HQ 544833: Acceptability of the "Price Paid" in Determining Eligibility of Imported Automobiles under the US/Canada Free Trade 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.

                                   HQ 544833
                                   December 3, 1991


VAL CO:R:C:V  544833 ML

CATEGORY:  Valuation

Regional Director
Regulatory Audit Division
Northeast Region

RE:  Acceptability of the "Price Paid" in Determining Eligibility
     of Imported Automobiles under the US/Canada Free Trade
     Agreement

Dear Mr. Battaglioli:

     This is in response to a request for internal advice, dated
October 24, 1991 (Aud-1-O:RA JMP), regarding the meaning of the
"price paid by the producer for all materials" in determining the
eligibility of certain importations of automobiles under the
US/Canada Free Trade Agreement (CFTA).

FACTS:

     The first situation you describe involves non-territorial
transmissions sold by Company X, a foreign corporation located
in a non-CFTA country, to Company Y, a Canadian corporation, for
approximately $300.  You found that Company X sold identical
transmissions to Company Z, a U.S. corporation, for approximately
$600.  Company Z in turn sold some of these transmissions to
Company Y for $300.  Further, you found that the $600 sales price
was fairly consistent with the price Company Z paid to Company X
for similar transmissions prior to the implementation of the
CFTA.  You conclude, therefore, that the price paid for the non-
territorial transmissions was influenced by Company Y's
relationship to Company X.  You state, that if you are restricted
to accepting the price paid in these situations then related
parties could affect the "50 percent test" by manipulating the
prices paid for originating and non-originating materials, i.e.,
the prices for originating materials could be increased and the
prices for non-originating materials could be decreased.

     Your second situation has more impact on originating
materials than non-originating materials.  This situation
involved a four percent mark-up that Company Z added to the
price it paid to non-related vendors in determining its sales
price to Company Y.  Company Z advised you that the mark-up was
intended to defray its purchasing expenses.  Company Y's price
paid includes the 4 percent mark-up added by Company Z so the
value of its materials would, therefore, be increased by 4
percent.  You inquire as to whether these mark-ups should be
allowed because it impacts more on originating materials than
non-originating materials since these products were purchased in
the territory.

ISSUE:

     Whether the price paid by the producer must be accepted even
though:

     (1)  you have indications that the price was influenced by
          the relationship of the parties; and

     (2)  the price includes a so called "source mark-up" added
          by a related supplier to the price it paid for
          components purchased from non-related territorial
          vendors and then sold to the producer.

LAW AND ANALYSIS:

     According to the US/Canada Free Trade Agreement, Article
304, the value of materials originating in the territory of
either Party or both Parties means the aggregate of:

     a)   the price paid by the producer of an exported good for
          materials originating in the territory of either Party
          or both Parties or for materials imported from a third
          country used or consumed in the production of such
          originating materials; and

     b)   when not included in that price, the following costs
          related thereto:
          i)   freight, insurance, packing and all other costs
               incurred in transporting any of the materials
               referred to in subparagraph (a) to the location of
               the producer;
          ii)  duties, taxes and brokerage fees on such materials
               paid in the territory of either Party or both
               Parties;
          iii) the cost of waste or spoilage resulting from the
               use or consumption of such materials, less the
               value of renewable scrap or by-product; and
          iv)  the value of goods and services relating to such
               materials determined in accordance with
               subparagraph 1(b) of Article 8 of the Agreement on
               Implementation of Article VII of the General
               Agreement of Tariffs and Trade (GATT);

     Your first question was whether the $300 price paid by the
producer, Company Y, to Company X for transmissions that Company
Z paid Company X $600 for must be accepted.  In this regard,
Article 304 of the U.S./Canada Free Trade Agreement, without any
qualification, provides that for the purposes of establishing the
value of materials the price paid by the producer of an exported
good for materials imported from a third country used in the
production of such originating material will be the value of the
materials.  Therefore, where Company X sold transmissions
directly to Company Y the price paid by Company Y to Company X
was the value of the materials, as that was the price paid by the
producer of the exported good for materials imported from a third
country used in the production of the originating material.

     Your second inquiry regarded a 4 percent mark-up that
Company Z charged Company Y on goods Company Z purchased from
non-related vendors.  Again, the price paid by the producer,
Company Y, for materials used in the production of originating
materials constitutes the value of materials originating in the
territory.  Therefore, the inclusion of Company Z's 4 percent
mark-up represented the price paid by the producer.

     It should be noted that Article 301(3)(c) of the CFTA
provides:

     3.  A good shall not be considered to originate in the
          territory of a Party pursuant to paragraph 2 merely by
          virtue of having undergone:

         ...

         c)  any process or work in respect of which it is
          established, or in respect of which the facts as
          ascertained clearly justify the presumption, that
          the sole object was to circumvent the provisions of
          this Chapter.

Consequently, in the context of reviewing a completed CFTA audit,
the totality of the facts must be examined to determine the
applicability of this provision.

HOLDING:

     (1)  The price paid by the producer, Company Y for
transmissions sold directly to it by Company X, was the value of
the materials.  The price paid was acceptable as the value of
the materials, as that was the price paid by the producer of the
exported good for materials imported from a third country used in
the production of the originating material.


     (2)  The price paid by Company Y to Company Z, which
included a 4 percent "source mark-up" added by Company Z
represented the value of the materials.

                                   Sincerely,



                                   Harvey B. Fox, Director
                                   Office of Regulations and
                                   Rulings