HQ 0545063 - Transaction value; limitations on use of transaction value; General Note 3(a)(iv) - United States International Trade Commision Rulings

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HQ 545063

September 8, 1992

VAL-CO:R:C:V 545063 GG

CATEGORY: VALUATION

Jonathan M. Fee, Esq.
Grunfeld, Desiderio, Lebowitz & Silverman 1201 West Peachtree Street, N.E.
Suite 4660
Atlanta, Georgia 30309

RE: Transaction value; limitations on use of transaction value; General Note 3(a)(iv)

Dear Mr. Fee:

This is in response to the ruling request, dated December 4, 1991, made by you on behalf of your client, xxxxxxx xxxxxxx Corporation ("xxxxxxx"). As you know, on July 28, 1992, we declined to issue a ruling because of uncertainty about the parameters of the proposed transaction. In a letter dated July 30, 1992, you asked that we reconsider our decision not to rule and stated that a ruling, if issued, would apply only to transactions between unrelated parties. You further stated that if xxxxxxx chooses to sell merchandise to related parties, it will do so with the understanding that those transactions are not addressed by the requested ruling.

On the basis of this information, we are now able to issue a ruling.

FACTS:
xxxxxxx plans to sell to U.S. customers men's cotton T- shirts that will be produced in its Northern Mariana Island manufacturing facility. For purposes of this ruling, it is understood that these customers will not be related persons as defined by Section 402(g)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a).

The knit cotton fabric that will be used to make the T- shirts will be imported into the Northern Mariana Islands from China, or other foreign countries, in bolts or rolls, with no marking or other indication of where the fabric is to be cut. The fabric will then be cut, sewn into T-shirts, pressed, packaged and then shipped directly from the factory to xxxxxxx's customers in the United States.

The price of the T-shirts will be negotiated, on an arm's length basis, with the unrelated U.S. customers. In price negotiations, xxxxxxx will generally be motivated by the desire to maximize return to its stockholders; its customers, by the desire to receive T-shirts of acceptable quality, in acceptable quantities, at the lowest obtainable price. Both parties will be aware of, and influenced by, the fact that the T-shirts will be duty-free under General Note 3(a)(iv) if the cost of foreign materials and of their transportation to the Northern Mariana Islands, does not exceed 50 percent of the T-shirts' appraised value. If such cost does exceed that amount, it is estimated that the T-shirts will be subject to a 21 percent ad valorem duty.
xxxxxxx expects to sell the T-shirts for $24.00 per dozen, F.O.B. Northern Mariana Islands port of export. There will be no packing costs, buying or selling commissions, or royalty or license fees incurred by the U.S. customers, nor will the U.S. customers furnish any assists. No part of the U.S. customers' proceeds of resale, disposal or use will accrue, directly or indirectly, to xxxxxxx. xxxxxxx will not pay rebates to its customers, nor will it sell other products to, or conduct any other business transactions with, them. There will be no restrictions on the disposition or use of the T-shirts by the U.S. customers. Neither the sale of, nor the price for, the T- shirts will be subject to any condition or consideration beyond payment of the $24.00 purchase price.
xxxxxxx estimates that the actual purchase price of the fabric and thread, plus the cost of transporting the fabric and thread from their country of origin to the Northern Mariana Islands, will be $10.50 per dozen T-shirts. The company will spend approximately $0.50 per dozen for U.S.-made labels and packing materials shipped directly from the United States to the Northern Mariana Islands. Its direct labor cost for the cutting and sewing operations will be approximately $3.00 per dozen. All other estimated general expenses will be $3.00 per dozen.

The estimated profit per dozen T-shirts will be $7.00, computed as follows:

Sale price, F.O.B. Northern Mariana
Islands port of export $24.00

Cost of foreign fabric and thread, inclusive of cost of transportation to the Northern Mariana Islands (10.50)

Cost of U.S.-made labeling and packing materials (0.50)

Direct labor cost (3.00)

General expenses (3.00)
Estimated profit $ 7.00
xxxxxxx does not know whether its estimated profit is consistent with the profit usually reflected in sales of T- shirts, if any, that are made by other producers in the Northern Mariana Islands. For purposes of this ruling request, however, xxxxxxx assumes that its profit will exceed the profit of such other producers.

