HQ 547859

November 26, 2001

## RR:IT:VA 547859 DCC

## CATEGORY: VALUATION

Port Director

U.S. Customs Service

40 South Gay Street

Baltimore, Maryland 21202

RE: Application for Further Review of Protest No. 1303-00-100105;
Transaction Value; *Nissho Iwai*; Multi-tiered Transactions

[]{.mark}

Dear Port Director:

This is in response to an Application for Further Review ("AFR") of
Protest No. 1303-00-100105, dated May 2, 2000, filed by Wilmer, Cutler &
Pickering on behalf of Interlink Metals, Inc. of New York, New York
("Interlink" or the "Importer").

Previously, on August 18, 1999, we issued a response to a request for
internal advice regarding imports of titanium sponge imported by
Interlink. *See* Headquarters Letter ("HRL") 547035. Although HRL 547035
addressed the valuation of the same merchandise imported by the same
importer, the sales transaction in that case was structured differently
and occurred under different conditions. Therefore, HRL 547035 does not
address directly the transactions which are the subject of this protest.

In addition, we met with an Interlink representative and Counsel on
September 6, 2001, and received three supplemental submissions from
Interlink, dated September 5, 26, and October 9, 2001. We also received
a request for confidential treatment for business proprietary
information, dated February 9, 2001, Pursuant to Customs Regulations
§ 177.2(b)(7) (19 C.F.R. § 177.2(b)(7)), we determine that the
information Counsel designated proprietary should be treated as
confidential. Accordingly, that information has been bracketed in this
letter and will be redacted from any public versions.

**[FACTS:]{.underline}**

The merchandise at issue is titanium sponge imported by Interlink
pursuant to a multi-tiered sales transaction and entered into the United
States on September 1, 1999. The relevant transactions involve a
middleman, **\[ **

**                                              \]** or the "Middleman,"
and titanium sponge manufacturer **\[ **  **\]** (the "Manufacturer").

Sometime before the end of 1998, the Manufacturer sold approximately
**\[**        **\]** metric tons of titanium sponge to **\[ **
                                      **\]**. The Manufacturer
subsequently exported the merchandise to
**\[ **                    ** \]**, where it was stored in a bonded
warehouse. Late in 1998, the Manufacturer repurchased the titanium from
**\[**      **\]** after the exclusive agency relationship between the
Manufacturer and **\[**       **\]** dissolved. The Manufacturer later
determined that the titanium could be sold to Interlink's U.S. customer,
**\[ **                               **\]** or the "Customer," and
arranged for the sale of **\[**        **\]** of the
**\[**        **\]** metric tons of titanium through the Importer in
February 1999. The titanium was subsequently shipped in installments
from **\[ **           **\]** to the Customer pursuant to the Customer's
delivery schedule.

The Importer entered the merchandise based on the sales price between
the Middleman and the Manufacturer. However, on January 14, 2000, your
office informed the Importer that pursuant to HRL 547035, you would
reappraise the merchandise based on the transaction value between the
Importer and the Middleman. On February 4, 2000, Customs liquidated the
merchandise at the higher value.

Interlink disputes your appraisal method and asserts that the facts of
the present case are distinguished from the proposed transaction covered
by HRL 547035 and therefore the merchandise in the present case should
be appraised based on the basis of the Manufacturer's sales price.
According to the Interlink's submission, the Manufacturer sold titanium
sponge to the Middleman, which resold the material to Interlink, which
resold it to the Customer.

In support of Interlink's protest, Counsel provided a purchase order
**\[**             

            **\]** from the Customer for titanium sponge dated February
19, 1999. The Customer's purchase order specified two grades of the
material: TG 90 and TG 100; and three dimensions: 2 x 12 mm, 12 x 25 mm,
and 12 x 70 mm. Counsel notes the purchase order instructs that the
titanium sponge meet the Customer's specification,
"**\[ **                 **\]**," and
"**\[ **                                                                  ** \]**."
The second page of Customer's purchase order notes that: "Interlink may
offer this spogne \[sic\] to other customers and reduce the amount
accordingly, with **\[ ** ** \]** prior approval." Counsel also provided
an affidavit from the president of Interlink that states that the
company's specifications for titanium sponge are company specific,
proprietary, and exclusive to the Customer.

