VAL CO:R:C:V 545669 CRS
U.S. Customs Service
P.O. Box 3130
Laredo, TX 78044-3130
RE: Internal advice request 33/94; related parties; transfer pricing; circumstances of sale; all costs
This is in reply to your memorandum of May 10, 1994, to the Customs Information Exchange,
under cover of which you forwarded the above-referenced internal advice request, dated January 27,
1994, filed by counsel Horton, Whiteley & Cooper, on behalf of Alps Electric, Inc. ("AEI"). We
regret the delay in responding.
AEI is a distributor of automotive parts to the three major U.S. automobile manufacturers.
AEI's automotive division (AEI AD) purchases keyless entry devices, switches and other electronic
articles manufactured by AEI's Japanese parent company, Alps Electric, Ltd. ("Alps"). However, the
merchandise is actually imported, through the port of Brownsville, Texas, from a related third party
in Mexico. AEI is the importer of record. In a CF 29 dated October 26, 1993, your office requested
cost information from AEI relative to the value of merchandise imported by AEI. The purpose of the
request was to determine whether transaction value was the proper basis of appraisement.
In lieu of the information requested, AEI submitted the instant request for internal advice.
AEI maintains that the acceptability of transaction value can be established, without resort to cost
data, from the circumstances of the related party sale. According to counsel, transfer prices are the
subject of negotiation between AEI and Alps. When AEI contemplates selling a new product a
quotation must first be obtained from Alps. AEI provides certain data to Alps which the latter
reviews and analyzes before quoting a price. AEI then quotes a price to its U.S. customers after
adding in an amount for profit. If the customer accepts the quote the price becomes final. If the
customer rejects the quote, however, there may be further negotiations. The Alps-AEI price includes
an adjustment for exchange rate fluctuations.
The issue presented is whether the information submitted regarding the circumstances of the
related party sale is sufficient to determine whether AEI's transfer price constitutes a valid transaction
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 under the TAA is transaction value, defined as the "price
actually paid or payable for the merchandise when sold for exportation to the United States," plus
certain enumerated additions. 19 U.S.C. 1401a(b)(1). However, merchandise will be appraised
under transaction value only if the buyer and seller are not related, or if related, the transaction value
is deemed to be acceptable. In the instant case the buyer, AEI, and the seller, Alps, are related as
defined by 19 U.S.C. 1401a(g)(1).
Section 402(b)(2)(B) of the TAA sets forth two conditions under which a related party
transaction value will be acceptable. The first is where an examination of the circumstances of sale
indicates that the relationship between the parties did not influence the price actually paid or payable.
In this regard Customs will examine the manner in which the buyer and seller organize their
commercial relations and the way in which the price in question was derived in order to determine
whether the relationship influenced the price. If it can be shown that the price was settled in a manner
consistent with the normal pricing practices of the industry in question, or with the way in which the
seller settles prices with unrelated buyers, this will demonstrate that the price was not influenced by
the relationship. 19 C.F.R. 152.103(l)(1)(i)-(ii). In addition, Customs will consider the price not
to have been influenced if the price was adequate to ensure recovery of all costs plus a profit
equivalent to the buyer's overall profit realized over a representative period of time. 19 C.F.R.
152.103(l)(iii). Customs has held that determinations as to whether the price actually paid or payable
was influenced by the relationship between buyer and seller should be made on a case-by-case basis.
The second approach for validating a related party transfer price is where the transaction value
closely approximates certain "test" values, i.e., the transaction value of identical or similar
merchandise sold to unrelated buyers in the U.S., or the deductive or computed value of identical or
similar merchandise. 19 U.S.C. 1401a(b)(2)(B). Although the TAA provides for the use of test
values, counsel has advised there are no test values in respect of the merchandise imported by AEI
and that, consequently, this method of establishing the acceptability of transaction value is
Nevertheless, counsel for AEI maintains that the circumstances of sale demonstrate that the
Alps-AEI relationship did not influence the price actually paid or payable. To this end, counsel has
described the manner in which the buyer and seller, AEI and Alps, arrive at their transfer prices.
Headquarters Ruling Letter (HRL) 543086 dated March 12, 1987. However, no documentation or
other evidence has been presented to support these assertions. Moreover, where Customs has held
that related buyers and sellers dealt with one another as if they were unrelated, there have been
factors present that clearly established the validity of the transfer price. E.g., HRL 542261 dated
March 11, 1981 (TAA No. 19) (where the transfer price was defined with reference to prices
published in a trade journal (the "posted price") and the posted price was commonly used by other
buyers and sellers as the basis of contract price). Accordingly, it is our position that the information
presented in regard to the circumstances of sale is insufficient to establish that the relationship did not
influence the price actually paid or payable.
In the event the imported merchandise cannot be appraised under transaction value, it should
be appraised in accordance with one of 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.
The circumstances of sale information submitted by counsel is insufficient to establish that the
relationship between AEI and Alps did not influence the price actually paid or payable of the imported
merchandise. The value of the imported merchandise should be determined in accordance with the
remaining bases of appraisement applied in sequential order.
This decision should be mailed by your office to the internal advice requester no later than
sixty days from the date of this letter. On that date the Office of Regulations and Rulings will take
steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS,
and to the public via the Diskette Subscription Service, the Freedom of Information Act and other
public access channels.
John Durant, Director
Commercial Rulings Division