HQ 545063: Transaction value; limitations on use of transaction value;General Note 3(a)(iv)

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                            HQ 545063

                        September 8, 1992

VAL-CO:R:C:V 545063 GG

CATEGORY:  Valuation

Jonathan M. Fee, Esq.
Grunfeld, Desiderio, Lebowitz & Silverman
1201 West Peachtree Street, N.E.
Suite 4660
Atlanta, Georgia 30309

RE:  Transaction value; limitations on use of transaction value;
General Note 3(a)(iv)

Dear Mr. Fee:

     This is in response to the ruling request, dated December 4,
1991, made by you on behalf of your client, xxxxxxx xxxxxxx
Corporation ("xxxxxxx").  As you know, on July 28, 1992, we
declined to issue a ruling because of uncertainty about the
parameters of the proposed transaction.  In a letter dated July
30, 1992, you asked that we reconsider our decision not to rule
and stated that a ruling, if issued, would apply only to
transactions between unrelated parties.  You further stated that
if xxxxxxx chooses to sell merchandise to related parties, it
will do so with the understanding that those transactions are not
addressed by the requested ruling.

     On the basis of this information, we are now able to issue a
ruling.

FACTS:

     xxxxxxx plans to sell to U.S. customers men's cotton T-
shirts that will be produced in its Northern Mariana Island
manufacturing facility.  For purposes of this ruling, it is
understood that these customers will not be related persons as
defined by Section 402(g)(1) of the Tariff Act of 1930, as
amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C.
1401a).

     The knit cotton fabric that will be used to make the T-
shirts will be imported into the Northern Mariana Islands from
China, or other foreign countries, in bolts or rolls, with no
marking or other indication of where the fabric is to be cut. 
The fabric will then be cut, sewn into T-shirts, pressed,
packaged and then shipped directly from the factory to xxxxxxx's
customers in the United States.

     The price of the T-shirts will be negotiated, on an arm's
length basis, with the unrelated U.S. customers.  In price
negotiations, xxxxxxx will generally be motivated by the desire
to maximize return to its stockholders; its customers, by the
desire to receive T-shirts of acceptable quality, in acceptable
quantities, at the lowest obtainable price.  Both parties will be
aware of, and influenced by, the fact that the T-shirts will be
duty-free under General Note 3(a)(iv) if the cost of foreign
materials and of their transportation to the Northern Mariana
Islands, does not exceed 50 percent of the T-shirts' appraised
value.  If such cost does exceed that amount, it is estimated
that the T-shirts will be subject to a 21 percent ad valorem
duty.

     xxxxxxx expects to sell the T-shirts for $24.00 per dozen,
F.O.B. Northern Mariana Islands port of export.  There will be no
packing costs, buying or selling commissions, or royalty or
license fees incurred by the U.S. customers, nor will the U.S.
customers furnish any assists.  No part of the U.S. customers'
proceeds of resale, disposal or use will accrue, directly or
indirectly, to xxxxxxx.  xxxxxxx will not pay rebates to its
customers, nor will it sell other products to, or conduct any
other business transactions with, them.  There will be no
restrictions on the disposition or use of the T-shirts by the
U.S. customers.  Neither the sale of, nor the price for, the T-
shirts will be subject to any condition or consideration beyond
payment of the $24.00 purchase price.

     xxxxxxx estimates that the actual purchase price of the
fabric and thread, plus the cost of transporting the fabric and
thread from their country of origin to the Northern Mariana
Islands, will be $10.50 per dozen T-shirts.  The company will
spend approximately $0.50 per dozen for U.S.-made labels and
packing materials shipped directly from the United States to the
Northern Mariana Islands.  Its direct labor cost for the cutting
and sewing operations will be approximately $3.00 per dozen.  All
other estimated general expenses will be $3.00 per dozen.

     The estimated profit per dozen T-shirts will be $7.00,
computed as follows:

     Sale price, F.O.B. Northern Mariana 
     Islands port of export                       $24.00

     Cost of foreign fabric and thread,
     inclusive of cost of transportation
     to the Northern Mariana Islands              (10.50)

     Cost of U.S.-made labeling and
     packing materials                             (0.50)

     Direct labor cost                             (3.00)

     General expenses                              (3.00)
                                                  -------
     Estimated profit                             $ 7.00
                                                  =======

     xxxxxxx does not know whether its estimated profit is
consistent with the profit usually reflected in sales of T-
shirts, if any, that are made by other producers in the Northern
Mariana Islands.  For purposes of this ruling request, however,
xxxxxxx assumes that its profit will exceed the profit of such
other producers.

