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HQ 544840




September 29, 1994

VAL CO:R:C:V 544840 ILK

CATEGORY: VALUATION

District Director
Duluth, Minnesota

RE: Application for Further Review of Protest No. 3601-90-000003; Headquarters Ruling Letter 544707; transfer price between related parties; application of formula; identical or similar merchandise; freight charges

Dear Sir:

The subject protest and application for further review is made in conjunction with a request for reconsideration of Headquarters Ruling Letter (HRL) 544707 dated July 16, 1991, and concerns the appraisement of styrene monomer imported by xxxxxxxxxxxxxxxxxxxxxxx (hereinafter referred to as the "importer"), a U.S. corporation. Members of my staff in the Value Branch met with counsel for the importer on March 24, 1994. New documentation submitted in support of the request for reconsideration includes the importer's October 30, 1991 submission, the audit report dated November 8, 1991 and the importer's May 26, 1993 submission with exhibits. The request for reconsideration has been merged into our response on the subject protest. We regret the delay in responding.

FACTS:

Styrene monomer purchased by the importer was appraised on the basis of transaction value of identical merchandise and similar merchandise under §402(c) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA, 19 U.S.C. 1401a(c)). The importer protests this basis of appraisement. The styrene monomer was imported from xxxxxxxxxxxx xxxxxxxxxxxxxxxx (hereinafter referred to as the "manufacturer"). The importer is a subsidiary of xxxxxxxxxxxxxxxxxxxxxxxxxxxx which is a subsidiary of the manufacturer. Consequently the parties are considered related under §402(g)(1).

In HRL 544707 two types of importations were addressed. The first is a direct shipment to the U.S. customer, and the second is a shipment, without a sale to a U.S. customer, to a terminal in the U.S. We found that the parties' pricing method, which they referred to as a "formula," contained adjustments which were inconsistent with an arms-length transaction. We determined that there were no sales to unrelated buyers of identical or similar merchandise, and there was no previously accepted computed or deductive value for use as test values. Therefore, pursuant to TAA §402(b)(2)(B), we were unable to use transaction value as a basis of appraisement, and we ruled that the merchandise which was shipped directly to the U.S. customer should be appraised using the next appropriate basis of appraisement. With respect to merchandise shipped to a terminal without a sale to a U.S. customer, we found that the merchandise was consigned, and as no sale under TAA §402(b) had taken place, the merchandise should be appraised based on the transaction value of identical or similar merchandise under TAA §402(c) whenever appropriate. As we determined that none of the merchandise could be appraised on the basis of transaction value, we did not rule with respect to a freight cost issue.

According to the entry documentation included in this protest, the imported merchandise was shipped directly to Georgia, to a U.S. customer of the importer.

A contract dated August 1, 19xx between the importer and the manufacturer provides for the manufacturer's sale of styrene monomer to the importer. In paragraph 5. the contract sets forth the price of the styrene monomer:

(i) the lower of low domestic contract price (on a per pound basis, F.O.B. xxxxxxx xxxxxxxxxx) for styrene monomer stated in the last publication of CMAI's Monomers Market Report (or a mutually agreed successor or substitute method) issued during the calendar month for which price is being determined hereunder, less discount plus Freight Equalization; or

(ii) spot price in the same publication plus Freight Equalization,
less

(iii)those costs of [the importer] as specified in schedules "B," "C" and "D" hereto other than [the manufacturer] price to [the importer] at Styrene Plant; and,

(iv) a reduction to establish a price that will provide a margin of profit and general expenses to [the importer] of %, based on the FOB value of styrene monomer at xxxxxxxxxxxxxxxxx.

