HQ 547019 - Application for Further Review of Protest 3901-97-102362; price discount; 19 CFR §152.103(a)(1); bona fide sale; J.L. Wood; selling commission; agency; related parties; circumstances of sale - United States International Trade Commision Rulings

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HQ 547019

March 31, 2000

RR:IT:VA 547019 KCC

CATEGORY: VALUATION

Port Director
U.S. Customs Service
610 S. Canal Street
Chicago, IL 60607-4523

RE: Application for Further Review of Protest 3901-97-102362; price discount; 19 CFR §152.103(a)(1); bona fide sale; J.L. Wood; selling commission; agency; related parties; circumstances of sale

Dear Port Director:

This is in regard to the Application for Further Review of Protest 3901-97-102362 dated October 8, 1997, filed by George N. Grammas of Gardner, Carton & Douglas, on behalf of [xxxxxxxxxxxxxxxxxxxxxxxxxxx], (“the importer”) concerning whether price discounts are included in the price actually paid or payable in determining transaction value pursuant to §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 of the imported [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx] (“imported merchandise”) from the importer’s related foreign supplier. Information presented by Counsel at a meeting and in additional submissions, including information presented to this office in a ruling request covering the same issue, was taken into consideration in reaching this decision. We regret the delay in responding.

The information furnished in connection with this Protest will be treated as confidential pursuant to §177.2(b)(7), Customs Regulations (19 CFR §177.2(b)(7)), and 5 U.S.C. §552, as set forth in a letter to Counsel dated the same date as this protest. Additionally, we have excised, in the public version of this decision, the bracketed (“[ ]”) confidential information.

FACTS:

[xxxxxxxxxxxxxxxxxxxxxxxxxxx] (“the importer”) purchases [xxxxxxxx xxxxxxx xxxxxxxxxxxxxxxxxxxxxxxx] (“imported merchandise”) from its foreign supplier, [xxxxxxxxxxxxxxxxxxxxxxxxxxxx]. The importer is a wholly-owned subsidiary of the foreign supplier. In establishing a price for the imported merchandise, the related foreign supplier uses a price list and a discount rating system. The price list and discount rating system are used by the related foreign supplier in sales to both related and unrelated buyers. This discount rating system has been in effect since [xxxx] and has been consistently utilized for all of the foreign suppliers sales worldwide. To date, the related foreign supplier’s sales in the U.S. are only made to the importer and another related party.

The discount rating system is established using the following criteria: (1) volume of foreign supplier’s merchandise purchased by the customer; (2) investment by the customer in spare parts inventory; (3) technical ability of the field service technicians employed by the customer; and (4) the level of Electronic Data Interchange between the customer and the foreign supplier. Based on these criteria, a customer is assigned a rating code. The foreign supplier evaluates a customer’s rating on an annual basis and makes adjustments to the purchase discount offered to the customer depending on any changes in the rating code.

A purchase discount is provided to the customer based on its rating and the delivery time involved in the merchandise order. For the purposes of determining the purchase discount, delivery time is defined as the period from when an order is received by the foreign supplier up to the time that it is ready to be shipped from the foreign supplier to the customer. Based on the rating and delivery time, a customer can receive a discount between [xxxxxxxx] percent. In the case of this protest, the importer received a discount of [xxxxxxxxx] percent.

The importer submitted an affidavit from the Vice President, Parts Sales and Marketing of the foreign supplier attesting to the establishment and use of the discount rating system. Additionally, invoices from the related foreign supplier to other unrelated foreign buyers were submitted for our examination to show that identical price discounts for merchandise identical to the imported merchandise is given to other unrelated parties. Additionally, the affidavit states that the foreign supplier does not seek to control the purchasing decisions of the importer. The foreign supplier states that the importer is not required to purchase any minimum annual requirement and that the importer is free to specify the place, time and method of delivery for each transaction.

The importer states that the imported merchandise is taken into its inventory for sale or use for its own account. However, the imported merchandise which is the subject of this protest was not taken into the importer’s inventory; the imported merchandise was dropped shipped to the importer’s customers. The importer states that the related foreign supplier will have no control over the merchandise after the importer takes title and control of the merchandise. The terms of sale on the invoices are listed as EXW (“ex works”) with title and risk of loss for the merchandise passing from the foreign supplier to the importer at the foreign supplier’s factory. The importer states that usually the foreign supplier will not even know the identity of the end-user customer until after-the-fact when the information is required for administration of new equipment warranties. In its affidavit, the foreign supplier confirmed this statement stating that it would only know the identity of the end-user customer, if the importer requested drop-shipment of the imported merchandise to the importer’s customer.

As noted above, the imported merchandise which is the subject of this protest was dropped shipped to the importer’s customers. The foreign supplier states that it does not have direct contact with the importer’s customers and does not participate in any sale negotiations or other discussions with the importer’s customers. Moreover, the foreign supplier states that it places no resale restrictions on the importer; the importer is free to determine its own resale prices. Additionally, the foreign supplier states that it is not made aware of the final price to the importer’s customer.

You appraised the imported merchandise under transaction value at the invoiced unit values, plus packing, without taking into consideration the specified percentage discount. You informed the importer that the discount was determined to be a selling commission.

