[Federal Register Volume 73, Number 16 (Thursday, January 24, 2008)]
[Notices]
[Pages 4254-4264]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-1140]
-----------------------------------------------------------------------
DEPARTMENT OF HOMELAND SECURITY
Bureau of Customs and Border Protection
[USCBP-2007-0083]
Proposed Interpretation of the Expression ``Sold for Exportation
to the United States'' for Purposes of Applying the Transaction Value
Method of Valuation in a Series of Sales
AGENCY: Customs and Border Protection, Department of Homeland Security.
ACTION: Proposed interpretation; solicitation of comments.
-----------------------------------------------------------------------
SUMMARY: ``Transaction value'' is the primary method of appraising
imported merchandise and is defined in 19 U.S.C. 1401a as ``the price
actually paid or payable for merchandise when sold for
[[Page 4255]]
exportation to the United States,'' plus specified additions to that
amount. This document provides notice to interested parties that
Customs and Border Protection (CBP) proposes a new interpretation of
the phrase ``sold for exportation to the United States'' for purposes
of applying the transaction value method of valuation in a series of
sales importation scenario. CBP proposes that in a transaction
involving a series of sales, the price actually paid or payable for the
imported goods when sold for exportation to the United States is the
price paid in the last sale occurring prior to the introduction of the
goods into the United States, instead of the first (or earlier) sale.
Under this proposal, transaction value will normally be determined on
the basis of the price paid by the buyer in the United States. This
proposed interpretation reflects the conclusions of the Technical
Committee on Customs Valuation as set forth in Commentary 22.1,
entitled ``Meaning of the Expression `Sold for Export to the Country of
Importation' in a Series of Sales.''
DATES: Comments must be received on or before March 24, 2008.
ADDRESSES: You may submit comments, identified by docket number USCBP
2007-0083, by one of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments via docket number USCBP
2007-0083.
Mail: Trade and Commercial Regulations Branch, Customs and
Border Protection, 1300 Pennsylvania Avenue, NW. (Mint Annex),
Washington, DC 20229.
Instructions: All submissions received must include the agency name
and docket number for this proposed interpretive rule. All comments
received will be posted without change to http://www.regulations.gov,
including any personal information provided. For detailed instructions
on submitting comments and additional information on the rulemaking
process, see the ``Public Participation'' heading of the SUPPLEMENTARY
INFORMATION section of this document.
Docket: For access to the docket to read background documents or
comments received, go to http://www.regulations.gov. Submitted comments
may also be inspected during regular business days between the hours of
9 a.m. and 4:30 p.m. at the Trade and Commercial Regulations Branch,
Customs and Border Protection, 799 9th Street, NW., 5th Floor,
Washington, DC. Arrangements to inspect submitted comments should be
made in advance by calling Joseph Clark at (202) 572-8768.
FOR FURTHER INFORMATION CONTACT: Lorrie Rodbart, Valuation and Special
Programs Branch, Regulations and Rulings, Office of International
Trade, (202) 572-8740.
SUPPLEMENTARY INFORMATION:
Public Participation
Interested persons are invited to submit written data, views, or
arguments on all aspects of the proposed interpretation. If appropriate
to a specific comment, the commenter should reference the specific
portion of the proposed interpretation, explain the reason for any
recommended change, and include data, information, or authority that
support such recommended change.
Background
I. Transaction Value--The Valuation Agreement and U.S. Value Law
The Agreement on Implementation of Article VII of the General
Agreement on Tariffs and Trade (GATT) (Valuation Agreement) sets forth
the methods for determining the value of imported goods.\1\ The General
Introductory Commentary to the Valuation Agreement provides that the
primary basis for customs value is ``transaction value'' as defined in
Article 1. Article 1 provides that the customs value of imported
merchandise ``shall be the transaction value, that is the price
actually paid or payable for the goods when sold for export to the
country of importation, adjusted in accordance with the provisions of
Article 8. * * * '' [Emphasis added] The Agreement does not define the
phrase ``sold for export to the country of importation.''
---------------------------------------------------------------------------
\1\ This Agreement was one of the codes resulting in 1979 from
the Multilateral Trade Negotiations in GATT and provides a detailed
set of valuation rules. These rules expanded and gave greater
precision to the general valuation principles established in the
GATT. The United States enacted the provisions of this Agreement
into U.S. law in the Trade Agreements Act of 1979 (TAA), Public Law
96-39, 93 Stat. 144, codified at 19 U.S.C. 1401a. See also 19 U.S.C.
2503(a) and (c)(1). As a result of the 1994 Agreement establishing
the World Trade Organization (WTO), the Agreement on Implementation
of Article VII of the GATT is now commonly referred to as the WTO
Valuation Agreement. For ease of reference, this document will refer
to this Agreement as the Valuation Agreement. All Members of the WTO
are required to implement and apply the provisions of the Valuation
Agreement.
---------------------------------------------------------------------------
Under the U.S. value law, set forth at 19 U.S.C. 1401a, transaction
value is also the primary method of determining the appraised value.\2\
The U.S. value law substantively incorporates the definitions of
``transaction value'' and ``price actually paid or payable'' contained
in the Valuation Agreement. The statutory additions that form part of
transaction value are the ones provided for in Article 8 of the
Valuation Agreement. Neither 19 U.S.C. 1401a, nor the implementing
regulations set forth in part 152 of title 19 of the Code of Federal
Regulations (19 CFR part 152), defines the phrase ``sold for
exportation to the United States.''
---------------------------------------------------------------------------
\2\ Transaction value is the price actually paid or payable for
the merchandise when sold for exportation to the United States plus
specified amounts. See 19 U.S.C. 1401a(b)(1).
---------------------------------------------------------------------------
II. Determining Transaction Value in a Series of Sales Situation
When the import transaction involves only one sale, it is generally
easy to identify the sale for exportation to the United States for
purposes of determining the price actually paid or payable. In that
situation, there is only one buyer, usually located in the United
States, and one seller, usually located in another country.
Difficulties arise when the import transaction involves a series of
sales.
Since it is common for import transactions to involve multiple
parties and multiple sales, the issue of which sale must be used to
calculate the price actually paid or payable arises frequently.
Although this series of sales issue is critical to the proper
determination of transaction value, the statute does not explicitly
address this question.
CBP's current interpretation is to base transaction value on the
price paid by the buyer in the first or earlier sale (e.g., the sale
between the manufacturer and the intermediary) provided the importer
can establish by sufficient evidence that this was an arm's length sale
and that, at the time of such sale, the merchandise was clearly
destined for exportation to the United States. See T.D. 96-87, vols.
30/31 Cust. B. & Dec. Nos. 52/1 (January 2, 1997); Customs Informed
Compliance Publication, entitled Bona Fide Sales and Sales for
Exportation to the United States, and; numerous CBP rulings.\3\
Application of this ``first-sale'' principle often results in the
transaction value being determined on the basis of the price paid by a
foreign buyer to a foreign seller. CBP has reassessed this current
interpretation in light of a recent decision issued by the Technical
Committee on Customs Valuation.
---------------------------------------------------------------------------
\3\ The informed compliance publication, as well as customs
rulings issued since 1989, are available to the public for
downloading from the CBP Web site at http://www.customs.gov.
---------------------------------------------------------------------------
[[Page 4256]]
III. Technical Committee on Customs Valuation: Commentary 22.1, Meaning
of the Expression ``Sold for Export to the Country of Importation'' in
a Series of Sales
Article 18 of the Valuation Agreement established the Technical
Committee on Customs Valuation (Technical Committee) ``with a view to
ensuring, at the technical level, uniformity in interpretation and
application of this Agreement''.\4\ One of the responsibilities of the
Technical Committee is to furnish information and advice on matters
concerning the valuation of imported goods for customs purposes, as may
be requested by any WTO Member or the Committee on Customs Valuation.
