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HQ 546260

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June 6, 1997

RR:IT:VA 546260 er
CATEGORY: VALUATION

Port Director
JFK Airport Area
NY, NY

RE: Request for Internal Advice IA 83/93; Bona fide Sale; Related Parties; Sale for Exportation; Selling Commmissions.

Dear Port Director:

This is in response to your request for Internal Advice which was forwarded to this office and received on February 6, 1996. Your memorandum accompanied a request for Internal Advice dated July 27, 1993, from the attorney for Transatlantic Textile, Inc. (“Transatlantic”) which addresses the issues of whether the subject merchandise may be appraised based on related party transactions and whether certain commissions paid to an agent, Dick & Goldschmidt Inc., in these transactions are dutiable. Co-counsel for Transatlantic supplemented the request with additional submissions.

Also part of the file is a memorandum from the Chief, Textile and Plastics Branch, National Commodity Specialist Division dated January 31, 1996, and an audit report dated August 12, 1994. We regret the delay in responding.

FACTS:

Transatlantic is a U.S. based company. Dormeuil Ltd. of London and Dormeuil Sarl of Paris, are wholesale woolen merchants who ship woolen fabrics into the U.S. Transatlantic and the Dormeuil companies have common shareholders and officers, and are therefore related parties within the meaning of 19 U.S.C. 1401a(g).

In order to try to determine the proper basis of appraisement for the imported merchandise, your office attempted to contact the importer of record, Transatlantic, at its New York address for an interview. You were unable to contact any Transatlantic personnel; you were only able to contact Dick & Goldschmidt, a selling agent in the U.S. for Transatlantic. Dick & Goldschmidt arranged for the Director of Dormeuil Ltd. to meet at your offices on November 5, 1991. Attached to your memorandum is a record of that interview.

The record of the interview reports the following as regards Transatlantic. Transatlantic is an importer of fabrics from its related parties, whom we will collectively refer to as “Dormeuil”, but has no office, telephone or personnel in the U.S. Transatlantic operates solely through its agent, Dick & Goldschmidt.

During the interview, Transatlantic claimed that while its books and records are prepared and kept in England by Dormeuil, Transatlantic nonetheless maintains its own profit center here in the U.S. Prices for the imported merchandise are set by price lists at the beginning of the year but are usually further negotiated. Shipments are paid for by bank transfers or by check, usually for batches of invoices.

The record of the interview provides that because Transatlantic has no office in the U.S., Dick & Goldschmidt performed the duties associated with selling the merchandise. Dick & Goldschmidt, however, claims to work exclusively for Transatlantic and not for Dormeuil. Dick & Goldschmidt receives between a 7.5% to 15% commission for its services. The commission is paid by Transatlantic.

Because the interviewing officer was not satisfied that the commissions paid to Dick & Goldschmidt were non-dutiable commissions or that the prices between Transatlantic and its related suppliers were not influenced by their relationship, the Regulatory Audit Division in New York (“RAD”) was asked to conduct an audit.

The objective of the audit was to verify the accuracy and reliability of the information submitted by Transatlantic in support of its consumption entries filed during fiscal years ending November 30, 1990 and November 30, 1991. The audit report is dated August 12, 1994. The audit concluded that the consumption entries during the audit periods resulted in undervaluations which were attributable to Transatlantic being established by the related foreign supplier to function solely as an importer of record for shipments from Dormeuil. RAD determined that the sale for exportation to the United States was between Dormeuil and the ultimate U.S. customer, and not between Dormeuil and Transatlantic. RAD further reported that it could not perform a review of internal controls because the importer does not have any office employees or books in the U.S.

Counsel disputes the findings of RAD and of your office. According to counsel, Transatlantic and the Dormeuil companies, while related, are legally distinct from each other with Transatlantic operating as a fully independent buyer/reseller of the imported merchandise. Transatlantic’s independence, counsel claims, is evidenced by the fact that it took title to the subject merchandise and bore the risk of its loss, purchases merchandise on its own behalf as inventory for sale, purchases “pre-ordered” stock (orders placed after receiving a purchase order from its U.S. customers), pays U.S. taxes, enters legally binding contracts, pays claims of customers, and acts lawfully and responsibly in all other respects.

