VAL:RR:IT:VA W548475 jsj
U.S. Customs and Border Protection
Director of Field Operations
Area Port of Jacksonville
2813 Talleyrand Ave.
Jacksonville, Florida 32206
Attn.: Import Specialist Peter A. Super
Port File Number: APP-I FO:NFL:APJ PAS
Importer: xxxxxxxx (importer-buyer), a division of xxxxxxxxxxxxx (parent company).
Re: Transaction Value; Related Parties; Circumstances of Sale; 19 C.F.R. 152.103 (1)(1)(iii) Interpretative note 3; Price Actually Paid or Payable; Total Payment; Generra Sportswear Co. v. United States.
Dear Director:
The purpose of this correspondence is to respond to your request for Internal Advice dated January 16, 2004. The correspondence requested a valuation decision concerning the use of the transaction value method of appraising imported merchandise in those circumstances where the importer-buyer is related to the seller-manufacturer and requests the use of another method of appraisement because the price actually paid or payable did not include all costs and a reasonable amount of profit for the seller.
This internal advice memorandum is being issued subsequent to a review of the following: (1) The request for internal advice from the Area Port of Jacksonville dated January 16, 2004; (2) Correspondence of counsel for the importer dated September 27, 2001; (3) Correspondence of counsel for the importer dated January 24, 2003; (4) A
Request for Information issued by Customs and Border Protection (CBP) to the importer dated August 7, 2003; and (5) The September 9, 2003 response of the importer to the Request for Information. The importer's response included: two separate letters dated September 9, 2003, a parent company and xxxxxxxxxxx (seller-manufacturer) "Statement of Inc / Exp Combined-Sewing" for the twelve months ending December 31, 2000, a seller-manufacturer commercial invoice summary for the year 2000 exhibiting individual invoice amounts and monthly totals, a statement of the seller-manufacturer addressing amortized deferred production costs and a commercial invoice from the seller-manufacturer to the importer dated February 29, 2000.
The request for internal advice submitted by the Port of Jacksonville and the accompanying documents contain confidential commercial or financial information. Customs and Border Protection will extend confidential treatment to that information. Information determined to be confidential will be underscored in this I.A. response and will be redacted in the public version.
FACTS:
The importer-buyer is xxxxxxxxxxxxxxxxxxxxx. The seller-manufacturer is xxxxxxxxxxxxxxxxxxxx The importer-buyer is a division of the parent company. The seller manufacturer is an affiliate of the parent company. The parent company and the seller manufacturer are commonly owned.
The buyer is the importer of garments assembled by the foreign seller. The importer advises that the seller negotiated at "arm's length" with the parent company and decided on a unit price for the imported garments. Correspondence of Counsel, Sept. 27, 2001, at p. 2. The importer advises CBP that no written contract between the buyer and seller was executed. Importer Response to Request for Information, Sept. 9, 2003, Item 1. According to the submission of counsel, the "prices were set with a specific quantity of production in mind which appeared to be sufficient to recoup its costs and to earn a reasonable profit based upon estimated quantities of production and sale." Correspondence of Counsel, supra. at 3. The actual production was less than anticipated, according to counsel, because "the workers were not familiar and lacked the skills necessary to produce the anticipated quantities...." Id. The fixed costs per unit of the seller increased as the result of production and merchandise sales that were less than anticipated by the seller.
According to counsel, the unit prices initially estimated by the seller were "insufficient to recoup all costs...." Id. "Excessive costs were deferred to later accounting periods" with losses being sustained by the seller as the result of the fact that "profits hoped for were not realized." Id.
A review of the seller's commercial invoice summary includes an item noted to be "Loans to cover Cash Needs component of operating losses." This sum listed for the year 2000 was $XXXXXXXX. The Port advises this office that the buyer has not provided CBP with documentation that this sum represents a loan or loans and that no documentation has been provided establishing the repayment to the buyer of any sums received by the seller over and above the invoice amounts.
ISSUES:
Is the transaction value method of appraisement acceptable in these circumstances ?
Should the payments made by the buyer to the seller that are characterized by the buyer and seller as "loans" be included in the price actually paid or payable ?
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 1979.2
The preferred method of appraisement is transaction value. The transaction value of imported merchandise is the "price actually paid or payable for merchandise when sold for exportation to the United States," plus amounts for the statutory additions. 19 U.S.C. 1401 a (b)(1).