The advice may take the form of advisory opinions, commentaries or
explanatory notes (referred to collectively as instruments). At its
24th Session held at the WCO in April, 2007, the Technical Committee
adopted Commentary 22.1, entitled ``Meaning of the Expression `Sold for
Exportation to the Country of Importation' in a Series of Sales.'' \5\
The series of sales issue had been on the agenda of the Technical
Committee for several sessions. Recognizing that this issue is
important to the proper application of the transaction value method
under Articles 1 and 8, and that different administrations have adopted
different interpretations, the Technical Committee decided to study and
clarify this issue.\6\
---------------------------------------------------------------------------
\4\ Article 18 established the Technical Committee under the
auspices of the Customs Cooperation Council, now known as the World
Customs Organization (WCO). The WCO publishes the instruments of the
Technical Committee in the Customs Valuation Compendium. Article 18
also established the Committee on Customs Valuation.
\5\ Commentary 22.1 was published in July, 2007, as part of
Amending Supplement 6, WCO Customs Valuation Compendium. A copy is
included as ``Attachment A'' to this document.
\6\ The Technical Committee asked Members to provide information
about how each Administration addressed the series of sales issue.
In response, the U.S. Administration submitted a copy of T.D. 96-87.
---------------------------------------------------------------------------
In Commentary 22.1, the Technical Committee states, ``[a] series of
sales consists of two or more successive contracts for sales of goods.
A basic issue in a series of sales is which sale should be used to
determine the transaction value under Articles 1 and 8 of the
Agreement. The purpose of this document is to clarify this issue.''
The Commentary includes an example illustrating a series of sales
situation. In the example, A is a retail store located in the country
of importation, B is a pen distributor located in country Z, and C is a
pen manufacturer located in country X. A contracts with B for the
purchase/sale of 1,000 pens of styles xx and yy. B contracts with C for
the same amounts and styles of pens. C subsequently ships the pens
directly to A. One of the questions posed was whether the price
actually paid or payable for the imported goods when sold for export to
the country of importation is the price A pays B in the last sale or
the price B pays C in the first sale.
In the section of Commentary 22.1 entitled, ``Guidance derived from
the provisions of the Agreement,'' the Technical Committee notes that
the Agreement does not define or otherwise directly address the meaning
of the expression ``sold for export to the country of importation.''
Therefore, the Technical Committee analyzes in great detail various
provisions of the Agreement for guidance regarding the meaning of this
phrase, including, for example, Article 8 relating to the adjustments
that must be made to the price actually paid or payable in the
determination of transaction value.
On the basis of this analysis, and in consideration of the fact
that different countries' administrations may find it difficult to
verify relevant information including accounting records that relate to
the first sale, the Technical Committee reached the following
conclusions:
The Technical Committee is of the view that the underlying
assumption of Article 1 is that normally the buyer would be located
in the country of importation and that the price actually paid or
payable would be based on the price paid by this buyer. The
Technical Committee concludes that in a series of sales situation,
the price actually paid or payable for the imported goods when sold
for export to the country of importation is the price paid in the
last sale occurring prior to the introduction of the goods into the
country of importation, instead of the first (or earlier) sale. This
is consistent with the purpose and overall text of the Agreement.
[Emphasis added]
In the example, consistent with the conclusion, the sale between
A and B represents such a sale. Therefore, the price actually paid
or payable for the imported goods when sold for export to Country I
is 10,000 c.u. (the price A pays B in the last sale).
In view of the fact that CBP's current interpretation of the
expression ``sold for exportation to the United States'' for purposes
of applying the transaction value method of valuation in a series of
sales situation is contrary to the considered views of the Technical
Committee, as reflected in Commentary 22.1, CBP has undertaken a
thorough examination of this series of sales issue under the U.S. value
law. Based on this examination, CBP has concluded that the current
interpretation as set forth in T.D. 96-87 and in CBP ruling letters is
not correct. The reasons for this conclusion are discussed below. CBP
is proposing a new interpretation to address how transaction value will
be determined in a series of sales situation that is consistent with
the conclusions of the Technical Committee in Commentary 22.1.
CBP further notes its understanding that most WTO Members already
apply the interpretation set forth in Commentary 22.1. Therefore,
adoption of the proposed interpretation would conform the U.S.
interpretation regarding the application of transaction value in a
series of sales to the current interpretation of most other WTO
Members.
Discussion of Proposed Interpretation
I. Transaction Value--Statutory Language
Transaction value is derived from the price the buyer actually paid
the seller for the imported merchandise. In this regard, the current
statute directs 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.'' [Emphasis added] See 19 U.S.C.
1401a(b)(1) and 19 CFR 152.103(b). The term ``price actually paid or
payable'' means the total payment made, or to be made, for imported
merchandise by the buyer to, or for the benefit of, the seller. See 19
U.S.C. 1401a(b)(4)(A) and 19 CFR 152.102(f). In determining transaction
value, various costs must be added to the price actually paid or
payable, to the extent they are not already included. See 19 U.S.C.
1401a(b)(1)(A)-(E).\7\ These additions form an integral part of
transaction value. If sufficient information is not available with
respect to any of the specified amounts, the transaction value of the
imported merchandise concerned will be treated, for purposes of this
section, as one that cannot be determined. See 19 U.S.C. 1401a(b)(1).
The statute also specifies certain limitations on the use of
transaction value. For example, a related party transaction value is
acceptable if it ``closely approximates * * * the transaction value of
identical merchandise, or of similar merchandise, in sales to unrelated
buyers in the United States * * *.'' [Emphasis added] See 19 U.S.C.
1401a(b)(2)(B)(i).\8\
---------------------------------------------------------------------------
\7\ These additions are listed in footnote 11 of this document.
\8\ The various methods of establishing that a related party
transaction value is acceptable are specified in 19 U.S.C.
1401a(b)(2)(B).
---------------------------------------------------------------------------
[[Page 4257]]
II. Transaction Value--Legislative History
Prior to the enactment of the TAA, imported merchandise was
appraised, in general, on its export value.\9\ Verification of facts in
the country of export was frequently required to determine export
value. The legislative history of the TAA makes it clear that Congress
intended to replace the complicated ``export value'' system requiring
investigations into the pricing practices in a foreign country with one
in which the requisite information was easily obtainable and the
determination of the appraised value was predictable and
straightforward. See S. Rep. No. 96-249 and H. Rep. No. 96-317 to
accompany H.R. 4537, 96th Cong. 1st Sess. (1979).
---------------------------------------------------------------------------
\9\ Export value was defined as the ``price, at the time of
exportation to the United States * * * at which such or similar
merchandise is freely sold or, in the absence of sales, offered for
sale in the principal markets of the country of exportation, in the
usual wholesale quantities and in the ordinary course of trade, for
exportation to the United States.'' [Emphasis added] 19 U.S.C.
1401a(b) (1976) and 19 U.S.C. 1402(d) (1976). The ``export value''
statute required an appraisement based on sales in the country of
exportation at the time of the exportation, i.e., the value of
``exported merchandise.''
The methods of valuation * * * represent a simplification of
U.S. law and add significantly more predictability regarding the
value which will be used for customs purposes. The use of
transaction value as the primary basis for customs valuation will
allow use of the price which the buyer and seller agreed to in their
transaction as the basis for valuation, rather than having to resort
to the more difficult concepts of ``freely offered,'' ``ordinary
course of trade,'' ``principal markets of the country of
exportation,'' and ``usual wholesale quantities'' contained in
existing U.S. law.