Transatlantic’s independence from Dormeuil, counsel claims, is further evidenced by its well-defined role as a buyer/reseller in which Dormeuil plays no role in the solicitation or orders, the acceptance of orders, or the setting of price or other terms to the U.S. customers. There is no contact between the U.S. customers and Dormeuil. The selection of which fabrics will likely be accepted in the U.S. market, the selection and solicitation of prospective customers, the sending of order books to potential customers, and the decisions on sales terms, discounts and the like are entirely within the province of Transatlantic.

In response to our request for additional information to support the claim that Transatlantic operates in an independent manner from its related supplier, Counsel revealed that Transatlantic is more than a mere “mailing address” in that it has had permanent staff in the U.S. since 1991. As of September 1996, Transatlantic increased its staff. In its New York office, there is a President, Commercial Secretary, Administrative Manager, Administrative Assistant and a Salesman. There is also a salesman in Los Angeles. On a part time basis, Transatlantic additionally employs a cleaner and a runner. Transatlantic books and records presently maintained at its New York offices include: customer account details, customer correspondence, sales records, invoices and credit notes, sales account applications and banking details. The only Transatlantic records maintained in London are the nominal ledger records.

Regarding the agency relationship with Dick & Goldschmidt, counsel describes the following. In January 1985, Transatlantic entered into an agency agreement with Dick & Goldschmidt, a U.S. company, to act as a selling agent for Transatlantic and to solicit orders for the imported merchandise in the U.S. Transatlantic and Dick & Goldschmidt share the same offices in New York. A copy of the agreement between these two parties, appearing on Dormeuil letterhead, was submitted to us for review. Under the agreement, orders are solicited by Dick & Goldschmidt from U.S. customers and Dick & Goldschmidt transmits the orders to Dormeuil. Dick & Goldschmidt is responsible for the collection of monies due in respect of goods sold and will pay the collected monies into the company’s bank account which is notified to Dick & Goldschmidt. The agreement specifies that Dick & Goldschmidt is to remit to Dormeuil in England such sums as may accrue from time to time on the company’s bank account on the basis of instructions to be given to them by the company. The agreement is subject to the laws of England, not U.S. law.

In March 1991, a different agency agreement was entered into, this time between Dormeuil and Dick & Goldschmidt. The new agreement, also appearing on Dormeuil letterhead, purportedly canceled all previous agreements between the two companies. The agreement specified that Dick & Goldschmidt was to continue to “work diligently to promote and extend the sales of the Company’s products through Transatlantic Textiles”. Counsel claims the agreement between Dick & Goldschmidt and Dormeuil was made in error and did not affect the 1985 agency agreement previously entered into between Transatlantic and Dick & Goldschmidt. The error was discovered and corrected in May 1992 with an exchange of correspondence between Dormeuil and Dick & Goldschmidt identifying the error and agreeing that the agreement was null and void from its date of inception. Copies of this correspondence were submitted to us for review.

A new agency agreement on Dormeuil letterhead, signed in May 1992 but retroactively effective as of March 1991, confirmed the continued appointment of Dick & Goldschmidt as agents of Transatlantic, specifying that it superseded the initial 1985 agency agreement. Unlike the 1985 agreement, the new agency agreement is subject to the laws of the U.S.

Counsel claims that at no time, even during the period when the erroneous contract was in existence between Dormeuil and Dick & Goldschmidt, were there any commission payments from Dormeuil to Dick & Goldschmidt. As evidence that Transatlantic continued to pay the commissions during the time the erroneous contract was in existence, counsel submitted copies of checks reflecting commission payments made to Dick & Goldschmidt by Transatlantic during that time period.

In addition to the documents described above, Counsel submitted various other documents including copies of: purchase orders from U.S. customers which list Transatlantic as the vendor; fax from Transatlantic/ Dick & Goldschmidt to Dormeuil ordering merchandise for delivery to Dick & Goldschmidt; freight-forwarder invoices to Transatlantic and Dormeuil of London; invoices from Dormeuil to Transatlantic/Dick & Goldschmidt; check from Transatlantic to freight forwarder; Federal Express air bills from Transatlantic to U.S. customers; and an order for relief from the United States Bankruptcy Court in the Western District of Texas regarding a petition brought by Transatlantic against a debtor. Also submitted were: copies of bank statements from Manufacturers Hanover in New York to Transatlantic c/o Dormeuil, London; copies of bank statements from Lloyds Bank in London reflecting a credit to Dormeuil’s account from “ordering customer Transatlantic Textiles Inc. Dormeuil Limited”; and a copy of a debit statement from Manufacturers Hanover in New York regarding the account of “Transatlantic Textiles Inc. Dormeuil Limited” for payment to Dormeuil’s account with Lloyds of London. Finally, a “Men’s Collection Price List” from Dormeuil of London was submitted which itemizes merchandise in pounds sterling.

