Transaction Value; Related Party Transactions

June 24, 2009 HQ H053359 OT:RR:CTF:VS H053359 YAG CATEGORY: Valuation Mr. Michael J. Horton Law Office of Michael J. Horton 6676 Mission St., Suite M Daly City, CA 94014 RE: Transaction Value; Related Party Transactions Dear Mr. Horton: This is in response to your letter, dated February 23, 2009, requesting a ruling with respect to the valuation of steel coils (hot bands) to be imported to the United States from Korea and Canada, on behalf of your client, *** (the “Importer/Buyer”) of ***. You have asked that certain information submitted in connection with this ruling request be treated as confidential. Inasmuch as your request confirms to the requirements of 19 CFR §177.2(b)(7), your request for confidentiality is approved. The information contained within brackets and all attachments to your ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling. FACTS: The Importer/Buyer is a U.S. limited liability company, organized for the purposes of manufacture and distribution of the American Petroleum Institute (“API”) spiral pipes in North and Central America. The steel coils (hot bands) necessary for the production of API spiral pipes will be manufactured in Korea and supplied by ***, a Korean company; however, some of the hot bands will be manufactured in Canada and supplied by *** (a U.S. Corporation). It is the valuation of these imported steel coils (hot bands) that is the subject of this ruling request. The Importer/Buyer has been organized by the following members: (1) *** (35% membership); (2) *** (30% membership), *** (35% membership). These three (3) members are in turn wholly-owned subsidiaries of ***, ***, and *** respectively. Thus, the Importer/Buyer and the Sellers *** are related pursuant to 19 U.S.C. §1401a(g)(1)(G) in that the Korean company, ***, owns 35% of the Importer/Buyer through an intermediate subsidiary ***, and the U.S. company, ***, owns 35% of the Importer/Buyer through an intermediate subsidiary ***. The Operating Agreement of the Importer/Buyer, dated March 21, 2007 was enclosed with your ruling request for our review. The Operating Agreement contained multiple attachments consisting of the following documents: (1) Land Transfer Agreement; (2) Technical Service Agreement; (3) Transportation Service Agreement; (4) Neutrality Agreement; and, (5) Parent Agreement. Additionally, according to your submission, the Importer/Buyer will purchase the steel coils (hot bands) from both Sellers pursuant to the Hot Band Agreement, also provided for our consideration. In accordance with the Hot Band Agreement, both Sellers have the right to supply 50% each of the Importer/Buyer requirements for the steel necessary to fill customers’ pipe orders. Additionally, Article 2 of the Hot Band Supply Agreement states that if one Seller is not able or willing to provide its half of Purchaser’s requirements, the other Seller may, in its sole discretion, provide such additional amounts of hot bands. If, and to the extent, both Sellers are not able or willing to provide the full amount of hot bands required by Purchaser, Purchaser may address any shortfall by purchasing hot bands from any third parties. Article 2 of the Hot Band Supply Agreement also states that in no case shall Purchaser buy hot bands from any third party unless both Sellers are unable or unwilling to supply the necessary hot bands at the time and in the quantities offered by any third party seller, and in no case shall Purchaser buy hot bands from any third party without the written approval of both Sellers. Article 2 of the Hot Band Supply Agreement further specifies that the terms of sale will be CFR, with the merchandise delivered by ocean freight, provided, however, that the cost of insurance, together with any customs fees and duties shall be deducted from the Buyer’s payments to the applicable Seller. Moreover, steel coils (hot bands) delivered by rail will be delivered CPT to the unloading facility. Article 3(c) of the Hot Band Supply Agreement states that the price to each Seller for the same type of hot bands shall be identical (except in the case of hot bands supplied by a first alternate special Seller). Since most of the hot bands sold to the Importer/Buyer by the U.S. company will not be imported, the Importer/Buyer will not be required to pay marine insurance or customs duties and fees on those hot bands. Therefore, in order to keep the prices identical for both sellers, the Importer/Buyer will charge back to the Korean company the cost of marine insurance and customs duties and fees paid on the imported coils arriving by vessel from Korea. These same costs, to the extent they will be incurred, would be charged back to the U.S. company for imported steel coils (hot bands) arriving by rail from Canada. It is stated that the charge backs will be aggregated on a per shipment basis (not on a per entry basis), and they will occur only once each year. Additionally, Article 3 of the Hot Band Supply Agreement discusses the methodology by which orders (and special orders) by the Importer/Buyer will be placed with the Korean company and the U.S. company for the purchase of coils. Article 3 specifies that the Importer/Buyer shall provide a written request for proposal of an order (including the appropriate information with respect to each such order) to Sellers before submitting a bid for the order. The Buyer and Sellers then have to agree on price, quantity, delivery, and technical specifications of hot bands for the order. If the winning bid by the Buyer is accepted, the Buyer must provide written specifications for the order to the Sellers within five (5) business days after being notified of its winning bid and Sellers must confirm that they are willing and able to meet the terms of the order. If