     The price was set at $24.00 to insure that the cost of
foreign fabric, inclusive of the cost of transportation to the
Northern Mariana Islands, would not exceed 50 percent of the
entered value declared to Customs by xxxxxxx's U.S. customers. 
xxxxxxx notes that if it were to price its T-shirts at $20.75,
xxxxxxx would still realize a profit of $3.75, but its U.S.
customers would have to pay duty on the T-shirts equal to 21% of
$20.75, or $4.36, if the merchandise is appraised under
transaction value.  The U.S. customers would pay $25.11, which is
$1.11 more than they would pay if the price were $24.00.  xxxxxxx
therefore assumes, for purposes of this inquiry, that duty
avoidance is one of the factors that will motivate its U.S.
customers to accept xxxxxxx's $24.00 price.

     In discussions with the Customs field office on how to
appraise the T-shirts, xxxxxxx was advised that its profits and
general expenses may be reviewed, and compared with those of
other Northern Mariana Island manufacturers, in the effort to
determine the proper appraisement method.  Customs reportedly
told xxxxxxx that if its profits and general expenses were
inconsistent with those of other Northern Mariana Island
manufacturers, then it might be necessary to appraise the T-
shirts under a method other than transaction value.  This is of
concern to xxxxxxx, whose plans are "critically dependent" on the
T-shirts being appraised under transaction value.  The use of
another valuation method that might result in a value that is
lower than the price paid, thereby possibly causing the foreign
material content to exceed 50 percent of the total value, could
make the T-shirts unacceptable to xxxxxxx's customers. 
Therefore, xxxxxxx requests a ruling on whether transaction value
will be used to appraise its merchandise.

ISSUE:

     Whether transaction value is the proper method of appraisal,
where qualification for a duty-free entry provision is a primary
factor in setting the price of imported merchandise, and where
the seller's profits and general expenses are inconsistent with
those of other manufacturers?

LAW AND ANALYSIS:

     General Note 3(a)(iv) of the Harmonized Tariff Schedules of
the United States (HTSUS) provides, in pertinent part, for the
duty-free entry of certain apparel articles that are imported
from an insular possession, if they were manufactured or produced
in the possession, do not contain foreign materials which
represent more than 50 percent of the articles' total value, and
came directly to the customs territory of the U.S. from the
possession.

     In Headquarters Ruling Letter (HRL) CLA-2 CO:R:C:S 556070,
dated July 1, 1991, Customs confirmed that the Northern Mariana
Islands are an insular possession.  Assuming that xxxxxxx's T-
shirts meet the requirements of being manufactured or produced in
the Northern Mariana Islands, they will be entitled to duty-free
entry under this special tariff program if they satisfy the 50%
foreign value limitation and are imported directly into the U.S.
from the Northern Mariana Islands.

     Section 7.8(d) of the Customs Regulations (19 CFR 7.8(d))
provides:

     In determining whether an article produced or
     manufactured in an insular possession contains foreign
     materials to the value of more than 50 percent, a
     comparison shall be made between the actual purchase
     price of the foreign materials, plus the cost of
     transportation to such insular possession, and the
     final appraised value in the United States determined
     in accordance with section 402, Tariff Act of 1930, as
     amended (19 U.S.C. 1401a), of the article brought into
     the United States.

xxxxxxx has estimated that the cost of the foreign fabric and
thread, inclusive of the cost of transportation to the Northern
Mariana Islands, will be $10.50.  Therefore, to qualify for duty-
free entry under General Note 3(a)(iv), that $10.50 figure can
constitute no more than 50 percent of the final appraised value
of the imported T-shirts.  xxxxxxx claims that transaction value
is the proper method of appraisement of the T-shirts, and that
under transaction value, they may be entered duty free.

