HQ 0544491 - Appraisement of Ethylene Glycol Subject to an "Exchange Savings Agreement"; Internal Advice 13/90 - United States International Trade Commision Rulings

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HQ 544491
October 29, 1990
VAL CO:R:C:V 544491 ML

CATEGORY: VALUATION

District Director

RE: Appraisement of Ethylene Glycol Subject to an "Exchange Savings Agreement"; Internal Advice 13/90

Dear Sir:

This is in response to a request for internal advice, dated February 20, 1990 (APP 6-05:SE:B:B:CO:D ECE), regarding the appraisement of Ethylene Glycol exported to the United States by -the manufacturer under an "exchange savings agreement."

FACTS:

------- (hereinafter referred to as the "importer") imports ethylene and diethylene glycol for sale in the United States. The importer imports glycol from their own plant in ---X-------- and from various other producers of glycol. One of these other manufacturers is the manufacturer--------. (hereinafter referred to as the "manufacturer") which has a manufacturing plant in Fort glycol from the manufacturer since 1987 and has filed approximately 66 entries in Blaine, Washington, with an average entered value of approximately $------.00 It should be noted that the importer also enters glycol through the port of Los Angeles.

The importer and manufacturer have entered into an "exchange savings agreement." The key to this agreement involves the calculation of a duty and freight savings amount realized when the importer, through his ------X------ affiliate, supplies glycol to the manufacturer's ----Z--- affiliate and in-turn, the manufacturer supplies product to the importer's United States plant. This agreement allows both parties to save money. By approximately $15/ton less expensive than shipping to the same point in --Z-- from the manufacturer's landlocked -----Y-- production facility. Shipping costs are also lower from the manufacturer to the importer, than from the importer's ---X- affiliate to himself in the United States. Additionally, --X-- origin merchandise into --Z-- enters duty free under --Z's-- Generalized System of Preferences (GSP), whereas, merchandise from --Y--- is afforded no such duty free treatment.

The invoices submitted on entries at Blaine are pro forma invoices. The importer pays the manufacturer based on the individual commercial invoices. The terms of sale are C & F with freight charges averaging $--.00 U.S. per metric ton, with the importer making a final annual adjustment to allow for any differences in pricing during each years shipments. The importer and manufacturer have agreed that pricing will be the average annual price (the total dollar value of all of the manufacturers' ---Z---- affiliates' sales in a calendar year divided by the tonnage sold in that year and converted to a FOB manufacturers' ---Y---- plant value).

The importer requests that Customs leave the entries open for a year, as the prices the manufacturer charges him on a shipment by shipment basis are provisional, estimated prices. These prices include partial allowances for savings expected to be realized during the year, and in no way are related to the specific transaction covered by a given invoice. They are incorporated in an invoice merely as an accounting convenience. The importer requests that the calculated savings arrived at at the end of the year, be deducted from the invoiced value of the shipments from the manufacturer.

ISSUE:

Whether transaction value is the appropriate method of appraisement for merchandise that is entered using a provisional price, which is subsequently modified after importation pursuant to an "exchange savings agreement?"

LAW AND ANALYSIS:

The primary basis of appraisement is transaction value. Transaction value is defined as the "price actually paid or payable" for imported merchandise when sold for exportation to the United States, plus certain enumerated additions. This is more specifically defined in section 402(b)(4)(A)) of the Trade Agreements Act of 1979, (TAA; 19 U.S.C. 1401a(B)(4)(A)), as the following:

The term "price actually paid or payable" means the total payment... made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.

The importer contends that while provisional (estimated) prices are used for entries made prior to an annual reconciliation between the importer and the manufacturer, negotiated prices do exist for these sales. Prices which accurately reflect the transaction value of the merchandise.

The Statement of Administrative Action indicates that transaction value may be established although the "price actually paid or payable" is not quantified, if there is a fixed formula or methodology for arriving at a specified amount. Section 152.103(a)(1) of the Customs Regulations (19 CFR 152.103(a)(1)), provides that the "price actually paid or payable":

...will be considered without regard to its method of derivation. It may be the result of discounts, or negotiations, or may be arrived at by the application of a formula... .

This provision was interpreted in TAA #47 dated April 28, 1982. That ruling held that if the "price actually paid or payable" is determined pursuant to a formula, a firm price need not be known or ascertainable at the time of importation. However, it is necessary for the formula to be fixed at the time of importation so that a final sales price can be determined at a later time. TAA #47 goes on to explain how transaction value may be inappropriate.

The importer believes that the price is determined pursuant to a formula. We do not believe that to be the case. Section 402(b)(2)(A) of the TAA provides, in relevant part:

"The transaction value of imported merchandise determined under paragraph (1) shall be the appraised value of that merchandise for the purposes of this act only if... (ii) the sale of, or the price actually paid or payable for, the imported merchandise is not subject to a condition or consideration for which a value cannot be determined with respect to the imported merchandise."

While it is true that a formula may establish an appropriate basis for determining the "price actually paid or payable", transaction value can only be used if there is no condition or consideration for which a price cannot be determined. Simply stated, the importer's "exchange savings agreement" with the manufacturer subjects the merchandise under appraisement to a condition or consideration for which a value cannot be determined. Interpretative note 1 found in section 152.103(k)(2)(i), Customs Regulations (19 CFR 152.103(k)(2)(i)) relates a situation where the seller establishes the price of the imported merchandise on condition that the buyer also will buy other merchandise in specified quantities. Transaction value according to Interpretative note 2 will also be unacceptable if the price of the imported merchandise is dependent upon the price or prices at which the buyer of the merchandise sells other merchandise to the seller of the merchandise. These are examples of a consideration or condition for which transaction value will not be accepted as the appraised value.

It is our position that the examples cited above establish the use of transaction value to be inappropriate in the instant case. Therefore, the next statutory method of appraisement must be considered.

HOLDING:

In light of the foregoing, transaction value is inappropriate because the agreement between the parties subjects the merchandise to a "condition... for which a value cannot be determined with respect to the imported merchandise," within the meaning of section 402(b)(2)(A)(ii).

Sincerely,

John Durant, Director
Commercial Rulings Division

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