VAL-CO:R:C:V 544666 GG

District Director
Seattle District
U.S. Customs Service
1000 Second Avenue, Suite 2200
Seattle, Washington 98104-1049

RE: IA 81/90; appraisement of alumina from Australia

Dear Sir:

This is in response to the internal advice request referenced above, which we received on March 12, 1991. We regret the delay in responding.

Three companies - Company A, Company P, and Company X/Y - import alumina from Australia. Alumina is a high volume, high value, duty free commodity. Entries of Australian alumina made prior to October 1, 1990 had revenue significance because the Merchandise Processing Fee and Harbor Maintenance Fee were assessed based on the appraised value; importations after that date are assessed a maximum Merchandise Processing Fee of $400 per entry, but the Harbor Maintenance Fee is still determined in the same manner.

You request advice concerning appraisement of the merchandise.

The details of each set of transactions differ depending on which company is the importer. Therefore, as in your memorandum, they will be presented separately.

1. COMPANY A

Company A, a Delaware corporation, buys and imports alumina from a related party, Company B. Company B is also incorporated in Delaware. Company B sources the alumina from Company C. The ultimate consignee is Company A.

The transactions between Company B and Company A are governed by a contract. The price terms are set down in Articles 2, 4, 5 and 10 of the contract. Article 2, which gives shipment and delivery terms, states that alumina produced by Company C shall be delivered by Company B to Company A f.o.b. vessel, Gladstone, Australia. Title to the alumina and risk of loss pass at the f.o.b. point. Under Article 4, the price per ton of alumina delivered to Company A f.o.b. vessel, shall be the fair market value of the alumina as determined each year by agreement of the parties based on long term supply arrangements between unrelated parties. During the month of December, Company A and Company B shall agree on a provisional price for invoicing purposes during the forthcoming calendar year pending agreement on a final price for that year. Prior to June 30 of each year the parties shall reach agreement on the final alumina price for that year which final price shall apply retroactively to January 1.

Article 5 provides that Company B will, within 15 days after the end of each calendar month, invoice Company A for the tons of alumina delivered to Company A during the preceding month multiplied by the price determined in accordance with Article 4. Amounts due from or payable to Company A following final agreement on price for each calendar year, shall be invoiced and paid by Company A or credited to Company A's account.

Finally, Article 10 of the agreement states that the final alumina price for each year, as determined in accordance with Article 4, shall be subject to the approval of the Australian government.

In your internal advice request, you state that in response to a Request for Information (CF 28) from Customs, you were informed that the price between Company B and Company A for alumina represents a provisional price agreement between Company B and the Australian Department of Primary Industries and Energy. The 1990 provisional price was $280/MT; that was also the final 1989 price. A Company B representative also indicated that the provisional price represents the cost of production plus a fair profit as gauged against sales between unrelated firms. Such related sales reportedly comprise no more than 15-20% of the total trade in Australian alumina; the rest are related sales. Company A has not provided any evidence or proof of its payment to Company B. The Company B representative did not know how much money is actually sent to Company C in payment for the alumina, but theorized that the only funds actually transferred to Company C are those required to keep the plant operating. There is no deductive value because Company A does not resell the alumina but uses it in its own smelters.

Using the figure of $280/MT to represent computed value, you indicate that you appraised most 1989 alumina entries under Section 402(f) of the TAA.

ISSUE:

What is the correct method of appraisement for Company A's importations of alumina? LAW AND ANALYSIS:

The primary method of appraising imported merchandise is transaction value. As you know, 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 amounts for packing costs, selling commissions incurred by the buyer, assists, royalties and license fees, and proceeds of any subsequent resale that accrue to the seller. Section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(b)). The price actually paid or payable means the total payment . . made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 CFR 152.102(f). It will be considered without regard to its method of derivation . . . and may be the result of discounts, increases or negotiations, or may be arrived at by the application of a formula. . . The word "payable" refers to a situation in which the price has been agreed upon, but actual payment has not been made at the time of importation. 19 CFR 152.103 (a).