the Buyer is a winning bidder, and there is a change in any terms and conditions of the order, then Sellers and the Buyer must again negotiate in good faith to come to an agreement concerning the changed terms or conditions. With respect to special orders, Article 3(b) of the Hot Band Supply Agreement states that the Buyer will provide Sellers with prompt notice of opportunities that, due to their urgency, quantity requirements, or other special nature, require expediting processing, and Sellers may agree to fulfill the order and negotiate with the Buyer the terms of the order. Article 3(b) specifically states that if one Seller cannot provide at least half of the Buyer’s requirements for special orders, the other Seller may, in its sole discretion, advise the Buyer that it would be willing to provide such shortfall and the first alternate Sellers would negotiate in good faith the terms of supply of additional hot bands to address the shortfall for a special order. If the first alternate special Sellers do not address the full amount of shortfall for a special order, the Buyer is free to purchase such shortfall from third party Sellers, provided that (1) both Sellers are unable to address the shortfall; and (2) in no case shall the Buyer buy hot bands from any third party without the written approval of the Sellers. Finally, Article 3(c) of the Hot Band Supply Agreement states the intent of the parties to set the prices reflective of market conditions for hot bands sold to customers in similar industries such as the pipe and tube converter industries. Thus, it is stated that then-current market conditions will be taken into account in determining order prices and any special pricing arrangements. ISSUE: Whether transaction value is the appropriate method of appraisement for the imported merchandise; and, Whether the post-entry charge backs to the sellers should be taken into account in determining the transaction value. LAW AND ANALYSIS: 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 (19 U.S.C. §1401a; TAA). The preferred method of appraisement of imported merchandise for customs purposes is transaction value. Transaction value is the price actually paid or payable for the merchandise when sold for export to the United States, plus certain enumerated additions. 19 U.S.C. §1401a(b)(1). The term “price actually paid or payable” means the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C §1401a(b)(4)(A). In order for transaction value to be used as a method of appraisement, it is essential that a "sale" between the parties is available. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed.Cir. 1999), the Court of Appeals for the Federal Circuit found that the term “sold” for purposes of 19 U.S.C. §1401a(b)(1) means a transfer of title from one party to another for consideration (citing J.L. Wood vs. United States, 62 CCPA, 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). Without a sale for exportation to the United States, transaction value must be eliminated as a means of appraisement. Since this a prospective ruling request, we have not reviewed any documents that would establish the existence of a bona fide sale between the parties. However, for the purpose of this ruling request, we assume that the transactions between the Importer/Buyer and two (2) related Sellers are bona fide sales. Furthermore, as previously noted, in this case the Importer/Buyer and the Sellers are related. There are special rules that apply when the buyer and seller are related parties, as defined in 19 U.S.C. §1401a(g). Specifically, transaction value between a related buyer and seller is acceptable only if the transaction satisfies one of two tests: (1) circumstances of sale or (2) test values. See 19 U.S.C. §1401a(b)(2)(B). The purpose of these rules is to ensure that the relationship between the parties does not affect the price. 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, CBP 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, CBP 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 CFR §153.103(l)(1)(iii). You have not provided any evidence to establish whether the prices that the sellers charged the buyer for the steel coils (hot bands) were consistent with normal pricing practice of the industry in question or whether the sellers charged the same prices to unrelated buyers. In addition, you did not furnish any evidence with respect to the all cost plus a profit method. Similarly, no test values for the steel coils (hot bands) were presented. Nevertheless, you contend that the transaction value applies and the price will be influenced by the relationship of the parties because an examination of the circumstances of the sale indicates that while the parties are related, the parties buy and sell from one another as they were unrelated. In support of this position, you cite Headquarters Ruling Letter (“HRL”) 543519, dated September 3, 1985 and state that if during the negotiations between the buyer and the sellers, the sellers cannot or will not offer hot bands at a price and quantity sufficient for the buyer’s requirements, the buyer is permitted to buy hot bands from unrelated third parties. Thus, the parties deal with each other as though they are not related. Further, you state that because Article 3(c) of the Hot Band Agreement specifies that it is the intent of the three parent companies that the sales prices of the hot bands sold to the buyer should reflect their market condition, the prices between the related parties are acceptable as transaction value. We are not persuaded by your argument. It is our opinion that the factual situation in HRL 543519 is distinguishable from the present case. In HRL 543519, the importer negotiated the price with the parent, rejected the prices if dissatisfied