RR:IT:VA 547982 DCC
Area Director
Port of New York, JFK Airport
U.S. Customs Service
Building #77
Jamaica, NY 11430
RE: Transaction Value; Related Party Pricing
Dear Area Director:
This in reply to your memorandum dated June 20, 2001, which requested internal advice in accordance with 19 CFR 177.11(a). Your request concerns the appropriate basis for appraisement for merchandise imported by [ . ], the Importer. In addition to your memorandum, we received a letter with comments, dated January 11, 2002, from Gerald Horn of Sandler, Travis & Rosenberg, counsel for the Importer. In response to our request for additional information from Counsel, we also received a supplemental submission dated February 22, 2002.
Business proprietary information provided in connection with your request for internal advice will be accorded confidential treatment. Such information is designated by brackets, and will be redacted from the public version of this letter.
FACTS:
The Importer is the exclusive U.S. distributor of apparel purchased from [ ], the Exporter, a related party seller. Prior to 1999, the Importer paid the Exporter a royalty pursuant to a royalty agreement executed in 1990. In response to concerns regarding the dutiability of these royalty payments, the Importer and Exporter signed a termination agreement that cancelled the 1990 royalty agreement and stopped the royalty payments effective January 1, 1999. In addition, in a letter dated May 3, 1999, the president and chief executive officer of the Exporter stated that the Importer would stop payment of all royalties “until such time as this matter is resolved.”
In your June 20 memorandum, you state that the Importer was a selling agent of the Exporter rather than a bona fide buyer. You base this determination on the fact that all of the Exporter’s sales to the United States are made through the Importer, U.S. retailers do not have direct access to the Exporter, and your assertion that the Importer performs tasks generally associated with selling agents such as storage and distribution of the merchandise.
You consequently determined that the transactions between the Exporter and the Importer are not bona fide sales for export to the United States and that the only statutorily viable sale for transaction value is the sale to the unrelated U.S. customers. You conclude that all payments made from the Importer to the Exporter were dutiable and, in a Notice of Action dated April 16, 1999, you demanded payment for the loss of revenue. In a second Notice of Action, you contemplate rejecting the price paid by the Importer to the Exporter as a basis of transaction value.
Counsel claims the transaction between the Exporter and Importer is an appropriate basis of appraisement. In particular, Counsel argues that the Exporter’s sales to the Importer are bona fide sales for export to the United States. In support of this claim, Counsel cites to several ruling letters describing the criteria for determining the existence of bona fide sales. Counsel explains that title and risk of loss passes from the Exporter to the Importer and that the Importer acts independently of the Exporter.
However, in a letter to the U.S. Customs Service, dated March 30, 2001, Counsel states: “We further agree that the price paid or payable has been influenced by the relationship [between the Exporter and the Importer].” Counsel goes on to claim that notwithstanding this fact, the transaction should still serve as the basis to determine the customs value. Counsel claims that sales from the Exporter to the Importer are bona fide sales for export to the United States noting that the Exporter sells merchandise to the Importer on an ex-works basis.
Counsel further claims that the transaction value between the Exporter and the Importer closely approximates test values previously accepted by Customs. Counsel claims that the Importer notified Customs in a letter, dated December 21, 1989, that as of December 1, 1989, the Importer and Exporter had restructured their way of doing business to create a bona fide buyer and seller relationship. Based on the modified business relationship and transaction structure, Counsel claims post December 1, 1989 sales from the Exporter to the Importer were bona fide sales for export to the United States. Counsel further claims that it has been Customs practice to appraise the subject merchandise on the basis of computed value and that the liquidation of post 1989 entries on the basis of such appraisement establishes accepted test values for the purpose examining the declare values under the test values method.
In support of the Importer’s claim, Counsel provided copies of the following documents: Exporter’s invoices dated November 9, 2001; Importer’s insurance endorsement for coverage of losses; documentation of insurance claims paid to the Importer for lost merchandise; Importer’s product specifications; Importer’s product merchandising plans; Importer’s pricing report; accounts receivable servicing agreement between Importer and third party servicer; purchase order from Canadian customer; Importer’s purchase confirmations to U.S. and Canadian customers; and Importer’s purchase order to an unrelated manufacturer.
ISSUE:
Whether the sales price between the Importer and the related party Exporter is an acceptable basis for transaction value under 19 U.S.C. § 1401a.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the United States is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”; codified at 19 U.S.C. § 1401a). Section 402(b)(1) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus enumerated statutory additions.
Under 19 U.S.C. § 1401a(b)(2)(A)(iv) transaction value is to be used "only if" the buyer and seller are unrelated or, if they are related, their transaction value is considered “acceptable.” The determination of whether a related party sales price is acceptable for purposes of determining transaction value requires two analyses. First, regardless of the relationship between the parties, Customs must determine whether there was a bona fide sale for export to the United States. Second, in the context of related party transactions, Customs must determine whether the sales price is an acceptable basis for transaction value given the relationship of the parties.
