# HQ 546998

January 19, 2000

VAL RR:IT:VA 546998 LPF

CATEGORY: Valuation

Port Director

U.S. Customs Service

6 World Trade Center

New York, NY 10048

[Attn]{.underline}: Mr. Nathaniel Lewis

RE: Application for Further Review of Protest No. 1001-97-101473; Bona
Fide Sale For Export; Related Party Transaction; Nissho Iwai

Dear Director:

This is a decision on an application for further review (AFR) of a
protest filed February 21, 1997, against your decision concerning the
valuation of watches and watch components. On August 31, 1999, a meeting
was held with counsel and the importer, Seiko Corporation of America
(SCA). Since that time, counsel has provided us with further information
concerning this matter.

FACTS:

*Roles of the Parties*

Seiko Logistics Hong Kong (SLHK), previously Hattori Overseas Limited HR
(HOHK), is responsible for the manufacturing function of the watches and
related accessories, by subcontracting the actual production based on
purchase orders from, its parent, Seiko Corporation of Japan (SCJ).
Watch movements and, sometimes, watch cases, are produced by Seiko Epson
(SE) and Seiko Instruments (SI) in Japan, and assembled into complete
watch heads at SE and SIs Hong Kong entities.

Once components produced by SE and SI are completed in Hong Kong, SLHK
arranges for transfer to unrelated band manufacturers/watch assemblers
in Hong Kong, mainly Bambi HR Ltd. (Bambi), Bear Zannon Co HR Ltd.
(Bear), and Glory Watch Band HR Ltd. (Glory). These entities manufacture
finished watches, which subsequently are returned to SLHK.

Counsel provides that SLHR maintains responsibility for coordinating all
aspects of the manufacturing functions (e.g., sourcing, shipment of
watcheads to band/assembly facilities, coordinating production
schedules, quality control, controlling manufacturing costs, etc.).
Additionally, counsel indicates that SLHK possesses title to the
finished products, coordinating the shipment of the finished goods to
U.S.

As the parent company, SCJ is responsible for all product and market
strategy efforts. All trademarks and goodwill associated with the
product lines also are SCI's property. SCJ bears the worldwide
after-market warranty and servicing obligations. According to counsel,
SCJ purchases finished watches from SLHK and is responsible for
negotiating with sales subsidiaries and distributors regarding product
lines to be offered in particular markets. SCJ also is responsible for
coordinating purchase orders received from distributors.

SCJ provides various business functions, with overall corporate
direction, and is responsible for corporate services such as:
identifying financial needs of business, developing budgets and
forecasts, maintaining books and records, preparing and disseminating
consolidated financial reports, and providing legal services.

Seiko Corporation of America (SCA) is a wholly owned U.S. subsidiary
that markets, distributes and sells watches, clocks and related
replacement products. SCA maintains a sales force to deal directly with
unrelated U.S. wholesalers and retailers. Once SCA accepts orders from
unrelated vendors, SCA must consolidate them and issue purchase orders
to SCJ. SCA has served as the importer of record for the transactions at
issue.

*Documentary Support*

Counsel and SCA have provided the following documentation to Customs
concerning these tiers of the transaction:

[Watch Manufacturers/Assemblers to SLHK or HOHK]{.underline}

1\. Invoices, dated May, 1997, from Bambi to SLHR, Order No.
Pulsar-9706, for watch bands. Corresponds to payment remittance, dated
July 14, 1997 and statement of accounts, dated May 30, 1997, between
Bambi and SLHK for the watchbands. (Correspond to purchase orders from
SCJ to Bambi, among others, discussed in the next section.)

2\. Invoices, dated September, 1996, from SE to HOHK, for local delivery
and providing for the sale of watch heads to HOHK, with Bear as
consignee. Corresponds to bank transfer, dated December 31, 1996, and
statement of accounts, dated October 8, 1996, between SE to HOHK for the
watch heads.

SLHK or HOHK to SCJ

1\. Invoice from SLHR to SCJ, dated January 27, 1997, with terms of sale
FOB Hong Kong, providing for the sale of watches with bands to SCJ, with
SCA as consignee.

2\. Invoice from HOHR to SCJ, dated September 16, 1996, with terms of
sale FOB Hong Kong as well as CIF New York, providing for the sale of
watches with bands to SCJ, with SCA as consignee.

