RR:IT:VA 548239 jsj
Port of New York, JFK Airport
U.S. Customs and Border Protection
Jamaica, N.Y. 11430
Attn: Mr. Joseph Rivera
Port File No.: VAL-1-K: TO: B7 MP
RE: Request for Internal Advice; Bona Fide Sale for Exportation; Related Party Service Agreement Fees.
Dear Area Director:
This is in response to your request for internal advice dated November 21, 2002, and received in this office on November 25, 2002, regarding the appraisement of merchandise imported by [************************************], the “Importer.” We also received and reviewed submissions, dated January 9 and March 17, 2003, from Pavia & Harcourt LLP, Counsel for the Importer.
Business proprietary information provided in connection with your request will be accorded confidential treatment. Such information is designated by brackets, and will be redacted from the public version of this letter.
The Importer is a wholly-owned subsidiary of [********************************], an Italian apparel manufacturer, the “Manufacturer.” The Importer is the exclusive distributor of products exported by the Manufacturer to the United States. Some of the merchandise at issue contains the [*********] trademark, the “Trademark,” which is owned by the Manufacturer. Counsel provided a certified translation of the exclusive sales agreement, the “Agreement,” that grants a trademark license to the Importer and governs sales between the Manufacturer and Importer. In addition, we reviewed several documents provided by Counsel in response to CF-28s issued by your office. According to the information presented, the Importer resells the imported merchandise to U.S. retailers—primarily large department store companies. These retailers place orders for the imported merchandise at the Importer’s showroom in New York City. The Importer then forwards these orders to the Manufacturer. The Manufacturer then sends confirmation orders to the Importer who checks for errors and sends them to the customers. After production, the Manufacturer ships the merchandise to the Importer’s U.S. warehouse where the goods are stored until shipment to the customers.
The Manufacturer maintains a base price list which applies to all international sales. According to the Agreement, the Importer receives a 24% discount off the base price of the merchandise. The terms of sale in the Manufacturer/Importer transaction are FOB Torino or Florence, Italy. The subject merchandise is shipped by air freight from Rome, Italy, to the Importer’s facilities located in [*******************]. The Importer resells the goods to the retailers on an ex-warehouse basis.
You state that transactions between the Manufacturer and the Importer fail to meet the principles established by Nissho. You assert that the Importer acts as a selling agent of the Manufacturer and consequently the transaction between the Manufacturer and the Importer is not a bona fide sale as required by the customs valuation statute. Counsel claims the transaction between the Manufacturer and the Importer is a bona fide sale for exportation to the United States.
Whether transactions between the Manufacturer and the Importer are bona fide sales conducted at arm’s length, wherein the merchandise was clearly destined for the United States, allowing transaction value to be based on the price paid by the Importer to the Manufacturer.
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”; codified at 19 U.S.C. § 1401a). The primary basis of appraisement under the TAA is transaction value, which is defined as “the price actually paid or payable for the imported merchandise when sold for exportation to the United States,” plus certain enumerated additions to the extent they are not otherwise included in the price actually paid or payable. 19 U.S.C. § 1401a(b)(1).
In order to use transaction value, however, there must be a bona fide sale for exportation to the United States. Several factors are relied on to determine whether a bona fide sale exists. See HRL 546067 dated Oct. 31, 1996.
Furthermore, the fact that one party is a subsidiary of another will not preclude a transaction between related parties from serving as a basis of transaction value. See VWP of Am., Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999) (“[T]he fact that a parent corporation controls a subsidiary . . . does not necessarily mean, under the statute, that the price may not serve as the basis for transaction value.” Id., 175 F.3d at 1336). In related party transactions, however, importers must demonstrate that the related party price was not influenced by the relationship or that the price closely approximates certain test values in order to use the transaction value method to appraise the merchandise.
Bona Fide Sales for Exportation to the United States
For the purposes of the Bureau of Customs and Border Protection (CBP), the term “sale,” as articulated by the court in J.L. Wood v. United States, 505 F.2d 1400, 1406 (1974), is defined as the transfer of property from one party to another for consideration. No single factor is decisive in determining whether a bona fide sale has occurred. See VWP, 175 F.3d at 1339 (“a determination that goods are being sold or assembled for exportation to the United States is fact-specific and can only be made on a case-by-case basis”). Customs and Border Protection will consider such factors as whether the purported buyer assumed the risk of loss for, and acquired title to, the imported merchandise. In addition, CBP may examine whether the purported buyer paid for the goods, and whether, in general, the roles of the parties and the circumstances of the transaction indicate that the parties are functioning as buyer and seller.
