HQ 545506 - Application for Further Review of Protest No. 3801-93-103165; Bona Fide Sale; Related Party Transactions; HRL 544455 - United States International Trade Commision Rulings

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HQ 545506

November 30, 1995

VAL RR:IT:VA 545506 LPF

CATEGORY: VALUATION

Port Director
U.S. Customs Service
477 Michigan Avenue - Room 200
Detroit, MI 48226

RE: Application for Further Review of Protest No. 3801-93-103165; Bona Fide Sale; Related Party Transactions; HRL 544455

Dear Sir:

This is a decision on an application for further review (AFR) of a protest filed August 19, 1993, against your decision concerning the valuation of industrial robots and robot parts. The entry was liquidated on May 21, 1993. A meeting was held with counsel on December 20, 1994. Since that time counsel as well as your office have the had the opportunity to provide us with further information concerning this matter. Because the classification issue also included in the AFR currently is before the Court of International Trade, it will not be addressed in this decision. With the exception of the request for confidential treatment for the Protest/AFR and Headquarters ruling numbers pertaining to this decision, counsel's request for confidentiality has been granted in accordance with his June 2, 1995 submission.

FACTS:

Since 1985 [****************************************] ("Importer") has imported assembly robots as well as robot parts and accessories into the U.S. from its German affiliate [*********************************** **] ("Manufacturer"). We understand that all concerned parties agree that the companies are related pursuant to section 402(g) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 1401a. Counsel explains that the Importer now is a complete systems integrator who designs and builds various systems which are used mainly in the automotive industry. The Importer employs approximately 40 engineers and servicemen to conduct all the necessary engineering.

The Customs Form 7501 reflects that the Importer served as importer of record. Counsel provided, for our review, purchase notifications from an ultimate U.S. purchaser to the Importer reflecting a price for the merchandise along with costs for various [************ ***********************************] ("services"). Invoices between the Importer and Manufacturer also were submitted indicating that the merchandise was shipped CIF. However, a purchase order from the ultimate purchaser to the Importer indicates that the goods were shipped FOB from Germany to the ultimate purchaser and that payment would occur "upon acceptance of equipment at Seller's Plant by Buyer's Engineering Representative."

In December 1987, a consumption entry audit of the Importer was performed by the Regulatory Audit Division (RAD), North Central Region, at the request of the concerned Detroit Import Specialist. The audit disclosed the following:

1. The Importer is 100% owned by the Manufacturer and the former is the only distributor of these robots in the USA.

2. The Importer and Manufacturer have a common member on their boards of directors.

3. Intercompany correspondence files and telexes indicate that restrictions on sales and prices were imposed by the Manufacturer. Further, the Manufacturer controls and approves the prices the Importer charges its customers.

4. A review of the March 1986, June 1986, October 1986, and January 1987 minutes for the Board of Directors meetings discloses that the Importer received sales commissions from the Manufacturer. It was explained to Customs auditors that a company could buy directly from the Manufacturer although the Importer would still receive a commission from the Manufacturer.

5. A review of the minutes of the Board of Directors meetings and of the 1985 and 1986 year-end financial statement discloses the forgiveness of note-payable debts of the Importer by the Manufacturer.

6. Around 1985, the Manufacturer and [**************************** *******], the parent company of the Manufacturer, contributed sizeable amounts of money to the Importer which was recorded as other paid-in capital in the consolidated balance sheet.

7. A review of the cash disbursement journal, bank documents, and the Manufacturer's open invoice lists and invoice statements reveals that bulk payments were made by the Importer to the Manufacturer for the imported merchandise. Although the payments tied into the invoice amounts, they did not tie into the entered value amounts shown on the entries. The 15% discounts, or commissions, when not deducted on the invoices were deducted from the invoice amounts to compute entered values.

It is our understanding that the appraising officer believed these findings continued to accurately reflect the nature of the relationship between the parties in February 1993, the time the merchandise at issue was entered. Accordingly, it was determined that the relationship between the Manufacturer and Importer was that of a seller and selling agent and the transaction value of the imported merchandise was based on the price paid by the ultimate U.S. purchaser, less non-dutiable costs. In cases where the item was purchased for stock, an invoice price plus a 15% sales commission was utilized.

Counsel claims that changes in the Importer's practices render Customs' 1987 findings inapplicable as far as the entries at issue are concerned. In particular, it is stated that the Importer markets systems integration and engineering and can no longer be regarded as a seller of robots and parts, the Importer independently determines its pricing and marketing policies for U.S. sales both of robots and robot parts, and robot sales always are the subject of a negotiated price between the Importer and Manufacturer based on market factors.