The first question to be addressed is whether there is a price actually paid or payable, and if so, what that price will be. The fact that the amount actually payable may be unknown at the time of exportation will not serve to prevent appraisement under transaction value where the price is subject to a formula. There is no price actually paid or payable for shipments of alumina to Company A that are entered under the provisional price because the price is subject to adjustment after exportation witout benefit of a formula. The absence of a firm price for the merchandise imported under these entries will prevent the alumina's appraisement under transaction value; resort must be made to the next available appraisement method. However, the alumina entered under the final agreed upon price may be appraised under transaction value unless there is a limitation upon the use of transaction value as an appraisement method. The relationship between Company B and Company A may present such a limitation.

Transaction value cannot be used as the appraisement method where the buyer and seller are related and the relationship influences the price. Section 402(b)(2)(B) TAA. There are two methods of determining whether the transaction value in a related party transaction is acceptable. The first involves an examination of the circumstances of the sale; the second, a comparison of the transaction value with a series of test values. If the criteria of one method are met, the transaction value will be accepted for customs purposes.

The circumstances of sale should show that the buyer and seller, although related, buy from and sell to each other as though not related. As noted in the Statement of Administrative Action, this can be done by demonstrating that the price has been settled in a manner consistent with the normal pricing practices of the industry in question, or with the way the seller settles prices for sales to buyers who are not related to him. The contract between Company B and Company A does stipulate that the price per ton of alumina delivered to Company A f.o.b. vessel shall be the fair market value of the alumina as determined each year by agreement of the parties based on long term supply arrangements between unrelated parties. If these long term supply agreements reflect the normal pricing practices of the alumina industry, then the circumstances of sale test may be satisfied, and the relationship between the parties will not prevent appraisement under transaction value. Customs has previously viewed the influence of market forces on the setting of prices to be an indication that the relationship did not affect the price. See TAA No. 19 (HRL 542261, dated March 11, 1981). Therefore, the fact that the alumina price is derived from "market values" may serve to satisfy the circumstances of sale test.

Proof 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 will also establish, under the circumstances of sale test, that the price has not been influenced. However, the information provided by a Company B representative that the provisional price represents the cost of production plus a fair profit as gauged against sales between unrelated firms appears to be a step away from that test.

There is no information on test values.

Assuming you are satisfied that the relationship between Company A and Company B did not influence the price of the alumina, the fact that the final price was subject to the approval of the Australian government should not serve to bar the appraisal under transaction value of all entries eligible for appraisement thereunder.

The entries that cannot be appraised under transaction value, i.e., those entered under the provisional price, will have to be appraised under the next available appraisement method. In this particular instance, it may be possible to appraise those entries under transaction value of identical or similar merchandise. If you determine that the relationship between Company B and Company A did not influence the finally agreed upon price of the alumina, and allow appraisal of entries under transaction value, then that transaction value may be used in arriving at the transaction value of identical merchandise. See T.D. 91-15. Otherwise, it will be necessary to appraise Company A's entries of alumina under the next available appraisement method. You have already noted that a deductive value cannot be calculated because the alumina is not resold in the United States. However you indicate that information may be available on production costs and profits, from which a computed value could be derived.

HOLDING:

The alumina entered under the final, agreed upon price may be appraised under transaction value if you are satisfied that the relationship between Company B and Company A did not influence the price. The alumina entered under the provisional price may not be appraised under transaction value. There may be a transaction value of identical or similar merchandise on which to base those appraisements. Otherwise, resort to the next available method must be made.

2. COMPANY P

Company P of Houston, Texas purchases alumina from Company Q of the Netherlands. Both companies are subsidiaries of Company R. The ultimate consignee of the alumina is Columbia Falls Aluminum Co. The transactions between these parties are governed by an Alumina/Aluminium Exchange Agreement between Company Q and Company P.