In addition to a bona fide sale, the merchandise must be sold for exportation to the United States in order to use the transaction value method of appraisement. In determining whether merchandise is clearly destined for the United States, CBP may consider whether there is a contingency of diversion that would allow the merchandise to be redirected to a third country. Factors considered in making this determination are: whether the merchandise is shipped under a through bill of lading to the United States; whether the merchandise is custom-made for a U.S. customer; and whether the quantity and characteristics of the purchase order are consistent with the merchandise shipped by the exporter.
In your request for internal advice you claim that there are no bona fide sales from the Manufacturer to the Importer. You assert that the Importer acts as an agent of the Manufacturer rather than an independent buyer and seller of merchandise and, consequently, determined that there are no bona fide sales between these parties.
In support of this position you cite Headquarters Ruling Letter (“HRL”) 544659, dated July 3, 1991, in which CBP determined that the importer acted as the selling agent of the foreign manufacturer and rejected the use of the transaction between those parties as a basis for calculating the transaction value of the imported merchandise. You contend that in the transaction between the Manufacturer and the Importer in the present case, the Importer performed tasks generally associated with a selling agent such as maintaining a showroom for the Manufacturer’s merchandise, using the Manufacturer’s letterhead to take orders, and being the exclusive U.S. distributor of the Manufacturer’s trademarked goods. You further note that the Importer is required to follow sales and credit procedures established by the Manufacturer. In addition, you note that the sales to the ultimate consignees, i.e., the U.S. customers, was the impetus for the entire production cycle and conclude that these customers had a security interest in the merchandise at the time of the alleged sale between the Manufacturer and the Importer. Finally, you state that the risk of loss passes directly from the Manufacturer to the ultimate customers in the United States. Based on these facts you conclude that the Importer acts as a selling agent rather than a middleman who buys and sells for his own account.
Counsel claims that the Importer performed as independent buyer and the Importer’s purchases from the Manufacturer were bona fide sales. Counsel notes that the terms of sale as spelled out in the Agreement are consistent with a bona fide sale between a seller and buyer and not a commissioned sale by a principal through an agent. Counsel points out that the text of the original Italian version of the Agreement does not contain the Italian terms “agenzia” or “agente” which would suggest the existence of an agency relationship.
We determine that the transactions between the Manufacturer and the Importer are bona fide sales of merchandise. A review by CBP of the terms of the sale set forth in the Agreement supports this conclusion. According to Counsel’s submission and the commercial documents provided, the Manufacturer issues invoices to the Importer, and the Importer remits payment to the Manufacturer against those invoices. Furthermore, under the FOB terms of sale, the Manufacturer fulfills its obligations and the Importer assumes title and risk of loss from the time the Manufacturer transfers the merchandise to the international freight carrier for delivery to the Importer. In consideration of the transfer of ownership, the Importer promises to pay the selling price. Every requirement for a sale, as defined in Wood, is present in the transactions between the Manufacturer and the Importer. Consequently, those transactions constitute bona fide sales for purposes of 19 U.S.C. 1401a(b)(1).
In addition to a bona fide sale, under 19 U.S.C. § 1401a(b)(1), a transaction must also be a sale for exportation to the United States. Customs and Border Protection makes this determination based on the individual circumstances of each case. See E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988) (“A determination that goods are being sold . . . for exportation to the United States is fact-specific and can only be made on a case-by-case basis”).
Based on the information provided we determine that the merchandise at issue was clearly destined for the United States at the time of the sale to the Importer. According to Counsel’s submissions, the Importer takes orders for merchandise from department store customers at the Importer’s showroom located in New York City. These orders are then forwarded by the Importer to the Manufacturer. The parent company then manufacturers the apparel and ships it to the Importer’s U.S. warehouse. Once the merchandise has been received, the Importer prepares an invoice and ships the merchandise to the customer. Based on the description of the quantity, style, sizing, and color of merchandise contained in the commercial documents—including purchase orders, confirmation orders, and invoices—it is apparent that the merchandise ordered by the U.S. customers is the same as the merchandise produced by the Manufacturer and eventually shipped to the those customers.
Finally, you raise a general concern about the acceptability of the transaction between the Manufacturer and the Importer and suggest that CBP should use the sale which causes the merchandise to be exported to the United States. In particular, you note that it was the sale to the ultimate consignee that “was the impetus for the entire production cycle [of the merchandise].” Furthermore, you state that similar to our decision in HRL 546015, dated December 13 1996, at the time the Importer issued purchase orders to the Manufacturer, the retailer had a “security interest in the final goods.” For these reasons, you conclude that the sale from the Manufacturer to the Importer is an inappropriate basis for determining the transaction value of the merchandise.
