HQ W545609: Transaction value; price actually paid or payable; Generra; swap agreement

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.

W545609      
August 11, 1995
      VAL R:C:V W545609 CRS      
CATEGORY:  Valuation      Peter J. Fitch, Esq.    Fitch, King &  Caffentzis    35 Beach Road   Monmouth Beach, NJ 07750      RE: Transaction value; price actually paid or payable; Generra; swap agreement    Dear Mr. Fitch:   This is in reply to your letter of March 29, 1994, on behalf of your client, **************   (the "buyer"), in which you requested a ruling on the dutiability of certain payments made to *******   (the "seller").  Pursuant to your request, the name of your client will be deleted from all published   versions of this decision.  We regret the delay in responding.      FACTS:      Under the terms of a "Purchase and Sale Agreement"  (the "agreement"),  effective October 1,   1989, the buyer will purchase and import from the seller all of its requirements of a certain chemical   (the "base chemical") for use in the manufacture of a pesticide product (the "stand-alone formulation(s)").   The buyer has also agreed to purchase and import its "major" requirements of the base chemical for use   in the manufacture  of a second  pesticide  product  (the "pre-mix(es)").  The agreement  establishes a   provisional price of the imported base chemical.  According to section 3.1 of the agreement, this price   represents the seller's full (direct) cost to produce the base chemical at a fixed exchange rate but does not   include an amount for profit. At the end of each contract year the provisional price is adjusted to reflect   the seller's overall cost of production which, according to Annex 2 of the agreement, includes overhead   costs and other indirect costs, but likewise does not include an amount for profit. Thus at the beginning   of each contract  year,  the provisional price reflects the seller's overall costs for the previous year. Any   adjustment to the provisional price must be paid within thirty days of the end of the contract year.      Moreover, the agreement requires the seller to notify the buyer of the provisional  price at the   beginning of each contract year.  Within thirty days of having been so notified, the buyer is obligated to   generate pro forma profit statements, based in part on the provisional price, showing its anticipated profit   on sales of stand-alone formulations and pre-mixes. If the pro forma profits are unsatisfactory to  either   party, section 3.5 of the agreement provides that the parties will enter into good faith negotiations "to   arrive at new cost numbers" on which to recalculate the profit figures.      With certain  exceptions,  the agreement  restricts the buyer's  use of the base  chemical to the   manufacture of stand-alone formulations and pre-mixes, and the sale of these products, in the United States.   Notwithstanding this restriction, and subject to certain other limitations, the buyer may swap the base   chemical purchased from the seller for the same base chemical manufactured by third parties. However, the   buyer may not swap the seller's base chemical for base chemical produced outside the   1     

   U.S. without the seller's prior consent. Under a pre-existing swap agreement, the buyer obtains domestic   base chemical  from  a U.S.  company  by the name  of **********.  However,  in order to fulfill its   obligations under the requirements agreement with the seller, the buyer purchases identical base chemical   from the seller, and supplies it to **********'s European subsidiary.      The agreement also gives the buyer the right to use certain of the seller's U.S. Environmental   Protection Agency (EPA) registrations  as the basis for obtaining registrations  of its own formulated   products and, moreover, provides that the seller will furnish the buyer with technical assistance in the   preparation  of these formulations.  The EPA registrations apply to the imported base chemical and the   agreement  provides that the seller will maintain the effectiveness  of the registrations  with the EPA.   Section 3.2 of the agreement provides that in consideration for the seller's registration rights and technical   assistance the buyer will pay the seller: (1) an amount equal to fifty percent  of the buyer's total profit   from sales of stand-alone formulations made with the base chemical; and (2) for each kilogram of the base   chemical used in pre-mixes, swapped, or otherwise sold or disposed of, an  amount equal to fifty percent   of the buyer's profit per kilogram of the base chemical that results from the sale of stand-alone formulations   containing the base chemical.      ISSUE:      The issue presented is whether the payments made by the buyer to the seller under section 3.2 of the   agreement are included in the appraised value of the imported merchandise.      LAW AND ANALYSIS:      Merchandise imported into the United States is appraised in accordance with section 402 of the   Tariff Act of l930, as amended by the Trade Agreements Act of l979 (TAA;  19 U.S.C.  § 140la).  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 additions   thereto.  19 U.S.C. § 1401a(b)(l). However, the TAA provides that merchandise will be appraised under   transaction value only if, inter alia:  the sale of, or the price actually paid or payable for, the imported   merchandise is not subject to a condition or consideration for which a value cannot be determined; or the   buyer  and seller are not related,  or if related, the transaction  value is  acceptable under  section   402(b)(2)(B) of the TAA. 19 U.S.C. § 140la(b)(2)(A). No information has been submitted in regard to   the relationship, if any, between the buyer and seller and we have assumed for purposes of this ruling   that they are unrelated.      The term "price actually paid or payable" is defined as "the total payment (whether direct or   indirect...) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the   seller." 19 U.S.C. § 140la(b)(4)(A).  Section 152.103(a)(l), Customs Regulations, states that the price   actually paid or payable will be considered without regard to its method of derivation. It may be arrived   at through the application of a formula, e.g.,  "the price in effect on the date of export in the  London   Commodity Market." 19 C.F.R. § 152.103(a)(l). While a firm price need not be known or ascertainable   at the time of importation, nevertheless, the formula must be fixed at that time so that a final sales price   can be determined on the basis of some future event or occurrence over which neither the seller nor the   buyer has any control. Headquarters Ruling Letter (HRL) 542701 (TAA No. 47) dated April 28, 1982,   at 3.  See also, HRL 544364 dated October 9, 1990; HRL 544944 dated May 26,  1992; HRL 545388   dated October 21,  1994.  Here, the provisional  price is adjusted based  on the seller's overall  cost of   production  within thirty days of the end of each contract year. Agreement,  § 3.1. Thus, the formula   pursuant to which the price of the imported base chemical is determined is not acceptable for transaction  

