HQ 544579

September 30, 1993

VAL CO:R:C:V 544579 ML

CATEGORY: Valuation

District Director

Portland, OR

RE: Application for Further Review of Protest (AFR) No. 3126-

89-000001; Determination of which Sale is a Statutorily

Viable Transaction Value

Dear Sir:

The above-referenced protest and application for further

review is against your decision regarding the sale for

exportation, for purposes of transaction value, of oil well

casing imported by Ipsco Steel Inc.

FACTS:

The facts of this case have been set forth in a Headquarters

ruling memorandum dated January 7, 1991 (see HQ 544415). Those

facts are reiterated briefly as follows. IPSCO Steel, Inc.

(hereinafter referred to as \"ISI\") is a Canadian corporation

qualified to do business in the U.S. and the exclusive sales

distribution arm in the U.S. for IPSCO, Inc. (hereinafter

referred to as \"Ipsco\"), also a Canadian corporation. According

to the sales agreement between Ipsco and ISI, Ipsco agrees to

sell its products to ISI for subsequent sale to U.S. customers.

The merchandise is sold to ISI, F.O.B. Ipsco plant in Canada, at

which point ISI obtains title and risk of loss for the

merchandise. In HQ 544415, we determined that a bona fide sale

existed between Ipsco and ISI.

ISI sold the Ipsco pipe to Arco Alaska Inc. (hereinafter

referred to as \"Arco\"), a U.S. customer of ISI. ISI negotiated

with Arco to sell oilwell casing manufactured by Ipsco. ISI

confirmed with Ipsco that Ipsco would build the pipe according to

Arco\'s specifications. In addition, Ipsco was to ship the

merchandise, and the invoice for ISI, directly to Arco in Alaska.

ISI was the importer of record.

In a letter, dated October 30, 1987, from ISI to an import

specialist in Blaine, Washington ISI explained the formula

methodology used to arrive at the prices paid by ISI to Ipsco.

Transfer Price = Final Selling Price - Freight

1+ .04 + Duty & Brokerage & Surcharge

This formula resulted in a margin of 4% which was claimed to be

comparable to the margin received by independent third parties

providing similar services. Apart from minor errors or very

slight variations in the range of .1% due to anomalies in the

calculation of brokerage fees, all transfer prices were said to

result in a gross profit margin to ISI of about 4%.

The Pacific Region, Regulatory Audit Division (RAD)

performed an audit of ISI, the results of which are found in

Report of Importer Audit IPSCO Steel Inc., dated December 20,

1990\. RAD reviewed 69 random entries during the period of March,

1986 through September, 1989. The entries involved in this AFR

were not the subject of the audit, however, there is every

indication that the methodology employed by the company in

arriving at its transfer prices remained constant.

ISSUE:

Whether the price paid by ISI to Ipsco or the price paid by

Arco to ISI should serve as the basis for determining transaction

value.

LAW AND ANALYSIS:

The method of appraisement is transaction value pursuant to

section 402(b) of the Tariff Act of 1930, as amended by the Trade

Agreements Act of 1979 (TAA; 19 U.S.C. 1401a). Section 402(b)(1)

of the TAA provides, in pertinent part, that the transaction

value of the imported merchandise is the \"price actually paid or

payable for the merchandise when sold for exportation to the

United States.\"

In an April 15, 1991 submission, counsel for the importer

contended that the transaction value of the imported merchandise

should be based on the sale between Ipsco and ISI. In support of

this he cited E.C. McAfee Co. et al. v. United States et al., 842

f.2d 314 (Fed. Cir. 1988) and United States v. Getz Bros. & Co.,

55 CCPA 11 (1967) as establishing that \"if the transaction

between the manufacturer and the middleman falls within the

statutory provision for valuation, the manufacturer\'s price,

rather than the price from the middleman to his customer is used

for appraisal.\" Further, counsel cites Orbisphere Corp. v.

