[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]


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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.

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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.''
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    \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.
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    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.''
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    \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).
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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.
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    \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.

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[[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\
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    \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.
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    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\
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    \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).

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[[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).
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    \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.
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    \10\ These are addressed in detail in Commentary 22.1. See 
``Attachment'' to this document
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    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.
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    \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]
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    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.
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    \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.
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    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:
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    \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