Customs Ruling HQ H038381 - Internal Advice Request; Service Fees; Transfer Price; Restrictions on the Disposition or Use of Imported Merchandise; 19 U.S.C. § 1401a(b)(2)

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HQ H038381
Nov 17, 2014

Type : Valuation • HTSUS :
Related: 548419

OT:RR:CTF:VS H038381

Area Director
U.S. Customs and Border Protection
JFK International Airport
Building #77
Jamaica, New York 11430

RE: Internal Advice Request; Service Fees; Transfer Price; Restrictions on the Disposition or Use of Imported Merchandise; 19 U.S.C. § 1401a(b)(2)

Dear Area Director:

This decision is in response to your request of September 3, 2008, requesting internal advice on the dutiability of service agreement fees paid by the Importer to a related party seller and another related party. You and the importer are seeking internal advice from this office under the provisions of 19 CFR 177.11. Along with your request, this office received a copy of the Pre-Assessment Survey Report Number 261-07-FA1-P1-20832 (hereinafter, Report), dated June 25, 2008. The Report audited imports from the Importer for its calendar year 2005. The Report sets forth the reasons Regulatory Audit believes the fees to be dutiable.

Your port is in agreement with Regulatory Audit. However, the Importer, represented by counsel, disagrees with the conclusion that the service fees are dutiable and in its response to the Report, the Importer requested Internal Advice be sought from this office. In addition, counsel for the Importer requested that this Internal Advice be considered in conjunction with another Internal Advice request filed on behalf of a related importer, in response to a Focused Assessment Follow-up Audit Report, Number 821-04-FA1-F1-18241, dated August 29, 2008. As the Internal Advice requests involve the same or substantially similar issues, this office considered all of the information submitted for both internal advice requests. Our decision herein is based on the information provided in both reports referenced above, including the submissions from counsel for the related importers submitted in response to the Regulatory Audit reports; supplemental submissions made in response to inquiries made by this office; additional material requested by this office from Regulatory Audit which was acquired in the course of the audits; a review of the service agreements at issue; consideration of arguments made at a meeting held with counsel and her clients on June 16, 2009 at our offices; and additional supplemental submissions from counsel. This decision is applicable to both internal advice requests.

By letter dated July 1, 2009, the importer requested confidential treatment be accorded to certain information submitted in connection with this Internal Advice request. In consideration of the request and sufficient justification being presented pursuant to 19 CFR 177.2(b)(7), this office will not identify the parties having any connection to the transactions under review nor any of the financial information provided to CBP which relates to the costs, pricing, profit, expenses and resale related to the imported merchandise.

FACTS:

In this case, the related parties, the Seller and the Importer, promote and sell merchandise under a trademarked brand name. Brand merchandise is promoted and sold globally. The Seller performs the design and development of the brand merchandise and oversees the manufacturing of the products by related and unrelated manufacturers from whom the Seller purchases the products. The Importer is a distributor of the Seller’s merchandise, imported and domestically produced, within the Northern Hemisphere, including the continental United States. The Seller owns all marketing intellectual property, brand names, trade names and trademarks. It owns the designs, models, and all intellectual property rights relating to the merchandise. The type of merchandise imported varies and includes a wide range of goods, including seasonal goods. In addition to buying merchandise from the Seller, the Importer buys merchandise from a U.S. related party.

The Importer provided Customs and Border Protection (CBP) with information regarding its electronic ordering/inventory control system. The Importer states that it monitors and manages the system whereby orders are generated through an auto-replenishment system based on sales activity and inventory levels in the Importer’s stores or inventory levels in the Importer’s warehouse. When the Seller ships the merchandise, whether to a store or to the Importer’s warehouse, the invoice indicates the Importer is the buyer, payment is due in U.S. dollars “30 days – End of month”, the total invoice amount due, and the sales terms, i.e., “ex-works.” It is asserted that based on the terms of sale as indicated on the invoice, title to the merchandise is transferred from the Seller to the Importer at the Seller’s distribution center abroad. The Importer is responsible for all freight, insurance, brokerage, and handling from that point forward.

