HQ 546865 - Transaction value; trade discounts; related parties; circumstances of sales; 19 CFR 152.103(j)(2). - United States International Trade Commision Rulings

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HQ 546865

August 6, 1999

RR:IT:VA 546865er
CATEGORY: VALUATION

Mr. Peter W. Klestadt
Mr. Harold I. Loring
Grunfeld, Desiderio, Lebowitz & Silverman, LLP 245 Park Avenue - 33rd Floor
New York, New York 10167

RE: Transaction value; trade discounts; related parties; circumstances of sales; 19 CFR 152.103(j)(2).

Dear Messrs. Klestadt & Loring:

This is in response to your letter, and supporting materials, dated September 15, 1997, requesting a ruling concerning the appraisement of merchandise imported into the U.S. when a trade discount is extended between related parties. Your position is that the trade discount between the related parties is justified and that the price actually paid or payable for the merchandise is not influenced by the relationship of the parties. Thus, it is your claim that the imported merchandise is properly appraised under transaction value pursuant to Section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 ("TAA"), codified at 19 U.S.C. 1401a.

We note that during the period between October 1998 and the present, this office has provided you with opportunities to submit additional evidence supporting your claim and to schedule a meeting. To date, no response has been received. Accordingly, we have no alternative but to issue a decision based on the evidence submitted.

FACTS:

You state that the importer of record is Versit, LLC (Versit), a Delaware limited liability company with its main offices in New York. Sixty percent of Versit’s capital was contributed by GiVi Moda, Incorporated (Moda), which is wholly owned by Gianni Versace International, N.V. which, in turn, is wholly owned by Gianni Versace S.p.A. (Gianni Versace). Forty percent of Versit’s capital was contributed by Fashion Avenue Incorporated (Fashion Avenue), which is wholly owned by Ittierre S.p.A. (Ittierre). Ittierre is an Italian corporation which manufactures wearing apparel and is licensed by Gianni Versace to manufacture (or have manufactured) and distribute wearing apparel incorporating Gianni Versace designs and bearing various Gianni Versace trademarks.

Ittierre and Versit entered into a distribution agreement, dated January 1, 1997, in which Ittierre appointed Versit as its exclusive wholesale distributor in the U.S., Canada, Mexico, and the Caribbean with respect to the sale of all products bearing the “Versace Jeans Couture” or “Versus” trademarks manufactured by or on behalf of Ittierre. (§ 1.1 Distribution Agreement (DA)). The distribution agreement further clarifies, however, that because Ittierre does not have exclusive rights to manufacture and distribute the trademarked products throughout the subject territories, such products could be manufactured and distributed by other parties. Therefore the "exclusive" wholesale distributorship granted to Versit by Ittierre is limited to those products manufactured by Ittierre. (§ 1.3 DA) A copy of the distribution agreement was provided to us.

The distribution agreement provides that certain price discounts are granted to Versit in exchange for Versit’s commitment to make certain minimum purchases (§ 5.1 DA). The purchase price to be paid by Versit is 75% of Ittierre’s listed Italian prices for the Fall/Winter 1997 and Spring/Summer 1998 collections, with future collections to be sold at a discount to be negotiated in the future in light of market conditions, purchase commitments, and other factors. In no event, will Versit be required to pay more than 75% of Ittierre’s list price. If future discount percentages cannot be agreed to, then the discount will remain 25% of Ittierre’s Italian list prices. (§ 3.3 DA). While the distribution agreement provides that the discount shall never be less than 25% of Ittierre’s Italian list prices, the agreement does not specify a percentage which would constitute a maximum discount.

The distribution agreement provides that Versit shall purchase merchandise from Ittierre on an FOB Italy basis. (§3.2 DA) Ittierre bears the cost of loading the merchandise but Versit bears all insurance and shipping expenses, freight charges, customs duties, brokerage charges and delivery costs. Risk of loss after delivery to the carrier is borne by Versit. (§3.2 DA).

You state that Ittierre does not place any conditions on Versit’s resale of product in the U.S. The distribution agreement does not limit Versit in its choice of resale customers or its ability to set resale prices. Versit sets its resale prices on the basis of the cost of the article to Versit, the applicable duty rate, and the allocation of fixed costs and marketing costs to assure that Versit meets its yearly marketing and financial goals.

Pursuant to the distribution agreement, Versit also agrees to actively promote and advertise the goods in the assigned territory. In so doing, Versit agrees to expend at least 7% of its net sales in the U.S. (§ 5.4 DA) However, the distribution agreement also specifically references the general licensing agreement between Gianni Versace and Ittierre pursuant to which Gianni Versace retains the right to review and approve all advertising and promotional materials utilized in connection with promoting the products. Accordingly, pursuant to § 5.3 of the distribution agreement, Versit has to deliver all proposed advertising and promotional materials to Gianni Versace directly rather than to Ittierre. Versit may not use or release any proposed advertising, promotional or publicity materials in the absence of the written approval of Gianni Versace. A copy of the general licensing agreement between Gianni Versace and Ittierre which controls Versit’s activities in this regard was not submitted with the ruling request. The general licensing agreement between Gianni Versace and Ittierre gives Ittierre the right to apply Gianni Versace’s trademarks to goods manufactured by Ittierre. For this right, Ittierre pays a royalty to Gianni Versace which you claim is included in any transfer price between Ittierre and Versit.

