RR:IT:VA 545804 er
Port Director
San Francisco
RE: Protest and Application for Further Review (2809-94- 1000879 and 3901-94-102835); Bona Fide Sale; Sale for Exportation; Assists.
Dear Sir:
This is in response to the above-referenced protest and application for further review dated February 10 and 11 and October 3, 1994 and supplemental submissions dated February 21, August 25 and 30, September 1, October 10, 11 and 30, 1995 presented by counsel on behalf of [the importer]. We regret the delay in responding.
FACTS:
The San Francisco protest, filed on July 6, 1994, involves merchandise imported on or about December 2, 1992. The entries were liquidated on April 29, 1994. On January 5, 1995, another protest was filed in Chicago which involves issues identical to those in the San Francisco protest. The entries in the Chicago protest were made on June 20 and 27, 1994, and were liquidated on October 21, 1994. In a subsequent submission dated August 25, 1995, counsel requested that the San Francisco protest be supplemented with the Chicago protest.1 The merchandise was appraised, as entered, based on the declared sale between [the importer] and [related company A in Japan]. To the declared price, Customs added amounts attributable to the assists provided to the manufacturer of the merchandise. The details concerning the sale for exportation and the assists will be explained in more detail below.
The transactions between the parties are described as follows. [The importer] places simultaneous purchase orders for the imported game paks with two companies, [company B in the US] and [company A in Japan].2 Representative copies of purchase orders were submitted. [The importer’s] purchase order to [company B] reflects an FOB, Japan price. The purchase order to [company A] also reflects an FOB, Japan price. Both purchase orders indicate that the goods are to be shipped by the manufacturer [in Japan], [ ], directly to [the importer].
According to counsel, [company B] then places an order for the game paks with [the manufacturer], its parent company in Japan. During a meeting between this office and counsel, this office requested representative copies of [the manufacturer’s] invoices and purchase orders to [the manufacturer] but was informed that such documentation could not be obtained.
[The manufacturer] (i) manufactures the imported game cartridges; (ii) prints [the importer’s] user instructions and limited warranty materials; (iii) attaches [the importer’s] label to the game cartridges; (iv) produces brochures for the game cartridge using [the importer’s] approved final Art Work; and (v) packages the game cartridge with user instructions and limited warranty materials enclosed.
[Company B] invoices [the importer] for the game paks which are shipped directly by the manufacturer, [ ], to [the importer]. A representative copy of a commercial invoice was submitted identifying [company A] as the buyer and [the importer] as the party to whom the goods are shipped. The unit price listed is FOB Japan, freight collect. A representative packing list prepared by [company B] was submitted as well as a bill of lading. The bill of lading identifies [company B] as the consignee and [the manufacturer] as the consignor with the parties to notify as [company A] and [the importer]. Freight is designated "collect" and the destination is Oakland, California.
The information submitted reveals that despite the fact that the commercial invoices presented to Customs identified the seller of the imported merchandise as [company A] and the buyer as [the importer], [the importer] takes the position that another sale for exportation had occurred from [company B], located in the U.S., to [company A], located in Japan. [The importer] reported that certain design and development expenses were incurred by [company A] for software provided by [company A] to [ ], the manufacturer of the imported merchandise. According to counsel, these assists were reported as a separate addition to the price because [the importer] believed that the goods should be appraised based on the transaction between [company B] and [company A].
Because the appraising officer determined that the transaction between [company B] and [company A] did not constitute a sale for exportation to the U.S., Customs declined to appraise the merchandise on the basis of that transaction. Customs, instead, appraised the merchandise based on the price paid by the importer, [ ], to [company A], plus the amounts attributable to the assists provided to the manufacturer.
The research and development expenses arose in conjunction with the development of software by [company A] which is incorporated into the game cartridges manufactured by [the manufacturer]. The software is developed pursuant to licensing agreements between [company B] and both [the importer] and [company A]. Specifically, [company B] provides [the importer and company A] with the necessary information and the rights to develop the software which, when incorporated into the manufacture of the imported game cartridges, enables the game cartridges to be used with [certain entertainment systems].3
ISSUE:
Whether the merchandise was correctly appraised?
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 thereto, including amounts not otherwise included within the price which are attributed to:
(C) the value, apportioned as appropriate, of any assist...
In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit reviewed the standard for determining transaction value when there is more than one sale which may be considered to be for exportation to the United States. In so doing, the court stated that Customs' former policy of basing transaction value on the sale which most directly caused the merchandise to be exported to the United States proceeded from an invalid premise. Nissho Iwai, 982 F.2d 505, 511. Instead, the court reaffirmed the principle of E.C.McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that the manufacturer's price, rather than the middleman's price, is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. In reaffirming the McAfee standard, the court states that in a three-tiered distribution system, the manufacturer's price constitutes a viable transaction value when the goods are clearly destined for export to the United States, and the manufacturer and the middleman deal with each other at arm's length, absent any non-market influences that affect the legitimacy of the sales price. Id. at 509. See also, Synergy Sport International, Ltd. v. United States, 17 C.I.T. , Slip Op. 93-5 (Ct. Int'l Trade January 12, 1993).
As a general matter Customs presumes that the price paid by the importer is the basis of transaction value. See, e.g., HRL 545603 dated March 10, 1995. However, in order to rebut this presumption and establish that the transaction between a manufacturer and a middleman, or some other sale, forms the basis of transaction value the importer must, in accordance with the court's standard in Nissho, provide evidence that establishes that at the time it purchased, or contracted to purchase, the imported merchandise, the goods were "clearly destined for export to the United States" and that the manufacturer and middleman dealt with each other at "arm's length". Customs has held that it is the importer's responsibility to demonstrate that the standard set forth in Nissho and Synergy has been met. See, e.g. HRL 545144 dated January 19, 1994. In the instant case, the presumption is therefore that transaction value is based on the price paid by [the importer] to [company A].