Counsel explains that the parties conduct their negotiations at arm's length and that the Importer is required to pay for each item it receives from the Manufacturer, although the Importer does not pay for the goods at the time the sale actually takes place. Instead, payment is made several times a year for purposes of convenience. Additionally, counsel submits that the prices of the Importer's competitors serves as evidence that the price actually paid or payable was not influenced by the relationship between the parties.

Furthermore, counsel submits that with regard to parts, the Importer imports them on its own account, takes title at the time of sale, pays against invoices and warehouses or stocks these parts for sale from its inventory, often as aftermarket sales and as replacement parts. Although the pricing for parts from the Manufacturer to the Importer is discounted, counsel provides that this is not remarkably high when volume sales are considered in general.

For these reasons, counsel believes that the Importer does not serve as a selling agent for the Manufacturer, but as an autonomous buyer/seller and that the relationship between the Importer and Manufacturer does not effect the price actually paid or payable. Hence, counsel avers that transaction value based on the price paid by the Importer to the Manufacturer is appropriate for appraisement.

ISSUE:

Based on the evidence presented, whether bona fide sales occurred between the Importer and both the Manufacturer and ultimate purchaser and, if so, whether the relationship between the parties did not influence the price actually paid or payable such that transaction value is an appropriate basis of appraisement.

LAW AND ANALYSIS:

As you are aware, the preferred method of appraising merchandise imported into the United States is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 1401a. Section 402 (b)(1) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the "price actually paid or payable for the merchandise when sold for exportation to the United States" plus amounts for the enumerated statutory additions (emphasis added). Accordingly, a bona fide sale must exist between the Importer and Manufacturer if transaction value is based on the price paid by the former to the latter.

In determining whether a bona fide sale has taken place between a potential buyer and seller of imported merchandise, no single factor is determinative. Rather, the relationship is to be ascertained by an overall view of the entire situation, with the result in each case governed by the facts and circumstances of the case itself. Dorf International, Inc. v. United States, 61 Cust. Ct. 604, A.R.D. 245 (1968). Customs recognizes the term "sale," as articulated in the case of J.L. Wood v. U.S., 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974), to be defined as: the transfer of property from one party to another for consideration.

However, several factors may indicate whether a bona fide sale exists between a potential buyer and seller. In determining whether property or ownership has been transferred, Customs considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, Customs may examine whether the potential buyer paid for the goods, and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller.

In determining whether the relationship of the parties to the transaction in question is that of a buyer-seller, where the parties maintain an independence in their dealings, as opposed to that of a principal-agent, where the former controls the actions of the latter, Customs will consider whether the potential buyer:
a. provided (or could provide) instructions to the seller;
b. was free to sell the items at any price he or she desired;
c. selected (or could select) his or her own customers without consulting the seller; and
d. could order the imported merchandise and have it delivered for his or her own inventory.

Based on the information and documentation provided by counsel and by your office, it appears that the Importer acted as a buyer/seller, as opposed to a selling agent. Counsel has advised, at least with regard to the parts, that the Importer acquires title to the merchandise and warehouses or stocks them for sale from its inventory. The shipping terms provided on the submitted invoices and purchase orders are inconclusive as to whether property or ownership was transferred to the Importer. However, in this case, because other relevant evidence has been made available concerning the roles of the parties and of the transaction in general, such evidence should be examined and afforded substantial weight in determining whether such sales in fact have occurred.

In this regard, counsel advises that the Importer independently determines its pricing and marketing policies for its U.S. sales and that the robot sales always are the subject of negotiations between the Importer and Manufacturer. In addition, it is submitted that the Importer is required to pay for each item it receives from the Manufacturer, although payment is made several times a year for convenience. Accordingly, it does not appear that the ultimate U.S. purchasers negotiate their prices with the Manufacturer nor that they control or influence the negotiations between the Importer and the Manufacturer.

The submitted invoices between the Importer-Manufacturer, indicating that the merchandise was sold to the Importer, as well as the ultimate purchaser-Importer purchase notifications, reflecting a price for the merchandise and the attendant services provided by the Importer, are consistent with a finding that the Importer autonomously determines its prices, is paid for the merchandise and not merely a commission for its services and, in general, acts as a buyer/seller. The fact that the ultimate purchaser-Importer purchase order reveals that the goods were shipped directly from Germany to the ultimate purchaser with payment occurring when the goods were accepted at the ultimate purchaser's plant, does not necessarily negate a finding of a bona fide sale.

