HQ 545368

July 6, 1995

VAL R:C:V 545368 RSD

CATEGORY: VALUATION

District Director

United States Customs Service

555 Battery Street

San Francisco, California 94111

RE: Application for Further Review of Protest Number 280993-100693;
concerning a sale for exportation of merchandise pursuant to three
tiered sale; related parties; Nissho Iwai American Corp. v. United
States

Dear Sir:

This is in response to your memorandum dated June 21, 1993, forwarding
an application for further review of protest 280993-100693 and other
related protests, filed on behalf of Helen of Troy Corporation by its
attorneys, Baker & McKenzie, on April 8, 1993. The protest concerns the
appraisement of hair dryers and other personal care appliances made in
China and imported from Hong Kong. Baker & McKenzie made an additional
submission dated March 10, 1994, to your office and made additional
submissions to the Office of Regulations and Rulings, the most recent on
May 16, 1995. We regret the delay in responding.

FACTS:

The protestant, Helen of Troy Corporation (HOT), which is based in El
Paso, Texas, imported electric hair dryers and other personal care
appliances and products. The products were manufactured in China, but
were imported from Hong Kong. HOT sells a variety of hairdressing
equipment marketed under the \"Vidal Sassoon\" trade name. HOT
determined the types and the quantities of the products which it needed,
and conveyed this information and specifications to one of its wholly
owned subsidiaries, International Appliances Cayman Ltd. (IACL) or
International Appliances Ltd. (IAL). IACL is located in the Cayman
Islands and IAL is located in Hong Kong. IAL/IACL ordered and purchased
the products from various Chinese manufacturers. IAL/IACL entered into
contracts with manufacturers to make the products in

China. HOT claims that it and IAL/IACL are unrelated to the foreign
manufacturers and that the price at which the Chinese manufacturers sold
the products was the result of arm\'s length negotiations.

According to protestant, IAL purchased finished goods from the factories
for a unit price, and it was obligated either to take the finished goods
for such price or to compensate the factories for any costs incurred as
a result of the order. On the other hand, protestant indicates that IACL
consigned certain components to the factories and employed these
factories as its agents for the purchase of other components and paid
the factories a total price which consisted of two separate amounts, one
for the components and raw material purchased on IACL\'s behalf, and
another for manufacturing services. IACL entered into a series of
manufacturing contracts with various companies in China to produce
personal care appliances. The contracts provided that the parties will
enter into production agreements. In the production agreements, the
manufacturers agreed to produce and ship products in accordance with the
agreement. These agreements further indicated that the raw materials
and/or components required in the manufacture of the products may be
furnished either by IACL or the manufacturers, that IACL was to
reimburse the manufacturers for any raw materials or components that
they purchased for making the products, manufacturers were to receive
what is referred to as a \"manufacturer\'s fee\", and that the factory
will be responsible for the cost of handling and transportation of the
products from the factory to the point from which they were shipped.
IACL followed up the production agreements by issuing purchase orders.

After HOT ordered the products from IAL/IACL, these companies
transmitted their own purchase orders for these articles with the Hong
Kong office of the relevant foreign manufacturer. Along with the
purchase order, the foreign manufacturer was also provided with the
specifications for the goods, which included instructions to label the
goods with the \"Vidal Sassoon\" trade name. IAL/IACL issued packing
lists describing the articles to be shipped to HOT. Upon loading the
goods in Hong Kong, the carrier issued a bill of lading showing IAL/IACL
as the shipper, and HOT as the consignee.

The manufacturers submitted their invoices to IAL/IACL for payment. IAL
and IACL issued invoices for the articles to HOT at prices which
included a profit. HOT paid these invoices amount through wire transfers
to IAL or IACL. The manufacturers\' invoices did not designate any
specific terms of sale. The invoices from IAL/IACL to HOT show that the
transactions were F.O.B. Hong Kong.

Customs appraised the goods under transaction value based on the price
HOT paid IAL/IACL. On February 24, 1993, HOT disclosed to Customs that
an upward price adjustment had been made on products sold by IAL to HOT.
Based on this adjustment, HOT tendered additional duties to the District
Director in San Francisco. However, on March 15, 1993, HOT notified the
Customs Service that it would seek to have entries reappraised in
accordance with the Nissho Iwai decision. Protestant claims that
transaction value should be based on the prices IAL/IACL paid the
foreign manufacturers.

For the transactions involving IAL, the protestant submitted the
following documents which were supposed to illustrate a representative
transaction: 1) Purchase Orders from IAL to the Chinese manufactures; 2)
Confirming Purchase Order from HOT to IAL; 3) International Bills of
Lading; 4) Packing List prepared by IAL, describing the model and
quantity of the goods;

5\) Invoices from the Chinese manufacturers to IAL, showing the price of
the product and packing cost; 6) Invoice from IAL to HOT showing the
description of the imported product and unit the price charged; 7) The
Entry Summary; 8) Funds Transfer Advice from NationsBank indicating a
transfer of funds.