3\. Invoices from HOHK to SCJ, dated May, 1996, with either terms of
sale FOB Hong Kong or both FOB Hong Kong and CIF New York, providing for
the sale of watches to SCJ, with SCA as consignee. Corresponds to
monthly statements from HOHK to SCJ. dated June 1, 1996, for watches and
watchbands.

4*.* Invoices from HOHK to SCJ, dated April and May, 1996, with terms of
sale FOB Hong Kong, providing for the sale of sample watches to SCJ,
with Fracht Ltd. of Switzerland and, in some cases, SCI or SE as
consignee.

5\. Three bank remittance documents, dated September 2, 1997, between
HOHK and SCJ as proof of payment for June, 1997 transactions. The
documents do not correspond to any individual statements.

6\. Purchase orders from SCJ on behalf of SLHK to Bambi, Bear, and Yat
Chung, throughout 1997, for watchbands. Correspond to Bambi - SLHK May,
1997 invoices and payment remittance/statement of accounts. (Counsel
provides that although a purchase order document covering the order from
SCJ to the contract watch manufacturer is not available, these purchase
orders serve as evidence of SCJ's orders placed in connection with the
production of the merchandise covered under the subject entry.)

7\. Invoice from HOHK to SCJ, dated October 30, 1995, with terms of sale
FOB Hong Kong as well as CIF New York, providing for the sale of watches
with bands to SCJ, with SCA as consignee.

[SCJ to SCA]{.underline}

1\. Invoice from SCJ to SCA, dated January 27, 1997, with terms of sale
FOB Hong Kong, providing for the sale of watches with bands to SCA as
the consignee. Corresponds to January 27, 1997 SLHK - SCJ invoice, with
markup price.

2\. Invoice from HOHK on behalf of SCJ to SCA, dated September 16, 1996,
with terms of sale FOB Hong Kong as well as CIF New York, providing for
the sale of watches with bands to SCA as the consignee. This invoice
corresponds to the following documents:

\- SCA purchase orders, dated April and May, 1996;

\- Confirmation Letters or Proforma Invoices, from SCJ to SCA, dated
July, 1996, with terms of sale FOB Hong Kong for watches;

\- July and August, 1996 SCJ watch head purchase order report,
accompanied by invoice reference list;

\- September, 1996 SE - HOHK invoices, providing for the sale of watch
heads to HOHK, with Bear as consignee. Accompanied by bank transfer and
statement of accounts;

\- September 16, 1996 HOHK - SCJ invoice, with markup FOB and CW prices,
including signature of same manager as September 16, 1996, HOHK/SCJ -
SCA invoice. Accompanied by October 1, 1996 payment statement and
October 3, 1996 consolidated statement between HOHK and SCJ (total
consolidated statement supported by December 30, 1996 bank payment
notices); and

\- proof of payment via October 7, 1996 payment request and October 15,
1996 bank debit notes between SCJ and SCA.

3\. Invoice from HOIIK on behalf of SCJ to SCA, dated October 30, 1995,
with terms of sale FOB Hong Kong as well as CIF New York, providing for
sale of watches with bands to SCA as the consignee. Corresponds to
October 30, 1995 HOHK-SCJ invoice, with markup FOB and CIF prices,
including signature of same manager.

*Counsel's Arguments*

Counsel provides that the totality of the facts and circumstances reveal
that *bonafide* sales occurred between SLHK and SCJ. Specifically,
counsel states that SCJ provides SLHK with instructions for design and
manufacturing requirements, quality and materials controls, production
schedules, labeling and size requirements, and the direct shipment to
SCA. Counsel adds that SCJ is free to resell at any price and does not
consult with or require permission from SLHK to sell to SCA. SLHK has no
interest or control over SCJ's choice of distributors or customers, SCJ
solely being responsible for negotiating with SCA as to the product line
to be offered in a particular market.

SCJ places its own purchase orders for merchandise with SLKK and records
it as inventory. SCJ can give alternative routing instructions to SLHK
and have goods temporarily inventoried overseas in Japan, prior to
exporting them to the U.S. Moreover, SCJ bears warranty claim and risks
beyond insurance coverage. SCA does not negotiate prices with SLHK, nor
control or influence negotiations between SCJ and SLHK. No privity of
contract or payment exists between SCA and SLHK.

