VAL CO:R:C:V 544579 ML

District Director
Portland, OR

RE: Application for Further Review of Protest (AFR) No. 3126- 89-000001; Determination of which Sale is a Statutorily Viable Transaction Value

Dear Sir:

The above-referenced protest and application for further review is against your decision regarding the sale for exportation, for purposes of transaction value, of oil well casing imported by Ipsco Steel Inc.

FACTS:

The facts of this case have been set forth in a Headquarters ruling memorandum dated January 7, 1991 (see HQ 544415). Those facts are reiterated briefly as follows. IPSCO Steel, Inc. (hereinafter referred to as "ISI") is a Canadian corporation qualified to do business in the U.S. and the exclusive sales distribution arm in the U.S. for IPSCO, Inc. (hereinafter referred to as "Ipsco"), also a Canadian corporation. According to the sales agreement between Ipsco and ISI, Ipsco agrees to sell its products to ISI for subsequent sale to U.S. customers. The merchandise is sold to ISI, F.O.B. Ipsco plant in Canada, at which point ISI obtains title and risk of loss for the merchandise. In HQ 544415, we determined that a bona fide sale existed between Ipsco and ISI.

ISI sold the Ipsco pipe to Arco Alaska Inc. (hereinafter referred to as "Arco"), a U.S. customer of ISI. ISI negotiated with Arco to sell oilwell casing manufactured by Ipsco. ISI confirmed with Ipsco that Ipsco would build the pipe according to Arco's specifications. In addition, Ipsco was to ship the merchandise, and the invoice for ISI, directly to Arco in Alaska. ISI was the importer of record.

In a letter, dated October 30, 1987, from ISI to an import specialist in Blaine, Washington ISI explained the formula methodology used to arrive at the prices paid by ISI to Ipsco.

Transfer Price = Final Selling Price - Freight 1+ .04 + Duty & Brokerage & Surcharge

This formula resulted in a margin of 4% which was claimed to be comparable to the margin received by independent third parties providing similar services. Apart from minor errors or very slight variations in the range of .1% due to anomalies in the calculation of brokerage fees, all transfer prices were said to result in a gross profit margin to ISI of about 4%.

The Pacific Region, Regulatory Audit Division (RAD) performed an audit of ISI, the results of which are found in Report of Importer Audit IPSCO Steel Inc., dated December 20, 1990. RAD reviewed 69 random entries during the period of March, 1986 through September, 1989. The entries involved in this AFR were not the subject of the audit, however, there is every indication that the methodology employed by the company in arriving at its transfer prices remained constant.

ISSUE:

Whether the price paid by ISI to Ipsco or the price paid by Arco to ISI should serve as the basis for determining transaction value.

LAW AND ANALYSIS:

The method of appraisement is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a). Section 402(b)(1) of the TAA provides, in pertinent part, that the transaction value of the imported merchandise is the "price actually paid or payable for the merchandise when sold for exportation to the United States."

In an April 15, 1991 submission, counsel for the importer contended that the transaction value of the imported merchandise should be based on the sale between Ipsco and ISI. In support of this he cited E.C. McAfee Co. et al. v. United States et al., 842 f.2d 314 (Fed. Cir. 1988) and United States v. Getz Bros. & Co., 55 CCPA 11 (1967) as establishing that "if the transaction between the manufacturer and the middleman falls within the statutory provision for valuation, the manufacturer's price, rather than the price from the middleman to his customer is used for appraisal." Further, counsel cites Orbisphere Corp. v. United states, 726 F.Supp. 1344, 13 CIT 866 (1989), after remand to Customs, 765 F.Supp. 1087, Slip Op. 91-39 (May 14, 1991), entry of judgment after second remand Slip Op. p. 91-69 (August 9, 1991), in support of his contention that the sale between ISI and Arco cannot be a "sale for export" because it is a domestic sale (i.e., title and risk of loss pass to Arco upon delivery in Alaska).

Additionally, in a January 8, 1993 submission, counsel for the importer noted the recent decision of the Court of Appeals for the Federal Circuit in Nissho Iwai American Corp. v. United States, Appeal 92-1239 decided December 28, 1992. That case involved a three-tiered distribution system for the sale of subway cars manufactured in Japan by Kawasaki, sold to a middleman, Nissho Iwai Corporation/Nissho Iwai America Corporation ("Nissho"), and from Nissho to the New York Metropolitan Transit Authority ("MTA"). On the authority of McAfee and Getz, the Appellate Court reversed the Court of International Trade and held that once it is determined that both the manufacturer's price and the middleman's price are statutorily viable transaction values, the rule is straightforward: the manufacturer's price, rather than the price from the middleman to the purchaser, is used as the basis for determining transaction value (emphasis added). The court noted, that determination can only be made on a case-by-case basis.

The Court of Appeals in Nissho also stated that the mechanical application of the above rule whenever there is a three-tiered distribution system could lead to inequitable results where the manufacturer's price is set artificially low. However, the rule applies where there is a legitimate choice between two statutorily viable transaction values. The manufacturer's price constitutes a viable transaction value when the goods are clearly destined for export to the United States and when the manufacturer and the middleman deal with each other at arm's length, in the absence of any non-market influences that affect the legitimacy of the sales price (emphasis added).

In the Nissho case the court found that the merchandise was clearly destined for the United States with no possible alternative destination. Additionally, the parties were not "related parties" within the meaning of section 402(g) of the TAA. Therefore, Kawasaki and Nissho dealt with each other at arm's length.

