HQ 546953

May 5, 1999

RR:IT:VA 546953 KCC

CATEGORY: Valuation

Port Director

U.S. Customs Service

10 Causeway Street

Boston, Massachusetts 02222‑1059

RE: Application for Further Review of Protest 0401‑97‑100504; *J.L. Wood
v. United States*; HRL 544775; HRL 543633; Statement of Administrative
Action; §402(f) of the TAA; Reasonably Adjusted Transaction Value; HRL
543628

Dear Port Director:

This is in regard to the Application for Further Review of Protest
0401‑97‑100504 filed on November 7, 1997, by Kirkland & Ellis on behalf
of their client, AromaScan, Incorporated ("AromaScan U.S."). AromaScan
U.S. claims that the imported merchandise should be appraised pursuant
to transaction value which takes into account the trade discount that
AromaScan, plc of the United Kingdom ("AromaScan U.K.") extends to its
subsidiary AromaScan U.S. Additional information submitted by Counsel
was taken into consideration in reaching this decision. We regret the
delay in responding.

We have agreed to honor Counsel's request to hold confidential
information pertaining to distribution agreements, trade discounts and
profit margin percentages which Counsel identified in their submissions.
This protest decision omits specific reference to this information..

**FACTS:**

AromaScan U.S. is a wholly-owned subsidiary of AromaScan U.K. AromaScan
U.S. imports lab equipment used to detect and measure odors. AromaScan
U.S. acquires the merchandise from its parent company, AromaScan U.K.
According to Counsel, the broker for AromaScan U.S. filed a protest of
on September 20, 1996, claiming an erroneous invoice was used. Once
Customs was provided with the correct invoice, Customs apparently agreed
that the invoice originally filed contained a clerical error. In
deciding the protest, however, Customs concluded that the discount
AromaScan U.K. extends to AromaScan U.S. was not allowed since no
transaction value exists. Accordingly, AromaScan U.S. now seeks further
review of Customs

appraisement pursuant to §402(f) of the Tariff Act of 1930, as amended
by the Trade Agreements Act of 1979 ("TAA"; 19 U.S.C. §1401(a)) based on
AromaScan U.K.'s shipping unit invoice price plus the addition of the
discounts.

AromaScan U.S. acquires goods from AromaScan U.K. based on a price list
less an agreed upon percentage distributor's discount. Counsel states
that the percentage is within the range of discounts AromaScan U.K.
grants to other distributors of identical or similar products. Copies of
other distribution agreements were submitted for our examination.
However, AromaScan U.S. is the sole supplier of AromaScan U.K. products
to U.S. customers. Your office has questioned the use of transaction
value based on the fact that AromaScan U.S. has "paid" for their
purchases from AromaScan U.K. by borrowing from AromaScan U.K. This loan
arrangement is memorialized by a promissory note which AromaScan U.S.
executed in favor of AromaScan U.K. Your office discovered that since
AromaScan U.S. was incorporated and began importing in 1994, AromaScan
U.S. had not made any repayment of the loan that AromaScan U.K. has
extended to them in exchange for their promissory note. Additionally,
AromaScan, U.S. executed a new promissory note in December, 1996,
increasing the face value of the promissory note. Copies of the
promissory notes were submitted for our examination. Counsel did submit
two proof of payments via bank notices dated November 18 and December16,
1998. Additionally, in the February 5, 1995 submission, Counsel states
that AromaScan U.S. intends to make quarterly payments throughout the
current (1999) calendar year.

