Opinion ID: 597241
Heading Depth: 2
Heading Rank: 1

Heading: Transaction Value

Text: 11 The parties do not dispute that the imported vehicles must be appraised on the basis of transaction value. The transaction value of imported merchandise is defined in Section 402(b)(1) of the Tariff Act of 1930, as amended by section 201 of the Trade Agreements Act of 1979, codified at 19 U.S.C. § 1401a(b)(1), as the price actually paid or payable for the merchandise when sold for exportation to the United States, subject to certain additions and deductions as noted earlier. The primary issue here is whether the trial court erred in determining that the NIC/NIAC-MTA contract price is the price actually paid or payable for the imported vehicles when sold for exportation to the United States. 12 McAfee similarly involved a three-tiered system for distributing custom-made clothing assembled in Hong Kong to purchasers in the United States. Under this system, purchasers' orders for the clothing were taken by a distributor who then contracted with tailors in Hong Kong to produce the clothing. Upon receipt of the completed clothing, the distributor imported the items into the United States and forwarded them to the purchasers. The clothing entries were liquidated pursuant to an assessment of transaction value based on the price to the U.S. purchasers rather than the price paid by the distributor to the Hong Kong manufacturers. 13 The principal issue addressed by the court in McAfee concerned the proper transaction value of the imported merchandise. In resolving that issue, the court in McAfee essentially addressed two separate questions: (1) whether the sale between the manufacturer and the middleman 7 involved merchandise that was for exportation to the United States, and if so, (2) which of the two possible sales prices (i.e., the price paid by the middleman or the price paid by the purchaser) was proper for valuation purposes. 14 Regarding the first question, the court determined that [w]here clothing is made-to-measure for individual United States customers and ultimately sent to those customers, the reality of the transaction between the distributors and the tailors is that the goods, at the time of the transaction between the distributors and tailors, are 'for exportation to the United States.'  842 F.2d at 319, 6 Fed.Cir. (T) at 98. Upon concluding that the merchandise sold by the manufacturers to the middleman was made for exportation to the United States, the court was then faced with deciding which price should be used as the basis for appraising the transaction value. 15 In addressing that question, the court found guidance from United States v. Getz Bros. & Co., 55 CCPA 11 (1967), a decision binding upon us in which the determination of transaction value of imported merchandise in the context of a three-tiered distribution was also involved. As the court in McAfee succinctly stated: 16 [t]he issue in Getz was whether valuation of certain plywood should be at the manufacturer's price to a foreign middleman or that middleman's price to the United States customer. Two holdings in that case are significant here. First, a sale need not be to purchasers located in the United States to provide the basis for valuation. Second, 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. [Citations omitted.] 17 McAfee, 842 F.2d at 318, 6 Fed.Cir. (T) at 97 (emphasis added). Following the holdings of Getz, the court in McAfee held that the transaction value of the imported garments should have been determined on the basis of the Hong Kong tailors' assembly price, rather than on the basis of the price paid by the U.S. purchasers to the distributor. 18 Although the court in McAfee recognized that [a] determination that goods are being sold or assembled for exportation to the United States is fact-specific and can only be made on a case-by-case basis, id. at 319, 6 Fed.Cir. (T) at 98, that caveat pertains specifically to determining whether a certain sales price falls within the statutory definition of transaction value under 19 U.S.C. § 1401a(b)(1). However, 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. Indeed, the court noted that 19 ... if the importer establishes that his claimed, lower valuation falls within the statute, the importer is entitled to the benefit of that valuation even though Customs' valuation also satisfies the same statutory requirements. While an argument could be made that Customs should have the option to impose the higher duty in such circumstances, ... precedent is to the contrary. 20 Id. at 318, 6 Fed.Cir. at 97. 21 The government argues that the so-called first sale rule of Getz and McAfee should not apply to every case where there is a manufacturer, a middleman, and a purchaser, regardless of the facts involved. We agree. Conceivably, mechanical application of the 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 only 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. As the government itself recognizes, that determination can only be made on a case-by-case basis. In this case, the vehicles that were the subject of the KHI-NIC contract were manufactured for a specific United States purchaser, the MTA. They were unquestionably intended for exportation to the United States and had no possible alternative destination. 22 At trial, the government argued that the transaction between KHI and NIC did not fall within the statutory definition of transaction value because the sales price negotiated between KHI and NIC was not the product of arm's length bargaining. The trial court, however, rejected the government's allegations that KHI and NIC were related parties under 19 U.S.C. § 1401a(g) and that there was no sale for exportation between KHI and NIC. The court determined that the agreements between NIC and KHI were [not] of a different nature from the foreign transactions in either Getz and McAfee. 786 F.Supp. at 1009-10. 23 On appeal, the government contends that the price paid by NIC to KHI under the KHI-NIC contract cannot represent the correct appraised transaction value of the imported vehicles because that contract did not involve the sale of complete vehicles. According to the government, KHI did not own the U.S.-made components found in the imported vehicles and thus the contract between KHI and NIC only involved the sale of the vehicles' Japanese-made components. In support of its position, the government relies on Article 3 of the KHI-NIC contract, which provided that the price negotiated between KHI and NIC of Y 80,002,100 per vehicle was subject to change with any change in the quantity of Japanese-made components as compared to U.S.