Protest No. 3701-10-100020; clear plastic lenses; related party transaction

HQ H127536 December 28, 2010 OT:RR:CTF:VS H127536 BGK CATEGORY: Valuation Port Director U.S. Customs and Border Protection 304915 S. Howell Ave. Milwaukee, WI 53207 Re: Protest No. 3701-10-100020; clear plastic lenses; related party transaction Dear Port Director: This is in response to the Application for Further Review of Protest No. 3701-10-100020, which pertains to the parties’ entitlement to use transaction value to appraise the merchandise in question. FACTS: Clear plano plastic lenses, 1.4999 index, were entered on February 16, 2010 by the importer, Big Islands Inc. (Big Islands) of Marietta, Ga. The lenses were manufactured and exported by Shanghai Conant Optical Co. Ltd. (Conant SH). The lenses were entered at the invoice price of 25 cents per pair for 50,000 pairs, and were shipped directly to Global Optics of Green Bay, Wisconsin. U.S. Customs and Border Protection (CBP) value advanced the lenses to $1.50 per pair, the lowest appraised value for shipments with the same Harmonized Tariff Schedule of the United States (HTSUS) subheading from Conant SH to unrelated suppliers with the same country of origin and around the same time as the entry in question. CBP took this action after requesting information concerning the transaction from Big Islands pursuant to Requests for Information issued on both March 15, 2010 and April 8, 2010. The March 15, 2010 inquiry requested the purchase order, seller’s confirmation, and proof of payment to the foreign vendor, along with information on any additional costs/expenses incurred in the transaction, any invoices, and an explanation of the role Big Islands in the transaction. Big Islands responded that they were the initial distributor/importer, and included both their purchase order to Conant SH and proof of payment. On April 8, 2010, CBP issued another Request for Information, this time re-requesting information on other additional costs/expenses incurred and requesting information on the relationship between Big Islands and Conant SH and how that affected the price. CBP also sought additional information on the structure of the transaction between Conant SH, Big Islands, and Global Optics. Big Islands responded that it and Conant SH are “two independent Companies” and that it bought the lenses from Conant SH at 25 cents per pair and sold them to Global Optics at 40 cents per pair. Big Islands also stated that the lenses were B/C grade lenses, which are for measurement purposes only and not for optical use. Big Islands submitted its invoice to Global Optics for 40 cents per pair for B/C grade lenses and a letter from Global Optics stating they paid 40 cents per pair for B/C grade lenses. On May 20, 2010, CBP issued a Notice of Proposed Action to value advance the entry to $1.50 per pair. Big Islands then filed this protest. Included in the June 8, 2010 submission is an exhibit labeled as a price list for another manufacturer of plastic lenses in China they order from, Big Islands’ invoice to Global Optics, Global Optics’ Letter, an invoice from Conant SH to Big Islands (which does not specify B/C grade lenses), and proof of payment from Big Islands to Conant SH. Information concerning the companies indicated that they were related. For example, Conant SH’s website lists Conant Optical INC in Marietta, Georgia (Conant GA) as a contact, and its address is 2255 Sewell Mill Road, Marietta, GA 30062. The company profile for Conant SH lists the CEO as Zhengxiang Fei. Zheng Xiang Fei’s address is also listed as the Sewell Mill Road address in Marietta, GA. The FDA profile for Conant SH lists Zheng Xiang Fei, Big Islands, Inc., 1255 Promontory Lane, Marietta GA 30062 as the official correspondent (the phone number given for him is the number for Conant GA, not Big Islands). According to the Georgia Secretary of State Corporate Records, Big Islands’ CEO and Registered Agent are both listed as Zheng Xiang Fei; the CFO and Secretary are listed as Zhoubo Shen. Conant GA’s CEO, Registered Agent, and CFO are listed as Zhoubo Shen, and the Secretary is listed as Bretty Chin. According to the Cobb County Assessor’s Office records, the lots at the addresses of both companies, Conant GA and Big Islands, are owned by Shen Zhoubo and Zhengxiang Fei. CBP and Big Islands disagree over the relationship of the parties, the substitution of $1.50 for the value of the lenses, and the type of lenses being shipped. CBP also still questions a commission paid to an “independent domestic sales rep” that was brought up in a response by Big Islands, yet not discussed by them. ISSUE: Is transaction value an appropriate method of valuation for the transaction between Conant SH and Big Islands? If not, what is the appropriate method of valuation, and is $1.50 an appropriate value? LAW AND ANALYSIS: The preferred method of appraising merchandise imported into the United States is transaction value pursuant to section 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). Section 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 enumerated statutory additions. Under 19 U.S.C. § 1401a(b)(2)(A)(iv), transaction value is to be used "only if" the buyer and seller are unrelated or, if they are related, their transaction value is considered "acceptable." Related parties are defined