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HQ 545621

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September 19, 1994

VAL CO:R:C:V: 545621 er

CATEGORY: VALUATION

District Director
San Francisco

RE: Request for Internal Advice (your file ) regarding the appraisement of porcelain tableware articles.

Dear Sir:

This is in response to your memorandum dated February 18, 1994, to the National Valuation Center which was forwarded to this office on April 8, 1994, for reply. Your memorandum accompanied a submission by counsel, dated August 6, 1993, on behalf of their client, [ ] in which they request "practical advice" regarding the appraisement of merchandise imported pursuant to a joint venture entered into between the relevant parties. Your memorandum and their request are being treated as a Request for Internal Advice pursuant to section 177.11 of the Customs Regulations (19 C.F.R. 177.11). Counsel have requested that certain information supplied in connection with this request be treated as confidential pursuant to section 177.2(b)(7), Customs Regulations (19 CFR 177.2(b)(7)). Any such information that appears in this decision has been bracketed and will be deleted from any published versions. We regret the delay in responding.

FACTS:

[ ] is an importer and wholesaler of various types of ceramic tableware. According to counsel, [ ] purchases imported tableware from various vendors in Mainland China and other countries directly or through sellers or agents. The instant submission, however, relates only to those goods manufactured by one Mainland Chinese vendor, ("manufacturer"), a state-run company, which accounts for approximately fifty percent (50 %) of [ ] importations.

Under a prior arrangement, the importer, the manufacturer, a Hong Kong reseller and a Mainland China reseller were each party to the transactions. The importer placed his order for goods with the Hong Kong reseller, who in turn placed the order with the Mainland China reseller, who in turn would place the order with the manufacturer. By counsel's account, the need for the Mainland China reseller in the transaction was brought about because under Chinese laws the manufacturer is not permitted to export goods to foreign markets. After the goods were produced, they were sold by the manufacturer to the Mainland Chinese reseller, who in turn sold the goods to the Hong Kong reseller, who in turn sold the goods to the importer. Counsel state that because all the parties were unrelated, the selling prices of each party presumably contained an element of general expense and profit which was included in the final resale price charged by the Hong Kong reseller to the importer. An undated, unsigned, and incomplete copy of the former agreement was submitted.

This request for internal advice relates to a new method of transacting business which involves the formation of a joint venture. According to counsel, under Chinese joint venture rules and regulations, a joint venture may sell and export the goods that it manufactures. Thus, under the new arrangement, the Mainland China reseller is eliminated because the manufacturer is now permitted, as a "joint venture", to export directly the merchandise it manufactures without having to go through a Mainland China reseller. Under this system, the importer places his order with the Hong Kong reseller, who in turn places the order with the joint venture. The merchandise is manufactured by the manufacturer, on behalf of the joint venture, and sold to the reseller, who in turn sells the merchandise to the importer. A copy of the new agreement was submitted but is not dated and does not include the exhibits referenced in the various articles.

The terms in the joint venture agreement reveal that the total capital funding in the joint venture is [ ], of which [ ] is registered capital. Of the registered capital, the manufacturer contributes [ ], comprising 75 percent; the importer contributes [ ], comprising 12.5 percent; and the manufacturer contributes [ ] comprising 12.5 percent. The manufacturer is to repatriate the importer and the reseller their contributed capital over the 5 year term of the agreement at 20 percent a year. The importer and reseller will deduct from payment to the manufacturer [ ] per year ([ ] each on June 30, and [ ] each on December 31). Repayment begins on June 30, 1994. The agreement further states that the reseller and the importer shall not share any profit or loss of the joint venture company, nor will any interest be due any party on the capital invested. (See Articles 5 and 6).

In Exhibit 5 of the submission, counsel provided a compilation of the old FOB Hong Kong prices, the new FOB Hong Kong prices, and the percentages of variation between old and new prices. The new prices are substantially lower than the old prices, which by your account averages out to be approximately 15 percent. Counsel contend that the difference in the prices under the old arrangement and the new may be accounted for due to the elimination of the profit and general expenses of the Mainland China reseller.

Counsel state that the negotiated prices are FOB Hong Kong and include the profit and general expense of the reseller and the joint venture. Article 7 to the agreement provides that pricing is worked out as described in Exhibit A to the agreement, which exhibit was not included. Discounts are provided for certain inferior grades of the merchandise, and a decorating charge of 10 percent of [ ] grade price is described. This pricing is valid through the end of December 1994, and thereafter may be adjusted each January according to the U.S. Consumer Price Index inflation rate. (See Article 7).

ISSUES:

1. Are the parties to the new joint venture agreement related within the meaning of section 402(g)?

2. In calculating transaction value, may specified amounts, representing repayment for the capital contributions funded by the importer, be deducted from the price actually paid or payable?

LAW AND ANALYSIS:

Transaction value, the preferred method of appraisement, is defined in section 402(b) of the Tariff act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a). Section 402(b)(1) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the "price actually paid or payable for the merchandise when sold for exportation to the United States", plus enumerated additions.