On April 19, 1999, the Importer issued a sales contract
**\[ **                               **\]** to the Customer confirming
the price and quantity terms of the Customer's purchase order. Although
the Customer's purchase order and the Importer's sales contract
correspond with regard to the dimensions of material, there is a
discrepancy in the grade of titanium in the two documents. The purchase
order states two grades (TG 90 and TG 100) but the sales contract states
three grades (TG 90, TG 100, and TG 110).

In June 1999, the Customer and the Importer agreed to revise the
delivery schedule, which both parties confirmed. The terms of sale for
the Importer/Customer transaction were
**\[ **                              ** \]** and
**\[ **                 

             ** \]**, with payment due
**\[ **                              ** \]**.

On June 16, 1999, the Importer issued a purchase order
**\[ **                   **\]** to the Middleman for
**\[**            **\]** metric tons of titanium sponge. In this case,
there are discrepancies in both the size and grade of titanium sponge
between the Importer's April 19 sales contract to the customer and the
Importer's June 16 purchase order from the Middleman. The sales contract
specified three grades and dimensions of material but the purchase order
stated only two grades and dimensions. According to the Importer's
purchase order, the terms of sale for the Importer/Middleman transaction
were **\[ **                                        ** \]**, with
payment due **\[ **                    

          ** \]**.

Also on June 16, 1999, the Middleman issued a sales contract
**\[ **                   **\]** to the Importer for
**\[**            **\]** metric tons of titanium sponge. Again, there is
a discrepancy between the Importer's purchase order and the Middleman's
sales contract in the grade of the material ordered. The Importer's
purchase order states two grades of titanium sponge (TG 90 and TG 100),
while the Middleman's sales contract specifies three (TG 90, TG 100, and
TG 110). The Middleman's sales contract does not state the dimension of
material ordered.

On June 20, 1999, the Middleman issued a purchase order
**\[**                     **\]** to the Manufacturer. In this
Middleman/Manufacturer transaction, the three grades of material stated
in the Middleman's purchase order to the Manufacturer do not fully
correspond to the grades stated in the Middleman's June 16 sales
contract (TG 90, TG 100, and TG 110). The Middleman's purchase order did
not specify the size of the material.

Also on June 20, 1999, the Manufacturer prepared a sales contract
**\[**                                   **\]**, for the same quantity
of titanium sponge. Again we note a discrepancy in the documents
underlying the Middleman/Manufacturer transaction. According to the
addendum to the Manufacturer's sales contract, there are three stated
grades for the titanium sponge. The Middleman's June 20 purchase order,
however, specified only two grades (TG 90 and TG 100). In addition,
pursuant to the addendum to the Manufacturer's sales contract, the
quality of the titanium sponge was in compliance with the Russian state
standard "GOST **\[ **                    ** \]**." The terms of
delivery on the Manufacturer's sales contract were
**\[ **                     

         ** \]**. The Manufacturer's sales contract stated three sizes
of material (2 x 12 mm, 12 x 25 mm, and 12 x 70 mm).

All the purchase orders and sales contracts between the Customer,
Importer, Middleman, and Manufacturer reference the Customer's original
purchase order number. Although the Customer's and Middleman's purchase
orders reference the Customer's specification
**\[ **               ** \]** or **\[ **              ** \]**, none of
the other documents cite these specifications.

Counsel also provided invoices from the Middleman and the Manufacturer.
The undated Manufacturer's invoice
**\[**                                **\]** was for
**\[ **          ** \]** metric tons of titanium sponge. The grade and
size information on the Manufacturer's invoice does not correspond to
the same information on the Manufacturer's sales contract. The
Manufacturer's invoice specifies two grades and sizes of material while
the Manufacturer's sales contract states three grades and sizes.

On August 8, 1999, the Middleman issued an invoice
**\[**                   **\]** to the Importer for
**\[**           **\]** metric tons of titanium sponge. Again, we note a
discrepancy in the grade of the material. According to the Middleman's
invoice, the Middleman sold two grades of titanium sponge (TG 90 and
TG 100). The Middleman's June 16 sales contract, however, states three
grades of material (TG 90, TG 100, and TG 110).

