HQ 0544313 - Request for Internal Advice on Reactor Art and Design Ltd. - United States International Trade Commision Rulings

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HQ 544313

January 22, 1990

CLA-2 CO:R:C:V 544313 VLB

CATEGORY: VALUATION

District Director of Customs
111 West Huron Street
Buffalo, New York 14202

RE: Request for Internal Advice on Reactor Art and Design Ltd.

Dear Sir:

This is in response to your memoranda (CLA-2-03:COD:KH) dated May 19 and 20, 1988, requesting internal advice (IA 19-88) on the valuation of merchandise sold by Reactor Art and Design Ltd, Toronto, Canada (hereinafter referred to as the "seller").

FACTS:

The merchandise at issue is silk-screened garments produced by The Incredible T-Shirt Company (hereinafter referred to as the "manufacturer"), an unrelated Canadian company. The seller provided "unique" designs to the manufacturer which were used to produce the silk-screened garments. The seller then purchased the merchandise from the manufacturer for resale in Canada and the U.S.

The seller states that the transactions at issue involved circumstances in which the seller's sales personnel attended trade shows in the U.S. where the designs were displayed. During the shows, the sales personnel accepted orders from unrelated domestic apparel retailers and wholesalers at delivered, freight- prepaid prices. The seller, in turn, consolidated many of its orders and ordered large quantities of garments from the manufacturer.

The manufacturer subsequently invoiced the seller and delivered the finished garments to the seller in Canada. The seller repacked the goods for delivery to its U.S. customers. The seller's counsel states that the seller was importer of record in the transactions involving U.S. purchasers. However, the Entry Summary forms submitted to Customs list Trans-Border Customs Service, Champlain, New York as the importer of record.

One of the seller's transactions was the subject of a Notice of Penalty and Seizure issued under Buffalo District Case No. 87- 0901-00149. You state in your memoranda that the penalty action involved both incorrect/false description and false identification of the parties involved in the transaction. The seller paid a negligence penalty of $1900.00, and the penalty action was closed.

Four other transactions were the subject of your letter to the seller, dated November 19, 1987, demanding payment of additional Customs duties under 19 U.S.C. section 1592(d). You explained in the letter that the seller had presented false pro forma invoices to Customs in the four transactions, resulting in an improper value for the merchandise and a loss of revenue.

After receipt of the demand letter, the seller requested that you seek internal advice on the proper appraisement of the merchandise. Your position is that the sale between the seller and the U.S. customers is the sale for exportation transaction value purposes. The seller claims that the transaction value should be based on the sale between it and the Canadian manufacturer.

ISSUE:

Whether the sale between the manufacturer and the seller or the sale between the seller and its U.S. customer is the price actually paid or payable for the merchandise when sold for exportation to the U.S.

LAW AND ANALYSIS:

Transaction value, the preferred method of appraisement, is defined in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a; TAA) as the "price actually paid or payable for the merchandise when sold for exportation to the United States. . ." (emphasis added). Section 101.1(k) of the Customs Regulations (19 CFR 101.1(k)), defines "exportation" as "a severance of goods from the mass of things belonging to this country with the intention of uniting them to the mass of things belonging to some foreign country".

In C.S.D. 84-54 and Headquarters Letter Ruling (HRL) 542928, cited as TAA #57, we held:

. . . the transaction to which the phrase "when sold
for exportation to the United States" refers, when there are two or more transactions which might give rise to a transaction value, is the transaction which most directly causes the merchandise to be exported to the United States.

The seller cites HLR 543726, dated August 25, 1986, to support its position that the sale between the manufacturer and the seller constitutes the transaction value of the imported merchandise. HRL 543726 involved a subcontract agreement entered into between a contractor and a subcontractor for installation of marble fixtures. Under the agreement, the subcontractor was responsible for purchasing the necessary materials from any source.

