HQ 544176: Request for Reconsideration of Headquarters Ruling No. 543492 MK

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                                        HQ 544176


                                    July 27, 1988


          CLA-2 CO:R:CV:V  544176 EK

          CATEGORY:  Valuation


          District Director of Customs
          Buffalo, New York

          RE:  Request for Reconsideration of Headquarters Ruling
               No. 543492 MK

          Dear Sir:

                This is in reference to a request for reconsideration of
          Headquarters Ruling No. 543492 MK dated February 20, 1985,
          initiated by -----------------, through counsel.  The importer,
          MGUS (U.S. company), imports wearing apparel from its related
          company in Canada, MGC.  The ruling in question held that there
          was no "sale" between MGC and MGUS and that the applicable sale
          for determining transaction value, section 402(b) of the Tariff
          Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA;
          19 U.S.C. 1401a(b)), was that between MGC and the ultimate
          purchaser in the United States.

                Through oral discussions with both counsel for the importer
          and members of your staff, we have narrowed the issue with regard
          to the "sale" between MGC and MGUS.  The relevant concern is
          whether there is consideration, i.e., payment, from MGUS to MGC,
          in order to conclude that a sale occurred between the two
          parties.  Moreover, the facts upon which we rely are based upon
          extensive audits performed by Customs personnel in both the
          Buffalo district and the Boston region.

                The audits were made in accordance with generally accepted
          auditing standards and accordingly, included such tests of the
          accounting records and such other auditing procedures as
          considered necessary.  





















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          FACTS:

                The importer states that an initial price list on
          merchandise to be exported to the United States is proposed by
          MGC officials in Canada.  Subsequently, the price list is revised
          by MGUS.  With regard to purchase orders, the importer states
          that the ultimate U.S. purchaser submits orders to MGUS which are
          stored on bulking cards.  The information is recorded, and the
          bulking cards are forwarded to MGC.  Upon receipt of purchase
          orders, MGC forwards the apparel to the ultimate purchasers.
          Invoices relating to these sale transactions are forwarded to
          both the ultimate customer and a factor, Walter Heller.
          (Note - Prior to February 3, 1984, the factor agreement with
          Walter Heller was discontinued and replaced with a factor
          agreement with the Boston Factors of Canada, Inc. (FNB)).

                Two invoices are prepared by MGC - a transfer invoice and a
          third party invoice.  The same format is used for both.  The
          importer states that the transfer invoice and the third party
          invoice have two different reference numbers which indicate
          whether it is an MGC or MGUS invoice.

                With regard to the importer's allegation that MGUS
          purchased merchandise from unrelated parties in Hong Kong, our
          audit concludes that during the time frame in question,
          merchandise was transferred to MGUS solely from MGC.

                Most of the accounting records with regard to these
          companies are maintained by MGC in Canada.

                The importer states that a separate invoice by invoice
          accounting is made for each transaction on the books of both
          companies, MGC and MGUS.  A payable is established in the
          intercompany account of MGUS and the account of MGC indicates a
          receivable.  Our auditors agree with this statement.  However,
          what remains in dispute is the settlement of these accounts.

                The importer states that the receivables paid by the
          ultimate customers directly to the factor are used to repay MGUS
          transfer invoice debt to MGC in the amount of the corresponding
          transfer invoices.  The importer further indicates that at all
          times, either company could draw its allocated portion in the
          intercompany account.

                The results of our audit reveal the following.  Receivables
          paid to the factor by the ultimate United States customers were
          offset against prior loans the factor had made to MGUS.  The














                                        - 3 -


          proceeds in the intercompany account were applied against these
          outstanding loans.  MGUS received loans from the factor on an
          as-needed basis which were placed in the Toronto Dominion Bank.
          As indicated above, as the factor collected from the ultimate
          United States purchasers against the receivables, the proceeds
          were applied against the outstanding loans.  During the audit
          period, loans exceeded collections.  Funds received by MGUS
          during the relevant time period were loans, on an as-needed
          basis.

