HQ H239496
OT:RR:CTF:VS H239496 YAG
Port Director
Port of Anchorage
U.S. Customs and Border Protection
605 W. 4th Avenue, Suite 230
Anchorage, AK 99501
Re: Internal Advice Request; Applicability of Transaction Value; Dutiability of Administrative Fees
Dear Port Director:
This is in response to your request for internal advice, transmitted to our office on January 17, 2013, regarding the proper method of appraisement of merchandise imported by [***] (Company A) located in the United States from its related party, [***] (Company B) located in Country B. Additionally, your internal advice request concerns the dutiability of certain administrative fees paid by Company A to its related party, Company B, to compensate Company B for activities and services it provides with respect to marketing, sales support, administration, information technology, finance, legal, human resources, and logistics arrangements. We regret the delay in responding.
Company A has asked that certain information submitted in connection with this internal advice be treated as confidential. Inasmuch as this request conforms to the requirements of 19 CFR §177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this internal advice request, forwarded to our office, will not be released to the public and will be withheld from published versions of this decision.
FACTS:
Company A purchases and imports jewelry from its parent company, Company B. Company B purchases the imported jewelry from [***] (Company C), a related manufacturer located in Country C [***]. Company A also purchases and imports certain items, such as jewelry boxes and watches, from Company B that are manufactured by unrelated parties. The issue in this case is the valuation of jewelry purchased by Company A from its parent, Company B.
Company A’s pricing policy has been consistently applied for many years. The pricing policy starts with prices the related manufacturer in Country C charges Company B. These prices are based on current metal prices, direct and indirect production expenses, such as salaries, etc., taking into account certain currency fluctuations. Subsequent to the sale of jewelry from the related manufacturer in Country C to Company B, Company B’s purchase price is marked up by pre-determined percentages to calculate the price between Company B and Company A in the United States, as to allow Company B to recover its costs and profit. This pricing policy has been created to allow all parties to recover all their costs plus a profit.
Company A states that the seller’s relationship with the buyer does not influence the price since the prices are at arm’s length based on the all costs plus a profit illustrative example under the circumstances of the sale test. To substantiate this assertion, Company A provided Company B’s (the parent company) operating profit for the sale of the merchandise to the United States, and Company B’s overall operating profit for global sales (the rest of the world and the United States) in the sale of the same class or kind of the merchandise over a representative period of time (in this case fiscal year (FY) 2010). The operating profit of Company B was provided alone and combined with the profit of its related manufacturer in Country C.
Additionally, Company A pays an administrative fee to compensate its parent company, Company B, for the following activities and services that Company B provides:
Sourcing and logistics arrangements between Company A and Company B, and between Company B and its related manufacturer of jewelry, Company C (these activities include Company B providing guidance and assistance between Company A and Company C in areas, such as Company C’s manufacturing capacity, Company A’s outstanding purchase orders, planned ship dates, number and timing of shipments, product manufacturing prioritization, global demand and supply planning (which includes assistance with software), vendor selection of all unrelated suppliers for the imports which are not manufactured by the related party in Country C, and price negotiations based on Company B’s global scale)
Product marketing and sales support in relation to development of point of sales material
Development of a visual campaign to enhance the display and improve the sales experience
Development of the retail store concept
Development of policies, tools and programs to assist in other administrative areas
The administrative fee paid by Company A to the seller, Company B, equals [**] percent of Company A’s net sales to its end-customers after importation in the North American market and [**] percent of the net sales to the Canadian market. This fee is documented in Company A’s 2009 transfer pricing study provided for our review. Company A states that the administrative fee represents an additional cash payment from Company A to Company B (in addition to the invoice paid for inventory) because this fee is not paid for the inventory, but for other services. However, Company A also claims that since the administrative fee is included in Company B’s revenue and calculation of its operating profit margin, as referenced by Company B’s audited income statement, Company B recovers all of its costs plus a profit and, thus, the administrative fee is part of the arm’s length prices declared to U.S. Customs and Border Protection (CBP). Therefore, Company A states that since the administrative fee is already part of the value declared to CBP and is not otherwise dutiable, the administrative fee does not have to be added a second time to the customs values declared to CBP at the time of entry. The Port questions Company A’s assertions that its prices are at arm’s length, and inquires as to whether certain portions of the administrative fee should be included in either the price actually paid or payable or as an addition to the price actually paid or payable under 19 U.S.C. §1401a(b)(1)(E).
