Transaction value; three-tiered distribution system; Nissho Iwai; middleman sale represents a valid transaction value

HQ W545979 August 24, 1995 VAL 545979 CRS CATEGORY: Valuation Mr. Charles L. Crowley Mr. James A. Geraghty Deloitte & Touche LLP Two World Financial Center New York, NY 10281-1414 RE: Transaction value; three-tiered distribution system; Nissho Iwai; middleman sale represents a valid transaction value Dear Messrs. Crowley and Geraghty: This is in reply to your letter of April 27, 1995, submitted on behalf of your client, Nikon
Inc., concerning the appraised value of merchandise purchased pursuant to a three-tiered distribution system. FACTS:
Nikon, Inc. ("INC"), the importer of record, orders cameras, lenses and other merchandise from its Japanese parent company, Nikon Corporation ("CORP"), which acts as middleman in this transaction. CORP does not fill these orders from inventory but, instead, contracts for the production of the merchandise with third parties (the "manufacturers") in various countries outside Japan, including Malaysia, Indonesia and South Korea. In connection with these transactions, CORP furnishes the manufacturers with certain molds, prototypes and designs used in the production of the imported merchandise. CORP and the manufacturers are not related.
A typical transaction is as follows. INC submits a purchase order to CORP for specific items of merchandise. In turn, CORP generates a second purchase order for the same merchandise and submits it to one of the manufacturers. Once the manufacturer confirms the order with CORP, the latter confirms the order with INC and arranges for shipment dates. Product labels bearing INC's name are affixed to the merchandise. The merchandise is packed and shipped directly from the manufacturers to INC. Product warranties specific to the U.S. market are enclosed with each item of merchandise. Moreover, certain merchandise destined for markets other than the U.S. will have different style numbers than the merchandise which is sold to the U.S. Thus, a style number used for cameras sold for export to the U.S. would not be used in respect of cameras sold to other markets. ISSUE: The issue presented is whether the imported merchandise sold by the manufacturers' is clearly destined for export to the United States such that the manufacturers' price to the middleman constitutes a viable 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 (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 thereto, including the value, apportioned as appropriate, of any assist. 19 U.S.C. § 1401a(b)(l). However, imported merchandise will be appraised under the transaction value method only if, inter alia, the buyer and seller are not related, or if related, transaction value is acceptable under section 402(b)(2)(B) of the TAA. In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit reviewed the standard for determining transaction value when there is more than one sale which may be considered to be for exportation to the United States. In so doing, the court stated that Customs' former policy of basing transaction value on the sale which most directly caused the merchandise to be exported to the U.S. proceeded from an invalid premise. Nissho Iwai, 982 F.2d 505, 511. Instead, the court reaffirmed the principle ofE.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that the manufacturer's price, rather than the middleman's price, is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. In reaffirming the McAfee standard, the court stated that in a three-tiered distribution system, the manufacturer's price constitutes a viable transaction value when the goods are clearly destined for export to the United States, and the manufacturer and the middleman deal each other at arm's length, absent any non-market influences that affect the legitimacy ofthe sales price. Id. at 509. See also, Sport International, Ltd. v. United States, 17 C.I.T Slip op. 93-5 (Ct. Int'l. Trade January 12, 1993). As a general matter in situations of this type, Customs presumes that the price paid by the importer is the basis of transaction value. However, in order to rebut this presumption the importer must, in accordance with the court's standard in Nissho, provide evidence that establishes that at the time it purchased, or contracted to purchase, the imported merchandise, the goods were "clearly destined for export to the United States" and that the manufacturer and middleman dealt with each other at "arm's length." Customs has held that it is the importer's responsibility to demonstrate that the standard set forth in Nissho and Synergy has been met. E g., Headquarters Ruling Letter (HRL) 545144 dated January 19, 1994. In the instant case you state that the manufacturers and CORP, the middleman, are unrelated, therefore, the only standard that must be met in order to overcome the presumption is whether the merchandise was clearly destined for exportation to the U.S. in accordance with Nissho. You have submitted a copy of the warranty that accompanies all merchandise purchased by INC for the U.S
market. The warranty applies only to merchandise sold in the U.S. and is enclosed with all products produced by the manufacturers and sold to INC. Therefore, the warranty supports your contention that the merchandise is clearly destined for export to the U.S. Furthermore, your description of the subject transaction, viz., the manner in which the merchandise is ordered, also supports a finding that the merchandise is clearly destined for export to the U.S. However, as noted above, it is the importer's responsibility to show that the price is acceptable under the standard set forth in Nissho Iwai and Synergy While the information presented in regard to the first sale supports your contention that the merchandise is clearly destined for export to the U.S. at the time it is sold by the manufacturers to the middleman, CORP, sufficient documentation must be presented at the time of entry in order for the price paid by the middleman to be accepted as the basis of transaction value. To this end, purchase orders, commercial invoices, proof of payment (e.g., letters of credit, wire transfer advices) and any other pertinent documentation relating to both the manufacturer-middleman sale, as well as the middleman-importer sale, should be submitted at the time of entry. Assuming the documentation supports the information submitted in your ruling request, it is our position that the merchandise is clearly destined for export to the U.S. such that the sale from the manufacturers to CORP constitutes the appropriate basis of appraisement. Finally, you state that the middleman,/buyer provides the manufacturer/seller with certain items used in the production of the imported merchandise- As noted above, transaction value is defined as the "price actually paid or payable for the merchandise when sold for exportation to the United States," plus certain enumerated additions, including the value, apportioned as appropriate, of any assist. 19 U.S.C. § 1401a(b)(l)(C). The term "assist" is defined by section 402(h)(l)(A) of the TAA as being that which is "supplied directly or indirectly, and free of charge or at a reduced cost, by the buyer of imported merchandise for use in connection with the production or sale for export to the United States" of imported merchandise. Assists include: tools, dies, molds and similar items used in the production of the imported merchandise; and engineering, development, artwork, design work, and plans and sketches, undertaken elsewhere than in the U.S., that are necessary for the production of the imported merchandise. 19 U.S.C. § 1401a(h)(l)(A). In the instant case, the middleman/buyer supplied the manufacturer/seller, free of charge, with molds, prototypes and design work used in the production of imported cameras. While the ruling does not specifically address this aspect of the transaction, we note that the transaction value of the imported merchandise should include the value of any assists determined in accordance with section 152.103(d), Customs Regulations (19 C.F.R. § 152.103(d)). HOLDING
Based on the information presented, the imported merchandise is clearly destined for export to the United States such that the manufacturers’ price to CORP constitutes a viable transaction value under section 402(b)(l) of the TAA.
Sincerely, John Durant, Director Commercial Rulings Division