Transaction value determination; Three-tiered distribution arrangement

HQ W574884 July 16, 2001 RR:IT:VA W547884 EK CATEGORY: Valuation Faith S. Diehl, Chief Counsel Pennsylvania Liquor Control Board Harrisburg, Pennsylvania 17124-0001 RE: Transaction value determination; Three-tiered distribution arrangement Dear Ms. Diehl: This is in response to your letter of December 15, 2000, requesting a ruling on behalf of the Pennsylvania Liquor Control Board, hereinafter referred to as the PLCB. As you indicate, the PLCB is in charge of the issuance of liquor licenses and the operation of state liquor stores. As part of its operations, the PLCB imports and sells various wines and spirits from foreign wineries and manufacturers. FACTS: You state that the PLCB is the designated importer of record in the transactions in question. The alcoholic products in questions are imported through a three-tiered distribution arrangement. The PLCB requests orders from various middlemen who in turn place orders with foreign manufacturers for the products ordered. You have provided purchase orders, domestic and foreign invoices and entry summaries for the following product manufacturers: Moet & Chandon: The PLCB issues a purchase order to Schieffelin & Somerset Co. (S & S) for Moet & Chandon products. The shipping terms are FOB France. S & S purchases the products from Moet & Chandon and Moet & Chandon invoices S & S. S & S invoices the PLCB separately. The terms of sale are FCA Mardeuil. The products are shipped directly to the PLCB via a foreign consolidator. Hennessy: The PLCB issues a purchase order to S & S for Hennessy products, again the shipping terms are FOB France. S & S purchases the products from Hennessy. Hennessey invoices S & S and S & S invoices the PLCB separately. These products are shipped to the PLCB via a foreign consolidator. R & A Bailey, LTD.: The PLCB issues a purchase order UDV North America, Inc. (UDV) for Bailey’s products. The shipping terms are FOB Dublin. UDV purchases the products from Bailey’s. Bailey’s invoices UDV and UDV invoices PLCB separately. The terms of sale are FOB, Dublin. The products are shipped to PLCB via a foreign consolidator. The Absolut Company: The PLCB issues a purchase order to Seagram America”, Inc. (Seagram) for Absolut products. The shipping terms are FOB Philadelphia. Seagram purchases the products from Absolut and Absolut invoices Seagram. Seagram invoices the PLCB and the products are shipped to the PLCB through Seagram, FOB Philadelphia. Santa Emiliana S.A.: The PLCB issues a purchase order to Banfi Vitners (Banfi) for Walnut Crest wine products, the shipping terms are FOB Philadelphia. Banfi purchases the products from Santa Emiliana. Santa Emiliana invoices Banfi and Banfi invoices the PLCB separately. The products are shipped to the PLCB through Banfi, FOB Philadelphia. Vina Concha & Toro S.A.: The PLCB issues a purchase order to Banfi for wine products. The shipping terms are FOB Philadelphia. Banfi purchases the products from Vina Concha y Toro. Vina Concha invoices Banfi and Banfi invoices the PLCB separately. These wine products are shipped to the PLCB via a foreign consolidator. Lugny: The PLCB issues a purchase order to Seagram for wine products. The shipping terms are FOB Bordeaux, France. Seagram purchases the products from Lugny. Lugny invoices Seagram and Seagram invoices PLCB separately. These products are shipped to the PLCB via a foreign consolidator. Perrier-Jouet: The PLCB issues a purchase order to Seagram for champagne products, the shipping terms are FOB Bordeaux, France. Seagram purchases the products from Lugny. Lugny invoices Seagram and Seagram invoices the PLCB separately. The products are shipped to the PLCB via a foreign consolidator. G.H. Mumm & Co.: The PLCB issues a purchase order to Seagram for wine products, the shipping terms are FOB Bordeaux, France. Seagram purchases the products from G.H. Mumm and G.H. Mumm invoices Seagram and Seagram invoices the PLCB separately. The products are shipped to the PLCB via a foreign consolidator. Barton & Guestiar: The PLCB issues a purchase order to Seagram for wine products, the shipping terms are FOB Bordeaux, France. Seagram purchases the products from Barton & Guestiar who then invoices Seagram. Seagram invoices the PLCB separately. These products are shipped to the PLCB via a foreign consolidator. You indicate that the PLCB issues purchase orders to these various middlemen who in turn place the orders with the foreign manufacturers for the products at issue. The foreign manufacturers issue invoices to the middlemen, and the middlemen issue separate invoices, with a significantly higher price, to the PLCB. The PLCB pays the middlemen directly. You state that the commercial invoices, the invoices between the foreign manufacturers and the middlemen, clearly designate the middleman as the “buyer” and the manufacturer as the “seller” in the transactions. The invoices between the middleman and the PLCB designate the middleman as the “seller” and the PLCB as the “buyer” in the transactions. The shipping terms are either FOB foreign location or FOB Philadelphia. A consolidator is used with respect to the merchandise that is FOB foreign location. The FOB Philadelphia merchandise is shipped to the PLCB via the middleman, the PLCB or its warehouses being the final delivery point. You indicate that the middlemen are free to sell the purchased merchandise to other buyers and that the middlemen are not related to the foreign manufacturers. ISSUE: Whether transaction value should be based upon the sales between the PLCB and the middlemen, or the sales that occur between the foreign manufacturers and the middlemen. 