HQ 548236 - Internal Advice; price actually paid or payable; sale for exportation; fallback method - United States International Trade Commision Rulings

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HQ 548236

March 27, 2003

RR:IT:VA 548236 CC

CATEGORY: VALUATION

Thomas H. Kudelka

Field Director, Regulatory Audit Division

U.S. Customs Service

610 S. Canal Street, 9th Floor
Chicago, IL 60607

RE: Internal Advice; price actually paid or payable; sale for exportation; fallback method

Dear Mr. Kudelka:

This is in response to your request for internal advice of November 21, 2002, concerning the valuation of certain computer, electronic, and telecommunication products and components imported by [xxxxxxxxxxxxx xxxxxxxxxxx].

In response to a request for a ruling from [xxxxxxx], we issued Headquarter Ruling Letter (HRL) 547798, dated August 23, 2000, in which we held the proper method of appraisement for merchandise imported by [xxxxxxx] was transaction value. Subsequently, we reviewed that ruling and issued HRL 547926, dated November 20, 2001, holding HRL 547798 void ab initio because it was based upon insufficient facts and supporting documentation. In response, counsel, on behalf of [xxxxxxx], requested your office seek this request for internal advice. You have forwarded a letter from counsel, dated October 29, 2002, explaining [xxxxxxxxx] position on this matter, along with various background documentation, including relevant agreements.

Counsel has requested confidential treatment for the parties and for certain commercial information. Specifically, copies of the following have been provided: an existing Master Supply Agreement with amendments, including the CPR Procedures; the Global Product Supply Agreement with the Introduction and Overview, Logistics and Transportation, CPR Procedures, and International Shipping Invoice Requirements portions of the Supplier Policy Handbook. We agree with your confidentiality request, and the subject information is bracketed in this ruling and will not be disclosed in copies of this ruling made available to the public.

FACTS:

The facts are presented as follows. [xxxxxxx] has, in conjunction with its supplier and selected independent warehouse contractors, a just-in-time inventory management program, which is operated through a network of supplier hubs throughout the United States known as “Centers for Production Replenishment” or “CPRs.” These CPRs act as inventory management facilities located near or in [xxxxxxxxx] various manufacturing facilities and are operated by third parties. [xxxxxxxxx] suppliers engage the services of these third parties for the storage and handling of their product within the CPRs. The CPR program is designed to assure that adequate supplies of product are readily available to [xxxxxxx] on a just-in-time basis and to limit inventory on [xxxxxxxxx] books. In addition, the CPR program helps insulate [xxxxxxx] from the adverse financial effects of continuing declines in component prices that commonly occur in the computer industry.

Under the CPR program, [xxxxxxx] acts as the importer of record for approximately 50 percent, by value, of the CPR-bound product. This internal advice concerns those entries where [xxxxxxx] acts as the importer of record. [xxxxxxxx] enters the merchandise at the contract price in effect at the date of exportation. The commercial invoice from the supplier to [xxxxxxx] contains this price.

The price [xxxxxxx] pays the supplier, however, is not the commercial invoice price. [xxxxxxx] does not take title, nor does it become obligated to pay for the product until it is withdrawn from the CPR. [xxxxxxx] pays the supplier for the product at the contract price in effect on the date the product is withdrawn from the CPR. In most cases the quick turn-around of the supplier’s inventory in the CPR assures that the declared value and the price paid to the supplier are the same. Since it has been the nature of the computer industry for prices to drop through the life of a given product, in some instances the price of a product may decline between the date of exportation and the date of withdrawal from the CPR. Thus, in those instances the price paid to the supplier upon withdrawal from the CPR is less than the price on the commercial invoice. The possibility exists (although it is rare, according to [xxxxxxx]), that the price for a product may increase between the date of exportation and the date of withdrawal from the CPR.

Under its standard Master Supply Agreement, which was revised under the new title of Global Products Supply Agreement, [xxxxxxx] generally requires its suppliers to maintain at least 10 days of inventory of the relevant product in the CPR, although certain suppliers have had this requirement revised to reflect larger lead times for replenishment of certain products. Under the just-in-time operation of the CPRs, products are usually withdrawn from the CPR within days of its receipt into the CPR. However, because the 10-day supply is the usual minimum requirement and [xxxxxxxxx] needs may change due to market demands for a given product, it is possible that some products can remain as inventory in the CPR for longer than the standard 10-day period.

