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HQ 546087





May 21, 1998

VAL RR:IT:VA 546087 CRS

CATEGORY: VALUATION

Mr. William Luebkert
Port Director
U.S. Customs Service
Second and Chestnut Streets
Philadelphia, PA 19106

RE: I.A. 29/95; related persons; sale; price actually paid or payable; Generra; Chrysler

Dear Sir:

This is in reply to your request for internal advice of June 19, 1995, forwarded through the Customs Information Exchange, New York, concerning the appraised value of merchandise imported by Kocks Pittsburgh Company, the importer of record, from Friedrich Kocks GmbH & Co., a related party in Germany. Additional information concerning this matter was submitted by counsel for the importer under cover of a letter dated July 29, 1997, following a meeting with members of my staff at Customs Headquarters on June 20, 1997. We regret the delay in responding.

Since the time the internal advice request was filed it became necessary to liquidate the underlying entries. The imported merchandise was appraised under transaction value on the basis of the price actually paid or payable by Kocks Pittsburgh Company plus an amount equal to that realized by the company in the resale of the goods in the U.S. Kocks Pittsburgh disputes the appraisement of the imported merchandise and accordingly filed a protest (No. 1101-97-100193) at the port of Philadelphia contesting Customs' decision. That protest is not technically before this office.

Please note that the importer has requested and been accorded confidential treatment with respect to certain information submitted in connection with this matter. Consequently, any information contained in brackets will be deleted from published versions of this decision.

FACTS:

The imported merchandise consists of various parts and components for a stretch reducing mill including the stretch reducing mill proper, type 270-ID-28, a stretch reducing mill inlet conveyor, seventy roll stands and a roll lathe. The importer, Kocks Pittsburgh Company (Kocks Pittsburgh), is a Pennsylvania limited partnership engaged in supplying specialty mill machinery to the steel industry. Kocks Pittsburgh is comprised of three partners: Mr. Ali Bindernagel, Sr.; Mr. Ali Bindernagel, Jr.; and Kocks Corporation. Mr. Bindernagel, Sr. owns 100 percent of the stock of Kocks Pittsburgh Corporation and has a majority interest in of Friedrich Kocks GmbH &Co., a German limited liability partnership.

Pursuant to an agreement dated December 3, 1991 (the "sales agreement"), Kocks Pittsburgh and Friedrich Kocks GmbH & Co. (hereinafter "Kocks GmbH") and Friedrich Kocks Verwaltung GmbH (hereinafter "Kocks Verwaltung"), contracted "jointly and severally" with the Sawhill Tubular Division of Cyclops Corporation (hereinafter, "Sawhill") for the sale of a twenty-eight stand, stretch reducing mill system and certain ancillary equipment and services, and to install the mill and equipment at Sawhill's plant in Sharon, Pennsylvania. Kocks Pittsburgh, Kocks Gmbh and Kocks Verwaltung are collectively identified in the agreement as the "vendor."

Article III of the agreement calls for Sawhill to pay the "vendor" a total contract price of [$*********] for the "design, engineering, fabrication, assembly and delivery" of the mill and equipment. The total price represents the complete compensation to the vendor in connection with the performance of its obligations under the sales agreement. The terms of delivery are FOB Sawhill's plant, at which time risk of loss passes from the vendor to Sawhill. Article II(a)(ii) of the sales agreement provides that during the design and engineering phase of the work the vendor shall supply to the vendee, i.e., to Sawhill, "foundation outline drawings, bolt and load plans and all associated data required for preparation by Vendee or its contractors and consultants of drawings necessary for the construction of the foundations for the Mill and Equipment; provided, however, that for component parts and equipment of the Mill and Equipment obtained by Vendor from its contractors and vendors, Vendor may deliver to Vendee such drawings thereof as are furnished to Vendor therewith by such contractors and vendors." Pursuant to Article XIV, the vendor, i.e., the three related Kocks companies, acknowledged and agreed that their liabilities to Sawhill for the performance of their obligations under the sales agreement were joint and several.