United states, 726 F.Supp. 1344, 13 CIT 866 (1989), after remand

to Customs, 765 F.Supp. 1087, Slip Op. 91-39 (May 14, 1991),

entry of judgment after second remand Slip Op. p. 91-69 (August

9, 1991), in support of his contention that the sale between ISI

and Arco cannot be a \"sale for export\" because it is a domestic

sale (i.e., title and risk of loss pass to Arco upon delivery in

Alaska).

Additionally, in a January 8, 1993 submission, counsel for

the importer noted the recent decision of the Court of Appeals

for the Federal Circuit in Nissho Iwai American Corp. v. United

States, Appeal 92-1239 decided December 28, 1992. That case

involved a three-tiered distribution system for the sale of

subway cars manufactured in Japan by Kawasaki, sold to a

middleman, Nissho Iwai Corporation/Nissho Iwai America

Corporation (\"Nissho\"), and from Nissho to the New York

Metropolitan Transit Authority (\"MTA\"). On the authority of

McAfee and Getz, the Appellate Court reversed the Court of

International Trade and held that once it is determined that both

the manufacturer\'s price and the middleman\'s price are

statutorily viable transaction values, the rule is

straightforward: the manufacturer\'s price, rather than the price

from the middleman to the purchaser, is used as the basis for

determining transaction value (emphasis added). The court noted,

that determination can only be made on a case-by-case basis.

The Court of Appeals in Nissho also stated that the

mechanical application of the above rule whenever there is a

three-tiered distribution system could lead to inequitable

results where the manufacturer\'s price is set artificially low.

However, the rule applies where there is a legitimate choice

between two statutorily viable transaction values. 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 (emphasis added).

In the Nissho case the court found that the merchandise was

clearly destined for the United States with no possible

alternative destination. Additionally, the parties were not

\"related parties\" within the meaning of section 402(g) of the

TAA. Therefore, Kawasaki and Nissho dealt with each other at

arm\'s length.

The facts in the instant case are similar to those in Nissho

yet there is a critical difference. Here, the parties are

\"related\" as defined in 402(g) of the TAA. The relevant

provision with regard to related parties states the following:

The transaction value between a related buyer and seller is

acceptable\...if an examination of the circumstances of the

sale of the imported merchandise indicates that the

relationship between such buyer and seller did not influence

the price actually paid or payable. See, section

402(b)(2)(B) of the TAA.

In determining whether the relationship between the parties

influences the price of imported merchandise, section

152.103(j)(2)(i), Customs Regulations (19 CFR 152.103(j)(2)(i)),

provides that if it is shown that the buyer and seller, albeit

related, buy and sell from one another as if they are not

related, this indicates that the price is not influenced by the

relationship between the parties, and appraisement pursuant to

transaction value is proper. If the price has been settled in a

manner consistent with the normal pricing practice of the

industry, or with the way the seller settles prices for sales to

unrelated buyers, then it is considered not to have been

influenced by the relationship between the parties. Also, if it

is shown that the price is adequate to ensure recovery of all

costs plus a profit which 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 would demonstrate

that the price has not been influenced. (See the Statement of

Administrative Action \"SAA\" p.54; and section 152.103(l)(2)(ii)

and (iii), Customs Regulations (19 CFR 152.103(l)(2)(ii) and

(iii)).

On April 19, 1993 a member of my staff requested that

counsel submit material that would demonstrate the acceptability

of the transfer price as between the related parties,

particularly in light of the \"margin\" that was used to determine

that price. Counsel responded with a submission dated May 7,

1993 wherein it was again stated that the related party price was

based upon ISI\'s arms-length prices to unrelated U.S. buyers with

deductions for freight, duty, brokerage, processing and carrying

costs in the U.S. where applicable, and a negotiated margin for

ISI.