Under its typical CPR procedures, [xxxxxxx] issues an initial blanket purchase order to the supplier for the quantity of product [xxxxxxx] forecasts as needed for a specific time period. The supplier ships the product against the purchase order and issues a commercial invoice based upon the contract price of the product at the time of exportation. [xxxxxxx] enters the merchandise based upon the commercial invoice price. Normally, [xxxxxxx] is responsible for selecting the carriers to ship the product as well as for payment of Customs duties. After importation, the goods are delivered to the CPR. When [xxxxxxx] requires the product, it issues a “pull” request and the supplier invoices [xxxxxxx] at the contract price in effect at the time the merchandise is withdrawn from the CPR.

[xxxxxxx] does not take title to the merchandise until it is withdrawn from the CPR and it makes payment based on the pulls. In addition, [xxxxxxx] is not required to withdraw merchandise from the CPRs. The Master Supply Agreement provides that the supplier may sell the merchandise to other entities if [xxxxxxx] does not have the merchandise pulled within 30 days, or in the case of the Global Product Supply Agreement, when the inventory in the CPR exceeds a specified number of days of merchandise. Despite these provisions, [xxxxxxx] believes that it withdraws in excess of 99 percent of the merchandise in the CPRs.

[xxxxxxx] has difficulty in linking CPR-bound entries with subsequent payments for merchandise withdrawn from CPRs for several reasons. The quantity of product required and delivered by the CPR in response to a pull request by [xxxxxxx] does not generally match the quantity in a specific shipment as originally delivered to the CPR. As a result, in most instances involving imported CPR-bound merchandise, there will be a series of [xxxxxxx] receipts and payments made over time for products covered by each Customs entry. In addition, the product contained in any single Customs entry typically results in multiple pull requests and in multiple receipts and payments. Since the CPR providers are engaged by [xxxxxxxxx] suppliers and are not normally engaged directly by [xxxxxxx], it has no electronic ability to match its post-CPR receipt and payment records to a pre-CPR Customs entry.

[xxxxxxx] believes that the subject entries should be appraised using the transaction value method, with the commercial invoice serving as the price actually paid or payable. If the merchandise cannot be appraised using transaction value, [xxxxxxx] believes the merchandise should be appraised using the commercial invoice price under the fallback method.

ISSUE:

Whether the subject merchandise can be appraised using the transaction value method, and, if not, how should the subject merchandise be appraised.

LAW AND ANALYSIS:

Imported merchandise is appraised in accordance with section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA: 19 U.S.C. § 1401a), and the preferred method of appraisement is transaction valuation. Transaction value is the “price actually paid or payable for merchandise when sold for exportation to the United States,” plus five statutorily enumerated additions. The term “price actually paid or payable” is defined as the “total payment (whether direct or indirect) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.”

Counsel believes that the commercial invoice price is the transaction value for the subject merchandise. Counsel’s first argument is that the commercial invoice price is the price actually paid or payable. Counsel states that the definition of the price actually paid or payable, as stated above, includes not only payments made but those to be made. Thus, Counsel maintains, “the amount payable by [xxxxxxx] to its foreign suppliers for CPR-bound imported products is the price reflected on the commercial invoice prepared at the time of exportation and presented at the time of importation.” In addition, Counsel argues, “[t]he fact that the price actually paid for a product and the price payable for said product at the time of exportation are not the same does not preclude the price payable at the time of exportation from constituting a valid transaction value.”

Counsel’s second argument is that transaction value applies since the transactions between [xxxxxxx] and its suppliers for CPR-bound merchandise constitute sales for exportation. Counsel relies on three cases in support of this position: J.L. Wood v. United States, 62 CCPA 25, 33; C.A.D. 1139, 505 F.2d 1400, 1406 (1974); VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999); and Enercon GmbH and the New World Power Corporation v. International Trade Commission, 151 F.3d 1376 (Fed. Cir. 1998). In addition, counsel argues that the mere fact that title passes to the U.S. purchaser after importation, is not enough to disqualify a sale from being a sale for exportation to the United States, citing HRL 544314, dated April 15, 1991, and TAA #59.