Counsel has provided Customs a copy of their Distribution Agreement that
AromaScan U.K. and AromaScan U.S. entered into May 28, 1996. The
agreement stipulates that AromaScan U.S. is entitled to receive a
discount from AromaScan U.K. list prices. §4.1 of the Distribution
Agreement. In addition, §5.1 of the Distribution Agreement provides that
risk of loss will pass to AromaScan U.S. upon the delivery of the
merchandise to AromaScan U.K.'s carrier. Moreover, §5,2 of the
Distribution Agreement states that, notwithstanding the passing of risk
of loss, ownership of the property shall not pass to AromaScan U.S.
until AromaScan U.K. "has received in cash or cleared funds payment in
full of the price of the Products and of all sums due in connection with
the supply of all goods and services. . .." §5.3 of the Distribution
Agreement also obligates AromaScan U.S. to hold the goods as AromaScan
U.K.'s fiduciary agent and as their bailee. Also, all products supplied
by AromaScan U.K. to AromaScan U.S. are presumed to belong to AromaScan
U.K. unless AromaScan U.S. can prove otherwise. §5.4 of the Distribution
Agreement. In addition, we have reviewed statements from AromaScan U.S.
officials in response to a Customs Form ("CF 28\"), Request for
Information, which indicated that since AromaScan U.S. was incorporated
and began importing in 1994, AromaScan U.S. had not remitted any payment
against their outstanding balance of the loan that AromaScan U.K. has
extended to them to acquire merchandise. As noted above, AromaScan U.S.
has recently made two payments to AromaScan U.K.

**ISSUE:**

Whether the merchandise described above was properly appraised?

**LAW AND ANALYSIS:**

Merchandise imported into the United States is appraised in accordance
with § 402 of the Tariff Act of 1930, as amended by the Trade Agreements
Act of 1979 (TAA; 19 U.S.C. §1401a). The preferred method of
appraisement is transaction value, defined as the price actually paid or
payable for the merchandise when sold for exportation to the United
States, plus amounts for certain enumerated additions, including any
selling commissions incurred by the buyer. §402(b)(1) of the TAA.

A prerequisite to concluding that there is a transaction value is
finding that there is a sale. For Customs purposes, the word \"sale\"
generally is defined as a transfer of ownership in property from one
party to another for a consideration. *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 whether the buyer has acquired title
to the imported merchandise. *See*, Headquarters Ruling Letter (HRL)
544775 dated April 3, 1992; HRL 543633 dated July 7, 1987.

In this case, we can not determine that there has been a "sale for
exportation." Pursuant to §5.1 of the Distribution Agreement that
AromaScan U.K. and AromaScan U.S. entered into on May 28, 1996, risk of
loss will pass to AromaScan U.S. upon the delivery of the merchandise to
AromaScan U.K.'s carrier. However, §5.2 of the Distribution Agreement
states that, notwithstanding the passing of risk of loss, ownership of
the property shall not pass to AromaScan U.S. until AromaScan U.K. "has
received in cash or cleared funds payment in full of the price of the
Products and of all sums due in connection with the supply of all goods
and services. . .." §5.3 of the Distribution Agreement also obligates
AromaScan U.S. to hold the goods as AromaScan U.K.'s fiduciary agent and
as their bailee. All products supplied by AromaScan U.K. to AromaScan
U.S. are presumed to belong to AromaScan U.K. unless AromaScan U.S. can
prove otherwise. §5.4 of the Distribution Agreement. In addition,
AromaScan U.S. had not remitted any payment against their outstanding
balance of the loan up until November and December 1998 when AromaScan
U.S. made two payments. These payments appear to be lump sum payments
which are untraceable to any particular shipment. We note that these
payments were made after AromaScan U.S.'s meeting with this office on
November 13, 1998.

Notwithstanding the existence of the promissory note AromaScan U.S. has
executed in favor of AromaScan U.K., the fact remains that pursuant to
the Distribution Agreement title to the merchandise rests with AromaScan
U.K. until AromaScan U.K. has "received in cash or cleared funds payment
in full of the price of the Products and of all sums due in connection
with the supply of all goods and services. . ." The first such payment
was made in November 1998 which is conceivably for merchandise that
AromaScan U.S. began importing in 1994. Based on this information, we
have no basis to conclude that a sale occurred in AromaScan U.S.'s
transactions with AromaScan U.K. Therefore, transaction value is not an
acceptable basis of appraisement.

