HQ 544491: Appraisement of Ethylene Glycol Subject to an "Exchange Savings Agreement"; Internal Advice 13/90

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 544491
                                   October 29, 1990
VAL CO:R:C:V  544491 ML

CATEGORY:  Valuation

District Director
---------------

RE:  Appraisement of Ethylene Glycol Subject to an
     "Exchange Savings Agreement"; Internal Advice 13/90

Dear Sir:

     This is in response to a request for internal advice, dated
February 20, 1990 (APP 6-05:SE:B:B:CO:D ECE), regarding the
appraisement of Ethylene Glycol exported to the United States by
----the importer---, Inc. to ------------------------------------
-the manufacturer under an "exchange savings agreement."

FACTS:

      ----------------------the importer-------------- in -------
------- (hereinafter referred to as the "importer") imports
ethylene and diethylene glycol for sale in the United States.
The importer imports glycol from their own plant in ---X--------
and from various other producers of glycol.  One of these other
manufacturers is the manufacturer--------. (hereinafter referred
to as the "manufacturer") which has a manufacturing plant in Fort
-----------------Y-----------.  The importer has been importing
glycol from the manufacturer since 1987 and has filed
approximately 66 entries in Blaine, Washington, with an average
entered value of approximately $------.00  It should be noted
that the importer also enters glycol through the port of Los
Angeles.

     The importer and manufacturer have entered into an "exchange
savings agreement."  The key to this agreement involves the
calculation of a duty and freight savings amount realized when
the importer, through his ------X------ affiliate, supplies
glycol to the manufacturer's ----Z--- affiliate and in-turn, the
manufacturer supplies product to the importer's United States
plant.  This agreement allows both parties to save money.  By
shipping into --Z-- from --X---------, the merchandise is
approximately $15/ton less expensive than shipping to the same
point in --Z-- from the manufacturer's landlocked -----Y--
production facility.  Shipping costs are also lower from the
manufacturer to the importer, than from the importer's ---X-
affiliate to himself in the United States.  Additionally, --X--
origin merchandise into --Z-- enters duty free under --Z's--
Generalized System of Preferences (GSP), whereas, merchandise
from --Y--- is afforded no such duty free treatment.

     The invoices submitted on entries at Blaine are pro forma
invoices.  The importer pays the manufacturer based on the
individual commercial invoices.  The terms of sale are C & F with
freight charges averaging $--.00 U.S. per metric ton, with the
importer making a final annual adjustment to allow for any
differences in pricing during each years shipments.  The
importer and manufacturer have agreed that pricing will be the
average annual price (the total dollar value of all of the
manufacturers' ---Z---- affiliates' sales in a calendar year
divided by the tonnage sold in that year and converted to a FOB
manufacturers' ---Y---- plant value).

     The importer requests that Customs leave the entries open
for a year, as the prices the manufacturer charges him on a
shipment by shipment basis are provisional, estimated prices.
These prices include partial allowances for savings expected to
be realized during the year, and in no way are related to the
specific transaction covered by a given invoice.  They are
incorporated in an invoice merely as an accounting convenience.
The importer requests that the calculated savings arrived at at
the end of the year, be deducted from the invoiced value of the
shipments from the manufacturer.

ISSUE:

     Whether transaction value is the appropriate method of
appraisement for merchandise that is entered using a provisional
price, which is subsequently modified after importation pursuant
to an "exchange savings agreement?"

LAW AND ANALYSIS:

     The primary basis of appraisement is transaction value.
Transaction value is defined as the "price actually paid or
payable" for imported merchandise when sold for exportation to
the United States, plus certain enumerated additions.  This is
more specifically defined in section 402(b)(4)(A)) of the Trade
Agreements Act of 1979, (TAA; 19 U.S.C. 1401a(B)(4)(A)), as the
following:

          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.

     The importer contends that while provisional (estimated)
prices are used for entries made prior to an annual
reconciliation between the importer and the manufacturer,
negotiated prices do exist for these sales.  Prices which
accurately reflect the transaction value of the merchandise.

     The Statement of Administrative Action indicates that
transaction value may be established although the "price
actually paid or payable" is not quantified, if there is a fixed
formula or methodology for arriving at a specified amount.
Section 152.103(a)(1) of the Customs Regulations (19 CFR
152.103(a)(1)), provides that the "price actually paid or
payable":

          ...will be considered without regard to its method of
          derivation.  It may be the result of discounts, or
          negotiations, or may be arrived at by the application
          of a formula... .

This provision was interpreted in TAA #47 dated April 28, 1982.
That ruling held that if the "price actually paid or payable" is
determined pursuant to a formula, a firm price need not be known
or ascertainable at the time of importation.  However, it is
necessary for the formula to be fixed at the time of importation
so that a final sales price can be determined at a later time.
TAA #47 goes on to explain how transaction value may be
inappropriate.

     The importer believes that the price is determined pursuant
to a formula.  We do not believe that to be the case.  Section
402(b)(2)(A) of the TAA provides, in relevant part:

          "The transaction value of imported merchandise
          determined under paragraph (1) shall be the appraised
          value of that merchandise for the purposes of this act
          only if... (ii) the sale of, or the price actually paid
          or payable for, the imported merchandise is not subject
          to a condition or consideration for which a value
          cannot be determined with respect to the imported
          merchandise."

     While it is true that a formula may establish an appropriate
basis for determining the "price actually paid or payable",
transaction value can only be used if there is no condition or
consideration for which a price cannot be determined.  Simply
stated, the importer's "exchange savings agreement" with the
manufacturer subjects the merchandise under appraisement to a
condition or consideration for which a value cannot be
determined.  Interpretative note 1 found in section
152.103(k)(2)(i), Customs Regulations (19 CFR 152.103(k)(2)(i))
relates a situation where the seller establishes the price of the
imported merchandise on condition that the buyer also will buy
other merchandise in specified quantities.  Transaction value
according to Interpretative note 2 will also be unacceptable if
the price of the imported merchandise is dependent upon the price
or prices at which the buyer of the merchandise sells other
merchandise to the seller of the merchandise.  These are examples
of a consideration or condition for which transaction value will
not be accepted as the appraised value.

     It is our position that the examples cited above establish
the use of transaction value to be inappropriate in the instant
case.  Therefore, the next statutory method of appraisement must
be considered.

HOLDING:

     In light of the foregoing, transaction value is
inappropriate because the agreement between the parties subjects
the merchandise to a "condition... for which a value cannot be
determined with respect to the imported merchandise," within the
meaning of section 402(b)(2)(A)(ii).

                                   Sincerely,


                                   John Durant, Director
                                   Commercial Rulings Division