HQ 545377: Application for Further Review of Protest Number 0401-92-100792 concerning a sale forexportation of merchandise imported pursuant to a three tiered sales agreement; related parties

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 545377
                            November 10, 1994
VAL CO:R:C:V 545377 RSD

CATEGORY: Valuation

District Director of Customs
10 Causeway Street
Room 603
Boston, Massachusetts 02222-1059

RE:  Application for Further Review of Protest Number 0401-92-100792 concerning a sale for
exportation of merchandise imported pursuant to a three tiered sales agreement; related parties

Dear Sir:

     This is in response to your memorandum dated July 9, 1993, forwarding the application
for further review of protest number 0401-92-100792 dated December 3, 1992, submitted on
behalf of the Goddess Bra Company by its attorneys, Middleton and Shrull.  We regret the
delay in responding.

FACTS:

     The merchandise in question is women's brassieres.  The brassieres are assembled in
the Philippines by South Seas Trading Corporation, Manila, Philippines from materials made
in the United States supplied by Goddess Bra Company and materials made in the Philippines
procured by South Seas Trading Corporation.
Goddess contracts with South Seas Trading Corporation-New York and deals only with the
South Seas Trading in New York.  South Seas Trading-Philippines is a wholly owned
subsidiary of South Seas Trading-NY. 

     Goddess consigns the United States components to South Seas Trading-NY and places
its orders with South Seas Trading-NY.  Goddess claims that at no time did it deal directly
with the Philippines assembler and in fact it has no contact with South Seas Trading-Philippines.  It made payment to South Sea Trading-NY and paid the amount shown on the
South Seas Trading-NY invoices.

     South Seas Trading-NY remits the amount shown on the South Seas Trading-Philippines.  This includes the labor cost for the assembly operation, the cost of any
Philippines procured material and the 50% mark up for overhead and profit required by the
Philippines government plus packing and Philippines brokerage fees. 

     The invoice from the Philippines states the value of the United States components
included in the imported merchandise, which is added to the above costs to arrive at the
invoice FOB value.  Upon entry, the customs broker adds an amount for the freight cost to
ship the U.S. components to the Philippines to arrive at the full value.  The deduction for the
U.S. components under HTSUS 9802.00.80601 is taken at the FOB port of export value of the
components as stated on the Philippine invoice.

     Goddess contends that there are two bona fide sales.  The first sale is from South Seas
Trading Corporation-Philippines to South Seas Trading-NY.  The second sale is South Seas
Trading-NY to Goddess.  Counsel claims that the proper basis of appraisement is the sale
between South Seas Trading Corporation-Philippines and South Seas Trading-NY.

ISSUE:

     Whether the sale between the manufacturer, South Seas Trading Corporation-Philippines, and South Seas Trading Corporation-NY in a three tiered sales transaction is the
proper basis of appraisement of the imported merchandise?

LAW AND ANALYSIS:

     As you know 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 is transaction value,
which is defined as the "price actually paid or payable for merchandise when sold for
exportation for the United States," plus certain enumerated additions.  For purposes of
determining transaction value in appraising imported merchandise, a sale for exportation to the
United States must take place at some unspecified time prior to the exportation of the goods. 
(HRL 545434, dated May 31, 1994).

     Until recently it has been the policy of the Custom Service to appraise imported
merchandise under transaction value based on the sale which most directly caused merchandise
to be exported to United States, Brosterhous, Coleman & Co. v. United States, 737 F.Supp.
1197 (Ct. Int'l Trade 1990).

     However, since the time that this protest was filed two important court decisions were
issued.  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 are two sales which may be  for exportation to the United States.  In so
doing, the court stated that Customs' policy of basing transaction value on the 

sale which most directly caused the merchandise to be exported to the U.S. proceeded from an
invalid premise. Nissho Iwai, 982 F.2d 505, 511. 

     Instead the court in Nissho reaffirmed the principle of E.C. McAfee Co. v. United
States, 842 F.2d 314 (Fed. Cir. 1988), that a manufacturer's price, for establishing transaction
value, 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
stated 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 when the manufacturer
     and the middleman deal with each other at arm's length, in the absence of any
     non-market influence that affect the legitimacy of the sale price...[T]hat
     determination can be made on a case-by-case basis.

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 in situations of this type, Customs presumes that the price paid by
the importer is the basis of transaction value.  However, in order to rebut this presumption, 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."

     In an addendum to its protest, counsel for Goddess Bra cites both Nissho and Syngery
in support of its contention that the proper basis of appraisement should be based on the sale
between South Seas Trading-Philippines and South Seas Trading-New York.
However, the middle-man South Seas Trading-NY and the manufacturer South Seas Trading-Philippines are related parties.   Although given an opportunity to present evidence to
demonstrate that the manufacturer and middleman dealt with each other at arm's length or their
relationship did not effect the price, the protestant was unable to do so.  Consequently, the
protestant has not rebutted the presumption that the price it paid for the merchandise should be
the basis of transaction value.




HOLDING:

     Because the manufacturer and middleman are related parties and insufficient evidence
was submitted to demonstrate that they dealt with each other at arm's length, the transaction
value of the imported merchandise was properly based upon the price actually paid or payable
for the imported merchandise by the importer.

     You are directed to deny the protest.  A copy of this decision with the Form 19 should
be sent to the protestant.
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 the
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 to the public via the Diskette Subscription Service, Lexis, the Freedom of Information Act
and other public access channels

                         Sincerely,




                         John Durant, Director
                         Commercial Rulings, Division