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

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