The Importer declares the invoice price as the value for purposes of appraisement under transaction value. The invoice price is a transfer price which is a percentage of the retail price. This method for determining the transfer price is referred to as the “resale minus method” or “resale price method.” The Seller has used this method worldwide for determining transfer prices since 1993 based on a transfer pricing study of the same year. The transfer pricing study states with regard to the “resale price method”: “. . . [the Seller] must maintain control and coordination over the retail price for its product. . . .” However, the Importer submits that it negotiates prices for the merchandise with the Seller and there is no evidence to support Regulatory Audit’s determination that the Importer must accept the pricing determined by the Seller. Evidence, in the form of printed emails, was submitted to support the argument that the related buyers negotiate with the Seller with regard to prices.

In addition to the invoiced amounts for shipments of merchandise which the Importer pays to the Seller, the Importer pays the Seller for certain services under a “Service Agreement” which the parties claim are unrelated to the imported merchandise and are strictly services related to the retail operation of the Importer. These services, in general terms, include, among other things: establishing worldwide policy for retail prices, improving logistical systems for retail stores, merchandising services, general management services, financial management, electronic data processing (EDP) services, trademark protection, consumer and marketing services, advertising support, and other retail services which the Importer may request which are necessary for the operation of the Importer’s retail business.

In consideration for these services, the Importer pays the Seller quarterly an advance in an amount equal to a set percentage of the external net sales of trademarked brand products (excluding taxes) of the North American territory for the preceding quarter. The North American territory includes the continental United States, Puerto Rico, and other locations in the Northern Hemisphere in which brand retail stores are located and operationally managed by the Importer. In other words, the Importer pays the Seller an advance for services on a quarterly basis, based on its net sales in the United States and Puerto Rico, plus the net sales of brand merchandise which occur outside the United States and its customs territory. However, the service agreement provides that at the beginning of the following year, after accounts have been finalized, the Seller and the Importer will review the services rendered and their related costs and the Seller shall reconcile the payments made by the Importer to the total amount of costs incurred. Based on this reconciliation by the Seller, the parties jointly determine any appropriate adjustment. We note the service agreement also

states that the Importer “agrees to reimburse [the Seller] for [the Seller’s] actual costs directly incurred in connection with the services rendered.”

The reconciliation of the payments was explained by the Importer as based on a combination of net sales by the Importer and a usage analysis. As counsel explained: “The methodology employed to determine the proper allocation was based upon the relative percentage of sales and management’s estimate of how much time and effort were applied to a particular expense, along with the degree to which each company benefited from the expense. The methodology was in accord with local GAAP standards.” The usage calculation was further explained as being determined by the Seller and Importer, in conjunction with one another. It was also explained as corresponding to the time spent/costs allocated by the Seller to provide services.

In addition to the service agreement with the Seller, the Importer has a service agreement with its parent holding company located in the U.S. The parent holding company provides the Importer with services which are referred to by counsel for the Importer as “back office services.” In general terms, these services include, among other things: accounting and treasury services, negotiating and purchasing general services, legal support services, human resource services, tax services, real estate related services, coordinating the centralization of media space-buying, representing the Importer in U.S. public relations activities, and serving as liaison with other U.S. related parties.

In consideration of the services provided, the parent holding company deducts from the Importer’s cash pool, account fees for services provided at the end of each quarter. “The amount of Fees shall be calculated by the Provider [the parent], in its sole discretion, based on a variety of factors including but not limited to [the Importer’s] percentage of net sales, payroll expenditures, the book value of all property held by the Company, etc., in relation to all entities that have entered into similar service agreements.” Based upon its terms, the fees paid under this service agreement are not limited to simply covering the actual costs of the services rendered. The calculation also includes a mark-up to provide a profit to the service provider.

With regard to written agreements between the parties, besides the service agreements described above, we have been provided with a copy of an “Exclusive Distribution Agreement” between the Seller and the Importer, executed on January 1, 2009. It is stated in the Distribution Agreement that “the parties agree that this Agreement is intended to memorialize the compliance with the norms and standards of [the Seller’s] distribution network that has been followed since 1981.” Other than the service agreements and the recently executed Distribution Agreement, we have been informed there are no other written agreements between the parties.

We note the following relevant portions of the Distribution Agreement:

3.4 This Agreement does not transfer or convey to [the Importer] any license or property rights whatsoever in relation with the Trademarks, the models, the distinctive signs, the decorations and/or the presentations which are used by the [Seller] for the Products.

