Dutiable Value of Imported Steel Products

HQ W544417 April 10, 1991 VAL CO: R:C: V W544417 VLB Category: Valuation Robert L. Eisen, Esquire Coudert Brothers 200 Park Avenue New York, New York 10166 RE: Dutiable Value of Imported Steel Products Dear Sir: This is in response to your letter dated November 15, 1989, requesting a ruling on a proposed arrangement involving your client Otto Wolff Flachstahl, GmbH (hereinafter referred to as "Otto Wolff"). We regret the delay in responding. FACTS: You state in your letter that Otto Wolff is a German corporation that purchases steel products, pursuant to a long-term supply agreement, from Rasselstein, A.G., a steel manufacturer. Otto Wolff and Rasselstein are related parties pursuant to section 402(g) of the Tariff act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(g); TAA). You further explain that although Otto Wolff and Rasselstein are related, each maintains a separate corporate identity. Each company has its own articles of incorporation, directors and corporate officers. Each company has separate employees whose salaries are drawn from separate payrolls. Each company is responsible for its own administrative and management services, and the two companies act as separate profit centers. Under the long-term supply agreement, you explain, Rasselstein agrees to sell, and Otto Wolff agrees to buy steel products at a certain price. Subsequently, Otto Wolff places orders with Rasselstein for steel products after Otto Wolff receives purchase orders from U.S. customers. You state that Otto Wolff informs Rasselstein of the type of product that the customer has ordered, and any specific treatments requested by the customer, such as cutting to a specific length or width, thickness tolerances, plating, coating, or painting. Otto Wolff also identifies for Rasselstein the U.S. port where Otto Wolff will enter the goods. -2- All of this information is set forth on the commercial invoice that Rasselstein issues to Otto Wolff. Rasselstein issues the invoice at the time the steel leaves the mill for transportation by barge to Antwerp. Otto Wolff will make these purchases from Rasselstein on a C.I.F. (U.S. port) duty-paid basis. You state that "[t]echnically speaking, this is not a true C.I.F. sale, because Otto Wolff arranges for ocean transportation from the port of export (Antwerp) to the U.S. port of importation." That is, Otto Wolff initially pays the freight charges, and Rasselstein subsequently reimburses Otto Wolff for the costs. Otto Wolff also pays the U.S. Customs Service for the duties owing on the imported merchandise, which again are reimbursed by Rasselstein. The contract obligates Otto Wolff to tender payment to Rasselstein on a fixed day of each month for all orders that Rasselstein has completed during the previous month. You indicate that Otto Wolff's payments to Rasselstein can be identified to specific invoices that Rasselstein issued in the preceding month. In the transaction between Otto Wolff and the U.S. purchasers, you state that the U.S. customers place orders directly with Otto Wolff, and payment is remitted directly to Otto Wolff. In addition, Otto Wolff uses a related U.S. subsidiary as an agent. The agent receives a commission for its services. The commission is included in the price that the U.S. purchasers pay Otto Wolff. Finally, you state that Otto Wolff sells the steel to U.S. purchasers on either a C.I.F. landed-duty-paid port of discharge, loaded on truck - duty paid, or free plant - duty paid. Otto Wolff is responsible for clearing the goods through Customs under the sales agreement with the U.S. purchaser. Otto Wolff issues the invoice to the U.S. customer after the steel has been loaded onto the vessel in Antwerp for ocean shipment to the U.S. The U.S. customer then remits payment to Otto Wolff. ISSUES: Whether there is a bona fide sale between Rasselstein and Otto Wolff. If yes, whether the sale between Rasselstein and Otto Wolff or the sale between Otto Wolff and the U.S. customer is the sale for exportation to the U.S. LAW AND ANALYSIS: The preferred method of appraisement is transaction value, which is defined in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 140la(b); TAA) as the "price actually paid or payable for the merchandise when sold for exportation to the United States (emphasis added)." Thus, there must be a bona fide sale for the imported merchandise to be appraised under transaction value. We are assuming for purposes of this ruling that transaction value will be the proper method of appraisement. -3- As a result, the first issue that must be resolved is whether there is a bona fide sale between Rasselstein and Otto Wolff. In J.L. Wood v. U.S., 62 CCPA 25, 33, C.A.D. 1139 (1974), the U.S. Court of Customs and Patent Appeals defined the term "sale" as the "transfer of property from one party to another for consideration." Although the J.L Wood case was decided under the appraisement statute prior to the TAA, Customs has accepted that this basic concept of what constitutes a sale is applicable under the TAA. In previous Headquarters Letter