-made components. We reject the government's contention. 24 Under the KHI-NIC contract, KHI agreed to manufacture 325 rapid transit passenger vehicles in accordance with the contract between NIC/NIAC and the MTA, and NIC agreed to pay for them. Although KHI was required to use a specified quantity of U.S.-made components in the fabrication of the vehicles, that requirement did not render the contract as merely one for the sale of components made in Japan. A breakdown between the Japanese and American content of the vehicles was necessary for purposes of establishing financing credit from the Export-Import Bank of Japan. Any change in the content ratio would have an effect on such credit, and thus the KHI-NIC contract provided for compensatory price adjustments. The government has failed to establish that the use of U.S.-made components in the manufacture of the imported vehicles in any way undermined the legitimacy of the price negotiated between KHI and NIC for the purchase of the completed vehicles or that the sales price did not accurately reflect the price that would exist in a true arm's length transaction. 25 Accepting that both the manufacturer's price and the middleman's price may serve as the basis of transaction value, the critical issue on appeal here centers upon which price is legally proper. In view of the controlling and binding authority of McAfee, we hold that the transaction value of the imported passenger cars at issue must be based on the KHI-NIC contract price. See also Generra Sportswear Co. v. United States, 905 F.2d 377, 381 n. 7 (Fed.Cir.1990). 26 The trial court, however, determined that McAfee was distinguishable from the instant case and thus did not consider it controlling authority in appraising the transaction value of the imported vehicles. Instead, the court employed the analysis set forth in Brosterhous, 737 F.Supp. 1197 (Ct. Int'l Trade 1990), in determining that the transaction value should be based on the price paid by the purchaser. We agree with NIAC that the trial court committed reversible error in failing to follow the controlling authority of McAfee. 27 Although the trial court cited differences in the material facts of McAfee, none supports its conclusion that those differences mandate a different result. The trial court determined that McAfee is inapplicable because it involved assembled merchandise within the meaning of 19 C.F.R. § 152.103 8 and did not involve the valuation of manufactured goods. The court found that KHI had an interest in the imported vehicles other than as an assembler because KHI was extensively involved in the negotiations with the MTA and that KHI possessed a significant stake in the ensuing contract between MTA and NIAC. That distinction, however, does not take this case out from under the rule of McAfee. In fact, it emphasizes KHI's role in the export of the vehicles to the United States, supporting the conclusion that its sale to NIC is the legally-controlling transaction. 28 The ultimate issue in McAfee was whether the assembly price of the imported merchandise, rather than the price paid by the purchaser, should serve as the basis for determining transaction value. Similarly, the critical issue here is whether the sales price paid by NIC to KHI should serve as the basis for appraising the transaction value of the imported vehicles. McAfee speaks directly to that question and answers it in the affirmative. That case is not only applicable here, it is dispositive. 29 In the interest of clarifying the law, we consider it necessary to examine the case of Brosterhous, Coleman & Co. v. United States, 737 F.Supp. 1197 (Ct. Int'l Trade 1990), upon which the trial court relied in reaching its decision. The court in Brosterhous held that where there are two transactions that can be considered to be sales for importation to the United States, Customs policy is that transaction value should be calculated according to the sale which most directly caused the merchandise to be exported to the United States. Id. at 1199. 30 The U.S. Customs Service issued a seminal ruling in CLA-2 CO:R:CV:V, 542928 BLS, TAA 57, C.S.D. 83-46, 17 Cust.B. 811 (January 21, 1983) in which it stated its position that the transaction to which the phrase 'when sold for exportation to the United States' refers when there are two or more transactions which might give rise to a transaction value, is the transaction which most directly causes the merchandise to be exported to the United States. C.S.D. 83-46, 17 Cust.B. at 813. In so ruling, Customs acknowledged that under 19 U.S.C. § 1401a(b), as it existed before amendment by the Trade Agreements Act of 1979, it was possible to use as the sale for exportation to the United States for purposes of determining statutory export value a sale from a foreign seller to a foreign buyer, who in turn sold the merchandise to a United States importer. However, Customs departed from that view because the Trade Agreements Act replaced export value with transaction value as the primary basis for valuation. Thus Customs concluded that [c]ases decided under the prior law are not, therefore, necessarily precedent under the [Trade Agreements Act]. C.S.D. 83-46, 17 Cust.B. at 813. 31 We reject the Customs Service's rationale as being legally unsound. A similar argument was rejected by the court in McAfee, which recognized that the language of the earlier statute is not significantly different from the ... provision of the current statute. McAfee, 842 F.2d at 318, 6 Fed.Cir. at 97. We agree with NIAC that the 1979 amendment did not change the operative language of the statutory provision for valuation which requires that the sale be for exportation to the United States. Further, we can discern nothing in the legislative history of the 1979 amendment that suggests that Customs, in determining the transaction value of imported merchandise, should undertake an investigation focusing on which of two transactions most directly caused the exportation. The Customs policy followed by Brosterhous proceeds from an invalid premise. To the extent Brosterhous is inconsistent with this court's decision in McAfee by requiring a weighing of the relative importance of two viable transactions, it is overruled. See Strott v. Derwinski, 964 F.2d 1124, 1128 (Fed.Cir.1992).