Schedule B provides for xxx xxxxxxxxxx xx xxxxxx xxxxxxxxx xx xxxxxxxxx xx xxxxxxx xxxxxxx. The deductions consist of xxxxxxx xx xxxxxx xxx xxx., xxxxxxx xxx xxxxxxxxx xxxx, xxxxxxx xxxx xxxx, xxxxxxx xxxxxxx (xxx xxxxxx xxx xxx), xxxx xxxxxx, xxxxxx xxx xxxxxxx xxxxxxxx xx xxx xxx xxxxxx xxxx xx xxxx Schedule C provides for the same deductions in shipments of styrene monomer via xxxxxxx terminals, and includes xxxxxxxx xxxxxx xxx xxx xxxxxxxx, xxxxxxxx xxxxxx xxx xxxxxxxx xxxxx. Schedule D provides for the same deductions in shipments via xxx xxxxxx terminal as schedule C, and includes a xxx xxxxxx xxxxx xxx. These different schedules result in the importer paying three different prices for the styrene monomer, depending upon the destination of the styrene monomer. As the subject protest involves a direct shipment of styrene monomer, presumably the schedule B price was paid for the imported merchandise.

The contract provides for payment of each invoice by the 25th day of the month following purchases for the previous month and delivery of the merchandise to the importer at xxxxxxxx (the manufacturer's plant is located near xxxxxxxx), xxxxxxx or another mutually agreed transfer point. The importer is required to pay all xxxxxxxxxxxxxx xxx xxxxxxx xxxxxxx xxxx xxx xxxxx xx xxxxx xxx xxxxxxxx xxxxx xxxxxxxx xx xxx xxxxxxxxxxx. The contract provides that risk of loss of the merchandise passes from the manufacturer to the importer when the merchandise has reached a border point into the U.S. and title to the merchandise passes from the manufacturer to the importer when the styrene monomer passes the loading spout at the manufacturer's plant. These provisions apply to all of the transactions of the importer, whether the styrene monomer is shipped directly to a customer or shipped to a terminal.

An audit of the transactions between the importer and the manufacturer was conducted, resulting in audit report No. Xxx-xx-xxxxxxx, dated November 8, 19xx ("audit report"). The audit covered the years 19xx and 19xx. The audit report states that while both another importer of styrene monomer from xxxxxx and the importer use the xxxxxxxxxx market price as a basis for establishing their price, the other importer's transfer price closely approximates the FOB U.S. xxxxxxxxxx price, while the importer's transfer price begins with the U.S. xxxxxxxxxx price but deducts various costs and profits to arrive at a price that is supposed to approximate statutory deductive value. In its October 30, 1991 submission, the importer claims that the other importer's price is artificial and unrealistic, as well as being 30% to 40% over the xxxxxxxxxx price. The auditors relied in part on a National Import Specialist ("NIS") classification and value report dated October 18, 1988 which stated that the other importer entered styrene at a value approximately xx% higher than that entered by the importer in the instant case. Audit report, p. 2. The other importer's price could not be used as a test value because that was a price for merchandise sold between related parties.

In its protest the importer takes the position that the imported merchandise should be appraised on the basis of transaction value, based upon the formula agreed to by the parties.

ISSUE:

Whether transaction value is the appropriate basis of appraisement for the imported merchandise.

LAW AND ANALYSIS:

In its October 30, 1991 submission, the importer takes the position that the amounts of the elements of the pricing formula are outside of the control of the parties. On that ground, the importer takes the position that the price actually paid or payable is derived from a formula, and the relationship between the parties could not possibly influence the price. In HRL 544707 we stated:

However, the importer made a variety of adjustments to the U.S. xxxxxxxxxx price. These additional adjustments negated the original arms-length agreement to use the U.S. xxxxxxxxxx price, a price over which neither party had control.

In support of its position, the importer cites TAA No.19, in which Customs accepted a price between related parties which was based on a "posted price" and included an adjustment which changed in the event there was an increase or decrease in the posted price. In that case we determined that the procedure permitted the price from the exporter to the importer to be determined by market forces (not by the parties). We do not find that to be the case. Although the xxxxxxxxxx price is determined by market forces, the adjustments are not. For example, with regard to the xxxx percent discount, counsel indicates that "neither party has any control over the xxx% figure, absent renegotiation of the agreement to adjust the figure." October 30, 1991 submission, p.4. Since these adjustments could be renegotiated they were within the control of the parties.

