one issued to [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx] and five issued to entities related to Ringspann GmbH; (6) Two Ringspann GmbH resale discount schedules each identified as [xxxxxxxx] one in German and one in English; (7) Ringspann resale discount schedules identified as [xxxxxxxxxx] and [xxxxxxxxx] for sales to Ringspann related entities Ringspann-Elecon and Ringspann Corporation, respectively; and (8) A Ringspann GmbH quantity discount scheduled entitled: “List of Quantity Discounts Sprag Assemblies DX, SX and UX Ringspann-Iberica and Ringspann Corporation.” Customs and Border Protection additionally notes significant electronic mail correspondence directed to counsel for the importer addressing the type of information necessary to resolve the issue posed.
Electronic correspondence received from counsel for the importer on October 27, 2003, in response to electronic correspondence from CBP, confirms for the correspondence dated August 18, 2003 that Exhibit 1 should be identified as Exhibit 2 and vice versa. CBP will, through the remainder of this ruling letter, refer to the Exhibit 1 as referencing the Ringspann GmbH resale discount schedule [xxxxxxxxxx], as the resale discount schedule extending discounts to Ringspann GmbH’s subsidiaries and “representatives” other than Ringspann Corporation and Ringspann Elecon. Exhibit 2, Ringspann GmbH resale discount schedule [xxxxxxxxxx], will reference the resale discount schedule extending discounts to Ringspann GmbH’s Ringspann Corporation and Ringspann Elecon subsidiaries.
Ringspann, in the initial ruling request and in this subsequent request, has sought confidential treatment pursuant to 19 C.F. R. 177.2 (b)(7) for the information contained in the Ringspann GmbH resale discount schedule, [xxxxxxxxxx], identified as Exhibit 1, the Ringspann GmbH resale discount schedule, [xxxxxxxxxx], identified as Exhibit 2, the “License and Know-How Agreement By and between Ringspann GmbH and Ringspann Corporation” and seven invoices of Ringspann GmbH, all of which were attached to either the correspondence of counsel dated August 18, 2003 or the submission dated March 3, 2004. Customs and Border Protection will extend confidential treatment in accordance with the request of counsel for Ringspann Corporation. Information determined to be confidential will be denoted in [brackets] in this ruling letter and will be redacted in the public version.
FACTS
Ringspann GmbH is a German company that manufactures and sells sprags, sprag chains and sprag cages, also known as “cage freewheel” and “freewheel cage.” Ringspann Corporation is a company domiciled in the United States that is a wholly owned subsidiary of Ringspann GmbH. Ringspann Corporation purchases sprags, sprag chains and sprag cages from Ringspann GmbH.
The Ringspann GmbH resale discounts schedules provided to CBP establish the following discounts for sprag, sprag chains and sprag cages:
Schedule Discount
[xxxxxxxxxx xx] %
[xxxxxxxx xx] %
[xxxxxxxx xx] % (German version)
[xxxxxxx xx] % (English version)
[xxxxxxxxxx xx] % and
[xxxxxxxxxx xx] %.
It is the understanding of CBP that Ringspann Corporation and another Ringspann GmbH-related entity receive “an additional [xx]% resale discount (leading to a total resale discount of [xxx] %)” because they are licensees of Ringspann GmbH’s know-how pursuant to the know-how licensing agreement.
The Ringspann GmbH quantity discount schedule lists a quantity discount of [xxx] percent for purchases of [x] or more items numbered: [xxxxxxxxxxxx]. The discount schedule indicates that it is applicable for sales to Ringspann-Iberica and Ringspann Corporation. Counsel’s statement to CBP suggests that it is the same quantity discount offered to all Ringspann GmbH customers, related or otherwise.
The Ringspann GmbH invoices provided to CBP with the importer’s submission of March 3, 2004 indicate resale discounts to the unrelated entities, [xxxxxx] and [xxxxxxxxxxxxxxxxxxxx], of [xxxxxxxxxx (xx)] percent. [xxxxxx] purchased [xxxxxxxxxxxxxxxxxxxxx] in June of 2003 and [xxxxxxxxxxxxxxxxxxxx] purchased [xxxxxxxxxxxxxxxxxxxxxxxx] in September of 2003. [xxxxxxxx], additionally, received a quantity discount of [xxxxxxxxxxxx (xx)] percent on the purchase of [xxxxxxx] items. Counsel states that [xxxxxxxxxxxxxxxxxxxxxx] did not receive a quantity discount “due to the small size of [its] transaction.” [xxxxxxxxxxxxxxxxxxxxxxxxx] purchased [xxxx] items. CBP received no information establishing how quantity discounts were determined with the exception of the related-party quantity discount schedule. The terms of sale are understood by CBP to be, in part, “Free german border / airport-FRA.” The [xxxxxx] and [xxxxxxxxxxxxxxxxxxxxxxxxxx] invoices state: “See terms overleaf,” but that aspect of the invoices was not provided to CBP.
