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HQ 554999

January 5, 1989

CLA-2 CO:R:CV:V 554999 VLB

CATEGORY: VALUATION

333 West Wacker Drive
Suite 1900
Chicago, Illinois 60606-1218

RE: Request for Reconsideration of Rulings 543916 and 543933

This is in response to your letter dated April 19, 1988, requesting reconsideration of the above-referenced rulings.

FACTS:

This case involves the sale of automotive pumps and relays (hereinafter referred to as the "importer"), the seller's U.S. subsidiary.

The case has a long and complex history beginning on February 4, 1985, when the Chicago field office requested internal advice (25-85) from Headquarters on whether transaction value was the proper appraisement method for the merchandise. In response to this request, Customs issued ruling 543519 dated September 3, 1985. This ruling examined evidence submitted by the importer to determine whether the parties relationship influenced the price actually paid for the merchandise.

You assure us that the following relevant portions of ruling 543519 discussing the evidence submitted by the importer is still correct.

The importer conducts its automotive business through two divisions. The first division sells exclusively to original equipment manufacturers (OEM). The second division, known as the Sales Group supplies automotive products to the replacement market. Both divisions are set up as individual profit centers, each having its own personnel and making its own decisions regarding the purchase and sale of automotive products.

The OEM division and the seller negotiate prices in two different ways. For components that are used in U.S.
manufacturing operations, the parties normally negotiate prices on an annual basis. The OEM division receives price quotations for various products from three divisions of the seller. These price proposals are sent to the OEM division's plant controller in Charleston, South Carolina, who, after looking at the pricing of competitive U.S. sellers of similar merchandise, will determine whether or not the seller's proposed prices are acceptable. If the price is unacceptable, the OEM division will demand price reductions from the parent. The annual price negotiations take place at the vice presidential level between the OEM representative and his counterpart in the seller's supply division.

If the parties do not reach an agreement, there are three alternatives. First, they may consult a mediator or mediators at the seller's company. If the OEM division is still dissatisfied with the price, it may attempt to get the component from another source, which may be a related company in another country or an unrelated source. The third alternative is for the OEM division to choose not to stock the product.

With regard to the finished products, much of the technical work and product development must be done by the seller's divisions from which the OEM division purchases. Therefore, prices for finished products are negotiated on a case-by-case basis. Factors that come into play are: the relative engineering efforts of the parties, the warranty costs to the importer, the OEM division's profit margin for the product and handling costs, and the competitive sellers' prices of similar items.

In all cases, the OEM division takes title to the merchandise from the seller, either on an ex-factory or central warehouse of supplier basis. The profit margins and general and administrative expenses vary by individual product. The prices to the importer's customers are determined on the basis of competitive conditions in the U.S. The OEM division establishes the financial arrangements for payment from its customers, which are made directly to the OEM division. If the U.S. purchaser fails to pay, the OEM division absorbs the loss. The OEM division also provides warranties for the merchandise it sells and absorbs losses against warranties.

The importer pays the supplier weekly for multiple invoices and the payment generally equals the invoice amounts.

The Sales Group orders its merchandise from either the seller or through other related companies throughout the world, depending upon availability and price. The Sales Group is its own profit center and the seller does not control decisions regarding where it orders its merchandise.

The starting point in pricing negotiations is prices contained in a catalogue that the seller publishes. The basis for the catalogue prices is the price of merchandise to unrelated parties in Germany. The applicable catalogue price is determined by the level of distribution of the purchaser. Therefore, unrelated parties in Germany could receive the same price as the price that the Sales Group pays for merchandise purchased from the parent. In most instances, the Sales Group does not accept the catalogue price and additional price negotiations take place. Specifically, if the catalogue price is not competitive, the Sales Group demands a price reduction.

If a satisfactory result on price concessions is not reached, the Sales Group will either refuse to buy the product or will contact another company for purchase of the product. In certain instances, where the product is not a specialized Bosch product, the Sales Group goes to a domestic unrelated manufacturing source for the product.

There are also instances where the Sales Group has purchased merchandise from an unrelated foreign supplier when the price from the seller is unsatisfactory. In all instances, the Sales Group acts as an independent profit center and the success of its executives is measured, to a great extent, on the return of profits for their division.

The Sales Group determines the prices to its U.S. customers and the terms of payment. The profit mark-up is determined on the basis of market studies the Sales Group conducts. Other details of its transactions are similar to the OEM division's sales.

Based on the foregoing information, we held in ruling 543519 that the price actually paid or payable for the merchandise was not influenced by the parties' relationship. Therefore, transaction value was the appropriate basis of appraisement.