Counsel describes the terms of sale from Dormeuil to Transatlantic as CIF and the terms of sale between Transatlantic to its U.S. customers as FOB, destination. Thus, counsel claims that title for the merchandise first passes to Transatlantic and then passes to the U.S. customer upon receipt of the merchandise by the U.S. customer.

ISSUE:

Whether the transaction between related parties Transatlantic and Dormeuil may form the basis of appraisement under transaction value.

Whether the commissions paid by Transatlantic to Dick & Goldschmidt are dutiable selling commissions.

LAW AND ANALYSIS

Merchandise imported into the U.S. 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, 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).

As described above, counsel claims that there was a bona fide sale between related parties, Transatlantic and Dormeuil. Some of the information submitted supports the likelihood that a bona fide sale occurs between Transatlantic and Dormeuil, while other information is contradictory. Customs defines the term “sale” as the transfer of property from one party to another for consideration. Counsel has submitted copies of bank statements and credit/debit notes, described above, which purportedly evidence that consideration has passed between Transatlantic and Dormeuil. We have some reservations concerning who was paying whom in view of the fact that Transatlantic’s name frequently appeared in conjunction with either Dormeuil or Dick & Goldschmidt, thus making it unclear whether Transatlantic was operating as an independent entity. Counsel, nonetheless, asserts that these payments reflect that consideration passed between Transatlantic and Dormeuil for the imported merchandise in question and, although covering several invoices, may be linked to specific import transactions.

As described above, counsel also submitted copies of purchase orders, invoices and other documents which characterize Transatlantic as the vendor to U.S. buyers, and the buyer of the merchandise in the import transaction with Dormeuil. Moreover, Transatlantic assumed the risk of loss for the imported merchandise and, according to counsel, the shipment terms are such that Transatlantic would acquire title to the merchandise before title subsequently passes to the U.S. customer. Counsel asserts that in addition to importing “pre-ordered” stock, Transatlantic maintains its own inventory. Lastly, copies of checks written on Transatlantic’s account to various parties, including freight forwarders, and commission payments to Dick & Goldschmidt, also support the claim that Transatlantic was purchasing and importing merchandise from Dormeuil.

Although the evidence submitted is sometimes contradictory with regard to whether Transatlantic has been an independently functioning company from the time this internal advice request was initiated, the evidence nonetheless supports counsel’s claim that Transatlantic is now a fully staffed company with an identity separate from that of its related suppliers. Under the circumstances, for purposes of this decision, we will assume that the transactions between Transatlantic and its related suppliers are bona fide sales which involve the transfer of property from one party to another for consideration.

However, imported merchandise is appraised under transaction value only if the buyer and seller are not related, or if related, the transaction value is deemed to be acceptable. 19 U.S.C. 1401a(b)(2)(A)(iv). As stated above, the parties to the transaction, Transatlantic and Dormeuil, are related pursuant to 19 U.S.C. 1401a(g)(1). Thus, under the assumption the transactions between Transatlantic and Dormeuil are bona fide sales, the issue to be resolved is whether the transfer prices between the related parties may form the basis of transaction value. 19 U.S.C. 1401a(b)(2)(B) provides the following with regard to transactions between related parties:

The transaction value between a related buyer and seller is acceptable for the purposes of this subsection if 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.

According to counsel, Transatlantic is the only purchaser/importer of the merchandise in question. Thus, no previously accepted test values are available, as described under 19 U.S.C. 1401a(b)(2)(B), to support the acceptability of the transfer prices between Transatlantic and Dormeuil as a basis of transaction value.

In determining whether the circumstances of sale support the acceptability of transfer prices, the Customs regulations provide that Customs may consider the way in which the buyer and seller organize their commercial relations and the way in which the price in question was arrived at in order to determine whether the relationship influenced the price. If it can be shown that the buyer and seller although related, buy from and sell to each other as if they were not related, this will demonstrate that the price has not been influenced by the relationship, and the transaction value will be accepted. If the price has been settled in a manner consistent with the normal pricing practices of the industry in question, or with the way the seller settles prices for sales to buyers who are not related to him, this will demonstrate that the price has not been influenced by the relationship. Or, if it is shown that the price 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 that the price has not been influenced. See, 19 CFR 152.103(l)(i)-(iii).

