VAL-2 OT:RR:CTF:VS H0106603 KSG
U.S. Customs & Border Protection
1100 Raymond Blvd., Suite 402
Newark, NJ 07102
RE: Application for Further Review of Protest # 4601-10-100384; Nissho Iwai; related party transaction; all costs plus profit
Dear Port Director:
This is in reply to your correspondence forwarding the Application for Further Review of Protest 4601-10-100384 timely filed by counsel for Company A, [XXX], the protestant and importer of record. Supplemental submissions dated February 7, 2011, and March 10, 2011, are incorporated as part of the file in this case. At the request of counsel, a telephone conference was held on this matter with Headquarters on December 1, 2010.
Company A has asked that certain information submitted in connection with this Protest be treated as confidential. Inasmuch as the request conforms to the requirements of 19 CFR 177.2(b)(7), the company’s request for confidentiality is approved. The information contained within brackets and all attachments to the protest forwarded to our office will not be released to the public and will be withheld from published versions of this ruling.
This case involves certain imported garments. The basis of appraisement at the time of entry was the sale between the importer, Company A, and Middleman X, [XXX]. In the protest, counsel claims that the “first sale” between Middleman X and Factory A, [XXX], should have been used as the basis of appraisement. Middleman X and Factory A are related parties. Middleman X, and Factory A are both 100% owned by [XXX], a holding company.
In support of this claim, counsel has submitted documentation for the entries that include: (1) a purchase order from Company A to Middleman X in Sri Lanka referencing a shipping address in the U.S; (2) a commercial invoice from Middleman X to Company A showing the port of loading as Colombo, Sri Lanka, with a final destination in the U.S., and the name and address of Factory A; (3) a document titled “first sale invoice” on Factory A’s letterhead, that states the goods are made for export to the United States and listing the unit price and total price for the transaction; (4) a packing list prepared by Factory A; (5) a bill of lading showing shipment by sea from the Port of Colombo, Sri Lanka to New York; and (6) a payment statement from HSBC Bank showing payment to Factory A with a customer reference number and a breakdown of the orders included in the payment.
Counsel also enclosed a submission dated December 2, 2008, to the Port of Atlanta, CBP, which stated that Company A would be using the first sale to appraise merchandise it acquired from Middleman X and produced by three factories related to the middleman: Factories A, B, and C, [XXX] Attached to that submission were documents that it referred to as a “sample transaction,” which were the same type of documents submitted for the transaction described above involving Factory A and Middleman X.
Middleman X’s documents include a statement signed by the Finance manager stating that the gross profit margin for fiscal year 2008 (the financial summary period) was 5%. The gross profit margin is described as total sales less costs of goods sold divided by total sales. The operating income was stated to be 0.13%. The operating income is described as the gross profit margin less administrative and other expenses such as selling expenses, office expenses, depreciation etc., divided by total sales.
The financial statement prepared by PriceWaterhouseCoopers (“PWC”) for Middleman X for fiscal year 2008, includes: the Annual Report of the Board, the Auditor’s Report, an Income Statement, Balance Sheet, a Statement of Changes in Equity, a Cash Flow Statement, and Notes to the Financial Statements. PWC gave an opinion that the information contained in the report is a true and fair view of the company for fiscal year 2008 and that proper accounting records were maintained. The Income Statement shows that Middleman X had an operating profit for the year. The notes indicate Middleman X is a trading house that exports all types of garments. The submission also included the financial statement for Middleman X for fiscal year 2009.
Factory A’s documents include a Financial Summary Statement signed by the Finance manager stating that the gross profit margin for the financial summary period for FY 2008 was –0.8%. The operating income for FY 2008 was stated to be –3.5%. The financial statement prepared by PWC for Factory A for fiscal year 2008, includes: an Annual Report of the Board, an Auditors’ Report, an Income Statement, a Balance Sheet, a Statement of Changes in Equity, a Cash Flow Statement, and Notes to the Financial Statements. The Notes indicate that it transferred employees and assets due to the amalgamation with Factory B and Factory C and that its main activity is the manufacture of ready-made garments. The Notes further indicate that there was a restructuring and the three factories were amalgamated at the end of 2008. The Notes also indicate 34 other related companies with common directorships.
Factory B’s documents include a Financial Summary Statement for FY 2008 signed by the Finance Manager stating that its gross profit margin for FY 2008 was 10%. The operating Income for FY 2008 was 6.8%. The Financial Statement prepared by PWC for for FY 2008 includes: an Annual Report of the Board, a Report of the Auditors, an Income Statement, a Balance Sheet, Statement of Changes in Equity, a Cash Flow Statement, and Notes to the Financial Statements. The Income Statement shows a net profit for FY 2008. The Notes indicate that the principal activity of Factory B is the manufacture of clothing.
