Internal Advice; formulas; sale for export; transaction value inapplicable; deductive value

HQ W548391 February 6, 2004 VAL RR:IT:VA 548391 CRS CATEGORY: Valuation Area Port Director U.S. Customs and Border Protection Attn: Ralph Riemer, Import Specialist Br. 2 423 Canal Street New Orleans, LA 70130 RE: Internal Advice; formulas; sale for export; transaction value inapplicable; deductive value Dear Sir: This is in reply to a request for internal advice dated September 12, 2003, submitted through your office by counsel Holland & Knight on behalf of their client, [***********************] (the “importer”), concerning the appraisement of imported bananas and other fruit. We note that your office issued a pre-penalty notice [(**********************)] in connection with the appraisement of [*************] imports, but that your office and the importer agreed that the matter should be referred to this office for internal advice. We also note that the importer requested that the issues raised herein be accorded confidential treatment in accordance with section 177.2(b)(7), Customs Regulations (19 C.F.R. § 177.2(b)(7), and that a sufficient justification for this request was provided. The bracketed text herein constitutes confidential Information under 19 C.F.R. § 177.2(b)(7). Accordingly, the bracketed portions of the text will be redacted from any published versions of this decision. A public version of this decision is enclosed for your files. FACTS: The importer is a subsidiary of [********************************************* (********)] (hereinafter, the cooperative), a Colombian agricultural cooperative. The cooperative] packs, ships and markets under the [****************] (hereinafter, the “trademarked label”) over thirty percent of the bananas grown in Columbia. The importer was established to market the cooperative’s fruit under the trademarked label. The importer purchases bananas and other fruit from [********************** (*****)] (hereinafter, “Vending Ltd.”), a [*********************************] corporation, pursuant to the terms of a Fruit Purchase Agreement (hereinafter, the “agreement”) dated January 1, 1995. The agreement provides that the price of all fruit sold by Vending Ltd. to the importer is to be determined in accordance with article VII of the agreement. Title and risk of loss are transferred to the importer on a free on board, port of loading basis, with transfer deemed to have occurred when the fruit passes the ship’s rail. Article VII of the agreement provides that the price of fruit is to be determined with reference to the ultimate sales price obtained by the importer in final sales to customers in the U.S. and Canada, less certain allowable deductions. All shipments in a particular week are grouped for purposes of calculating the purchase price for that week, determined in accordance with a shipment liquidation described in section 7.2 of article VII. The basis of liquidation is the gross sales price, including sales surcharges, obtained by the importer in sales to its customers, less all costs associated with such sales, less agreed deductions, plus agreed credits. The term “Gross Sales Price” is defined in Section 7.2.a of the Agreement, which provides: The “Gross Sales Price” shall be the gross sales price charged by [*********] (including all up-charges and surcharges) on all sales from the Combined Ports in the Territory on all sales of fruit supplied by [****]. The Gross Sales Price shall be calculated separately for each type of product, and on a per box basis. All fruit shipped by [****] in a particular week shall be liquidated by [**********] at the market prices of the following week, regardless of any inventory accumulation decisions made by [**********], except that any fruit that arrives in a damaged condition shall be excluded from the normal liquidation, but shall instead be handled in accordance with the provisions of Section 8.4 of Article VIII. Such Gross Sales Price shall be calculated on a per-box basis for each type of product shall govern the purchase price for that type of product for that weekly shipment even though the Gross Sales Price charged by [*********] may be from the sale of fruit shipped the prior week and even though [**********] does not in fact sell all of the fruit shipped to [*********] during a week. It should be noted that the term “territory,” as defined in the agreement, includes Canada as well as the U.S. Furthermore, as noted above, certain costs are deducted from the gross sales price. These include trucking costs, credits for advertising, promotions, and damaged or spoiled goods, and shipping and landing costs. The latter include the actual cost of ocean freight, stevedoring, terminal charges, port charges, insurance and certain other miscellaneous costs. Agreement, article VII, section 7.2.b.3. ISSUE: The issues presented are: (1) whether transaction value is an acceptable basis of appraisement; and (2) if not, whether the pricing mechanism set forth in the Fruit Purchase Agreement constitutes an acceptable basis for a deductive value appraisement. LAW AND ANALYSIS: As you know, 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 (19 U.S.C. § 1401a; TAA). The primary basis of appraisement under the TAA is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included. 