Bona fide Sale for Export to the United States
The first question presented is whether the transaction between the Importer and the Exporter was a bona fide sale for export to the United States. To determine whether a transaction is bona fide Customs may consider the circumstances of the transaction including: passage of title; assumption of the risk of loss; payment of consideration; ability of buyer to instruct the seller; ability of buyer to resell merchandise at any price and to any customer; and ability of buyer to order merchandise for buyer’s own account.
Based on your belief that the Importer is a selling agent of the Exporter, you state that sales between the Exporter and the Importer are not bona fide sales for export to the United States. You note that that all of the Exporter’s sales to the United States are made through the Importer, U.S. retailers do not have direct access to the Exporter, and the Importer performs tasks generally associated with selling agents.
Although related to the Exporter, Counsel argues that the Importer does not act as an agent of the Exporter and that the sales between these parties are bona fide. Counsel notes that the royalty agreement between the Importer and the Exporter was cancelled as of January 1, 1999. Counsel also states that in a letter dated August 15, 2000, Customs decided not to pursue a penalty against the Importer for failing to include the Importer’s royalty payments in the entered value of the merchandise.
Furthermore, Counsel claims that the merchandise is purchased by the Importer on an ex-works basis. In addition to title, Counsel notes that the risk of loss passes to the Importer from the time the merchandise leaves the Exporter’s premises. Because risk of loss transfers at the point of shipment, Counsel explains that the Importer maintains a factoring agreement to limit its risk.
Counsel further claims that the Importer acts independently with regard to ordering, pricing, and selling merchandise. According to Counsel, the Importer operates as a separate profit center and is therefore free to order any merchandise—and even refrain from purchasing any merchandise—from the Exporter. Moreover, Counsel states that the Importer purchases merchandise for its own inventory and assumes responsibility for any first quality merchandise returned by the Importer’s customers.
We determine that there are bona fide sales for export between the Importer and the Exporter. According to the Exporter’s invoices, the Importer purchases the merchandise on an ex-works basis. Under an ex-works or shipment contract, title passes from the seller to the buyer at the point the merchandise leaves the seller’s factory. In this case, the Importer acquires title to the merchandise from point it leaves the Exporter’s premises.
In addition, under a shipment contract the Importer assumes the risk of loss for merchandise from the point of shipment. The fact that the Importer assumes the risk of loss while the merchandise is in transit is demonstrated by the insurance claims paid to the Importer for lost merchandise.
Finally, based on the Exporter’s invoice and the Importer’s product specifications, it appears that the Importer maintained merchandise for its own inventory. The fact that the Importer bought and sold merchandise for its own account indicates that the Importer was not acting as an agent of the Exporter. Although it may be true that the Importer is the exclusive distributor of the Exporter’s merchandise, such an arrangement does not demonstrate that the Importer performed as an agent of the Exporter. Therefore, based on the information presented, we determine that the subject transactions were bona fide sales for export to the United States. Although we determine that there were bona fide sales for export, we must also analyze whether the related party price is an acceptable basis for transaction value.
Acceptability of Related Party Price
Although the valuation statute allows appraisement based on the transaction value between related parties, the statute requires that the price between such parties to be either free of influence from the relationship or to closely approximate certain test values. According to the statute:
(B) The transaction value between a related buyer and seller is acceptable for the purposes of this subsection 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; or if the transaction value of the imported merchandise closely approximates—
the transaction value of identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United States; or
the deductive value or computed value for identical merchandise or similar merchandise;
but only if each value referred to in clause (i) or (ii) that is used in comparison relates to merchandise that was exported to the United States at or about the same time as the imported merchandise.
19 U.S.C. § 1401a(b)(2)B)
Accordingly, the price between related parties may be an acceptable basis for appraisement under either of the two statutory analyses: the circumstances of sale method or the test values method.
Circumstances of Sale
The circumstances of sale method requires an examination of the how related parties conduct business to determine whether their relationship affects the sale. The Statement of Administrative Action provides two examples of how the circumstances of sale test may be satisfied: 1) the pricing between the related parties is consistent with normal industry pricing practice; and 2) the pricing between the related parties is consistent with the way the seller deals with unrelated buyers. See Statement of Administrative Action (“SAA”), 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; Section 152.103(j)(2), Customs Regulations (19 C.F.R. 152.103(j)(2)). The SAA also explains that the circumstances of sale test may be satisfied if the related party price is adequate to ensure recovery of all costs plus a profit that is equivalent to the exporter’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind.
The first method of satisfying the circumstances of sale test requires an examination of the consistency of the seller’s pricing practices. The test may be satisfied if the related party method of pricing is consistent with either pricing practices in sales to unrelated buyers or with normal pricing practices in the industry.
