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HQ 548698

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October 4, 2005

RR:IT:VA 548698 GG

CATEGORY: VALUATION

Sandra Liss Friedman, Esq.
Barnes, Richardson & Colburn
475 Park Avenue South
New York, NY 10016

RE: Request for Ruling; Transfer Pricing Formula

Dear Ms. Friedman:

This is in response to your ruling request dated July 20, 2005, made on behalf of your client, Cambridge University Press (Cambridge). You ask about the correct method of appraisement for books imported from related branch offices.

FACTS:

Cambridge is the U.S. branch office of Cambridge University Press of the United Kingdom (Cambridge UK). In its capacity as a branch office, Cambridge does not have a legal status separate and apart from that of Cambridge UK. Cambridge orders and imports books from other affiliated branches. The books are imported through the ports of Champlain and JFK International Airport, New York. In June 2004 U.S. Customs and Border Protection (CBP) in Champlain approved Cambridge’s use of a formula for declaring the books at a value that would be acceptable under the fallback method. Specifically, CBP permitted the use of an “average selling price for each title based upon the list price for that title less a calculated average discount for its applicable books category.”

As of July 1, 2005, the various branch offices, including Cambridge, will be purchasing books from other Cambridge branches at the selling branch’s list price less a discount of between 60-70%. The discount has a range of between 60 and 70 percent because it is adjusted based upon two factors: the anticipated customers for the book in the country where the branch office purchasing the books is located, and the perceived market value of the book title in question. These purchases will be reflected in invoices that will be paid by the U.S. branch. The discounted price takes into account manufacturing costs, general expenses, overhead and profit.

Cambridge explains that while the transfer price will remain constant for a given book title, the underlying costs are likely to change from the first printing to subsequent printings. For example, in the first run of a book, the cost per unit is higher because one time costs such as editorial expenses, production costs for proofing, typesetting and other costs for printing the first copies are expensed over the units in the first run, as is customary for the book publishing industry. In the second and later runs of a book, those expenses are not included because they have already been fully expensed in the first run.

ISSUE:

What is the correct method of appraising the imported books?

LAW AND ANALYSIS:

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 five statutorily enumerated additions. 19 U.S.C. § 1401a(b)(1). For CBP purposes, the word “sale” generally is defined as a transfer of ownership in property from one party to another for a consideration. J.L. Wood v. United States, 62 CCPA 25, 33; C.A.D. 1139 (1974). While J.L. Wood was decided under the prior appraisement statute, CBP adheres to this definition under the TAA. In the Cambridge situation, there is no sale because the transfer of books takes place between parties with the same legal identity. No sale exists when a transfer of merchandise merely involves the movement of goods from one portion to another of the same corporate entity. See Mitsui & Co., Ltd. V. United States, 68 Cust. Ct. 266, 270 (1972), rev’d on other grounds, 70 Cust. Ct. 301, 306, 359 F. Supp., 1398, 1402 (1973). The absence of a sale precludes the use of transaction value as an appraisement method in this particular case.

When imported merchandise cannot be appraised on the basis of transaction value, it is appraised in accordance with the remaining methods of valuation, applied in sequential order. 19 U.S.C. § 1401a(a)(1). The alternative bases of appraisement, in order of precedence, are: the transaction value of identical or similar merchandise (19 U.S.C. § 1401a(c)); deductive value (19 U.S.C. § 1401a(d)); computed value (19 U.S.C. § 1401a(e)); and the “fallback” method (19 U.S.C. § 1401a(f)).

The transaction value of identical or similar merchandise is based on sales, at the same commercial level and in substantially the same quantity, of merchandise exported to the United States at or about the same time as that being appraised. (19 U.S.C. § 1401a(c)). Counsel for Cambridge indicates that there are no sales of identical or similar merchandise. Consequently, this appraisement method is unavailable.

Under the deductive value method, merchandise is appraised on the basis of the price at which it is sold in the U.S. in its condition as imported and in the greatest aggregate quantity either at or about the time of importation, or before the close of the 90th day after the date of importation. 19 U.S.C. § 1401a(d)(2)(A)(I)-(ii). This price is subject to certain enumerated deductions. 19 U.S.C. § 1401a(d)(3). According to Cambridge’s counsel, deductive value cannot be determined because many of the books imported by Cambridge are put into stock and are not sold within the specified time limits, or are returned to the selling branch without ever having been sold in the United States. Accordingly, deductive value cannot serve as the basis of appraisement of these goods.

