HQ 547790 - Request for Internal Advice #32/98; Cameca Instruments, Inc. - United States International Trade Commision Rulings

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HQ 547790

September 10, 2001

RR:IT:VA 547790er

CATEGORY: VALUATION

Port Director
Minneapolis, Minnesota 55401

RE: Request for Internal Advice #32/98; Cameca Instruments, Inc.

Dear Sir:

This is in response to your request for internal advice dated November 6, 1998, involving Cameca Instruments, Inc. The request pertains to both a classification and a value matter. The classification matter was addressed in a separate ruling, HRL 962444 dated August 30, 2000. Accordingly, this response addresses the value matter, only.

FACTS:

In your memorandum to this office, you state that Cameca Instruments, Inc. (“CI”) has requested that you seek internal advice in connection with their importation of an SX 100 Microanalyzer from its related party Cameca SA (“SA”) of France. The SX 100 Microanalyzer was originally entered under Temporary Importation Bond (TIB) [] on August 7, 1996). The importer did not export the imported merchandise and instead defaulted on the TIB. The TIB entry is currently the subject of a liquidated damages case #[].

The facts pertaining to the value matter are described as follows in your memorandum. The invoice submitted by CI with the TIB entry indicated a “Value for Customs Only” price of [] French Francs (converted to US $[]) using the rate of exchange on the date of exportation.) The import specialist questioned the importer about the entered value. By letter dated May 8, 1997, the importer explained how the declared value was calculated, as described below.

Specifically, the importer explained that the declared value was derived by deducting from the price of the imported merchandise ([]) a [] commission ($[]). CI retains the [] commission and remits the balance to SA. CI, accordingly, claims that the price actually paid or payable for the imported merchandise equals US $[].

You, however, appraised the merchandise under transaction value at $[], claiming that the [] commission retained by CI constitutes a selling commission, which is not deductible from the price actually paid or payable. In support of your position you cite to the “Non-Exclusive Distributorship Agreement” between CI and SA which was submitted by counsel. You contend that this agreement supports your claim that the sale for exportation occurs between SA and the ultimate U.S. purchasers, rather than between SA and CI, as asserted by counsel.

Specifically, you note that Item 1.3 of the agreement indicates that SA will “sell” to CI only upon receipt of orders by customers so that CI is insulated from risk. CI does not have the power to bind SA and all sales must be approved by SA (Item 1.5). SA oversees all pricing (Item 5). All orders are accepted in France (Item 9.3). Where customers are given special incentive terms, CI can delay payment for a similar period. (Item 9.7). If the customer is late in paying CI due to product defect claims, CI can delay payment to SA for a similar period (Item 9.8). These factors, you contend, all point to CI being a selling agent working on behalf of SA. Further, you point to Item 9.4 which provides that CI is required to remit to SA the price paid by the U.S. customer, less [] on all new instruments. We additionally note that SA has a right of consultation in CI’s mode of calculation and the pricing of the wholesale and retail prices. SA can intervene in the case of excessive pricing (minimum and maximum prices). (Item 5.3)

Counsel cites to the Non-Exclusive Distributorship Agreement between SA and CI as evidence of bona fide sales . Specifically, counsel points out that the importer is specifically described as a distributor and not an agent of the manufacturer (Item 1.5). The merchandise is sold to the importer with title passing on shipment from France (Item 9). Risk of loss is passed with the title (Item 15.2). Accordingly, counsel argues the importer is the owner of the goods and a sale takes place between SA and CI.

Counsel then describes the “transfer” price between the parties as based upon the “retail price method” – the resale price in the U.S. less certain discounts. With regard to the merchandise the transfer price between CI and SA is [] less the price to the U.S. customer. Therefore, argues counsel, the [] represents the gross profit that the importer obtains on the sale in the U.S of the merchandise. Counsel points out that under the terms of the Distributorship Agreement, CI is required to establish and maintain a sales organization and staff for promoting the imported products. And, as noted in item 6.2, the distributor must advertise and promote the product in the territory. Further, CI must establish and maintain an after sales service staff. These requirements, counsel maintains, are expenditures by the importer that must be recovered by its sale and the gross profit obtained.