* * *

5.1.2 The [Seller] is free to change the [merchandise] at its own will, including the additions of articles of different types.

The [Importer] declares to have accepted in advance all changes, additions or withdrawals that may have future effect on the [merchandise].

The [Seller] has the right to withdraw from distribution certain Products and require that they not be sold, and the [Seller] shall be obliged to buy back certain products from the [Importer] according to a repurchase price to be determined by the Parties on a case by case basis, taking into account possible damages suffered.

It is understood that the [Seller] shall have the right at any time and in its sole discretion to withdraw existing Products from, to add new Products to, or to modify in any other way the list of Products, without incurring any liability towards the [Importer].

* * *

ARTICLE 8 – ADVERTISING AND PROMOTION

8.1 The [Importer] shall actively and continuously advertise and promote the Products in the Territory. [The Importer] agrees to submit for the [Seller’s] prior written approval any proposed advertising and promotional program before it is implemented.

* * *

8.2 The [Seller] is responsible for advertising outside the Territory. . . ., the Parties agree that the advertising themes and documents shall be in accordance with the [Seller’s] international advertising policy.

Therefore, the [Importer] shall have the obligation to use any publicity tools that may be provided to it by the [Seller].

. . ., such tools shall have to be used according to the [Seller’s] instructions and shall by no means, be modified by the [Importer].

* * *

16.1 If, in the course of the execution of the Agreement, a Party does not require from the other one to comply with a provision or provisions of this Agreement or does not take advantage of a provision, it shall not be considered as an expressed or tacit waiver of the related right of requiring the correct implementation of the other Party’s commitments.

* * *

ARTICLE 17 – MODIFICATIONS:

This Agreement may not be altered, amended or changed, nor may any provision hereof be amended or waived, except by an instrument in writing signed by a duly authorized representative of the Party against whom such amendment, change or waiver is sought to be enforced.

[Bold added.]

In its Report, Regulatory Audit concluded that the Importer is using the appropriate basis for appraisement, i.e., transaction value, but believes that the Importer does not have adequate controls for reporting accurate and complete transaction value information. Specifically, Regulatory Audit finds the service fees being paid by the Importer to the Seller and to its parent holding company to be dutiable indirect payments which have not been declared to Customs and Border Protection (CBP) as part of the price actually paid or payable.

Regulatory Audit believes these service fees are dutiable because of the relationship of the services to the product. The value of the product includes not only the cost of producing the product, but the customer’s perception of the product’s brand name value. This perception is created and controlled by the Seller. The service agreements allow the Seller to maintain the necessary control to ensure a uniform image, marketing strategy, and perceived value for its brand name products on a worldwide basis. Regulatory Audit concluded that the service agreements were intrinsically linked with the imported merchandise and thus dutiable as part of the price actually paid or payable.

Your port agrees with Regulatory Audit that the service fees are dutiable, but you differ on the basis of the dutiability. You believe that the service fees are dutiable as royalty payments and/or proceeds of a subsequent sale. You adopt Regulatory Audit’s

view that these service fees are part of the price actually paid or payable, as opposed to additions thereto, as an alternative argument for their dutiability.

As noted, a Related Importer filed a request for internal advice on substantially similar issues. Regulatory Audit’s San Francisco Field Office took a different approach in determining that the service fees paid by the Related Importer to the same Seller and other related parties were dutiable. In a Focused Assessment Follow-up Audit Report, dated August 29, 2008, Number 821-04-FA1-F1-18241, the San Francisco Field Office determined, after an audit of imports by the Related Importer for the calendar year 2006, that the Related Importer’s transfer payment to its related Seller was insufficient to meet the circumstances of the sale under the all costs plus a profit test. However, when the service payments which the Related Importer paid to the Seller, its parent holding company, and another related party, were added to the transfer price, then the Related Importer met the all costs plus a profit test. Regulatory Audit found the service fees to be related to the merchandise and to be dutiable as part of the price actually paid or payable, or as proceeds from the sale of the imported merchandise after importation.