On December 4, 1991, Kocks Pittsburgh and Kocks GmbH signed a distribution agreement pursuant to which Kocks Pittsburgh agreed to act as the exclusive distributor for Kocks GmbH in the U.S. and Canada. The distribution agreement covers equipment and machinery comprising Friedrich Kocks' supply program, and includes "tube mills as complete mills or as individual components such as hot mills for producing tube shells or stretch reducing mill" (sic). Section 2.1 of this agreement provides that Kocks Pittsburgh will sell the products "as an autonomous and independent distributor or licensee in its own name and for its own account" and that it is "neither a trade representative nor an employee" of Kocks GmbH. Kocks Pittsburgh is not authorized to contract for or on behalf of Kocks GmbH, nor to bind it in any way. Schedule 2 of the distribution agreement sets forth the general terms of delivery between Kocks Pittsburgh and Kocks GmbH. Schedule 2, section 2 provides that Kocks GmbH effects delivery to Kocks Pittsburgh on FOB terms, German North Sea Port. In the instant case, delivery occurred at Bremen.

By letter dated December 17, 1991 (the "letter agreement"), Kocks Pittsburgh "confirm[ed] the receipt of an order from Sawhill" with Kocks GmbH and, in furtherance of the Sawhill contract, placed an order with Friedrich Kocks for certain mechanical equipment and engineering services. The letter agreement sets forth a total price of [$*******], FOB German North Sea Port, for the mechanical be provided, subject to confirmation by Kocks GmbH. In a letter dated April 23, 1992, Kocks GmbH notified Kocks Pittsburgh that the price of a certain item had increased by [$*******]. As a result the total price of the goods and services sourced from Kocks GmbH increased to [$**********]. The mechanical equipment and spares purchased from Kocks GmbH constitute the imported merchandise.

In addition to the merchandise sourced from Kocks GmbH, subcontracts were placed with U.S. suppliers for the supply of additional components for the mill and equipment related to the Sawhill agreement.
[$********] subcontract for certain electrical equipment and spares. The manufacture of certain pipe handling equipment was subcontracted U.S. manufacturers were also involved in the provision of mechanical equipment and parts for the mill and equipment. Other parts of the mill system manufactured in the U.S. include the cooling bed and the inlet conveyor.

Under the letter agreement Kocks GmbH furnished three types of engineering services to Kocks Pittsburgh: general engineering; electrical engineering; and detailed engineering for equipment to be manufactured in the United States. The general engineering performed by GmbH consists of drawings and specifications concerning the functional relationship of mechanical and electrical parts, the foundation of the mill and the overall stretch-reducing mill system. The electrical engineering pertains, inter alia, to the calculation and sizing of motor drives, a complete functional description of all equipment supplied under the agreement, the incorporation of electrical devices and transmitters into intermediate junction boxes, suggestions for positioning electrical devices on control desks, operating and indicator panels and the positioning of electrical cables, conduits and channels in the area of the equipment foundations. This information was provided to [********] to enable it to design an electrical system that would interact with the stretch-reducing mill system. The third category of engineering consists of detail and assembly drawings, bills of materials and calculations in respect of equipment manufactured in the U.S.

In a letter to your office dated August 31, 1993, Kocks Pittsburgh accounted for the difference between the [$*********] price for the mill and equipment as set forth in the sales agreement and the [$**********] paid to Kocks GmbH under the letter agreement. In addition to the two subcontracts, the major element of difference was an amount totaling [$***********] which Kocks Pittsburgh has advised constitutes its gross profit in the Sawhill transaction.

Kocks Pittsburgh has submitted voluminous information regarding the transaction in question. The information submitted includes copies of the relevant agreements, commercial invoices, correspondence with Kocks Gmbh, Sawhill, and other parties to the transaction, bank payment advices, Kocks Pittsburgh's chart of accounts and 1992 audited financial statements, plans and sketches of the mill constructed for Sawhill, product descriptions and specifications, and affidavits from various persons involved in the transaction.

ISSUES:

The issues presented are: (1) whether there was a sale between Kocks Pittsburgh and Kocks Gmbh; (2) whether this sale constitutes a sale for exportation to the United States for purposes of determining transaction value; and (3) whether amounts in respect of certain engineering services are included in transaction value as part of the price actually paid or payable for the imported merchandise.

LAW AND ANALYSIS:

Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. ? 1401a). The primary basis of appraisement is transaction value, i.e., the "price actually paid or payable for the merchandise when sold for exportation to the United States," plus five statutorily enumerated additions thereto, including the proceeds of any subsequent resale, disposal or use of the imported merchandise that accrue, directly or indirectly, to the seller. 19 U.S.C. ? 1401a(b)(1). Transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain "test values." 19 U.S.C. ? 1401a(b)(2)(B). Assuming transaction value is the appropriate basis of appraisement, the following constitutes our position in respect of the issues raised.

