HQ 547493

March 14, 2002

RR:IT:VA 547493 MMC

**CATEGORY:** Valuation

Port Director of Customs

1East Bay Street

Savannah, Georgia 31401

**RE:** Protest 1703-99-100060; transaction value; price actually paid
or payable; formula; Transaction Value of Identical Merchandise

Dear Port Director:

This is our decision on Protest 1703-99-100060, concerning whether the
price as determined by a method specified in a contract represents the
price actually paid or payable for transaction value purposes. The
protest was filed on behalf of Phenolchemie Inc. by Grunfeld, Desiderio,
Lebowitz & Silverman. The goods were entered on February 9, 1998 and the
entry was liquidated without review on December 12, 1998. A protest
together with a memorandum in support of it, was timely filed on March
26, 1999.

In response to the filing of the protest, you issued a request for
information (CF 28) on April 26, 1999, asking for additional
information. That information included a copy of the contract containing
the method identified for determining the price actually paid or
payable, proof of payment for each shipment involved in the referenced
protests, a copy of the charter party agreement, proof of ocean freight
charges, proof of U.S. storage costs, and a breakdown and complete
explanation of the miscellaneous selling costs. Protestant replied to
this request in a July 27, 1999, letter with an explanation and
accompanying exhibits.

You denied the protest and forwarded it to this office, where it was
received on September 8, 1999. We regret the delay in responding.
Protestant seeks refunds of the difference between estimated prices
declared for the protested entries and the actual prices paid for the
imported merchandise.

**FACTS:**

On January 1, 1998, the Phenolchemie Inc (importer/alleged buyer)
entered into a "Cooperation Agreement" (contract) with Phenolchemie GmbH
& Co. KG (seller). The seller is engaged in the business of
manufacturing, processing distributing and selling certain bulk
chemicals (products). The Phenolchemie is in the process of building a
plant to produce and process the same products as the seller. In the
contract, the buyer and seller state their intent to "cooperate" with
regard to

manufacturing, marketing, selling, distributing, process development,
and other business areas of common interest. The buyer purchased
products from the seller for resale in North America (area). Seller
provided the products on an exclusive basis in order to develop the
market for the products to be manufactured by buyer after commercial
start up of the plant. The contract contains the following relevant
information.

**1. Business Transition as of January 1, 1998**

> §1.1 **Distributorship**
>
> As of January 1, 1998, (PC-GMbH )Seller appoints (PC Inc.) Buyer its
> distributor of the Products in the Area. Buyer has the right to use
> sub-distributors or agents in the Area, particularly in order to deal
> with small customers of the Products and to ensure adequate
> representation in all regions of the area. Buyer shall honor its
> Agency Agreement with Windsor Chemicals (dated July 11, 1997,
> including Heads of Agreement and Seller's Side letter dated June 3,
> 1997) for the promotion of the Products to small customers.
>
> §1.2 **Assignment of tank storage facilities, office lease and certain
> rail car leases**
>
> As of January 1, 1998, Seller will assign to Buyer the tank lease
> agreements for storage facilities currently used by Seller. In
> addition, Seller will cause Windsor Chemicals Inc. to assign the
> office lease and certain rail car leases to Buyer.
>
> §1.3 **Insurances**
>
> 1.3.2 **Freight Insurance**
>
> Seller agrees to have Buyer named as an additional insured to insure
> the risk of loss of or damage to the goods while the risk of loss
> rests with Buyer. In addition, Seller agrees to insure the leased
> railcars (rolling stock) of Buyer.

§ 1.6 **Prices**

The products are sold 'FOB' (Incoterms 19900 \[sic\] port of shipment).
The prices to be paid for Products by Buyer shall be at arm's length and
determined as follows:

## Gross Sales of Product 

> -discounts, boni, etc. if any
>
> -total freight costs
>
> -total cost of storage
>
> -import duties
>
> -commission payable to sub-distributors or agents
>
> -any other miscellaneous costs associated with the distribution
>
> -buyer's commission of 3% of gross sale
>
> Total net sales (out of tank)
>
> Actual revenues and cost incurred will be calculated at the end of
> each month, if necessary, inventory values will be adjusted at the end
> of each month. Seller will credit or debit the appropriate amount
> according to this calculation to buyer. Invoice prices shall be based
> on the expected prices for the forthcoming months.