The "price actually paid or payable" is defined in section 402(b)(4)(A) of the TAA as 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 . . .) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller."

Counsel argue that in light of certain facts -- namely, that the capital contributions of the importer and the reseller will be returned or repatriated over a period of five years, the importer and reseller do not share in any of the profit of the joint venture, and upon expiration of the joint venture term, all assets of the company shall belong to the manufacturer -- the capital contributions of the importer and reseller are only temporary loans to the manufacturer with the result being that the parties are not related within the meaning of section 402(g)(1) of the TAA. We disagree. Section 402(g)(1)(F) of the TAA provides that any person directly or indirectly owning, controlling, or holding with power to vote, 5 percent or more of the outstanding voting stock or shares of any organization and such organization shall be considered related parties for the purpose of appraisement. Under this section the seller, reseller and importer are related parties. The statute does not provide that persons otherwise meeting these criteria are unrelated by virtue of the existence between the parties of an agreement whereby capital contributions are eventually repatriated. Accordingly, the manufacturer, the importer and the reseller, are all related parties by reason of their participation in, and ownership of the joint venture.

Counsel cite to TAA 45 (HRL 542666 dated January 26, 1982) as support for their position that the capital contributions of the importer do not constitute part of the price actually paid or payable. In TAA 45 the buyer and seller were unrelated. There the buyer agreed to fund certain capital requirements for facilities and equipment expansion. Per the terms of the contract the importer agreed that no part of the money advanced would be "... set off against the sales price of Schedules A and B ..." of the contract. Schedules A and B outlined all components of the sales prices of the merchandise to be imported. Customs concluded that the cash advance was not tied to the payment for the imported merchandise but represented a separate undertaking or transaction from the payment for the imported merchandise. Accordingly, the advance did not constitute part of the price actually paid or payable for the imported merchandise.

The relevant facts in the instant case differ in significant ways from those in TAA 45. Unlike the terms of the contract in TAA 45, this transaction involves three parties, instead of two, each of which is related to the other. Additionally, here, the agreement expressly provides that repayment of the capital contributions is directly linked to the import transaction in that the importer and reseller are to "... deduct from payment to [the manufacturer] [ ] per year ([ ] each on June 30, and [ ] each on December 31)..." In other words, the deductions are designed to settle the preexisting debt owed by the manufacturer to the importer and the reseller. The repayment is structured in such a way that the importer deducts [ ] a year from payments to the reseller, who in turn deducts that amount plus an additional [ ], totalling [ ], a year from payments to the manufacturer.

It has long been Customs' position that such price reductions between a buyer and seller represent indirect payments and are part of the price when calculating the transaction value of the imported merchandise. See, e.g., HRLs 543152 (June 6, 1984); 543771 (July 11, 1986); 543772 (July 11, 1986); 543766 (September 30, 1986); 543830 (November 7, 1986); and 543877 (March 17, 1987). Because the instant transaction involves three parties and the claimed transaction value is based upon the price paid by the importer to the reseller, the "seller" in the relevant transaction is the reseller, not the manufacturer. Accordingly, the amounts deducted by the importer from the payment remitted to the reseller (seller) are indirect payments and are part of the price actually paid or payable for purposes of calculating transaction value.

Where the parties to a transaction are related, the transfer prices between them are acceptable if the circumstances of sale indicate that the relationship did not influence the price actually paid or payable. Alternatively, the transfer prices between related parties are acceptable if they closely approximate, inter alia, the deductive or computed value test values for identical or similar merchandise. 19 U.S.C. 1401a(b)(2)(B). To our knowledge no previously established test values exist which might have been used by Customs to appraise identical or similar merchandise. Under the circumstances of sale approach, if the importer can document how the prices were negotiated between the parties, and you are satisfied that the evidence demonstrates that the relationship does not affect the price, then the negotiated FOB prices, without the adjustments for repayment of the importer's capital contributions, may form the basis of transaction value, plus any other statutory additions, if appropriate.

We note that the new joint venture agreement references an "Exhibit A", which purportedly sets out how the prices are determined. A copy of that exhibit was not included with this submission. You may want to ask for a copy of that exhibit and any written correspondence between the parties which might reveal the role played by each party and the relative control and independence exercised by each party during the negotiations. If you find out that one of the parties has overall control and dictates the prices with little or no negotiation, this would seem to indicate that the relationship does affect the pricing so as to negate transaction value. On the other hand if, as counsel claims, it appears that the prices include all costs plus a markup covering general expenses and a reasonable profit, then transaction value may be appropriate.

HOLDING:

The importer, Hong Kong reseller and manufacturer are related parties within the meaning of section 402(g) of the TAA. If you are satisfied that the circumstances of sale of the imported merchandise disclose that the relationship between the parties did not influence the price, then the merchandise may be appraised under transaction value on the basis of the total payment represented by the FOB prices between the importer and the reseller, without downward adjustments for repayment of the importer's contributions, plus any statutory additions, if appropriate.

Sincerely,

John Durant, Director
Commercial Rulings Division

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