     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)) provides
for the appraisement of imported merchandise in hierarchical
order.  The primary, or preferred, method is transaction value. 
Transaction value is the price actually paid or payable for
merchandise when sold for exportation to the United States, plus
additions for packing costs, selling commissions incurred by the
buyer, assists, royalties or license fees, and proceeds of any
subsequent resale that accrue to the seller.  The term "price
actually paid or payable" is defined in section 402(b)(4)(A) of
the TAA as "the total payment . . . made, or to be made, for
imported merchandise by the buyer to, or for the benefit of, the
seller."  Pointing out that a price actually paid or payable will
be considered "without regard to its method of derivation" (19
CFR 152.103(a)(1)), xxxxxxx argues that its price can be used to
appraise the T-shirts under transaction value.  A refusal by
Customs to appraise the T-shirts under transaction value because
the price was in part set for duty avoidance purposes, would, in
xxxxxxx's view, be an improper inquiry into how the price was
derived.  Notwithstanding the merits of these arguments, 
transaction value cannot be used in certain circumstances.

     The use of transaction value is proscribed when there is
insufficient information to determine the amount by which the
price actually paid or payable should be increased for any of the
five additions enumerated in section 402(b)(1), TAA.  This is not
applicable here because, under the facts presented, there will be
no such additions.  Transaction value's use is also inappropriate
where any of the limitations described in section 402(b)(2)(A)
exist.

     The limitations can be divided into four groups: 
restrictions on the disposition or use of the imported
merchandise by the buyer; conditions for which a value cannot be
determined; proceeds accruing to the seller; and related party
transactions where the transaction value is not acceptable.  The
purpose of these limitations is to insure that a particular
transaction is bona fide and "at arm's length" before the
transaction value standard will apply.  See S. Rep. No. 249, 96th
Cong., 1st Sess. (1979), reprinted in 1979 U.S. Code Cong. &
Admin. News 381, at 501.

     According to xxxxxxx, the U.S. customers will not be
restricted in their disposition or use of the imported T-shirts. 
xxxxxxx also states that it will not receive, directly or
indirectly, any part of the U.S. customers' proceeds of resale,
disposal or use of the imported T-shirts.  And, although xxxxxxx
and its U.S. customers who are the subject of this ruling request
will have a business relationship, they will not, according to
counsel for xxxxxxx, be related parties as defined by Customs
law.  Absent either a change in circumstances or evidence that
would contradict these factual assertions, there do not appear to
be any limitations involving restrictions on use, subsequent
proceeds, or related party transactions that would bar the use of
transaction value.

     The remaining category of limitations, i.e., involving cases
in which the sale of, or the price actually paid or payable for,
the imported merchandise is subject to some condition or
consideration for which a value cannot be determined with respect
to the imported merchandise, is also not applicable to xxxxxxx's
situation.  The only noted condition or consideration that will
be placed on the price or sale is that the buyers pay the
established $24.00 purchase price.  Thus, the proposed sale of T-
shirts and their agreed-upon price do not appear to be subject to
any factors which would render the determination of the T-shirts'
value impossible.

     That the price was in part set so that the seller could make
a profit, and the buyer take advantage of a duty-free entry
provision, is merely a factor that went into the negotiation of
the price for the T-shirts.  It does not fall under any of the
four limitations discussed above.

     The separate issue of whether xxxxxxx's profits and general
expenses may serve as a reason to prevent the use of transaction
value as a method of appraisement, apparently was raised by the
field.  Having profits and general expenses that are inconsistent
with those of other Northern Mariana Island manufacturers is, in
and of itself, insufficient cause to require the appraisal of the
T-shirts under an alternate method.  It would have to be shown
that the inconsistency created one of the four limitations
discussed above to preclude use of transaction value; this,
however, has not been done.   

     In summary, on the basis of the facts as presented by
xxxxxxx, the T-shirts qualify for appraisement under transaction
value.  However, it should be noted that a condition of this
ruling is that there are to be no sales between related parties
within the meaning of section 402(g) of the TAA.  If such sales
should occur, then Customs will treat this ruling as no longer
being in effect.
  
HOLDING:

     Transaction value may be used to appraise imported
merchandise, even though qualification for a duty-free entry
provision is a primary factor in setting the price of imported
merchandise and the seller's profits and general expenses are
inconsistent with those of other manufacturers, where no
statutory limitations exist to preclude the use of transaction
value and there is sufficient information to determine the value
of any statutory additions to the price actually paid or payable.

                               Sincerely,



                               John Durant
                               Director, Commercial