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HQ 545929





January 30, 1998
RR:IT:VA 545929 er
CATEGORY: VALUATION

RE: Application for Further Review of Protest 2002-94-101458; Request to Set Aside Denial of Applications for Further Review of Protest Numbers 2002-95-100063, 2002-95-100326, and 2002-95-100420; Transaction Value; Transfer Pricing; Related Parties.

Port Director
U.S. Customs Service
New Orleans, Louisiana 70130

Dear Sir:

This is in response to the application for further review of protest number 2002 94 101458, dated October 21, 1994, submitted by a broker on behalf of AVX Corporation (“AVX”), which was approved for review by your office on February 24, 1995. The application was forwarded under separate cover dated March 2, 1995, to this office for review. Concurrently before this office is a request dated April 2 and June 11, 1996, submitted by counsel on behalf of AVX to set aside the denial of the applications for further review of protest numbers 2002-95-100063, 2002-95-100326, and 2002-95-100420. We regret the delay in responding.

FACTS:

This protest involves tantalum capacitors imported by Protestant from Europe and El Salvador. AVX’s British subsidiary, AVX Limited, and a German affiliate manufacture tantalum anodes, which serve as the principal component of tantalum capacitors. Certain of these anodes are shipped from England or Germany to AVX’s subsidiary in El Salvador, where assembly operations are performed to produce completed capacitors. AVX imports the completed capacitors for sale in the U.S., to unrelated third parties. Other tantalum anodes, which are manufactured by AVX Limited, undergo assembly in Europe into finished capacitors and are imported directly from Europe by AVX, also for sale in the U.S. to unrelated parties.

According to counsel, AVX and AVX Limited establish intercompany transfer prices which consist of the sum of (1) AVX Limited’s cost of production of the anodes in Europe, (2) the value of the work performed in El Salvador (if applicable), (3) 5% profit for AVX’s El Salvador subsidiary (if applicable), and (4) a 5% surcharge to account for the general expenses and profit of AVX Limited. Copies of cost submissions for fiscal years 1991, 1992 and 1993 were provided to Customs on April 3, 1995.

You sent a letter of instructions dated January 22, 1990, to AVX in which you advised AVX that the protested merchandise should be appraised under 19 U.S.C. 1401a(f). In that letter you confirmed that the prices for the imported merchandise were established in the manner described above by counsel for AVX. You concluded, however, that the transfer prices were affected by the relationship between the parties. Your stated reason for so concluding is that:
given the hypothetical situation that one or both of the European firms sold the finished capacitors to an unrelated third party, the 5% overall mark-up would have to be higher in that it did not include the cost of selling the goods in the U.S. It was thus apparent that the corporate relationship does affect the so-called transfer price.

In the letter of instructions, you went on to explain why the imported merchandise should be appraised under 19 U.S.C. 1401a(f). Specifically, you state that because there were no other companies in Germany or England that sold identical or similar merchandise to unrelated third parties in the U.S., the merchandise could not be appraised under either 19 U.S.C. 1041a(b) or (c). Deductive value, under 19 U.S.C. 1401a(d) was also rejected because AVX’s manner of conducting its inventory of shipments in and out was such that tracking shipments would result in “an accountant’s nightmare”. Last, computed value, under 19 U.S.C. 1401a(e), was rejected because you had “established that the profit added by [the] two European firms was affected by [the] corporate relationship”. Thus, there would be no basis for a legal addition for profit. Consequently, you appraised the merchandise under 19 U.S.C. 1401a(f), based on the above described transfer price, plus an additional 9%.

The addition of 9% was arrived at for the following reasons. It was your understanding that when AVX resells the imported merchandise to U.S. customers, it aims for a 14% mark-up. The 14% was meant to cover the expenses of selling the merchandise in the U.S. plus a small profit. You, thus, concluded that the tantalum capacitors going through El Salvador should be appraised under 19 U.S.C. 1401a(f) at their:
transfer cost (cost of production in Europe, plus transportation costs to El Salvador, plus the work done in El Salvador, plus 5% profit for El Salvador, plus 5% [general expenses and profit for AVX Limited]), plus 9% ([5% general expenses and profit for AVX Limited plus 9%] to total 14%) to cover the amount which would have been incurred by an unrelated third party sale, net, packed. The appraisement of such tantalum capacitors wholly manufactured in Europe and shipped directly to AVX without any work being performed in El Salvador, will be appraised at their transfer cost, plus 9%, net packed.

Counsel for AVX disputes the stated reasons for rejecting the transfer price as a basis for appraisement under transaction value. Counsel claims that the relationship did not influence the price and that the transfer price represents the full value of the imported capacitors, with the 5% allowance for profit and general expenses to AVX Limited representing the actual amount of profit and general expenses incurred by AVX Limited in sales for exportation to the U.S.

ISSUE:

Whether the related party transfer prices between AVX and AVX Limited were properly disregarded as a basis of transaction value because the prices did not include an amount associated with post-importation resale costs and resale profit?

LAW AND ANALYSIS:

We advised your office of our decision to set aside the denial of the applications for further review and that we would be considering the merits of all the applications for further review, treating protest number 2002 94 101458 as the lead protest. Your office declined the opportunity to submit additional information or documentation in support of your position on the merits of the protests.

