HQ 545518 - Request for Internal Advice 88/93 Concerning the Appraisement of Forgings and Castings; Sale for Exportation; Related Parties; Transfer Prices. - United States International Trade Commision Rulings

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HQ 545518

August 17, 1995

VAL CO:R:C:V 545518 er

CATEGORY: VALUATION

District Director,
JFK Airport, New York

RE: Request for Internal Advice 88/93 Concerning the Appraisement of Forgings and Castings; Sale for Exportation; Related Parties; Transfer Prices.

Dear Sir:

This is in response to your memorandum dated November 8, 1993, forwarding a request for internal advice, dated October 5 and December 9, 1992 and February 8, 1993, submitted by counsel on behalf of their client, Fortech Inc. ("Fortech") concerning a transaction between the importer, its related party in France, and the ultimate U.S. purchasers. We regret the delay in responding.

FACTS:

The facts below are taken from counsel's submission. Fortech is an importer and distributor of semi-finished open die and closed die forgings of steel, aluminum and titanium, as well as forged seamless rolled rings. The seller is Fortech, S.A. ("S.A.")., a French firm. Fortech and S.A. are related parties 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)).

Fortech solicits orders of the merchandise from its U.S. customers, negotiates its purchases with S.A., and acts as the importer of record of the merchandise it purchases. Pursuant to a Distributorship Agreement ("Agreement") between Fortech and S.A., Fortech acts as the exclusive distributor for the imported merchandise. The terms of the Agreement give Fortech control over its management and business decisions, the conduct of its selling operations in the United States, the quotation of prices for the merchandise which Fortech imports, and the power to solicit and accept orders from the U.S. customers on its own behalf. Fortech's board of directors is separate from that of S.A., and the officers and directors of Fortech have independent decision making authority. All major business decisions affecting Fortech are made by Fortech personnel.

Fortech offices in the U.S. employ seven people. Six of these employees are engaged in the solicitation and consummation of sales to Fortech's U.S. customers. These employees additionally have administrative responsibilities arising from the company's sales activities. Fortech also employs a full-time accountant.

Fortech solicits purchase orders from customers in the U.S. Products ordered by Fortech's customers generally are made to specification. Fortech's U.S. customers have no contact with S.A., except in cases where complicated technical questions are discussed with plant engineers with Fortech's knowledge and approval. Fortech has no authority to contract on behalf of S.A.

Upon receipt of a purchase order from a U.S. customer, Fortech issues a separate purchase order of its own which is forwarded to its supplier in France. Along with its order to the factory, Fortech also forwards copies of any plans or design specifications received from its U.S. customer which are necessary for the manufacture of the merchandise.

For purposes of this response, we will assume that the plans or design specifications, provided by U.S. customers to Fortech and by Fortech to the manufacturers, are undertaken within the U.S. The plans or design specifications, accordingly, do not meet the definition of an assist within the meaning of section 402(h)(1)(A)(iv) of the TAA and are not treated as an assist. Once the merchandise is manufactured, it is shipped directly to the U.S. customer, with Fortech acting as the importer of record.

The invoicing and payment for the merchandise between S.A. and Fortech are conducted independently of the invoicing and payment arrangements between Fortech and its U.S. customers. S.A. invoices Fortech when the merchandise is shipped to the U.S. The payment terms between S.A. and Fortech are sixty (60) days, and interest for late payment may be imposed. Fortech invoices the U.S. customers and payment terms between Fortech and the customers generally are net thirty (30) days.

The U.S. Customers remit payment for the goods directly to Fortech. Fortech retains its mark-up of 4%-5%, representing its profit, and remits to the seller the negotiated amounts. No portion of the mark-ups is remitted directly or indirectly to the seller of the merchandise.

It is your position that you cannot determine whether the price negotiated between Fortech and S.A. is an acceptable transfer price as no test values exist and there is insufficient information upon which to analyze the circumstances of sale. You, accordingly, believe that the transaction upon which the merchandise should be appraised is that between Fortech and its U.S. customers.

By memorandum dated December 30, 1993, the Chief, National Import Specialist Division at the New York Seaport, ("NIS"), advises us that based on the evidence submitted, including the Agreement between Fortech and S.A., they believe that Fortech, though wholly owned, acts independently and is a separate profit center. The conclusion reached is that transaction value should be based on the price paid by Fortech to the related seller.

ISSUE:

Whether a sale for exportation to the U.S. occurred between Fortech and S.A. or between Fortech and the U.S. customers.

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 is transaction value, which is defined as the "price actually paid or payable for merchandise when sold for exportation to the United States," plus certain enumerated additions. 19 U.S.C. 1401a(b)(1). Thus, a bona fide sale must exist between the S.A. and Fortech in order for appraisement of the imported merchandise to be based on the transaction value represented by that price.

Customs recognizes the term "sale," as described in J.L. Wood v. U.S., 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974), to be a transfer of property from one party to another for consideration. In ascertaining whether a bona fide sale has taken place between a purported buyer and seller of the 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). Also see, HRL 545709, dated May 12, 1995.

Several factors may indicate whether a bona fide sale exists between the purported buyer and seller. In determining whether property or ownership has been transferred, Customs considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, Customs may examine whether the purported 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. See, HRL 545709, supra.

In ascertaining whether the relationship of the parties to the transaction is that of a buyer-seller in which the parties maintain an independence in their dealings, as opposed to that of a principal-agent in which 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.

See, HRL 545709 supra.

