HQ 546052 - Application for Further Review of Protest No. 1001-94-105077; Related Parties; Applicability of Transaction Value. - United States International Trade Commision Rulings

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HQ 546052

October 27, 1995

VAL R:C:V 546052 EK

CATEGORY: VALUATION

Port Director
Newark, NJ 07114

RE: Application for Further Review of Protest No. 1001-94-105077; Related Parties; Applicability of Transaction Value.

Dear Sir:

This is in response to the application for further review of the protest referenced above. The protest was filed on behalf of Baroness B Corporation (hereinafter referred to as BB) against your decision in the liquidation of entries of imported wearing apparel.

FACTS:

BB purchased the imported wearing apparel from M. Lange (hereinafter referred to as seller), a designer and manufacturer of women's clothing, and the worldwide owner of the trademark "Rena Lange". Approximately 25% of the shares of BB are owned by Peter Gunthert of Munich, Germany, who also owns an unspecified amount of M. Lange (hereinafter referred to as seller). In order to expand its market to the United States, the seller entered into an agreement with BB whereby BB would be the exclusive distributor of women's clothing of the Rena Lange collection in the United States. BB and the seller are related within the meaning of section 402(g) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. §1401a(g)).

The prices negotiated between the parties included a 16% discount from the European price list. BB indicates that the discount was granted by the seller in order to reflect the exclusive distribution nature of BB's operations in the United States, and to provide products at price points which would be marketable in the United States. Counsel claims that the relationship between the parties did not influence the price
actually paid or payable, and that the prices are the same as those which would have been negotiated with an unrelated party in the same circumstances.

During the second year of operation, BB's sales in the United States more than doubled, and the company was successful in reducing its operating expenses as a percentage of net sales. However, due in part to a significant deterioration in the value of the dollar against the Deutsche Mark, the cost of sales increased which resulted in a deficit of approximately 10% of net sales. Following the time frame covered by the entries involved in the protest, the seller renegotiated its agreement with BB seeking added security due to BB's deficit financial situation The purchase price was revised from the German price list, less 16%, to the price list to distributors. Counsel indicates that the prices to BB continued at the same level as under the first agreement, indicating that the seller had established a separate distributor's price list at prices 16% lower than its price list for sales to non-distributors. BB subsequently ceased operations and the agreement was terminated. BB has submitted an affidavit indicating that operations have ceased and that a significant quantity of unsold merchandise was returned to the seller.

ISSUE:

Whether transaction value is applicable in appraising the merchandise imported into the United States.

LAW AND ANALYSIS:

The preferred method of appraisement is transaction value pursuant to section 402(b) of the TAA. Transaction value is defined as the "price actually paid or payable for the merchandise when sold for exportation to the United States," plus certain enumerated additions. 19 U.S.C. § 1401a(b)(1).

However, imported merchandise is appraised pursuant to transaction value only if the buyer and seller are not related, or if related, the transaction value is deemed to be acceptable. Section 402(b)(2)(B) of the TAA provides that a transaction value between a related buyer and seller is acceptable if the circumstances of sale indicate that the relationship did not influence the price actually paid or payable. Alternatively, a transaction value between related parties is acceptable if it closely approximates: " . . . the transaction value of identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United States [or] the deductive value or computed value for identical merchandise or similar merchandise . . . " . 19 U.S.C. § 1401a(b)(2)(B).

With regard to the "test value" method of validating transaction value, the term "test values" refers to values determined pursuant to actual appraisements of imported merchandise. See, Headquarters Ruling No. 543568 dated May 30, 1986. No evidence has been submitted to indicate that there are any previously accepted transaction values of identical or similar merchandise, deductive, or computed value appraismements of the merchandise. Therefore, the "test value" approach to validate the transaction value may not be used to demonstrate the acceptability of the related party price.

With respect to the circumstances of sale approach, if the circumstances indicate that albeit related, the parties buy and sell from one another as if they were unrelated, transaction value is considered to be acceptable. If the price is determined in a manner that is 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. In addition, Customs will consider the price not to have been influenced if the price is adequate to ensure recovery of all costs plus a profit equivalent to the overall profit realized over a representative period of time. 19 CFR § 152.103(l).

As indicated above, counsel for BB claims that the discount was granted to BB not because of the relationship between the parties but rather, was intended to reflect the exclusive distribution nature of BB's operations in the U.S., and to provide products at price points which would be marketable in the United States. Counsel further states that the seller had no control beyond the distribution agreement over the pricing and sales operations of BB, and that BB made the determination of price levels thought to be acceptable in the U.S. market, and negotiated a price schedule with the seller on that basis. Counsel indicates that BB's markups were consistent with the trade, and its action taken in the ordinary course of business.

Insufficient documentation has been submitted to substantiate the claim that the price was acceptable under the circumstances of sale approach. There is no information with regard to how the seller deals with unrelated purchasers, nor is there any indication as to whether the price was adequate to ensure recovery of all costs plus a profit equal to its overall profit realized over a representative period of time in sales of merchandise of the same class or kind. Counsel states that transaction value is also supported by sales transactions occurring after the end of the distribution agreement with BB in sales to a subsidiary at similar price levels. However, comparing prices in sales between related parties is not appropriate. For comparison purposes, the parties must be unrelated in order for Customs to conclude that the price is acceptable.

It is therefore our position that transaction value is inapplicable in appraising the merchandise. The appraising officer correctly eliminated transaction value as a means of appraisement.

There is no evidence to indicate that an acceptable transaction value of identical or similar merchandise is available to appraise pursuant to section 402(c) of the TAA. Accordingly, the merchandise should be appraised under the next applicable basis of appraisement, applied in sequential order.

In a subsequent submission dated October 20, 1995, BB indicates that in fact deductive value pursuant to section 402(d) of the TAA is available to appraise the merchandise. If adequate information exists in order to appraise pursuant to deductive value, then the merchandise should be appraised accordingly.

HOLDING:

You are directed to DENY the protest with regard to the issue of the acceptability of transaction value. However, if information regarding a deductive value appraisement is presented and is found to be acceptable, then the merchandise should be appraised pursuant to deductive value, section 402(d) of the TAA. In accordance with Section 3A(11)(b) of the 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 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,

Acting Director

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