ISSUE:

Whether the discounted price constitutes the price actually paid or payable for the imported merchandise, or whether the price discount between the related parties is, in fact, a selling commission which is included in the price actually paid or payable.

If the related parties function as buyer and seller, is transaction value an acceptable basis of appraisement for the merchandise imported by the importer from its parent?

LAW AND ANALYSIS:

Merchandise imported into the United States is appraised in accordance with §402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”; 19 U.S.C. 1401a). The preferred method of appraisement under the TAA is transaction value, defined as "the price actually paid or payable for the merchandise when sold for exportation to the United States," plus five enumerated additions, including any selling commission incurred by the buyer with respect to the imported merchandise.

§402(b)(4(A) of the TAA provides that the term "price actually paid or payable" means:
the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.

The Customs Regulations further provide that the price actually paid or payable “will be considered without regard to its method of derivation. It may be the result of discounts, or negotiations, or may be arrived at by the application of a formula.” 19 CFR §152.103(a)(1). Thus, where a seller discounts its price for certain merchandise to a buyer, and the discount is agreed to and effected prior to importation of the merchandise, the discounted price constitutes the “price actually paid or payable” for the merchandise. See, Allied International v. United States, 16 CIT 545, 795 F.Supp. 449 (1992) and Headquarters Ruling Letters (“HRL”) 545659 dated October 25, 1995, and HRL 543302 dated November 1, 1984. Therefore, if the importer and foreign supplier are functioning as buyer and seller, the discounted price between the parties would constitute the price actually paid or payable for the imported merchandise within transaction value.

Thus, first, we must determine whether the related parties were functioning as buyer and seller. You determined that a sale between the importer and foreign supplier did not occur as the importer was functioning as a selling agent for the related foreign supplier. 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). 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, HRL 544775 dated April 3, 1992, and HRL 543633 dated July 7, 1987.

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, it appears that a bona fide sale occurred between the importer and foreign supplier. The importer assumes title and risk of loss for the imported merchandise from the foreign supplier’s factory. The invoices indicate that the terms of sale are EXW or Ex Works. “Ex works” means that the seller delivers when it places the goods at the disposal of the buyer at the seller’s premises not cleared for export and not loaded on any collecting vehicle. See, International Chamber of Commerce, Incoterms 2000, at pg. 27.

Additionally, information provided by the importer and confirmed by the foreign supplier indicates that the foreign supplier does not seek to control the purchasing decisions of the importer. The foreign supplier states that the importer is not required to purchase any minimum annual requirement and that the importer is free to specify the place, time and method of delivery for each transaction. Moreover, although not the case for the protested entries, the importer states that imported merchandise is taken into its own inventory for sale or use for its own account. The imported merchandise which is the subject of this protest was not taken into the importer’s inventory; the imported merchandise was dropped shipped to the importer’s customers. The importer states that the related foreign supplier will have no control over the merchandise after the importer takes title and control of the merchandise. Moreover, the foreign supplier states that it does not have direct contact with the importer’s customers and does not participate in any sale negotiations or other discussions with the importer’s customers. The foreign supplier states that it places no resale restrictions on the importer; the importer is free to determine its own resale prices. Additionally, the foreign supplier states that it is not made aware of the final price to the importer’s customer for any particular transaction. No other evidence demonstrating that the importer was functioning as a selling agent was available. Therefore, based on the information submitted, we determine that a bona fide sale occurs between the importer and the foreign supplier.

However, the imported merchandise can be appraised under transaction value only if the buyer and seller are not related, or if related, the transaction value is deemed to be acceptable. In this situation, the parties are related pursuant to §402(g) of the TAA. §402(b)(2)(B) of the TAA provides that transaction value between related parties is acceptable only if an examination of the circumstances of the sale indicates that the relationship between the parties does not influence the price actually paid or payable or, if the transaction value of imported merchandise closely approximates the transaction value of identical or similar merchandise in sales to unrelated buyers in the U.S. or the deductive or computed value for identical or similar merchandise.

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, reprinted in Customs Valuation under the Trade Agreements Act of 1979, Department of the Treasury, U.S. Customs Service (October 1981) at 54; 19 CFR §152.103(j)(2)).

In this case, we are of the opinion that the circumstances of the sale test has been met. The foreign seller deals with unrelated buyers in the same way that it deals with related buyers. Thus, the importer and related foreign supplier transact business as if they were unrelated. The foreign supplier grants various discounts based on established criteria from a price list. The same discounts based on matching ratings are given to both related buyers and unrelated buyers. As evidence of this practice, the importer presented invoices from its related foreign supplier to other unrelated foreign buyers showing that identical price discounts for merchandise identical to the imported merchandise was given to other unrelated parties. Thus, transaction value is an acceptable method of appraisement for the imported merchandise in the sale from the related foreign supplier to the importer. Accord, HRL 546953 dated May 5, 1999.

HOLDING:

Based on the evidence available, the discounted price constitutes the price actually paid or payable for the imported merchandise. Additionally, the circumstances of the sale test has been met. Thus, the imported merchandise should be appraised under transaction value pursuant to §402(b) of the TAA.

This Protest should be GRANTED. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065 dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision.

Sixty days from the date of the decision the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on customs Home Page on the World Wide Web at www.customs.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Thomas L. Lobred

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