value purposes since the price actually paid or payable is unknown at the time the merchandise is shipped.   Moreover, per the agreement, the final price for each contract year is not set until the seller determines   its overall costs for that year.  Accordingly, it is our position that transaction value is not an acceptable   basis on which to appraise the imported base chemical.      When  imported  merchandise  cannot  be  appraised  on the  basis  of transaction  value,  it  is   appraised in accordance with the remaining methods of valuation, applied in sequential order.  19   U.S.C. §  140la(a)(l).  The  alternative  bases  of  appraisement,  in  order  of  precedence,  are: the   transaction value of identical or the transaction value of similar merchandise (19 U.S.C. § 1401a(c));   deductive value (19-U.S.C. § 140la(d)); computed value (19 U.S.C.  § 140la(e)); and the "fallback"   method  (19 U.S.C.  § 140la(f)). However,  in the instant  case, however,  there is no information   concerning the existence of identical or similar merchandise.  Moreover,  since the imported base   chemical is not resold, the deductive value method is also inapplicable.      Under the computed value method, merchandise  is appraised on the basis of the material  and   processing costs incurred in the production of imported merchandise, plus an amount for profit and general   expenses equal to that usually reflected in sales of merchandise of the same class or kind, and the value of   any assists and packing costs. 19 U.S.C. § 140la(e)(l). In respect of the amount for profit and general   expenses that is included in computed value, section 402(e)(2) of the TAA provides:      (B) the amount for profit and general expenses under paragraph (1)(B) shall be based upon the   producer's profits and expenses, unless the producer's profits and expenses are inconsistent with   those usually  reflected  in sales of merchandise  of the  same class or  kind  as the  imported   merchandise that are made by producers in the country of exportation for export to the United   States, in which case the amount under paragraph (1)(B) shall be based on the usual profit and   general expenses of such producers in such sales, as determined from sufficient information.      19 U.S.C. § 140la(e)(2)(B).      In the instant case, the provisional price of the imported base chemical is based on the seller's direct   cost of producing the base chemical at a fixed exchange rate, but does not include an amount for profit.   At the end of each contract year the provisional  price is adjusted to reflect the seller's overall cost of   production  which,  according to Annex 2 of the agreement, includes overhead costs and other indirect   costs, but which also does not include an amount for profit. Thus, while it appears that some elements of   computed value may be present in the provisional price, it is clear that it does not incorporate an amount   for "profit and general expenses" as required under section 402(e)(l)(B) of the  TAA. Nevertheless, in   such cases, the TAA permits  the  "amount for profit  and general expenses" to be based on the usual   profit  and general expenses of producers of merchandise  of the same  class or kind  as the imported   merchandise  when  that  merchandise  is made  for  export  to the U.S., as determined from sufficient   information. Such a determination must be based on reliable and quantifiable information other than that   which is supplied by, or on behalf of, the producer  of the merchandise.  19 C.F.R.  § 152.106(c)(2) -   Interpretative  note 2.  Given the unique features of the agreement between the buyer and seller, i.e., the   fact that it is a requirements  contract, the presence of the swap arrangement,  and the structure of the   royalties provision,  it is our position that there is insufficient information to determine an addition for   profit and general expenses as required under section 402(e)(l )(B) of the TAA.  Consequently, the use   of computed value is inapplicable.      When merchandise cannot be appraised under the methods set forth in 19 U. S.C. § 1401a(b) (e), its   value is to be determined in accordance with the "fallback" method set forth in section 402(f) of the TAA.   The fallback method provides that merchandise should be appraised on the basis of a value derived from   3     

   one of the prior methods reasonably adjusted to the extent necessary to arrive at a value.    19 U.S.C.   §140la(f)(l).      Under section 402(f), the imported base chemical may be appraised based on a reasonably   adjusted transaction value. As noted above, the transaction value of imported merchandise is the price   actually paid or payable for the merchandise when sold for exportation to the United States. The term   "price actually paid or payable" is defined as "the total payment (whether direct or indirect...) made,   or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller." 19 U.S.C. §   140la(b)(4)(A).  In Generra Sportswear Co. v.  United  States, 905 F.2d 377 (1990), the Court of   Appeals for the Federal Circuit stated:      As long as  the...payment was made to the seller in exchange for merchandise sold for export to the   United States, the payment properly may be included in transaction value, even if the payment   represents something other than the per se value of the goods. The focus of transaction value is   the actual transaction between the buyer and seller....      905 F.2d at 380. Under Generra, Customs has held that all payments made to a seller are part of the price   actually paid or payable.  E.g., HRL 544640 dated April 26, 1991.      However,  in Chrysler Corporation v. United States, Slip Op. 93-186 (Ct. Int'l Trade September   22, 1993),  the Court of  International Trade applied the standard in Generra and determined that certain   shortfall and special application fees paid by the buyer to the seller were not part of the price actually paid   or payable for the imported merchandise. Instead, in Chrysler, the court found that the evidence established   that the fees were assessed because the buyer failed to purchase other products from the seller; thus, the   fees were not part of the price actually paid or payable for the imported engines.  Under Generra, there   is a presumption that all payments made by a buyer to a seller are part of the price actually paid or payable   for the imported merchandise.  Nevertheless, this presumption may be rebutted by evidence which clearly   establishes that the payments, like those in Chrysler, are not related to the imported merchandise.      In this instance, the agreement supports the Generra presumption that the payments at issue are   part of the price actually paid or payable for the imported merchandise.  Under the "Purchase and Sale   Agreement,"  the buyer is obligated to purchase  one hundred percent  of its requirements  of the base   chemical for use  in the  manufacture of  stand-alone formulations, as well as its "major" requirements   of the base chemical for use in the manufacture of pre-mixes. In return, the buyer has agreed to pay the   seller a provisional price, which is adjusted at the end of each contract year, plus certain other payments   as set forth in section 3.2 of the agreement.  These other payments represent:  (I) a percentage of the total   profit from sales of stand-alone formulations containing the base chemical; and (2) a percentage of   the total profit from each kilogram of the imported base chemical used in pre-mixes or swapped for a   similar base chemical.  Once the provisional price for the base chemical is set at the beginning of each   contract year, the buyer is required to provide the seller with pro forma profit figures relative to sales of   stand-alone  formulations  and pre-mixes.  If  the  profits  reflected on the pro forma statements are   unsatisfactory, the buyer and seller will negotiate another basis for determining the consideration to be   paid to the seller. Purchase and Sale Agreement, '¶3.2 at 8, ¶ 3.5 at 9.      In essence, the agreement breaks the seller's compensation into two elements:  cost and profit. The   seller has agreed to sell the base chemical at cost, i.e., the provisional price, plus a percentage of the buyer's   profits on the sale of the formulations and pre-mixes made with the base chemical. The profit element, i.e.,   the payments provided for under section 3.2 of the agreement, forms part of the total payment to the seller   in exchange for merchandise sold for export to the United  States. This is evidenced by the fact that the  

buyer and seller will negotiate another basis for determining the seller's compensation if the profits shown   on the pro forma statements are deemed to be unsatisfactory. Purchase and Sale Agreement, ¶ 3.5 at 9.   Accordingly,  under section 402(f) of the TAA, and in accordance with the principle established by the   court in Generra, it is our position that the payments are part of the price actually paid or payable for the   imported base chemical.  See also, HRL 544800, dated May 17, 1994 (holding that certain royalty payments   were included in transaction value as part of the price actually paid or payable).      HOLDING:      The payments made by the buyer to the seller under the terms of the agreement are included in a   modified transaction value under section 402(f) of the TAA as part of the price actually paid or payable   for the imported merchandise.                 
Sincerely,
         John Durant, Director    Commercial Rulings Division   5