OT:RR:CTF:VS H256779 RMC
Port Director
U.S. Customs & Border Protection
237 West Service Rd.
Champlain, NY 12919
Re: Application for Further Review of Protest 0712-14-150012; Transaction Value; Bona Fide Sale
Dear Port Director:
This is in response to your correspondence, dated July 14, 2014, forwarding the Application for Further Review (“AFR”) of Protest 0712-14-150012, timely filed by Aquabrass, Inc.
FACTS:
This AFR arises out of transactions between Aquabrass Inc. (“AB Inc.”), a Canadian manufacturer of bathroom and kitchen fixtures, and Aquabrass International Corporation (“AB International”), a wholly-owned subsidiary operating in the United States. AB Inc. sold fixtures to Canadian customers and to AB International, which is the sole distributor of AB Inc.’s products in the United States. At the time of the relevant imports, AB International employed a warehouse shipper/receiver with a “limited purchasing role” in Florida but, due to the “economic downturn experienced during 2010 to 2013,” AB Inc. also shipped orders directly from its Canadian warehouse to customers in the United States.
AB Inc. charged AB International an intercompany price averaging a 77% discount off the list price of the merchandise. Based on the structure of the relationship between the parties and the pricing of the deal, AB International claims that a “bona fide sale for export” occurred between AB Inc. and AB International when AB Inc. sent goods from its Canadian warehouse to AB International’s customers in the United States. As a non-resident importer, AB Inc. declared the intercompany price as the transaction value for customs purposes instead of the price that AB International charged the ultimate U.S. customer.
In May 2013, the Port of Champlain issued a CBP 28 requesting appraisement information on AB Inc.’s shipments. With respect to one representative entry, AB Inc. responded by providing a description of the products and commercial invoices showing the item numbers and prices. One invoice, for example, shows that the merchandise was “sold to” AB International in Florida but was to be delivered by United Parcel Service to a particular U.S. customer in New Jersey. No purchase orders were provided to document the sale, and the order number and purchase order number on the invoice were inconsistent.
The Port determined that this information was insufficient to support the shipment’s entered value and issued another CBP 28 in July 2013 requesting a complete paper trail of all commercial documents relating to the importation. AB Inc. responded with a letter from the company’s CFO outlining the legal structure of AB Inc. and AB International, portions of unlabeled bank statements that purport to show AB International’s payment to AB Inc. for the imports at issue, and AB Inc.’s receipt confirmation for the payments. Although AB Inc. provided some purchase orders from one representative entry to document the sale, the corresponding invoices from AB Inc. to AB International refer to different purchase orders.
After considering AB International’s responses, the Port of Champlain concluded that AB Inc. and AB International operated as principal and sales agent, rather than as an independent seller and buyer, and that the transaction value must therefore be based on the price that AB International charged the ultimate U.S. customer. The Port of Champlain’s determination was based on the information set forth below.
Structure of Relationship Between AB International and AB Inc.
As noted above, AB International is a separate entity that is incorporated in Florida. The same person serves as president of both AB Inc. and AB International. This person oversaw the operations of AB International when the contested merchandise was imported in 2013. Although AB International was legally distinct from AB Inc., it lacked, and continues to lack, an intercompany agreement that establishes the terms of services or fee arrangements. Instead, the agreements have been “verbal . . . [with the understanding that] AB International is a full-fledged distributor and assumes the inherent risks.” AB International states that those risks included warranty claims and responsibility for defective merchandise.
Although AB International’s U.S. workforce has fluctuated substantially due to market conditions, at the time of the imports at issue, AB International only had one U.S.-based employee, a warehouse manager.
AB International’s U.S. Operations
The scope of AB International’s U.S. operations has varied greatly depending on “market conditions” and the number of staff employed. At the time of the imports, AB International’s U.S. operations were based in its warehouse in Dania Beach, Florida. Because of poor market conditions, AB International reduced its U.S.-based staff to only one warehouse manager in 2010. AB Inc. “assisted” this employee by shipping orders directly to U.S. customers from AB Inc.’s headquarters in Canada and by taking over responsibility for accounting and purchasing.
For the entries at issue, AB International states that it took title to the goods when the carrier picked them up from AB Inc. in Montreal. However, there is no written sales agreement between AB International and AB Inc., and no other documentation was provided that sets forth the terms of sale or details the passage of title and risk of loss of the imported merchandise. Although AB Inc. provided an insurance policy as evidence that AB International bore the risk of loss, the Port found this evidence inconclusive because it was signed by the president of AB Inc. and did not show which entity paid for the policy.
The Port states that AB International never took possession of the merchandise or held its own inventory and that the costs of shipping and warehousing goods in the United States were paid by AB Inc. The Port also states that AB Inc. invoiced and shipped orders directly to U.S. customers and performed accounting functions for AB International.