Concerning counsel’s first argument, that the commercial invoice price represents the price payable, 19 CFR § 152.103(a)(1) provides the following:

In 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 (emphasis added).

The commercial invoice price is not the agreed upon price. The agreed upon price is not known until the merchandise is withdrawn from the CPR and payment is based on the price at time of withdrawal from the CPR. It is clear from the definition of payable in 19 CFR § 152.103(a)(1) that the price payable and the price ultimately paid are the same. Consequently, counsel’s argument that the price actually paid for a product and the price payable for said product at the time of exportation do not have to be the same when determining transaction value is erroneous. We note that pursuant to 19 CFR § 152.103(a)(1), we have found that under certain circumstances a pre-determined formula agreed to by the parties prior to importation may be used to arrive at transaction value. See, e.g., TAA #47. However, neither the price paid for the goods withdrawn from the CPR nor the commercial invoice price are based on a predetermined formula used to determine the amount paid for the subject goods. Consequently, it is clear that the commercial invoice price does not represent the price payable for the subject merchandise.

The second argument raised by counsel is that there are sales for exportation for CPR-bound merchandise represented by the commercial invoice price which is fixed at the time of exportation. In determining whether a bona fide sale takes 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 recognized the term "sale," as articulated in the case of J.L. Wood v. United States, 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 producer. In determining whether property or ownership has been transferred, Customs considers whether the potential buyer has assumed 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.

Ownership of the subject merchandise rests with the suppliers until it is withdrawn from the CPR. This is evident because, according to the terms of the relevant agreements, [xxxxxxx] is not required to take possession and ownership of the merchandise by withdrawing it from the CPR. In fact, [xxxxxxx] does not dispute that it does not withdraw all merchandise from the CPR, but simply states that it withdraws practically all of it. [xxxxxxxxx] not having ownership of the subject merchandise is also evidenced by the fact that title does not pass until the merchandise is withdrawn from the CPR. In addition, just as [xxxxxxx] does not have ownership of the merchandise until it is withdrawn from the CPR, there is no consideration transferred until that time. This is evidenced by the fact that a price is not set, and payment is not made, until the merchandise is withdrawn. Consequently, a sale does not take place until merchandise is withdrawn from the CPR. Based on all the above factors, there is no sale for exportation for the subject merchandise.

As stated above, counsel seeks to rely on certain court cases to support its position. One case that counsel relies on is J.L. Wood, supra. Counsel argues that consistent with that case, there is a transfer of property from one party to another for consideration for the CPR-bound merchandise. As discussed above in detail, no transfer of property for consideration takes place until the merchandise is withdrawn from the CPR, and therefore, J.L. Wood does not support counsel’s contention that there is a sale for exportation.

A second case counsel relies on is VWP, supra. In that case Victor Woolen Products of America, Inc. (“VWPA”) imported products from Canada from its related supplier, Victor Woolen Products, Ltd. of Quebec, Canada (“VWPC”). The products were then sold to U.S. customers. The court had to decide whether the goods should be appraised at the price paid from VWPA to VWPC or the price paid by the U.S. customers to VWPA. Thus, an important issue present was whether there were sales for exportation from VWPC to VWPA.

The court found that every requirement for a sale, as defined in J.L. Wood, was present in the transactions between VWPC and VWPA. The court stated the following, at page 1339, as evidence that sales did occur:

VWPC issued invoices to VWPA and VWPA made payment to VWPC against those invoices. Moreover, the transactions were recorded in the books of the companies as sales. Under the terms of sale, VWPC transferred title to, and possession of, the fabrics to VWPA at the factory in St. Victor, Quebec. In consideration of the transfer of ownership, VWPA promised to pay the selling price.