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 primary 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. In Nissho Jwai American Corp. v. United States, 982 F. 2d 505 (Fed. Cir. 1992) (“Nisho lwai”) and Synergy Sport lntemational, Ltd. v. United States, 17 C.l.T. 18, (1993), the U.S. Court of Appeals for the Federal Circuit and the Court of International trade, respectively, addressed the proper sale upon which to base transaction value in 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. Both courts held that the manufacturer’s price, rather than the middleman’s price, was valid as long as the transaction between the manufacturer and the middleman fell within the statutory provisions for valuation. The courts explained that in order for a transaction to be viable under the valuation statute, it must be a sale, negotiated at “arm’s length” free from any non-market influences and involving goods “clearly destined for export to the United States.” In our rulings, we have consistently stated that in fixing the appraisement of imported merchandise, Customs presumes that the price paid by the importer is the basis of transaction value. In your request, you indicate that the PLCB is the importer of record. In order for the sales to the middlemen from the foreign manufacturers to be used in determining the transaction value, the presumption indicated must be overcome. To rebut this presumption, the merchandise must be clearly destined for the United States at the time of purchase, and the sale must be on an arm’s length basis. In this case, based upon your descriptions and documentation submitted, it appears that the transactions between the manufacturers and the middlemen are in fact bona fide sales. Also, you indicate that the foreign manufacturers and the middlemen are not related parties. However, our research has indicated that in some instances, the companies are in fact related. Schieffelin & Somerset, the middleman in at least two instances described above, is co-owned by Moet/Hennessey/LouisVuitton (LVMH) and Diageo. If the parties are related pursuant to section 402(g) of the T AA, then the price actually paid or payable between the related parties may be used if: (1) an examination of the circumstances of the sale between the buyer and the seller indicate that the relationship did not influence the price actually paid or payable or, (2) if the transaction value of the imported merchandise closely approximates: the transaction value of identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United States; or (ii) the deductive value or computed value for identical merchandise or similar merchandise. However, in order for these sales to form the basis of transaction value, they must also be “clearly destined for export to the United States”. In your submission, you have not provided information regarding the acceptability of the price in a related party transaction. Therefore, we cannot conclude that the all of the foreign manufacturers deal with the middlemen on an “arm’s length basis”. In addressing whether the goods are “clearly destined” to the United States, you indicate that the middlemen are free to sell the purchased merchandise to other buyers. Although this is an indication that the middlemen do in fact “purchase” the merchandise from the manufacturer, and subsequently “sell” to an ultimate purchaser, it is also evidence that the merchandise may be subject to a sale to a purchaser other than the PLCB. The merchandise may be diverted and not sold to the PLCB, but rather sold to a purchaser in another country. In addition, in eight out of the ten transactions described in your submission, the merchandise is not shipped directly to the PLCB but is shipped to a foreign consolidator. It is not clear how long the foreign consolidator possesses the merchandise. Based on these factors, we conclude that the merchandise is not clearly destined for export to the United States when it is purchased by the middlemen. It is our conclusion that the sale for exportation for purposes of determining transaction value is that between the PLCB and the middlemen. The PLCB is the importer of record in these transactions, and the presumption that the sale to the importer of record is the sale that is used in determining transaction value has not been rebutted. HOLDING: The transaction value of the imported merchandise should be based on the price actually paid or payable for the imported merchandise of the sales between the PLCB, the importer of record, and the middlemen. Sincerely, Virgina L. Brown, Chief Value Branch