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HQ 547421





May 8, 2002

RR:IT:VA 547421 MMC

CATEGORY: VALUATION

Mr. Christopher M. Kane
Serko & Simon, LLP
666 5th Avenue, 16th floor
New York, New York 10103

RE: Multi-Tiered Transaction; Related Parties

Dear Mr. Kane:

This is in response to your letter dated June 22, 1999, in which you request a prospective ruling regarding the appraisement of fine china imported into the U.S. pursuant to a multi-tiered transaction. In letters dated December 23, 1999 and May 18, 2001, as well as a February 13, 2002, conference call and February 2, 11, and March 1, 2002, facsimiles you submitted additional information. You have also provided two samples. The first is identified as "[yyy mmm] pattern by [xxxx] bone china" the second as "[xxxx] Fine English China [rrr]". All of the information provided in these various submissions have been considered for this request. We regret the delay in responding.

In your initial submission, you requested confidentiality for certain information. We grant your confidentiality request. Any confidential information is bracketed in this ruling and will not be disclosed in copies made available to the public.

You have supplied documentation involving past transactions. For the purposes of this ruling, we will utilize these documents to assist in determining the proper means of appraisement. Please note that the determination of this issue is factually specific and for prospective transactions only.

FACTS:

[xxx USA] (hereinafter importer) is an importer and distributor of lead crystal and dinnerware. [xxx Limited] (middleman) is a vendor of various pieces of china and dinnerware. [ppp] (related manufacturer) manufactures various pieces of china. According to your initial submission, the importer sends a purchase order to the middleman that contains its orders for a variety of crystal and china pieces. The middleman then sends a
purchase order to the related manufacturer for the portions of dinnerware the related manufacturer can produce. The middleman’s purchase order indicates that the goods are to be delivered to the importer in the US. The related manufacturer then generates an invoice to the middleman. That invoice indicates the goods are to be shipped to the importer. The middleman then generates an invoice to the importer. The invoice indicates a variety of merchandise that is apparently sourced from varying factories.

You have cited to Headquarters Ruling Letter (HRL) 545709 dated May 12, 1995, claiming it is controlling. HRL 545709 was a prospective ruling request concerning the nearly identical multi-tiered transaction with the exception that the manufacturer in that ruling was not related to the middleman and importer. In HRL 545709 counsel asserted that pursuant to Nissho Iwai, the merchandise should be appraised on a “first cost” basis, meaning it should be appraised based on the sale between the middleman and the unrelated manufacturer. We held that based on the evidence presented, the transaction value of the merchandise could be based on the price paid by the middleman to the unrelated manufacturer. After reviewing HRL 545709, we are in agreement that the structure of that transaction (bona fide sale for export to the U.S.) and this one are materially similar. As such we believe that 545709 would also apply to the first sale in this situation to the extent that the first sale in this situation is a bona fide sale for export to U.S. However, this "first sale" is a sale between related parties and must also meet the related parties test to overcome the presumption that the merchandise should be appraised based on the price paid by the importer.

A May 18, 2001, submission provided the following relevant documentation to demonstrate a representative related parties transaction for a five-piece place setting of china in the [aaa] pattern. We note that this pattern differs from your earlier submission and samples that discuss the related parties [rrr] pattern.

A May 18, 2001 print screen computer print out. You state in your letter that the date is the date of print out not entry into the requisite computer system. You claim that "[t]he actual date of entry into the purchase order system was before October 12, 2000, the date the middleman issued its own purchase order." The print out states the name of the importer, the phrase "purchase order system", a purchase order number, item number, quantity, expected date and the phrase "order has been received."

Page 2 only of an October 12, 2000, purchase order from the middleman to the factory. It indicates delivery is to the importer. It also indicates a purchase order number, supplier number, item number, quantity, unit description, required date, unit price and line total. It is signed and dated by a purchasing manager. The item number and quantity are identical to that on the computer print out described above. Finally it states that "[a]ll purchases are made in accordance with Conditions printed overleaf."

Page 3 only of a November 3, 2000, factory invoice. It indicates "sent to" and lists both the middleman and importer. Additionally it indicates a package number, quantity, description (5pps-5 piece place setting), unit price, and selling price to purchaser. You indicate in your letter that this invoice demonstrates only a "partial shipment of 24 of the 1,120 ordered sets."

