Request for Reconsideration of HQ544726 (November 3, 1992).

HQ W545242 April 16, 1995 VAL RR:IT:VA 545242 er CATEGORY: Valuation District Director Los Angeles, CA RE: Request for Reconsideration of HQ544726 (November 3, 1992). Dear Sir: This is in response to the request for reconsideration submitted by counsel, dated February 16 and March 22, 1993, and February 14, 1994, regarding the dutiability of certain retroactive adjustments made to the price of imported cars sold by the [A] of Japan to [B] of America, Inc. We regret the delay in responding. FACTS: The following facts are taken from the facts presented in connection with HRL 544726 as modified by those presented in connection with this reconsideration. [B] contracts to purchase motor vehicles and component parts from its parent company, [A]. The mechanism for pricing the imported merchandise is based on the pricing mechanism [A] used in selling its vehicles to [C] (hereinafter referred to as ["C"]). That is, pursuant to a separate contract between [A] and [C], in instances where [A] sells the same or similar models to [C] and [B], the [A] price to [C] cannot be higher than the [A] price to [B]. The pricing mechanism is the means of protecting [C]’s margin. The actual final prices for the imported merchandise [A] sells to [B], however, are determined through negotiations that may continue after the merchandise is imported into the United States. These negotiations take into consideration cost factors, the pricing for comparable models by [B] 's competitors in the United States, and other circumstances. Once these negotiations are complete and [B] has determined the price to its dealers, such price minus an applicable discount becomes the final price that [A] charges to [B] for the imported merchandise. 1 According to counsel, at the time HQ 544726 was issued [C] was related party: however, the parties are no longer related. r 2 In HRL 544726 Customs ruled that the pricing mechanism did not result in a firm price at the time of importation, and consequently that transaction value was not an available method of appraisement for the merchandise imported by [B] for inventory. However, because it was Customs' understanding that certain vehicles not subject to post-importation adjustments were "pre-sold" to [B] dealers before importation, a sale for exportation upon which transaction value could be based existed between [B] and its United States dealers with respect to these "pre-sold" vehicles. Customs, accordingly, held that the [B] resale price for the "pre-sold" vehicles could form the basis of transaction value for identical merchandise for the remaining merchandise imported for [B]'s inventory. According to counsel's request for reconsideration, Customs proceeded under the mistaken factual premise that such vehicles were “pre-sold" at the time of importation. Counsel states that the sales of these vehicles to the dealers takes place at a point in time after the vehicles have cleared Custom and, moreover, that the transaction between [B] and the dealers is not a "sale for exportation" upon which transaction value may be based. Counsel reasserts its position set forth in the initial submissions presented in connection with the issuance of HRL 544726 that the transaction between [B] and [A] is a sale for exportation upon which transaction value is properly based. Also, at issue in 544726 was whether certain post-importation lump-sum payments were dutiable. In the years 1986 and 1987, [A], and B] agreed to reduce the discount that is applied in calculating the price for the imported merchandise. The reason for this reduction, according to counsel, was due to "non-recurring competitive conditions" and the fact that [A] decided to market its stock publicly. The reduction of the discount resulted in a higher price for the imported merchandise for those years. Lump-sum payments were made by [B] to [A] after the merchandise was imported. Because Customs concluded in 544726 that the merchandise should be appraised under transaction value of identical or similar merchandise, the question of whether the lump sum payments were dutiable under transaction value was not addressed. ISSUE: Whether the subject merchandise may be appraised under transaction value based on the transaction between [B] and [A]. Whether the 1986 and 1987 lump-sum payments are part of the appraised value for the imported merchandise.  