The price was set at $24.00 to insure that the cost of foreign fabric, inclusive of the cost of transportation to the Northern Mariana Islands, would not exceed 50 percent of the entered value declared to Customs by xxxxxxx's U.S. customers. xxxxxxx notes that if it were to price its T-shirts at $20.75, xxxxxxx would still realize a profit of $3.75, but its U.S. customers would have to pay duty on the T-shirts equal to 21% of $20.75, or $4.36, if the merchandise is appraised under transaction value. The U.S. customers would pay $25.11, which is $1.11 more than they would pay if the price were $24.00. xxxxxxx therefore assumes, for purposes of this inquiry, that duty avoidance is one of the factors that will motivate its U.S. customers to accept xxxxxxx's $24.00 price.

In discussions with the Customs field office on how to appraise the T-shirts, xxxxxxx was advised that its profits and general expenses may be reviewed, and compared with those of other Northern Mariana Island manufacturers, in the effort to determine the proper appraisement method. Customs reportedly told xxxxxxx that if its profits and general expenses were inconsistent with those of other Northern Mariana Island manufacturers, then it might be necessary to appraise the T- shirts under a method other than transaction value. This is of concern to xxxxxxx, whose plans are "critically dependent" on the T-shirts being appraised under transaction value. The use of another valuation method that might result in a value that is lower than the price paid, thereby possibly causing the foreign material content to exceed 50 percent of the total value, could make the T-shirts unacceptable to xxxxxxx's customers. Therefore, xxxxxxx requests a ruling on whether transaction value will be used to appraise its merchandise.

ISSUE:

Whether transaction value is the proper method of appraisal, where qualification for a duty-free entry provision is a primary factor in setting the price of imported merchandise, and where the seller's profits and general expenses are inconsistent with those of other manufacturers?

LAW AND ANALYSIS:

General Note 3(a)(iv) of the Harmonized Tariff Schedules of the United States (HTSUS) provides, in pertinent part, for the duty-free entry of certain apparel articles that are imported from an insular possession, if they were manufactured or produced in the possession, do not contain foreign materials which represent more than 50 percent of the articles' total value, and came directly to the customs territory of the U.S. from the possession.

In Headquarters Ruling Letter (HRL) CLA-2 CO:R:C:S 556070, dated July 1, 1991, Customs confirmed that the Northern Mariana Islands are an insular possession. Assuming that xxxxxxx's T- shirts meet the requirements of being manufactured or produced in the Northern Mariana Islands, they will be entitled to duty-free entry under this special tariff program if they satisfy the 50% foreign value limitation and are imported directly into the U.S. from the Northern Mariana Islands.

Section 7.8(d) of the Customs Regulations (19 CFR 7.8(d)) provides:

In determining whether an article produced or manufactured in an insular possession contains foreign materials to the value of more than 50 percent, a comparison shall be made between the actual purchase price of the foreign materials, plus the cost of transportation to such insular possession, and the final appraised value in the United States determined in accordance with section 402, Tariff Act of 1930, as amended (19 U.S.C. 1401a), of the article brought into the United States.
xxxxxxx has estimated that the cost of the foreign fabric and thread, inclusive of the cost of transportation to the Northern Mariana Islands, will be $10.50. Therefore, to qualify for duty- free entry under General Note 3(a)(iv), that $10.50 figure can constitute no more than 50 percent of the final appraised value of the imported T-shirts. xxxxxxx claims that transaction value is the proper method of appraisement of the T-shirts, and that under transaction value, they may be entered duty free.