In the instant case, Kocks Pittsburgh, Kocks GmbH and Kocks Verwaltung, contracted with Sawhill for the mill system and the ancillary equipment and services. The sales agreement between the parties identifies the three Kocks companies collectively as being the "vendor" in this transaction. In a subsequent letter agreement, Kocks Pittsburgh "confirm[ed] the receipt of an order from Sawhill" with Kocks GmbH and, in furtherance of the Sawhill contract, placed an order with Friedrich Kocks for certain mechanical equipment and engineering services. Given the circumstances of this transaction, in particular, the language of the agreement in which the Kocks companies contracted jointly and severally with Sawhill, we are therefore confronted with the issue of whether there was a sale between Kocks Pittsburgh and Kocks Gmbh.

As you know, in order for imported merchandise to be appraised under the transaction value method there must be a bona fide sale between the buyer and seller. For Customs purposes, the term "sale", as defined by the court in J.L. Wood v. U.S., 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974), means a transfer of property from one party to another for a consideration. In determining whether a bona fide sale has occurred between a potential buyer and seller of imported merchandise, no single factor is determinative. Customs reviews all the facts and circumstances of the transaction and makes its determination on a case-by-case basis. Among the factors which Customs will consider are whether the potential buyer assumed the risk of loss and acquired title to the imported merchandise, and whether the potential buyer paid for the goods.

However, the terms of the sales agreement notwithstanding, we find, based on the totality of the information presented, that the transaction between Kocks GmbH and Kocks Pittsburgh constitutes a bona fide sale. The terms of sale governing the Kocks Gmbh-Kocks Pittsburgh transaction were FOB, German North Sea Port. In accordance with Incoterms 1990, the buyer assumes the risk of loss in an FOB sale at the time the goods pass the ship's rail at the named port of shipment, in this case, Bremen. Thus, Kocks Pittsburgh assumed the risk of loss at this point. In addition, Kocks Pittsburgh acquired title to the goods at this time.

Title to the imported goods also passed to Kocks Pittsburgh in Bremen. As a general matter, title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods. In this regard, section 2-401 of the Uniform Commercial Code provides that "if the contract requires or authorizes the seller to send the goods to the buyer, but does not require him to deliver them at destination, title passes to the buyer at the time and place of shipment. U.C.C. completed its performance by delivering the goods to the port of shipment, at which point Kocks Pittsburgh acquired title to the goods. Kocks Pittsburgh paid Kocks Gmbh for the goods in accordance with the established payment schedule after it, in turn, had received payment from Sawhill.

Moreover, the distribution agreement provides that Kocks Pittsburgh is not to act as an agent or sales representative of Kocks Gmbh, but as a seller in its own right. In this regard, section 2.1 of the distribution agreement provides:

[Kocks Pittsburgh] shall sell the products...as an autonomous and independent distributor or licensee in its own name and for its own account. [Kocks Pittsburgh is neither a trade representative nor an employee of [Kocks Gmbh].

Distribution agreement, ? 2.1. Additional support for the existence of a sale between Kocks Gmbh and Kocks Pittsburgh is furnished by the fact that the record shows that Kocks Pittsburgh initiates contact with its U.S. customers from whom it solicits and accepts orders. Furthermore, the record shows that once the customer's needs have been identified, Kocks Pittsburgh requests bids from various suppliers. In the instant case, the suppliers include not subcontractors involved in the Sawhill deal.

Finally, as to the language of the Kocks-Sawhill agreement which designates the three Kocks companies as the vendor and provides that they will be jointly and severally liable under the contract, counsel has provided an affidavit from an officer of Sawhill to the effect that the terms were added at Sawhill's request during the contract negotiations in order to provide Sawhill with additional security. Specifically, Sawhill requested that a third-party guarantee be secured from Kocks Gmbh and Kocks Verwaltung. However, instead of drafting a separate third-party agreement, it was decided to include Kocks Gmbh and Kocks Verwaltung in the definition of "vendor" in the sales agreement. It was the understanding of the parties that Kocks Gmbh and Kocks Verwaltung were acting as secondary guarantors. Thus, the provisions of the sales agreement notwithstanding, for the reasons set forth above and based on the totality of the evidence, we find that there was a bona fide sale between Kocks Pittsburgh and Kocks Gmbh.