Finally, to substantiate its arguments, Company A provided the following documents for our review: (1) Internal Advice Supplement Memorandum, prepared by Ernst & Young, LLC, dated December 1, 2014, addressing the administrative fee in question and arm’s length pricing; (2) Submission from Ernst & Young, LLC, dated February 25, 2015, summarizing the results of the meeting with CBP on February 25, 2015, concerning the company’s transfer price and the administrative fee; (3) Arm’s length financial analysis (two (2) Excel Worksheets with notes and cross references to Company B’s audited financial statements for 2010 (with and without the profits of the related manufacturer in Country C)); both of these Excel Worksheets reconcile to the profit percentages in the tables in the Internal Advice Supplement Memorandum, dated December 1, 2014; and Company B’s audited financial statements and transfer pricing documentation); (4) Company B’s 2010 Annual Report (Company B’s Income Statement, which includes the parent company’s sales to the United States and other entities globally, and Company B’s Consolidated Income Statement which includes Company B’s global operations); (5) Transfer pricing documentation for FY 2010 to support Company B’s sales to the United States and the administrative fee Company A pays to Company B; and, (6) Documents previously provided to CBP by Company A regarding the administrative fee (Company A’s Administrative Fee Presentation, dated December 6, 2011; Company A’s clarification of administrative fees involved, dated December 20, 2011; and, Company A’s draft Request for Internal Advice, dated December 1, 2011 with exhibits). CBP also met with Ernst & Young LLC and Company A’s representatives on December 6, 2011, and on February 25, 2015.
ISSUES:
What is the proper method of appraisement of the imported merchandise?
Is the administrative fee paid by Company A to its related party (Company B) dutiable as part of the price actually paid or payable or as an addition to the price actually paid or payable under 19 U.S.C. §1401a(b)(1)(E)?
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised for customs purposes in accordance with Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. §1401a). The primary method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions, including “the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.” 19 U.S.C. §1401a(b)(1)(D)(E). These additions apply only if they are not already included in the price actually paid or payable.
What is the proper method of appraisement of the imported merchandise?
Transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, an examination of the circumstances of the sale indicates that the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain “test values.” 19 U.S.C. §1401a(b)(2)(B); 19 CFR §152.103(l). While the fact that the buyer and seller are related is not in itself grounds for regarding transaction value as unacceptable, where CBP has doubts about the acceptability of the price and is unable to accept transaction value without further inquiry, the parties will be given the opportunity to supply such further detailed information as may be necessary to support the use of transaction value pursuant to the methods outlined above.
“Test values” refer to values previously determined pursuant to actual appraisements of imported merchandise. Thus, for example, a deductive value calculation can only serve as a test value if it represents an actual appraisement of merchandise under section 402(d) of the TAA. See Headquarters Ruling Letter (“HRL”) 543568, dated May 30, 1986. In this instance, no information regarding test values has been submitted or is available; consequently, the circumstances of the sale must be examined in order to determine the acceptability of transaction value.