S. Rep. No. 96-249, at 119.
An attempt has been made to ensure that these new rules are fair
and simple, conform to commercial reality, and allow traders to
predict, with a reasonable degree of accuracy, the duty that will be
assessed to their products.
H. Rep. No. 96-317, at 79.
The Court of Appeals for the Federal Circuit (CAFC) quoted the
Senate Report language with approval in Generra Sportswear Co. v.
United States, 905 F.2d 377, 380 (Fed. Cir. 1990). In Generra, the CAFC
also indicated that the transaction value statute was enacted in order
to provide a ``straightforward approach'' to valuation that would not
require Customs to engage in ``formidable fact-finding.'' See also VWP
of America v. Untied States, 175 F.3d 1327 (Fed. Cir. 1999).
In Salant v. United States, 86 F. Supp. 2d 1301 (C.I.T. 2000), a
case involving the interpretation of the assist provision (assists are
one of the additions to the price actually paid or payable), the Court
of International Trade (CIT) indicated that the legislative history of
the U.S. value law includes an examination of the GATT Valuation Code
(Valuation Agreement) noting that 19 U.S.C. 1401a implemented the
Agreement in the U.S. law.
It is therefore appropriate to examine the analysis of this issue
by the Technical Committee. To that end, it is noted that the Technical
Committee stated in Commentary 22.1:
Article 1 does not refer to import transactions involving a
series of sales and consequently does not provide criteria in that
respect. Therefore, guidance must be sought from the purpose and the
overall text of the Agreement, including an examination of its
provisions. In addition, certain practical considerations are
relevant.
Accordingly, the Technical Committee undertook a detailed
examination of the Agreement. This examination included the General
Introductory Commentary, the text, and interpretative notes to Articles
1, 6, 7, 8, and 9. The Technical Committee concluded that ``there are
various indications in the General Introductory Commentary, Article 1
and other provisions of the Agreement that it was envisaged that
Article 1 would normally be based on sales to buyers in the country of
importation.''\10\ Two of these indications, Article 8 regarding
adjustments and Article 7 regarding the fallback method, are discussed
below.
---------------------------------------------------------------------------
\10\ These are addressed in detail in Commentary 22.1. See
``Attachment'' to this document
---------------------------------------------------------------------------
In paragraphs 14-20, Commentary 22.1, the Technical Committee
analyzes the adjustments that must be made to the price actually paid
or payable pursuant to Article 8. The Technical Committee observes that
the determination of the proper sale upon which transaction value is
based under Article 1 (i.e., the first or last sale) directly affects
what adjustments can be made under Article 8. Article 8 requires the
addition of specified costs, including certain commissions incurred by
the buyer, certain goods and services (referred to as assists under
U.S. law) supplied by the buyer, certain royalties and license fees
paid by the buyer and certain proceeds that accrue to the seller.
Because these costs must be incurred by the buyer, supplied by the
buyer, paid by the buyer or must accrue to the seller, the Technical
Committee observes that ``in many cases it would not be possible to
make the Article 8 adjustments if transaction value was determined
based on (the price actually paid or payable by the buyer in) the first
sale'', a result that was not intended. Based on the provisions of
Article 1, Article 8, and the General Introductory Commentary, the
Technical Committee states that ``the Article 8 adjustments are
intended to fully reflect the substance of the entire transaction'' and
that ``it is essential to apply transaction value in a series of sales
situation in a manner that takes into account the substance of the
entire commercial import transaction and permits the proper application
of Article 8.'' The Technical Committee concludes that this occurs when
transaction value is based on the last sale rather than the first sale:
. . . [F]or example, under Article 8.1(a) and (c), selling
commissions or royalties and license fees, are only to be included
in the Customs value where they are incurred or paid by the buyer.
Similarly, under Article 8.1(b), the buyer must supply the assist.
In a series of sales, a buyer who is located in the country of
importation would rarely be the buyer in the first sale. (Paragraph
17)
Moreover, in a series of sales, the buyer in the first sale is
not necessarily the party who pays the royalties or provides the
assists. Therefore, the application of the first sale may preclude
the addition of certain selling commissions, royalties and assists
that otherwise would be included in the transaction value.
Similarly, under Article 8.1(d), only proceeds that accrue directly
or indirectly to the seller may be added to the price actually paid
or payable. Proceeds paid by the buyer in the country of importation
would not necessarily revert to the seller in the first sale.
(Paragraph 18)
In sum, a transaction value based on the first sale may not
fully reflect the substance of the inputs resulting from, or forming
part of the entire commercial chain as envisioned by the General
Introductory Commentary, and Articles 1 and 8. In contrast, a
transaction value based on the last sale will more fully reflect the
substance of the entire transaction as envisioned. (Paragraph 21)
As indicated above, Article 8 is implemented in U.S. law in 19
U.S.C. 1401a(b)(1)(A)-(E). These provisions are substantively the same
as Article 8 and include these same references to costs incurred by or
paid by the buyer or proceeds that accrue to the seller.\11\
[[Page 4258]]
Therefore, the above considerations would also apply to the U.S. law.
This means that the series of sales issue has a direct impact on the
additions that can be made under 19 U.S.C. 1401a(b)(1)(A)-(E). In fact,
CBP has encountered many situations where certain royalties, selling
commissions or other required statutory additions could not be included
in the transaction value due to the application of the first sale
principle.
---------------------------------------------------------------------------
\11\ The additions under 19 U.S.C. 1401a(b)(1) include:
(A) The packing costs incurred by the buyer with respect to the
imported merchandise;
(B) Any selling commission incurred by the buyer with respect to
the imported merchandise;
(C) The value, apportioned as appropriate, of any assist; (An
assist is defined as specified items if supplied directly or
indirectly, and free of charge or at reduced cost, by the buyer of
imported merchandise for use in connection with the production or
the sale for export to the United States of the merchandise)
(D) Any royalty or license fee related to the imported
merchandise that the buyer is required to pay, directly or
indirectly, as a condition of the sale of the imported merchandise
for exportation to the Untied States; and
(E) The proceeds of any subsequent resale, disposal, or use of
the imported merchandise that accrue, directly or indirectly, to the
seller. [Emphasis added]
---------------------------------------------------------------------------
After analyzing various provisions of the Valuation Agreement that
directly relate to the determination of transaction value under Article
1 (i.e., the General Introductory Commentary, Article 1, Article 8, and
the Note to Article 8), Commentary 22.1 refers to other provisions of
the Valuation Agreement for further guidance (i.e., Articles 6, 7 and
9). For example, in paragraph 23, the Technical Committee refers to the
text of Article 7 (commonly referred to as ``the fallback method'') and
finds indications therein that Article 1 was intended to be determined
on the basis of the last sale, instead of the first (or earlier) sale.
The fallback method is used when transaction value (Article 1) and the
other methods of valuation (Articles 2-6) cannot be applied to
determine the value. Paragraph 23 states:
As provided in paragraph 2 of the Note to Article 7, the methods
of valuation to be employed under Article 7 should be those laid
down in Articles 1 through 6 but with a reasonable flexibility.
However, Article 7 indicates that this flexibility does not extend
to allow the use of certain prices, including ``the price of goods
on the domestic market of the country of exportation'' (see Article
7.2). This gives a clear indication of the intended scope of Article
1, namely that a sale that is prohibited under a flexible
application of Article 1 cannot possibly be considered as valid
under the normal application of Article 1. In a series of sales
situation, the first sale often involves a sale between a producer
and a local distributor in the same country. Clearly, these sales
cannot be used to determine the Customs value under Article 7. It
follows that such sales should also not be used to determine the
value under Article 1.
The provisions of Article 7, including its prohibitions, are
implemented in U.S. law in 19 U.S.C. 1401a(f).\12\ CBP is of the view
that these same observations can be made on the basis of 19 U.S.C.