Counsel states that title transfers from SLHK to SCJ, although the
shipping terms may not reflect the parties' intent and conduct to this
effect. Upon final production and completion of pre­delivery preparation
at SLHK's facilities (e.g., packing, preparing documentation etc.),
SLHK's performance is completed as to the sale to SCI. According to
counsel, the FOB shipping term only is understood to be a price term.

Furthermore, SCA does not guarantee payment to SLHK if SCJ defaults its
obligation to pay for the merchandise. Counsel also notes that SLHK's
agreement precludes the ability to contract for other distributors,
therefore, once manufactured, the goods are sold to, and expected to be
paid for by, SCJ. Watches are custom-made to SCJ's specifications, often
incorporating intellectual property owned by SCJ, thus limiting sales
only to them.

The fact that SLHK performs certain tasks (e.g., both sets of commercial
invoices originate from SLHK and contain the same manager's signature)
on behalf of SCJ, does not vilify the *bona fides* of the sales,
according to counsel. SCJ does prepare its own pro-forma invoice,
however, SLHK performs such tasks as a convenience for SCJ, because the
goods are shipped directly to the U.S. from SLHK facilities. Counsel
provides that a transfer of property for consideration, nevertheless,
occurs.

Furthermore, counsel provides that because SLHK's prices are settled in
a manner consistent with the normal pricing practices of the industry in
question, the circumstances of sale demonstrate acceptability of the
related party price between SLHK and SCJ. Counsel provides a range of
uncontrolled (arm's length) adjusted full cost markups observed in the
industry as the indicator of normal pricing practices. Counsel asserts
this most reliably and accurately captures all direct and indirect
costs, plus profit associated with manufacturing watches and timepieces.
In essence, the full cost markup is represented by the ratio of
operating income to the sum of the operating expense and cost of goods
sold. In other words, this figure reflects a percentage factor that
would be applied to the total costs incurred in producing the product to
arrive at the profit element to be earned. Counsel provides, for
example, that a five (5) percent markup provides \$5.00 of operating
profit for every \$100 costs incurred.

Counsel provides a range of adjusted full cost markups in a Comparable
Industry Set (CIS) of six (6) companies. The study undertaken by counsel
found an initial sample of 23 possible comparable companies using the
SIC category for watches, clocks, clockwork, and parts. Those companies
engaging in a significant amount of unrelated activities, manufacture of
other goods, and without adequate financial data available were dropped,
yielding a Worldwide Set of 13 companies. The CIS, which counsel
ultimately utilized, was formulated after taking into account different
geographic factors (currency, local material/labor costs, distribution,
regional business cycles, etc.). In effect, this yielded a set comprised
of Eastern Asia companies. Next, the full cost markup was chosen, as the
objective profit level indicator (PLI) to be used as an accurate measure
of comparability (e.g., ratio of operating income to sum of operating
expense and cost of goods sold). Once the figures were normalized (or
adjusted), by accounting for disparities in the operation asset levels
of the companies (e.g., cash, cash equivalents, accounts receivable, and
inventories) the CIS figures were derived based on the interquartile
range (middle 50 percent) of data and observations.

While enabling Customs to compare the full cost markup between these
company sets, the data also provides the following specific figures for
comparison between SLHK and SCJ. The unadjusted comparable industry set
provides that SLHK has a full cost markup of 2.1%, while SCJ has one of
1.2%. SCJ's adjusted figure in the normalized set is 0.0%. The median
markup figures for the company sets were 3.3% (unadjusted) and 2.3%
(adjusted).

Finally, counsel asserts that the goods are clearly destined to the
U.S., based on the manner in which the parties conduct their
transactions. Specifically, counsel provides that SCA develops annual
purchasing forecasts of style specifications and quantity requirements.
Based on various factors, SCA transmits electronic purchase orders to
SCJ each month. Upon receipt of monthly electronic purchase orders from
SCA, SCJ remits order confirmations based upon factory production
capability.

Based on production schedules from SCJ, SLHK develops corresponding
schedules for subcontractors and arranges for delivery of the necessary
raw materials and components to the sub-contractor facilities. SLHK also
relays to the subcontractors, special instructions regarding the watch
products to be manufactured (e.g., including all labeling, packaging,
and instruction manuals done in English for the U.S. market).