Customs contended that the sale that most directly caused the marble to be exported to the U.S. was the "sale" or the contract between the contractor and the subcontractor. The subcontractor argued that the sale between it and its foreign supplier was the correct sale for purposes of transaction value. The subcontractor argued that the specifications submitted to the foreign suppliers indicated that the marble was intended to be used for a construction project located in the U.S. In addition, the subcontractor alleged that when the marble was delivered to the subcontractor (presumably in the foreign country), it was destined for the U.S. for use in the construction project.

We held that the sale between the foreign supplier and the subcontractor constituted the sale for exportation to the U.S. for purposes of transaction value. The subcontract agreement was a service contract between the parties that gave the subcontractor the right to provide the services necessary to complete the contract.

HRL 543726 is not controlling in the present case. In this case there are two sales of the merchandise. In HRL 543726 there was only one sale of the merchandise, which occurred between the foreign supplier and the subcontractor. The second sale was a sale of services involving the installation of the merchandise which did not meet the definition of transaction value.

The seller also cites HRL 543789, dated February 17, 1987, as support for its position that the sale between the manufacturer and the seller is the "price actually paid or payable". In HRL 543789, the importer, a Canadian corporation purchased merchandise in various foreign countries for resale to customers in the U.S. The merchandise was delivered directly to
a public warehouse facility in the U.S., where the merchandise was prepared for subsequent delivery to the ultimate purchasers. The importer retained control of all aspects of the transaction, including bearing the risk of loss from the time of importation into the U.S. until delivery to the ultimate purchaser. Although the importer generally had a customer for the merchandise prior to importation, sometimes, imported merchandise was held in inventory until the importer found a customer.

Customs held that the sale for exportation to the U.S. for purposes of transaction value was the sale between the foreign manufacturer and the importer. The subsequent sales between the importer and the ultimate U.S. purchasers were considered to be domestic sales and did not properly represent the "price actually paid or payable" for the merchandise when sold for exportation to the U.S.

The present case also differs from HRL 543789. In this case the seller purchases the merchandise in Canada from the Canadian seller. The seller takes title to the merchandise in Canada. According to the documents submitted by the seller's counsel, the seller takes title to large quantities of garments. These garments are still part of the mass of goods belonging to Canada.

The documents submitted also indicate that only a portion of the garments purchased from the manufacturer are used to fill orders in the U.S., e.g., 78 Good Sport shirts were ordered from the Canadian manufacturer (Ex. C), but only 24 were shipped to U.S. purchaser (Ex. A). This appears to be the reason for the repacking undertaken by the seller in Canada. It is at this point, at the repacking stage, that the goods are severed from the mass of goods belonging to Canada with the intention to unite them with the mass of goods belonging to the U.S., i.e. the exportation process begins. As a result, the sale that most directly causes the merchandise to be exported from Canada is the sale between the seller and its U.S. customer.

Finally, the seller's counsel has also cited E.C. McAfee Co. v. U.S., 842 F.2d 314 (Fed. Cir. 1988) as authority for its position. As you know the Customs limited the application of the McAfee decision to the facts in the case, i.e., made-to-measure suits. See, HLR 544179, dated April 1, 1988. The merchandise in this case differs substantially from the made to measure suits. The Reactor merchandise can be, and is, sold in places other than the U.S. Thus, the McAfee decision does not apply to the facts in this case.

In sum, the "price actually paid or payable" is the price the U.S. customer paid the seller for the merchandise. If the seller fails to produce these prices then you should proceed sequentially though the remaining bases of appraisement.

Lastly, please note that designs that the seller supplies free of charge to the manufacturer appear to fall under the definition of an "assist" (section 402(h) of the TAA) and should be added to the "price actually paid or payable" for the merchandise to arrive at the transaction value of the goods.

HOLDING:

The sale that most directly causes the merchandise to be exported from Canada is the sale between the seller and its U.S. customer. Therefore, the price the U.S. customer pays the seller is the "price actually paid or payable" for the merchandise.

Sincerely,

John Durant, Director,
Commercial Rulings Division

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