Application for Further Review of Protest number 1601-95-100068; Nissho Iwai American Corp. v. United States, 786 F. Supp. 1002 (CIT 1992) rev'd 982 F.2d 505 (Fed. Cir. 1992); Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993) HRL 545434; 19 CFR §152.103(I)

HQ W546449 JAN 6 1998 RR:IT:VA W546449 DEC CATEGORY: VALUATION Port Director United States Customs Service 200 East Bay Street Charleston, South Carolina 29401 RE: Application for Further Review of Protest number 1601-95-100068; Nissho Iwai American Corp. v. United States, 786 F. Supp. 1002 (CIT 1992) rev'd 982 F.2d 505 (Fed. Cir. 1992); Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993) HRL 545434; 19 CFR §152.103(I) Dear Director: This is in response to the Application for Further Review (AFR) of protest number 1601-95-100068 filed by counsel on behalf of Fleissner Inc. on March 24, 1995, concerning the appraisement of certain machines referred to as "draw lines" and parts of draw lines. Counsel made a supplemental submission dated July 11, 1996. We regret the delay in responding. FACTS: Four entries are the subject of the protest/AFR, involving certain machinery imported by Fleissner Inc. from its related German company, Fleissner GmbH (GmbH). The circumstances surrounding these importations were addressed in a related penalty case (Customs Headquarters File 659932) involving Fleissner Inc. The following facts were ascertained from the information supplied in connection with the penalty case. Fleissner Inc., a South Carolina corporation, is the importer of record for textile dyeing and finishing machinery manufactured by a German company, Fleissner GmbH (hereinafter GmbH). Both GmbH and Fleissner Inc. are subsidiaries of Fleissner AG, a Swiss corporation. The imported merchandise is built to customer specifications. Because Fleissner Inc. sells only customized products in response to specific orders, it does not maintain an inventory of machinery in the U.S. However, Fleissner Inc. does maintain a limited inventory of replacement parts for sales support. Fleissner Inc. also provided after sales service and support. -2 Orders for merchandise are solicited by Fleissner Inc.'s sales staff. The U.S. customer confirms its orders by submitting a purchase order to Fleissner Inc., which Fleissner Inc. then forwards to GmbH. Counsel claims that the U.S. customer deals with Fleissner Inc., not with GmbH. U.S. buyers make payments to Fleissner Inc.'s Deutsche mark account with the Bank fuer Gemeinswirtshaft AG (BFG) in Offenbach, Germany. Fleissner Inc.'s account with BFG is controlled by Mr. Gerhold Fleissner, who is Fleissner Inc.'s president and a manager of GmbH. Counsel claims that the U.S. customers made payments to Fleissner Inc. in marks to a German bank in order to protect against currency risk. Counsel has included contract confirmations, purchase orders from a Fleissner Inc. customer, invoices between Fleissner Inc. and GmbH, cash receipts journal and account ledger sheets from Fleissner Inc, Fleissner Inc.'s bank deposit receipts, and records of payment from Fleissner Inc. to GmbH. After the merchandise is manufactured, GmbH ships it to the U.S. customer. The terms of sale on the invoices that GmbH prepares for Fleissner Inc. vary, but they often show an ex works price with charges added for inland freight and packing to arrive at an FOB price and charges for international freight and insurance to the U.S. port of importation to arrive at a total CIF price for the imported merchandise. Thus, counsel states that the payment to GmbH includes foreign inland freight, international transportation and insurance, U.S. duty and transportation charges. According to counsel, title and risk of loss passed from Fleissner Inc. to the final customer in the United States at the port of entry in the U.S. Your office appraised the imported merchandise using transaction value based on the sale between Fleissner Inc. and its U.S. customers. Fleissner Inc. contends that the merchandise should have been based on the transactions between it and GmbH. Because Fleissner Inc. and GmbH are related parties the issue arises whether the sales between these parties could serve as the basis of appraisement. Counsel contends that the relationship between parties did not influence the price of the imported merchandise. In support of this position, counsel has provided a financial statement regarding the profits that GmbH earned in its sales with Fleissner Inc. in 1991 and the profits GmbH earned as a whole earned in 1991. Counsel seeks a finding that the subject merchandise be appraised in accordance with Nissho lwai American Corp. v. United States, 786 F. Supp. 1002 (CIT 1992) rev’d. 982 F.2d 505 (Fed. Cir. 1992). More specifically, it claims that transaction value should be based on the lower price that Fleissner Inc. paid to the GmbH, and not the price the U.S. purchaser paid to Fleissner Inc.-3 ISSUE: Should the imported merchandise have been appraised using transaction value based on sales between the related parties, Fleissner Inc. and GmbH? 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 is transaction value, which is defined as the "price actually paid or payable for merchandise when sold for exportation to the United States," plus certain enumerated additions. For purposes of determining transaction value in appraising imported merchandise, a sale for exportation to the United States must take place at some unspecified time prior to the exportation of the goods. Headquarters Ruling Letter (HRL) 545434, dated May 31, 1994. Counsel contends that the arrangement between Fleissner Inc. and GmbH results in two independent sales, one from the foreign manufacturer (GmbH) to the U.S. seller (Fleissner Inc.), and one from Fleissner Inc. to the ultimate U.S. purchaser. Accordingly, counsel argues that Nissho Iwai American Corp. v. United States, 786 F. Supp. 1002 (CIT 1992) rev'd 982 F.2d 505 (Fed. Cir. 1992) controls. In Nissho Iwai and Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993), the U.S. Court of Appeals for the Federal Circuit and the Court of International Trade, respectively, addressed the proper dutiable value of merchandise imported pursuant to a three-tiered distribution arrangement involving a foreign manufacturer, a middleman, and a U.S. purchaser. In both cases the middleman was the importer of record. 