The agreement is for barter at the rate of one ton metal to 9.9 tons of alumina. For purposes of invoicing, the price shown is the USTP (average Metals Week U.S. Transaction Price) for the month prior to the month of shipment, divided by 9.9, and the result is multiplied by the bill of lading weight. Metals Week is a weekly trade periodical which reports daily and weekly COMEX positions, New York Mercantile Exchange positions, London Metals Exchange prices, etc.

Company P is responsible for paying freight and insurance charges for the alumina from the port of exportation, and assumes responsibility for all duties and taxes levied upon importation. Property and a right of possession of the alumina passes from Company Q to Company P at the moment at which the carrying vessel sailing eastward first passes the 135th degree of longitude west.

Company P in turn delivers the aluminum on a CIF, duty unpaid, basis to a mutually agreed upon Japanese port. Company Q, at option, may elect not to take delivery of any month's quantity of metal, in which case Company P shall pay Company Q "in partial consideration" for the amount of alumina delivered times the average USTP for the calendar month preceding the scheduled month of shipment of the aluminum.

There is a provision in the agreement for remittance to Company P of a portion of Company Q's resale price for the aluminum metal under certain market conditions.

Company P states (through Company S of New York) that it is not involved in any price negotiations with the Australian government, it does not own any part of Company T (the supplier of the alumina), it does not know Company Q's relationship to Company T, and it does not know what price is paid to Company T for the alumina.

ISSUE:

What is the correct method of appraising Company P's importations of alumina from Australia? LAW AND ANALYSIS:

Transaction value, the preferred method of appraisement, is defined in section 402(b)(1) of the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a) as the "price actually paid or payable for the merchandise when sold for exportation to the United States", plus specified statutory 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 for imported merchandise by the buyer, to or for the benefit of, the seller." Thus, transaction value requires a sale of imported merchandise and a direct or indirect payment that benefits the seller. However, the sale and/or price actually paid or payable for imported merchandise cannot be subject to any condition or consideration for which a value cannot be determined with respect to the imported merchandise. See Section 402(b)(2)(A)(ii) of the TAA.

Such a condition or consideration may exist in situations involving countertrade. Countertrade, which is discussed in depth in General Notice, Countertrade Transactions, Vol. 25, No. 6, Customs Bulletin, February 6, 1991, is a mechanism of paying for goods in international trade through the exchange of products for products. A common countertrade practice is known as barter; this is a single exchange of goods with no payment in currency made. The arrangement between Company P and Company Q, in which alumina is exchanged for aluminum, is one of barter. The rate of exchange is one ton metal to 9.9 tons of alumina. The price shown on the invoices is the USTP (average Metals Week U.S. Transaction Price) for the month prior to the month of shipment, divided by 9.9 and then multiplied by the bill of lading weight.

The use of transaction value is precluded in a pure barter situation where the transaction is neither expressed nor settled in monetary terms, and there is no transaction value or objective and quantifiable way to determine that value. See General Notice, p. 6, supra. Company P and Company Q's transactions appear to be expressed in monetary terms, because there is an invoice price. However, the invoice price merely reflects the average U.S. price for aluminum, not that for the merchandise imported, alumina. The manner in which the invoice price of alumina is determined - dividing the USTP by 9.9 then multiplying that figure by the bill of lading weight for the alumina - may not accurately portray the value of the alumina because the exchange ratio of 1:9.9 presumably was set by Company P and Company Q, who are related parties. This, together with the fact that there were no money transfers between the parties, leads to the conclusion that the transactions were neither expressed nor settled in monetary terms. There is also no objective way to determine a transaction value. Consequently, there is a condition or consideration for which a value cannot be determined, and Company P's alumina imports cannot be appraised under transaction value. The next available appraisement method must be used to appraise these shipments.

It may be possible to appraise Company P's alumina under transaction value of identical or similar merchandise, using a transaction value established by Company B, or by any other company with alumina importations from Australia. If a transaction value of identical or similar merchandise is not found, then, as you have already suggested, there may be enough cost and profit data available to appraise the merchandise under computed value.