Ringspann GmbH’s invoices to the related entities indicate resale discounts of [xxxxxxxx (xx)] percent for items identified as [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxx and xxxxxxxxxxxxxxx]. Item [xxxxxxxxxxxxxxxxxxxxxxxxx] when sold to a related entity was extended a [xxxxxxxxxxx (xx)] percent resale discount. The quantity discounts in sales to the related entities were [xxxxxxxxx (xx)] percent, [xxxxx (xx)] percent and [xxxxxxxxxx (xx)] percent. The quantities sold were: [xxxxxx, xxxx, xxxxxxx, xxxxxx and xxxxxxxxxxxxxx]. Three of the invoices to related entities did not include terms of sale. Two of the invoices noted terms of sale, in part, of: “Free german border / airport-FRA,” and “See terms overleaf.” The “overleaf” was not provided.
ISSUE
May Ringspann Corporation, a wholly owned subsidiary of Ringspann GmbH, use the transaction value method of appraising imported merchandise for merchandise purchased from Ringspann GmbH ?
LAW AND ANALYSIS
The federal agency responsible for interpreting and applying the United States Code and the regulations of U.S. Customs and Border Protection, as they relate to the final appraisement of merchandise, is Customs and Border Protection. Customs and Border Protection, in accordance with its legislative mandate, fixes the final appraisement of imported merchandise in accordance with Section 402 (b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979.
The preferred method of appraisement is transaction value. Transaction value is the “price actually paid or payable,” plus amounts equal to the five statutorily enumerated additions. 19 C.F.R. 152.103 (a) and (b). Recourse to the transaction value method of appraisement is, however, limited to, among other circumstances, those transactions in which “[t]he buyer and seller are not related, or the buyer and seller are related but the transaction value is acceptable.” 19 C.F.R. 152.103 (j)(1)(iv). Transactions between a related buyer and seller are acceptable “if an examination of the circumstances of sale indicates that their relationship did not influence the price actually paid or payable” or if the transaction value closely approximates certain test values. 19 C.F.R. 152.103 (j)(2).
The regulations of Customs and Border Protection define “Related persons” in 19 C.F.R. 152.102 (g). “Related persons” are:
Members of the same family, including brother and sisters
(whether by whole or half blood), spouses, ancestors, and lineal descendants.
Any officer or director of an organization, and that organization.
Any officer or director of an organization and an officer or director of another organization, if each individual also is an officer or director in the other organization.
Partners.
Employer and employee.
Any person directly or indirectly owning, controlling, or holding with power to vote, five percent or more of the outstanding voting stock or shares of any organization, and that organization.
Two or more persons directly or indirectly controlling, controlled by, or under common control with, any person.
Counsel for Ringspann Corporation advises CBP that Ringspann GmbH and Ringspann Corporation are “related persons” for the purposes of the Customs laws. Customs and Border Protection has made no independent determination. Counsel suggests that although the buyer and seller are related, the relationship does not influence the price actually paid or payable for imported merchandise and the transaction value method of appraisement is acceptable pursuant to the circumstances of sale test.
Customs and Border Protection has not been provided with previously accepted values that could serve as “test values” pursuant to 19 C.F.R. 152.103 (j)(2)(i)(A) and (B) and, in accordance with the suggestion of counsel for the importer, will only employ the “circumstances of sale” analysis. This office initially notes, in accordance with CBP regulations, that CBP “shall not disregard a transaction value solely because the buyer and seller are related.” 19 C.F.R. 152.103 (l)(1). The focus of CBP in examining the transfer pricing arrangement between Ringspann GmbH and Ringspann Corporation, in order to determine if the relationship influenced the price, will be on “the way in which the buyer and seller organize their commercial relations and the way in which the price in question was arrived at.” Statement of Administration Action, H.R. Doc. No. 103-316, 103rd Cong., 2d Sess. (1994) reprinted in Customs Valuation Under the Trade Agreements Act of 1979, at 53-54; see also 19 C.F.R. 152.103 (l)(1)(i).
The appraisement of imported merchandise pursuant to the transaction value method will also be acceptable, even for a transaction between related persons, if the price is settled “in a manner consistent with the normal pricing practices of the industry in question, or with the way the seller settles prices for sales to buyers who are not related to him.” Statement of Administration Action, Id.; see also 19 C.F.R. 152.103 (l)(1)(ii). The importer may further demonstrate that the relationship between the buyer and the seller did not influence the price by establishing that “the price is adequate to ensure recovery of all costs plus a profit that is equivalent to the firm’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind….” Statement of Administration Action, Id.; see also 19 C.F.R. 152.103 (l)(1)(iii).
