CLA-2 RR:CTF:VS 563400 KSG
Eagle Global Logistics
2151 Airwest Blvd
Plainfield, IN 46168
Re: Transaction value; related parties; transfer pricing; “circumstances of the sale” test
Dear Ms. Roberts:
This is in response to your letter dated October 31, 2005, requesting a binding ruling on behalf of Rollomatic, Inc., as to whether transaction value can be used as a basis of appraisal in this case.
Rollomatic USA (Rollo USA) imports grinding machines and parts which are used for producing cutting tools for various industrial and medical uses. The machines are purchased from a related party, Rollomatic SA (Rollo SA), a Swiss company. Rollo USA is a U.S. corporation which is 100% owned by Rollo Holding SA. All of the stock of Rollo SA is also owned by Rollo Holding SA. There are no common employees between Rollo USA and Rollo SA. Rollo USA gets a 20% discount from the stated price.
The submission includes: 1) two invoices from Rollo SA to Rollo USA showing the sale of two machines (serial numbers 3422 and 3316); 2) a purchase order draft; 3) an invoice from Rollo SA to Rollo USA for a machine (serial number 3703) that was returned to Rollo USA; 4) an invoice from Rollo SA to a Japanese corporation which the importer states is an unrelated party for a machine showing that it receives a 20% discount; and 5) an invoice for advertisement expenses, payment to participate in a trade show and a copy of an advertisement describing the Rollomatic LS-Smart machine.
The importer also submitted an affidavit from Rollo SA stating that Rollo SA does not impose restrictions on the buyer and that Rollo USA is free to sell to any customer it chooses; Rollo SA has no authority over Rollo USA’s decisions about the machinery purchases; Rollo USA is not required to purchase any minimum number of machines; Rollo SA does not determine the place, time and method of delivery for any purchases made by Rollo USA; Rollo SA holds title of the merchandise until it enters the U.S. at which time title and risk of loss passes to Rollo USA; and all sales from Rollo SA to Rollo USA are final.
Whether there is a bona fide sale between the related buyer and seller?
If so, is transaction value an acceptable basis of appraisement for the imported article?
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”), codified at 19 U.S.C. 1401a. 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 the enumerated statutory additions. 19 U.S.C. 1401a(b). In order for imported merchandise to be appraised under the transaction value method it must be the subject of a bona fide sale between a buyer and seller, and it must be a sale for exportation to the United States.
In determining whether a bona fide sale has taken place between a potential buyer and seller of imported merchandise, no single factor is determinative. Rather, the relationship is to be ascertained by an overall view of the entire situation, with the result in each case governed by the facts and circumstances of the case itself. For customs purposes, the word “sale” generally is defined as a transfer of ownership in property from one party to another for a consideration. J.L. Wood v. United States, 62 CCPA 25, 33; C.A.D. 1139(1974). While J.L. Wood was decided under the prior appraisement statute, Customs adheres to this definition under the TAA. The primary factors to consider in determining whether there has been a transfer of property or ownership are whether the alleged buyer has assumed the risk of loss, and whether the buyer has acquired title to the imported merchandise. See HRL 544775, dated April 3, 1992, and HRL 543633, dated July 7, 1987.
In determining whether the relationship of the parties to the transaction in question is that of a buyer-seller, where the parties maintain an independence in their dealings, as opposed to that of a principal –agent, where the former controls the actions of the latter, Customs will consider whether the potential buyer:
Provided (or could provide) instructions to the seller;
Was free to sell the items at any price he or she desired;
Selected (or could select) his or her own customers without consulting the seller; and
Could order the imported merchandise and have it delivered for his or her own inventory.
Based on the information and documentation provided, it appears that a bona fide sale occurred between the importer and foreign supplier. The importer assumes title and the risk of loss for the imported merchandise. Rollo SA does not impose restrictions on the buyer and Rollo USA is free to sell to any customer it chooses; Rollo SA has no authority over Rollo USA’s decisions about the machinery purchases; Rollo USA is not required to purchase any minimum number of machines; Rollo SA does not determine the place, time and method of delivery for any purchases made by Rollo USA; and all sales from Rollo SA to Rollo USA are final. Based on the information submitted, we determine that a bona fide sale occurs between the importer and the foreign supplier.