The Customs Regulations specified in 19 CFR Part 152 set forth illustrative examples of how to examine the circumstances of the sale to determine if the relationship between the buyer and the seller influences the price. See also HRL 029658, dated December 8, 2009; H037375, dated December 11, 2009; and, HRL H032883, dated March 31, 2010. In this case, Company A contends that it has satisfied the “all costs plus a profit” illustrative example to show that the adjusted prices are not influenced by the relationship of the parties. 19 CFR §152.103(l)(1)(iii) states that “if it is shown that the price is adequate to ensure recovery of all costs plus a profit which is equivalent to the firm’s overall profit realized over a representative period of time (e.g., on an annual basis), in sales of merchandise of the same class or kind, this would demonstrate that the price has not been influenced.”
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. See HRL 542792, dated March 25, 1983; HRL 546998, dated January 19, 2000; and HRL H065015, dated April 14, 2011. 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 Custom’s purposes. See HRL H106603, dated July 25, 2011 and HRL H065024, dated July 28, 2011. Finally, CBP Regulations do not define what profit we are to consider – gross profit or operating profit. However, CBP is of the view that the operating profit margin is a more accurate measure of a company’s real profitability because it reveals what the company actually earns on its sales once all associated expenses have been paid.
Company A provided Company B’s operating profit for the sale of the merchandise to the United States and Company B’s overall operating profit for global sales in the sale of the merchandise of the same class or kind (jewelry) over a representative period of time (in this case FY 2010). We note that in this case, Company B is both the parent company of Company A and the seller of the imported jewelry. The operating profit of Company B was provided alone and combined with its related manufacturer in Country C. In each case, the operating profit margin for Company B’s sales to the United States exceeded the operating profit margin of Company B’s global sales, including the United States (with and without the manufacturer’s profit in Country C). Accordingly, upon review of numerous documents identified in the FACTS portion of this decision and submitted to CBP in support of profit calculations for purposes of satisfying the all costs plus a profit example, we find that the relationship between Company A and Company did not influence the price. Therefore, the imported merchandise is correctly appraised under the transaction value method of appraisement.
Is the administrative fee paid by Company A to its related party (Company B) part of the price actually paid or payable or an addition to the price actually paid or payable under 19 U.S.C. §1401a(b)(1)(E)?
In this case (and based on the information and documents provided by Company A), the administrative fee indeed represents an additional cash payment from Company A to Company B (in addition to the invoice paid for inventory) because this fee is not paid for the inventory, but for other services. However, upon our review of the financial records of the company, we find that the administrative fee Company A pays to Company B is included in Company B’s audited income statement. Specifically, the administrative fee is included in Company B’s revenue and is part of Company B’s operating profit calculation. In other words, the administrative fee is part of the related parties’ calculation of the price, ultimately declared to CBP. Accordingly, even though there are two payments made by Company A to Company B (one for the inventory and one for administrative services provided by Company B to Company A), the price declared to CBP contains the administrative fee in question. Therefore, since the administrative fee is already part of the price declared to CBP, we have no authority to deduct this fee from this price pursuant to 19 U.S.C. §1401a.
Price actually paid or payable
Having determined that the administrative fee is part of the value declared to CBP, we address Company A’s argument that had the fee not already been included in the customs value, it would not have to be added as either part of the price actually paid or payable or as an addition to the price actually paid or payable under 19 U.S.C. §1401a(b)(1)(E). The “price actually paid or payable” means the total payment (whether direct or indirect, and exclusive of any charges, costs, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.” 19 U.S.C. §1401a(b)(4)(A). It is CBP’s position that payments made by the buyer to a party related to the seller are indirect payments made to, or for the benefit of, the seller. All such payments are included in transaction value unless it is established that they were made in exchange for something other than the imported goods. See Generra Sportswear Company v. United States, 905 F.2d 377 (CAFC 1990), and Chrysler Corporation v. United States, 17 CIT 1049 (CIT 1993).
In this case, the administrative fee is paid for a number of services provided by Company B to Company A such as marketing, sales support, administration, information technology, finance, legal, human resources, and logistics arrangements. Company A argues that the administrative fee is not part of the price actually paid or payable because this fee is not connected to the imported merchandise, but is paid after importation for additional post-importation services provided by the seller, Company B. Based on the evidence presented, we agree with Company A’s position.