The Protestant also submitted several sets of documents for different
products which are presented as being representative of transactions
between HOT and IACL. Included in these sets of documents were 1)
Production Agreements between HOT Cayman (IACL) and the Chinese
Manufacturers; 2) Purchase Orders from Hot Cayman (IACL) to the Chinese
manufacturers; 3) HOT specifications for the goods delivered to the
manufacturers; 4) Confirming Purchase Orders from HOT to HOT Cayman
(IACL); 5) International Bills of Lading with attaching lists of the
model descriptions and quantities of the goods; 6) Packing Lists
prepared by HOT Cayman (IACL); 7) Invoices from the Chinese
manufacturers to HOT Cayman (IACL); 8) Invoices from HOT Cayman (IACL)
to HOT; 9) Entry Summaries; 10) NationsBank Fund Transfer Advice from
HOT to HOT Cayman (IACL).

ISSUE:

Whether the transaction value should be based on the sale between the
foreign manufacturers and IAL/IACL or the sale between IAL/IACL and HOT?

LAW AND ANALYSIS:

As you know 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. § 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).

In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir
1992), the Court reaffirmed the principle of E.C. McAfee Co. v. United
States, 842 F.2d 314 (Fed. Cir. 1988), that a manufacturer\'s price, for
establishing transaction value, is valid so long as the transaction
between the manufacturer and the middleman falls within the statutory
provision for valuation. In reaffirming the McAfee standard 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 influence that affect the
legitimacy of the sale price\...\[T\]hat determination can be made on a
case-by-case basis.

Id. at 509. See also, Synergy Sport International, Ltd. v. United
States, 17 C.I.T.\_\_\_, Slip Op. 93-5 (CT. Int\'l Trade January 12,
1993).

As a general matter in situations of this type, Customs presumes that
the price paid by the importer is the basis of transaction value.
However, in order to rebut this presumption, the importer must in
accordance with the court\'s standard in Nissho, provide evidence that
establishes that at the time the middleman purchased, or contracted to
purchase, the imported merchandise the goods were \"clearly destined for
export to the United States\" and that the manufacturer and middleman
dealt with each other at \"arm\'s length.\"

In the instant case, HOT is claiming that based on Nissho, the
transaction value for the imported merchandise should be based on the
sales between IAL/IACL and the manufacturers in China. In determining if
this claim is valid, the first question to be addressed is whether there
were bona fide sales between IAL/IACL and the manufacturers.

For Customs purposes, a \"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). Although
J.L. Wood was decided under the prior appraisement statute, Customs
recognizes this definition under the TAA. Several factors may indicate
whether a bona fide sale exists between potential seller and buyer. In
determining whether property or ownership has been transferred, Customs
considers whether the alleged buyer has assumed the risk of loss and
acquired title to the imported merchandise. In addition, Customs may
examine whether the alleged buyer paid for the goods, 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 545705, January 27, 1995.

In assessing whether there was a sale between the manufacturers and IAL,
we note that the transaction documents between the manufacturers and IAL
do not specify the terms of sale. However, the other evidence indicates
that there was a sale between the IAL and the manufacturers. IAL
prepared separate purchases orders describing the merchandise for the
manufacturers. The purchase orders also indicate that the goods had to
be inspected by IAL and an inspection certificate had to accompany each
shipment, showing that IAL had an interest that the goods were in
compliance with specifications. IAL also prepared a packing list. The
manufacturers also issue specific invoices for the products shown on the
purchase orders, which show that the transaction is \"By order and for
account of International Appliance Ltd.\". We also assume that IAL paid
the manufacturers the amount shown on invoices for the merchandise. In

turn, IAL issued invoices to HOT for the imported merchandise. The
invoices show a specific model number and an amount that was to be paid.
Based on the totality of the evidence submitted, we conclude that there
was a bona fide sale between IAL and the manufacturers.

The transactions involving IACL were different than those involving IAL
because rather than buying the merchandise straight out from the
manufacturers, IACL supplied certain components to the manufacturers and
paid them a manufacturer\'s fee for the assembly of the merchandise.
Nonetheless, as explained below, the assembly transaction may form the
basis of transaction value.

19 CFR 152.103(a)(3) states that:

In some cases, the price actually paid or payable may represent an
amount for assembly of merchandise in which the seller has no interest
in the merchandise other than as the assembler. In such cases the price
actually paid or payable, adjusted by the addition of the value of the
components and required adjustments, will form the basis for transaction
value.