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)) provides for the appraisement of imported merchandise in hierarchical order. The primary, or preferred, method is transaction value. Transaction value is the price actually paid or payable for merchandise when sold for exportation to the United States, plus additions for packing costs, selling commissions incurred by the buyer, assists, royalties or license fees, and proceeds of any subsequent resale that accrue to the seller. The term "price actually paid or payable" is defined in section 402(b)(4)(A) of the TAA as "the total payment . . . made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller." Pointing out that a price actually paid or payable will be considered "without regard to its method of derivation" (19 CFR 152.103(a)(1)), xxxxxxx argues that its price can be used to appraise the T-shirts under transaction value. A refusal by Customs to appraise the T-shirts under transaction value because the price was in part set for duty avoidance purposes, would, in xxxxxxx's view, be an improper inquiry into how the price was derived. Notwithstanding the merits of these arguments, transaction value cannot be used in certain circumstances.

The use of transaction value is proscribed when there is insufficient information to determine the amount by which the price actually paid or payable should be increased for any of the five additions enumerated in section 402(b)(1), TAA. This is not applicable here because, under the facts presented, there will be no such additions. Transaction value's use is also inappropriate where any of the limitations described in section 402(b)(2)(A) exist.

The limitations can be divided into four groups: restrictions on the disposition or use of the imported merchandise by the buyer; conditions for which a value cannot be determined; proceeds accruing to the seller; and related party transactions where the transaction value is not acceptable. The purpose of these limitations is to insure that a particular transaction is bona fide and "at arm's length" before the transaction value standard will apply. See S. Rep. No. 249, 96th Cong., 1st Sess. (1979), reprinted in 1979 U.S. Code Cong. & Admin. News 381, at 501.

According to xxxxxxx, the U.S. customers will not be restricted in their disposition or use of the imported T-shirts. xxxxxxx also states that it will not receive, directly or indirectly, any part of the U.S. customers' proceeds of resale, disposal or use of the imported T-shirts. And, although xxxxxxx and its U.S. customers who are the subject of this ruling request will have a business relationship, they will not, according to counsel for xxxxxxx, be related parties as defined by Customs law. Absent either a change in circumstances or evidence that would contradict these factual assertions, there do not appear to be any limitations involving restrictions on use, subsequent proceeds, or related party transactions that would bar the use of transaction value.

The remaining category of limitations, i.e., involving cases in which the sale of, or the price actually paid or payable for, the imported merchandise is subject to some condition or consideration for which a value cannot be determined with respect to the imported merchandise, is also not applicable to xxxxxxx's situation. The only noted condition or consideration that will be placed on the price or sale is that the buyers pay the established $24.00 purchase price. Thus, the proposed sale of T- shirts and their agreed-upon price do not appear to be subject to any factors which would render the determination of the T-shirts' value impossible.

That the price was in part set so that the seller could make a profit, and the buyer take advantage of a duty-free entry provision, is merely a factor that went into the negotiation of the price for the T-shirts. It does not fall under any of the four limitations discussed above.

The separate issue of whether xxxxxxx's profits and general expenses may serve as a reason to prevent the use of transaction value as a method of appraisement, apparently was raised by the field. Having profits and general expenses that are inconsistent with those of other Northern Mariana Island manufacturers is, in and of itself, insufficient cause to require the appraisal of the T-shirts under an alternate method. It would have to be shown that the inconsistency created one of the four limitations discussed above to preclude use of transaction value; this, however, has not been done.

In summary, on the basis of the facts as presented by xxxxxxx, the T-shirts qualify for appraisement under transaction value. However, it should be noted that a condition of this ruling is that there are to be no sales between related parties within the meaning of section 402(g) of the TAA. If such sales should occur, then Customs will treat this ruling as no longer being in effect.

HOLDING:

Transaction value may be used to appraise imported merchandise, even though qualification for a duty-free entry provision is a primary factor in setting the price of imported merchandise and the seller's profits and general expenses are inconsistent with those of other manufacturers, where no statutory limitations exist to preclude the use of transaction value and there is sufficient information to determine the value of any statutory additions to the price actually paid or payable.

Sincerely,

John Durant
Director, Commercial

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