A January 6, 1999, manufacturer’s price list. In the first column the document indicates all the place setting and all other pieces available for order. In the next 10 columns the document lists the various prices between the related manufacturer and middleman, in pounds, for 10 different patterns of china. The prices correspond to the listed piece in column one. In the 12 and 13th columns, the document indicates the gross price and discounted price between manufacturer and the compared unrelated middleman for the [mmm] subject pattern. These prices are also in pounds and track by place setting and other pieces to complete the china set.

A July 31, 1999, manufacturer’s invoice for a china pattern [mmm] the manufacturer sells to an unrelated third party [yyy]. The invoice is a computer print out. It appears to be sent to a [qqq] in New York. The document has 3 main categories; China Tableware, Package Summary, and Package Contents Summary. The relevant category, China Tableware, lists orders for the subject pattern are identified. The order includes 150 6-inch plates, 420 10.7-inch plates, 250 8-inch plates and 240 teacups. It then indicates the gross ware value, net ware value, amount payable in dollars and the conversion rate. No other pages of the invoice were provided.

No contracts or proof of payment between the related middleman and factory were provided. No contract, purchase orders, agreements or proof of payment between the manufacturer and unrelated party was provided. Finally, in your December 23, 1999 submission, you state that the "blanks" for the dinnerware are produced using the same process and are the same shape for the unrelated and related party patterns.

In addition to your submitted information, Customs collected the following independent information on the subject merchandise and the industry as a whole from trade magazines and market reports. Dinnerware can be classified by material, design category, price, manner, and type of store or department where it is sold. Dinnerware is essentially made of 3 different materials ceramic, glass and plastic. For the purposes of this ruling we are only concerned with ceramic dinnerware. Ceramic dinnerware is made by molding a mixture of clay and powdered minerals and firing to hold a desired shape. The firing process determines whether the dinnerware is vitrified or nonvitrified. Both fine china, porcelain, and bone china, which are translucent as well as casual china and stoneware which are opaque, are vitrified.

"Tabletop Market", Packaged Facts [1996] p. 76 The subject merchandise belongs to the china category.

China is manufactured by mixing together kaolin (a white clay) quartz and feldspar, pouring the mixture into a mold, and firing it at very high temperatures. China goes through several firings. Further defining the china category are fine china and bone china. Fine china is made of top quality clays fired at a high temperature, is thin and translucent, and makes a clear "ring" when struck. It may have either a pure white or ivory ground. Bone china is so named because it contains animal bone ash or other commercial equivalent in a minimum 25% concentration for added translucency and whiteness. It is usually thin and lightweight, has a chalk-white body, and a resonance when struck. "Tabletop Market", Packaged Facts [1996] p. 77

When classified by style, dinnerware falls into two main categories, formal and casual. Formal dinnerware is nearly always made of fine or bone china. Designs range from simple narrow bands to intricate displays of craftsmanship. Formal dinnerware may be further embellished with gold or platinum trim "Tabletop Market", Packaged Facts [1996] p. 81.

In addition to material and style, dinnerware is classified by the price, manner and type of store or department in which it is sold. "Upstairs" dinnerware is sold in the china department of department stores and in fine specialty stores. It is almost always sold as place settings and is more expensive than "downstairs" dinnerware, sold in the housewares department of department stores, usually in sets. Least expensive is mass-market dinnerware, sold in sets in mass-market outlets. "Tabletop Market", Packaged Facts [1996] p. 83 Formal dinnerware is usually retailed by the 5 piece place setting, with almost 75% of sales taking place under the $100-per-setting mark. Almost 1/3 of all formal china currently retails for under $70 per place setting. "Tabletop Market", Packaged Facts [1996] p. 88