The information and documents submitted do not support the acceptability of the transfer prices. Although the information and documents reveal how orders are placed and how payment is remitted, there is no information on how the prices are negotiated between Transatlantic and Dormeuil. It is unclear if these prices are settled in a manner consistent with the normal pricing practices of the industry, and because Dormeuil only sells to Transatlantic in the U.S., there is no means by which to determine whether the prices are settled in the same manner as in unrelated transactions. Further, there is no information which goes to whether the prices are adequate to ensure the recovery of all costs plus a profit, equivalent to the firm’s overall profit realized over a representative period of time.

Under these circumstances, we believe the merchandise should be appraised based on the transaction between Transatlantic and the U.S. Customer. This conclusion is consistent with United States v. Hitachi America, Ltd. And Hitachi, Ltd. (CIT Slip Op. 97-46, decided 15, 1997). In Hitachi, for purposes of determining a loss of revenue, the Court had to examine which of several sale transactions formed a statutorily viable transaction value. Consistent with Customs’ position that there is a presumption that transaction value is based on the price paid by the importer, the Court began by looking at the price paid by the importer, noting that “transaction value, i.e., the price paid by the importer to the seller, is the preferred method of valuation.” The Court rejected the related party transaction as not being statutorily viable because the importer failed to meet its burden of demonstrating the acceptability of the related party transaction. The Court found no evidence was presented that met the criteria set forth in section 1401a(b)(2)(B). As discussed above and using the same analysis as the Court in Hitachi, we find that the transaction between Transatlantic and Dormeuil is not statutorily viable because it has not been demonstrated that the related party transaction is an acceptable basis for transaction value within the meaning of the statute and regulations.

After rejecting the related party transaction in Hitachi, the court then looked to another related party sale and again concluded that it was not a statutorily viable transaction value based on the same reasoning. The court ultimately decided to determine the loss of revenue based on the sale between the importer and the ultimate purchaser in the U.S. In so determining, the court stated:
the government has not contested the statutory viability of the price paid by MARTA [the U.S. purchaser] and the Court shall accept that position as did the court in Nissho Iwai. Further, 1401a(f) of the valuation statute grants the Court wide discretion in determining value... The evidence produced at trial has left the Court with only two options to choose from and since the related party yen valuation is expressly prohibited by statute, the Court must opt for the price paid by MARTA.

Hitachi, at 70.

In concluding that transaction value, or a modified transaction value under 19 U.S.C. 1401a(f), should be based on the sale between the U.S. importer and MARTA, the Court in Hitachi supports the position that a sale between two domestic parties can be a statutorily viable sale for purposes of appraisement under transaction value. Accordingly, in keeping with Hitachi, and because the sale to the importer is unacceptable, we find that the transaction between Transatlantic and its unrelated U.S. customers may form the basis of appraisement of the imported merchandise under transaction value.

The next issue to address is whether the commissions paid by Transatlantic to Dick & Goldschmidt are dutiable selling commissions. 19 U.S.C. 1401a(b)(1)(B) provides 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 amounts equal to any selling commission incurred by the buyer with respect to the imported merchandise.

In the transaction upon which the imported merchandise is to be appraised, Transatlantic is the “seller” of the merchandise and the U.S. customer is the “buyer”. As described above and as claimed by counsel, Dick & Goldschmidt is the selling agent for Transatlantic. Under these circumstances, the commissions paid by Transatlantic to Dick & Goldschmidt are selling commissions within the meaning of 19 U.S.C. 1401a(b)(1)(B)and, hence, must be added to the price actually paid or payable by the U.S. purchaser to arrive at the transaction value of the merchandise.

HOLDING:

As described above, because the transfer price between related parties Transatlantic and Dormeuil may not form the basis of transaction value, the goods should be appraised based on the transaction between Transatlantic and its unrelated U.S. customers. Under these circumstances, the commissions paid by Transatlantic to its selling agent, Dick & Goldschmidt, are dutiable selling commissions and must be added to the price actually paid or payable by the U.S. customer to arrive at the transaction value of the imported merchandise.

This decision should be mailed by your office to the internal advice requester no later than 60 days from the date of this letter. On that date 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,

Acting Director
International Trade

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