With regard to the daily operations or role of the Importer, from the information provided it appears that, in general, the Importer appears to have served as a buyer/seller. In particular, counsel explains that the Importer, as a complete systems integrator, designs and builds systems and has its own employees and servicemen who conduct engineering on site. This is confirmed by the ultimate purchaser-Importer purchase notifications reflecting a price for the merchandise along with costs for such services. Accordingly, it appears that, at least in some cases, the Importer purchased robots or robot parts from the Manufacturer and after integrating or customizing the merchandise then sold the completed systems to the ultimate U.S. purchasers.

Finally, from the evidence submitted, it appears likely that the Importer was: 1) free to sell the merchandise at any price it desired; 2) able to select its own customers and negotiate with them without consulting the Manufacturer; and 3) able, if desired, to have the merchandise delivered for its inventory. These factors indicate that the Importer was not subject to control by either the Manufacturer or the ultimate U.S. purchaser and acted primarily for its own account, as is characteristic of an independent buyer/seller as opposed to an agent. See Dorf, supra.

However, regardless of such a determination, we still recognize that imported merchandise is appraised under transaction value only if the buyer and seller are not related, or if related, as is the case between the Importer and Manufacturer, the transaction value is deemed to be acceptable. Section 402(b)(2)(B) of the TAA provides that a transaction value between related parties will be deemed acceptable if an examination of the circumstances of sale indicates that the relationship between the parties did not influence the price actually paid or payable or where the transaction value closely approximated certain "test" values.

Under the circumstances of sales approach, if the parties buy and sell from one another as if they were unrelated, transaction value will be considered acceptable. Thus, if the price is determined in a manner consistent with normal industry pricing practice, or with the way the seller deals with unrelated buyers, the price actually paid or payable will be deemed not to have been influenced by the relationship. Furthermore, the price will not be influenced if it is shown that the price is adequate to ensure recovery of all costs plus a profit that is equivalent to the firm's overall profit realized over a representative period of time in sales of merchandise of the same class or kind. Statement of Administrative Action, H.R. Doc. No. 153, Pt. II, 96th Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 at 54 (1981); section 152.103(j)(2), Customs Regulations (19 CFR 152.103(j)(2)).

Counsel's mere statements that the sale prices between the Importer and Manufacturer always are the subject of negotiations conducted at arm's length does not allay our concerns regarding the influence on the price by the relationship between the parties. Further, counsel's assertion that the discounted price between the related parties is not remarkably high when volume sales are considered in general is without evidentiary or factual support. As far as the circumstances of sale are concerned, we cannot accept the transaction value based on the price paid by the Importer to the Manufacturer without evidence substantiating either that the price was determined consistent with industry pricing practices or with the way the seller deals with unrelated buyers, or that the price was adequate to ensure recovery of all costs plus a profit equivalent to the firm's overall profit in sales of such merchandise.

In addition, counsel has been unable to provide "test" values closely approximating the transaction value based on the price established between the related parties. As stated in Headquarters Ruling Letter 544455, issued March 14, 1995, "it continues to be Customs position that in determining whether a test value closely approximates an instant transaction value, that the test value reflect a value previously accepted as a customs value." Hence, counsel's bare assertion that the prices of the Importer's competitors serve as evidence that the price was not influenced by the relationship is without merit.

Accordingly, insofar as your office confirms that no such "test" values exist, transaction value is not an appropriate method of appraisement. At that point, you would proceed sequentially through the subsequent provisions of section 402 of the TAA to appraise the merchandise pursuant to transaction value of identical or similar merchandise (section 402(c)), deductive value (section 402(d)), computed value (section 402(e)), and the "fallback" method (section 402(f)).

HOLDING:

Based on the evidence presented, although it appears that bona fide sales occurred between the Importer and both the Manufacturer and ultimate purchaser, it has not been demonstrated that the relationship between the parties did not influence the price actually paid or payable such that transaction value is an appropriate basis of appraisement.

You are directed to reliquidate the entries in accordance with the foregoing. In the event that reliquidation would result in an appraised value greater than or equal to the liquidated amount, you are instructed to deny the protest in full. A copy of this decision with the Form 19 should be sent to the protestant.

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 to the public via the Diskette Subscription Service, the Freedom of Information Act and other public access channels.

Sincerely,

Acting Director

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