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HQ 544835

June 15, 1994

VAL-CO:R:C:V 544835 GG


District Director
U.S. Customs Service
300 Second Avenue S.
P.O. Box 789
Great Falls, Montana 59405

RE: Application for further review of Protest No. 3303-91-100022; transaction value; sale for exportation Dear Sir:

This is in response to the application for further review of the protest referenced above. We regret the delay in responding.


Novell, Inc. ("Novell"), a U.S. corporation, is a manufacturer of software for Local Area Network ("LAN") applications. During the period in question, Novell combined its LAN software with the necessary computer hardware to create a complete LAN system. Novell does not produce hardware systems but purchases them from hardware suppliers.

On October 17, 1985, Novell entered into an agreement with a California-based developer and supplier of computer hardware systems, Micro Five Corporation ("MFC"), to purchase MFC computer hardware. Under the agreement, which was labelled an "OEM" (original equipment manufacturer) agreement, Novell agreed to resell the MFC hardware under its own private brand name after adding constituent parts of sufficient value. The price of each unit under the agreement was initially set at $2000.00; however, this was amended when the agreement was signed to allow Novell to be assessed a lower "Favored Nation" price.

Before entering into its agreement with Novell, MFC had, on July 31, 1985, signed a separate agreement with a Korean manufacturer of hardware, Samsung Electronics ("Samsung"). Under this agreement, Samsung was to manufacture the Series 5000 microcomputer, which had been developed by MFC, exclusively for MFC. The price charged by Samsung to MFC would be in U.S. dollars on an FOB Korea basis, and would be reviewed periodically to take into account cost of materials, changes in specifications, and design changes for cost alterations. MFC would provide Samsung with technical information and manufacturing training. In addition, Samsung was granted a non-exclusive license to sell the products in Asia. Samsung also agreed that at MFC's request it would ship future orders directly to OEM customers of MFC. In such instances, Samsung would "assume the inventory risk associated with deliveries to these customers".

The MFC/Novell OEM agreement contained no reference to Samsung and no requirement that the computer hardware Novell purchased from MFC be manufactured by Samsung. However, the computers sold by MFC to Novell were manufactured for MFC by Samsung. The terms of sale between MFC and Novell were FOB Korea.

Both agreements were governed by the laws of the State of California.

Novell, the importer of record, made three entries of computers manufactured by Samsung between October 1986 and October 1987. MFC invoiced Novell using an FOB Korea unit price of $1350.00. Commercial invoices issued by Samsung several days prior to the issuance of the MFC/Novell invoices, listed Samsung as the seller, MFC as the buyer, and Novell as the ultimate consignee. The Samsung/MFC invoices used the lower "Most Favored Nation" price, which was $1150.00, $1121.00, or $1154.OO FOB Korea, depending on the entry. The entered value was taken from the Samsung/MFC invoices and therefore reflected the lower Samsung/MFC prices.

Customs appraised the merchandise and liquidated the entries on January 11, 1991 at $2000.00 per unit. It also reclassified the merchandise from item A676.15, Tariff Schedules of the United States (TSUS), free of duty, to item 676.15, TSUS, at the duty rate of 3.9%.

Novell timely protested the appraisement and liquidation of these entries, claiming that the merchandise should have been appraised at the entered value of $1,154 each, or the price paid by MFC to Samsung; or alternatively, at a value of $1,350 each, the price paid by Novell to MFC. (We note that the entered value was not always $1,154; the protest fails to take this into account.) Novell also claimed that one entry of merchandise was eligible for duty free entry under the Generalized System of Preferences (GSP).

Novell states that its GSP claim was denied because the reappraisement of the entry by the import specialist caused the GSP country value content to drop below the 35% minimum requirement. However, in its Customs Protest and Summons Information Report (CF 6445), the import specialist notes that that there is no percentage shown in column 8 of the Certificate of Origin Form A. Only a "Y" is shown without the percentage as required by the instructions on the form.

Customs also stated on the CF 6445 that the appraisement at $2000.00 per unit was based on original entries filed by Novell. The agency subsequently learned that the prices charged by MFC to Novelle had dropped to either $1,500.00, $1425.00, or $1340.00 each, depending on the entry. These figures were "derived from Office of Enforcement investigation."


1) Whether the transaction between Samsung and MFC, and/or that between MFC and Novell, are bona fide sales such that the price actually paid or payable constitutes a valid transaction value.

2) Whether merchandise which was denied duty free entry under the Generalized System of Preferences (GSP) is now entitled to duty free treatment under this provision.


The merchandise at issue was appraised under transaction value. Transaction value is defined in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(b); TAA), as the price actually paid or payable for the merchandise when sold for exportation to the United States, plus certain enumerated additions.

