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HQ 545136




April 28, 1994

VAL R:C:V 545136 RSD

CATEGORY: VALUATION

Mr. Daniel C. Muscatto
Customs Analyst
New Holland, North America, Inc.
500 Diller Avenue
P.O. Box 1895
New Holland, Pennsylvania 17557-0903

RE: Request for a ruling on whether an alleged "sale" between related parties in a three party transaction is a valid sale for exportation on which to base transaction value; sale for exportation; agricultural tractors

Dear Mr. Muscatto:

This is in response to your letter dated November 5, 1992, requesting a ruling on the proper valuation of certain agricultural tractors and components manufactured in Japan and imported by New Holland North America, Inc. You made an additional submission dated March 12, 1993. A meeting was held with you, your attorney, and officials from the Office of Rulings and Regulations at our office on December 8, 1994, in Washington, D.C. to discuss this matter. In your submission, you have requested that two exhibits be given confidential treatment. These exhibits will be treated as confidential in accordance with 19 C.F.R. 177.2(b)(7), and will not be disclosed to the public. We regret the delay in responding to your request.

FACTS:

New Holland, North America Inc. (formerly Ford New Holland and hereinafter NHNA) is an importer and seller of agricultural tractors. The products in question include agricultural tractors manufactured in Japan by Ishikawajima Shibaura Machinery, Co. Ltd., (hereinafter ISM) and formerly sold under the names "Ford" and "Ford New Holland", but now under the "New Holland" trade name. You state that other products included in the ruling request are garden
tractors and commercial mowers, and whole goods such as wheels, tires, and valve kits. These items are imported primarily through the ports of Norfolk, Savannah, Fernandina Beach, Los Angeles, San Francisco, Tacoma, and Newark.

In the submitted documents, reference is made to a currency sharing agreement entered into between NHNA and ISM which provided for a specific formula for determining the final price (see Exhibit D). However, you have advised that this agreement is no longer in effect. You indicate that after January 1, 1994, ISM no longer makes adjustments in their prices because of currency fluctuations and that the prices it charges for the imported merchandise are not based on a formula. Instead, ISM is paid a fixed amount in yen for the merchandise as negotiated between NHNA and ISM. However, to avoid problems due to currency fluctuations, NHNA has developed a plan whereby it "purchases" the imported products from a related company by the name of NHG Trade N.V. (hereinafter NHGT), and NHGT in turn purchases the products from ISM. NHGT's principal offices are located in Switzerland. Both NHNA and NHGT are subsidiaries of New Holland Geotech. N.V., a company incorporated in the Netherlands, with offices in London, England. The products are still shipped from Japan directly to the United States. This ruling is based on the facts as clarified above.

In your submission, you explain that the reason why NHNA will "purchase" the products from NHGT is to allow NHGT to centrally manage the currency flow between N.H. Geotech's operating subsidiaries in order to mitigate the effects of currency fluctuations from the profit and loss statements of the operating subsidiaries. This is accomplished by purchasing the products from a seller in the seller's local currency, and then subsequently preparing another invoice to the buyer in the buyer's local currency. The currency conversion is performed at a fixed exchange rate as determined by N.H. Geotech's central treasury function and adjusted annually or more frequently if conditions require. NHGT earns income through the subtraction of a percentage mark-down from the seller's price, a percentage mark-up to buyer's price and/or the inclusion of a percentage mark-up in the fixed exchange rate. NHGT is not designed to be a profit center. The intent is not to make or lose money on the currency transactions, but to break even.

In addition to currency management, the consolidation of payments and receipts through one accounting system is supposed to provide better operational efficiencies through streamline electronic communication, greater invoicing accuracy and enhanced management reporting capabilities. You indicate that the operating subsidiaries are willing to incur NHGT's marginally higher prices, and pay incrementally more duty, in order to realize the benefits in both the currency and operating efficiency.

According to your submissions, the title to the imported merchandise will transfer between ISM and NHGT after discharge from carrier U.S. port of entry, and title will transfer between NHGT and NHNA after discharge from carrier, U.S. port of entry. Risk of damage or loss will pass from ISM to NHGT F.A.S. Japanese Port. Similarly, risk of damage or loss will pass from NHGT to NHNA F.A.S. Japanese Port. NHNA also guarantees payment to ISM in the event of default by NHGT.

You state that NHNA will issue what your refer to as blanket purchase orders to NHGT, referencing both the yen price and the equivalent U.S. dollar price at a pre-determined and fixed exchange rate. NHGT will issue identical blanket purchase orders on their own paper to ISM, deleting first the reference to the U.S. dollar price. New blanket purchase orders will be generated by NHNA to NHGT and NHGT to ISM each time the yen price changes as a result of negotiations with ISM. Monthly releases will be issued against the blanket purchase orders detailing model option combination quantities, and shipping destinations. You state that these monthly releases will continue to flow directly from NHNA on behalf of NHGT to ISM.

Significantly, the price of merchandise in yen will continue to be directly negotiated between NHNA and ISM. Prices are generally negotiated annually, with changes effective in July. Procedures have been set up to make adjustments due to currency fluctuations. The invoices prepared by NHGT for NHNA will reference only the total price in U.S. dollars. Reference to the model/catalog numbers, quantities, descriptions, and so forth will not be listed on the NHGT invoice. Instead NHNA will process these invoices for payment by referring to the detailed invoice in yen from ISM to NHGT.

NHNA requests confirmation that the merchandise can be appraised based on the "sale" between NHGT and itself.