19 U.S.C. § 1401a(b)(1)(A)-(E). However, inasmuch as the transaction value method requires a sale for exportation to the U.S., there must be a bona fide sale between the buyer and seller in order for merchandise to be appraised on this basis. No single factor is determinative of the existence of a sale, but rather the particular facts and circumstances of each case. Dorf International, Inc. v. United States, 61 Cust. Ct. 604, A.R.D. 245 (1968). Customs and Border Protection (CBP) considers a sale to be a transfer of property from one party to another for a consideration. J.L. Wood v. United States, 62 CCPA 25, 33 C.A.D. 1139, 505 F.2d 1400, 1406 (1974). In the instant case, the agreement provides that the importer will purchase the fruit from Vending Ltd. and will assume title and risk of loss on a free on board, port of loading basis. However, the agreement provides further that the price of the merchandise will be determined with reference to a formula, viz., the ultimate sales price obtained by the importer in final sales to customers in the U.S. This price is unknown at the time of exportation and may reflect the price of merchandise shipped in a previous week. Moreover, the formula is within the importer’s control. Agreement, Article VIII, section 8.1. In regard to formulas, section 152.103(a), Customs Regulations, provides in pertinent part that the price actually paid or payable will be considered without reference to the method pursuant to which it is derived. As such, it “may be arrived at by the application of a formula, such as the price in effect on the date of export in the London Commodity Market.” 19 C.F.R. § 152.103(a). In HRL 542701, dated April 28, 1982, we stated that the price actually paid or payable may be determined with reference to a formula provided that the final sales price for the imported merchandise can be quantified at the time of importation. Nevertheless, in order for a formula to be acceptable for purposes of transaction value it must be based on a future event over which neither the buyer or the seller has control. Here, the buyer and seller are related and the importer has some measure of control over the formula, as represented by the ultimate sales. Moreover, the price of the goods cannot be quantified at the time of export. Indeed, the price is contingent on a future sale in the U.S. Therefore, the transaction value method is inapplicable. When imported merchandise cannot be appraised on the basis of transaction value, it is to be appraised in accordance with the remaining methods of valuation, applied in sequential order. The alternative methods of appraisement in order of precedence are: the transaction value of identical merchandise; the transaction value of similar merchandise; deductive value; and computed value. If the value of imported merchandise cannot be determined under these methods, it is to be determined in accordance with section 402(f) of the TAA. 19 U.S.C. § 1401a(a)(1). In this case, there is no information relative to the transaction value of identical or similar merchandise. The next applicable method in order of sequence is deductive value. Under this method, merchandise is appraised based on the unit price at which the merchandise concerned is sold in the U.S. in its condition as imported, at the first commercial level after importation, in the greatest aggregate quantity, at or about the date of importation. If the merchandise is not sold in the U.S. at or about the date of importation, it will be appraised under the deductive value method at the unit price at which it is sold, at the first commercial level after importation, in the greatest aggregate quantity after the date of importation, but before the close of the ninetieth day thereafter. 19 U.S.C. § 1401a(d)(2)(A)-(B). In the importer’s case, the imported merchandise is sold in its condition as imported, generally within five to seven days. Headquarters Ruling Letter (HRL) 546217, dated April 8, 1998, considered the meaning of the expression “at or about the time” in the context of section 402(c) of the TAA relative to the appraisement of asparagus. It was determined that a period of one week before or after the date of exportation of the merchandise being appraised represented a time period “about” the time of exportation. In the case of fresh produce, this period of time was one in which commercial practices and market conditions affecting the price would generally remain the same. In this regard we stated: We recognize that such determinations will vary as between different kinds of goods and attendant factors and circumstances unique to the merchandise and industry. For instance, factors influencing supply and demand, such as fluctuations in the quality, availability, and desirability of a product may have a profound impact on the price a buyer will pay for merchandise from one occasion to the next. It would be appropriate to consider such factors in any reasonable interpretation of the “at” or “about” language. HRL 546217 at 3. Similarly, it is our position that a period of one week, i.e., seven calendar days, before or after the date of importation of the merchandise being appraised, represents a time period “about” the date of importation. Furthermore, we noted that the terms should be applied in a hierarchical fashion. A sale “at” would therefore take precedence over a sale “about,” while an “about” transaction that was one day removed from the date of exportation would be preferred to one that was two days removed in time. CBP’s construction of the phrase has been accorded respect under Skidmore v. Swift & Co., 323 U.S. 134 (1944). Four Seasons Produce, Inc. v. United States, No. 99-03-00142, slip op. 01-151 (Ct. Int’l Trade 2001). Similarly, it is our position that for purposes of section 402(d), the expression “at or about” in regard to the date of importation should be applied hierarchically. However, section 402 also mandates that deductive value be based on the unit price of the greatest aggregate quantity sold. The “unit price at the greatest aggregate quantity” is the price at which the greatest number of units is sold to unrelated persons at the first commercial level after importation. Furthermore, the unit price must determined with reference to a total volume that is greater than the total volume sold at any other unit price. 