HQ 546285: Transaction value; trade discounts; warehouse costs; marketing and advertising costs; 402(b)(2)(B); related parties; 402(g)(1); transfer price; circumstances of sales; 19 CFR 152.103(j)(2); HRLs 544713 and 545274

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 546285

                           June 7, 1996
RR:IT:VA  546285 KCC

CATEGORY:  Valuation

Director, National Commodity Specialist Division 
U.S. Customs Service 
6 World Trade Center
Room 423
New York, New York  10048

RE:  Transaction value; trade discounts; warehouse costs;
     marketing and advertising costs; 402(b)(2)(B); related
     parties; 402(g)(1); transfer price; circumstances of sales;
     19 CFR 152.103(j)(2); HRLs 544713 and 545274

Dear Mr. Silvestri:

     This is in regard to a memorandum (CLA-2-70:RR:NC:GI:226)
dated February 23, 1996, from Chief, National Commodity
Specialist Division, Branch 4, concerning a trade discount
between related parties.  Your position is that the trade
discount between the related parties is justified and that the
price actually paid or payable for the merchandise is not
influenced by the relationship of the parties.  Thus, the
imported merchandise is properly appraised under transaction
value pursuant to 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.  A memorandum from Regional Director, Regulatory
Audit Division, Northeast Region dated September 11, 1995,
agreeing with your position, was taken into consideration in
rendering this decision.

FACTS:

     The buyer of the imported merchandise is a subsidiary of the
foreign seller.  The foreign seller is the related buyer's only
foreign vendor.  Using the same price list, the foreign seller
sells its merchandise to the related buyer, unrelated U.S.
distributors and unrelated U.S. retailers.  However, the related
buyer receives a 20.91% trade discount and the unrelated U.S.
distributors receive a 10% trade discount.  The trade discounts
to both the related buyer and unrelated U.S. distributors are
based on the volume of their purchases from the foreign seller. 
Currently, the related buyer purchases 50% of the foreign
seller's exports to the U.S. which at one time were almost twice
as much in dollar volume over the next largest unrelated U.S.
distributor.   Additionally, the larger trade discount is due to
the increased warehousing costs which the related buyer incurs by
stocking a larger and more extensive line of the foreign seller's
products then do the unrelated U.S. distributors.  We also note
that the related buyer markets and advertises the foreign
seller's merchandise in the U.S.

ISSUE:

     Whether one of the tests for the acceptability of
transaction value in a related party transaction has been met.

LAW AND ANALYSIS:

     The preferred method of appraising merchandise imported into
the United States is transaction value pursuant to 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.  402(b)(1) of the TAA
provides, in pertinent part, that the 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 certain enumerated additions specified in
402(b)(1) of the TAA.

     Imported merchandise is 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 this situation,
the related buyer is a subsidiary of the foreign seller and,
thus, the parties are related pursuant to 402(g)(1) of the TAA. 
402(b)(2)(B) of the TAA provides that transaction value between
related parties is acceptable only if an examination of the
circumstances of the sale indicates that the relationship between
the parties does not influence the price actually paid or payable
or, if the transaction value of imported merchandise closely
approximates the transaction value of identical or similar
merchandise in sales to unrelated buyers in the U.S. or the
deductive or computed value for identical or similar merchandise.

     Under the circumstances of sales approach, if the parties
buy and sell from one another as if they were unrelated,
transaction value will be considered acceptable.  Thus, if the
price is determined in a manner consistent with normal industry
pricing practice, or with the way the seller deals with unrelated
buyers, the price actually paid or payable will be deemed not to
have been influenced by the relationship.  Furthermore, the price
will not be considered to be influenced if it is shown that the
price is adequate to ensure recovery of all costs plus a profit
that is equivalent to the firm's overall profit realized over a
representative period of time in sales of merchandise of the same
class or kind.  Statement of Administrative Action, reprinted in
Customs Valuation under the Trade Agreements Act of 1979,
Department of the Treasury, U.S. Customs Service (October 1981)
at 54; 152.103(j)(2), Customs Regulations (19 CFR
152.103(j)(2)).

     In your memorandum, you noted another decision concerning a
trade discount between related parties.  In Headquarters Ruling
Letter (HRL) 545274 dated March 9, 1995 (affirming HRL 544713
dated December 2, 1992), we determined that the related parties'
relationship did influence the price actually paid or payable and
that the transaction value represented by the price paid by the
related buyer did not closely approximate the value of the
identical merchandise sold to unrelated buyers.  Therefore,
transaction value was eliminated as the method of appraisement. 
In this decision, the prices charged by the foreign seller to the
unrelated buyers were 20% higher than the prices charged to the
related buyer.  The foreign seller established its prices for
sales to unrelated buyers differently than those for the related
buyer.  A fixed price list was used for unrelated sales while
oral negotiations and discussions determined the price for
related sales.  Furthermore, the foreign seller paid commissions
for the related buyer's administrative, marketing, sourcing, and
other costs incurred for both the foreign seller's sales to
unrelated buyers and for the related buyers in the U.S. own sales
in the U.S.  Thus, the circumstances of sale indicated that the
related parties did not buy and sell from each other as if they
were unrelated.

     It is our opinion that the factual situation in HRL 545274
is distinguishable from the present case.  Unlike HRL 545274, the
foreign seller has an established price list which is the basis
of its sales to the related buyer, the unrelated U.S.
distributors and the unrelated U.S. retailers.  From the price
list trade discounts are given to both the related buyer and the
unrelated U.S. distributors, both of who buy in large quantities
for resale to other retailers.  The difference between the two
trade discounts is 10.91%.  The evidence available indicates that
this difference is based on the volume of the related buyer's
purchases.  The related buyer purchases 50% of the foreign
seller's exports to the U.S. which at one time were almost twice
as much in dollar volume over the next largest unrelated U.S.
distributor.  The larger trade discount is also due to the
related buyer's warehousing costs which are high because of the
large volume and greater variety of merchandise stocked compared
to other importers, including the unrelated U.S. distributors. 
Although not cited as evidence for the larger trade discount, we
note that the related buyer markets and advertises the foreign
seller's merchandise in the U.S.

     Regulatory Audit determined that when the related buyer's
purchases are adjusted for volume, the trade discounts were not
significantly different between the related buyer and unrelated
U.S. distributors.  Thus, it does not appear that the parties
relationship affected the price of the merchandise; the parties
buy and sell from each other as if they were unrelated. 
Therefore, the circumstances of sale indicate that transaction
value is an acceptable method of appraisement.  However, we note
that if the related buyer's volume of purchases were to change
and/or other evidence is made available such as, an indication
that the discount is solely associated with the warehousing or
marketing and advertising costs of the related buyer, this
determination might be different.

HOLDING:

     Based on the available evidence, the circumstances of the
sale test has been met.  Thus, the imported merchandise should be
appraised under transaction value pursuant to 402(b) of the TAA.
                              Sincerely,



                              Acting Director
                              International Trade Compliance
Division