Based on the information submitted, it appears that a bona fide sale occurred between S.A. and Fortech. According to the terms of the Agreement, Fortech obtains title and risk of loss for the merchandise based on the CIF terms of sales it negotiates with S.A. Based upon Fortech's knowledge of S.A.'s capability to have its factories produce the merchandise ordered, and the prices commanded for such merchandise in the market, Fortech negotiates a price for the merchandise with its U.S. customers. These negotiations are made within price guidelines suggested by S.A. These guidelines reflect the range of prices that the factories believe that the goods will command in the resale market, based upon their knowledge of the market and the prices charged by them for similar merchandise in sales to countries other than the U.S. Fortech generally "marks-up" the prices it pays to S.A. by between 4%-5% to reach its resale price to the U.S. customer.

Fortech's import transactions are not conducted pursuant to formal "sales contracts". Instead, once a price is agreed upon between Fortech and its U.S. customer, the latter generates a purchase order to Fortech for that merchandise. The purchase order embodies the terms agreed upon between Fortech and the U.S. purchaser, representing the contract between Fortech and the customer. There is no other contract linking the rights and obligations of the U.S. customer to S.A. Pursuant to the Agreement, Fortech has no authority to contract on behalf of S.A.

When Fortech receives a purchase order from a U.S. customer, Fortech generates a separate purchase order of its own, which it forwards to S.A. Along with its order to S.A., Fortech also will forward copies of any plans or design specifications received from its U.S. customer which are necessary for the manufacture of the merchandise. When the merchandise is completed, it is usually "drop-shipped" to the U.S. customer with Fortech acting as the importer of record for the merchandise.

Invoicing and payment for the merchandise between Fortech and S.A. are conducted independently of the invoicing and payment arrangements between Fortech and its U.S. customers. The factory invoices Fortech when the merchandise is shipped to the U.S. Fortech invoices its U.S. customers after the merchandise clears U.S. Customs.

The U.S. customers remit payment for the goods directly to Fortech. Fortech retains its mark-up of 4%-5% and remits to S.A. only the amounts negotiated between it and S.A. for the imported merchandise.

Based on the evidence submitted, we find that Fortech is: (1) in a position to give instructions to the seller; (2) free to sell the merchandise purchased from the seller at any price it desired; and is (3) able to select its own customers and negotiate with them without consulting the seller. It is not clear whether Fortech ever purchases the subject imported merchandise for its own inventory; however, based on the evidence submitted it appears that Fortech could, if desired, have the merchandise delivered for its own inventory. In sum, these factors indicate that Fortech is not subject to control by the seller and acted primarily for its own account, as is characteristic of an independent buyer/seller as opposed to an agent. See Dorf, supra and HRL 545709 supra.

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 for exportation to the United States. The court reaffirmed the principle of E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that a manufacturer's price, rather than the middleman's price, is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. In reaffirming the McAfee standard, the court stated that in a three-tiered distribution system:

The manufacturer's price constitutes a viable 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 that affect the legitimacy of the sales price.... [T]hat determination can only be made on a case-by-case basis.

Id. at 509. See also, Synergy International, Ltd. v. United States, 17 C.I.T. , Slip Op. 93-5 (Ct. Int'l Trade January 12, 1993).

As a general matter in situations of this type, Customs presumes that the price paid by the importer is the basis of transaction value. In order to rebut this presumption the importer must, in accordance with the court's standard in Nissho, provide evidence that establishes that at the time it purchased, or contracted to purchase, the imported merchandise the goods were "clearly destined for export to the United States" and that the manufacturer and middleman dealt with each other at "arm's length."

In the instant case, the importer is not making a claim that a price other than the price paid by the importer forms the basis of transaction value. Accordingly, the importer does not have to overcome the above-noted presumption. Nonetheless, we note that it is evident from the information submitted, that the merchandise is clearly destined for the U.S. in that it shipped directly from the factory to the U.S. customer and is made to the specifications of the U.S. customer. We presume that, if requested, documentation such as purchase orders between Fortech and the U.S. customers and between Fortech and S.A., and the plans and specifications provided by the U.S. customer to Fortech for use by the factory, could be presented to Customs. In sum, as discussed above, based on the terms of the Agreement we are satisfied that a bona fide sale occurs between Fortech and S.A.

As noted above, Fortech and S.A. are related parties within the meaning of section 402(g) of the TAA. Imported merchandise may 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. As you know, section 402(b)(2)(B) of the TAA sets forth two methods under which a transaction value between related parties will be deemed acceptable. The first is where an examination of the circumstances of sale indicates that the relationship between the parties did not influence the price actually paid or payable. The second is where the transaction value closely approximately certain "test" values. 19 U.S.C. 1401a(b)(2)(B).

There are no previously determined test values. Under the circumstances of sale method, Customs may examine the manner in which the buyer and seller organize their commercial relations and the way in which the price in question was derived in order to determine whether the relationship influenced the price. No information was submitted to demonstrate that the price was settled in a manner consistent with the normal pricing practices of the industry in question, or with the way in which the seller settles prices with unrelated buyers. 19 CFR 152.103(l)(1)(i)-(ii). Nor has any information been submitted to demonstrate whether the price was adequate to ensure recovery of all costs plus a profit equivalent to the buyer's overall profit realized over a representative period of time. 19 CFR 152.103(l)(1)(iii). While counsel's description of the manner in which the parties negotiate the price, and the provisions in the Agreement which reflect the parties' intent to deal with each other in an independent manner is some evidence that the transfer prices are acceptable, you may want to obtain additional information from the importer regarding this issue.

HOLDING

Based on the evidence submitted, we find that a bona fide sale occurs between Fortech and S.A. Transaction value may be based on the price actually paid or payable by Fortech to its related party S.A. provided you are satisfied that the transfer prices are acceptable.

Sincerely,

John Durant, Director
Commercial Rulings Division

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