The facts of this matter are quite different from the facts in VWP. Whereas, the court stated in VWP that every requirement for a sale under J.L. Wood was present, it appears the exact opposite in this matter. Although the suppliers issue invoices to [xxxxxxx], [xxxxxxx] does not make payment against those invoices. Instead, [xxxxxxx] makes payments based on the price at the time of withdrawal from the CPR. The transactions are not recorded in the books of the companies until the merchandise is withdrawn from the CPR. Unlike VWP, title does not pass in the country of export; instead; title does not pass until the merchandise is withdrawn from the CPR. In this matter, ownership does not occur until the merchandise is withdrawn from the CPR, and there can be no promise to pay a selling price since there is no selling price at the time of exportation. [xxxxxxx] essentially agrees to pay a to-be-determined price if it withdraws merchandise from warehouse, which is not required. Clearly, VWP lends no support to the argument that a sale, represented by the commercial invoice price, occurs prior to withdrawal from the CPR.

The final case counsel relies on is Enercon, supra. That case concerned the alleged sale from Enercon to New World Power Corporation to import wind turbines that infringed on a patent, in violation of 19 U.S.C. § 1337. Enercon argued, at page 1382, that a sale requires that “title in specific goods pass from the buyer to the seller and that without such delivery of the goods, no sale has occurred.” The court stated that although there was no definition of sale within 19 U.S.C. § 1337, the common definition of the term applied. The court cited a number of definitions of the term sale, including Black’s Law Dictionary and Webster’s Dictionary and concluded, at page 1382, that, “[p]lainly, the common, or usual meaning of the term sale includes those situations in which a contract has been made between two parties who agree to transfer title and possession of specific property for a price.” The court stated that it is common for a sale to be completed even though delivery is to be made in the future. The court concluded, therefore, that a sale does not require an immediate delivery of the goods.

Counsel believes that its situation is like Enercon because there is an agreement that constitutes a sale and title does not pass until after the sale is completed. In Enercon, however, there was a “written offer to sell wind turbines at a specific price per turbine,” and obviously an acceptance to this offer in order for there to be a sale. In this matter, as discussed above, there is no specific price agreed upon for the goods until they are withdrawn from the CPR. The definitions of a sale in Enercon make clear that there must be a price established for a sale to occur. Consequently, Enercon is distinguishable from this matter.

Finally, counsel cites HRL 544134 and TAA #59 which found that the mere fact that title passes to the U.S. purchaser after importation, is not enough to disqualify a sale from being a sale for exportation to the United States. Those rulings found that the title passing after importation by itself, when all other factors led to the conclusion that there was a sale, would not disqualify a sale from being a sale for exportation. For example, in HRL 544134 “the only element of the sale that occurs in the U.S. is passage of title.” In both of those rulings the price was agreed to and set prior to importation. Thus, the facts of those rulings are different from this matter in which the price is not agreed to until after importation and there are other factors, discussed above, which indicate there is not a sale for exportation. Thus, HRL 544134 and TAA #59 do not support counsel’s position that there is a sale for exportation.

Based on the foregoing, there is no sale for exportation. Consequently, the subject merchandise cannot be appraised on the basis or transaction value, pursuant to 19 U.S.C. § 1401a(b).

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)).

The transaction value of identical or similar merchandise is based on sales, at the same commercial level and in substantially the same quantity, of merchandise exported to the United States at or about the same time as that being appraised. (19 U.S.C. § 1401a(c)). [xxxxxxx] is not aware of the existence of identical or similar merchandise for which transaction value has been accepted. We assume there will be no sales of similar or identical merchandise made at or about the same time as the merchandise imported. Consequently, it is not possible to appraise on the basis of the transaction value of identical or similar merchandise.

Under the deductive value method, merchandise is appraised on the basis of the price at which it is sold in the U.S. in its condition as imported and in the greatest aggregate quantity either at or about the time of importation, or before the close of the 90th day after the date of importation. 19 U.S.C. § 1401a(d)(2)(A)(i)-(ii). This price is subject to certain enumerated deductions. 19 U.S.C. § 1401a(d)(3). As indicated above, [xxxxxxx] does not have the ability to effectively match its post-CPR receipt and payment records to a pre-CPR Customs entry. Thus, for any specific entry, [xxxxxxx] is not able to find the price for the merchandise when it is withdrawn from the CPR and the price for the sales that take place in the greatest aggregate quantity. The merchandise cannot be appraised, therefore, under the deductive value method.

