HQ 547493 - Protest 1703-99-100060; transaction value; price actually paid or payable; formula; Transaction Value of Identical Merchandise - United States International Trade Commision Rulings

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HQ 547493

March 14, 2002

RR:IT:VA 547493 MMC

CATEGORY: VALUATION

Port Director of Customs
1East Bay Street
Savannah, Georgia 31401

RE: Protest 1703-99-100060; transaction value; price actually paid or payable; formula; Transaction Value of Identical Merchandise

Dear Port Director:

This is our decision on Protest 1703-99-100060, concerning whether the price as determined by a method specified in a contract represents the price actually paid or payable for transaction value purposes. The protest was filed on behalf of Phenolchemie Inc. by Grunfeld, Desiderio, Lebowitz & Silverman. The goods were entered on February 9, 1998 and the entry was liquidated without review on December 12, 1998. A protest together with a memorandum in support of it, was timely filed on March 26, 1999.

In response to the filing of the protest, you issued a request for information (CF 28) on April 26, 1999, asking for additional information. That information included a copy of the contract containing the method identified for determining the price actually paid or payable, proof of payment for each shipment involved in the referenced protests, a copy of the charter party agreement, proof of ocean freight charges, proof of U.S. storage costs, and a breakdown and complete explanation of the miscellaneous selling costs. Protestant replied to this request in a July 27, 1999, letter with an explanation and accompanying exhibits.

You denied the protest and forwarded it to this office, where it was received on September 8, 1999. We regret the delay in responding. Protestant seeks refunds of the difference between estimated prices declared for the protested entries and the actual prices paid for the imported merchandise.

FACTS:

On January 1, 1998, the Phenolchemie Inc (importer/alleged buyer) entered into a “Cooperation Agreement” (contract) with Phenolchemie GmbH & Co. KG (seller). The seller is engaged in the business of manufacturing, processing distributing and selling certain bulk chemicals (products). The Phenolchemie is in the process of building a plant to produce and process the same products as the seller. In the contract, the buyer and seller state their intent to “cooperate” with regard to
manufacturing, marketing, selling, distributing, process development, and other business areas of common interest. The buyer purchased products from the seller for resale in North America (area). Seller provided the products on an exclusive basis in order to develop the market for the products to be manufactured by buyer after commercial start up of the plant. The contract contains the following relevant information.

1. Business Transition as of January 1, 1998

§1.1 Distributorship
As of January 1, 1998, (PC-GMbH )Seller appoints (PC Inc.) Buyer its distributor of the Products in the Area. Buyer has the right to use sub-distributors or agents in the Area, particularly in order to deal with small customers of the Products and to ensure adequate representation in all regions of the area. Buyer shall honor its Agency Agreement with Windsor Chemicals (dated July 11, 1997, including Heads of Agreement and Seller’s Side letter dated June 3, 1997) for the promotion of the Products to small customers.

§1.2 Assignment of tank storage facilities, office lease and certain rail car leases As of January 1, 1998, Seller will assign to Buyer the tank lease agreements for storage facilities currently used by Seller. In addition, Seller will cause Windsor Chemicals Inc. to assign the office lease and certain rail car leases to Buyer.

§1.3 Insurances

1.3.2 Freight Insurance
Seller agrees to have Buyer named as an additional insured to insure the risk of loss of or damage to the goods while the risk of loss rests with Buyer. In addition, Seller agrees to insure the leased railcars (rolling stock) of Buyer.

§ 1.6 Prices
The products are sold ‘FOB’ (Incoterms 19900 [sic] port of shipment). The prices to be paid for Products by Buyer shall be at arm’s length and determined as follows:

Gross Sales of Product

-discounts, boni, etc. if any
-total freight costs
-total cost of storage
-import duties
-commission payable to sub-distributors or agents -any other miscellaneous costs associated with the distribution -buyer’s commission of 3% of gross sale Total net sales (out of tank)

Actual revenues and cost incurred will be calculated at the end of each month, if necessary, inventory values will be adjusted at the end of each month. Seller will credit or debit the appropriate amount according to this calculation to buyer. Invoice prices shall be based on the expected prices for the forthcoming months.

After the buyer pays the estimated invoices, the actual revenues and costs are computed and the seller issues debits or credits to reconcile the actual revenue and costs.

The protested entries were made during the buyer’s calendar quarter that ended on March 31, 1998, the first quarter during which the contract was alleged to be in effect. Counsel has provided a “schedule” showing the outcome of the application of the pricing method outlined in §1.6 of the contract. The conclusion indicates that there is a difference between the estimated paid costs at the time of entry and the actual costs or “prices” calculated a month later according to the contract. The actual cost “price” is lower than the estimated. As such the buyer seeks a refund from Customs for the portion of duty paid on the estimated cost “price”. Protestant bases the request on the theory that the pricing method provided for in the contract is an acceptable formula for transaction value purposes.

ISSUE:

Whether the subject merchandise may be appraised under transaction value. If so, whether the price, as determined in the method outline in the contract, represents the price actually paid or payable for the 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 preferred method of appraisement under the TAA is transaction value, which 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). 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, insurance, 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. 19 U.S.C. 1401a(b)(4)(A).

