HQ 0544124 - Decision on Application for Further Review of Protest No. 3004-4-000016 - United States International Trade Commision Rulings

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HQ 544124

July 12, 1989

CLA-2 CO:R:CV:V 544124 VLB

CATEGORY: VALUATION

District Director of Customs
909 First Avenue
Room 2039
Seattle, Washington 98174

RE: Decision on Application for Further Review of Protest No. 3004-4-000016

Dear Sir:

This protest was filed against your decision in the liquidation of various entries made by Celanese Chemical Company, Inc. (hereinafter referred to as "CCC"). The merchandise was appraised pursuant to section 402(c) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(c); TAA).

FACTS:

The merchandise in question is methanol. The methanol was produced in Canada by Joint Venture, a party related to CCC under section 402(g) of the TAA. CCC acted as Joint Venture's exclusive U.S. distributor of methanol.

The CCC/Joint Venture transactions fall into three categories. Case I shipments involved direct sales of methanol to CCC's U.S. customers. CCC's counsel states that the Case I shipments were appraised under transaction value using the price that CCC paid to Joint Venture for the methanol as the price actually paid or payable less nondutiable charges. The importer is not protesting the Case I appraisements.

In the Case II shipments, CCC imported the methanol and shipped it to CCC's storage facility at either San Pedro, California or Richmond, California. CCC later sold the methanol from its inventory to unrelated third parties. In correspondence dated December 4, 1987, CCC's counsel conceded that there was no transaction value for the Case II shipments because there was no sale for export.

You appraised the Case II shipments under section 402(c) of the TAA, transaction value of identical or similar merchandise. You used the transaction values established in Case I to appraise the Case II shipments. While CCC agrees that section 402(c) is the appropriate appraisement method for the Case II shipments, it argues that the applicable identical merchandise transaction values are the Case III importations discussed below.

In the Case III transactions, CCC allegedly purchased methanol from Joint Venture, imported it, and then exchanged the methanol with either Borden Chemical ("Borden") or Chembond. The exchange was arranged because Borden and Chembond had substantial quantities of methanol on the Gulf Coast in Louisiana but did not have methanol on the West Coast to serve their customers in that area. CCC, on the other hand, had substantial quantities of methanol on the West Coast but did not have methanol on the Gulf Coast to serve its customers in that area. The three companies determined that it would be cheaper to "swap" methanol from their respective facilities rather than incur the considerable cost involved in transporting the methanol to another part of the U.S.

You determined that in Case III there was not a bona fide sale between CCC and Joint Venture. As a result, you appraised the Case III shipments under section 402(c) of the TAA, transactions value of identical or similar merchandise using the Case I transaction values.

CCC contends that there was a bona fide sale in the Case III transactions. In addition, CCC asserts that the price CCC paid for the methanol was not influenced by the relationship between CCC and Joint Venture.

ISSUE:

Whether the Case II and Case III entries were properly appraised under section 402(c) of the TAA using the transaction values established in the Case I appraisements.

LAW AND ANALYSIS:

The preferred method of appraising merchandise is transaction value , which is defined in section 402(b) 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 U.S., plus certain enumerated additions. In Case II transactions, CCC's counsel has conceded that there was no sale for exportation to the U.S. Therefore, transaction value cannot be used to appraise the merchandise.

When there is no transaction value, the next basis of appraisement in order of statutory preference is transaction value of identical or similar merchandise under section 402(c) of the TAA, which you used to appraise the Case II shipments. Transaction values determined under section 402(c) of the TAA are based on sales of identical or similar merchandise
at the same commercial level and in substantially the same quantity as the sales of the merchandise being appraised. If no such sale is found, sales of identical merchandise or similar merchandise at either a different commercial level or in different quantities, or both, shall be used, but adjusted to take account of any such difference . . . If . . . two or more transaction values for identical merchandise. . . are determined, such imported merchandise shall be appraised on the basis of the lower or lowest of such values.

CCC alleges that the Case III transactions provide valid transaction values that should serve as the values for appraising the Case II shipments under section 402(c) of the TAA. CCC alleges that in the Case III transactions, there is in fact and in law, a sale for exportation between Joint Venture and CCC. The National Import Specialist (NIS) in New York states that he believes that the CCC/Joint Venture transaction involved a transfer of property for consideration. Therefore, the NIS concluded that the Case III shipments involved bona fide sales.