For Customs purposes, the word "sale" generally is defined as a transfer of ownership in property from one party to another for a consideration. See J.L. Wood v. United States, 62 CCPA 25, 33, C.A.D. 1139 (1974). While J.L. Wood was decided under the prior appraisement statute, Customs adheres to this definition under the TAA. The primary factors to consider in determining whether there has been a transfer of property or ownership are whether the alleged buyer has assumed the risk of loss and has acquired title to the imported merchandise. See HRL 544775 dated April 3, 1992; HRL 543633 dated July 7, 1987.

Counsel for the protestant argues that title does not have to transfer between the seller and buyer for a sale to have transpired. Rather, the Woods case simply required a passing of title for valuable consideration. Counsel cites third party beneficiary contracts as an example of a situation where title passes to a party other than the buyer. Following this reasoning, counsel contends that there was a valid sale between Samsung and MFC even though title passed directly to the beneficiary party, Novell. We are not persuaded by this argument, because the Samsung/MFC contract was not set up as a third party beneficiary contract; rather, in counsel's own words, "the transactions in question involve two sets of sales of the merchandise for export to the United States". See Counsel's letter to Harvey B. Fox, dated April 10, 1992. We will base our analysis on previous examinations of two purported "sales".

In HRL 543708 dated April 12, 1988, we stated in regard to the transfer of title and the assumption of the risk of loss:

[A] determination of when title and risk of loss pass from the seller to the buyer in a particular transaction depends on whether the applicable contract is a "shipment" or "destination" contract.... FOB point of shipment contracts and all CIF and C&F contracts are "shipment" contracts, while FOB place of destination contracts are "destination" contracts.... Unless otherwise agreed by the parties, title and risk of loss pass from the seller to the buyer in "shipment" contracts when the merchandise is delivered to the carrier for shipment, and in "destination" contracts when the merchandise is delivered to the named destination.

The question of whether the transactions involved in the protest are shipment contracts or destination contracts depends on the shipment terms specified in the documentation.

The shipment term listed both in the Novell/MFC and MFC/Samsung contracts and on the invoices was "FOB Korea". Accordingly, the contracts were shipment contracts. The use of identical shipment terms meant that title and risk of loss passed simultaneously from Samsung to MFC, and from MFC to Novell, when the merchandise was delivered on board the exporting carrier. In such situations, we have taken the position that only one sale occurred, i.e., that between the seller/manufacturer and the ultimate consignee. See HRL 543708, dated April 21, 1988; HRL 544745, dated February 19, 1992; and HRL 544740, dated July 22, 1992. The only sale was between Samsung and Novell, and consequently, there was only one statutorily viable transaction value.

In situations where the middleman held title only momentarily, we have taken the position that the middleman was in reality acting for the seller. As a result, we held that the middleman was operating as a selling agent, not as an independent seller, and that amounts retained by the middleman were selling commissions. In effect, there was only one sale. See HRL 544513, dated September 6, 1990; and HRL 545105, dated November 9, 1993. The goods in question in the instant case were shipped directly from Samsung to Novell; Novell was the importer of record, had title to, and bore the risk of loss for the merchandise when it entered the United States. The only sale occurred between Samsung and Novell, and consequently, there was only one statutorily viable transaction value.

Although Novell used the lower Samsung/MFC prices on the entry documents (a fact which itself raises questions about the nature of the relationship between all three parties), the price actually paid by Novell was the higher per unit price of $1350.00. The protest of the appraisement of the entries should be allowed to the extent that the merchandise should now be appraised at the entered value of $1350.00, instead of the incorrectly enter value of $2000.00.

Counsel for the protestant notes that Customs' position with regard to transfer of risk of loss and title is based on the Uniform Commercial Code. Counsel argues that the UCC is not applicable to the interpretation of contracts for the purposes of Customs' valuation laws. However, both sales contracts state that their provisions are governed by the laws of the State of California, which has adopted a modified version of the UCC.

It is unnecessary to examine the issue of which sale was the sale for exportation because there was only one sale for exportation.

Novell's claim that certain of the merchandise is eligible for duty free entry under the Generalized System of Preferences must be denied because of a lack of evidence showing that the 35% requirement has been met.


1) Based on the documentation submitted, the price actually paid or payable by the ultimate consignee, Novell, constitutes a valid transaction value for the purposes of appraisement under 19 U.S.C. 1401a(b).

2) The merchandise is not entitled to duty free entry under the Generalized System of Preferences.

You are directed to ALLOW this protest to the extent that the appraised value of the merchandise may be adjusted downward to reflect the price paid by Novell to Samsung. However, Novell's request that certain of its merchandise be entered duty free under the Generalized System of Preferences must be DENIED. In accordance with Section 3A(11)(b) of the 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 the public via the Diskette Subscription Service, Lexis, Freedom of Information Act and other public access channels.


John Durant
Director, Commercial
Rulings Division

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