Counsel stated the margin amount was originally set on the

basis of negotiations and discussions between the two companies

with consideration given to the pricing structure in comparable

situations involving independent distributors and the industry in

general in the U.S. Ipsco knew this information, stated counsel

due to its commercially acquired knowledge and through trade

associations. Therefore, by 1984-1985, the companies experience

re: operating costs for an efficient distribution business had a

high degree of reliability. Therefore, with a 4 percent margin

ISI would make a profit on some transactions and realize a loss

on others if one could quantify general and administrative

overhead costs on a sale-by-sale basis. However, the only way

for a margin to be reasonably set is on an aggregate basis and

the companies never intended to assure ISI of a profit on every

transaction.

Counsel stated that the 4 percent margin must be viewed as

reasonable and conservative given ISI\'s performance of selling,

marketing, promotion and account servicing. Counsel stated that

there was no chance that the transaction values involved here

were lower than those private parties would have negotiated yet

no proof by counsel has been offered.

While we appreciate counsel\'s reliance upon it\'s client\'s

business acumen, no evidence has been provided to support

2counsel\'s claim that through trade associations or elsewhere the

general industry contained a profit similar to that of ISI.

Additionally, counsel has stated that the prices determined by

Ipsco and ISI always allowed for certain profit percentages.

Again, no evidence was submitted which suggests that during the

time of the entries in question the industry was always

guaranteed to make at least a 4% profit comparable to that of ISI

guarantee from Ipsco. Certainly, a guarantee of profit for ISI

regardless of industry variations could lead to \"artificially low

transfer prices\" as described by the court in Nissho.

Consequently, we are unable to verify that the price inclusive of

this profit margin is consistent with the normal pricing practice

of the industry in question. The fact that the parties were able

to manipulate profit amounts with no reference to the industry as

a whole leads us to conclude that the relationship indeed

influenced the price actually payable.

The prices between the related parties were not established

to have been negotiated at arm\'s length, nor shown to be

consistent with the industry in question nor was there any

evidence submitted showing that the prices contained all costs

plus a profit equivalent to the firm\'s overall profit as a whole

for the same class or kind of merchandise. Therefore, we

conclude that the examination of the circumstances of the sale of

the imported merchandise indicates that the relationship between

ISI and Ipsco influenced the price actually paid or payable.

Additionally, no evidence was presented showing that the parties

met the alternative test for acceptability (i.e., that the

transfer price closely approximated test values). In sum, the

transaction value between Ipsco and ISI was not acceptable under

section 402(b)(2)(B) of the TAA.

As stated above, the court in Nissho observed that the rule

only applies where there is a legitimate choice between two

statutorily viable transaction values. In order for the

manufacturer\'s price to constitute a viable transaction value two

essential elements must exist. First, the goods must be clearly

destined for export to the United States and second, the

manufacturer and the middleman must deal with each other at arm\'s

length.

Here, the imported merchandise was made for a specific U.S.

customer, Arco. Therefore, the merchandise was clearly destined

for export to the United States. As for the second criteria, we

believe the parties did not deal with each other at arm\'s length

and that the price was influenced by the relationship. As a

consequence, this case is not like Nissho so that case does not

apply. Here, there is only one statutorily viable transaction

value and there is no choice to made as there was in Nissho. The

ISI price to Arco is the only statutorily viable transaction

value which is acceptable under section 402(b) of the TAA. The

merchandise was clearly destined for the United States and ISI

and Arco dealt with each other at arm\'s length. The two were not

related parties, none of the restrictions on the use of

transaction value as may be found in section 402(b)(2)(A) or

elsewhere occurred.

HOLDING:

In the instant case, no legitimate choice existed between

two statutorily viable transactions as propounded by the court in

Nissho. In the instant transactions only the sale between ISI

and Arco represents a statutorily acceptable transaction value.

Accordingly, you are directed to deny the protest in full.

A copy of this decision should be attached to the Customs Form 19

and mailed to the protestant as part of the notice of action on

the protest.

Sincerely,

John Durant, Director