1401a(f). CBP has also observed many instances where the first sale is
between a manufacturer and distributor each located in the country of
exportation (e.g., see E.C. McAfee Co. v. United States, 842 F.2d 314
(Fed. Cir. 1988), discussed below). The fact that Congress expressly
prohibited the use of these sale prices under the fallback method
(which permits a flexible application of the other statutory methods)
provides a good indication that Congress assumed that these sale prices
would not be used to determine transaction value. This anomaly does not
arise when transaction value is determined on the basis of the last
sale.
---------------------------------------------------------------------------
\12\ 19 U.S.C. 1401a(f)(1) states: If the value of imported
merchandise cannot be determined, or otherwise used for the purposes
of this Act, under subsections (b) through (e), the merchandise
shall be appraised for the purposes of this Act on the basis of a
value that is derived from the methods set forth in such
subsections, with such methods being reasonably adjusted to the
extent necessary to arrive at a value. 19 U.S.C. 1401a(f)(2)(C)
states: Imported merchandise may not be appraised, for the purposes
of this Act, on the basis of the price of merchandise in the
domestic market of the country of exportation.
---------------------------------------------------------------------------
Based on its examination of all the provisions of the Valuation
Agreement, and the Agreement's underlying purpose, the Technical
Committee stated that it is of the view that the underlying assumption
of Article 1 is that normally the buyer would be located in the country
of importation and that the price actually paid or payable would be
based on the price paid by this buyer. The Technical Committee
therefore concluded that in a series of sales situation the price
actually paid or payable is the price paid in the last sale occurring
prior to the introduction of the goods into the country of importation,
rather than the first, or earlier, sale.
Although Congress also did not explicitly address the series of
sales issue in the U.S. value law, based on an examination of all the
provisions of 19 U.S.C. 1401a and the legislative history, CBP is of
the view that the underlying assumption of transaction value was that
normally the buyer would be located in the United States and that the
price actually paid or payable would be based on the price paid by this
buyer. In light of the concerns expressed about export value (i.e.,
that it was a complex valuation system that required foreign inquiries
in order to determine the value), CBP is of the view that had Congress
intended that under the transaction value statute the price actually
paid or payable ought to be the price paid by a buyer in the first sale
(usually a buyer located outside the U.S.) or that the required
additions ought to be based on the costs incurred by that buyer in the
first sale, it would have so provided. CBP also maintains that if
Congress had intended that transaction value would be determined on the
basis of a domestic sale in the country of exportation, it would not
have included this prohibition under a flexible application of
transaction value under the fallback method.
CBP is of the view that basing transaction value on the last sale
occurring prior to the introduction of the goods into the United States
reflects the proper construction of the statute and carries out the
legislative intent of the TAA. In addition, it establishes a
straightforward rule for determining transaction value in a series of
sales situation that does not require CBP to engage in formidable fact-
finding or to conduct foreign inquiries. This new approach will enable
traders to predict with a reasonable degree of accuracy the customs
value based on information readily available in the U.S. In addition,
this proposal is consistent with the provisions and purpose of the
Valuation Agreement, as clarified by the Technical Committee.
III. Court Decisions on Series of Sales Issue
A. Early court decisions and the invocation of the export value
statute.
Two early court cases that considered the series of sales issue
under the transaction value statute were E.C. McAfee Co. v. United
States, 842 F.2d 314 (Fed. Cir. 1988) and Nissho Iwai American Corp. v.
United States, 982 F.2d 505 (Fed. Cir. 1992).
E.C. McAfee Co. v. United States involved the importation of made-
to-measure suits. The U.S. purchaser ordered the suits from a Hong Kong
distributor who then contracted with a tailor in Hong Kong to assemble
the clothing. After receiving the completed clothing from the tailor,
the Hong Kong distributor delivered the clothing to the freight
forwarder for transport to the United States and the purchaser in the
U.S. The issue presented was whether transaction value should be
determined on the basis of the price the U.S. purchaser paid to the
distributor or the lower price the distributor paid to the Hong Kong
tailor who assembled the clothing.
Although the transaction value statute applied to the importations
at issue in McAfee, the CAFC concluded that it was necessary to follow
the judicial precedents decided under the prior export value statute.
The court adopted Customs' reasoning that the export value decisions
were applicable to the issue presented because the phrase ``for
exportation to the United States'' in the old export value statute ``is
not significantly different from the quoted provision of the current
statute.''
[[Page 4259]]
McAfee 842 F.2d 314, 318.\13\ The McAfee Court reasoned:
---------------------------------------------------------------------------
\13\ The merchandise at issue in McAfee was addressed by CBP
(formerly the U.S. Customs Service) in TAA 10/065056,
entitled ``Export Value: Dutiability of Sales from Manufacturers to
Distributors'' Customs Service Decision 81-72, 15 Cust. B. & Dec.
876, Oct. 17, 1980. In this ruling, CBP concluded that case law
decided under the export value statute was also applicable to the
interpretation of the transaction value statute, noting that both
statutes include the language ``for exportation to the United
States.'' CBP is now of the view that this conclusion was erroneous
because CBP relied on the only phrase common to both statutes and
did not take into account the remainder of the new statutory text
that reflects the significant analytical change that Congress
intended. (TAA 10 was subsequently revoked by an
unpublished ruling, TAA 40/542643, October 19, 1981 due to
discrepancies in the facts presented).
The cited [export value] cases assume, without explanation, that
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, the cited precedent is to the contrary.
[Parenthetical added]
McAfee at 318.\14\
---------------------------------------------------------------------------
\14\ CBP issued a general notice indicating that the holding of
McAfee is limited by the language of the court to the facts of that
particular case. According to the notice, the principles set forth
within the court case should only be applied to the importation of
made-to-measure clothing and only in situations where the
distributor and tailor are located in the same country. See 22 Cust.
B. & Dec. No. 18, 7-8 (May 4, 1988).
The CAFC primarily relied on United States v. Getz Bros. & Co, 55
C.C.P.A 11 (1967) and other cases decided under the export value
statute in finding that the price actually paid or payable must be
based on the price the Hong Kong distributor paid to the Hong Kong
tailor. It is noteworthy that McAfee did not take into account any of
the new language in the transaction value statute or the legislative
history of 19 U.S.C. 1401a.
The CAFC subsequently considered another series of sales situation
in Nissho Iwai American Corp. v. United States, cited above, which
involved imported subway cars. The issue presented was whether
transaction value should be determined using the price the U.S.
customer paid to the intermediary or the price the intermediary's
parent company paid to the manufacturer. Relying on the analysis in
McAfee, and the export value case law cited therein regarding the
phrase ``for exportation to the United States,'' the CAFC determined
that transaction value must be based on the ``first sale;'' that is,
the sale between the intermediary and the manufacturer so long as that
sale constitutes a viable transaction value.\15\
---------------------------------------------------------------------------
\15\ In Nissho Iwai, the imported merchandise consisted of
subway cars custom manufactured for the New York City Metropolitan
Transit Authority (MTA). The MTA contracted with Nissho Iwai
American Corporation (NIAC) for subway cars made according to its
specifications. NIAC assigned its contract rights to its Japanese
corporate parent, Nissho Iwai Corporation (NIC), and NIC contracted
with the manufacturer, Kawasaki Heavy Industries (Kawasaki), for the
subway cars. Kawasaki was directly involved in the negotiations and
sale between MTA and NIAC and was named as the manufacturer in the
MTA-NIAC contract. The custom-made subway cars manufactured by
Kawasaki were imported by NIAC.