After the buyer pays the estimated invoices, the actual revenues and
costs are computed and the seller issues debits or credits to reconcile
the actual revenue and costs.

The protested entries were made during the buyer's calendar quarter that
ended on March 31, 1998, the first quarter during which the contract was
alleged to be in effect. Counsel has provided a "schedule" showing the
outcome of the application of the pricing method outlined in §1.6 of the
contract. The conclusion indicates that there is a difference between
the estimated paid costs at the time of entry and the actual costs or
"prices" calculated a month later according to the contract. The actual
cost "price" is lower than the estimated. As such the buyer seeks a
refund from Customs for the portion of duty paid on the estimated cost
"price". Protestant bases the request on the theory that the pricing
method provided for in the contract is an acceptable formula for
transaction value purposes.

**ISSUE:**

Whether the subject merchandise may be appraised under transaction
value. If so, whether the price, as determined in the method outline in
the contract, represents the price actually paid or payable for the
merchandise.

**LAW AND ANALYSIS:**

# 

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 under the TAA is transaction value, which is defined as the
"price actually paid or payable for the merchandise when sold for
exportation to the United States." plus certain enumerated additions. 19
U.S.C. 1401a(b)(1). The term "price actually paid or payable" means:

the total payment (whether direct or indirect, and exclusive of any
costs, charges, or expenses incurred for transportation, insurance, and
related services incident to the international shipment of the
merchandise from the country of exportation to the place of importation
in the United States) made, or to be made, for imported merchandise by
the buyer to, or for the benefit of, the seller. 19 U.S.C.
1401a(b)(4)(A).

In order for transaction value to be applicable, there must be a price
actually paid or payable when sold for exportation to the United States.
In 19 CFR 152.103(a), Customs Regulations, the following is provided
with respect to the price actually paid or payable:

\[i\]n determining transaction value, the price actually paid or payable
will be considered without regard to its method of derivation. It may be
the result of discounts, increases, or negotiations, or may be arrived
at by the application of a formula, such as the price in effect on the
date of export in the London Commodity market. The word "payable" refers
to a situation in which the price has been agreed upon, but the actual
payment has not been made at the time of importation . . ..

In HRL 544346 dated September 11, 1990, we emphasized that a formula in
a contract can be acceptable under transaction value if it is a formula
that is based on a future event over which neither the seller nor the
buyer has any control. It *must* be an objective standard over which
neither the buyer nor the seller has control, such as the price in
effect on the date of export in the London Commodity Market, the example
of an acceptable means of a formula used to determine the price actually
paid or payable for the imported cited in 19 CFR 152.103 (a)(1).

For example, in HRL 546736 dated March 31, 1998, the buyer, middleman
and seller were all related. The buyer sold a chemical compound used as
an oxygenating additive and octane booster to the middleman who then
resold it to its sister company in the U.S. A contract between the buyer
and seller indicated that the price was to be determined by the average
of the published high and low prices quoted in a trade publication
DeWitt and ICIS for the NOR (Notice of Readiness) month which is
reported by an independent survey company. We held that the price
determined through the application of the agreed upon formula between
the parties may represent the price actually paid or payable for the
merchandise because the final price was determined based upon a set
price as published in DeWitt and ICIS on a specified future date and
neither party had control over the published figures.