Approximately 120 companies market dinnerware in the U.S. The upstairs formal dinnerware, or fine china, market is dominated by 5 marketers: Lenox China & Crystal ( a subsidiary of Brown-Forman Corp.); Noritake Co.,Inc.; Mikasa, Inc.; Royal Doulton USA; and Wedgwood the dinnerware division of Waterford Wedgwood USA (the American subsidiary of Waterford/Wedgwood Plc.). Lenox is an American producer, Noritake and Mikasa are Japanese, and Royal Doulton and Wedgwood are subsidiaries of British companies. Together these resources control approximately 85% of the formal china market. A large majority of players in the fine china segment of the dinnerware market are importers from Europe and Japan. "Tabletop Market", Packaged Facts [1996] p. 100-101 However the Untied Kingdom dominates the bone china segment, accounting for 62% of all the bone china imported into the U.S. "Tabletop Market", Packaged Facts [1996] p. 92 Yet all of the importers actual sales volume is powerfully offset by the presence of Lenox, the major producer of fine china in the U.S. market. "Tabletop Market", Packaged Facts [1996] p. 100-101

Concerning the industry as a whole, future prospects for the UK/European tableware industry in particular are uncertain, given the increasing activity and competition made possible by new technology. New technology means there is little difference in the cost of making a dinner plate from clay to white glost (blanks) in Europe or in one of the emerging countries. Rather it is the labor cost of decorating, warehousing and general overheads which is significantly lower in emerging countries, and what establishes the final cost and selling price. "Challenging Times for International Tableware," Tableware International, V.27:No.1 (1997 February), p. 81 Additionally, although dinnerware marketers are more likely to be the licensors than licensees, licensed dinnerware is making a greater impact in the market. "Until recently, this business was largely restricted to children's dinnerware or designer names such as Christian Dior or Ralph Lauren." "Tabletop Market", Packaged Facts [1996] p. 147. "Numerous artists and designers offer their works for licensing. For instance, the works of designer Nicole Millerappear on a variety of ceramic dinnerware. "Tabletop Taps into $100 Billion Licensing Industry," Tableware Today, February/March 1998, p.60

Finally, concerning advertising, most dinnerware marketers focus more on showing product than conveying an image. Their ads typically feature and identify a small number of patterns or a single pattern "Tabletop Market", Packaged Facts [1996] p. 154. Marketers run trade advertisements for dinnerware in publications such as HFN, China Glass & Tableware, and Gifts & Decorative Accessories. The ads frequently use the same photography as consumer advertisements, but copy geared to a trade rather than consumer audience. Dinnerware marketers also target retail buyers at trade shows, which provide an essential link between the vendors and their current and prospective retail accounts. "Tabletop Market", Packaged Facts [1996] p. 159

ISSUE:

Whether the price paid for the merchandise by the middleman to a related manufacturer may form the basis for transaction value.

LAW AND ANALYSIS:

Merchandise imported into the U.S. 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 preferred basis 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. Thus, for imported merchandise to be appraised under transaction value, it must be the subject of a bona fide sale between a buyer and seller and it must be a sale for exportation to the U.S.

In the context of filing an entry, Customs Form (“CF”) 7501, an importer is required to make a value declaration. As indicated by the language of CF 7501, the language of the valuation statute, and in accordance with the Nissho and Synergy decisions and our own precedent, Customs presumes that transaction value is based on the price paid by the importer.

As we noted above, we find HRL 545709, dated May 12, 1995, persuasive on the sale for export issue. It addresses a materially similar transaction and concerns some of the same parties. We note however, that for future transactions the documents identified in Treasury Decision 96-87, Cust. Bull 52/1, January 2, 1997, Determining Transaction Value in Multi-Tiered Transactions (T.D. 96-87) must be available for review. T.D. 96-87 indicates that the requestor must describe in detail the roles of all the various parties and furnish relevant documents pertaining to each transaction that was involved in the exportation of the merchandise to the United States. If there is more than one possible sale for exportation, information and documentation about each of them must be available. The recognition that the transaction is a bona fide sale for export to the U.S. answers only half the question however. This "first sale" is between a related manufacturer and middleman. If this sale is to overcome the presumption that merchandise should be appraised at the price paid by the importer, you must demonstrate that the related party price is an acceptable one.

Imported merchandise is appraised under transaction value only if the buyer and seller are not related, or if related, the transaction value is deemed to be acceptable. In the alleged sale, the buyer (middleman) and seller (manufacturer) of the merchandise are related parties pursuant to §402(g)(1) of the TAA. Section 402(b)(2)(B) of the TAA provides that transaction value between related parties is acceptable only if an examination of the circumstances of sale indicates that the relationship between the parties did not influence the price actually paid or payable, or the transaction value of the imported merchandise closely approximates the transaction value of identical or similar merchandise in sales to unrelated buyers in the U.S. or the deductive or computed value for identical or similar merchandise.