In regard to the Related Importer, Regulatory Audit reviewed the cost information for ten (10) imported items, along with three (3) items related to the Importer who is the primary subject of this internal advice. Regulatory Audit calculated the operating profit for each item and compared it to the overall operating profit of the related Seller. As a result, Regulatory Audit found that most items fell below the overall profit of the Seller and therefore, the transfer price was insufficient to ensure recovery of all costs plus a profit equivalent to the Seller’s overall profit in sales of goods of the same class or kind. In support of the argument that the service fees are not properly part of the transaction value of the merchandise, the Importer has presented information through counsel to argue that the transfer price of the merchandise is sufficient to ensure recovery of all costs plus a profit equivalent to the Seller’s overall profit for the audit years at issue (in both Internal Advice Requests) in sales of merchandise of the same class or kind. In addition, numerous supplemental submissions were made to further support the Importer’s view and to respond to questions from this office.

Counsel argues that the fee calculation for services rendered by the Seller and parent holding company to the Importer includes net sales of merchandise, imported and domestically produced, sold within and outside the continental U.S. in the Northern Hemisphere. The Importer recoups costs for services which are attributed to sales outside the continental U.S. through service agreements with related parties in those locales for the same services that the Seller and parent holding company provide to the Importer. Counsel submits this is evidence that the services received by the Importer are not conditioned upon the sale of imported merchandise from the Seller. Counsel submits that these services are retail services separate and apart from the sale of the merchandise and thus are not dutiable. In arguing that the service fees are not dutiable as part of the price actually paid or payable or as additions thereto, counsel submits that the service fee payments “were not predicated upon the resale price [of merchandise] but the costs actually incurred by [the Seller] on [the Importer’s] behalf in connection with [its] retail operations. However, counsel further stated, with regard to the Related Importer:

It is equally clear that the payment of services fees does not result in a direct or indirect benefit to [the Seller] as the worldwide service fees charged by [the Seller] in 2006 were insufficient to recapture the total costs incurred in that year, thus establishing that [the Seller] did not earn a profit by providing these services but merely recovered a portion of the incurred costs [ ].”

Regulatory Audit disagrees with the claim that the fees are for actual costs of services taking issue with the methodology used by the parties to calculate the fees, in particular the usage factor. Regulatory Audit found a failure of documentation to support the calculation.

We have considered all of the information in the reports from Regulatory Audit and the submissions from Importer’s counsel. In addition, we have reviewed some of the underlying documents provided to Regulatory Audit during the course of their review including the Importer’s store handbook and standard operating instructions for various matters.

The Importer initially presented Regulatory Audit with the related Seller’s 2005 and 2006 profit and loss statements. However, at a meeting with CBP personnel on June 16, 2009, the Importer presented information wherein the Seller’s role was broken down into three functions – industrial (i.e., production), wholesale, and retail. The Importer submitted information regarding the Seller’s cost allocations for general and administrative expenses and for pre-shipment and post-shipment warehouse expenses, among other cost information, for the three core functions. Further, the various supplemental submissions from the importers through counsel included numerous schedules which showed revisions to the cost plus profit data previously submitted to Regulatory Audit during the follow-up audit by San Francisco Regulatory Audit and computation of dutiable “pre-shipment” expenses. At our request and due to variances in the submitted figures, Regulatory Audit reviewed the supplemental submissions received and provided this office with a Technical Assist Audit Report, No. 821-10-AT0-AU-22844, dated January 27, 2011.

ISSUE:

Whether transaction value is the proper method of appraisement?

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 preferred method of appraisement under the TAA is transaction value, defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus certain enumerated additions, including “any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States” and “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) and (E). These additions apply only if they are not already included in the price actually paid or payable.

There is no dispute that the transactions at issue involve related parties as defined in section 402(g) of the Tariff Act of 1930, as amended by the TAA, codified at 19 U.S.C. 1401a. Under 19 U.S.C. § 1401a(b)(2)(A)(iv), transaction value is used for appraisement of imported merchandise “only if” the buyer and seller are unrelated, or if the buyer and seller are related, transaction value is acceptable under 19 U.S.C. § 1401a(b)(2)(B). As the ports, Regulatory Audit, and the Importer accept that sales occur between the Seller and the Importer, we will not examine that question. However, we still must examine whether transaction value is acceptable pursuant to 19 U.S.C. § 1401a(b)(2).