Under the computed value method, merchandise is appraised on the basis of the material and processing costs incurred in the production of imported merchandise, plus an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind, and the value of any assists and packing costs. 19 U.S.C. § 1401a(e)(1). Counsel for Cambridge reports that it examined the feasibility of calculating a computed value for each edition of each title that Cambridge imports into the United States, and concluded that such calculations would not be feasible because some expenses are not recorded as being associated with specific titles within the company. Also, Cambridge will import many titles in a container for which it is impossible to determine when and by whom each specific unit was printed. For these reasons, Cambridge maintains that the goods cannot be appraised under the computed value method. We agree with this assessment.

When the value of imported merchandise cannot be determined under the methods set forth in 19 U.S.C. § 1401a(b)-(e), it may be appraised on the basis of a value derived from one of those methods, reasonably adjusted to the extent necessary to arrive at a value. However, it may not be appraised, inter alia, on the basis of the price in the domestic market of the country of export, the selling price in the U.S. of merchandise produced in the U.S., minimum values, or arbitrary or fictitious values. 19 U.S.C. § 1401a(f); 19 CFR § 152.108.

Under section 500 of the Tariff Act of 1930, as amended, which constitutes CBP’s general appraisement authority, the appraising officer may:
fix the final appraisement of merchandise by ascertaining or estimating the value thereof, under section 1401a of this title, by all reasonable ways and means in his power, any statement of cost or costs of production in any invoice, affidavit, declaration, other document to the contrary notwithstanding. 19 U.S.C. § 1500(a) (emphasis added)

In this regard, the Statement of Administrative Action (SAA), which forms part of the legislative history of the TAA, provides in pertinent part:

Section 500 is the general authority for Customs to appraise merchandise. It is not a separate basis of appraisement and cannot be used as such. Section 500 allows Customs to consider the best evidence available in appraising merchandise. It allows Customs to consider the contract between the buyer and seller, if available, when the information contained in the invoice is either deficient or is known to contain inaccurate figures or calculations. Section 500 authorize [sic] the appraising officer to weigh the nature of the evidence before him in appraising the imported merchandise. This could be the invoice, the contract between the parties, or even the recordkeeping of either of the parties to the contract.

In those transactions where no accurate invoice or other documentation is available, and the importer is unable, or refuses, to provide such information, then reasonable ways and means will be used to determine the appropriate value, using whatever evidence is available, again within the constraints of section 402.

Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 67.

In the particular circumstances of this case, all “reasonable ways and means” must be used to appraise the merchandise, subject to the prohibitions in 19 U.S.C. § 1401a(f). To this end, we find that the appraised value in this instance may be based on the transfer price paid by Cambridge to the foreign branch “sellers” of the books. This follows the approach previously taken by U.S. Customs and Border Protection (CBP) in several rulings, to wit, Headquarters Ruling Letters (HQ’s) 546941, dated August 11, 1999, and HQ 546953, dated May 5, 1999. Both of those cases involved situations in which, for various reasons, no sale was deemed to have occurred. HQ 546953, in particular, is strikingly similar in that the parties were related and negotiated a price based on a list price less a discount. CBP, noting that under the fallback method a reasonably adjusted transaction value may be the basis of appraisement, took the position that a reasonable adjustment to transaction value would be to deem a sale to have occurred. The goods were appraised based on the list price less the discount under 19 U.S.C. § 1401a(f). In HQ 546953 there was evidence that the “seller” granted discounts to other distributors that were both less than and greater than the discount accorded to the importer. This indicated to CBP that the discount did not appear to be inappropriate or excessive. Although Cambridge has not submitted evidence of the granting of discounts to other distributors, it does maintain that the discounted price takes into account manufacturing costs, general expenses, overhead and profit. Based on that information, we find that appraisement should be based on the discounted price Cambridge pays its related branches as a reasonably adjusted transaction value pursuant to 19 U.S.C. § 1401a(f).

HOLDING:

The books should be appraised based on the discounted price Cambridge pays its related branches as a reasonably adjusted transaction value pursuant to 19 U.S.C. § 1401a(f).

Section 177.9(b)(1) of the CBP Regulations (19 CFR § 177.9(b)(1)) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a CBP field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.”

Sincerely,

Virginia L. Brown
Chief

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