LAW AND ANALYSIS: In its request for reconsideration, counsel reiterates the claim that the merchandise should be appraised based on the price paid by [B] to [A] at the time of entry, without any adjustment to reflect post importation adjustments, whether increases or decreases, between the parties. Counsel questions Customs' analysis and holding in HRL 544726 with regard to [B]'s resale transactions. Specifically, counsel states that in order for Customs to hold that [B]'s resale prices to its United States dealers support statutory transaction value, Customs must determine that such sales are "for exportation to the United States." Counsel maintains that [B] dealer sales transactions are not for exportation to the United States because [B] is a United States corporation, whose sales transactions with its dealers take place in the United States, after arm's length negotiations conducted in the United States. It is counsel's position that the dealer sales transactions are United States resales, which constitute the basis for deductive value, as that term is defined in Section 402(d)(1) of the Tariff Act. Upon review of the facts, we find that it is not necessary to determine whether the transactions between [B] and the dealers constitute sales for exportation, because, as further discussed below, we believe that while the pricing methodology between [B] and [A] does not result in a price actually paid or payable for purposes of appraisement under transaction value, the goods may nonetheless be appraised under section 402(f) of the TAA following a modified transaction value approach. 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 ("TAA; 19 U.S.C. 1401a). The preferred method of appraisement under the TAA is transaction value, defined as the "price actually paid or payable for the merchandise when sold for exportation to the United States,'' plus certain enumerated additions. 19 U.S.C. 140la(b)(1). Counsel claims that the appraised value of the imported merchandise may be obtained under transaction value, based on the price paid by [B] to [A] at the time of entry, without any adjustment to reflect post importation price adjustments (whether increase or decrease) between the parties. Should Customs conclude, however, that adjustments to transaction value are warranted, counsel argues that all adjustments, including decreases, should be taken into account in calculating the appraised value of the goods.  Upon review of the facts, we remain of the opinion that transaction value does not exist. At the time of importation, the price of the merchandise is not "fixed". The price for the goods is arrived at pursuant to an agreed-upon methodology which includes an initial sum which may be subject to adjustments. As described in a report prepared by the Regulatory Audit Division in the Pacific Region, that retroactive adjustments were anticipated is evidenced as follows: The parties to the agreement were to cooperate in the planning process for each model of [A] vehicle to be distributed in the U.S. during each model year with the objective of providing competitively marketable vehicles for distribution by [C] and [B]. Starting approximately 36 months prior to the introductory month (importation) of the selected models there was to be a constant exchange of information which monitored the changing market and economic conditions to anticipate the pricing position in the U.S. market. The use of terms such as target pricing, estimating selling price, and pre­ tentative price within the contract ... affirms Customs' belief that all parties concerned realized that due to the nature of the automotive industry and the changing market environment that influenced prices, it would be unrealistic to attempt to attach a firm fixed price to the [A]-built vehicles at the time of importation. Clause 7 of the USDA [United States Distribution Agreement] defined the selling price of [A]-built vehicles for shared or non-shared models. The general pricing methodology by which the prices were to be determined [was] clearly stated in this section of the agreement. The fact that the parties definitely anticipated future sales price adjustments due to competitive, economic, or other factors, [is] also clearly stated in this section of the agreement ... As stated in Clause 25 of the USDA, the Distribution Advisory Committee, would have no control over, or power to affect, the pricing flexibility of the parties, or the competitive freedom of the parties. This clause emphasized the fact that managing officials did not inhibit, but rather encouraged and allowed impending pricing fluctuations to occur among the parties to the agreement. The purpose of this pricing flexibility favored by the parties was to bolster the sales volume of  [A] products and to facilitate the implementation of the contractual agreements ... That retroactive price adjustments were anticipated is additionally evidenced by a letter dated January 7, 1994 from the General Manager of (A] to the President and CEO of [B], attached to counsel's February 14, 1994 request for reconsideration, which confirms that "from the 1994 model year forward, price adjustments will no longer be retroactively applied to vehicles sold to [B] by [B) [and that] [i]n the future, price adjustments will be prospective, affecting only these vehicles which have not yet been shipped from Japan." Customs finds that the above information illustrates that the parties to the agreement(s) knew that the pricing structure took into consideration possible, if not probable, price adjustments due to changing conditions and market pressures existing in the U.S. automobile industry. Under section 152.103(a)(1), Customs Regulations (19 CFR 152.103(a) (1)), Customs does have the authority to appraise merchandise under a formula using transaction value so long as 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 have any control. HRL 543089 dated June 