The buyer and the seller in the instant Customs transaction are related as defined in 19 U.S.C. 1401a(g)(1). One of the issues raised is whether this related party transaction is an acceptable transaction value. Section 1401a(b)(2)(B) provides:
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 imported merchandise indicates that
the relationship between the buyer and seller did not influence the price
actually paid or payable; or if the transaction value of the imported
merchandise closely approximates -
(i) the transaction value of identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United States; or
(ii) the deductive value or computed value for identical or similar merchandise;
but only if each value referred to in clause (i) or (ii) that is used for 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).
' See 19 U.S.C. 1500 (West 1999) (providing that Customs and Border Protection is responsible for fixing the final appraisement, classification and amount of duty to be paid); See also Joint Explanatory Statement of the Committee of Conference, H.R. Conf. Rep. No. 100-576, at 549 (1988) reprinted in 1988 U.S. Code Cong. and Adm. News 1547, 1582 [hereinafter Joint Explanatory Statement].
2 See 19 U.S. C. 1401 a (West 1999); See generally, What Every Member of The Trade Community Should Know About: Customs Value, an Informed Compliance Publication of Customs and Border Protection available on the World Wide Web site of Customs and Border Protection at www.cbp.gov.
Customs and Border Protection regulations provide that the transaction value method of appraising imports shall not be disregarded "solely because the buyer and seller are related." 19 C.F.R. 152.103(l)(1). The regulations, in three "interpretative notes," assist importers in determining whether the price was influenced by the relationship between the buyer and seller. Interpretative note 1 suggests an examination of "the way in which the buyer and seller organize their commercial relations and the way in which the price in question was arrived at...." Id. at 152.103(l)(1)(i). Interpretative note 2 focuses attention on whether the buyer and seller "buy from and sell to each other as if they were not related," whether the price was settled in a "manner consistent with the normal pricing practices of the industry in question" and the "way the seller settles prices for sales to buyers who are not related to him." Id. at 152.103(l)(1)(ii).
The third interpretative note is the focus of the importer's position that transaction value is not an acceptable method of appraising the merchandise subject to the instant Customs transactions. Interpretative note 3 provides:
If it is shown that the price is adequate to ensure recovery of all costs
plus a profit which is equivalent to the firm's overall profit realized over
a representative period of time (e.g., on an annual basis), in sales of
merchandise of the same class or kind, this would demonstrate that
the price has not been influenced. Id.. at 152.103(l)(1)(iii).
Interpretative note 3, as with interpretative notes 1 and 2, is intended to assist the importer in determining whether the price actually paid or payable was influence by the relationship between the buyer and the seller. If the price was not influenced by the relationship, the transaction value method of appraisement should be utilized.
The importer relying on interpretative note 3 suggests a "converse" position to the language of the note. ." Correspondence of Counsel, surpa. at 2. Counsel for the importer specifically states:
Where a price between a related seller and buyer which is not sufficient
to include all costs and a reasonable amount for profit is not acceptable
to represent a transaction value of imported merchandise and some other
basis of valuation must be used to appraise the imported goods subject
to appraisement. Id.
Counsel’s argument that “[t]he converse is also true” is without merit.
The issue is whether the price was influenced by the relationship between the buyer and the seller. Customs and Border Protection regulations were not drafted to ensure that sellers of imported merchandise make a profit or that importers may value their merchandise less because the seller, related or otherwise, failed to cover its costs and make a profit.
In the Customs transaction that is subject of this internal advice memorandum, the importer advised CBP through counsel’s submission of September 27, 2001 that the price was negotiated at arm's length. If the price actually paid or payable was the result of negotiations that were not influenced by the relationship of the parties, then the transaction value method is acceptable pursuant to 19 U.S.C. 1401a(b)(2)(B). Recourse to the other methods of valuation is only appropriate when the value using the preceding method cannot be determined. See 19 U.S.C. 1401a(a)(1)(A) - (F). Accordingly, appraisement under the subsequent methods is not warranted.
The Port further advises this office that the buyer made payments to the seller which the buyer characterizes as loans and that are noted on the seller's commercial invoice summary as loans to cover operating losses. The issue posed by the Port is whether these payments should be included in the price actually paid or payable. The "price actually paid or payable," as defined in the Trade Agreements Act, is:
the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C. 1401a(b)(4)(A). (Emphasis added).