Counsel concludes by stating that because there is a sale between SA and CI, the remaining question is whether the transfer price, because of the relationship between the parties, can be used as the basis for transaction value. Counsel believes that the [] recouped by the importer represents gross profit upon which he must recoup the expenses associated with the sale and requirements under the Distributorship Agreement. Counsel states that [] is not unreasonable given the responsibilities and expenditures the importer must incur under the agreement and hence that the transfer price should be accepted. Failing to do so, argues counsel, would requirement that an alternative basis of appraisement be used.

ISSUE:

Whether the merchandise may be appraised under transaction value based on the transactions between the importer, CI, and it related party, SA?

LAW AND ANALYSIS:

Section 402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreement Act of 1979 (TAA: 19 U.S.C. 1401a) 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.” 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).

The parties at issue, CI (the importer) and SA (parent corporation in France), are related parties within the meaning of 19 U.S.C. 1401a(g).

The first inquiry is whether a bona fide sale occurs between CI and SA. Customs defines the term “sale” as “the transfer of property from one party to another for consideration.” J.L. Wood v. United States, 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974). While J.L. Wood was decided under the prior appraisement statute, Customs adheres to this definition under the TAA. In determining whether a bona fide sale as taken place between a potential buyer and seller of imported merchandise, no single factor is determinative. Rather, the relationship is ascertained by an overall view of the entire situation, with the result in each case governed by the facts and the circumstances of the case itself. Dorf International, Inc. v. U.S. , 61 Cust. Ct. 604, A.R.D. 245 (1968).

In determining whether the relationship of the parties to the transaction in question is that of a buyer-seller, where the parties maintain an independence in their dealings, as opposed to that of a principal-agent, where the former controls the actions of the latter, Customs will consider whether the potential buyer:

Provided (or could provide) instructions to the seller; Was free to sell the items at any price he or she desired; Selected (or could select) his or her own customers without consulting the seller; and Could order the imported merchandise and have it delivered for his or her own inventory.

The facts presented are problematic with regard to finding a sale between the parent and importer. Based on the terms of the Distributorship Agreement, as described above, it is evident the parent company exerted considerable control over the importer. Moreover, we note that we have not been presented with any documentary evidence in support of finding a sale, such as invoices, purchase orders and proof of payment. The described transactions are strongly suggestive of a principal-agent relationship, such that the commissions retained by CI would constitute dutiable selling commissions within the meaning of 19 U.S.C. 1401a(b)((1)(B), to be added to the price actually paid or payable by the U.S. customer.

Nonetheless, assuming arguendo, without deciding, that the transactions between SA and CI are bona fide sales we would conclude that if the parties failed to satisfy one of the two related party tests set forth under to 19 U.S.C. 1401a(b)(2)(B)

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 –
the transaction value of identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United States; or
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., Customs would appraise the merchandise based on the price actually paid or payable between CI and its unrelated customer in the U.S. This conclusion is supported by VWP of America, Inc. v. United States, 175 F.3rd 1327 (Fed. Cir. 1999) vacating and remanding VWP of America, Inc. v. United States, 21 CIT 1109, 980 F. Supp. 1280 (1997), where the CAFC concluded Customs was correct in that if sales from the foreign entity to its related party in the U.S. could not serve as the basis for transaction value because one of the related party tests was not satisfied, the merchandise would be appraised under transaction value based on the sales from the U.S. party to its U.S. customers. Accordingly, it is necessary to determine whether the transactions between SA and CI satisfy one of the two related party tests in 19 U.S.C. 1401a(b)(2)(B).