HOLDING:

The barter arrangement between Company P and Company Q precludes the use of transaction value. The alumina importations must be appraised under the next available appraisement method. There may be a transaction value of identical or similar merchandise to which resort may be made.

3. COMPANY X AND COMPANY Y

Company V of Oslo, Norway, buys alumina from Company W (U.S.A). The source of the alumina is Company W (Australia). The alumina is imported into the United States. The importer of record is Company X/Company Y, Company V's successor when Company V merged with Company Z in 1986.

Company W (U.S.A.) generates two invoices for each shipment. Half of the tonnage is paid for in cash, and half is paid for in barter with aluminum ingots which Company X/Company Y claims are of equivalent value.

Company X/Company Y has provided proof of its payment to Company W (U.S.A.) of the cash portion of one shipment, and the amount paid matches the cash invoice total. The cash invoices show a price per ton, and some deduct a "Freight Credit Australia to all other destinations" of $1.50 per ton.

The barter invoices show a price per ton which is not always the same as that on the corresponding cash invoices. No evidence has been presented on the value of the aluminum ingots. However, all the barter invoices received to date are annotated "Barter 12% = _____T Metall", with the blank being filled by a figure which is 12% of the quantity on the barter invoice. You interpret this to mean that Company W (U.S.A.) receives a fixed quantity of aluminum rather than a fixed value of aluminum.

Company X/Company Y has been asked for a copy of its contract with Company W, but has not yet furnished it. Company X/Company Y has stated that it does not participate in price negotiations with the Australian government. Entries are routinely made on pro-forma invoices which, you state, in some cases show highly unlikely prices. Company X/Company Y has failed to respond to Requests for Information and proposed value advances sent by Portland, where it also enters alumina.

ISSUE:

What is the correct method of appraising Company X/Company Y's alumina importations from Australia?

LAW AND ANALYSIS:

In this case alumina from Australia is imported into the United States by Company X/Company Y. The alumina has been sold by Company W (U.S.A.) to Company V, Company X/Company Y's predecessor. Company W (U.S.A.) and Company V are not related.

The situation here involves countertrade. (See previous discussion of countertrade in Law and Analysis section of Company P/Company Q transactions). Specifically, it involves a practice known as counterpurchase, which is an exchange of goods for goods and money, or an exchange of goods for services and money. See General Notice, p. 3, supra. Here, Company W (U.S.A.), the seller, generates two invoices for each shipment of alumina. Half of the tonnage is paid for in cash, the other half with aluminum ingots which the buyer claims are of equivalent value.

As previously mentioned, transaction value is the price actually paid or payable for the merchandise when sold for exportation to the United States, plus certain statutory additions. 19 U.S.C. 1401a(b)(1). The term "price actually paid or payable" means the total payment made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C. 1401a(b)(4)(A). Here, there is no price actually paid or payable because it is not possible to ascertain a "total payment"; only one half, not all, of the payment is known.

A price cannot be placed on the half of each shipment that is paid for in barter with aluminum ingots, because even though an invoice is presented with the alumina importations, the barter invoices show a price per ton which is not always the same as that on the corresponding cash invoices. As discussed earlier, the use of transaction value is precluded in a pure barter situation where the transaction is neither expressed nor settled in monetary terms, and there is no transaction value or objective or quantifiable way to determine that value. Absent further information on how the barter price was set, the objectivity of the pricing method cannot be determined. A condition or consideration exists for which a transaction value cannot be determined.

Company X/Company Y's alumina importations should be appraised under the next available appraisement method. There may be a transaction value of identical or similar merchandise.

HOLDING:

The presence of a countertrade situation precludes the appraisement of Company X/Company Y's alumina entries under transaction value. It will be necessary to proceed to the next available appraisement method, possibly transaction value of identical or similar merchandise.

We will be more than willing to discuss this further with you should difficulties arise in appraising these entries. Please contact Gina Grier or Tom Lobred at (202) 482-7010 should you need further assistance.

Sincerely,

John Durant
Director, Commercial
Rulings Division