Rulings (HRL's), involving the question of whether a bona fide sale existed between a foreign seller and a related company, Customs has examined several factors. To determine whether there was a transfer of property or ownership, Customs has ascertained whether title and risk of loss to the merchandise passed to the related company. In addition, Customs has scrutinized whether the alleged buyer paid for the goods, and whether the amounts remitted to the selling company equaled the related party transfer price. Finally, Customs has examined whether the payments can be linked to specific importations of merchandise. In this case, you state that Otto Wolff acquires title to the merchandise at the time Rasselstein delivers it to the exporting carrier. Otto Wolff then retains title to the merchandise until the goods are delivered to the U.S. purchaser. You further state that the insurance policy that covers the goods during transit, names Otto Wolff as the beneficiary. In addition, you indicate that Otto Wolff tenders payment to Rasselstein on a fixed day of each month, for all orders that Rasselstein has completed during the previous month. Nevertheless, each transfer of funds from Otto Wolf to Rasselstein can be identified to specific invoices that Rasselstein has issued to Otto Wolff. Based on these facts, and assuming the payments can be tied to specific importations, there is sufficient evidence to establish that title and risk of loss to the merchandise will pass from Rasselstein to Otto Wolff, and that Otto Wolff will pay for the merchandise. Therefore, we hold that there is a bona fide sale between Otto Wolff and Rasselstein. Thus, we are left with a situation where there are two sales, the sale between Otto Wolff and Rasselstein and the sale between Otto Wolff and the U.S. purchaser. As a result, we must decide which sale is the sale for exportation to the U.S. for purposes of transaction value. You contend that the price paid by Otto Wolff to Rasselstein should be the basis for determining the transaction value of the merchandise. You further argue that imported steel cannot be appraised based on the price between Otto Wolff and the U.S. customer because this sale occurs after the steel has been exported to the U.S. The standard that customs has consistently applied to determine which of two or more sales should be the basis of transaction value, is which sale or transaction most directly caused the merchandise to be exported to the U.S. See, HRL 542928, dated January 21, 1983, cited as TAA #57. -4- To support your position that the sale between Otto Wolff and Rasselstein is the proper basis for transaction value, you cite E.C. McAfee v. U.S., 842 F.2d 314 (Fed. Cir. 1988). In McAfee, Hong Kong distributors of made-to-measure wearing apparel solicited orders from customers in the U.S. or in Hong Kong. After the customers orders were taken in the U.S., the orders were sent to the distributor in Hong Kong. In the situations where the orders were taken in Hong Kong, the transactions originated in retail shops of distributors where tourists placed orders. In the latter situations, the clothing was subsequently sent through a freight forwarder to the U.S. for shipment to the U.S. customer. In the transactions involving orders solicited in the U.S., the distributor, upon receipt of an order, would contract with tailors in Hong Kong to produce the apparel from fabric supplied by the distributor. Upon receipt of the finished clothing, the distributor packed the clothing, addressed the packages to the individual U.S. customers, obtained quota and visas, and gave the package to a freight forwarder for shipment to the U.S. In McAfee, the Court of Appeals for the Federal Circuit held that the cut, make and trim operation by the Hong Kong tailors was an "assembly.'' Therefore, 19 CFR 152.l03(a)(3), which provides that an assembly price may be the price actually paid or payable for the merchandise in certain circumstances, was applicable. The court further held that the transaction value of the apparel should have been based on the assembly price that the distributor paid the tailor. In reaching this result, court noted that "[a] determination that goods are being sold or assembled for exportation to the United States is fact-specific and can only be make on a case-by­case basis. 842 F.2d at 319. In addition, the court pointed out that "(t)he merchandise at issue is unique in that, from the time of the initial contact until eventual importation, the goods in question were being made for a specific United States consumer, not the United States market generally." Id. Based on the above-stated language, Customs issued a general notice stating that the holding in McAfee was limited to the particular facts of the case. 22 Cust. Bull. 18 at 8 (1988). That is, the principles set forth in the court opinion are only to be applied to the importation of made-to-measure clothing when the distributor and the tailor are located in the same country. Moreover, for reasons discussed on page 6 of this ruling, we do not find the McAfee case to be controlling