Customs has applied this provision both where the price paid by the
importer is for assembly of the imported merchandise and where it is
paid for processing the goods. This position was articulated in HRL
543737, July 21, 1986, modifying HRL 543593, March 28, 1986. In that
case, a U.S. importer purchased oil well tubing from an unrelated
manufacturer in Japan. The tubing was then shipped to Canada where a
plastic protective coating was applied to the inside of the tubing by
another unrelated party. Separate payments were made by the importer to
the Japanese manufacturer and to the company in Canada which performed
the further processing. Customs initially determined that transaction
value could not be determined because the imported tubing was not sold
for exportation to the United States from Canada. However, in HRL
543737, July 21, 1986, Customs found that this decision was incorrect
and that the merchandise should have been appraised on the basis of
transaction value. Customs concluded that the transaction between the
importer and the Canadian processor represents a sale \"for exportation
to the United States,\" as those words are used in section 402(b) of the
TAA, and may, therefore, be the basis for a proper transaction value.
The ruling states that this is true even though the price actually paid
or payable to the Canadian processor relates solely to the processing of
the imported merchandise in Canada, noting section 152.103(a)(3),
Customs Regulations. Customs found that transaction value is represented
by the price paid to the Japanese manufacturer and the transportation
and related costs incurred in shipping the merchandise from Japan to the
site of the further processing Canada.

Customs applied a similar analysis in HRL 543971, July 22, 1987. In that
case, the importer purchased copper concentrate from Zaire. The
concentrate was then transported to a smelter/refinery in Zambia where
it was converted into copper cathode. From Zambia, the final product was
transported to South Africa where it was shipped to the United States.
Even though the price actually paid or payable to the Zambian processor
related solely to the processing of the imported merchandise, Customs
ruled that the transaction between the importer and the foreign
smelter/refinery represents a sale for exportation to the Untied States,
as those words are used in section 402(b) of the TAA, and may therefore,
be the basis for a proper transaction value. The price actually paid or
payable was determined to be the price the importer paid to the Zambian
smelter/refinery plus the value, as an assist, of the copper concentrate
furnished to the smelter/refinery free of charge by the importer.

Based on the above rulings and section 152.103(a)(3), we find that the
transactions between IACL and the manufacturers are sales for
exportation to the United States and may be the basis for a proper
transaction value. The price actually paid or payable is the fee IACL
pays the manufacturer for the assembly of the merchandise plus the value
as an assist, of the components furnished to the assembler. The hair
driers may be appraised on the manufacturer\'s price if the requirements
of Nissho-Iwai are satisfied.

Turning to the first part of this two part test, the protestant has
presented a number of factors which indicate that the hair dryers were
clearly destined to the United States at the time they were sold to the
IAL or IACL. First, there is the exclusive use of the English language
on the packaging and the use care manual. Second, the electrical
products bear the Underwriters Laboratory (UL) Trademark, indicating
that the products meet the safety standards of one of the major
organizations that tests products used in the U.S. market. Third, the
electrical products are made to operate on 110 volt electrical current,
which is not used outside of North America. All the hair dryers have a
circuit interruption device which prevents electrical shock if the
appliance is dropped into water. This is required in the United States,
but not in other countries, and it is generally not used in other
countries because of its expense. Fourth, the products bear a U.S.
trademark, \"Vidal Sassoon\", licensed to HOT. Finally, the shipping
documents indicate that the merchandise was to be delivered to the HOT
in the United States. Accordingly, the evidence establishes that the
merchandise was clearly destined for export to the United States at time
it was sold to the middlemen.

Regarding the second part of the test, the Chinese manufacturer and the
middlemen, IAL or IACL, are unrelated and it is presumed that they
negotiated with each other at arm\'s length. Therefore, absent evidence
to show that the sale between manufacturer and IAL/IACL, was not at
arm\'s length, it is our position that the transaction value should have
been based on the manufacturer\'s price that IAL or IACL paid. However,
we note that IACL supplied the manufacturer with component parts for the
hair dryers, which would be assists and must be added to the price
actually paid or payable to determine the transaction value for imported
merchandise.

HOLDING:

Because the imported merchandise was clearly destined to the United
States when sold to the middlemen, and the manufacturers and the
middlemen are unrelated and they apparently have

dealt with each other at arm\'s length, the transaction value of the
imported merchandise should be based upon the price actually paid or
payable for the imported merchandise by the middlemen, IAL/ IACL, to the
manufacturers.

You are directed to grant the protest. A copy of this decision with the
Form 19 should be sent to the protestant. In accordance with Section
3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993,
Subject: Revised Protest Directive, this decision should be mailed by
your office to the protestant no later than 60 days from the date of
this letter. Any reliquidation of the entry in accordance with the
decision must be accomplished prior to mailing of the decision. Sixty
days from the date of the decision, the office of Regulations and
Rulings will take steps to make the decision available to Customs
personnel via the Customs Rulings Module in ACS, and to the public via
the Diskette Subscription Service, the Freedom of Information Act and
other public access channels.

Sincerely,

John Durant, Director

Commercial Rulings, Division