HQ 0544176 - Request for Reconsideration of Headquarters Ruling No. 543492 MK - United States International Trade Commision Rulings

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HQ 544176

July 27, 1988

CLA-2 CO:R:CV:V 544176 EK

CATEGORY: VALUATION

District Director of Customs
Buffalo, New York

RE: Request for Reconsideration of Headquarters Ruling No. 543492 MK

Dear Sir:

This is in reference to a request for reconsideration of Headquarters Ruling No. 543492 MK dated February 20, 1985, MGUS (U.S. company), imports wearing apparel from its related company in Canada, MGC. The ruling in question held that there was no "sale" between MGC and MGUS and that the applicable sale for determining transaction value, section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(b)), was that between MGC and the ultimate purchaser in the United States.

Through oral discussions with both counsel for the importer and members of your staff, we have narrowed the issue with regard to the "sale" between MGC and MGUS. The relevant concern is whether there is consideration, i.e., payment, from MGUS to MGC, in order to conclude that a sale occurred between the two parties. Moreover, the facts upon which we rely are based upon extensive audits performed by Customs personnel in both the Buffalo district and the Boston region.

The audits were made in accordance with generally accepted auditing standards and accordingly, included such tests of the accounting records and such other auditing procedures as considered necessary.

FACTS:

The importer states that an initial price list on merchandise to be exported to the United States is proposed by MGC officials in Canada. Subsequently, the price list is revised by MGUS. With regard to purchase orders, the importer states that the ultimate U.S. purchaser submits orders to MGUS which are stored on bulking cards. The information is recorded, and the bulking cards are forwarded to MGC. Upon receipt of purchase orders, MGC forwards the apparel to the ultimate purchasers. Invoices relating to these sale transactions are forwarded to both the ultimate customer and a factor, Walter Heller. (Note - Prior to February 3, 1984, the factor agreement with Walter Heller was discontinued and replaced with a factor agreement with the Boston Factors of Canada, Inc. (FNB)).

Two invoices are prepared by MGC - a transfer invoice and a third party invoice. The same format is used for both. The importer states that the transfer invoice and the third party invoice have two different reference numbers which indicate whether it is an MGC or MGUS invoice.

With regard to the importer's allegation that MGUS purchased merchandise from unrelated parties in Hong Kong, our audit concludes that during the time frame in question, merchandise was transferred to MGUS solely from MGC.

Most of the accounting records with regard to these companies are maintained by MGC in Canada.

The importer states that a separate invoice by invoice accounting is made for each transaction on the books of both companies, MGC and MGUS. A payable is established in the intercompany account of MGUS and the account of MGC indicates a receivable. Our auditors agree with this statement. However, what remains in dispute is the settlement of these accounts.

The importer states that the receivables paid by the ultimate customers directly to the factor are used to repay MGUS transfer invoice debt to MGC in the amount of the corresponding transfer invoices. The importer further indicates that at all times, either company could draw its allocated portion in the intercompany account.

The results of our audit reveal the following. Receivables paid to the factor by the ultimate United States customers were offset against prior loans the factor had made to MGUS. The
proceeds in the intercompany account were applied against these outstanding loans. MGUS received loans from the factor on an as-needed basis which were placed in the Toronto Dominion Bank. As indicated above, as the factor collected from the ultimate United States purchasers against the receivables, the proceeds were applied against the outstanding loans. During the audit period, loans exceeded collections. Funds received by MGUS during the relevant time period were loans, on an as-needed basis.

The balance in the intercompany account which MGUS owed to MGC as a result of importations was reduced on paper when MGC paid for goods and services in U.S. dollars and used MGUS funds. In addition, various design, administrative, and accounting expenses incurred by MGC on behalf of MGUS also served to reduce the intercompany balance. Based upon our investigations, it is our conclusion that MGUS had no control or access to the funds in the Toronto Dominion Bank. As funds were received in the form of loans from the factor, they were disbursed based upon the needs of MGC. There was no correlation between the amounts owed by MGUS to MGC for importations to the reduction in the intercompany account when MGC used MGUS funds to purchase materials and services in U.S. dollars.

As indicated above, prior to February 3, 1984, the factor agreement with Walter Heller was discontinued and replaced with an agreement with FNB. Pursuant to this agreement, all sums remitted, lent or advanced to either MGC or MGUS for the account of either MGC or MGUS, all sums paid to third parties and all other sums properly chargeable by FNB to either MGC or MGUS constituted loans to MC.

There is essentially no difference between the arrangements under the factor Walter Heller and FNB. However, MGC changed its accounting for U.S. funds received from the factor. This accounting shifted the U.S. cash account which was maintained on the books of MGUS to the books of MGC. As was the case in previous years, loans during fiscal year 1984 far exceeded the collections made against third party invoices.

ISSUE:

Whether there is a sale between MGC & MGUS for purposes of determining transaction value.

LAW AND ANALYSIS:

The preferred method of appraisement is transaction value pursuant to section 402(b) of the TAA. This is defined as "the price actually paid or payable for the merchandise when sold for exportation to the United States . . . " . (Emphasis added). Therefore, in order for transaction value to be applicable, an actual sale must take place.

Based upon the circumstances taken as a whole, it is our conclusion that the method of payment between the parties does not establish the passage of consideration which is necessary in a sale. As indicated above, the intercompany account balance which MGUS owed to MGC as a result of importations was reduced on paper when MGC paid for goods and services in U.S. dollars and utilized the funds of MGUS. As funds were received in the form of loans from the factor, they were disbursed based upon the needs of MGC. The total amount transferred was not approximately equal to "payments" for "purchases" and operating expenses were based upon the financial needs of MGC. There appears to be no reconciliation or settlement of amounts owed for alleged purchases.

It is our conclusion that no "sale" occurred between MGC and MGUS for purposes of determining transaction value.

The importer states that if there is no sale between MGUS and MGC, then we must proceed sequentially through the remaining methods of appraisement afforded by the TAA.

However, we find that a transaction value does in fact exist which is proper in appraising the merchandise. There exists a "sale" for exportation to the United States between MGC and the ultimate United States purchaser, with MGUS acting as an agent of MGC, i.e., selling on its behalf. We agree with the importer's statement that the final U.S. customer had no direct contact with MGC. However, this is not necessary since MGUS contracted with the final purchaser on behalf of MGC. As an agent, MGUS had the capacity to obligate MGC to fulfill the sales contracts, whether the principal (MGC) was disclosed or undisclosed.

In this case, there exists a sale for exportation to the United States from MGC to the ultimate purchaser in the United States, through MGUS, acting as agent of MGC.

HOLDING:

The conclusion in Headquarters Ruling No. 543492 is affirmed. The importer has not established that the ruling was incorrect and therefore, the ruling should apply to merchandise imported during the audit period.

Sincerely,

John Durant, Director,
Commercial Rulings Division

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