In order for transaction value to be applicable, there must be a price actually paid or payable when sold for exportation to the United States. In 19 CFR 152.103(a), Customs Regulations, the following is provided with respect to the price actually paid or payable:

[i]n determining transaction value, the price actually paid or payable will be considered without regard to its method of derivation. It 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. The word “payable” refers to a situation in which the price has been agreed upon, but the actual payment has not been made at the time of importation . . ..

In HRL 544346 dated September 11, 1990, we emphasized that a formula in a contract can be acceptable under transaction value if it is a formula that is based on a future event over which neither the seller nor the buyer has any control. It must be an objective standard over which neither the buyer nor the seller has control, such as the price in effect on the date of export in the London Commodity Market, the example of an acceptable means of a formula used to determine the price actually paid or payable for the imported cited in 19 CFR 152.103 (a)(1).

For example, in HRL 546736 dated March 31, 1998, the buyer, middleman and seller were all related. The buyer sold a chemical compound used as an oxygenating additive and octane booster to the middleman who then resold it to its sister company in the U.S. A contract between the buyer and seller indicated that the price was to be determined by the average of the published high and low prices quoted in a trade publication DeWitt and ICIS for the NOR (Notice of Readiness) month which is reported by an independent survey company. We held that the price determined through the application of the agreed upon formula between the parties may represent the price actually paid or payable for the merchandise because the final price was determined based upon a set price as published in DeWitt and ICIS on a specified future date and neither party had control over the published figures.

If however, the future event is subject to the control of either the seller or the buyer, then the formula fails to establish a “price actually paid or payable” pursuant to transaction value. For example, in HRL 546421 dated March 27, 1998, the ultimate purchase price for the product was dependent upon the gross annual production of the product worldwide. The parties submitted an invoice that was a good faith estimate of the projected price. Within 90 days of the end of each calendar year, the seller sent to the buyer a reconciliation showing the actual worldwide production, the actual price for the product and any debits or credits between the parties. Customs concluded that this method did not result in a fixed price within the meaning of 152.103(a)(1) and that without a fixed price at the time of importation, transaction value could not be used.

In the present case, we disagree with counsel’s conclusion that the price arrived at by the agreed-upon method between the parties represents the price actually paid or payable for the merchandise. Although the contract specifies the method that will be used to determine the price for the product and arguably could be viewed as a formula for such, it is not a formula upon which transaction value can be based. This is because contrary to counsel's assertion, the amounts of the actual revenues and costs incurred are within the control of one of the parties. No element in the formula was based on a future event over which neither the seller or the buyer has any control.

We note that Counsel cites HRL 542975 dated March 9, 1983 in support of his proposition that that the pricing method set out in protestant’s contract is in fact an acceptable formula. We disagree. HRL 542975 was an advanced ruling request where an invoice price reflected a fixed amount for overhead and profit, and a standard cost estimate for labor. We held that the standard cost estimate for labor, while adjusted periodically to reflect actual costs, was not a variable used to effect payment, but rather, payment for the merchandise was based on actual costs. In that prospective ruling request, we indicated that the importer would be permitted to deposit duties based upon the invoiced amount and make periodic deposits, e.g., every 90 days to compensate for any additional labor costs which may have been paid in connection with the production of the imported merchandise during the preceding period. Furthermore, the importer was not entitled to a refund of duties paid, based upon an overestimate of labor costs. Finally, HRL 542975 was a prospective ruling request. The importer notified and/or sought approval for its pricing methodology prior to entry. In the instant situation that did not occur. Rather, protestant entered merchandise declaring the invoice price to be true and accurate and Customs liquidated the entry without examination based on Protestant’s representation. Only after entry and through protest did protestant first notify Customs of the estimated and/or changed nature of the price and seek a duty refund for overestimated costs.

The information presented fails to establish that the contractual method for determining the price is acceptable for purposes of appraising the merchandise under transaction value. Because we find that the price between Phenolchemie Inc. and Phenolchemie GmbH & Co. is not acceptable in determining a transaction value, the imported merchandise cannot be appraised on the basis of transaction value.

When imported merchandise cannot be appraised on the basis of transaction value, it is appraised in accordance with the remaining methods of valuation, applied in sequential order. [19 U.S.C. 1401a(a)(1)] The alternative bases of appraisement, in order of precedence, are: the transaction value of identical or similar merchandise [19 U.S.C.1401a(c)]; deductive value [19 U.S.C. 1401a(d)]; computed value [19 U.S.C. 1401a(e)]; and the "fallback" method [19 U.S.C. 1401a(f)]. Appraisement of the merchandise should proceed sequentially through the subsequent provisions of § 402 of the TAA, with the first alternative basis of appraisement being the transaction value of identical or similar merchandise in § 402(c) of the TAA. It is our understanding that there are transaction values of identical merchandise that can be used under 19 USC402 (c) to appraise the shipments at issue.

HOLDING:

The contractual method for determining the price is not acceptable for purposes of appraising the merchandise under transaction value. Appraisement of the merchandise should proceed sequentially through the subsequent provisions of § 402 of the TAA, with the first alternative basis of appraisement being the transaction value of identical or similar merchandise in § 402(c) of the TAA. This Protest should be administered in a manner consistent with the decision as set forth above.

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 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,

Virginia L. Brown
Chief, Value Branch

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