VAL CO:R:C:V 544659 ML

District Director
San Francisco, Ca

RE: Internal Advice Request Regarding the Sale For Exportation Between Related Parties

Dear Sir:

This is in response to a memorandum, dated February 12, 1991, regarding file VAL-1-SF:COII(RK) forwarded from your office. The merchandise was appraised under section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979, (TAA; 19 U.S.C. 1401(b)).

FACTS:

According to the submission, the merchandise was sold by Fujitsu Limited, located in Japan, (hereinafter referred to as the "manufacturer"). The manufacturer is a related party to Fujitsu America Inc., a California corporation, (hereinafter referred to as the "importer"), and Amdahl Corp., which has it's principal place of business in California, (hereinafter referred to as "AC"), as that term is defined in section 402(g) of the TAA. The manufacturer and AC entered into a written agreement for the sale of main frame computers, units and parts. The manufacturer and AC negotiated the price to be paid for the merchandise and that subsequent to this agreement, all purchase orders for the above mentioned merchandise to be placed with the manufacturer, would go through the importer. The Manufacture and Purchase Agreement referred to above, provided for the merchandise to be delivered by the manufacturer to San Francisco International Airport on a CIP basis, delivery to AC's facility (CIP is an Incoterm with the same substantive meaning as CIF and applying to both air and surface methods of shipment). All of the imported merchandise was manufactured in Japan.

The manufacturer also agreed to bear the entire risk of loss and damages to the merchandise prior to delivery to AC's facility in California. Counsel for the importer maintains, however, that in actual business practice the manufacturer provides risk insurance for the importer from delivery to the carrier in Japan to AC's facilities, or to the importer's warehouse. The importer's insurance covers products from the port of entry to AC's facility. Counsel states in the event of a loss prior to the delivery to AC, the importer bears the risk of loss. Claims for any loss or damage are filed by the importer and the proceeds are received by the importer. Payment for loss under these insurance contracts was made to the importer.

After the agreements were concluded between the manufacturer and AC, AC issued purchase orders to the importer for merchandise, the price being the previously established amount in the contract between the manufacturer and the importer. The importer then issued its purchase order to the manufacturer. The purchase price between the importer and manufacturer was between X% and XX% less than the price as established between the manufacturer and AC. Counsel for the importer stated that the percent ranges were dependent upon the product line, with the general markup being X%. Upon filling the order, the merchandise was shipped by the manufacturer to the importer. The commercial invoices and the bills of lading accompanying the merchandise reflect that the merchandise was sold to the importer. The amount stated on the entry documents was the transfer price between the importer and the manufacturer as indicated on the manufacturer's invoice to the importer.

Section 14.1 of the agreement between AC and the manufacturer provided for the payment of the contracted for merchandise. In accordance with the purchase order terms as found in the agreement, the importer made payment to the manufacturer by international letters of credit. As stated above, after entry the merchandise was delivered to the importer's common carrier, who then either delivered the goods directly to AC's facility or to the importer's warehouse. After the products were delivered to AC, the importer invoiced AC in accordance with the terms of the AC purchase order. In accordance with the purchase order, AC paid the importer for the merchandise by domestic letters of credit.

The importer and the manufacturer entered into a Fundamental Agreement, as provided for in the agreement between AC and the manufacturer, which loosely described the importer's performance of various functions. Two of these functions were that of a distributor and that of an agent as to specified products. During the relevant time periods involved, the importer and the manufacturer never formally specified any merchandise as applicable to either function.

ISSUE:

Whether the transaction between the manufacturer and the importer or the transaction between the manufacturer and AC, determines the "price actually paid or payable for the merchandise when sold for exportation to the United States.

LAW AND ANALYSIS:

Transaction value, the method of appraisement for the imported merchandise is defined in section 402(b) of the TAA. Transaction value is defined as the "price actually paid or payable for the imported merchandise when sold for exportation to the United States" plus certain 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...) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.

In determining transaction value, a sale for exportation to the United States must take place at some unspecified time prior to the exportation of the merchandise. In J.L. Wood v. United States, 62 CCPA 25, C.A.D. 1139 (1974), it was stated that for appraisement purposes the word "sales" should be given "its ordinary meaning, namely: transfers of property from one party to another for a consideration." Similarly, section 2-106(1) of the Uniform Commercial Code ("U.C.C.") defines a "sale" as "the passing of title from the seller to the buyer for a price." While the J.L.Wood case was decided under prior law, Customs has accepted this basic concept of what constitutes a sale as applicable under the TAA.

In the instant case, the contract for the sale of the merchandise was between the manufacturer and AC. The agreement between these parties covered all aspects of the sale, including the designation of a party (the importer) with whom the arrangements for payment would be made. The contract between AC and the manufacturer provided for a bona fide sale for exportation to the United States. The parties agreed on a price, delivery terms and the method of payment. Although the manufacturer and AC agreed in the contract for payment and arrangements for delivery of the merchandise to go through the importer, these provisions do not negate the bona fides of the sale between the manufacturer and AC.

In a similar contract, one for the purchase of Communication Control Processor System, the manufacturer agreed to sell and AC to buy products and firmware. In section 3.3 of this contract the parties clearly stated that the parties to this sales contract were AC and the manufacturer, but for the purposes of administrative convenience the manufacturer might fulfill or perform certain of its obligations hereafter through the importer. Therefore, the language found in both contracts supports finding the two agreements establish sales for exportation to the United States as between the contracting parties, AC and the manufacturer. Consequently, the price actually paid or payable for the imported merchandise would be the price as reflected in the sales agreement between the manufacturer and AC.

Counsel for the importer states that the transaction value of the imported merchandise should be based on the invoiced prices between the manufacturer and the importer. Counsel contends that a bona fide sale for exportation occurred between the importer and the manufacturer, and that the only other sale was a domestic sale between the importer and AC. We do not concur that a "sale for exportation" for purposes of establishing transaction value of the merchandise occurred between the manufacturer and the importer.

We do not find as an evidentiary matter, that the importer ever acted as anything other than the manufacturer's selling agent. Selling agents generally collect orders, and in some cases the agent may arrange for storage and delivery of the goods. The language used in section 13.2 of the written arrangement, which discusses the delivery of the merchandise, supports this conclusion. The parties clearly state that the merchandise shall be delivered by the manufacturer through the importer to AC. Counsel states that although the manufacturer paid for the insurance, the importer bore the risk of loss. Consistent with the notion of an agency arrangement, the importer was merely taking care of a continuing obligation of the seller, that of proving insurance until the merchandise was delivered to AC's facility.

Thus, in reality the sales of the main frame computers, units and parts occurs between the manufacturer and AC. The importer acted as an agent, as was described in the written contract on behalf of the manufacturer for the merchandise that was destined for the United States. The amount retained by the importer from the invoiced prices to AC are dutiable selling commissions under section 402(b)(1)(B) of the TAA. That section states that any selling commission incurred by the buyer with respect to the imported merchandise is added to the "price actually paid or payable" to arrive at the transaction value of the goods.

It should be noted, that all of the parties in this transaction are related as that term is defined in section 402(g) of the TAA. Therefore, for the transaction value method of appraisement to be acceptable the "circumstances of the sale" test or the test value method for determining the acceptability of a price in a related party transaction would need to be examined. This determination should be made by the concerned import specialist.

HOLDING:

The sale for exportation for purposes of transaction value is the sale between the manufacturer and AC, with the importer

acting as a selling agent. The amount retained by the importer from the invoiced prices to AC are considered dutiable selling commissions.

Sincerely,


John Durant, Director