Restriction affecting value; 19 U.S.C. 1401a(b)(2)(A)(i)

19 U.S.C. § 1401a(b)(2) states, 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 chapter only if –

there are no restrictions on the disposition or use of the imported merchandise by the buyer other than restrictions that – are imposed or required by law. limit the geographical area in which the merchandise may be resold, or do not substantially affect the value of the merchandise;

(ii) the sale of, or the price actually paid or payable for, the imported merchandise is not subject to any condition or consideration for which a value cannot be determined with respect to the imported merchandise;

(iii) no part of the proceeds of any subsequent resale, disposal, or use of the imported merchandise by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment therefor can be made under paragraph (1)(E); and

(iv) the buyer and seller are not related, or the buyer and seller are related but the transaction value is acceptable, for purposes of this subsection, under subparagraph (B).

[Bold added].

19 U.S.C. § 1401a is the U.S. implementation of the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (WTO Valuation Agreement). See Headquarters Ruling Letter (HQ) 548161, dated August 21, 2002, footnote 1. The meaning of the term “restrictions” as it applies to Article 1.1(a)(iii) of the WTO Valuation Agreement, which is the basis for 19 U.S.C. § 1401a(b)(2)(A)(i)(III), is discussed in Commentary 12.1 issued by the Technical Committee on Customs Valuation. The Technical Committee provides guidance on the interpretation of the WTO Valuation Agreement through, among other things, commentaries which are not binding upon member countries, but which may be instructive. With regard to the exception regarding restrictions on the disposition or use of imported merchandise which do not substantially affect the value of the goods, the Commentary states, in relevant part:

. . . In the case of the third exception, however, a number of factors may have to be taken into consideration to determine whether the restriction has substantially affected the value or not. These factors include the nature of the restriction, the nature of the imported goods, the nature of the industry and its commercial practices, and whether the effect on the value is commercially significant. Since these factors may vary from case to case, it would not be proper to apply a fixed criterion in this respect. For example, a small effect on the value in a case involving one type of goods may be treated as substantial while a much greater change in the value of goods of another type may not be treated as substantial.

In this case, the Distribution Agreement places restrictions on the disposition or use of the imported merchandise by the buyer that substantially affect the value of the merchandise. Paragraph 5.1.2 clearly states that the Seller, i.e. the Seller, “has the right to withdraw from distribution certain Products and require that they not be sold.” This right is stated not once, but three times in paragraph 5.1.2 – “It is understood that the [Seller] shall have the right at any time and in its sole discretion to withdraw existing Products from . . . the list of Products, without incurring any liability towards the [Importer];” and, “The [Seller] is free to change the [merchandise] at its own will . . . The [Importer] declares to have accepted in advance all changes, additions or withdrawals that may have future effect on the [merchandise].”

CBP has been presented with conflicting information in this case. The language of paragraph 5.1.2 of the Distribution Agreement is clear - the Seller can tell the Importer to stop selling merchandise the Importer now supposedly owns, i.e., holds title to. When CBP inquired as to the intent of this provision, we were told: “This provision pertains to those products which contain a manufacturer’s defect or defects and does not apply to obsolete products, as the Distributor has the right and ability to decide whether it wants to discontinue offering such product for sale.” However, based on the wording and context of paragraph 5.1.2, and other information in the file, we believe that the right of the Seller to direct the Importer to stop selling certain merchandise goes beyond products which may contain some defect. The language of the Agreement does not limit the right of the Seller in any way with regard to the withdrawal of products or its right to require products to no longer be sold.

In the Importer’s store handbook, at section 3.3, “Returning Obsolete/Shop Worn Products,” an obsolete item is defined as “[a]n item that can no longer be offered for sale based on the official list issued by the Zone’s Logistics Management.” With regard to returning obsolete/shop worn items, it is stated that “returns for obsolete are organized on a countrywide basis” and “returns are under the direct management of the Country’s Head of Logistics (or Country Financial Controller) and the Zone’s Head of Logistics.” With regard to certain seasonal merchandise, the handbook states: “At the end of each season, the [responsible individual] will send the stores an inventory removal file that lists the SKUs for all end-of-season items to be returned to [the Seller’s foreign warehouse] or to the Zone Logistics Center. Items on the list will then be vouchered/transferred out of the system and sent back to the Zone Logistics Center.” However, we were informed that “[s]ince 2006, the audit year, no out-of-season, obsolete or shop worn product has been returned to [the Seller’s warehouse].”