in 19 U.S.C. § 1401a(g)(1): For purposes of this section, the persons specified in any of the following subparagraphs shall be treated as persons who are related: (A) Members of the same family, including brothers and sisters (whether by whole or half blood), spouse, ancestors, and lineal descendants. (B) Any officer or director of an organization and such organization. (C) An officer or director of an organization and an officer or director of another organization, if each such individual is also an officer or director in the other organization. (D) Partners. (E) Employer and employee. (F) Any person directly or indirectly owning, controlling, or holding with power to vote, 5 percent or more of the outstanding voting stock or shares of any organization and such organization. (G) Two or more persons directly or indirectly controlling, controlled by, or under common control with, any person. In HRL 546583, dated December 2, 1997, an importer and its supplier were found to be related, pursuant to 19 U.S.C. § 1401a(g)(1)(C), because one individual sat on the board of directors of both companies. That is the situation here. Zheng Xiang Fei is the CEO of both Conant SH (supplier) and Big Islands (importer). Therefore, for purposes of 19 U.S.C. § 1401a, Conant SH and Big Islands are related parties pursuant to 19 U.S.C. § 1401a(g)(1)(C). Section 402(b)(2)(B) of the TAA 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. 19 U.S.C. § 1401a(b)(2)(B). 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 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 the 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 C.F.R. § 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 buyer's overall profit realized over a representative period of time. 19 C.F.R. § 152.103(l)(1)(iii). Big Islands has not provided any of the information necessary to make a finding that the relationship did not influence the price. Therefore, the circumstances of the sale test, 19 U.S.C. § 1401a(b)(2)(B), may not be used to establish the acceptability of the transaction value. Alternatively, a transaction value between related parties is acceptable if it closely approximates a “test value.” See 19 U.S.C. § 1401a(b)(2)(B); 19 C.F.R. § 152.103(l)(2). The term "test values" refers to values previously determined pursuant to actual appraisements of imported merchandise. See 19 U.S.C. § 1401a(b)(2)(B); 19 C.F.R. § 152.103(j)(2)(i). These values include 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 if the value used for comparison relates to merchandise exported to the U.S. at or about the same time as the importation in question. See 19 U.S.C. § 1401a(b)(2)(B). Big Islands has also failed to provide test values for CBP’s consideration. As it cannot be shown that the relationship of the parties had no affect on the price, transaction value is not an acceptable method of appraisement. See 19 U.S.C. § 1401a(b)(2)(A)(iv). Transaction value is also not appropriate because selling commissions incurred by the buyer with respect to the imported merchandise must be added to the value under 19 U.S.C § 1401a(b)(1)(B), and the transaction value is treated as one that cannot be determined if sufficient information is not available with regard to this cost/expense. See 19 U.S.C. § 1401a(b)(1). As Big Islands has stated that it pays a commission to an “independent domestic sales rep”, but has not provided any other information with regard to this payment, the transaction value should be treated as one that cannot be determined. See id. If imported merchandise cannot be appraised on the basis of transaction value, it will be appraised in accordance with the remaining methods of valuation, applied in sequential order. 19 U.S.C. § 1401a(a)(1). When transaction value is not available as an appraisement method, the remaining methods of appraisement set forth in 19 U.S.C. § 1401a must be applied in sequential order. The alternative methods of appraisement, in order of precedence, are: the transaction value of identical or similar merchandise (19 U.S.C. § 1401a(c)); deductive value (19 U.S.C. § 1401a(d)); computed value (19 U.S.C. § 1401a(e); and the "fallback" method (19 U.S.C. § 1401a(f)). The first alternative basis of appraisement is the transaction value of identical or similar merchandise exported to the U.S. at or about the same time as the merchandise being appraised. 19 U.S.C. § 1401a(c). This value is defined as: Transaction values determined under this subsection shall be based on sales of identical merchandise or similar merchandise, as the case may be, at the same commercial level and in substantially the same quantity as the sales of the merchandise being appraised. If no such sale is found, sales of identical merchandise or similar merchandise at either a different commercial level or in different quantities, or both, shall be used, but adjusted to take account of any such difference. Any adjustment made under this paragraph shall be based on sufficient information. If in applying this paragraph with respect to any imported merchandise, two or more transaction values for identical merchandise, or for similar merchandise, are determined, such imported merchandise shall be appraised on the basis of the lower or lowest of such values. 