---------------------------------------------------------------------------
The court in Nissho Iwai utilized a two-prong test for determining
whether the ``first-sale'' was a viable transaction value: The sale
must be an arm's length sale and the goods must be clearly destined for
export to the U.S. Based on the facts presented, the CAFC determined
that these criteria were met and held that the custom-made subway cars
at issue must be appraised based on the price the intermediary paid the
manufacturer.
In Synergy Sport International, Ltd. v. United States, 17 C.I.T. 18
(1993), another transaction value case involving a series of sales that
was decided shortly after Nissho Iwai, the CIT applied the reasoning in
Nissho Iwai and concluded that the imported garments at issue should be
appraised based on the price the intermediary paid to the manufacturer.
The CIT stated that there was no allegation that the sale was not an
arm's length sale and determined that the garments were clearly
destined for export to the United States by virtue of the labels the
manufacturer was required to place on the garments.\16\
---------------------------------------------------------------------------
\16\ That case involved garments imported by Synergy, a Hong
Kong company with offices in the United States. Synergy sold the
garments to J.C. Penney in the U.S. After J.C. Penney placed its
order with Synergy, Synergy placed an order with Chinatex, the
Chinese manufacturer. The issue presented was whether the garments
should be appraised based on the price J.C. Penney paid to Synergy
or on the price Synergy paid to Chinatex.
---------------------------------------------------------------------------
Thus, the early court decisions that required transaction value to
be determined on the basis of the price actually paid or payable in the
first sale are based primarily on case law decided under the prior
export value law and the similarity of some language from the export
value law.
B. Recent Decisions Departing From the Statutory Analysis in Prior
Court Cases on Series of Sales
More recently, the CAFC again had occasion to consider the
relevance of certain court decisions decided under the prior export
value law to the application of the transaction value statute. In VWP
of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the
CAFC held that the prior export value case law cannot properly account
for the significant differences between the two statutes, citing
Generra, which quoted from S. Rep. No. 96-249, as discussed above:
In Generra Sportswear Co. v. United States, 905 F.2d 377, 380
(Fed. Cir. 1990), we referred to ``the critical difference'' between
``export value'' under pre-1979 law and ``transaction value'' under
the present statute. In that context, we quoted with approval
material from legislative history of the Trade Agreements Act: The
use of transaction value as the primary basis for customs valuation
will allow use of the price which the buyer and seller agreed to in
their transaction as the basis for valuation, rather than having to
resort to the more difficult concepts of ``freely offered,''
``ordinary course of trade,'' ``principal markets of the country of
exportation,'' and ``usual wholesale quantities'' contained in
existing U.S. law.
[a]s the Court of International Trade itself recognized, Getz and
Bjelland were decided under the export value statute, which was
repealed in 1979. In determining that transactions between [the
parties] were not viable, the court applied incorrect standards,
specifically, standards relevant under the now superseded export
value statute. The correct standards are those set forth in the
provisions of 19 U.S.C. 1401a discussed above.
VWP of America, Inc. v. United States at 1334.
The substantial differences between export value and transaction
value were also noted by the CIT in Moss Manufacturing Co., Inc. v.
United States, 714 F. Supp. 1223 (C.I.T. 1989), aff'd, 896 F.2d 535
(Fed. Cir. 1990).
In light of the decisions in VWP and Moss, CBP is of the view that
notwithstanding the fact that the export value and transaction value
statutes each contain the phrase ``for exportation to the United
States,'' the two statutes are substantially different. Therefore, the
analysis of the series of sales issue under the transaction value
statute should be based on a full analysis of the provisions of 19
U.S.C. 1401a and its legislative history, rather than on the only
common wording found in both statutes and the cases decided under the
export value statute.
IV. Difficulties in Administering the First Sale Principle in a Series
of Sales
The application of the first-sale principle for transaction value
in a series of sales requires considerable review of the specific facts
and documentation presented. For example, determining whether fungible
goods are clearly destined to the U.S. when they are sold to the
intermediary is never clear-cut, especially when the merchandise is
shipped to a foreign
[[Page 4260]]
intermediary prior to the importation into the U.S. For example, the
intermediary often sells the same merchandise both to buyers in the
U.S. and to buyers in other countries but the claim is made that the
inventory records and other evidence establish that the imported
merchandise was clearly destined to the U.S. In these cases, CBP must
review the inventory records and other evidence in order to evaluate
the claim. In other cases, importers claim that the submitted paper
trail relating to all the various sales in the series of sales is
sufficient to establish that the imported merchandise was destined for
a particular U.S. customer. Determining whether the merchandise was
clearly destined to the U.S. customer requires a review of all of these
documents and extensive fact-finding.
Considerable fact-finding is also necessary to determine whether a
particular first sale transaction is a bona fide arm's length sale,
especially when some or all of the parties involved in the series of
sales are related parties or when the series of sales involves more
than two sales and when additional parties, such as buying and/or
selling agents, are involved in the series of sales transactions. In
these cases, before a determination can be made that the first sale
represents transaction value, it is necessary to examine the roles of
the various parties and whether the claimed first sale is a bona fide
arm's length sale. If the buyer and seller are related, CBP has to
consider whether the relationship between the parties has affected the
price. Assuming that a determination has been made that the first sale
is an arm's length sale and that the goods are clearly destined to the
U.S., additional fact-finding is necessary to determine whether all the
statutory additions have been properly reflected.
The first sale principle also presents post-entry audit
verification issues. This is due to the fact that the first sale
usually involves a foreign sale and CBP does not have easy access to
the records, including accounting records, which may be needed for
verification purposes. CBP lacks direct access to the books and records
relevant to the first sale transaction.\17\
---------------------------------------------------------------------------
\17\ On December 8, 1993, Title VI (Customs Modernization of
``Mod Act''), of the North American Free Trade Agreement
Implementation Act (Pub. L. 103-182, 107 Stat. 2057), went into
effect. Title VI amended many sections of the Tariff Act of 1930, as
amended, and related laws. Under the provisions of the Mod Act and
19 CFR part 163, certain persons are required to maintain specified
records pertaining to the import transaction for examination and
inspection by CBP (i.e., an owner, importer, consignee, importer of
record, and entry filer and other specified persons). Under these
provisions, CBP may initiate an investigation or compliance
assessment, audit or other inquiry for the purpose of ascertaining
the correctness of the entry and insuring compliance with the
customs laws. When transaction value is based on the last sale, it
is likely that at least one of the parties to that sale would be
subject to the recordkeeping requirements and the pertinent
information relating to the sale is easily verified by CBP. This is
often not the case when transaction value is determined based on the
first sale.
---------------------------------------------------------------------------
The first-sale principle for determining transaction value also
makes it difficult for an importer to meet its obligations under 19
U.S.C. 1484 to use reasonable care to properly declare the value of
imported merchandise.\18\ The importer's burden increases greatly when
an importer declares a transaction value based on the first sale, a
sale for which the importer may not have access to all the transaction
documents and the surrounding details. In addition, without knowledge
of all the particulars surrounding that sale, it is difficult for the
importer to attest to the truthfulness of the value declaration as
required by 19 U.S.C. 1485(a). For example, it may be impossible to
know whether all the applicable statutory additions have been fully and
accurately reported.
---------------------------------------------------------------------------
\18\ Section 484, as amended by the Customs Modernization Act,
requires importers to use reasonable care to correctly value and
classify entered merchandise. See 19 U.S.C. 1484.
---------------------------------------------------------------------------
The proposed interpretation in this document addresses the above
concerns by establishing a transparent standard for determining
transaction value that is easily applied and based on information
available in the United States. Under the proposal, transaction value
is based on the price paid in the last sale occurring prior to the
introduction of the goods into the United States, instead of the first
(or earlier) sale. This will generally be the price paid by the buyer
in the United States. CBP will be better able to verify the accuracy of
the declared value when transaction value is based on the last sale. As
a result, both CBP and importers will be better able to meet their
shared responsibilities with respect to proper customs valuation.