Counsel claims that the Exporter’s method of pricing with the Importer is consistent with the Exporter’s pricing practices to unrelated firms. Counsel notes that the price list used for sales to unrelated parties is similar to the price list used for sales to the Importer. Counsel further states the Exporter negotiates prices with the Importer and unrelated parties in the same manner. According to Counsel, the Exporter negotiates with related and unrelated price lists from their respective price lists. From those price levels, the Exporter considers certain criteria when settling final price levels with the buyers. Counsel maintains that these criteria—volume and market conditions—are the same for related and unrelated buyers.
According to Counsel, the price list used for the Exporter’s sales to the Importer is similar to—but not the same as—the price list for sales to unrelated parties. Counsel, however, did not provide copies of the two lists or any sample pricing data for related and unrelated parties. Furthermore, Counsel did not describe the degree of similarity between the lists or explain why the Exporter maintains separate price lists for related and unrelated parties.
The SAA instructs Customs to examine the consistency in the manner in which prices are established—not simply price levels—in sales to related and unrelated parties. It is inadequate to allege merely that related and unrelated party prices are similar since the Exporter may have employed dissimilar methodologies that resulted in similar prices. Although Counsel states that the same criteria are used to adjust the related and unrelated party price lists, Counsel provides no information as to how the Exporter devised the two price lists that are the starting point for price negotiations. Furthermore, Counsel offers no commercial justification for why the Exporter maintains different price levels for related and unrelated buyers. We therefore determine that under the circumstances of sale test we have insufficient information to analyze whether the Exporter’s related party pricing practices are consistent with its unrelated party or normal industry pricing practices.
In addition, we have insufficient information to determine whether the Exporter’s related party pricing is adequate to ensure recovery of all costs plus a profit that is equivalent to the exporter’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind. Counsel did not provide any information regarding the Exporter’s pricing, costs, and profit for sales to the Importer, nor any information concerning the Exporter’s firm-wide profit on sales of the same class or kind. Without this information, we cannot examine the adequacy of the Exporter’s profit on sales to the Importer. Consequently, we have insufficient information to analyze either the adequacy or consistency of the Exporter’s pricing practices and therefore cannot determine the acceptability of the Exporter’s related party pricing under the circumstances of sale method.
Furthermore, Counsel’s letter, dated March 30, 2001, states: “We further agree that the price paid or payable has been influenced by the relationship [between the Exporter and the Importer].” Based on this statement, the relationship between the parties apparently affected the price paid by the Importer. We therefore determine that the circumstances of sale test has not be satisfied.
Test Values
Under test values method, related party transaction values may be acceptable if the subject transaction values closely approximate previously accepted values of either: 1) identical or similar merchandise in sales to unrelated buyers; or 2) the deductive or computed value for identical or similar merchandise. See 19 U.S.C. 1401a(b)(2)(B). Factors considered in determining whether the transaction value closely approximates the test values include the nature of the imported merchandise, the nature of the industry itself, the season in which the goods are imported, and whether the difference in value is attributable to internal transport costs in the country of exportation. See SAA at 54.
Counsel claims that the transaction value closely approximates the test values based on the computed value of the merchandise. This claim is based on Counsel’s notice to Customs in 1989 that the Importer reorganized the structure of its transactions and relationship with the Exporter from selling agent to bona fide buyer. Counsel also asserts that the subsequent liquidation of hundreds of entries by the Importer demonstrates that Customs accepted the Importer’s valuation methodology and that the declared values contained in these entries now represent accepted computed values for purposes of comparing the transaction values under review.
We disagree. Under the test values method, transaction value is an acceptable basis of appraisement only if the transaction value of the merchandise closely approximates previously accepted values of either sales of identical or similar merchandise to unrelated buyers or the deductive or computed value for identical or similar merchandise. In this case, we have no information concerning sales of merchandise to unrelated buyers. Moreover, Customs has not accepted previously the deductive or computed value of identical or similar merchandise. The mere fact that the Importer notified Customs that it restructured its transactions with the Exporter in no way demonstrates that Customs ever calculated or accepted the deductive or computed value of merchandise imported by the Importer. Therefore, in the absence of previously accepted test values, we have insufficient information to determine whether the related party prices closely approximate the price of merchandise of the same class or kind in sales to unrelated parties.
In conclusion, we determine that Counsel has not demonstrated that the Exporter’s related party pricing is an acceptable basis for transaction value. Consequently, the merchandise should be appraised according to the next acceptable method of valuation under the hierarchy of methods set forth in 19 U.S.C. 1401a.
HOLDING:
An analysis of the circumstances of sale indicate that transaction between the Importer and the Exporter are influenced by the relationship between the parties. We therefore determine that the price paid between the Importer and Exporter is not an appropriate basis for determining transaction value according to 19 U.S.C. 1401a.
Sincerely,
Virginia L. Brown
Chief, Value Branch