CLA-2 CO:R:CV:V 554999 VLB
-------------, Esquire
----------------------------------, Ltd.
333 West Wacker Drive
Suite 1900
Chicago, Illinois 60606-1218
RE: Request for Reconsideration of Rulings 543916 and 543933
Dear Mr. -----:
This is in response to your letter dated April 19, 1988,
requesting reconsideration of the above-referenced rulings.
FACTS:
This case involves the sale of automotive pumps and relays
between -----------------, a West German entity (hereinafter
referred to as the "seller") and ------------------------
(hereinafter referred to as the "importer"), the seller's U.S.
subsidiary.
The case has a long and complex history beginning on
February 4, 1985, when the Chicago field office requested
internal advice (25-85) from Headquarters on whether transaction
value was the proper appraisement method for the merchandise. In
response to this request, Customs issued ruling 543519 dated
September 3, 1985. This ruling examined evidence submitted by
the importer to determine whether the parties relationship
influenced the price actually paid for the merchandise.
You assure us that the following relevant portions of
ruling 543519 discussing the evidence submitted by the importer
is still correct.
The importer conducts its automotive business through two
divisions. The first division sells exclusively to original
equipment manufacturers (OEM). The second division, known as the
Sales Group supplies automotive products to the replacement
market. Both divisions are set up as individual profit centers,
each having its own personnel and making its own decisions
regarding the purchase and sale of automotive products.
The OEM division and the seller negotiate prices in two
different ways. For components that are used in U.S.
- 2 -
manufacturing operations, the parties normally negotiate prices
on an annual basis. The OEM division receives price quotations
for various products from three divisions of the seller. These
price proposals are sent to the OEM division's plant controller
in Charleston, South Carolina, who, after looking at the pricing
of competitive U.S. sellers of similar merchandise, will
determine whether or not the seller's proposed prices are
acceptable. If the price is unacceptable, the OEM division will
demand price reductions from the parent. The annual price
negotiations take place at the vice presidential level between
the OEM representative and his counterpart in the seller's supply
division.
If the parties do not reach an agreement, there are three
alternatives. First, they may consult a mediator or mediators at
the seller's company. If the OEM division is still dissatisfied
with the price, it may attempt to get the component from another
source, which may be a related company in another country or an
unrelated source. The third alternative is for the OEM division
to choose not to stock the product.
With regard to the finished products, much of the technical
work and product development must be done by the seller's
divisions from which the OEM division purchases. Therefore,
prices for finished products are negotiated on a case-by-case
basis. Factors that come into play are: the relative engineering
efforts of the parties, the warranty costs to the importer, the
OEM division's profit margin for the product and handling costs,
and the competitive sellers' prices of similar items.
In all cases, the OEM division takes title to the
merchandise from the seller, either on an ex-factory or central
warehouse of supplier basis. The profit margins and general and
administrative expenses vary by individual product. The prices
to the importer's customers are determined on the basis of
competitive conditions in the U.S. The OEM division establishes
the financial arrangements for payment from its customers, which
are made directly to the OEM division. If the U.S. purchaser
fails to pay, the OEM division absorbs the loss. The OEM
division also provides warranties for the merchandise it sells
and absorbs losses against warranties.
The importer pays the supplier weekly for multiple invoices
and the payment generally equals the invoice amounts.
- 3 -
The Sales Group orders its merchandise from either the
seller or through other related companies throughout the world,
depending upon availability and price. The Sales Group is its
own profit center and the seller does not control decisions
regarding where it orders its merchandise.
The starting point in pricing negotiations is prices
contained in a catalogue that the seller publishes. The basis
for the catalogue prices is the price of merchandise to unrelated
parties in Germany. The applicable catalogue price is determined
by the level of distribution of the purchaser. Therefore,
unrelated parties in Germany could receive the same price as the
price that the Sales Group pays for merchandise purchased from
the parent. In most instances, the Sales Group does not accept
the catalogue price and additional price negotiations take place.
Specifically, if the catalogue price is not competitive, the
Sales Group demands a price reduction.
If a satisfactory result on price concessions is not
reached, the Sales Group will either refuse to buy the product or
will contact another company for purchase of the product. In
certain instances, where the product is not a specialized Bosch
product, the Sales Group goes to a domestic unrelated
manufacturing source for the product.
There are also instances where the Sales Group has
purchased merchandise from an unrelated foreign supplier when the
price from the seller is unsatisfactory. In all instances, the
Sales Group acts as an independent profit center and the success
of its executives is measured, to a great extent, on the return
of profits for their division.
The Sales Group determines the prices to its U.S. customers
and the terms of payment. The profit mark-up is determined on
the basis of market studies the Sales Group conducts. Other
details of its transactions are similar to the OEM division's
sales.
Based on the foregoing information, we held in ruling
543519 that the price actually paid or payable for the
merchandise was not influenced by the parties' relationship.
Therefore, transaction value was the appropriate basis of
appraisement.
Several months after the issuance of ruling 543519, you
informed Customs that certain statements in the internal advice
request that formed the basis for ruling 543519 were incorrect.
The statements involved the payments from the buyer to the
- 4 -
seller. You stated that the were three types of payments made by
the importer to the seller in addition to the invoice price. The
payments included (1) specialized tooling, (2) reimbursements for
out-of-pocket expenses for underutilized capacity (so-called
maintenance payments) and (3) a profit sharing program between
the importer and the seller.