Factory C’s documents include the Financial Summary Statement for FY 2008 signed by its Finance Manager, stating that its gross profit margin for FY 2008 was 16% and its operating Income was 14%. The Financial Statement prepared by PWC for Factory C for FY 2008 includes: the Annual Report of the Board, Independent Auditor’s Report, Consolidated Income Statement, Consolidated Balance Sheet, Consolidated Statement of Changes in Equity, Consolidated Cash Flow Statement, and Notes to the Consolidated Financial Statements. The Notes indicate that Factory C manufactures men’s and women’s clothing.
In its November 29, 2010, submission, counsel states that Factory A’s profit and income was lower than the other related factories due to the world economic crisis with the most profound effect on Factory A because it concentrated more on U.S. customers compared to the other factories. Counsel also stated that Factory A carried a more substantial inventory than Factories B and C. Counsel also states that the 2008 losses were due to Factory A’s production of more complex fashion garments than the other factories. No documentation was submitted to support these assertions.
In its February 7, 2011, submission, counsel states that in 2009, Factory A had an overall profit. This is supported by a financial statement prepared by PWC for Factory A for FY 2009.
Whether Company A has demonstrated that the appropriate basis of appraisement for the imported goods is the sale between the related manufacturer Factory A and Middleman X.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”), codified at 19 U.S.C. 1401a. Transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for five enumerated statutory additions. 19 U.S.C. 1401a(b). In order for imported merchandise to be appraised under the transaction value method, it must be the subject of a bona fide sale between a buyer and seller, and it must be a sale for exportation to the United States. We will assume for the purposes of this decision that transaction value is the appropriate basis of appraisement.
In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the U.S. Court of Appeals for the Federal Circuit reviewed the standard for transaction value when there was more than one sale which may be considered as being a sale for exportation to the United States. The court ruled that for imported merchandise to be appraised on the basis of the manufacturer-middleman sale, the transaction must be conducted at arm’s length and the merchandise must be clearly destined for export to the United States at the time of the sale. The court reaffirmed the principle established in E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that the manufacturer’s price, rather than the middleman’s price, is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. In upholding the McAfee standard the court stated that in a three-tiered distribution system, “the manufacturer’s price constitutes a viable transaction value when the goods are clearly destined for export to the United States and when the manufacturer and the middleman deal with each other at arm’s length, in the absence of any non-market influences that affect the legitimacy of the sales price.”
As a general rule, CBP presumes that the price paid by the importer is the appropriate basis for determining transaction value, and the burden is on the importer to rebut this presumption. See Treasury Decision (“T.D.”) 96-87, 30 Cust. Bull. 52/1 (January 2, 1997). To rebut this presumption, the importer must, in accordance with the court’s standard in Nissho, provide evidence that at the time the middleman purchased or contracted to purchase the imported merchandise, the goods were clearly destined for exportation to the United States, and that the manufacturer and middleman dealt with each other at arm’s length. This documentary evidence must satisfy the requirements set forth in Nissho Iwai.
T.D. 96-87 sets forth the documentation and information needed to support a determination that transaction value should be based on a sale involving a middleman and the manufacturer or other seller rather than on the sale in which the importer was a party. First, “a complete paper trail of the imported merchandise showing the structure of the entire transaction” must be provided. Second, if the parties to the requested transaction are related, the importer must provide CBP with information which demonstrates that transaction value may be based on the related party sale as provided in 19 U.S.C. 1401a(b)(2)(B), i.e., the circumstances of the sale indicate that the relationship did not influence the price or that the transaction value closely approximates certain test values. Finally, sufficient information must be provided with regard to the statutory additions set forth in 19 U.S.C. 1401a(b)(1), i.e., packing costs, selling commissions, assists, royalty or license fees, and proceeds of any subsequent sale. Because this case involves related parties, it is protestant’s burden to satisfy CBP that the transaction was conducted at arm’s length.
According to Nissho Iwai, in order for a transaction to be viable for transaction value purposes, it must be a sale negotiated at arm’s length, free from any non-market influences. There is a presumption that a transaction will meet this standard if the buyer and seller are unrelated. If the parties are related, then “it is necessary to provide Customs with information which demonstrates that transaction value may be based on the related party sale as provided in 19 U.S.C. 1401a(b)(2)(B). (i.e., that the circumstances of sale indicate that the relationship did not influence the price or that the transaction value closely approximates certain test values.)” See T.D. 96-87, supra.
While the fact that the buyer and seller are related is not in itself grounds for rejecting the use of the first sale, where CBP has doubts about the acceptability of the price and is unable to accept the first sale value without further inquiry, the parties will be given the opportunity to supply further information as may be necessary to support the use of the first sale.