If however, the future event is subject to the control of either the
seller or the buyer, then the formula fails to establish a "price
actually paid or payable" pursuant to transaction value. For example, in
HRL 546421 dated March 27, 1998, the ultimate purchase price for the
product was dependent upon the gross annual production of the product
worldwide. The parties submitted an invoice that was a good faith
estimate of the projected price. Within 90 days of the end of each
calendar year, the seller sent to the buyer a reconciliation showing the
actual worldwide production, the actual price for the product and any
debits or credits between the parties. Customs concluded that this
method did not result in a fixed price within the meaning of
152.103(a)(1) and that without a fixed price at the time of importation,
transaction value could not be used.

In the present case, we disagree with counsel's conclusion that the
price arrived at by the agreed-upon method between the parties
represents the price actually paid or payable for the merchandise.
Although the contract specifies the method that will be used to
determine the price for the product and arguably could be viewed as a
formula for such, it is not a formula upon which transaction value can
be based. This is because contrary to counsel\'s assertion, the amounts
of the actual revenues and costs incurred are within the control of one
of the parties. No element in the formula was based on a future event
over which neither the seller or the buyer has any control.

We note that Counsel cites HRL 542975 dated March 9, 1983 in support of
his proposition that that the pricing method set out in protestant's
contract is in fact an acceptable formula. We disagree. HRL 542975 was
an advanced ruling request where an invoice price reflected a fixed
amount for overhead and profit, and a standard cost estimate for labor.
We held that the standard cost estimate for labor, while adjusted
periodically to reflect actual costs, was not a variable used to effect
payment, but rather, payment for the merchandise was based on actual
costs. In that prospective ruling request, we indicated that the
importer would be permitted to deposit duties based upon the invoiced
amount and make periodic deposits, *e.g.,* every 90 days to compensate
for any additional labor costs which may have been paid in connection
with the production of the imported merchandise during the preceding
period. Furthermore, the importer was not entitled to a refund of duties
paid, based upon an overestimate of labor costs. Finally, HRL 542975 was
a *prospective ruling request*. The importer notified and/or sought
approval for its pricing methodology prior to entry. In the instant
situation that did not occur. Rather, protestant entered merchandise
declaring the invoice price to be true and accurate and Customs
liquidated the entry without examination based on Protestant's
representation. Only after entry and through protest did protestant
first notify Customs of the estimated and/or changed nature of the price
and seek a duty refund for overestimated costs.

The information presented fails to establish that the contractual method
for determining the price is acceptable for purposes of appraising the
merchandise under transaction value.

Because we find that the price between Phenolchemie Inc. and
Phenolchemie GmbH & Co. is not acceptable in determining a transaction
value, the imported merchandise cannot be appraised on the basis of
transaction value.

When imported merchandise cannot be appraised on the basis of
transaction value, it is appraised in accordance with the remaining
methods of valuation, applied in sequential order. \[19 U.S.C.
1401a(a)(1)\] The alternative bases of appraisement, in order of
precedence, are: the transaction value of identical or similar
merchandise \[19 U.S.C.1401a(c)\]; deductive value \[19 U.S.C.
1401a(d)\]; computed value \[19 U.S.C. 1401a(e)\]; and the \"fallback\"
method \[19 U.S.C. 1401a(f)\]. Appraisement of the merchandise should
proceed sequentially through the subsequent provisions of § 402 of the
TAA, with the first alternative basis of appraisement being the
transaction value of identical or similar merchandise in § 402(c) of the
TAA. It is our understanding that there are transaction values of
identical merchandise that can be used under 19 USC402 (c) to appraise
the shipments at issue.

**HOLDING:**

The contractual method for determining the price is not acceptable for
purposes of appraising the merchandise under transaction value.
Appraisement of the merchandise should proceed sequentially through the
subsequent provisions of § 402 of the TAA, with the first alternative
basis of appraisement being the transaction value of identical or
similar merchandise in § 402(c) of the TAA. This Protest should be
administered in a manner consistent with the decision as set forth
above.

In accordance with Section 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 take steps to make the decision available to Customs
personnel via the Customs Rulings Module in ACS and the public via the
Diskette Subscription Service, Freedom of Information Act and other
public access channels.

Sincerely,

Virginia L. Brown

Chief, Value Branch