V. Relevance of Technical Committee Commentary 22.1, Meaning of the
Expression ``Sold for Export to the Country of Importation'' in a
Series of Sales to Interpretation of U.S. Value Statute (19 U.S.C.
1401a)
The courts have previously considered the relevance of the
Valuation Agreement as interpreted by the Committee on Customs
Valuation to the proper interpretation of 19 U.S.C. 1401a.
Recognizing that 19 U.S.C. 1401a was promulgated specifically to
implement the provisions of the Valuation Agreement, both the CAFC and
the CIT have noted the importance of interpreting 19 U.S.C. 1401a in a
manner consistent with GATT obligations. See Luigi Bormioli Corp., Inc.
v. United States, 304 F.3d 1362 (Fed. Cir. 2002) and Caterpillar Inc.
v. United States, 20 C.I.T. 1169, 941 F. Supp 1241 (CIT 1996). For this
same reason, the CIT determined in Salant, cited above, that the
legislative history of 19 U.S.C. 1401a includes an examination of the
Valuation Agreement.
In the Luigi Bormioli case, the CAFC relied on a decision by the
Committee on Customs Valuation regarding the proper interpretation of
transaction value under Article 1 of the Valuation Agreement and under
19 U.S.C. 1401a. In that case, the CAFC considered the validity of T.D.
85-111, which concerned the treatment of interest payments under the
transaction value statute. In T.D. 85-111, CBP determined that interest
payments are not included in transaction value when the conditions
specified therein are satisfied. This decision was issued in order to
implement Decision 3.1 of the Committee on Customs Valuation, entitled
``Treatment of Interest Charges in the Customs Value of Imported
Goods.'' The court in Luigi Bormioli noted that in the background to
the document CBP stated, ``the 1994 GATT Committee Decision had
prompted Customs to reassess its previous position.'' In upholding T.D.
85-11, the CAFC emphasized the fact that it incorporated the
conclusions of the Committee on Customs Valuation in Decision 3.1
regarding the treatment of interest under the Valuation Agreement. It
also noted that the Committee decision established a uniform and
logical policy regarding the treatment of interest payments and the
documentation required, and that such policy was consistent with the
U.S. law and with the policy of the U.S. law. In its analysis, the
Luigi Bormioli Court stated:
We must first consider whether T.D. 85-111 is consistent with
the statute. Although all the detailed criteria of T.D. 85-111
cannot be found in the explicit language of the statute, we think
that the statute must be interpreted to be consistent with GATT
obligations, absent contrary indications in the statutory language
or its legislative history. See Fed. Mogul Corp. v. United States,
63 F.3d 1572, 1581 (Fed. Cir. 1990) (``Absent express Congressional
language to the contrary, statutes should not be interpreted to
conflict with international obligations.''). Here there are no such
contrary indications. The GATT approach is quite consistent with the
statute. Like 19 U.S.C. 1401a(b)(4)(A), the GATT broadly
[[Page 4261]]
defines ``price actually paid or payable.'' See 1994 GATT
Interpretive Note. GATT is also consistent with the policy of the
statute. The GATT parameters not only provide a uniform method to
evaluate when `interest' charges are included in transaction value,
but they also serve to prevent importers from manipulating the
amount of duties assessed on particular merchandise by simply
designating part of the payment made for that merchandise as
``interest.'' Without a policy that requires both sufficient
documentation of the transaction, and evidence of comparable
prevailing rates and sales, an importer could easily reduce the
``price actually paid or payable'' of the goods by denominating
charges that actually represented a portion of the price of the
goods as ``interest.'' Thus, we construe the statute to make it
consistent with GATT.
Under that construction, T.D. 85-111 is consistent with the
statute because it is the same as GATT. In all relevant respects
T.D. 85-111 and the 1984 GATT Committee decision set forth the same
criteria * * * [Emphasis added]
Luigi Bormioli at 1369.
CBP is of the view that this decision strongly supports an
interpretation of 19 U.S.C. 1401a that is consistent with the Valuation
Agreement as clarified by the Technical Committee in Commentary 22.1.
There are no contrary indications in the statutory language of 19
U.S.C. 1401a or its legislative history. In fact, CBP notes that most
of the provisions in 19 U.S.C. 1401a mirror the provisions of the
Valuation Agreement. Moreover, the relevant definitions of transaction
value and price actually paid or payable and the provisions regarding
the additions to be made to the price actually paid or payable under
the Valuation Agreement and the U.S. value law are substantively
identical. Similar to the circumstances considered in the CAFC's
analysis and holding in Luigi Bormioli, CBP has reassessed its current
position regarding the determination of transaction value in light of a
decision issued by a Committee established under Article 18 of the
Valuation Agreement and is proposing to adopt that Committee's
conclusions. Most important, Commentary 22.1 clarifies the series of
sales issue and provides a uniform method for determining transaction
value in a series of sales in a manner that CBP believes is consistent
with the text and legislative history of the U.S. value law.
Conclusions
I. Proposal for Adoption of Commentary 22.1
For the reasons discussed in this document, CBP proposes to change
its current position with regard to the determination of transaction
value in a series of sales context and to adopt the conclusions in
Commentary 22.1. Specifically, CBP is proposing that in a series of
sales situation, the price actually paid or payable for the imported
goods when sold for exportation to the United States is the price paid
in the last sale occurring prior to the introduction of the goods into
the United States, instead of the first (or earlier) sale. The result
will be that transaction value is normally determined on the basis of
the price paid by the buyer in the United States.
If this proposed interpretation is adopted, it will result in the
revocation of T.D. 96-87, the modification or revocation of
administrative rulings that have analyzed the series of sales issue
using the first-sale criteria, and the revocation of any treatment
previously accorded by CBP to substantially identical transactions. In
addition, the application of McAfee, Nissho Iwai and Synergy would be
limited to the specific entries at issue in those cases.
II. Application of Proposed Interpretation to U.S. Value Law
In order to facilitate a greater understanding of how the proposed
interpretation set forth in this document would apply to U.S. value
law, it is useful to examine the proposed interpretation in the context
of a series of sales example.
The example, set forth in paragraphs 4-9 of Commentary 22.1
(attached), reflects a common fact pattern addressed in numerous first-
sale rulings issued by CBP; namely, the buyer in the country of
importation (i.e., the U.S.) begins the series of sales by agreeing to
purchase certain items (in this case, pens) according to its
specifications from a foreign distributor. The foreign distributor then
orders these items from an unrelated manufacturer according to the
buyer's specifications and the merchandise is shipped directly from the
manufacturer to the buyer in the U.S. The example also presents an
issue that often arises in first-sale rulings; namely, whether one or
more additions to the price actually paid or payable apply. In the
example, the buyer in the country of importation is required to pay
certain proceeds of a subsequent resale to the distributor. The issue
is whether these proceeds accrue, directly or indirectly, to the seller
as provided in 19 U.S.C. 1401a(b)(1)(E).
Based on the facts presented in Commentary 22.1 and the various
assumptions made (e.g., all the relevant documentation pertaining to
both sales can be produced), the pens in the example would currently
qualify for appraisement based on the first sale between the
distributor and the manufacturer if they were imported into the U.S.
Based on the facts presented, the first sale is an arm's length sale
and the pens were always clearly destined to the United States. Under
this interpretation, the proceeds of the subsequent resale from the
buyer in the U.S. to the distributor could not be included in the
transaction value absent evidence that such proceeds accrued directly
or indirectly to the seller in the first sale (i.e., the manufacturer).