Under the circumstances of sales approach, if the parties buy and sell from one another as if they were unrelated, transaction value will be considered acceptable. Thus, if the price is determined in a manner consistent with normal industry pricing practice, or with the way the seller deals with unrelated buyers, the price actually paid or payable will be deemed not to have been influenced by the relationship. Furthermore, the price will be acceptable if it is shown that the price is adequate to ensure recovery of all costs plus a profit that is equivalent to the firm's overall profit realized over a representative period of time in sales of merchandise of the same class or kind. Statement of Administrative Action, reprinted in Customs Valuation under the Trade Agreements Act of 1979, Department of the Treasury, U.S. Customs Service (October 1981) at 54; 19 C.F.R. §152.103(j)(2)).

In all of your correspondence you state that the related parties buy and sell from one another as if they were unrelated. You base this claim on the premise that prices charged by the manufacturer to an unrelated third party [yyy] for pieces of the [mmm] pattern are "essentially the same" as prices charged by the manufacturer to its related party middleman. Initially you asserted that the related parties comparison should be done with a 5-piece place setting of the [rrr] related party pattern and submitted a sample of it. However, you later determined that the available documentation followed the related party [aaa] pattern for a 5-piece place setting better.

A review of the information submitted indicates that we have not been provided with sufficient evidence to indicate that the statutory requirements set forth in §402(b)(2)(B) of the TAA, have been met. Contrary to your claim about "blanks", the two samples are not identical in nature. The unrelated party's sample is bone china while both of the patterns for the related transaction are fine china. As was indicated in the facts section the composition, translucency and "ring" of bone and fine chinas are different. Furthermore, this distinction between bone china and other fine china is recognized in the tariff (see chapter 69), by separate 6-digit classifications.

Even if the unrelated transaction concerned fine and not bone china, it still has severe flaws. The unrelated party is a designer who according to the industry information licenses their name for use on bone and or fine china dinnerware. As dinnerware marketers are likely to be either licensors or licensees, there is a legitimate question concerning the nature of the relationship between the manufacturer and the unrelated party. Is the relationship one of buyer/seller or licensor/licensee? Moreover, the submissions do not flush out the entire unrelated transaction. Who is the party identified on the manufacturer's invoice? Is that party a middleman or a retailer?

Concerning the unrelated invoice itself, it lacks the necessary 5-piece place setting comparison and unlike the manufacturer's invoice to the related middleman, it indicates that the goods are sold "open stock" by the manufacturer, not as place settings.

As for the differences between the related and unrelated prices, your February 5, 2002 facsimile attributes the difference in the unrelated gross and net prices to a trade discount negotiated at arm’s length between the manufacturer and the unrelated buyer and that “such discounts are traditional in the trade.” Additionally, you indicate that the lower prices charged by the manufacturer to the unrelated third party are the result of a volume discount. You further assert that the "cache attached to both the middleman's and third party's name and trade mark" are the cause of the larger sales.

Such discounts must be examined in light of the recognition by the trade that new dinnerware technology means there is little difference in the cost of making a dinner plate from clay to white glost (blanks) in Europe or in one of the emerging countries. Rather it is the labor cost that establishes the final cost and selling price. It is entirely possible that the discounts were offered by the manufacturer to compete against other sources. This "competitive discount" may not in fact be common to the trade but rather something only this manufacturer is offering to offset competition. Without concurrent documentary evidence of when and why the discounts were provided, we cannot except your explanation. Accordingly, there is an insufficient evidentiary basis to support the acceptability of a related party transaction value for the first sale. As such the importer has not overcome the presumption that transaction value should be based on the price paid by the importer.

HOLDING:

There is an insufficient evidentiary basis to support the acceptability of a related party transaction value for the first sale. As such the importer has not overcome the presumption that transaction value should be based on the price paid by the importer. Unless or until the importer can successfully demonstrate the acceptability of the related party price for the first sale, appraisement should be based on the price paid by the importer.

Sincerely,

Virginia L. Brown

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