and could purchase from other suppliers, both related and unrelated, or could refrain from stocking an item. In the instant case, Article 2 of the Hot Band Agreement indeed gives the Importer the right to address the shortfall of hot bands by purchasing the merchandise from the third party, however, this section also states that “in no case shall Purchaser buy hot bands from any third party unless both sellers are unable or unwilling to supply the necessary hot bands at the times and in the quantities offered by any third party seller, and in no case shall Purchaser buy hot bands from any third party without the written approval of both sellers” (emphasis added). Consequently, the Importer/Buyer cannot buy the merchandise from the third party, without the written approval of both Sellers. It is not clear from the documents provided what exactly would this written approval entail, nor it is clear as to whether the Buyer can walk away from the potential customer (order) if the Sellers do not give their approval. Moreover, Article 3(c) of the Hot Band Supply Agreement states that it is the intent of the parties to set the prices that would reflect the market conditions for hot bands and that the then-current market conditions shall be taken into account in determining order prices and any special pricing arrangements. This is a very general and self-serving provision that does not shed any light on how the parties plan to set their prices to reflect market conditions (pricing methodology) and the possible special pricing arrangements. There is no description in the documents submitted as to how the price will be determined or the way in which the price in question will be arrived at. Finally, the last issue to be resolved in this case is whether the post-entry charge backs to the sellers should be taken into account in determining the transaction value. Since the Importer failed to show that the relationship between the parties did not influence the price in this case, transaction value is not an acceptable method of appraisement. However, we would like to address the issue of the alleged post-importation adjustments to the price actually paid or payable, even though the transaction value cannot be used based on the information and arguments submitted by the Importer/Buyer. The post-entry charge backs to the sellers involve the charge backs for the cost of insurance and duties/taxes to be paid by the Importer/Buyer upon the importation of the merchandise into the United States. Basically, the payments will be made by Sellers to the Importer/Buyer for the cost of insurance and Customs duties and fees that the Importer will have to pay in connection with the importation of steel coils (hot bands) from Canada and Korea. In other words, Sellers will reimburse the Importer for the cost of insurance and duties and fees to comply with the requirement in the Hot Bands Supply Agreement, which states that the Seller in Korea (and Canada) and the Seller in the United States are required to sell steel coils (hot bands) to the Importer/Buyer at an identical price, so that one Seller does not have an advantage over the other Seller. You argue that these post-entry charge backs should be disregarded in determining the transaction value of the imported hot bands pursuant to 19 U.S.C. §1401a(b)(4)(B). 19 U.S.C. §1401a(b)(4)(B) states as follows: Any rebate of, or other decrease in, the price actually paid or payable that is made or otherwise affected between the buyer and seller after the date of importation of the merchandise into the United States shall be disregarded in determining transaction value. CBP has ruled that this provision does not apply when the rebate or decrease is made pursuant to a formula as provided in 19 CFR §152.103(a). Specifically, CBP has stated that it is necessary for the formula to be fixed prior to importation so that a final sales price can be determined at a later time on the basis of some future event or occurrence over which neither the seller nor the buyer has any control. See HRL 542701, dated April 28, 1982. Where either the buyer or seller exercises some control over whether and to what degree the price would be adjusted, the pricing methodology could not be considered a "formula" within the meaning of 19 CFR §152.103(a)(1). We are of the view that the proposed charge backs has not been fixed prior to the importation and that the charge backs in question are under the control of the Importer. Accordingly, since the Sellers planned to reimburse the Importer/Buyer for the cost of insurance and duties and fees after the importation of steel coils (hot bands) from Korea and Canada and that there was no formula in effect prior to the importation of the merchandise, the charge backs constitute the rebates of the price actually paid or payable as stated in 19 U.S.C. §1401a(b)(4)(B). Therefore, pursuant to Section 1401a(b)(4)(B), such post-importation adjustments should be disregarded in determining the transaction value of the imported hot bands. See Century Importers, Inc. v. United States, 205 F.3d 1308 (Fed. Cir. 2000); HRL 544370, dated October 9, 1990 and HRL 546363, dated July 15, 1997. HOLDING: Based on the information provided, transaction value is not an acceptable method of appraisement. We understand that this is a prospective ruling request and that additional information might not be available at this time, thus, we urge you to resubmit your ruling request at a later time when you obtain the necessary information to substantiate your assertion that the relationship of the parties did not influence the price. Please note that 19 CFR §177.9(b)(1) provides that "[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based."    Sincerely, Monika R. Brenner, Chief Valuation & Special Programs Branch