Under the proposed interpretation, the sale between the buyer in
the U.S. and the distributor is the last sale prior to the introduction
of the pens into the United States. Therefore, transaction value would
be determined based on the price paid by the buyer in the U.S. to the
distributor in this last sale. The proceeds of the subsequent resale
paid by this buyer accrue directly to the seller in this last sale
(i.e., the distributor). Therefore, under the proposed interpretation,
these proceeds would be added to the price actually paid or payable
pursuant to 19 U.S.C. 1401a(b)(1)(E). Basing transaction value on the
sale from the buyer in the U.S. to the foreign distributor is
consistent with the statement in Commentary 22.1 that the underlying
assumption of Article 1 (transaction value) is that normally the buyer
would be located in the country of importation and that the price
actually paid or payable would be based on the price paid by this
buyer. Basing transaction value on this sale also allows for the
inclusion of the applicable additions to the price actually paid or
payable, in this case, the proceeds of the subsequent resale.
Solicitation of Comments
CBP will consider written comments timely submitted in accordance
with the instructions set forth in the ADDRESSES section of this
document in its review of the proposed interpretation of the term
``sold for exportation to the United States'' for purposes of applying
the transaction value method of valuation in a series of sales
importation scenario. Before making this proposed interpretation final,
consideration will be given to any written comments timely received on
this matter.
Dated: January 17, 2008.
W. Ralph Basham,
Commissioner, U.S. Customs and Border Protection.
Attachment--Meaning of the Expression ``Sold for Export to the Country
of Importation'' in a Series of Sales
1. Introduction
1. A series of sales consists of two or more successive contracts
for sales of
[[Page 4262]]
goods. A basic issue in a series of sales is which sale should be used
to determine the transaction value under Articles 1 and 8 of the
Agreement. Advisory Opinion 14.1--Meaning of the expression ``sold for
export to the country of importation''--does not clarify the meaning of
this phrase as applied to a series of sales situation. The purpose of
this document is to clarify this issue.
2. As provided in the General Introductory Commentary of the
Agreement, the primary basis for Customs value is transaction value.
Transaction value is defined in Article 1 as ``the price actually paid
or payable for the goods when sold for export to the country of
importation adjusted in accordance with the provisions of Article 8''.
Price actually paid or payable is defined in the Note to Article 1 as
``the total payment made or to be made by the buyer to or for the
benefit of the seller for the imported goods''.
3. In a series of sales, it is necessary to establish which of the
sales should be taken into account in order to identify the price
actually paid or payable for the goods when sold for export to the
country of importation. Any series of sales will include a last sale
occurring in the commercial chain prior to the introduction of the
goods into the country of importation (the last sale) and a first (or
earlier) sale in the commercial chain.\1\ In the example below, there
are two successive contracts for sales of the imported goods, one
between importer A and distributor B (the last sale) and another
between distributor B and manufacturer C (the first sale).
---------------------------------------------------------------------------
\1\ In a series of sales, it is common to refer to the various
sales as the last sale and the first (or earlier) sale whether or
not these terms are consistent with the chronological order of the
sales contracts.
---------------------------------------------------------------------------
2. Example Illustrating a Series of Sales Situation
4. A is a retail store located in the country of importation I, B
is a pen distributor located in country Z, and C is a pen manufacturer
located in country X. There is no relationship between A, B, or C
within the meaning of Article 15.4.
5. On July 10, 2004, retailer A contracts with distributor B for
the purchase/sale of certain pens. Pursuant to the A-B sales contract:
A agrees to purchase 1,000 pens from B for 10,000 currency
units (c.u.);
B will provide A with 400 pens of style xx and 600 pens of
style yy;
Each pen will display A's name and address;
B can obtain the pens from any pen manufacturer in country
X;
The pens will be shipped directly from the manufacturer to
A;
Title will pass from B to A when the pens are boarded on
the ship in country X;
Payment is due within 30 days of shipment;
A agrees to pay B 20% of the resale price for each pen A
sells prior to October 1, 2004.
6. On July 12, 2004, B contracts with manufacturer C for the
purchase/sale of certain pens. Pursuant to the B-C sales contract:
B agrees to purchase 1,000 pens from C for 8,000 c.u.;
C will provide B with 400 pens of style xx and 600 pens of
style yy;
Each pen will display A's name and address;
C will ship the pens directly to A;
Title passes from C to B when the pens leave C's factory;
Payment is due within 30 days of shipment.
7. On August 10, 2004, C ships the pens to A. On August 20, the
pens arrive in country I and A files a Customs entry. On September 1, A
pays B 10,000 c.u. On September 5, B pays C 8,000 c.u. Prior to October
1, A sells 400 pens at 15 c.u. each. On October 5, A pays B 1,200 c.u.
(20% of A's resale price for pens sold prior to October 1).
8. In this example, the last sale is the one between A and B and
the first sale is the one between B and C.
3. Questions
9. Assuming transaction value is the appropriate basis for
determining the Customs value of the imported pens, and that A is able
to produce all the documentation pertaining to both the A-B and B-C
sales (contracts, purchase orders, invoices, payment records):
(1) Is the price actually paid or payable for the imported goods
when sold for export to country I 10,000 c.u. (the price A pays B in
the last sale) or 8,000 c.u. (the price B pays C in the first sale)?
(2) Should the 1,200 c.u. payment from A to B be added to the price
actually paid or payable as ``proceeds of a subsequent resale of the
imported goods that accrues directly or indirectly to the seller''
pursuant to Article 8.1(d)?
4. Analysis
Guidance Derived From the Provisions of the Agreement
10. The Agreement does not define or otherwise directly address the
meaning of the expression ``sold for export to the country of
importation.'' However, it is easy to identify the sale for export to
the country of importation that is used to determine transaction value
under Article 1 when the import transaction involves only one sale. In
that situation, there is only one buyer, usually located in the country
of importation, and one seller, usually located in another country.
11. Article 1 does not refer to import transactions involving a
series of sales and consequently does not provide criteria in that
respect. Therefore, guidance must be sought from the purpose and the
overall text of the Agreement, including an examination of its
provisions. In addition, certain practical considerations are relevant.
12. As set forth below, there are various indications in the
General Introductory Commentary, Article 1 and other provisions of the
Agreement that it was envisaged that Article 1 would normally be based
on sales to buyers in the country of importation.
13. There is explicit language in Article 1 that reflects the
intended scope of Article 1. Pursuant to Article 1.1(a)(i), the Customs
value of imported goods shall be the transaction value provided that
there are no restrictions as to the disposition or use of the goods by
the buyer other than restrictions which are imposed or required by law
or by the public authorities in the country of importation. The
emphasized text is a good indication that the underlying assumption of
Article 1.1(a)(i) was that the buyer of the goods sold for export to
the country of importation would normally be located in the country of
importation.\2\
---------------------------------------------------------------------------
\2\ This assumption would not apply if there was no buyer in the
country of importation.
---------------------------------------------------------------------------
14. The intended scope of Article 1 is also reflected in the
provisions regarding the adjustments to the price actually paid or
payable. The General Introductory Commentary makes it clear that the
proper determination of transaction value depends on the application of
Article 1 in conjunction with Article 8. Paragraph 1 of the General
Introductory Commentary provides that ``the primary basis for Customs
value under the Agreement is `transaction value' as defined in Article
1''. It further states that ``Article 1 is to be read together with
Article 8, which provides, inter alia, for adjustments to the price
actually paid or payable in cases where certain specific elements which
are considered to form a part of the value for Customs purposes are
incurred by the buyer but are not included in the price actually paid
or payable for the imported goods.