in the present case. You also cite the recent case of Brosterhous, Coleman & Co., a/c Lurgi Chemie und Huttentechnik GmbH v. U.S., C.I.T., Slip Op. 90-48, (May 11, 1990), as support for your position that the sale between Otto Wolff and Rasselstein is the sale for exportation to the U.S. In Brosterhous, Crown Zellerbach Corp., a U.S. producer of paper, contracted with the plaintiff, Lurgi, a West German corporation, to design, fabricate and supervise the construction of a chlorine dioxide bleach plant at Crown's paper-making facility in the U.S. The contract did not specify the vendors who would supply the components or the countries from which the components were to be purchased. Lurgi then contracted with vendors in Germany for the -5- manufacture of the components. Subsequently, the plaintiff Brosterhous, a customs broker, imported the components for Lurgi. The Court of International Trade held that the transaction value of the imported components should have been based on the prices that Lurgi agreed to pay its vendors for the components. The court based its decision on the fact that the contract between Crown and Lurgi did not require that Lurgi to purchase the components from any particular vendor or country. The court noted that it was not until Lurgi had decided which vendors would supply the components that any importation became necessary. You contend, based on an analysis of Brosterhous and McAfee, that Otto Wolff, like Lurgi, purchases products that conform to specific customer specifications, not the general U.S. market. In addition, you state that the contracts between Otto Wolff and its customers do not require Otto Wolff to purchase products from a particular vendor or country. However, we find that the holding in Brosterhous is not controlling in this case. The contract involved in Brosterhous between Crown and Lurgi was a "turn key'' contract that involved the designing, fabricating and construction of an entire plant in the U.S. The very nature of the contract required Lurgi to source several different components from various suppliers. The sales at issue in the present case involve the sale of only one commodity, steel. Otto Wolff is the exclusive distributor/seller of steel products made by Rasselstein. In addition, Otto Wolff and Rasselstein have a long-term supply contract. Thus, when Otto Wolff receives an order from a U.S. customer, Otto Wolff must source the steel from Rasselstein in Germany. Only in the rare instances when Rasselstein cannot meet the order would Otto Wolff source the steel elsewhere. This is situation is quite different from the transaction in Brosterhous where Lurgi could source components worldwide, including the U.S. Given that Otto Wolff has the long-term supply agreement with Rasselstein, it is not until the U.S. customer supplies its specifications to Otto Wolff that the merchandise is produced and sold for exportation to the U.S. This situation is analogous to the facts in the rulings that the court distinguished in Brosterhous. See, Brosterhous, Slip Op. 90-48, at 6. In each of those rulings, as in the present case, a U.S. purchaser placed an order for a certain commodity with a foreign distributor, who in turn, purchased that commodity from a foreign manufacturer to fill the order. In those cases, the sale between the distributor and the U.S. purchaser was considered to be the sale for exportation to the U.S. As a result, we hold that the sale between Otto Wolff and the U.S. customer is the sale that most directly caused the merchandise to be exported to the U.S. Thus, this sale is the basis of transaction value. -6- However, you contend that the sale between the Otto Wolff and the U.S. customer cannot be used as the basis for transaction value because the sale occurs after the steel has been exported to the U.S. You argue that the sale to the U.S. customer is on a landed-duty-paid basis with title to the merchandise passing to the U.S. customer after the goods arrive in the U.S. Thus, because title passes to the U.S. customer after the goods reach the U.S., the sale is excluded from being a sale for exportation to the U.S. The fact that title to the merchandise may pass from Otto Wolff to the U.S. purchaser in the U.S. does not negate the fact that the Otto Wolff - U.S. purchaser sale is the sale that caused the international movement of the goods. In HRL 542930, dated March 4, 1983, cited as TAA #59, Customs specifically held that the fact title to the imported merchandise may pass at some time subsequent to importation, does not preclude a sale for exportation to the U.S., which can be used to establish transaction value. Thus, given that the sale between Otto Wolff and the U.S. purchaser is the sale that most directly caused the goods to be exported to the U.S., it is that sale that is to serve as the basis of transaction value. HOLDINGS: A bona fide sale occurs between Rasselstein and Otto Wolff. (2) The sale for exportation for purposes of transaction value is the sale between Otto Wolff and the U.S. purchaser. Sincerely, John Durant, Director Commercial Rulings Division