Financials
AB International maintains separate books and records in its name. For example, AB International maintains a bank account in its name at the HSBC branch in Pompano Beach, Florida and maintains source documents (e.g., copies of purchase orders, sales invoices, expense vouchers, etc.) in Florida. However, all of these appear to be controlled by AB Inc. in Canada. AB International states that “AB Inc. provides bookkeeping services for AB International” and that the books and records are kept in Canada for “facilitation purposes.”
Based on the factual record described above, your office believes that there were no “bona fide sales for exportation” between AB Inc. and AB International. Instead, because significant parts of AB International’s operations are based in Canada and because the two companies are so closely intertwined, your office believes that AB International acts merely as a sales agent that solicits orders for AB Inc. As such, there is no “bona fide sale” between AB Inc. and AB International, and the entries were liquidated based on price charged to the ultimate U.S. customer.
AB Inc. states that it settles prices with AB International in a manner consistent with the way it settles prices for buyers who are not related to it. For example, AB Inc. provided documentation about pricing for an arm’s-length distributor in Canada. In that case, AB Inc. granted the unrelated distributor a “net discount of 68% off list price” compared to an average discount of 77% off list price for AB International. AB Inc. therefore contends that its dealings with AB International are at arm’s length and that the sales between the entities should therefore be considered “bona fide sales” for customs purposes.
ISSUE:
Whether there were bona fide “sales for exportation to the United States” between AB Inc. and AB International.
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 (19 U.S.C. § 1401a). The preferred method of appraisement of imported merchandise for customs purposes is transaction value. Transaction value is the price actually paid or payable for the merchandise when sold for export to the United States, plus certain enumerated additions. 19 U.S.C. § 1401a(b)(1). The term “price actually paid or payable” means the total payment (whether direct or indirect, and exclusive of any costs, charges, 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). In order for transaction value to be used as a method of appraisement, there must be a bona fide sale between the buyer and the seller. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit found that the term “sold” for purposes of 19 U.S.C. 1401a(b)(1) means a “transfer of title from one party to another for consideration” (citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). No single factor is decisive in determining whether a bona fide sale has occurred. See HQ 548239, dated June 5, 2003. CBP will consider whether the purported buyer assumed the risk of loss for, and acquired title to, the imported merchandise and whether consideration has passed.
The Port of Champlain concluded that the transactions between AB Inc. and AB International were not “bona fide sales.” Therefore, the Port of Champlain decided that the goods should be valued on the prices paid by the ultimate purchasers in the United States. While counsel for AB Inc. continues to argue that transactions between AB Inc. and AB International are indeed “bona fide sales,” we agree with the Port of Champlain’s finding that the evidence does not support this position.
First, counsel has not provided sufficient evidence to show that the imports at issue were the subject of a “bona fide sale” between AB Inc. and AB International. As noted above, a “sale” for customs purposes is the transfer of title from one party to another for consideration. Here, counsel argues that AB International obtained title to the goods and assumed risk of loss when the goods were shipped from Montreal. However, AB International does not have a written agreement establishing when title and risk of loss passed, and none of the invoices, bills of lading, or purchase orders provided can confirm counsel’s statement. Furthermore, AB International never took possession of the goods because they were shipped directly from Montreal to the ultimate U.S. consumer. Moreover, as the Port noted, the insurance policy in AB International’s name is inconclusive because it is unclear which party paid for the policy and it was signed by the president of AB Inc. Because there is insufficient evidence to show that title passed from AB Inc. to AB International, we find that the imports at issue were not the subject of a “bona fide sale” between AB Inc. and AB International for customs purposes.
Second, even if there was a “sale” between AB Inc. and AB International, the transaction value of these related-party sales would not acceptable for customs purposes. Counsel argues that the circumstances of the sale show that the price payable between AB Inc. and AB International was appropriate because “the price was settled in a manner consistent with the way the seller settles prices for sales to buyers who are not related to it” under 19 C.F.R. § 152.103(1). However, the documents that AB International provided to prove this point show that it enjoyed a substantially larger discount than arm’s-length distributors. For example, AB Inc.’s unrelated Canadian distributor was granted a “net discount of 68% off list price” whereas AB International enjoyed an average discount of 77% of off list price. Furthermore, no evidence was provided to show that the parties freely negotiated for the preferential price. Therefore, AB Inc. gave preferential pricing to its wholly-owned subsidiary, and AB International’s price was not “settled in a manner consistent with the way the seller settles prices for sales to buyers who are not related to it.”
Lastly, counsel’s submission goes into great detail about how AB International’s operations have changed since the time of these imports. For example, counsel states that AB International now operates an additional facility in Arizona with nine employees (as of 2014) and that shipments from AB Inc. to U.S. customers are now rare. However, this protest is concerned only with AB International’s operations at the time of the imports at issue. Accordingly, we did not consider this information in our review of the protest, and we give no opinion on whether an acceptable related-party transaction could occur now between AB Inc. and AB International.
HOLDING:
We find that a bona fide sale has not occurred between AB Inc. and AB International. Therefore, the transaction between these parties cannot form the basis of appraisement of the imported merchandise. Instead, the merchandise should be appraised using transaction value based on the price actually paid or payable by AB International’s customers in the United States.
Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division