Several months after the issuance of ruling 543519, you informed Customs that certain statements in the internal advice request that formed the basis for ruling 543519 were incorrect. The statements involved the payments from the buyer to the
seller. You stated that the were three types of payments made by the importer to the seller in addition to the invoice price. The payments included (1) specialized tooling, (2) reimbursements for out-of-pocket expenses for underutilized capacity (so-called maintenance payments) and (3) a profit sharing program between the importer and the seller.

As a result, on July 15, 1986, the Charleston, South Carolina, Customs office sought internal advice (61-86) from Headquarters on the dutiability of the special tooling and maintenance payments. Customs Headquarters issued ruling 543882 dated March 13, 1987, in response to the internal advise request. In that ruling, we held that the payments for the specialized tooling were "indirect payments" made by the importer to the seller. Therefore, the payments were part of the price paid or payable for the imported merchandise and were to be included in dutiable value.

In addition, in ruling 543882, we held that the "maintenance" payments for the seller's out-of-pocket costs resulting from underutilized capacity were not part of the price actually paid or payable for imported merchandise. Rather, the payments were made to compensate the seller for expenses incurred in preparation for production of merchandise contracted for by the importer but not imported. Therefore, the payments were not dutiable under transaction value.

On March 30, 1987, after the issuance of the previously discussed rulings, the Chicago Customs office requested reconsideration of ruling 543519 which held that transaction value was the proper appaisement method. Customs in Chicago argued that in light of the new information submitted by the importer, the ruling was based on incomplete data.

Thus, on September 23, 1987, Customs Headquarters issued ruling 543916 which revoked ruling 543519 on the basis that the ruling was not based on accurate and complete information. On the same date, Customs also issued ruling 543933, revoking ruling 543882 concerning the specilized tooling and maintenance payments. The basis for the revocation was that because the transaction value ruling was revoked, the underlying assumption in ruling 543882 that transaction value applied was "no longer valid". Therefore, ruling 543933 stated that there was "no issue to decide".

The result of this "rule-revoke" scenario is that the appraisement issues must now be addressed pursuant to the importer's request for reconsideration of the revocation rulings (543916 and 543933).

ISSUES:

(1) Whether transaction value is the proper method of appraisement for the imported merchandise.

(2) Whether the importer's payments to the seller for the specialized tooling, maintenance, and profit sharing are dutiable.

LAW AND ANALYSIS:

Transaction value, the preferred method of appraisement is defined in section 402(b)(1) 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 United States . . . ." 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; . . .

Thus, in determining whether the relationship between the parties influences the price of imported merchandise, the buyer and seller must prove that although they are related, they buy and sell from one another as if they are not related. There are two methods for determining whether the transaction value is acceptable. The first method involves an examination of the circumstances of the sale of the imported merchandise to determine if the relationship between the buyer and the seller influenced the price actually paid or payable. The second method involves using 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, it appears that the importer and the seller meet the first test. That is, it appears that the relationship between the parties does not influence the price actually paid or payable. The importer has assured us that the method for determining the price of the merchandise continues to be the same method described in ruling 543519, with the exception of the additional payments that have been revealed subsequently to Customs. Based on this assurance, we find that the additional payments do not affect the method the parties use for negotiating the price of the merchandise. Rather, the additional payments must be examined independently to determine whether the amounts are dutiable under transaction value.

The first payment at issue is for specialized tooling. These payments as discussed previously, are made by the ultimate purchasers through the importer to the seller. We hold that these payments are indirect payments to the seller that must be included in the price actually paid or payable for the merchandise.

The second payment is for the out-of-pocket maintenance costs incurred by the seller for reserving capacity to manufacture the imported goods. If the importer fails to purchase a minimum quantity of merchandise, the importer must reimburse the seller for its out-of-pocket expenses. We hold, as we did in ruling 543882, that these payments are not part of the price actually paid or payable for the imported merchandise. Therefore, the amounts are not dutiable under transaction value.

The third payment at issue involves a profit sharing program. Under the program, the parties share the profits on the resale of the imported relays. You and Customs in Chicago previously reached an agreement that these amounts are dutiable as additions to transaction value under section 402(b)(1)(E) of the TAA which states that
proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrued, directly or indirectly, to the seller [are to be included in the transaction value of the merchandise].

We find nothing in the file that necessitates a reversal of that agreement.

HOLDING:

(1) The evidence presented by the importer demonstrates that the parties' relationship did not affect the price actually paid or payable for the imported merchandise. Therefore, transaction value is the proper appraisement method.

(2) The specialized tooling and profit sharing payments are indirect payments to the seller that are dutiable under transaction value. The maintenance payments for the seller's
out-of-pocket expenses in reserving manufacturing capacity for the importer are not part of the price actually paid or payable for imported merchandise. Thus, the payments are not dutiable.

Sincerely,

Harvey Fox, Director
Office of Regulations and Rulings

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