The payments made by the buyer to the seller are not encompassed within the enumerated transaction value additions of subparagraphs (A) through (E) of section 1401 a (b)(1), nor are they expressly excluded pursuant to section 1401 a (b)(3). The resolution of the issue presented in this I.A. is, therefore, dependent on the interpretation of the phrase "price actually paid or payable" of section 1401 a(b)(4)(A).
Customs and Border Protection has long held the position that all monies paid to a foreign seller or to a party related to a seller are presumed to be part of the price actually paid or payable for imported merchandise pursuant to the transaction value method of appraisement. See HQ 542169 (Sept. 18, 1980), TAA #6; HQ 547532 (Nov. 2, 2001). This presumption is consistent with the decision of the Court of Appeals for the Federal Circuit in Generra Sportswear Co. v. United States, 905 F. 2d. 377 (Fed. Cir. 1990), rehearing denied, (Fed. Cir. 1990). See also HQ 547532 (Nov. 2, 2001). The court in Generra held that the term "total payment" in the definition of the phrase "price actually paid or payable" was intended to be all inclusive. See id. at 379. The reasoning underlying the Court's decision stems from the language of section 1401 a (b)(4)(A) which states that the price actually paid or payable is the "total payment" made for imported merchandise whether the payments are "direct or indirect." 19 U.S.C. 1401a(b)(4)(A).
The Generra court further held that:
Congress did not intend for [Customs and Border Protection] to engage
in extensive fact-finding to determine whether separate charges, all
resulting in payments to the seller in connection with the purchase of imported
merchandise, are for the merchandise or for something else. Id. at 380.
The court, quoting Moss Mfg. Co. v. United States, 896 F. 2d 535, 539 (Fed. Cir. 1990), concluded that the "straightforward approach [of section 1401 a(b)] is no doubt intended to enhance the efficiency of [CBP's] appraisal procedure; it would be frustrated were we to parse the statutory language... and require [CBP] to engage in [a] formidable fact-finding task...." Id. at 380.
Although the presumption that payments made directly or indirectly by a buyer to or for the benefit of a seller are part of the price actually paid or payable is rebuttable, the burden of establishing that the payments are unrelated to the imported merchandise rests on the importer. See id. HQ 547532; See also Chrysler Corp. v. United States, 17 C.I.T. 1049 (Ct. Int'l Trade 1993). No information has been presented to establish that the importer carried this burden.
The buyer has not established that the payments it made to the seller are unrelated to the imported merchandise. See generally HQ 548332 (Oct. 31, 2003), HQ 546430 (Jan. 6, 1997). Although the payments are characterized as loans, the buyer has not provided loan agreements or proof of repayment by the seller. Therefore, all financial transfers characterized by the parties as loans should be include in the transaction value.
The Port of Tampa also requested that CBP Headquarters address the issue of whether payments made by the buyer to the seller and identified by the importer as "startup" costs should be included in the price actually paid or payable. Mcclenny's response of September 10, 2003 to CBP's Request for Information (CF 28) states that costs amounting to $XXXXXXXX were "startup costs that were accumulated through August 1999." The response to the CF 28 further stated that those costs were "amortized" from September 1999 through January 2001 at an amount of $XXXXX per unit based on XXXXXXXX units. CBP officials at the Port note that the manufacturer's invoices do not note the "amortized" "startup costs" of $XXXX on the invoices and question whether it should be added to the invoice amount of $XXXX to arrive at a total unit price of $XXXXX.
It is the determination of this office, relying on analysis previously set forth, that payments for the startup costs are part of the price actually paid or payable. Absent documentation provided by the importer establishing that the startup costs are already included in the invoice price, they should be added.
HOLDING:
Based on the representations that the related party price was negotiated at arm's
Length, the transaction value method of appraisement is acceptable and should be utilized.
Payments made by the buyer to the seller that are characterized by the parties as "loans" should be included in the price actually paid or payable.
Costs identified as "startup costs" and allegedly amortized over a period of time are to be included in the price actually paid or payable. If the importer is unable to establish with sufficient information that the invoice included these costs, they should be added.
You are to mail this decision to the importer no later than 60 days from the date of this letter. On that date, this office will make a public version of the ruling available to Customs personnel and to the public on the Customs Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act and other methods of public distribution.
Sincerely,
Virginia L. Brown, Chief
Value Branch