The transaction value between a related buyer and seller is acceptable
if an examination of the circumstances of the sale indicates that although
related, their relationship did not influence the price actually paid or payable.
The Customs Regulations in 19 CFR Part 152 set forth illustrative examples of
how to determine if the relationship between the buyer and the seller influences
the price. See also HRL H029658, dated December 8, 2009; HRL H037375, dated
December 11, 2009; and, HRL H032883, dated March 31, 2010. In this respect,
CBP will examine the manner in which the buyer and seller organize their
commercial relations and the way in which the price in question was derived in
order to determine whether the relationship influenced the price. If it can be
shown that the price was settled in a manner consistent with the normal pricing
practices of the industry in question, or with the way in which the seller settles
prices with unrelated buyers, this will demonstrate that the price has not been
influenced by the relationship. See 19 CFR §152.103(l)(1)(i)-(ii). In addition,
CBP will consider the price not to have been influenced if the price was
adequate to ensure recovery of all costs plus a profit equivalent to the firm’s
overall profit realized over a representative period of time. 19 CFR §152.103(l)(1)(iii).
These are examples to illustrate that the relationship has not influenced the
price, but other factors may be relevant as well.
In this case, there were no sales to unrelated parties. The protestant did not submit information related to the normal pricing practices of the industry in question or a transfer pricing study. The protestant contends that it has satisfied the “all costs plus a profit” methodology. This method examines whether a related party price compensates the seller for all its costs plus a specified amount of profit (i.e., a profit that is equivalent to the firm’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind).
The amount shown for “profit” for Factory A was a negative number, a loss that did not cover all the costs. Counsel acknowledged that all the costs have not been recovered in this case. The difference between the amount shown for profit for Middleman X was several percentage points, almost 6%.
A very important consideration in the all costs plus a profit example is the “firm’s” overall profit. In applying the all costs plus a profit test, CBP normally considers the “firm’s” overall profit to be the profit of the parent company. Thus, if the seller of the imported goods is a subsidiary of the parent company, the price must be adequate to ensure recovery of all the seller’s costs plus a profit that is equivalent to the parent company’s overall profit. See HRL 546998, dated January 19, 2000. The regulations do not give us the definition of “equivalent” profit; however, if the profit of the seller is equal to or higher on the U.S. imports than the firm’s overall profit, the purchase price would not be artificially low for Customs purposes.
The financial information related to the parent corporation as a basis of comparison was not provided in this case. Counsel argued that instead of comparing the profit of sales by the related factory A to Middleman X, to the overall profit of the parent, it was appropriate to compare the profit to that of sales by the other related factories, Factory B and C, to Middleman X. In
HRL H065015, dated April 15, 2011, an argument was made that CBP should not look at the profit of the parent company but rather to the seller’s profitability on a product-line level compared to the manufacturer’s total profit in the sale of merchandise of the same class or kind. CBP stated that this comparison “did not shed any light on whether the sale is at arm’s length.” A comparison of the profit earned in transactions between Factory A and Middleman X to transactions between related Factories B and/or C and Middleman X shed no light on whether any of the sales are at arm’s length.
The documents submitted do not show that the price between Factory A and Middleman X was adequate to recover all costs plus a profit which is equivalent to the firm’s overall profit realized over a representative period of time, in sales of merchandise of the same class or kind, that would demonstrate that the price had not been influenced as argued by counsel.
Further, counsel’s assertion that the sale involved in this case resulted in a loss because the sales were to the U.S. is not a compelling argument. Assuming for the purposes of this decision that the U.S. market was affected by the downturn in the global economy in the relevant time period, counsel would still have to provide information to show that the price between the related parties was at arm’s length. Any unsubstantiated assertion concerning the lack of profit is not sufficient.
Accordingly, we find that the protestant has not demonstrated based on the all costs plus a profit method that the sale between Factory A and Middleman X was at arm’s length. Further, the protestant has not submitted any other documentation that demonstrates that the first sale involved an arm’s length transaction. As an arm’s length transaction has not been established between Factory A and Middleman X, no discussion of the appropriateness of the paper trail is necessary. The protestant has not overcome the presumption in favor of the sale between the middleman and importer as the basis of appraisement in this case. The protest is denied.
Based on the facts presented above, the protest should be denied. The information submitted does not support a finding that the sale between the Middleman X, and Factory A was an arms length sale. Therefore, the merchandise should be appraised on the basis of the transaction value between the middleman and the importer.
In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2007), please promptly mail this decision, together with the Customs Form 19, to the protestant, but in no event later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the office of Regulations and Rulings will make the decision available to
CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Myles B. Harmon, Director
Commercial & Trade Facilitation Division