As described above, Counsel claims that the relationship between the parties did not influence the price, such that the transfer price paid by CI to SA should form the basis of transaction value. In support of the claim, counsel states that the transfer price between SA and CI is [] less the price to the U.S. customer. The importer’s gross profit on the sale is thus [] from which he must recoup the expenses associated with the sale and requirements under the Distributorship Agreement. Specifically, counsel argues the following.

As the gross profit of [] is not unreasonable given the responsibilities and expenditures it must incur under the Distributorship Agreement, the transfer price should be accepted as Transaction Value. Failing to do so would require that we resort to an alternative basis of appraisement. As there is no identical or similar merchandise imported into the United States, the merchandise must be appraised on the basis of Deductive Value. This would leave us in the same position, as the transfer price is based upon the resale price in the United States less the so-called discount and, in effect, the transfer price is a deductive value since the 16.5% must cover the importer’s general expense and profit, freight, insurance, packing, etc. Furthermore, if the transfer price is equal to the Deductive Value, the transfer price equals or closely approximates one of the test values. As a result, the transfer price must be accepted as a basis for Transaction Value even though the parties are related.

Counsel’s arguments do not satisfy either of the related party tests. Counsel claims that no similar or identical merchandise is imported into the U.S. Accordingly, no test values exist. Test values are transaction values of identical or similar merchandise in sales to unrelated buyers in the U.S., and deductive value or computed value for identical or similar merchandise. Test values are previously established values which were used by Customs to appraise identical or similar merchandise. Hence, only through an examination of the circumstances of sale can it be established that the relationship did not influence the price.

The Customs Regulations (19 CFR 152.103(l)(1) Interpretative Note indicates that under a circumstances of sale approach, the following information may be studied. Under this review, transaction value may be accepted for a related party transaction if 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 in sales of merchandise of the same kind.” If the percentage for profit in the instant transaction is comparable to the firm’s overall percentage for profit, this could indicate that the relationship does not affect the price and transaction value may be acceptable. The information provided by counsel is that a profit of [] is not unreasonable. This statement fails to satisfy the regulatory requirements for establishing the validity of transaction value under a circumstances of sale approach.

Nothing else in counsel’s submission constitutes a circumstances of sale approach showing the legitimacy of the related party price. To the contrary, the information regarding the manner in which SA and CI organize their business relationship is indicative of transactions that are influenced by their relationship. Namely, as you point out in your submission, Item 1.3 of the Distribution Agreement indicates that SA will “sell” to CI only upon receipt of orders by customers so that CI is insulated from risk. CI does not have the power to bind SA and all sales must be approved by SA (Item 1.5). SA oversees all pricing (Item 5). All orders are accepted in France (Item 9.3). Where customers are given special incentive terms, CI can delay payment for a similar period. (Item 9.7). If the customer is late in paying CI due to product defect claims, CI can delay payment to SA for a similar period (Item 9.8). Moreover, SA has a right of consultation in CI’s mode of calculation and the pricing of the wholesale and retail prices. And, SA can intervene in the case of excessive pricing (minimum and maximum prices). (Item 5.3).

Given this information, we conclude that no evidence has been submitted which could lead us to conclude that the parties dealt with each other as though unrelated. Accordingly, even if the sale between SA and CI is a bona fide sale, the related party price is unacceptable under the tests set forth under the statute and may not form the basis for transaction value. As stated by the CAFC in VWP of America, supra, where sales by foreign party to its related U.S. buyer could not serve as the basis for transaction value then transaction should be based upon the sales by U.S. buyer to its U.S. customers. Accordingly, in the instant matter we find that because the transactions between SA and CI cannot form the basis for transaction value, the merchandise should be appraised based on the price actually paid or payable by the U.S. customer to CI, which price includes the [] selling commission retained by CI.

HOLDING:

Based on the information submitted and for the reasons explained above, we find that the subject merchandise may not be appraised under transaction value based on the related party price between the importer, CI, and its related party, SA. Instead, transaction value should be based on the price actually paid or payable between CI and its U.S. customers.

You are to mail this decision to the internal advice applicant no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Virginia L. Brown, Chief
Value Branch

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