Even if we found that a sale had occurred, 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 this situation, Counsel indicates that AromaScan U.K. and
AromaScan U.S. are related parties pursuant to §402(g)(1) of the TAA. §
402(b)(2)(B) of the TAA, provides that transaction value between related
parties is acceptable only if an examination of the circumstances of the
sale indicates that the relationship between the parties does not
influence the price actually paid or payable, or the transaction value
of 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 not be influenced 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; §152.103(j)(2), Customs
Regulations (19 CFR 152.§103(j)(2)).

Counsel states that AromaScan U.K. and AromaScan U.S. buy and sell from
one another as if they were unrelated. As evidence of this practice,
Counsel provided a copy of their Distribution Agreement that AromaScan
U.K. and AromaScan U.S. entered into May 28, 1996. §4.1 of the
Distribution Agreement stipulates that AromaScan U.S. is entitled to
receive a discount from AromaScan U.K. list prices. In addition, §5.2 of
the Distribution Agreement provides that risk of loss will pass to
AromaScan U.S. upon the delivery of the merchandise to AromaScan U.K.'s
carrier. Moreover, §5.2 of the Distribution Agreement states that,
notwithstanding the passing of risk of loss, ownership of the property
shall not pass to AromaScan U.S. until AromaScan U.K. "has received in
cash or cleared funds payment in full of the price of the Products and
of all sums due in connection with the supply of all goods and services.
. .." §5.3 of the Distribution Agreement also obligates AromaScan U.S.
to hold the goods as AromaScan's fiduciary agent and as their bailee.
All products supplied by AromaScan U.K. to AromaScan U.S. are presumed
to belong to AromaScan U.K. unless AromaScan U.S. can prove otherwise.
§5.4 of the Distribution Agreement.

As noted previously, AromaScan U.S. had not, until its two recent
payments in November and December 1998, made any payment to AromaScan
U.K.. for any of the imported merchandise even though AromaScan U.S. had
begun importing merchandise from AromaScan U.S. in 1994. The absence of
payment combined with evidence of AromaScan U.K. only attempting to
recover payment for merchandise shipped subsequent to our November 13,
1998, meeting with Counsel leads to the conclusion, upon an examination
of the circumstances of the "sale," that AromaScan U.S. has not
demonstrated that the relationship between AromaScan U.K. and AromaScan
U.S. did not influence the price actually paid payable. These terms lead
us to conclude that the relationship between AromaScan U.K. and
AromaScan U.S. did influence the price actually paid or payable.

Having concluded that the relationship between AromaScan U.K. and
AromaScan U.S. influences the price actually paid or payable,
transaction value may still be the proper method of appraisement "if the
transaction value of the imported merchandise closely approximates\--
(i) 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. . .." §402(b)(2)(B) of the TAA. Since AromaScan
U.S. is the only U.S. importer of AromaScan U.K. products, we do not
have evidence of identical or similar importations that were appraised
at transaction value. Furthermore, Counsel has not provided previously
accepted importations that were appraised using deductive or computed
value of identical or similar merchandise which may be used to determine
if such a value closely approximates the purported transaction value.
Thus, AromaScan U.S. has not established the acceptability of the price
under transaction value and we cannot appraise the merchandise under
protest pursuant to §402(b) of the TAA.

Since we have concluded that transaction value is not the proper basis
of appraisement, we must examine whether there is a transaction value of
identical or similar merchandise pursuant to §402(c) of the TAA.
Transaction value of identical or similar merchandise refers to a
previously accepted and adjusted transaction value of identical and
similar merchandise which was exported at or about the same time as the
goods being valued. Merchandise is not regarded as identical or similar
unless it was produced in the same country as the merchandise being
valued. *See* HRL 543628, dated November 4, 1995. As stated above,
AromaScan U.S. is the only U.S. importer of AromaScan U.K. products. We
do not have information regarding a previously accepted transaction
value of identical or similar merchandise that was exported at or about
the same time as the goods subject to the protest. Accordingly,
appraisement of the goods under protest cannot be determined pursuant to
transaction value of identical or similar merchandise.