Counsel also provided a copy of the Customer's specifications for
titanium sponge **\[**                  **\]**, dated April 4, 1994, and
revised October 27, 1999. The specifications detail the size, chemistry,
and the methods of processing, inspection and certification.

Counsel did not provide an invoice from the Importer to the Customer,
bills of lading for shipments to either
**\[ **                       **\]** or
**\[ **                                   ** \]**, or evidence of
payment between the parties.

**[ISSUE:]{.underline}**

Whether the transactions between the Manufacturer and the Middleman
consist of a *bona fide* sale conducted at arm's length, wherein the
merchandise was clearly destined for the United States, allowing
transaction value to be based on the Manufacturer's sales price.

**[LAW AND ANALYSIS:]{.underline}**

Although many of the facts are similar---including the subject
merchandise, the Customer, the Manufacturer, the Importer and one of the
intermediaries, and the terms of delivery---Counsel argues that the
facts in HRL 547035 are distinguished from the facts in the present
case. In HRL 547035, Interlink imported titanium sponge through two
middlemen: the Middleman and
**\[ **                                              **\]**. In the
present case, however, the Middleman was the only intermediary. In
addition, in HRL 547035, Interlink did not disclose to the Manufacturer
that the titanium sponge was destined for the United States because the
merchandise was subject to an antidumping duty order. On August 31,
1998, the U.S. Department of Commerce revoked the antidumping duty order
for titanium sponge from Russia. Consequently, in the present case,
Interlink was able to disclose to the Manufacturer that the titanium
sponge was destined for the United States. Because the facts and
circumstances of the present case differ from those in HRL 547035,
including the structure of the transaction, we determine that the advice
rendered in that case does not address directly the issues raised in the
present case.

Counsel also argues that the Manufacturer knew that the titanium sponge
was destined for the United States because of the requirement that the
material must meet the Customer's specifications. In addition, Counsel
argues that the references to the Customer's and Interlink's purchase
order numbers on all of the commercial documents demonstrates that the
Manufacturer knew that the merchandise was destined for the United
States.

[Transaction Value]{.underline}

Transaction value, the preferred method of appraisement, is defined in
section 402(b)(1) 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 merchandise when sold for exportation to
the United States . . . ."

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; codified at 19 U.S.C. §1401a). The primary
basis of appraisement under the TAA is transaction value, which is
defined as "the price actually paid or payable for the imported
merchandise when sold for exportation to the United States," plus
certain enumerated additions thereto to the extent they are not
otherwise included in the price actually paid or payable. [19 U.S.C.
§1401a](../../../../../../../../cgi-bin/om_isapi.dll%3FclientID=2404742&infobase=usc19.nfo&jump=19%20USC%201401a&softpage=Doc_Frame_Pg42&wordsaroundhits=8#JUMPDEST_19 USC 1401a)(b)(1).

As a general matter, Customs assumes that the price the importer paid is
the basis of transaction value. As Customs explained in a General Notice
entitled, "Determining Transaction Value in Multi-tiered Transactions,"
T.D. 96-87, 30/31 Cust. Bull. 52/1, January 2, 1997:

> Customs presumes that the price paid by the importer is the basis of
> transaction value and the burden is on the importer to rebut this
> presumption. In order to rebut this presumption, in accordance with
> the *Nissho Iwai* standard, the importer must prove that at the time
> the middleman purchased, or contracted to purchase, the goods were
> "clearly destined for the United States" and the manufacturer (or the
> seller) and middleman dealt with each other at "arm's length."