ISSUE:

Is there a sale for exportation between NHNA and NHGT which can be used to base the transaction value of the imported merchandise?

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. ยง 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 for 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. (HRL 545434, dated May 31, 1994). The term "price actually paid or payable" is defined in TAA 402(b)(4)(A) as:

...the total payment (whether direct or indirect and exclusive of any costs, charges or expenses incurred for transportation, insurance, and related services incident to international shipment of the merchandise from the country of exportation to place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.

In analyzing the facts described above to determine the proper appraisement for the imported merchandise it is necessary to determine whether there is in fact a bona fide sale between NHNA and NHGT. In the case of J.L. Wood v. U.S., 62 CCPA 25, 33 C.A.D. 1139 (1974), the court defined the term "sale" as the "transfer of property one party to another for consideration." Similarly, section 2-106(1) of the Uniform Commercial Code ("UCC") defines a "sale" as "the passing of title from the seller to the buyer for a price." Although the J.L. Wood case was decided under the appraisement statute prior to the TAA, Customs has applied this basic concept of what constitutes a sale under the TAA. See HRL 545447, May 12, 1994.

Customs has also stated in previous rulings that several factors may indicate whether a bona fide sale exists between a potential seller and buyer. In determining whether property or ownership has been transferred, a primary factor to consider was whether the alleged buyer acquired the title and assumed the risk of loss for the merchandise from the seller. In addition, Customs may examine other factors including whether such payments are linked to specific importations of merchandise, and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HRL 545542, December 9, 1994.

In determining whether the purported buyer acquired title and assumed the risk of loss for the merchandise, Customs will first examine the documents related to the sale transactions including the shipping terms. The sales documents indicate that the title will transfer from ISM to NHGT after discharge from the carrier at the U.S. port of entry. Similarly, title will transfer from NHGT to NHNA upon delivery or after discharge from ocean or air carrier at the U.S. Port or Airport of entry. In addition, the risk of damage or loss to products will transfer from ISM to NHGT at the Japanese Port, and from NHGT to NHNA also at the Japanese Port. Based on this information, we cannot find any point in time when NHGT clearly holds title to the merchandise. Instead the title in the imported merchandise transfers from ISM to NHNA, without ever really being held by NHGT. The fact that NHGT never has title to the imported merchandise for a definite period of time is a strong indication that there is not a bona fide sale between NHGT and NHNA.

There are also a number of other significant factors involved in the transactions which demonstrate that there is not a genuine sale between NHGT and NHNA. First we note that the price of the merchandise in yen will still be directly negotiated between NHNA and ISM, which indicates that terms of the sale are decided between ISM and NHNA not NHGT. Next, the monthly releases issued against the blanket purchase orders, which detail model/option combinations, quantities, and shipping destinations will continue to flow directly from NHNA to ISM. Furthermore, the invoices issued by NHGT for NHNA will not reference the model/catalog, number, quantities, or a description of he merchandise. In order to process the invoices, the staff of NHNA will have to refer to the detail invoices generated by ISM. This shows that NHNA has the real interest in the imported merchandise and that NHGT is not a really concerned about what merchandise is purchased from ISM. Moreover, the ultimate responsibility for buying the merchandise from ISM rests with NHNA because in case of default by NHGT, NHNA guarantees payment to ISM. These additional factors indicate that the parties to sale are NHNA and ISM.

The relationship of the parties is further shown by a December 1992, amendment to the 1978 purchase agreement between Ford New Holland and ISM. The agreement states that NHGT will, on behalf of NHNA, place purchase orders with ISM for finished goods and components. It further states that NHGT will be acting as an agent of NHNA and that ISM and NHNA shall remain the responsible parties. (emphasis added). The final sentence of the agreement says that NHNA asserts that payment properly owed from NHGT to ISM are recognized as obligations of NHNA. As such, NHGT is not really free to sell the imported merchandise to anyone it wants, but must act on behalf of NHNA.

Although NHNA and NHGT entered into a distributorship agreement where the parties are referred to as buyer and seller, it is necessary to look at the substance of the transaction and not just the labels the parties attach to it, to determine if the parties are buyer and seller. Based on a consideration of the relevant factors cited above, we find that the relationship between NHGT and NHNA is not one of buyer and seller. Instead, what has been described is an arrangement between related parties, or a kind of an agency relationship, whereby NHGT is performing certain functions on behalf of NHNA such as centrally managing currency fluctuations on behalf of a parent company, and helping with other administrative functions. The arrangement described between NHNA and NHGT cannot serve as the basis of the transaction value of the imported merchandise because it is not a genuine sale for exportation. Accordingly, the imported merchandise cannot be appraised based on the transaction between NHNA and NHGT. Based on the submitted information, it appears that the actual sale for exportation occurs between ISM and NHNA and that the price actually paid or payable for purposes of transaction value is the yen price negotiated between these parties as reflected in the ISM invoices. Since you have advised that ISM and NHNA no longer have an agreement regarding a currency conversion formula, the yen price should converted to U.S. dollars at the currency conversion rate in effect at the date of exportation. See HRL 543089, June 20, 1984.

HOLDING:

There is no sale for exportation between NHNA and NHGT upon which to base the transaction value of the imported merchandise. Based on the submitted information it appears that the actual sale for exportation for purposes of transaction value is between NHNA and ISM and that the price actually paid or payable is the yen price as set forth in ISM invoices and converted to U.S. dollars at the rate in effect at the date of exportation.

Sincerely,

John Durant, Director

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