Under the computed value method, merchandise is appraised on the basis of the material and processing costs incurred in the production of imported merchandise, plus an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind, and the value of any assists and packing cost. 19 U.S.C. § 1401a(e)(1). Since there is no information on which to base computed value, this method is also unavailable.

When merchandise cannot be appraised under the methods set forth in 19 U.S.C. § 1401a(b)-(e), its value is to be determined in accordance with the “fallback” method set forth in section 402(f) of the TAA. The fallback method provides that merchandise should be appraised on the basis of a value derived from one of the prior methods reasonably adjusted to the extent necessary to arrive at a value. 19 U.S.C. § 1401a(f)(1).

[xxxxxxx] requests that the price on the commercial invoice prepared at the time of exportation be treated as a reasonably adjusted transaction value under the fallback method. Cited in support of this request are HRL 546953, dated May 5, 1999, and HRL 546941, dated August 11, 1999. In both of those rulings we found there was no sale for exportation and thus transaction value was not applicable. In HRL 546953, we found there was no sales for exportation because of the absence of a transfer of ownership, the lack of payment, and the existence of a relationship which influenced the price. In both rulings we found that although transaction value could not be used to appraise the merchandise, under the fallback method a sale could be deemed to have occurred to arrive at a reasonably adjusted transaction value. In HRL 546953, appraisement under the fallback method was based on the invoice price from the foreign seller to the importer.

Counsel argues that the invoice price should be used under the fallback method for a number of reasons. First, it states that most of the imported CPR-bound product is released from the CPR in a relatively short time frame, so that the price shown on the commercial invoice prepared at the time of exportation will be the price paid for most of that merchandise withdrawn from the CPR. In addition, counsel states that the unit price for the imported CPR-bound merchandise as it appears on the commercial invoice prepared at the time of exportation should always be the same as the unit price paid by [xxxxxxx] for the identical product being pulled from the CPR on the date of exportation.

We believe that the reasons articulated above support counsel’s position to use the commercial invoice price under the fallback method. Related to the first reason above, we note that [xxxxxxx] employs a just- in-time inventory operation so that merchandise should not remain in the CPR very long, and thus we would agree that it is likely that most of the time the price on the commercial invoice would be the same as the price paid upon withdrawal from the CPR. In addition, counsel’s second point assures us that there is a method for auditing [xxxxxxxxx] importations and that there is a clear and definite relationship between the commercial invoice price and the price upon withdrawal from the CPR. We also note that counsel has stated that due to the nature of the computer business, most times the cost of products will decrease after importation. Consequently, based on these factors, we find the commercial invoice price acceptable under the fallback method.

Please note that 19 CFR § 177.9(b)(1) provides that each ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. This ruling is based on the presented facts. [xxxxxxx] has stated that the price contained in the commercial invoice is typically the same price paid for the merchandise when it is withdrawn from the CPR. Although some prices paid for merchandise withdrawn from the CPR may decline from the price on the commercial invoice, it is rare that the price would increase. If it occurs more than rarely that the price paid on withdrawal from the CPR increases from the price in the commercial invoice, then this ruling is not applicable in accordance with 19 CFR § 177.9(b)(1). Consequently, when the price paid on withdrawal from the CPR increases from the price on the commercial invoice, [xxxxxxx] should make Customs aware of this fact, so that Customs is able to verify that a price increase indeed is only occurring rarely. In addition, this ruling is being issued based on the assumption that the unit price for the imported CPR-bound merchandise as it appears on the commercial invoice prepared at the time of exportation matches the unit price paid by [xxxxxxx] for the identical product being pulled from the CPR on the date of exportation, which could be verified by Customs.

HOLDING:

The subject merchandise cannot be appraised using the transaction value method. Because none of the other methods of appraisement apply, the subject merchandise should be appraised under the fallback method. The commercial invoice price represents a reasonably adjusted transaction value under the fallback method.

You are to mail this decision to the internal advice applicant no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the 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,

Virginia L. Brown

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