19 U.S.C. § 1401a(c)(2). In this case, your office has provided a list of entries under the same HTSUS subheading from Conant SH to unrelated companies around the time of the entry in question. Big Islands, however, states that these values are not appropriate because the lenses in question were B/C grade lenses, which are not optical quality. In support of this claim, they have provided their invoice to Global Optics for the order which describes the lenses as B/C grade, and a letter from Global Optics that states “the lenses are B/C grade and used for measurement purposes only”. However, they have submitted an invoice from Conant SH (the manufacturer/seller) that lists the lenses as “1.499 Clear Plano Lens”, and the invoice states nothing about the lenses being B/C grade. Big Islands also did not provide any samples to CBP to confirm this claim. As not enough information has been provided to determine with certainty if the other entries were identical or similar, your office decided that the transaction value of identical or similar merchandise may not be used as the method of appraisement. We find this to be reasonable. The next two methods of appraisement are deductive value and computed value. See 19 U.S.C. § 1401a(d)&(e). No information has been provided for valuation under either of these methods. When the value of imported merchandise cannot be determined under the methods set forth in 19 U.S.C. § 1401a(b)-(e), it may be appraised on the basis of a value derived from one of those methods, reasonably adjusted to the extent necessary to arrive at a value. This is known as the fallback valuation method. Under Section 500 of the Tariff Act of 1930, as amended, which constitutes CBP’s general appraisement authority, the appraising officer may: [F]ix the final appraisement of merchandise by ascertaining or estimating the value thereof, under section 1401a of this title, by all reasonable ways and means in his power, any statement of cost or costs of production in any invoice, affidavit, declaration, other document to the contrary notwithstanding[.] 19 U.S.C. § 1500(a). In this regard, the Statement of Administrative Action (“SAA”), which forms part of the legislative history of the TAA provides, in pertinent part: Section 500 is the general authority for Customs to appraise merchandise. It is not a separate basis of appraisement and cannot be used as such. Section 500 allows Customs to consider the best evidence available in appraising merchandise. It allows Customs to consider the contract between the buyer and seller, if available, when the information contained in the invoice is either deficient or is known to contain inaccurate figures or calculations…. Section 500 authorize [sic] the appraising officer to weigh the nature of the evidence before him in appraising the imported merchandise. This could be the invoice, the contract between the parties, or even the recordkeeping of either of the parties to the contract. In those transactions where no accurate invoice or other documentation is available, and the importer is unable, or refuses, to provide such information, then reasonable ways and means will be used to determine the appropriate value, using whatever evidence is available, again within the constraints of section 402. Statement of Administrative Acton, H.R. Doc. No. 153, 96 Cong., 1st Sess. Pt 2, reprinted in Department of Treasury, Customs Valuation under the Trade Agreements Act of 1979 (Oct. 1981), at 67. In this case it is possible to use a fallback method based on the transaction value of identical or similar merchandise. As discussed above, Big Islands has failed to provide sufficient information, documents, or samples to conclude that the lenses are B/C grade. Therefore, the other entries found by your office are acceptable as similar merchandise under the fallback method as they all were imported under the same HTSUS subheading. These entries were imported from Conant SH (spelled “Conent” in the entry summaries) on May 3, 2010; March 29, 2010; and February 12, 2010. The entered values were $1.78/pair, $1.77/pair, and $1.50/pair, respectively. The February 12, 2010 entry was valued at $1.50 per pair, the lowest value of the three entries, for 20,200 pairs. The other entries were for greater quantities of lenses, but had higher values. In addition, the February 12, 2010 entry was only four days prior to the entry at issue, which was imported on February 16, 2010. As such, we find that this is an acceptable value under 19 U.S.C. § 1401a(f). The importer has argued that this is an arbitrary or fictitious value prohibited by 19 U.S.C. § 1401a(f)(2)(G), however, as explained above, this value is appropriate under 19 U.S.C. § 1401a(f). HOLDING: The protest should be denied in full. Transaction value may not be used to value the lenses because the parties are related and have failed to show that the relationship did not influence the price. The port’s decision to liquidate the lenses at $1.50 per pair is appropriate under the fallback method. In accordance with the Protest/Petition Processing Handbook (CIS HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with this decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision Regulations and Rulings of the Office of International Trade will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Myles B. Harmon, Director Commercial and Trade Facilitation Division