19 U.S.C. § 1401a(d)(2)(B). In determining a valid unit price under the deductive value method, a number of units sufficiently representative of commercial reality must have been sold. A determination of what constitutes a number of units sufficient to establish the unit price must be made on a case-by-case basis whenever all the units of the merchandise concerned have not been sold. Statement of Administrative Action (SAA), H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 59; see also 19 C.F.R. § 152.105(h). Accordingly, for purposes of deductive value, the expression “at or about” must be interpreted with reference to the “unit price at the greatest aggregate quantity.” See, Dep’t of Treasury, Customs Valuation under the Trade Agreements Act of 1979 (Oct. 1981), at 18-19. If the greatest aggregate quantity “at” the date of importation, for example, were to exceed the greatest aggregate quantity “about” the date of importation, the unit price for deductive value would be based on the unit price prevailing “at” the date of importation. In the event that the aggregate quantities were equal, however, e.g., a hundred units were sold at the date of importation and another hundred units were sold four days later, the unit price “at” prevailing at the date of importation would take precedence over the unit price on day four. On the other hand, if the aggregate quantities of the merchandise concerned imported on a particular day about the date of importation exceed the aggregate quantities imported at the date of importation, then deductive value should be based on the unit price in sales of the merchandise concerned “about” the date of importation. As set forth in section 402(d)(3)(A) of the TAA, the unit price established under section 402(d)(2) will be reduced by certain enumerated amounts, including amounts equal to any commissions paid or agreed to be paid, or the addition usually made for profit and general expenses. The amount for profit and general expenses will be determined in connection with sales in the U.S. of imported merchandise of the same class or kind. It will be based on the importer’s profit and general expenses unless these are inconsistent with those usually reflected in sales in the U.S. of merchandise of the same class or kind. The unit price will also be reduced by amounts equal to the actual costs and associated costs of transportation and insurance incurred with respect to international shipments, the usual costs and associated costs of transportation and insurance from the place of importation to the place of delivery, and customs duties and other Federal taxes currently payable. 19 U.S.C. § 1401a(d)(3)(A). Counsel assets that the pricing mechanism set forth in the Fruit Purchase Agreement is an acceptable basis for determining the appraised value of the imported merchandise under the deductive value method. However, while there are similarities between the pricing structure set forth in the agreement and the deductive value method, there are nevertheless certain differences that would preclude the use of the prices established pursuant to the agreement for purposes of determining the appraised value of the imported goods. For example, the agreement provides that the price of the imported fruit will be based on the ultimate sales price as determined pursuant to a “shipment liquidation” of all shipments in a particular week. The basis of the liquidation is the “gross sales price,” i.e., the gross sales price charged by the importer on sales in the U.S. and Canada of fruit supplied by Vending Ltd. In contrast, section 402 of the TAA is concerned only with the value of merchandise imported into the U.S. Prices based on sales to Canada are therefore inconsistent with section 402. In addition, the price of the imported merchandise as determined under the agreement is based on the per-box, gross sales price of each particular type of product. This is inconsistent with the deductive value method. Under section 402(d), the deductive value of imported merchandise is based, e.g., on the unit price at which the merchandise concerned is sold in the greatest aggregate quantity at or about the date of importation. 19 U.S.C. §§ 1401a(d)(2)(A). Consequently, the merchandise concerned should be appraised in accordance with the relevant provisions of section 402(d) of the TAA as determined by the cognizant import specialist. However, in regard to the manner in which the deductive value of the merchandise concerned is determined, we note that under section 402(d), the appraised value may be determined with reference to the merchandise being appraised, identical merchandise, or similar merchandise, and that no one type need have priority over the other. [W]hile Customs generally concerns itself with the sale of the goods being valued, it is not precluded, based on the information available at or about the date of importation, from utilizing on-going sales of identical or similar goods for appraisement. Customs is not required to wait until the instant goods actually are sold or the necessary information concerning such sales is made available. Assuming such prices otherwise fit the criteria and definitions set forth in section 402(d), they may serve as appropriate bases for appraisement. HRL 546602 dated January 29, 1997. Insofar as information is available relative to particular types and qualities of fruit, it would be appropriate to use the price at which the greatest aggregate quantity of the merchandise concerned is sold at or about the date of importation. HOLDING: In conformity with the foregoing, transaction value is not an acceptable basis of appraisement. Merchandise imported by the importer should be appraised under the deductive value method on the basis of the unit price at which the merchandise concerned is sold to unrelated persons in the greatest aggregate quantity at the first commercial sale after importation. The gross sales price established under the agreement may not be used for purposes of determining deductive value. This decision should be mailed to the internal advice applicant no later than sixty days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to CBP personnel and to the public via the CBP Home Page on the World Wide Web at www.cbp.gov, through the Freedom of Information Act, and by other methods of public distribution. Sincerely, Virginia L. Brown Chief, Value Branch Encl.