                The balance in the intercompany account which MGUS owed to
          MGC as a result of importations was reduced on paper when MGC
          paid for goods and services in U.S. dollars and used MGUS funds.
          In addition, various design, administrative, and accounting
          expenses incurred by MGC on behalf of MGUS also served to reduce
          the intercompany balance.  Based upon our investigations, it is
          our conclusion that MGUS had no control or access to the funds in
          the Toronto Dominion Bank.  As funds were received in the form of
          loans from the factor, they were disbursed based upon the needs
          of MGC.  There was no correlation between the amounts owed by
          MGUS to MGC for importations to the reduction in the intercompany
          account when MGC used MGUS funds to purchase materials and
          services in U.S. dollars.

                As indicated above, prior to February 3, 1984, the factor
          agreement with Walter Heller was discontinued and replaced with
          an agreement with FNB.  Pursuant to this agreement, all sums
          remitted, lent or advanced to either MGC or MGUS for the account
          of either MGC or MGUS, all sums paid to third parties and all
          other sums properly chargeable by FNB to either MGC or MGUS
          constituted loans to MC.

                There is essentially no difference between the arrangements
          under the factor Walter Heller and FNB.  However, MGC changed its
          accounting for U.S. funds received from the factor.  This
          accounting shifted the U.S. cash account which was maintained on
          the books of MGUS to the books of MGC.  As was the case in
          previous years, loans during fiscal year 1984 far exceeded the
          collections made against third party invoices.


          ISSUE:

                Whether there is a sale between MGC & MGUS for purposes of
          determining transaction value.  















                                        - 4 -


          LAW AND ANALYSIS:

                The preferred method of appraisement is transaction value
          pursuant to section 402(b) of the TAA.  This is defined as "the
          price actually paid or payable for the merchandise when sold for
          exportation to the United States . . . " .  (Emphasis added).
          Therefore, in order for transaction value to be applicable, an
          actual sale must take place.

                Based upon the circumstances taken as a whole, it is our
          conclusion that the method of payment between the parties does
          not establish the passage of consideration which is necessary in
          a sale.  As indicated above, the intercompany account balance
          which MGUS owed to MGC as a result of importations was reduced on
          paper when MGC paid for goods and services in U.S. dollars and
          utilized the funds of MGUS.  As funds were received in the form
          of loans from the factor, they were disbursed based upon the
          needs of MGC.  The total amount transferred was not approximately
          equal to "payments" for "purchases" and operating expenses were
          based upon the financial needs of MGC.  There appears to be no
          reconciliation or settlement of amounts owed for alleged
          purchases.

                It is our conclusion that no "sale" occurred between MGC
          and MGUS for purposes of determining transaction value.

                The importer states that if there is no sale between MGUS
          and MGC, then we must proceed sequentially through the remaining
          methods of appraisement afforded by the TAA.

                However, we find that a transaction value does in fact
          exist which is proper in appraising the merchandise.  There
          exists a "sale" for exportation to the United States between MGC
          and the ultimate United States purchaser, with MGUS acting as an
          agent of MGC, i.e., selling on its behalf.  We agree with the
          importer's statement that the final U.S. customer had no direct
          contact with MGC.  However, this is not necessary since MGUS
          contracted with the final purchaser on behalf of MGC.  As an
          agent, MGUS had the capacity to obligate MGC to fulfill the sales
          contracts, whether the principal (MGC) was disclosed or
          undisclosed.

                In this case, there exists a sale for exportation to the
          United States from MGC to the ultimate purchaser in the United
          States, through MGUS, acting as agent of MGC.
















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          HOLDING:

                The conclusion in Headquarters Ruling No. 543492 is
          affirmed.  The importer has not established that the ruling was
          incorrect and therefore, the ruling should apply to merchandise
          imported during the audit period.

                                  Sincerely,



                                  John Durant, Director,
                                  Commercial Rulings Division