With regard to HRL 546015, the circumstances of that case differ significantly from the facts of the instant case. In HRL 546015, the ultimate customer provided a fabric assist to the manufacturer. The fabric in that case represented the customer’s security interest in the finished goods, i.e., property that the customer could reclaim in the event of nonperformance by the manufacturer. There is no indication in the present case that the customers had any secured interests in the finished merchandise from the Manufacturer. Because the facts in the present case differ significantly from those in HRL 546015, we cannot apply the reasoning in that case to our analysis.
Based on the terms of sale in the transaction between the Manufacturer and the Importer that show that the Importer acquired and retained title and assumed the risk of loss for the merchandise from the time the Manufacturer shipped the merchandise to the Importer’s warehouse until the time the Importer shipped the goods to the U.S. customers, and the fact that the Importer paid consideration for the goods, we determine that sales between the Manufacturer and the Importer are bona fide sales in which the merchandise was clearly destined for the United States. In order to use the related party sale, however, we must determine whether that transaction was conducted at arm’s length.
Arm’s Length Transaction
As noted above, the determination of whether a transaction is a bona fide sale is separate from the determination of whether a related party transaction was conducted at arm’s length. In order to be an acceptable basis for transaction value, a related party transaction must be both a bona fide sale for exportation to the United States and conducted at arm’s length. See VWP of Am., Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), “the fact that a parent corporation controls a subsidiary and dictates the price that the subsidiary charges for merchandise it sells does not necessarily mean, under the statute, that the price may not serve as the basis for transaction value.”
In response to your request for information regarding pricing practices between the Manufacturer and the Importer, Counsel states that, “the ordinary pricing between [************] and [********], is based on the regular calculations of costs, plus the usual markup set-forth above, less a 24% discount.” With regard to the discount, Counsel further states, “The 24% discount was comparable to amount offered to other [************] related companies throughout the world during the year 2000.”
You suggest that the price paid by the Importer is unacceptable because it is the result of a “unilaterally formulated price list less an unjustifiable twenty-four percent discount.” You therefore conclude that price paid by the Importer is not a statutorily viable basis for the determining transaction value of the merchandise.
Counsel asserts that the 24% discount is not unreasonable and is “justified by business exigencies which, in the end, affect [*******************] production and export sales to the largest and most lucrative market in the world, the United States.” Counsel also notes that the Importer incurs substantial duties on its imports that the Manufacturer’s European subsidiaries do not.
There is insufficient information to determine whether the related party transaction is conducted at arm’s length. In order to be an acceptable basis for transaction value, a related party transaction must satisfy one of two tests under 19 U.S.C. § 1401a(b)(2)(B): the circumstances of sale test or the test values test. In essence, the Importer must prove that the relationship between the parties did not influence the price actually paid or payable or that the related party price closely approximates certain test values. In order to satisfy the circumstances of sale test, the Importer must show that the pricing practices in the related party transaction are consistent with normal pricing practices of the industry or with pricing practices in sales to unrelated parties. In addition, an importer may demonstrate the acceptability of the related party price if the manufacturer’s price is adequate to ensure recovery of all costs plus a profit that is equivalent to the firm’s overall profit realized over a representative time period in sales of the same class or kind of merchandise. See 19 C.F.R § 152.103(l)(1)(ii). Alternatively, an importer may show that the related party prices closely approximate previously accepted customs values in sales of identical or similar merchandise to unrelated buyers in the United States or the deductive or computed value of identical or similar merchandise. See 19 C.F.R § 152.103(l)(2).
In the present case, Counsel presented no information regarding the Manufacturer’s pricing practices in sales to unrelated parties or the normal pricing practices of the industry. There is also no information regarding the Manufacturer’s costs and overall profit levels so we cannot determine whether the related party price is sufficient. Finally, Counsel provided no information to demonstrate whether the related party price closely approximates previously accepted test values. Without this information we cannot determine whether the sale from the Manufacturer to the Importer is an acceptable basis for determining the transaction value of the merchandise. We recommend that you request additional information from the Importer concerning this issue. If further information is not available to substantiate the arm’s length nature of the price, then transaction value cannot be used as the method of appraisement.
The evidence presented demonstrates that the merchandise is sold from the Manufacturer to the Importer pursuant to a bona fide sale in which the merchandise is clearly destined for the United States. There is insufficient information to determine whether the related party transaction was conducted at arm’s length. Transactions between the Manufacturer and the Importer may be an appropriate basis for determining transaction value according to 19 U.S.C. 1401a(b) provided the Importer can demonstrate that the price between the parties was not influenced by the relationship.
Sixty days from the date of this letter, this office will make a public version of the ruling available to Customs personnel and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Virginia L. Brown, Chief