HQ 544313: Request for Internal Advice on Reactor Art and Design Ltd.

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 544313

                        January 22, 1990

CLA-2  CO:R:C:V  544313 VLB

CATEGORY:  Valuation

District Director of Customs
111 West Huron Street
Buffalo, New York   14202

RE:  Request for Internal Advice on Reactor Art and Design Ltd.

Dear Sir:

     This is in response to your memoranda (CLA-2-03:COD:KH)
dated May 19 and 20, 1988, requesting internal advice (IA 19-88)
on the valuation of merchandise sold by Reactor Art and Design
Ltd, Toronto, Canada (hereinafter referred to as the "seller").

FACTS:

     The merchandise at issue is silk-screened garments produced
by The Incredible T-Shirt Company (hereinafter referred to as the
"manufacturer"), an unrelated Canadian company.  The seller
provided "unique" designs to the manufacturer which were used to
produce the silk-screened garments.  The seller then purchased
the merchandise from the manufacturer for resale in Canada and
the U.S.

     The seller states that the transactions at issue involved
circumstances in which the seller's sales personnel attended
trade shows in the U.S. where the designs were displayed.  During
the shows, the sales personnel accepted orders from unrelated
domestic apparel retailers and wholesalers at delivered, freight-
prepaid prices.  The seller, in turn, consolidated many of its
orders and ordered large quantities of garments from the
manufacturer.

     The manufacturer subsequently invoiced the seller and
delivered the finished garments to the seller in Canada.  The
seller repacked the goods for delivery to its U.S. customers.
The seller's counsel states that the seller was importer of
record in the transactions involving U.S. purchasers.  However,
the Entry Summary forms submitted to Customs list Trans-Border
Customs Service, Champlain, New York as the importer of record.

                              - 2 -

     One of the seller's transactions was the subject of a Notice
of Penalty and Seizure issued under Buffalo District Case No. 87-
0901-00149.  You state in your memoranda that the penalty action
involved both incorrect/false description and false
identification of the parties involved in the transaction.  The
seller paid a negligence penalty of $1900.00, and the penalty
action was closed.

     Four other transactions were the subject of your letter to
the seller, dated November 19, 1987, demanding payment of
additional Customs duties under 19 U.S.C. section 1592(d).  You
explained in the letter that the seller had presented false pro
forma invoices to Customs in the four transactions, resulting in
an improper value for the merchandise and a loss of revenue.

     After receipt of the demand letter, the seller requested
that you seek internal advice on the proper appraisement of the
merchandise.  Your position is that the sale between the seller
and the U.S. customers is the sale for exportation transaction
value purposes.  The seller claims that the transaction value
should be based on the sale between it and the Canadian
manufacturer.


ISSUE:

     Whether the sale between the manufacturer and the seller or
the sale between the seller and its U.S. customer is the price
actually paid or payable for the merchandise when sold for
exportation to the U.S.


LAW AND ANALYSIS:

     Transaction value, the preferred method of appraisement, is
defined in section 402(b) of the Tariff Act of 1930, as amended
by the Trade Agreements Act of 1979 (19 U.S.C. 1401a; TAA) as the
"price actually paid or payable for the merchandise when sold for
exportation to the United States. . ." (emphasis added).  Section
101.1(k) of the Customs Regulations (19 CFR 101.1(k)), defines
"exportation" as "a severance of goods from the mass of things
belonging to this country with the intention of uniting them to
the mass of things belonging to some foreign country".

     In C.S.D. 84-54 and Headquarters Letter Ruling (HRL) 542928,
cited as TAA #57, we held:

     . . . the transaction to which the phrase "when sold
                              - 3 -

     for exportation to the United States" refers, when
     there are two or more transactions which might give
     rise to a transaction value, is the transaction which
     most directly causes the merchandise to be exported to
     the United States.

     The seller cites HLR 543726, dated August 25, 1986, to
support its position that the sale between the manufacturer and
the seller constitutes the transaction value of the imported
merchandise.  HRL 543726 involved a subcontract agreement
entered into between a contractor and a subcontractor for
installation of marble fixtures.  Under the agreement, the
subcontractor was responsible for purchasing the necessary
materials from any source.

     Customs contended that the sale that most directly caused
the marble to be exported to the U.S. was the "sale" or the
contract between the contractor and the subcontractor.  The
subcontractor argued that the sale between it and its foreign
supplier was the correct sale for purposes of transaction value.
The subcontractor argued that the specifications submitted to the
foreign suppliers indicated that the marble was intended to be
used for a construction project located in the U.S.  In addition,
the subcontractor alleged that when the marble was delivered to
the subcontractor (presumably in the foreign country), it was
destined for the U.S. for use in the construction project.

     We held that the sale between the foreign supplier and the
subcontractor constituted the sale for exportation to the U.S.
for purposes of transaction value.  The subcontract agreement was
a service contract between the parties that gave the
subcontractor the right to provide the services necessary to
complete the contract.

     HRL 543726 is not controlling in the present case.  In this
case there are two sales of the merchandise.  In HRL 543726 there
was only one sale of the merchandise, which occurred between the
foreign supplier and the subcontractor.  The second sale was a
sale of services involving the installation of the merchandise
which did not meet the definition of transaction value.

     The seller also cites HRL 543789, dated February 17, 1987,
as support for its position that the sale between the
manufacturer and the seller is the "price actually paid or
payable".  In HRL 543789, the importer, a Canadian corporation
purchased merchandise in various foreign countries for resale to
customers in the U.S.  The merchandise was delivered directly to

                              - 4 -

a public warehouse facility in the U.S., where the merchandise
was prepared for subsequent delivery to the ultimate purchasers.
The importer retained control of all aspects of the transaction,
including bearing the risk of loss from the time of importation
into the U.S. until delivery to the ultimate purchaser.  Although
the importer generally had a customer for the merchandise prior
to importation, sometimes, imported merchandise was held in
inventory until the importer found a customer.

     Customs held that the sale for exportation to the U.S. for
purposes of transaction value was the sale between the foreign
manufacturer and the importer.  The subsequent sales between the
importer and the ultimate U.S. purchasers were considered to be
domestic sales and did not properly represent the "price actually
paid or payable" for the merchandise when sold for exportation to
the U.S.

     The present case also differs from HRL 543789.  In this case
the seller purchases the merchandise in Canada from the Canadian
seller.  The seller takes title to the merchandise in Canada.
According to the documents submitted by the seller's counsel, the
seller takes title to large quantities of garments.  These
garments are still part of the mass of goods belonging to Canada.

     The documents submitted also indicate that only a portion of
the garments purchased from the manufacturer are used to fill
orders in the U.S., e.g., 78 Good Sport shirts were ordered from
the Canadian manufacturer (Ex. C), but only 24 were shipped to
U.S. purchaser (Ex. A).  This appears to be the reason for the
repacking undertaken by the seller in Canada.  It is at this
point, at the repacking stage, that the goods are severed from
the mass of goods belonging to Canada with the intention to unite
them with the mass of goods belonging to the U.S., i.e. the
exportation process begins.  As a result, the sale that most
directly causes the merchandise to be exported from Canada is the
sale between the seller and its U.S. customer.

     Finally, the seller's counsel has also cited E.C. McAfee Co.
v. U.S., 842 F.2d 314 (Fed. Cir. 1988) as authority for its
position.  As you know the Customs limited the application of the
McAfee decision to the facts in the case, i.e., made-to-measure
suits.  See, HLR 544179, dated April 1, 1988.  The merchandise in
this case differs substantially from the made to measure suits.
The Reactor merchandise can be, and is, sold in places other than
the U.S.  Thus, the McAfee decision does not apply to the facts
in this case.

                              - 5 -

     In sum, the "price actually paid or payable" is the price
the U.S. customer paid the seller for the merchandise.  If the
seller fails to produce these prices then you should proceed
sequentially though the remaining bases of appraisement.

     Lastly, please note that designs that the seller supplies
free of charge to the manufacturer appear to fall under the
definition of an "assist" (section 402(h) of the TAA) and should
be added to the "price actually paid or payable" for the
merchandise to arrive at the transaction value of the goods.


HOLDING:

     The sale that most directly causes the merchandise to be
exported from Canada is the sale between the seller and its U.S.
customer.  Therefore, the price the U.S. customer pays the seller
is the "price actually paid or payable" for the merchandise.



                              Sincerely,



                              John Durant, Director,
                              Commercial Rulings Division