In HRL 543512, dated April 9, 1985, CBP addressed a similar situation, and the analysis offered is also applicable in this case. In HRL 543512, the buyer and seller were related parties, and the transaction involved the foreign seller-manufacturer. In addition to manufacturing and selling the merchandise at issue, there were fees for accounting, finance, planning, management, marketing, and clerical activities. CBP concluded that the fees paid by the buyer to the seller for these services were not dutiable additions to the price actually paid or payable. It was CBP’s determination that the fees were not dutiable because they were “not tied to the sale for exportation of any specific merchandise.” Id. CBP found that although the “price actually paid or payable” includes all payments to or for the benefit of the seller, whether direct or indirect, the instant management fees were not “made, or to be made, for imported merchandise.” 19 U.S.C. §1401a(b)(4)(A). See also HRL 545998, dated November 13, 1996 and HRL 548316, dated July 16, 2003.
Proceeds of any subsequent resale
Furthermore, the administrative fee constitutes [**] percent of Company A’s net sales to the end-customers after importation in the North American market and [**] percent of the net sales to the Canadian market. 19 U.S.C. §1401a(b)(1)(E) provides that “the proceeds of any subsequent resale, disposal or use of the imported merchandise that accrue, directly or indirectly, to the seller,” are to be added to the price actually paid or payable.
Generally proceeds are defined as “issues; income; yield; receipts; produce; money or article or other thing of value arising or obtained by the sale of property; and the sum, amount or value of property sold or converted into money or into other property.” Black’s Law Dictionary, 6th ed., 1990 at p. 1204; see also HRL 545998, dated November 13, 1996.
Moreover, the Statement of Administrative Action (“SAA”) provides that:
Additions for the value of any part of the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrues directly or indirectly to the seller, do not extend to the flow of dividends or other payments from the buyer to the seller that do not directly relate to the imported merchandise. Whether an addition will be made must be determined on a case-by-case basis depending on the facts of each individual transaction.
SAA, H.R. Doc. No. 153, Pt. II, 96th Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 at 49 (1981). CBP has ruled that in order for proceeds of a subsequent resale to be dutiable under this section, they must pertain to the resale of the imported merchandise, and they must accrue directly or indirectly to the benefit of the seller. See HRL 545035, dated August 23, 1995.
In this case, the administrative fee is paid to the seller of the imported merchandise. However, while paid upon the resale of jewelry and calculated on the net sales of Company A, these fees are based on specific undertakings of Company B in the United States and are not issues, income yield, or receipts, arising out of or obtained by the sale of property. Additionally, this administrative fee for services, enumerated in the FACTS portion of this decision, is tied to the sale of the imported jewelry in the United States and is not related to any specific shipment or the importation of the jewelry. Accordingly, we find the payment of the administrative fee by Company A to Company B does not pertain to the imported jewelry at issue and does not fall within the definition of proceeds. See HRL 545998. Therefore, the administrative fee in question would not be dutiable as proceeds of subsequent resale pursuant to 19 U.S.C. §1401a(b)(1)(E), if not already included in the customs value of the imported merchandise.
HOLDING:
In conformity with the foregoing, we find that transaction value is the appropriate method of appraisement for sales between the related parties in question. Company A satisfied the circumstances of the sale test in this instance. Additionally, we find that even though the administrative fee is included in the price declared to CBP, this fee is not part of the price actually paid or payable or an addition to the price actually paid or payable under 19 U.S.C. §1401a(b)(1)(E). However, since this fee is already included in the price between the related parties, we have no authority to deduct it under 19 U.S.C. §1401a.
This decision should be mailed by your office to the party requesting Internal Advice no later than 60 days from the date of this letter. On that date, 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.
Please do not hesitate to contact us at (202) 325-0042 if you have any questions or concerns.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch