HQ 546091: Application for Further Review of Protest Number 2704-93-101989; sale for exportation in an alleged three tieredsales transaction; Nissho Iwai American Corporation v. United States ; 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 546091
                         January 3, 1996
RR:IT:VA  546091 RSD

CATEGORY: Valuation 

Port Director 
United States Customs Service
300 S. Ferry Street
Terminal Island, California 90731

RE:       Application for Further Review of Protest Number 2704-93-101989; sale for exportation     in an alleged three tiered
sales transaction; Nissho Iwai American Corporation v. United    States ; related parties

Dear Director:

     This is in response to the memorandum from the former
District Director for the Los Angeles District dated August 3,
1995, forwarding the application for further review of Protest
No. 2704-93-101989, filed by the importer, Playmate Toys  USA,
Inc., (hereinafter PTI-US) on June 3, 1994.  On November 13,
1995, your office forwarded additional information submitted by
the protestant.  We are aware that the Regulatory Audit Division
has conducted an audit on various aspects of the import
operations of PTI-US.  We have been in contact with the
Regulatory Audit Division to discuss to this matter and they have
sent us additional material related to this case.  

FACTS:

     PTI-US is an importer and wholesaler of toys in the United
States.  It operates out of a warehouse-office in La Mirada,
California.  Its only supplier of merchandise has been a related
company, Playmates Toys (Hong Kong) (hereinafter PTI-HK).  Both
companies are subsidiaries of a Hong Kong based holding company,
Playmates International Holding Ltd. (hereinafter PIHL).  In
addition to sales and distribution functions, PTI-US performs
significant administrative functions related to the
identification and development of toy ideas.  It relies heavily
on subcontractors for this creative work, and its customers
include some of the largest retailers in the United States.  

     The Playmates family of companies has a complex
organizational structure involving 34 companies located in 8
countries.  The parent of this family of companies is PIHL, a
Bermuda company, whose managing office is in Hong Kong.  PIHL was
founded in 1966 as a manufacturer of dolls for major U.S. and
European retailers and toy companies.  Over the years the company
has divested itself of its own manufacturing operations, while
retaining equity interest in other manufacturers in Hong Kong,
China, and Macau.  Prior to this divesture, PTI-US was buying its 

toys from PIHL, and PTI-HK acted largely as a selling agent.  In
July 1988, PIHL modified its  agreement with PTI-HK and after
divesting itself of manufacturing facilities, it became a
corporate shell.  PTI-HK became responsible for the management of
all PIHL's toy  business and began purchasing toys from related
and non-related manufacturers.  In addition, a second channel of
distributing products to U.S. was set up.  This method of
distribution bypassed PTI-US by selling toys directly to U.S.
retailers. 

     Despite PTI-HK's direct sales to the retailers in the U.S.,
PTI-US continued to order all of its products from PTI-HK.  PTI-US supplied PTI-HK with tooling and other assists related to its
U.S. imports.  In turn, PTI-HK reimbursed PTI-US for all its toy
development related costs.  PTI-HK relied on contract
manufacturers to produce its toys.  Based on the analysis of the
Regulatory Audit Division, it appears that more than 90% of toys
imported by PTI-US were produced by three manufacturers, Acefield
Limited, Macau International Toys Limited, and Coronet Garment
Manufacturers Limited.  These companies are part of the Harbour
Ring Group.  In 1993, PTI-HK owned 16.75% of Harbor Ring through
a holding company called Reading Investment.

     PTI-US seeks to have the imported merchandise appraised
based upon the alleged sales between PTI-HK and the contract toy
manufacturers.  PTI-US contends that these transactions  were
sales for exportation to the United States.  In an effort to show
that the sales between PTI-HK and the toy contract manufacturers
were arms-length transactions, PTI-US has furnished price quotes
from unrelated toy manufacturers during 1992 and 1993, for
identical Playmates items.  A comparison of the prices from the
Harbour Ring group companies to the price quotes from the
completely unrelated manufacturers shows that Harbour Ring group
companies' prices are slightly higher.  Nevertheless, PTI-HK
claims that it is willing to pay a slightly higher price for the
merchandise for several reasons including Harbour Ring's large
production capacity, high quality standards, and a track record
of working efficiently and effectively with PTI-HK's engineering
and quality control.  

     PTI-US has also presented documents to demonstrate how the
transactions supposedly work.  Included in this package of
documents are invoices from PTI-HK to PTI-US, packing lists,
order releases from PTI-US, order confirmations, purchase orders
from PTI-HK to the contract manufacturers, and pro-forma
invoices.  We have been informed by the Regulatory Audit Division
that PTI-US does not use formal purchase orders with due dates
and related performance penalties.  Instead, PTI-US provides PTI-HK with order releases against product requirements forecasts. 
Apparently, PTI-HK has a great deal of flexibility as to when
merchandise is shipped to PTI-US.

     As noted above, Regulatory Audit Division has conducted an
audit on various aspects of the import operations of PTI-US. 
However, this decision will deal solely with the issue raised by
the importer's protest that of whether the imported merchandise
should be appraised based on the alleged sale between the
middleman, PTI-HK, and the toy manufacturers.



ISSUE:

     Whether the imported merchandise should have been appraised
based upon the transactions between the manufacturers and PTI-HK?

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. 

     In Nissho Iwai American Corp. v. United States, 982 F.2d 505
(Fed. Cir. 1992), the Court 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 only 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 the
middleman 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 the instant case, the importer, PTI-US, is claiming that
in accordance with Nissho, the transaction value for the imported
merchandise should be based on the sale between PTI-HK and the
toy manufacturers.  In determining if this claim is valid, the
first question to be considered is whether there was a bona fide
sale between PTI-HK and the toy manufacturers.

     For Customs purposes, a "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).  Although J.L. Wood was decided under the
prior appraisement statute, Customs recognizes this definition
under the TAA.  Several factors may indicate whether a bona fide
sale exists between  potential seller and buyer.  In determining
whether property or ownership has been transferred, Customs
considers whether the alleged buyer has assumed the risk of loss
and acquired title to the imported merchandise.  In addition,
Customs may examine whether the alleged buyer paid for the goods,
whether such payments are linked to specific importations of
merchandise, and whether, in general, the roles of the parties
and circumstances of the transaction indicate that the parties
are functioning as buyer and seller.  See HRL 545705, January 27,
1995. 

     The evidence in this case does not establish that there were
sales between the  manufacturers and PTI-HK.  The transaction
documents presented by the protestant concerning alleged sales
between PTI-HK and contract manufacturers, such as proforma
invoices and purchase orders do not indicate the shipping terms,
so we are unable to ascertain when or if PTI-HK acquired title to
the goods and if it bore the risk of loss.  We also note that
protestant has not presented any other indication of a sale such
as a supply contract between PTI-HK and the manufacturers.

     Even if it is assumed that there was a sale between PTI-HK
and the contract manufacturers, the protestant has not
established that the two criteria laid out by the court in Nissho
have been satisfied.  First, there is no evidence that the
merchandise was clearly destined to the United States at the time
of the alleged sale with PTI-HK. We note that PTI-HK sells its
products to many counties.  The Regulatory Audit Division has
indicated that PTI-HK has the capability of diverting the 
shipments to other markets after the transactions occur. 
Significantly, PTI-HK is under no contractual obligation to
deliver specific merchandise to PTI-US at a certain time. 
Playmates organization apparently does not use formal purchase
orders with due dates and related performance penalties as is
typical with unrelated parties.  Instead, PTI-US just provides
PTI-HK with order releases against product requirement forecasts. 
Accordingly, it appears that PTI-HK buys the merchandise and
determines the shipping dates and quantities that will be
shipped.  Therefore, there is no evidence that the merchandise
was clearly destined to the U.S. at the time it was supposedly
purchased from the manufacturers.

     The protestant has also failed to establish that the
transactions between the contract toy manufacturers and PTI-HK
were arm's length.  The vast majority of the imported merchandise
was procured from manufacturers which were part of the Harbour
Ring Group.  PTI-HK through a holding company owned more than 5%
of the stock of the contract manufacturers in the Harbor Ring
Group.  Under 19 U.S.C. 1401a(g)(1)(F) and section 152.102(g)(6)
of the Customs Regulations, 19 CFR 152.102(g)(6), the contract
manufacturers in the Harbor Ring Group and PTI-HK are considered
related parties.  Consequently, the transactions between the
contract manufacturers and PTI-HK were not arm's length and could
not serve as the basis of transaction value unless they are
deemed to be acceptable transaction values.  19 U.S.C. 1401a
(b)(2)(B) sets forth two conditions under which a transaction
value between related parties will be deemed acceptable.  The
first is where an examination of the circumstances of sale
indicates that the relationship between the parties did not
influence the price actually paid or payable.  The second is
where the transaction value closely approximates certain "test"
values.  See 19 U.S.C. 1401a(b)(2)(B).  In order for a sale
between related parties to be acceptable as an "arm's length"
sale under Nissho, it must satisfy the statutory requirements
noted above.  See HRL 544579 and memorandum dated March 8, 1993,
from Director, Office of Trade Operations, Regarding Effect of
Nissho Iwai and Related Cases on Field Operations.

     Under the first approach, if the circumstances of sale
indicate that while related, the parties buy and sell from one
another as if they were unrelated, transaction value will be
considered to be acceptable.  In this respect, Customs will
examine 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 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 has not been influenced by the relationship. 19 CFR
152.103(l)(1)(i)-(ii).  In addition, Customs will consider the
price not to have been influenced, if the price was adequate to
ensure recovery of all costs plus a profit equivalent to the
firm's overall profit realized over a representative period of
time.  19 C.F.R. 153.103(l)(1)(iii).

     Alternatively, a transaction value between related parties
is acceptable if it closely approximates, the transaction,
deductive or computed "test values" for identical or similar
merchandise.  The term "test values" refers to values previously
determined pursuant to actual appraisements of imported
merchandise.  Thus, for example, a computed value calculation can
only serve as a test value if it represents an actual
appraisement of imported merchandise pursuant to 19 U.S.C.
1401a(e). E.g.  HRL 543568 dated May 30, 1986.  There are no
previously determined transaction, deductive or computed values
with respect to the merchandise imported by PTI-US. 
Consequently, test values cannot be used to validate transaction
value.

     Instead, to support its position that the transaction
between PTI-HK and the Harbour Ring manufacturers should be
considered acceptable, the protestant has furnished price
quotations from other unrelated toy manufacturers.  Although
these price quotations are very close to the prices charged by
the Harbour Ring manufacturers, they are slightly lower. 
Moreover, we believe that these price quotations without any
other substantiation of the prices are inadequate to show that
the transactions between PTI-HK and the Harbor Ring manufacturers
were conducted at arms length.  First, we note that PTI selected
the manufacturers and the quotes, and a price quotation is not
necessarily the same as an actual price charged by a supplier
when a purchase is made.  As such, it is not clear whether the
price quotations were firm and binding on these companies, or if
the prices could change when actual purchases were made. 
Furthermore, there is no indication of the terms and conditions
of these price quotations.  For example, certain elements which
generally impact prices such as the size of the orders and the
time period for delivering the merchandise were not specified in
the price quotes.  Under such circumstances, the price
comparisons are not especially meaningful.



      In addition, it appears that transactions between PTI-HK
and toy manufacturers are more informal than would be expected in
most arm's length transactions.  You point out that it is unclear
if the manufacturers actually issued formal invoices to PTI-HK
for the merchandise.  You have also indicated that PTI-HK
provided research and development to the suppliers, and it is not
clear whether these costs are included in the price. 
Accordingly, we find that the protestant has failed to establish
that the transactions between PTI-HK and the manufacturers were
arm's length transactions.  Since neither requirement of Nissho
has been satisfied, the imported merchandise should not be
appraised based on the transaction between PTI-HK and contract
toy manufacturers.

HOLDING:

     For the reasons explained above, the imported merchandise
should not have been appraised based upon the transactions
between PTI-HK and the contract toy manufacturers.

     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, the Freedom of
Information Act and other public access channels.

                         Sincerely,



                         Acting Director
                               International Trade Compliance
Division