With regard to section 3.3 in the handbook, CBP was told that “[o]bsolete products . . . are those products which [the Seller] has discontinued the (sic) manufacture. . . it does not signal that current inventory will automatically be pulled from the shelves.” We were told the Importer’s merchandising team has the final word on whether there is sufficient demand to continue to offer a product for retail sale or to remove it. With regard to the seasonal merchandise, CBP was told that it is the business practice of the Importer to not sell out-of-season merchandise. Out-of-season, shop worn, and obsolete merchandise is offered to employees at a discount and what is not purchased is destroyed. The Importer’s decision “to destroy is not mandated by [the Seller] and is not expressed or recorded in any written document. Duty drawback claims are filed to recover the duties initially paid on importation of the destroyed merchandise.”

With regard to duty drawback, from the Related Importer’s Standard Operation Procedures (SOP), we find, in relevant part:

Policy: Periodically, [the Related Importer] will export or destroy unused merchandise that was previously imported, on which duty was paid. [The Related Imported] will avail itself to duty drawbacks (i.e., the refund of 99 percent of the duties paid upon importation) whenever possible. . . .

* * *

1.3 Examples of unused merchandise which are exported or destroyed: a. End of season [merchandise] b. End of life products (obsolete and discontinued) c. Defective customer return products d. Excess stock

In addition, the Supply Chain and Logistics organizational chart for the Related Importer identifies an individual with, among other responsibilities, the responsibility for “Drawbacks for EOS/Obsolete Destruction & Returns.” Therefore, although the Importer has indicated that since 2006 it has not returned any out-of-season, obsolete or shop worn products to the Seller, its store handbook and SOP for drawback provide for such situations.

The written agreement between the parties bestows the right upon the Seller to withdraw and stop sales of certain merchandise, with no limiting language. Such a right constitutes a restriction upon the disposition or use of the imported merchandise which may be exercised at any time. The parties specifically provided in Article 16.1 of the Agreement that if a party does not require compliance of the other with a provision or does not take advantage of a provision of the Agreement it is not an expressed or tacit waiver of the right of requiring implementation of the other party’s commitment under the Agreement. Further, Article 17 provides that the Agreement “may not be altered, amended or changed, nor may any provision hereof be amended or waived, except by an instrument in writing. . . .” Therefore, the actions of the parties, i.e., not returning any no out-of-season, obsolete or shop worn product to the Seller since 2006, may not constitute an amendment to the written agreement.

CBP believes this restriction by the Seller substantially affects the value of the imported merchandise, enhancing its value, due to the control exerted by the Seller over distribution in stores of its products. The image created by the Seller for its trademarked goods is enhanced by its ability to control the distribution of its goods. In an interview with [ ], published under the title [ ] the CEO [ ], at the time, stated:

[ ] The advertising is the same. [ ]

[Emphasis added.]

In [ ] in discussing distribution, it is stated:

[ ] take control [ ]

Further, in [ ] we find:

[ ] control of distribution [ ]

[ ] image and inventory. [ ]

Based upon the control exerted by the Seller over the disposition or use of the imported goods pursuant to paragraph 5.1.2 of the Distribution Agreement, we find that transaction value may not be used for appraisement purposes pursuant to 19 U.S.C. § 1401a(b)(2)(i)(III).

Fees as a Condition of Sale

Regulatory Audit took the view that the service fees at issue were dutiable because the services which were provided allowed the Seller to control a uniform image, marketing strategy, and perceived value for its trademarked merchandise on a worldwide basis. Counsel submits that the Seller’s business model of control through ownership of the processes of the product life does not mean that the related parties do not operate at arm’s length. With regard to the services provided by the Seller, counsel argues that the services are optional on the part of the Importer, are based on actual expenses incurred and cover costs borne by the Seller at the request of the Importer. We disagree.