The facts in the instant case are similar to those in Nissho yet there is a critical difference. Here, the parties are "related" as defined in 402(g) of the TAA. The relevant provision with regard to related parties states the following:

The transaction value between a related buyer and seller is acceptable...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. See, section 402(b)(2)(B) of the TAA.

In determining whether the relationship between the parties influences the price of imported merchandise, section 152.103(j)(2)(i), Customs Regulations (19 CFR 152.103(j)(2)(i)), provides that if it is shown that the buyer and seller, albeit related, buy and sell from one another as if they are not related, this indicates that the price is not influenced by the relationship between the parties, and appraisement pursuant to transaction value is proper. If the price has been settled in a manner consistent with the normal pricing practice of the industry, or with the way the seller settles prices for sales to unrelated buyers, then it is considered not to have been influenced by the relationship between the parties. Also, 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 in sales of merchandise of the same class or kind, this would demonstrate that the price has not been influenced. (See the Statement of Administrative Action "SAA" p.54; and section 152.103(l)(2)(ii) and (iii), Customs Regulations (19 CFR 152.103(l)(2)(ii) and (iii)).

On April 19, 1993 a member of my staff requested that counsel submit material that would demonstrate the acceptability of the transfer price as between the related parties, particularly in light of the "margin" that was used to determine that price. Counsel responded with a submission dated May 7, 1993 wherein it was again stated that the related party price was based upon ISI's arms-length prices to unrelated U.S. buyers with deductions for freight, duty, brokerage, processing and carrying costs in the U.S. where applicable, and a negotiated margin for ISI.

Counsel stated the margin amount was originally set on the basis of negotiations and discussions between the two companies with consideration given to the pricing structure in comparable situations involving independent distributors and the industry in general in the U.S. Ipsco knew this information, stated counsel due to its commercially acquired knowledge and through trade associations. Therefore, by 1984-1985, the companies experience re: operating costs for an efficient distribution business had a high degree of reliability. Therefore, with a 4 percent margin ISI would make a profit on some transactions and realize a loss on others if one could quantify general and administrative overhead costs on a sale-by-sale basis. However, the only way for a margin to be reasonably set is on an aggregate basis and the companies never intended to assure ISI of a profit on every transaction.

Counsel stated that the 4 percent margin must be viewed as reasonable and conservative given ISI's performance of selling, marketing, promotion and account servicing. Counsel stated that there was no chance that the transaction values involved here were lower than those private parties would have negotiated yet no proof by counsel has been offered.

While we appreciate counsel's reliance upon it's client's business acumen, no evidence has been provided to support 2counsel's claim that through trade associations or elsewhere the general industry contained a profit similar to that of ISI. Additionally, counsel has stated that the prices determined by Ipsco and ISI always allowed for certain profit percentages. Again, no evidence was submitted which suggests that during the time of the entries in question the industry was always guaranteed to make at least a 4% profit comparable to that of ISI guarantee from Ipsco. Certainly, a guarantee of profit for ISI regardless of industry variations could lead to "artificially low transfer prices" as described by the court in Nissho. Consequently, we are unable to verify that the price inclusive of this profit margin is consistent with the normal pricing practice of the industry in question. The fact that the parties were able to manipulate profit amounts with no reference to the industry as a whole leads us to conclude that the relationship indeed influenced the price actually payable.

The prices between the related parties were not established to have been negotiated at arm's length, nor shown to be consistent with the industry in question nor was there any evidence submitted showing that the prices contained all costs plus a profit equivalent to the firm's overall profit as a whole for the same class or kind of merchandise. Therefore, we conclude that the examination of the circumstances of the sale of the imported merchandise indicates that the relationship between ISI and Ipsco influenced the price actually paid or payable. Additionally, no evidence was presented showing that the parties met the alternative test for acceptability (i.e., that the transfer price closely approximated test values). In sum, the transaction value between Ipsco and ISI was not acceptable under section 402(b)(2)(B) of the TAA.

As stated above, the court in Nissho observed that the rule only applies where there is a legitimate choice between two statutorily viable transaction values. In order for the manufacturer's price to constitute a viable transaction value two essential elements must exist. First, the goods must be clearly destined for export to the United States and second, the manufacturer and the middleman must deal with each other at arm's length.

Here, the imported merchandise was made for a specific U.S. customer, Arco. Therefore, the merchandise was clearly destined for export to the United States. As for the second criteria, we believe the parties did not deal with each other at arm's length and that the price was influenced by the relationship. As a consequence, this case is not like Nissho so that case does not apply. Here, there is only one statutorily viable transaction value and there is no choice to made as there was in Nissho. The ISI price to Arco is the only statutorily viable transaction value which is acceptable under section 402(b) of the TAA. The merchandise was clearly destined for the United States and ISI and Arco dealt with each other at arm's length. The two were not related parties, none of the restrictions on the use of transaction value as may be found in section 402(b)(2)(A) or elsewhere occurred.

HOLDING:

In the instant case, no legitimate choice existed between two statutorily viable transactions as propounded by the court in Nissho. In the instant transactions only the sale between ISI and Arco represents a statutorily acceptable transaction value.

Accordingly, you are directed to deny the protest in full. A copy of this decision should be attached to the Customs Form 19 and mailed to the protestant as part of the notice of action on the protest.

Sincerely,


John Durant, Director