# 

# Clearly Destined for the United States

The U.S. Court of Appeals for the Federal Circuit has established that
for merchandise imported pursuant to a three-tiered transaction to be
appraised on the basis of the manufacturer-middleman sale, the
merchandise must be *clearly destined* for export to the United States.
In *Nissho Iwai American Corp. v. United States*, 982 F.2d 505 (Fed.
Cir. 1992), the Court of Appeals reviewed the standard for determining
transaction value when there is more than one sale which may be
considered as being a sale for exportation to the United States. In so
doing, the court reaffirmed the rationale established in *E.C. McAfee
Co. v. United States*, 842 F.2d 314 (Fed. Cir. 1988), that the
manufacturer's price, rather than the middleman's price, is valid so
long as the transaction between the manufacturer and the middleman falls
within the statutory provision for valuation. *Nissho Iwai*, 982 F.2d at
511. In reaffirming the *McAfee* rationale, the court stated that in a
three-tiered distribution system, "the manufacturer's price constitutes
a viable transaction value when the goods are clearly destined for
export to the United States and when the manufacturer and the middleman
deal with each other at arm's length, in the absence of any non-market
influences that affect the legitimacy of the sales price." *Id*. at 509.
*See also*, *Synergy Sport International, Ltd. v. United States*, 17 CIT
18 (1993).

In support of Interlink's contention that the Manufacturer's sales price
is the appropriate basis for determining the transaction value, Counsel
argues that the subject merchandise was clearly destined for the United
States at the time of export to the Middleman. Counsel argues the
references to the Customer's specification demonstrate that the
Manufacturer and the Middleman both knew that the merchandise was a sale
for export to the United States. Counsel also maintains, and the
Interlink affidavit states, that the Customer's specifications are
proprietary and are not used by any other company.

Counsel also claims that the Manufacturer knew of the sale to the
Importer and Customer because the Manufacturer was directly involved in
the negotiations of the sales contract between the Customer and the
Importer. In support of this assertion the Interlink affidavit states
that the Customer engaged in direct negotiations with the Middleman and
the Manufacturer.

Furthermore, Counsel asserts that the Customer ordered titanium sponge
meeting the Customer's exclusive specifications. In support of this
assertion, Counsel provided an affidavit from the president of the
importing company. The affidavit states that the Customer's
specifications are specific and proprietary to the Customer.

Counsel's claim that the titanium sponge could only be sold to the
Customer is not supported by the facts. First, reference to the
Customer's specifications is not conclusive evidence that the titanium
was destined to the United States. Significantly, the metallurgical
composition specifications of the GOST **\[ **                  **\]**
standard differ from the Customer's specifications. For three of the
seven mineral impurities covered by the GOST
**\[ **                 **\]** standard, including
**\[**                               

                 **\]**, the maximum allowable percentage exceeds the
maximum percentage allowed under the Customer's specifications. In
addition, the Customer's specifications contain maximum allowable
percentages for seven other impurities, including
**\[**                                                                                                     

           **\]**, which are not contained in the GOST standard. It is
therefore not clear that the titanium sponge sold by the Manufacturer in
fact met the Customer's specifications. Moreover, we note that the
Customer's specifications provided by Counsel were revised on October
27, 1999---after the date the Importer entered the subject merchandise.

Furthermore, the Customer specification is not referenced in the
Middleman's sales contract, the Manufacturer's sales contract, the
Manufacturer's invoice, or the Middleman's invoice. Although none of
these documents mentions the Customer's specification, they do specify
the Customer's size and grade requirements. In addition, the addendum to
the Manufacturer's sales contract notes only that the quality of the
material was according to the Russian state standard "GOST
**\[ **          

** \]**."

Moreover, the Customer's purchase order states that the titanium sponge
ordered by the Customer may be sold to other customers. Counsel asserts
that this statement is irrelevant to the determination of whether the
merchandise qualifies for *Nissho Iwai* treatment. Despite the language
of the statement, Counsel claims that there is no indication that either
the Manufacturer or the Middleman intended to ship the merchandise to
any party other than the Customer. We disagree. The Customer's purchase
order plainly states that the Importer may sell the titanium to other
customers and accordingly reduce the amount shipped to the Customer.
Accordingly, we conclude that the titanium sponge that meets the
Customer's specifications could be sold to other customers and therefore
was not manufactured exclusively for, nor sold exclusively to, the
Customer.