Transaction value is an acceptable basis of appraisement, inter alia, only if: the buyer and seller are not related; or if related, an examination of the circumstances of the sale indicate that the relationship did not influence the price actually paid or payable; or the transaction value of the merchandise closely approximates certain “test values.” 19 U.S.C. 1401a(b)(2)(B). The port director shall not disregard a transaction value solely because the buyer and seller are related. 19 CFR 152.103(l)(1). Where Customs & Border Protection (“CBP”) has doubts about the acceptability of the price and is unable to accept transaction value without further inquiry, the parties will be given the opportunity to supply such further detailed information as may be necessary to support the use of transaction value.
Under the circumstances of sales approach, CBP examines 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 CFR 152.103(l)(1)(i).
In this case, as described above, the parties are related pursuant to
19 U.S.C. 1401a(g)(1). This case involves a transfer price, which is a price at which divisions of a company transact with each other. www.dictionary.com.
CBP has previously ruled on instances in which transfer prices were utilized in related party transactions. For instance in Headquarters Ruling Letter (“HRL”) 545669, dated November 17, 1994, CBP determined that insufficient information was presented in regard to the circumstances of the sale to establish that the relationship did not influence the price actually paid or payable where the importer submitted a description of the manner in which the buyer and seller arrived at the transfer price, but no other factors established the validity of the transfer price.
In HRL 547019, dated March 31, 2000, CBP held that transaction value was the proper basis of appraisement for a related party transaction because the importer satisfied CBP that the “circumstances of the sale” test had been met. The transaction value in HRL 547019 was calculated based on a price list and a discount rating system used by the foreign supplier in sales to both related and unrelated buyers. The importer satisfied CBP that this pricing formula had been in effect for a certain period of time and had been consistently utilized for all of the foreign suppliers worldwide. The pricing system used four criteria to rate customers on an annual basis and the pricing was determined based on the annual rating of the particular customer and the delivery time involved in the order. In addition, the importer submitted invoices from the foreign supplier to other unrelated foreign buyers for CBP review to show that identical price discounts for merchandise identical to the imported merchandise was given to unrelated parties.
We find that the importer has not submitted sufficient information to satisfy the “circumstances of the sale” test in this case. This case is distinguishable from HRL 547019 because in that case, the importer submitted detailed information on its pricing and was able to establish that it consistently used a particular detailed pricing system for both related and unrelated buyers. Although the foreign supplier did not sell to other parties in the U.S., the importer established that the foreign supplier used its detailed pricing policy on a consistent basis worldwide, using the same price for identical merchandise for both unrelated and related buyers. In this case, the importer has not submitted sufficient information to establish a pricing policy or that the pricing policy is applied consistently on a worldwide basis for identical merchandise regardless of whether the buyer is a related party or not. For example, the ruling request references a price list and universal rating system that is used in sales to related and unrelated companies, but did not submit a copy. In this case, we find that insufficient information was presented in regard to the circumstances of the sale to establish that the relationship did not influence the price actually paid or payable.
In addition, CBP will consider the price not to have been influenced by the relationship if the price was adequate to ensure recovery of all costs plus a profit equivalent to buyer’s overall profit realized over a representative period of time. 19 CFR 152.103(l)(1)(iii). No information has been submitted with regard to “all the costs plus profit” relating to the merchandise involved in this case. Therefore, we are unable to analyze whether this test is satisfied in this case.
The second approach for validating a related party 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). In this case, the importer has not provided test values for goods imported into the U.S. Therefore, we are unable to determine if this test has been met.
Based on the information submitted, we determine that a bona fide sale occurs between Rollo USA, the importer and Rollo SA, the foreign supplier. The importer has not submitted sufficient information to establish that the “circumstances of the sale” test has been met in this case. Based on the information given, the imported merchandise should not be appraised based on transaction value.
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs official handling the transaction.
Monika R. Brenner
Chief, Valuation & Special Programs Branch