We agree that the Case III transactions constitute bona fide sales, i.e. passage of title for consideration. Moreover Article 4.01 of the United States Sales and Marketing Agreement ("Sales Agreement") executed between CCC and Joint Venture on December 16, 1981, states that "[t]itle and risk of loss to Methanol will pass from the Joint Venturers to CCC (a) upon delivery to the ship's flange at the Kitimac Terminal [Canada] for Methanol to be shipped by sea, and (b) F.O.B. the Plant for all other Methanol. Based on this language, we hold that there was a sale for exportation to the U.S.

CCC and Joint Venture are related parties. Therefore, Customs must examine the acceptability of the transaction value between CCC and Joint Venture. 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;. . .

In determining whether the relationship between the parties influenced the price of the goods, the buyer and the seller must prove that although they are related, they buy and sell from one another as if they are not related. The parties may also use 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, CCC argues that the circumstances of the methanol sale indicate that CCC's relationship to the Joint Venture did not influence the price. Section 6.01 of the Sales Agreement discussed previously contains a formula for the calculation of the price actually paid or payable. The contract states that CCC will pay Joint Venture the "Net Sales Price" less 5% of the Net Sales Price which is CCC's distribution fee.

Section 6.04 of the Sales Agreement and an amendment to the agreement dated March 24, 1983, contains the formula for the Case III exchange transactions. The Net Sales Price is the average price received by CCC on sales of methanol from its Gulf Coast facilities to unrelated customers in the month preceding the importation, plus a freight or location differential, less CCC's distribution expenses. The freight differential accounts for the freight savings previously discussed.

CCC contends that the formula in the Sales Agreement is an acceptable transaction value under section 152.103(a)(1), Customs Regulations (19 CFR 152.103(a)(1)), which states that

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 formula, such as the price in effect on the date of export in the London Commodity Market.

In addition, CCC cites Headquarters Letter Ruling 542261, TAA #19, dated March 11, 1981, to support its position. In TAA #19, Customs held that the related parties' use of a formula based on the price of methanol "posted" weekly in the Chemical Marketing Reporter was an acceptable transaction value. CCC asserts, and the NIS agrees, that CCC's pricing formula is similar to the "posted price" system in TAA #19. Based on the information before us, we also agree that the CCC/Joint Venture formula is an acceptable transaction value because the formula is based on CCC's sales to unrelated parties.

However, you and the NIS contend that the 5% distribution fee is a dutiable selling commission. Under section 402(b)(1)(B) of the TAA "selling commission[s] incurred by the buyer with respect to the imported merchandise" (emphasis added) are added to the transaction value. In this case the alleged selling commission is not incurred by CCC, the buyer. Rather, the reduction is incurred by the seller, Joint Venture, in the form of a lower price that it receives for the methanol, not in the form of a selling commission.

In sum, we hold that the formula in the Sales Agreement for determining the Net Sales Price is an acceptable transaction value for the Case III transactions. As a result, we must determine whether the Case II shipments, appraised under transaction value of similar or identical merchandise , should be based on the Case I transactions or the Case III transactions.

The Case I sales prices are higher than the Case III prices. CCC's counsel stated in a letter dated July 28, 1988, that the differences in the sales prices are attributable exclusively to quantity differences. Counsel explained that

[f]or 1983 (the year in which the protested entries were made) the Joint Venture sold a total of 25,400,000 gals. of methanol to CCC in Case III transactions, i.e., those in which CCC subsequently exchanged the methanol for fungible product owned by Borden (21,100,000) and Chembond (4,300,000 gals.) In contrast, in the so-called direct sales of methanol (Case I), the Joint Venture in 1983 shipped the following quantities to U.S. customers of CCC-

Reichold 1,700,000 gals.
Chevron 400,000 gals.
Union 300,000 gals.
Chemcentral 200,000 gals.

Under transaction value of identical and similar merchandise the transaction value must be based, if possible, on the same
commercial level and quantity as the sales of the merchandise being appraised. Therefore, if the Case II shipments involved large quantity sales similar to the Case III quantities, then the Case III transaction values are the appropriate appraisement values. On the other hand if the Case II shipments were smaller shipments like the shipments listed on page 5 of this ruling, then the Case I transaction values are the correct appraisement values.

HOLDING:

The Case II transactions should be appraised under section 402(c) of the TAA, transaction value of identical or similar merchandise. If the Case II shipments have small quantities similar to the Case I shipments, then the appropriate transaction values for appraisement are the Case I transaction values. If the Case II shipments involved large quantities such as those in the Case III shipments, the Case II appraisements should be based on the Case III transaction value.

The Case III shipments should be appraised under transaction value using the price actually paid or payable between CCC and Joint Venture.

The protest should be granted. A copy of this decision should be attached to the Form 19, Notice of Action, to be sent to the protestant.

Sincerely,

John Durant, Director,
Commercial Rulings Division

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