The Customs Regulations provide that a price actually paid or payable "may be the result of discounts, increases, or negotiations, or may be arrived at by the application of a formula, such as the price in effect on the date of export in the London Commodity Market." 19 C.F.R. §152.103(a)(1). The method of determining the price of the styrene monomer in this case goes beyond the concept of a formula as set forth in the Customs Regulations. The method has little relation, if any, to market forces, which relationship we did find in TAA No. 19. As a result Customs cannot find a price actually paid or payable for the imported merchandise. Therefore, the merchandise cannot be appraised on the basis of transaction value.

In HRL 544707, it was concluded that the transactions in which the styrene monomer was delivered to terminals, were consignments to which transaction value was not applicable, as no "sale" within the meaning of TAA §402(b) had taken place. For Customs purposes, the word "sale" generally is defined as a transfer of ownership in property from one party to another for a consideration. J.L. Wood v. United States, 62 CCPA 25,33; C.A.D. 1139 (1974). While J.L. Wood was decided under the prior appraisement statute, Customs adheres to this definition under the TAA. The primary factors to consider in determining whether there has been a transfer of property or ownership are whether the alleged buyer has assumed the risk of loss, and whether the buyer has acquired title to the imported merchandise. See e.g., HRL 543633 dated July 7, 1987. Based on the provisions of the contract between the parties, pursuant to which payment terms were the same as in cases of delivery directly to U.S. customers, and title and risk of loss were passed to the importer by the time the merchandise entered the U.S., we find that a sale within the meaning of TAA §402(b) took place between the parties. However, the restrictions on the application of the transaction value method of appraisement is the same as for the sales in which the styrene monomer is shipped directly to the U.S. customer.

Based on the foregoing we find that transaction value cannot be used as the basis of appraisement for the imported styrene monomer. As transaction value cannot be used as the basis of appraisement, the merchandise must be appraised on the basis of the next appropriate method of appraisement. We agree with the importer's statements that in order for the subject merchandise to be appraised on the basis of the transaction value of identical merchandise and similar merchandise, the requirements of TAA §402(c)(2) must be met. The statute requires that if the sales of identical or similar merchandise are not at the same commercial level and in substantially the same quantity as the sales of the styrene monomer being appraised, the sales must be adjusted to take into account any such differences.

The audit report does not indicate whether there are differences in commercial level or quantity, or whether any adjustments have been made to account for any such differences. In its October 30 submission, the importer asserts that the other company imports the styrene monomer at a different commercial level because it manufactures the styrene monomer into xxxxxxxxxxx for which manufacturing drawback duties are obtained. The importer also claims that the quantity of styrene monomer imported by the other company is different. Customs should determine whether the sales of identical or similar merchandise are at the same commercial level and in substantially the same quantity as the merchandise being appraised, and if not, determine whether sufficient information exists in order to make appropriate adjustments of the sales of the identical or similar merchandise. If there is insufficient information regarding the sales of identical or similar merchandise, or upon which to base any necessary adjustments, the merchandise must be appraised on the basis of the next appropriate appraisement method.

This protest concerns merchandise imported and shipped directly to a U.S. customer of the importer. However, if the facts were different and concerned a sale in which the imported merchandise was shipped to a terminal, the outcome would not change.

In view of our finding that the subject merchandise cannot be appraised on the basis of transaction value, we do not address the importer's payments to the producer or the freight payments made by the importer to the producer.

HOLDING:

Under the facts presented, no price actually paid or payable for the imported merchandise can be established, therefore the imported merchandise cannot be appraised on the basis of transaction value, and the merchandise must be appraised on the basis of the next appropriate appraisement method.

Consistent with the decision set forth above, you are hereby directed to deny the Protest. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director
Commercial Rulings Division

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