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). For purposes of this decision we assume the transactions between AVX and AVX Limited are bona fide sales. However, imported merchandise is appraised under transaction value only if, inter alia, the buyer and seller are not related, or if related, transaction value is found to be acceptable. 19 U.S.C. 1401a(b)(2)(A)-(B). Section 402(f) provides for a method of determining a value for imported merchandise if the value of the imported merchandise cannot be determined under subsections 402(b) through (e) of the TAA.

Your office rejected transaction value on the ground that the relationship between AVX and AVX Limited affected the transfer prices of the imported merchandise. Your conclusion was reached based on your conclusion that if AVX Limited were to sell the same merchandise to unrelated third parties, the 5% overall mark-up would have to be higher to take into consideration the costs associated with selling the goods in the United States.

Counsel argues that there is no legal basis for Customs to impute to AVX Limited a mark-up that includes the U.S. selling expense where such a mark-up does not exist. Counsel points out that the transfer price was set as it was because AVX Limited did not sell to end users in the U.S., and thus did not incur any U.S. selling expenses. It is AVX who resells to the U.S. end users; thus, any addition for U.S. selling expenses would presumably be added to AVX’s resale prices, which prices are not at issue for purposes of determining the acceptability of a related party price in a separate transaction between AVX and AVX Limited.

Nowhere in the valuation statute, regulations or previously issued rulings can we find authority for the position that in order for a transfer price between related parties to form the basis of transaction value, that transfer price must include a price element associated with the resale, after importation, of the merchandise. We, therefore, agree with counsel that the basis under which your office determined that the related party price was influenced by the relationship, is not supported by the relevant statute, regulations or legal precedent. Having reached this conclusion it does not automatically follow that transaction value is an acceptable means of appraisement.

It is still necessary to determine whether the related party transfer price is an acceptable basis upon which to appraise the merchandise under transaction value. As stated above, imported merchandise is appraised under transaction value only if, inter alia, the buyer and seller are not related, or if related, transaction value is found to be acceptable. 19 U.S.C. 1401a(b)(2)(B) provides that:

The transaction value between a related buyer and seller is acceptable for the purposes of this subsection is an examination of the circumstances of the sale of the imported merchandise indicates that the relationship between such buyer and seller did not influence the price actually paid or payable; or if the transaction value of the imported merchandise closely approximates --

(i) the transaction value of identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United States; or

(ii) the deductive value or computed value for identical merchandise or similar merchandise;
but only if each value referred to in clause (i) or (ii) that is used for comparison relates to merchandise that was exported to the United States at or about the same time as the imported merchandise.

As provided in interpretative note 3 to section 152.103(l)(iii), Customs Regulations (19 CFR 152.103(l)(iii)), if it is shown that the price between related parties is adequate to ensure recovery of all costs plus a profit which is equivalent to the firm’s overall profit realized over a representative period of time (e.g. on an annual basis), in sales of merchandise of the same class or kind, this would demonstrate the price has not been influenced. Counsel claims that the transfer prices represent arm’s length prices as evidenced by the fact that the 5% allowance for profit and general expenses represents the actual profit and general expenses incurred by AVX Limited over a representative period. Specifically, counsel advises us that:

The total actual profit (loss) earned by AVX Limited on its sales of tantalum products to AVX during fiscal year (FY 1992) and FY 1993 YTD was 1% and 2%, respectively. The Transfer Price is established during the year in consideration of standard costs, and with the goal of providing AVX Limited a 5% profit. In the event that the year-end actual profit is calculated to be less than 5%, AVX typically remits to AVX Limited an additional payment sufficient to bring its year-end actual profit to 5%, assuming consolidated company profit is adequate.

Although it is possible that the transfer prices meet the test as set forth under 19 CFR 152.103(l)(iii), described above, additional clarification is necessary to determine whether the transfer prices may form the basis of transaction value. For example, we note that while counsel provides the figures for total actual profit (loss) earned by AVX Limited on its sales of tantalum products to AVX during a representative period, it is not clear whether AVX Limited also sells the same merchandise to other buyers worldwide. If AVX Limited does sell the merchandise to buyers other than AVX it must be determined whether the profit figures provided are consistent with AVX Limited’s overall profit with respect to all its sales of the subject merchandise over the representative period. It is our understanding that the Office of Regulatory Audit is presently performing an audit of AVX. The scope of the audit includes the acceptability of the subject transfer prices. Consequently, please refer to the results of the audit report regarding this issue. Assuming the transfer prices meet the test set forth under 19 CFR 152.103(l)(iii), we note that in those situations where additional payments were transmitted by AVX to AVX Limited to equal the AVX Limited’s 5% profit factor, such additional payments must be declared to Customs and added to the declared transaction value.

HOLDING:

The basis upon which the related party transfer price between AVX and AVX Limited was rejected was improper. Therefore, you are directed to grant this protest and to reevaluate whether the merchandise may be appraised on the basis of transaction value, taking into account the results of the audit. If transaction value is not acceptable, then you are directed to examine the remaining methods of appraisement, in hierarchical order, to determine the proper basis of appraisement.

In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to Protestant no later than 60 days from the date of this letter. Any reliquidation of the entries in accordance with the decision must be accomplished prior to mailing of 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, Lexis, Freedom of Information Act and other public access channels.

Sincerely,

Acting Director
International Trade
Compliance Division


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