Counsel explains that upon the assemblers' completion of the production,
the products are shipped to SLHK for packing and preparation of the
requisite documentation. SLHK invoices SCJ for inventory shipped
directly to SCA. SCJ reviews shipping invoices issued by SLHR, matches
them to open SCA purchase orders and invoices SCA accordingly.

IS SUE:

Whether the transactions between SLHK and SCJ consist of *bonafide*
sales conducted at arm's length, wherein the merchandise was clearly
destined to the U.S., enabling transaction value to be based on the
price actually paid or payable between these parties.

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the United
States is transaction value pursuant to section 402(b) of the Tariff Act
of 1930*,* as amended by the Trade Agreements Act of 1979 (TAA),
codified at 19 U.S.C. 1401a. Section 402(b)(l) of the TAA provides, in
pertinent part, that the transaction value of imported merchandise is
the "price actually paid or payable for the merchandise when sold for
exportation to the United States" plus amounts for the enumerated
statutory additions.

However, 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 case, SLHK and SCJ are related
pursuant to section 402(g)(1)(G) of the TAA. Section 402(b)(2)(B) of the
TAA provides that a transaction value between related parties will be
deemed acceptable 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 where the transaction value
closely approximated certain "test" values. In essence, such evidence
satisfies Customs that the transacting parties conducted their sales at
"arm's length." Accordingly, SLHK and SCJ must conduct *bonafide* sales
at arm's length, wherein the merchandise is destined to the U.S., in
order for appraisement of the imported merchandise to be based on the
transaction value represented by that price.

First, in determining whether a *bonafide* sale has taken place between
a potential buyer and seller of imported merchandise, no single factor
is determinative. Rather, the relationship is to be ascertained by an
overall view of the entire situation, with the result in each case
governed by the facts and circumstances of the case itself *Dorf
International, Inc.* V. *United States,* 61 Cust. Ct. 604, A.R.D. 245
(1968). Customs recognizes the term "sale," as articulated in the case
*of J.L. Wood v. U.S.,* 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406
(1974), to be defined as: the transfer of property from one party to
another for consideration.

However, several factors may indicate whether a *bonafide* sale exists
between a potential buyer and seller. In determining whether property or
ownership has been transferred, Customs considers whether the potential
buyer has assumed the risk of loss and acquired title to the imported
merchandise. In addition, Customs may examine whether the potential
buyer paid for the goods, and whether, in general, the roles of the
parties and circumstances of the transaction indicate that the parties
are functioning as buyer and seller.

In determining whether the relationship of the parties to the
transaction in question is that of a buyer-seller, where the parties
maintain an independence in their dealings, as opposed to that of a
principal-agent, where the former controls the actions of the latter,
Customs may consider whether the potential buyer: (a) provided (or could
provide) instructions to the seller; (b) was free to sell the items at
any price he or she desired; (c) selected (or could select) his or her
own customers without consulting the seller; and (d) could order the
imported merchandise and have it delivered for his or her own inventory.

The information and documentation counsel has provided does indicate
that the transaction reflects that of a buyer-seller as opposed to that
of a principal-agent. Specifically, counsel's submissions include
invoices, purchase orders, and proof of payment between the parties,
indicating that payment was made from SCA to SCJ and then from SCJ to
SLHK for the merchandise. Additionally, while the terms of sale on the
submitted documentation may not, in and of itself, demonstrate that a
transfer of title and, hence, risk of loss occurred between SLHK and
SCJ, an overall analysis of the situation reveals otherwise. In this
regard, we note that SLHK appears to serve as an independent
buyer/seller insofar as it maintains the responsibility for fully
coordinating the manufacturing functions as well as the actual shipment
of the merchandise to the U.S. Only upon final production and completion
of pre-delivery preparation at its facilities (e.g., packing, preparing
documentation, etc.) is SLHK's performance completed as to its sale to
SCJ. Furthermore, SCJ's role as an independent buyer/seller is supported
by the fact that it negotiates its prices with SCA, determines to whom
the merchandise will be sold, and may order the merchandise requesting
it be held for delivery as seen fit.