In this case the manufacturer, [ ], and [company B] are related parties. Counsel for [the importer] is not asking for appraisement based on the transaction between [company B] and [the manufacturer]. Instead counsel requests appraisement based upon the transaction between [company B] and [company A], two purportedly unrelated parties. Alternatively, counsel claims that transaction value may also be based upon the transaction between [company A] and [the importer]. In the latter instance, however, counsel claims that transaction value should be based on the price paid by [the importer] without further additions for assists because the value of the assists is already included in the marked-up price paid by [the importer]. As described above, Customs appraised the merchandise based on the transaction between [company A] and [the importer], plus amounts attributable to the assists.
HRL 545648 dated August 31, 1994, involved a multi-tiered distribution arrangement in which the middleman was not the importer. The parties to the transactions included a Korean seller, Japanese Middleman 1, Japanese Middleman 2, the importer and the U.S. customer. There counsel indicated that there were several sales involving the imported goods (Korean seller- Japanese Middleman 1; Japanese Middleman 1-Japanese Middleman 2; Japanese Middleman 2-importer; Importer-U.S. customer) and requested appraisement based on the transaction between the Korean seller and Japanese Middleman 1. Because pertinent information regarding one of the transactions (Middleman 1- Middleman 2) was lacking, Customs declined to appraise the merchandise based on the requested transaction (Korean seller- Middleman 1) and, instead, appraised the merchandise based on the price actually paid or payable by the importer (Middleman 2- importer). In so doing, Customs noted that there was no documentation regarding the sale from Middleman 1 to Middleman 2. Accordingly, Customs was unable to determine whether the alleged sales to both middlemen were bona fide sales, and if so, when the sales occurred and the underlying circumstances surrounding them. “Without knowing all the circumstances surrounding the importation, we cannot determine whether the alleged sale to Japanese Middleman 1 was a sale for exportation to the United States.”
In the meeting with counsel, this office asked for a manufacturer’s invoice and purchase orders to [the manufacturer] to verify that a bona fide sale occurred between [company B] and [the manufacturer]. In view of the fact that such documentation cannot be obtained, Customs cannot determine whether [company B] was acting as an independent buyer/reseller of the imported goods, or whether instead, [company B] was acting as a selling agent for its parent company, [ ], the manufacturer of the imported goods. Moreover, assuming [company B] is acting as an agent for its parent company, [the manufacturer], in the absence of documentation describing all transactions between [company B], [the manufacturer] and [company A], Customs is unable to accept the price paid by [company A] as a basis for transaction value.4
Under these circumstances because the importer has failed to persuade Customs that the claimed transaction is a valid sale for exportation, the presumption that transaction value is based on the price actually paid or payable by the importer controls. In this instance, the importer [is the buyer for purposes of appraisement] . Customs liquidated the protested entries at the amount paid by [the importer] to [company A] plus amounts representing the value of the assists provided by [the importer’s] related party, [company A], to [the manufacturer]. Section 402(h)(1)(A)(iv) of the TAA defines an assist to include the following:
[I]f supplied directly or indirectly, and free of charge or at a reduced cost, by the buyer of the imported merchandise for use in connection with the production or the sale for export to the U.S. of the merchandise:
* * *
[E]ngineering, development, artwork, design work, and plans and sketches that are undertaken
elsewhere than in the United States and are necessary for the production of the imported merchandise.
(19 U.S.C. §1401(h)(1)(iv))
It is undisputed that software is furnished to the manufacturer, free of charge, for use in connection with the production of the imported merchandise. The licensing agreements regarding the production of the software and its incorporation into the imported merchandise are between [company B] and both [the importer] and [company A], not between just [company B] and [company A]. [The importer] and [company A] are collectively referred to in the agreements as “Licensee”. While the software is developed by [company A], because [company A] and [the importer] share a legal obligation to provide the foreign developed assists for use in connection with the production of the merchandise, we find that such assists are, in effect, provided by the buyer of the merchandise.
In its August 25, 1995 submission page 31, counsel claims that all the research and development expenses incurred by [company A] are less than [company A’s] markup to [the importer] and thus are part of the invoice unit prices to [the importer]. While there appears to be a markup between the [company B] price to [company A] and [company A’s] price to [the importer], the information submitted does not reveal the components making up the price such that Customs can verify that the research and development expenses are actually included. Customs determined that in order for the merchandise to be appraised on the basis of transaction value, the value of the assists had to be added to the declared price. The merchandise was, accordingly, appraised based on the invoiced amounts plus amounts representing the value of the assists. Because the information submitted in conjunction with this protest fails to rebut the presumption of correctness which attaches to Customs appraisement of the merchandise, we find that Customs appraisal of the merchandise based on the price paid by the importer, plus the amounts attributable to the value of the assists, is correct.
HOLDING:
Based upon the information submitted, we find that the merchandise was correctly appraised based upon the transaction between [the importer] and [company A] with amounts identified as the value of the assists to be added to the price actually paid or payable. Accordingly, this protest is denied.
In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to Protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision 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 the public via the Diskette Subscription Service, Lexis, Freedom of Information Act and other public access channels.
Sincerely,
Acting Director
International Trade
Compliance Division