15. Article 8 also provides for the inclusion in the transaction
value of certain considerations which may pass
[[Page 4263]]
from the buyer to the seller in the form of specified goods or services
rather than in the form of money.'' \3\ If the specified amounts are
not already included in the price actually paid or payable, Article 8
requires their addition. In others words, the transaction value method
is intended to take account of the substance of the entire commercial
import transaction preceding import of the goods, including the
economic inputs and related transactions which arise therefrom.
---------------------------------------------------------------------------
\3\ These goods or services are often referred to as assists.
---------------------------------------------------------------------------
16. Therefore, as mandated by the General Introductory Commentary,
it is essential to apply transaction value in a series of sales
situation in a manner that takes into account the substance of the
entire commercial import transaction and permits the proper application
of Article 8.
17. In many cases, it would not be possible to make the Article 8
adjustments if transaction value was determined based on the first
sale. For example, under Article 8.1(a) and (c), selling commissions or
royalties and licence fees, are only to be included in the Customs
value where they are incurred or paid by the buyer. Similarly, under
Article 8.1(b), the buyer must supply the assist. In a series of sales,
a buyer who is located in the country of importation would rarely be
the buyer in the first sale.
18. Moreover, in a series of sales, the buyer in the first sale is
not necessarily the party who pays the royalties or provides the
assists. Therefore, the application of the first sale may preclude the
addition of certain selling commissions, royalties and assists that
otherwise would be included in the transaction value. Similarly, under
Article 8.1(d), only proceeds that accrue directly or indirectly to the
seller may be added to the price actually paid or payable. Proceeds
paid by the buyer in the country of importation would not necessarily
revert to the seller in the first sale.
19. The example is illustrative. If the transaction value is
determined on the basis of the first sale between B and C, C is
considered the seller of the imported goods and the proceeds of the
subsequent resale from A to B would not be proceeds that accrue
directly to the seller. In the absence of evidence that the proceeds
accrued indirectly to the seller, such proceeds could not be added
pursuant to Article 8.1(d). However, if the transaction value is
determined on the basis of the last sale between A and B, B is
considered the seller and the proceeds paid to B would fall squarely
within the provisions of Article 8.1(d). Under the latter
interpretation, the transaction value takes into account the substance
of the entire commercial transaction. In contrast, application of the
first sale results in a transaction value that does not fully reflect
the substance of the entire transaction.
20. In sum, a transaction value based on the first sale may not
fully reflect the substance of the inputs resulting from, or forming
part of the entire commercial chain as envisioned by the General
Introductory Commentary, and Articles 1 and 8. In contrast, a
transaction value based on the last sale will more fully reflect the
substance of the entire transaction as envisioned.
21. Certain provisions of the Agreement use the terms ``buyer'' and
``importer'' interchangeably. For example, while Article 8.1(a)(i)
stipulates that buying commissions incurred by the buyer are not to be
added to the price actually paid or payable, the Note to that Article
defines the term ``buying commissions'' as ``fees paid by an importer
to the importer's agent for the service of representing the importer
abroad in the purchase of the goods being valued.'' Also, while Article
8.1(b) stipulates that the value of certain elements supplied by the
buyer is to be added to the price actually paid or payable, paragraph 2
of the Note to Paragraph 1(b)(ii) of Article 8 explains the value of
the element in relation to the importer. Furthermore, paragraph 4 of
that Note provides an illustrative case where an importer is the buyer
who supplies the producer with a mould to be used in the production of
the imported goods.
22. The Note to Article 6 states that ``as a general rule, Customs
value is determined under this Agreement on the basis of information
readily available in the country of importation''. This concept is also
reflected in Article 7: ``If the Customs value of the imported goods
cannot be determined under the provisions of Articles 1 to 6,
inclusive, the Customs value shall be determined using reasonable means
consistent with the principles and general provisions of this Agreement
* * * and on the basis of data available in the country of
importation.'' With respect to the determination of transaction value
under Article 1, it is the last sale, rather than the first sale, that
will normally satisfy this general rule. As noted, the last sale
normally involves a buyer located in the country of importation and
information about this sale will usually be more readily available in
the country of importation than information about the first sale.
23. As provided in paragraph 2 of the Note to Article 7, the
methods of valuation to be employed under Article 7 should be those
laid down in Articles 1 through 6 but with a reasonable flexibility.
However, Article 7 indicates that this flexibility does not extend to
allow the use of certain prices, including ``the price of goods on the
domestic market of the country of exportation'' (see Article 7.2). This
gives a clear indication of the intended scope of Article 1, namely
that a sale that is prohibited under a flexible application of Article
1 cannot possibly be considered as valid under the normal application
of Article 1. In a series of sales situation, the first sale often
involves a sale between a producer and a local distributor in the same
country. Clearly, these sales cannot be used to determine the Customs
value under Article 7. It follows that such sales should also not be
used to determine the value under Article 1.
24. There are also other indications in the Agreement that it was
not envisaged that the determination of transaction value would
diverge, depending on whether the import transaction involved a single
sale or a series of sales. For example, in the General Introductory
Commentary, the Members recognize the need for a uniform system of
valuation. In a series of sales, determining transaction value based on
the last sale addresses this need for uniformity. In a single sale
situation, the price actually paid or payable will normally be
represented by the price paid by the buyer in the country of
importation. If, in a series of sales situation, transaction value is
based on the last sale, the result will generally be the same; namely,
a transaction value based on the price paid by the buyer in the country
of importation. On the other hand, if transaction value is based on the
first sale, then the price actually paid or payable will generally be
represented by the price paid by a buyer outside the country of
importation and the result is a different transaction value.
25. It should also be noted that the Agreement allows Members to
apply different treatments in certain cases. In this regard, Article
8.2 specifies that in framing its legislation, each Member shall
provide for the inclusion in or the exclusion from the Customs value of
certain transportation costs. Article 9 specifies that the currency
conversion rate to be used shall be that in effect at the time of
exportation or the time of importation, as provided by each Member.
Since Article 1 provides no
[[Page 4264]]
such choice, the logical conclusion is that the authors envisaged that
the resulting transaction value would be the same whether the
importation involves a single sale or a series of sales (i.e.,
transaction value would normally be determined based on the price paid
by the buyer in the country of importation). Otherwise, they would have
either specified how transaction value should be determined in a series
of sales situation or provided an explicit choice to Members.
Practical Consideration
26. In practice, the Customs administration may face difficulties
in verifying information, including accounting records, related to the
first sale when such information is held by the foreign intermediary or
seller. This could include, for example, information and accounting
records pertaining to the total payment made by the foreign
intermediary to the seller and the Article 8 adjustments. Such
difficulties are alleviated when the last sale is applied.
5. Conclusion
27. The Technical Committee is of the view that the underlying
assumption of Article 1 is that normally the buyer would be located in
the country of importation and that the price actually paid or payable
would be based on the price paid by this buyer. The Technical Committee
concludes that in a series of sales situation, the price actually paid
or payable for the imported goods when sold for export to the country
of importation is the price paid in the last sale occurring prior to
the introduction of the goods into the country of importation, instead
of the first (or earlier) sale. This is consistent with the purpose and
overall text of the Agreement.
28. In the example, consistent with the conclusion, the sale
between A and B represents such a sale. Therefore, the price actually
paid or payable for the imported goods when sold for export to country
I is 10,000 c.u. (the price A pays B in the last sale).
29. Accordingly, the 1,200 c.u. payment from A to B represents
proceeds of a subsequent resale of the imported goods that accrues
directly or indirectly to the seller under Article 8.1(d) that must be
added to the price actually paid or payable in determining transaction
value.
Com. 22.1
Amending Supplement No. 6--July 2007
[FR Doc. E8-1140 Filed 1-23-08; 8:45 am]
BILLING CODE 9111-14-P