Furthermore, as detailed above, many of the commercial documents
underlying the subject transaction contain discrepancies in the grade
and size of the titanium. Counsel explains that the Customer orally
amended its purchase order to include the third grade of titanium sponge
(TG 110), and claims that this amendment was confirmed in the Importer's
April 19, 1999 sales contract, which references all three grades of
material. After the Importer's sales contract was prepared, however,
four of the commercial documents reference just two of the specified
grades of titanium sponge. In particular, the Importer's purchase order,
the Middleman's purchase order, the Manufacturer's undated invoice, and
the Middleman's invoice all specify only two of the three grades of
titanium sponge allegedly ordered by the Customer.

With regard to discrepancies in the size ranges, Counsel asserts that
the Customer purchase order, the Importer sales contract, and the
Manufacturer sales contract all state that the relevant size ranges for
the sponge are 2 x 12 mm, 12 x 25 mm, and 12 x 70 mm. Counsel further
notes that these are standard size ranges for titanium sponge. Counsel
does not explain, however, why only two of the three size ranges are
specified in two other commercial documents. In particular, the
Importer's June 16, 1999 purchase order, and the Middleman's August 8,
1999 invoice state just the two of the three size ranges.

Moreover, the method of shipment undermines Counsel's claim that the
merchandise was clearly destined for the United States. Prior to the
transaction underlying this protest, the Manufacturer exported the
titanium to **\[**           **\]**, an unrelated company. At the end of
1998, the Manufacture reacquired the titanium which was warehoused in
**\[ **                              **\]** from
**\[**           **\]**. Counsel states that the merchandise was shipped
to **\[ **          **\]** where it is warehoused until shipment to the
United States pursuant to the Customer's installment delivery schedule.
The fact that the merchandise was shipped to **\[ **          **\]**
prior to the sale to the Middleman is an important factor in this
determination. See HRL 547035, dated August 18, 1999. The export of
titanium to the warehouse in **\[ **          **\]** before the sale to
the Middleman raises the possibility of diversion to a third party,
especially in light of the fact that the Customer's purchase order
states that Interlink may sell the merchandise to other customers.

Finally, Counsel provided insufficient documentation to determine
whether all of the titanium sponge shipped by the Manufacturer was
delivered to the Importer. As noted above, the Manufacturer invoiced the
Middleman for **\[ **          **\]** metric tons of merchandise but
there is only one invoice from Middleman to the Importer for
**\[ **          **\]** metric tons. Therefore, it is not clear whether
the remaining **\[ **          **\]** metric tons of titanium sponge
shipped to the Middleman were in fact delivered to the Importer.

With regard to the sale between the Manufacturer and the Middleman, we
find insufficient evidence to determine that the subject merchandise was
clearly destined for the United States. Although Interlink was
designated as the consignee on the Importer's purchase order, the
Manufacturer's sales contract and invoice make no reference to the
Importer or to the United States as the ultimate destination of the
merchandise. In the absence of convincing evidence that the titanium
sponge was clearly destined for the United States we do not reach the
question of whether there was an arm's length sale between the
Manufacture and the Middleman.

In order to appraise the merchandise on the basis of the Manufacturer's
sales price, the Protestant must present sufficient evidence that the
titanium sponge was clearly destined for exportation to the United
States. Based on the evidence submitted, we determine that there exists
a possibility of diversion and that the merchandise, therefore, is not
clearly destined for the United States at the time of the Importer's
purchases. Therefore, the Protestant failed to rebut the presumption
that transaction value should be based on the price paid by the
Importer.

**[HOLDING:]{.underline}**

Based on the information submitted, we find that there exists a
possibility of diversion and that the merchandise from the Manufacturer
was not clearly destined for the United States at the time of sale.
Consequently, transaction value cannot be based on the sale between the
Manufacturer and the Middleman. We conclude, therefore, that transaction
value should be based on the sales between the Middleman and the
Importer.

The protest should be denied. In accordance with Section 3A(11)(b) of
Customs Directive 099 3550-065, dated August 4, 1993, you should 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 this decision must be
accomplished prior to mailing this decision.

Sixty days from the date of this decision, the Office of Regulations &
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](http://www.customs.ustreas.gov/), by means of
the Freedom of Information Act, and other methods of public
distribution.

> Sincerely,

Virginia L. Brown

Chief, Value Branch