However, consistent with the cases of *Nissho Iwai American Corp. v.
United Stales,* 16 CIT 86, 786 F. Supp. 1002 (CIT 1992) *rev'd* 982 F.2d
505 (Fed. Cir. 1992) and *Synergy Sport International, Ltd. v. United
States,* 17 CIT 18 (1993) in order to base transaction value on the
price between SLHK and SCJ as opposed to the price paid by SCA, the
importer, to SCJ, Customs must find that the sale between the former
parties was one negotiated at arm's length free from any nonmarket
influences and involved goods clearly destined for export to the United
States." Such evidence also may serve to support the previous analysis
concerning the *bonafides* of the sales between the transacting parties.

Customs presumes that an importer's declared value is based on the price
paid by that importer and that transaction value shall be based on that
price. However, in situations where the importer is not the middleman,
but the importer requests appraisement based on the manufacturer's
price, the importer must demonstrate that the manufacturer's price is
acceptable in accordance with *Nissho Iwai.*

With regard to whether the sale was negotiated at "arm's length," we
note that the Statement of Administrative Action (SAA), adopted by
Congress with the passage of the TAA, provides that if it is shown that
the buyer and seller, although related, buy from and sell to each other
as if they were not related, this will demonstrate that the price has
not been influenced by the relationship and the transaction value will
be accepted. The SAA provides, as an example, that if the price has been
settled in a manner consistent with the normal pricing practices of the
industry in question, this will demonstrate that the price had not been
influenced by the relationship. As a further example, if it is shown
that the price is adequate to ensure recovery of all costs plus 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, this will demonstrate that the price has not been influenced.
Statement of Administrative Action, HR. Doc. No. 153, Pt. II, 96^th^
Cong., 1^st^ Sess. (1979), *reprinted in* Department of Treasury,
*Customs Valuation under the Trade Agreements Acts of 1979* at 54
(1981).

Among the figures and analyses provided to Customs concerning the full
cost markup between the various companies' figures, we find the
comparison between SLHK's 2. 1% markup and SCJ's 1 .2% markup most
relevant for consideration pursuant to the TAA. These amounts show that
SLHK's price adequately ensures its recovery of all costs plus profit
equivalent to SCJ's, or the firm's, overall profit, over an appropriate
time period, for sales of timepieces and clocks, that is, merchandise of
the same class or kind. Moreover, the markup comparison between SLHK to
SCJ, as well as to the other companies selling merchandise of the same
class or kind, indicate that SLHK's cost and profit figures are
consistent with the market as a whole. Such consistency demonstrates
that the price between SLHK to SCJ also has been settled in a manner
consistent with the normal pricing practices of the industry.
Accordingly, the evidence demonstrates that the price has not been
influenced by the relationship.

Finally, the submitted evidence also does demonstrate that the
merchandise is clearly destined for the U.S. The submitted invoices,
purchase orders, proof of payment, sales confirmations, and accompanying
documentation, provide a paper trail indicating that the merchandise was
clearly destined for export to the U.S. In particular, the invoice from
HOHK/SCJ to SCA, dated September 16, 1996, and the enumerated
corresponding documents, shows the structure and flow of the entire
transaction. Additional support arises from the fact that SCA transmits
electronic purchase orders to SCJ on a monthly basis after developing
annual purchasing forecasts, style specifications, and quantity
requirements. In order to meet SCA's requirements, SCJ and SLHK must
confirm factory production capability, with the latter relaying special
instructions regarding the merchandise to the subcontractors (e.g.,
labeling, packaging, instruction, and English manuals). Moreover, we
note that the merchandise is custom-made to SCJ's specifications, often
incorporating intellectual property owned by SCJ, thus limiting sales
only to them.

Accordingly, the transactions between SLHK and SCJ consisted of
*bonafide* sales conducted at arm's length, wherein the merchandise was
clearly destined to the U.S.

HOLDING:

Based on the evidence presented, the transactions between SLHK and SCJ
consisted of *bonafide* sales conducted at arm's length, wherein the
merchandise was clearly destined to the U.S. Accordingly, transaction
value may be based on the price actually paid or payable between these
parties.

The protest should be granted. In accordance with Section 3 A(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.treas.gov, by means of the Freedom of Information Act, and
other methods of public distribution.

> Sincerely,
>
> Thomas L Lobred
>
> Chief Value Branch