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 Iwai, provide evidence that establishes that at the time the middleman 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." If the importer is able to establish by adequate evidence that a bona fide sale has occurred between the middleman and the manufacturer, the Nissho Iwai decision is relevant in determining whether transaction value is appropriately based on a manufacturer's price, rather than a middleman's price. Bona Fide Sale and Clearly Destined for Export to the United States In a penalty decision, HQ 659932, dated April 2, 1997, involving the same parties and similar transactions, a determination was made that the transactions between Fleissner Inc. and GmbH were bona fide sales. Under the analysis followed in the penalty decision, we conclude that there was a sale for exportation to the United States -4 between Fleissner Inc. and GmbH. This analysis is based on the commercial documents which support the existence of sales between Fleissner Inc. and GmbH in that the parties acted as buyer and seller. Fleissner Inc. issued purchase orders to GmbH for specific custom-made merchandise and GmbH in turn issued invoices for the merchandise. These commercial documents refer to GmbH as the seller and Fleissner Inc. as the buyer. Moreover, payments were made from Fleissner Inc. to GmbH. Arm's-Length Transaction Pursuant to section 402(b)(2)(A) of the TAA, transaction value is acceptable only in certain circumstances, e.g., where the buyer and seller are not related, or where related, the relationship does not influence the price actually paid or payable. Here, the parties are related pursuant to section 402(g)(1)(G) of the TAA in that Fleissner Inc. and GmbH are under the common control of Fleissner AG. 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. § 1401 a(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 to be acceptable. In this respect, Customs will examine the manner in which the buyer and seller organize their commercial relations and the way in which the prices in question were 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(I)(1)(ii). In addition, Customs 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 in sales of merchandise of the same class or kind. 19 CFR §152.103(l)(1)(iii). Alternatively, a transaction value between related parties is acceptable if it closely approximates, inter alia, the deductive or computed value "test values" for identical or similar merchandise. The term "test values" refers to values previously determined pursuant to actual appraisements of imported merchandise. Thus, for example, a computed value calculation can only serve as a test value if it represents an actual appraisement of imported merchandise determined pursuant to section 402(e) of the TAA e.g. HRL 543568, dated May 30, 1986. There are no previously determined deductive or computed values with respect to merchandise imported by Fleissner Inc. Consequently, test values cannot be used to validate transaction value. -5 As noted above, transaction value is acceptable 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 as sales of merchandise of the same class or kind. Counsel has provided a financial statement prepared by GmbH's accountant, showing the profits that GmbH earned in its sales to Fleissner Inc. for the contracts covered under this protest and the overall profits that GmbH earned for 1991. Although counsel claims that this documentation supports the conclusion that "the profit recognized in the transactions under review is reflective of the overall profit recognized by the company as a whole in sales of machinery of the same general class or kind," we believe that information provided is not adequate to support counsel's contention. We note that the statement furnished is only a short form profit and loss statement, which is not detailed enough to reach any definite conclusions. To make an accurate assessment of the cost and profits of GmbH, the actual profit and loss statement must be reviewed. Also, evidence of the producer's costs associated with the imported merchandise was not provided. Finally, no specifics regarding a comparison of the imported merchandise with other merchandise sold by the producer are provided other than the statement that GmbH produces and sells machinery in both textile and fiber branches and that all three transactions at issue were made in the branch of fiber-machinery. The information presented fails to demonstrate that merchandise on which the comparison is based is of the same class or kind as the imported merchandise. Based on the above, we conclude that the financial information furnished is not sufficient to establish that the price that GmbH charged Fleissner Inc. 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 in sales of merchandise of the same class or kind. Thus, the requirements for establishing the acceptability of transaction value based on the related party sale as set forth in 19 CFR § 152.103(l)(1)(iii) have not been met. No other evidence regarding the circumstances of the sale was submitted. Accordingly, we find that Fleissner Inc. has not demonstrated that the price the importer paid was not influenced by its relationship with GmbH. Since Fleissner Inc. has not demonstrated that the relationship with GmbH did not influence the price actually paid or payable, transaction value based on the related party sale is inapplicable.  HOLDING: You are directed to deny the protest. Fleissner Inc. has not established that price of imported merchandise was not influenced by its relationship with GmbH. Therefore, transaction value based on the sales between Fleissner Inc. and GmbH is not an acceptable basis of appraisement.  -6 A copy of this decision with the Form 19 should be sent to the Protestant. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to the Protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision, the office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS, and to the public via the Diskette Subscription Service, the Freedom of Information Act and other public access channels. Sincerely, Acting Director, International Trade Compliance Division