20, 1984. Where the future event is subject to the control of the seller or the buyer, however, the formula fails. HRL 544364 dated October 9, 1990; HRL 544944 dated May 26, 1992, and HRL 545388 dated October 21, 1994. HRL 544364 concerned the refund of certain mold charges associated with imported merchandise. The refund was contingent upon the number of items ordered by the importer. Accordingly, the amount of the refund was fully within the importer's control and, therefore, the refund arrangement did not constitute a formula under 19 CFR 152.103(a)(1). By contrast, HRL 543089, dated June 20, 1989, concerned a formula to share gains and losses on foreign exchange. The formula was pegged to a base exchange rate, gains and losses were shared equally between the buyer and seller, the formula was fixed at the time of importation, and neither party exercised control. Consequently, the formula was held to be acceptable for the purposes of transaction value. In the instant case the parties exercise control over whether and to what degree the price will be adjusted in response to changing competitive pricing conditions. This control eliminates consideration of the pricing methodology as an acceptable "formula" within the meaning of 19 CFR 152.103(a)(1).  Moreover, we note that with respect to the price of the vehicles sold to [B] which are the same or similar models as those sold by [A] to [C], there exists a condition or consideration for which a value cannot be determined, which pursuant to section 402(b)((2)(A)(ii) also precludes appraisement under transaction value. The effect of the arrangement between [C], [A] and [B] results in the sale price of one good being conditioned on the sale price of another. Such an arrangement is unacceptable under transaction value. When imported merchandise cannot be appraised on the basis of transaction value it is appraised in accordance with the remaining methods of valuation, applied in sequential order. 19 U.S.C. 1401a(a)(1). The alternative bases 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)). To our knowledge we do not have the information to appraise the merchandise under the methods set forth in 19 U.S.C. 1401a(b)­ (e). Under these circumstances, the value of the merchandise must be determined in accordance with the “fallback" method of section 402(f) of the TAA. The fallback method provides that merchandise should be appraised on the basis of a value derived from one of the prior methods reasonably adjusted to the extent necessary to arrive at a value. 19 U.S.C. 1401a(f)(1). Section 500 of the TAA is the general authority for Customs to appraise merchandise. At the time the subject entries were made, section 500(a) stated that the appraising officer shall, under the rules and regulations prescribed by the Secretary: appraise 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 As noted in the Statement of Administrative Action which was adopted by Congress with the passage of the TAA: Section 500 of the TAA authorizes 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 record keeping of either of the parties to the contract. For example, if information contained in an invoice is negated by sworn statements contained in affidavits, the appraising officer has the authority to appraise the merchandise based on the information contained in the affidavits.  As stated earlier, transaction value is eliminated as a basis of appraisement due to the fact that the pricing methodology does not result in a fixed price at the time of importation or an acceptable formula for transaction value purposes. However, under section 402(f), the merchandise may be appraised based on a reasonably adjusted transaction value. Transaction value is defined as the price actually paid or payable for the merchandise when sold for exportation to the United States. 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. 140la(b)(4)(A). Here the imported merchandise is ultimately sold to [Bl under the methodology negotiated between the parties. Although the methodology is not acceptable for purposes of appraisement under transaction value, pursuant to section 500 of the TAA, it is nonetheless, a "reasonable" means for determining the value under section 402(f) of the TAA using a modified transaction value approach and taking into account upward and downward adjustments. Although counsel maintains that the lump-sum payments resulting from the distributor margin cut were the result of an unanticipated adjustment, for the reasons previously discussed we believe that all parties nevertheless knew that adjustments were possible if not probable. Accordingly, the lump-sum adjustments are also to be included in the value of the imported merchandise. HOLDING: As set forth above, the subject merchandise should be appraised under section 402(f) of the TAA as represented by the sum of the price agreed upon between the parties plus any adjustments, including the lump-sum payments, which are effected after the date of importation. The resultant price is an acceptable basis for appraisement under section 402(f) of the TAA. Thomas L. Lobred Acting Director International Trade Compliance Division