As a result, on July 15, 1986, the Charleston, South
Carolina, Customs office sought internal advice (61-86) from
Headquarters on the dutiability of the special tooling and
maintenance payments. Customs Headquarters issued ruling 543882
dated March 13, 1987, in response to the internal advise request.
In that ruling, we held that the payments for the specialized
tooling were "indirect payments" made by the importer to the
seller. Therefore, the payments were part of the price paid or
payable for the imported merchandise and were to be included in
dutiable value.
In addition, in ruling 543882, we held that the
"maintenance" payments for the seller's out-of-pocket costs
resulting from underutilized capacity were not part of the price
actually paid or payable for imported merchandise. Rather, the
payments were made to compensate the seller for expenses incurred
in preparation for production of merchandise contracted for by
the importer but not imported. Therefore, the payments were not
dutiable under transaction value.
On March 30, 1987, after the issuance of the previously
discussed rulings, the Chicago Customs office requested
reconsideration of ruling 543519 which held that transaction
value was the proper appaisement method. Customs in Chicago
argued that in light of the new information submitted by the
importer, the ruling was based on incomplete data.
Thus, on September 23, 1987, Customs Headquarters issued
ruling 543916 which revoked ruling 543519 on the basis that the
ruling was not based on accurate and complete information. On
the same date, Customs also issued ruling 543933, revoking ruling
543882 concerning the specilized tooling and maintenance
payments. The basis for the revocation was that because the
transaction value ruling was revoked, the underlying assumption
in ruling 543882 that transaction value applied was "no longer
valid". Therefore, ruling 543933 stated that there was "no issue
to decide".
The result of this "rule-revoke" scenario is that the
appraisement issues must now be addressed pursuant to the
importer's request for reconsideration of the revocation rulings
(543916 and 543933).
- 5 -
ISSUES:
(1) Whether transaction value is the proper method of
appraisement for the imported merchandise.
(2) Whether the importer's payments to the seller for the
specialized tooling, maintenance, and profit sharing are
dutiable.
LAW AND ANALYSIS:
Transaction value, the preferred method of appraisement is
defined in section 402(b)(1) of the Tariff Act of 1930, as
amended by the Trade Agreements Act of 1979 (TAA) as the "price
actually paid or payable for merchandise when sold for
exportation to the United States . . . ." Section 402(b)(2)(B)
of the TAA states the following:
The transaction value between a related buyer and seller is
acceptable . . . if an examination of the circumstances of
the sale of the imported merchandise indicates that the
relationship between such buyer and seller did not
influence the price actually paid or payable; . . .
Thus, in determining whether the relationship between the
parties influences the price of imported merchandise, the buyer
and seller must prove that although they are related, they buy
and sell from one another as if they are not related. There are
two methods for determining whether the transaction value is
acceptable. The first method involves an examination of the
circumstances of the sale of the imported merchandise to
determine if the relationship between the buyer and the seller
influenced the price actually paid or payable. The second method
involves using a series of test values as a basis of comparison
to the transaction value. If the transaction value closely
approximates any one of the test values, it will be accepted.
In this case, it appears that the importer and the seller
meet the first test. That is, it appears that the relationship
between the parties does not influence the price actually paid or
payable. The importer has assured us that the method for
determining the price of the merchandise continues to be the same
method described in ruling 543519, with the exception of the
additional payments that have been revealed subsequently to
Customs. Based on this assurance, we find that the additional
payments do not affect the method the parties use for negotiating
the price of the merchandise. Rather, the additional payments
must be examined independently to determine whether the amounts
are dutiable under transaction value.
- 6 -
The first payment at issue is for specialized tooling.
These payments as discussed previously, are made by the ultimate
purchasers through the importer to the seller. We hold that
these payments are indirect payments to the seller that must be
included in the price actually paid or payable for the
merchandise.
The second payment is for the out-of-pocket maintenance
costs incurred by the seller for reserving capacity to
manufacture the imported goods. If the importer fails to
purchase a minimum quantity of merchandise, the importer must
reimburse the seller for its out-of-pocket expenses. We hold,
as we did in ruling 543882, that these payments are not part of
the price actually paid or payable for the imported merchandise.
Therefore, the amounts are not dutiable under transaction value.
The third payment at issue involves a profit sharing
program. Under the program, the parties share the profits on the
resale of the imported relays. You and Customs in Chicago
previously reached an agreement that these amounts are dutiable
as additions to transaction value under section 402(b)(1)(E) of
the TAA which states that
proceeds of any subsequent resale, disposal, or use of the
imported merchandise that accrued, directly or indirectly,
to the seller [are to be included in the transaction value
of the merchandise].
We find nothing in the file that necessitates a reversal of
that agreement.
HOLDING:
(1) The evidence presented by the importer demonstrates
that the parties' relationship did not affect the price actually
paid or payable for the imported merchandise. Therefore,
transaction value is the proper appraisement method.
(2) The specialized tooling and profit sharing payments
are indirect payments to the seller that are dutiable under
transaction value. The maintenance payments for the seller's
- 7 -
out-of-pocket expenses in reserving manufacturing capacity for
the importer are not part of the price actually paid or payable
for imported merchandise. Thus, the payments are not dutiable.
Sincerely,
Harvey Fox, Director
Office of Regulations and Rulings