The distribution agreement provides that Versit shall maintain exclusive control over any premises maintained by Versit or its employees. Likewise, any personnel employed by Versit shall be the responsibility of Versit, and not Ittierre. (§ 7.1 DA)

You state that the relationship between Versit and Ittierre will not invalidate transaction value because they negotiate prices with each other at arm’s length. In negotiating prices with Ittierre, Versit receives the assistance of Gianni Versace personnel. You claim that Ittierre and Gianni Versace “do not have the exact same interests” and “[i]n fact, their interests may compete.” Namely, Ittierre is a manufacturer which seeks to maximize profits through sales of the subject garments at higher prices. On the other hand, Gianni Versace, whose U.S. subsidiary (GiVi Mode) is a majority owner of Versit, "might be expected to try to maximize Versit’s profit in the United Sates by reducing the cost of goods sold. Under these circumstances, you believe that because the manufacturer’s (Ittierre) risks purportedly differ from those of the trademark owner (Gianni Versace), the "dissimilar interests" represent assurance that the transfer prices between Ittierre and Versit are negotiated at arm’s length. We were not provided with copies of any documents reflective of the price negotiations between the parties.

ISSUE:

Based on the evidence presented, whether the price between Ittierre and Versit meets one of the tests for the acceptability of transaction value in a related party transaction?

LAW AND ANALYSIS:

Merchandise imported into the United States in appraised in accordance with §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 merchandise when sold for exportation to the United States, ”plus amounts for certain enumerated additions specified in Section 402(b)(1) of the TAA.

Imported merchandise is only appraised under transaction value if the buyer and seller are not related, or if related, the transaction value is deemed acceptable. Pursuant to section 402(b)(2)(B), using transaction value is acceptable only if, upon examination of the circumstances, the sales indicate that the relationship of the parties does not influence the price actually paid or payable, or the transaction value of imported merchandise closely approximates the transaction value of identical or similar merchandise in sales to unrelated buyers in the U.S., or the deductive or computed value for identical or similar merchandise. In this situation, the seller (Ittierre) and buyer (Versit) are related since Ittierre owns a 40% stake in Versit. Thus, the parties are related pursuant to Section 402(g)(1)(F) of the TAA.

Section 402(b)(2)(B) of the TAA (19 U.S.C. §1401a(b)(2)(B)) sets forth two conditions 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 approximates certain “test” values. As far as we know, no previously accepted values, which could serve as test values in the instant case, have been shown to exist.

It is your belief that the circumstances of sale between Ittierre and Versit demonstrate that the parties buy and sell from one another as if they are unrelated, and that accordingly, transaction value is an acceptable means of appraising the subject goods. You point out that if the circumstances of sale indicate that the price is determined in a manner consistent with normal industry pricing practices, the price actually paid or payable will be deemed not to have been influenced by the relationship. We note that under a circumstances of sale approach, a related party price may also be shown to be acceptable if it can be shown that the price is determined in a manner consistent with the way the seller deals with unrelated buyers or if it is shown that the price is adequate to ensure recovery of all costs plus a profit that is equivalent to the firm's overall profit realized over a representative period of time in sales of merchandise of the same class or kind. Statement of Administrative Action (SAA), H.R. Doc. No. 153, Pt. II, 96th Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 at 54 (1981); section 152.103(j)(2), Customs Regulations (19 C.F.R. §152.103(j)(2)).

Although you claim that one of the above-noted examples of a circumstances of sale test is met, you have not presented any information to us regarding the "normal pricing practices" for the industry. Nor have you presented us with any information as to whether or how Ittierre deals with unrelated buyers, or that the price is adequate to ensure recovery of all costs plus a profit that is equivalent to the firm’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind. Instead, as more fully described below, you argue that the transfer prices between Ittierre and Versit represent a valid transaction value because Ittierre and Gianni Versace have competing interests.

Specifically, you argue that the relationship between Versit and Ittierre will not invalidate transaction value because Ittierre and Gianni Versace (whose U.S. subsidiary (GiVi Mode) is a majority owner of Versit) “do not have the exact same interests” and “[i]n fact, their interests may compete” (emphasis added). These purported competing interests are due to the fact that Ittierre, as a manufacturer, seeks to maximize profits through sales of the subject garments at higher prices to Versit; while, on the other hand, Gianni Versace’s interests "might be expected to try to maximize Versit’s profit in the United States by reducing the costs of goods sold" (emphasis added) from Ittierre and Versit. Because Versit is assisted by Gianni Versace in negotiating transfer prices with Ittierre, it is your belief that the integrity of the transfer prices are assured because of the purported competing interests between Ittierre and Gianni Versace.

We are not persuaded. First, the competing interests to which you point, have not been proven to exist. While you suggest that these interests might exist, you do not affirmatively state or attempt to prove the actual existence of such competing interests. Secondly, the so-called competing interests are alleged to exist, not between the buyer and the seller, but instead between the seller (Ittierre) and the parent company in Italy (Gianni Versace) which wholly owns Gianni Versace Int’l N.V. which, in turn wholly owns GiVi Moda, Inc. which funded sixty percent (60%) of Versit’s initial capital. Simply put, this line of argument is too attenuated, and by itself does not support a circumstances of sale approach to demonstrate that the transfer prices between Ittierre and Versit were negotiated at arm’s length.

Based on the information presented, it has not been demonstrated that the circumstances of sale indicate that the relationship between the parties did not influence the price. Specifically, the evidence presented does not sufficiently demonstrate that the price is determined consistent with industry practice or with the way the seller deals with unrelated buyers. As noted above, the SAA provides that the price will not be considered to have been influenced if it is shown that the price is adequate to ensure recovery of all costs plus a profit that is equivalent to the firm's overall profit realized over a representative period of time in sales of merchandise of the same class or kind. No such comparison of the price to the firm's overall profit has been provided for our review. In the absence of additional information regarding the circumstances of sale, we cannot determine whether the trade discounted prices could form the basis of transaction value.

HOLDING:

Based on the available evidence, the circumstances of the sale test has not been met. Thus, the imported merchandise should not be appraised under transaction value pursuant to Section 402(b) of the TAA.

Sincerely,

Thomas L. Lobred

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