Since there is no indication that the importer has elected to apply the
computed value method set forth in §402(e) of the TAA before applying
the deductive value method of appraisement, the next applicable basis of
appraisement is deductive value pursuant to §402(d) of the TAA. No
information is available or was submitted to establish appraisement
pursuant to

the deductive value method or the computed value method. Thus, we will
address the accuracy of your appraisement of the merchandise under
§402(f) of the TAA.

Using §402(f) of the TAA, your office appraised the merchandise under
protest by adding back the applicable trade discount that AromaScan U.K.
extended to AromaScan U.S. The result was appraisement at the value set
forth in the price list. If merchandise cannot be appraised under
§402(b) - (e) of the TAA, its value is to be determined in accordance
with §402(f) of the TAA, which provides that merchandise should be
appraised on the basis of a value derived from one of the previous
methods, reasonably adjusted to the extent necessary to arrive at a
value. §402(f)(1) of the TAA. To the greatest extent possible, values
determined under §402(f) of the TAA should be based on previously
determined values. SAA at pg. 63. §402(f) of the TAA precludes the use
of certain methods such as, methods based on minimum values, arbitrary
values or fictitious values.

Trade discounts are routinely given to customers in the normal flow of
commerce. In fact, Counsel has provided documentation which details
discounts that were extended to AromaScan U.S.'s corporate and
government customers. Since discounts from the price list are extended
to AromaScan U.S. customers, we find that in the absence of compelling
information to the contrary, appraising the imported merchandise at a
value in excess of the price AromaScan U.S. charges its customers is
arbitrary and is unacceptable pursuant to §402(f)(2)(G) of the TAA.

Pursuant to §402(f)(1) of the TAA, a reasonably adjusted transaction
value may be the basis of appraisement. Under §402(f) of the TAA, it is
our position that a reasonable adjustment to transaction value would be
to recognize that there was a "sale" between AromaScan U.K. and
AromaScan U.S. and to find that the circumstances of the sale did not
influence the price actually paid or payable, thereby allowing the trade
discount extended to AromaScan U.S. Counsel submitted evidence in the
form of other distribution agreements to show that AromaScan U.K. grants
other distributors discounts that are both less than and greater than
the trade discount accorded to AromaScan U.S. so that the discount does
not appear to be inappropriate. Appraisement should be based on the
AromaScan U.K. invoice price to AromaScan U.S. as a reasonably adjusted
transaction value pursuant to §402(f) of the TAA.

**HOLDING:**

In this case, the rejection of transaction value as the basis of
appraisement is correct. Based on the evidence available, we are unable
to appraise of the imported merchandise pursuant to the transaction
value of identical or similar merchandise set forth in §402(c) of the
TAA, the deductive value set forth in §402(d) of the TAA, or the
computed value set forth in §402(e) of the TAA. If such information is
available, appraisement should proceed pursuant to the hierarchy
established in §402(b) of the TAA. Based on the evidence presented,
appraisement should be based on the AromaScan U.K.. invoice price to
AromaScan U.S. as a reasonably adjusted transaction value pursuant to
§402(f) of the TAA. To appraise the merchandise at the price list is an
arbitrary value and is precluded from serving as the basis of
appraisement under §402(f) of the TAA.

The protest should be GRANTED. In accordance with §3A(11)(b) of Customs
Directive 099 3550‑065, dated August 4, 1993, Subject: Revised Protest
Directive, you are to mail this decision, together with the Customs Form
19, to the protestant no later than 60 days from the date of this
letter. Any reliquidation of the entry or entries in accordance with the
decision must be accomplished prior to mailing the decision. Sixty days
from the date of the decision, the Office of Regulations and Rulings
will make the decision available to Customs personnel, and to the public
on the Customs Home Page on the World Wide Web at
www.customs.ustreas.gov, by means of the Freedom of Information Act, and
other methods of public distribution.

Sincerely,

Thomas L. Lobred

Chief, Value Branch