Counsel for Ringspann maintains that “[n]o distinction is made between Ringspann Corporation and other customers concerning list prices and quantity discounts.” It is the determination of Customs and Border Protection, based on the information provided, that the price for merchandise sold by Ringspann GmbH to Ringspann is influenced by the relationship between the seller and the importer.
This office notes with particular interest the fact that Ringspann Corporation, as well as Ringspann Elecon, another related entity, in accordance with the resale discount schedules receive [xx] percent discounts for sprag, sprag chains and sprag cages, VA Number items: [xxx and xxx], while the other subsidiaries and customers of Ringspann GmbH receive only a [xx] or [xx] percent discount. The importer attributes the [xxx] percent difference between the [xx] percent and the [xx] percent discounts to the fact that Ringspann Corporation and Ringspann Elecon are licensees of Ringspann’s “know-how.” Ringspann has not, however, directed the attention of CBP to any particular aspect of the know-how licensing agreement nor has the importer explained why extending a related licensee an additional [xxx] percent discount should not be understood as reflecting an influence on the price because of the relationship. No explanation was forthcoming concerning those circumstances which differentiate when a non-related entity will be entitled to receive the [xx] percent discount as opposed to only the [xx] percent discount. In either case, the fact that related entities receive, at least, a [x] percent discount, without further explanation, establishes that the relationship between the parties influenced the price.
The invoices provided by Ringspann also fail to provide CBP with a basis to conclude that the relationship between Ringspann and Ringspann GmbH did not influence the price. Ringspann provided CBP with a total of seven invoices, two for sales to two non-related entities and five for sales to related entities. The invoices establish that Ringspann GmbH extended related entities resale discounts of either [xx] percent or, in a single case, [xx] percent. Resale discounts to non-related entities were only [xx] percent.
Compounding the explicit difference in the resale discounts in favor of the related entities, are three additional facts. The invoices identify nine different cage freewheels or freewheel cages. Only one item sold to one of the unrelated entities corresponds to an item sold to a related entity. Customs and Border Protection must assume, not having been advised otherwise, that merchandise bearing different identification numbers are different items. CBP has no basis for concluding that they are of the same class or kind of goods and, therefore, comparable for the purposes of this ruling letter. The invoices for sales to non-related entities are dated June and September of 2003. Three of the invoices for sales to related entities are dated February of 2003 and one is from August of 2003. CBP questions why sales invoices of merchandise of the same class and kind for sales that transpired at or about the same time could not have been provided. This agency was provided no explanation and questions whether the market for the instant merchandise fluctuates such that it is a factor that must be taken into consideration. The invoices, furthermore, are not complete documents. Some of the invoices provide no terms of sale while others provide minimal terms of sale and reference to an “overleaf” for other terms and/or conditions. The “overleafs,” as previously stated, were not provided.
Customs and Border Protection was also not provide with contracts of sale for either the related entities or the non-related entities. Sales agreements or some other type of contract establishing the base price and the complete agreements between related parties and non-related parties would have enabled this agency to better understand how the prices were set and to more accurately gauge whether the prices between related entities were influenced by the relationship. Absent this information, CBP will not presume that the terms and conditions were identical in sales between related and non-related entities.
The quantity discount schedule provided by counsel for Ringspann also fails to support the position of Ringspann. Customs and Border Protection notes that the quantity discount schedule provided by the importer is identified as applicable to sales between Ringspann GmbH, Ringspann Corporation, the importer in this ruling letter, and one other related entity. Counsel advises this office that it is the same quantity discount schedule applicable to sales to non-related entities, but supports this statement with no confirmation from Ringspann GmbH. CBP is left to question why a business would specifically identify a quantity discount schedule as applicable to two related entities if it is also to be applied to sales to non-related entities.
Customs and Border Protection, subsequent to reviewing the interpretative notes in the CBP regulations addressing the “circumstances of sale” analysis and applying that analysis to the facts of this ruling request, concludes that the use of transaction value by Ringspann is not acceptable. Ringspann has failed to demonstrate that the circumstances of the instant sales are not influenced by the relationship between the buyer and seller.
HOLDING
The use of the transaction value by Ringspann Corporation, a wholly owned subsidiary of Ringspann GmbH, is not an acceptable method of appraising imported sprags, sprag chains and sprag cages purchased by Ringspann Corporation from Ringspann GmbH.
The price actually paid or payable by Ringspann Corporation to Ringspann GmbH in sales of sprags, sprag chains and sprag cages is influenced by the relationship between the buyer and seller.
Sincerely,
Virginia L. Brown, Chief
Value Branch