However, due to Kocks Gmbh's involvement in the Sawhill agreement, we also find it necessary to consider whether the related party sale constituted a sale for exportation to the United States. In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit reviewed the standard for determining transaction value when there is more than one sale which may be considered as being a sale for exportation to the United States. The court stated that in a three-tiered distribution system the manufacturer's price represents a valid transaction value when the goods are clearly destined for export to the United States and when the manufacturer and the middleman deal with each other at arm's length, in the absence of any non-market influences affecting the legitimacy of the sales price. Id. at 509. See also, Synergy Sport International, Ltd. v. United States, 17 CIT 18, (1993). Based on the information presented, the imported merchandise was clearly destined for exportation to the U.S. The only question under Nissho is whether the parties dealt with each other at arm's length.

As noted above, Kocks Pittsburgh and Kocks GmbH are related persons pursuant to section 402(g) of the TAA. In order to determine whether a relationship between the buyer and seller of imported merchandise influenced the price actually paid or payable, Customs may, inter alia, look to the circumstances of the sale. 19 Gmbh has provided information which supports a finding that the price of the imported merchandise was settled in a manner consistent with Kocks Gmbh's normal pricing practices and, moreover, that the price to Kocks Pittsburgh was sufficient to recover all costs plus a profit equivalent to that realized in sales, over a representative period of time, of merchandise of the same class or kind. Accordingly, we find that the relationship between Kocks Pittsburgh and Kocks Gmbh did not influence the price actually paid or payable and that, consequently, transaction value is an acceptable method of appraisement.

However, in regard to the determination of the transaction value of the imported merchandise, Kocks Pittsburgh disputes your position that the amount of the profit which Kocks Pittsburgh realized in the contract with Sawhill for the mill and equipment should be included in the price actually paid or payable. As you know, pursuant to section 402(b)(4) of the TAA, the term "price actually paid or payable" is defined as "the total payment (whether direct or indirect...) made, for imported merchandise by the buyer to, or for the benefit of, the seller." 19 U.S.C. ? 1401a(b)(4)(A). In Generra Sportswear Co. v. United States, 13 CIT 482 (1989), rev'd, 905 F.2d 377 (1990), the Court of Appeals for the Federal Circuit held that:

[a]s long as the...payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods. The focus of transaction value is the actual transaction between the buyer and seller....

905 F.2d at 380. Accordingly, it is our position that there is a presumption that all payments made, directly or indirectly, by a buyer to a seller, are part of the price actually paid or payable for the imported merchandise. This presumption may be rebutted, however, by evidence which clearly establishes that the payments are completely unrelated to the imported merchandise. Chrysler Corporation v. United States, 17 CIT 1049, 1056 (1993) (holding that certain shortfall and Special Application fees were not part of the price actually paid or payable for imported merchandise).

In the instant case, the sales agreement with Sawhill specifies a total price of [$**********] for the mill system and certain ancillary equipment and services. Included in the total price is an amount of [$*********] which Kocks Pittsburgh identifies as its gross profit in the Sawhill transaction and which, moreover, it contends should not be included in transaction value as part of the price actually paid or payable for the imported merchandise. The information submitted indicates that the profit was realized on the Sawhill contract rather than on the sale of the imported merchandise. Moreover, bank payment advices which detail the amounts paid by Kocks Pittsburgh to Kocks Gmbh do not support a finding that any additional amounts were paid to Kocks Gmbh over and above the price called for in the letter agreement. Consequently, since the information presented indicates that the profit on the Sawhill contract of [$*******] was not part of the price actually paid or payable for the imported merchandise there is no authority under section 402 of the TAA to include this amount in transaction value. Id. at 1056; see also Brosterhous, Coleman & Co. v. United States, 14 CIT 307, 737 F. Supp. 1197 (1990), overruled on other grounds by Nissho Iwai American Corp. v. United States, 982 F.2d 505 (1992) (holding that in a three-tiered transaction for the fabrication and construction of a paper factory, transaction value was properly based on the prices in the sale between the middleman and the manufacturer of the imported merchandise).

HOLDING:

Based on the information presented, the sale between Kocks Pittsburgh and Kocks Gmbh constitutes a bona fide sale for purposes of determining transaction value. The profit which Kocks Pittsburgh realized in the Sawhill contract should not be included in transaction value as part of the price actually paid or payable for the imported merchandise. Accordingly, you may also wish to dispose of protest no 1101-97-100193 in conformity with this decision.

This decision should be mailed by your office to the internal advice requester no later than sixty days from the date of this letter. On that date, 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
International Trade Compliance Division

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