Regulatory Audit believes that the entire Service Fee paid to the Seller is dutiable. The payment of the Service Fee to the Seller is a direct payment, not indirect, but not all payments to a seller from a buyer are dutiable. As cited by counsel for the Importer, in VWP of America Inc. v. United States, 163 F. Supp. 2d 645, 653, the Court of International Trade stated:

At a minimum, it would appear that the general interpretation of Customs is that characterization of an expense does not determine its dutiability, a position with which this Court would agree: the inquiry should focus on whether the expenditure proximately results in or is connected in some way to importation. If importation is the proximate result of an expense, however characterized, the expense is dutiable. [citation omitted].

The Court went on to state with regard to proceeds:

. . . subsection (E) of 19 U.S.C. § 1401a(b)(1) requires inclusion in transaction value of the “proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.” Obviously, all of VWPA’s revenues were “proceeds” of the “subsequent resale, disposal, or use of the imported merchandise”, some of which were remitted to VWPC for services rendered and fees expended in fulfilling VWPA’s obligations to U.S. purchasers of Victor Woollen Product fabrics in advance of importation. The Court considers such payments to fall within the ambit of “proceeds” in accordance with the plain meaning of 19 U.S.C. § 1401a(b)(1)(E). Customs requires proceeds to be “directly related” to importation to be dutiable. 19 C.F.R. § 152.103(g)(1992).

Id. at 654.

As noted above, transaction value is not applicable due to the provision affecting the disposal or use of the imported merchandise in the Distribution Agreement, but it is also not applicable because some of the services for which the Importer pays a fee to the Seller intrinsically relate to the imported merchandise, while others do not. For instance, the Service Agreement between the Seller and the Importer includes trademark protection. It also provides that the reimbursement of the expenses by the Importer “does not cover the repayment of a trademark right” and trademark ownership is not included in the services rendered. Further, the Distribution Agreement, at paragraph 3.4, clearly states that the Importer has no license or property rights “whatsoever” in the trademarks owned by the Seller.

Counsel argues that the “trademark” services charged the Importer relate to “anti-counterfeiting services to cover the cost of seizures, police coordination, judicial proceedings and the like.” Counsel claims these types of services are normally carried out by domestic retail chain stores. However, in The Mashantucket Pequot Tribe v. Redican, 403 F. Supp. 2d 184, 190, the Court stated, citing the Lanham Act, 15 U.S.C. §§ 1114(1)(a):

The owner of a trademark may enforce the right to exclude others from using the trademark in an action for trademark infringement. Anyone who, without the consent of the owner, uses “any reproduction, counterfeit, copy, or colorable imitation” of a registered trademark in connection with the sale of goods or services in a manner likely to cause confusion, mistake, or deception as to the source of the goods or services infringes the trademark.

In Chanel, Inc., v. Gordashevsky, 558 F. Supp. 2d 532 (April 7, 2008), the Court stated:

To establish either Lanham Act claim, [referring to trademark infringement or false designation of origin claims] the record must demonstrate that plaintiff (1) has a valid and legally protectable mark; (2) owns the mark; and (3) the defendant’s use of the mark to identify goods or services causes a likelihood of confusion [citation omitted.]

Finally, in G&F Licensing Corp. v. Field & Stream Licenses Co., LLC, et.al., (U.S.S.D. NY, July 16, 2010), the Court stated at 11:

Only the “registrant” of a mark may assert a claim alleging infringement of that mark pursuant to 15 U.S.C. § 1114. 15 U.S.C.A. § 1114 (West 2009). “The term []. . . ‘registrant’ embrace[s] the legal representatives, predecessors, successors and assigns of such . . .registrant.” 15 U.S.C.A. § 1127 (West 2009). Because Plaintiff is only a licensee, its “interest in the trademark arises solely from the contractual relationship between it and [FSLC, the registrant], and such interest is secondary to the registrant’s.” Silverstar Enters., Inc., 537 F. Supp. at 240. Plaintiff may therefore assert, at most, a claim for infringement of the licensed marks “on behalf of [FSLC] to enforce the trademark owner’s proprietary rights.” Id. at 241.

The responsibility for protecting a trademark lies with the owner of the mark. In this case, the Seller owns the mark. Through the Service Fee Agreement, the Seller is charging the Importer for doing something the Seller is obligated to do by law, that is, protect its trademark. The Importer has no property interest in the trademark and cannot legally take action against a party for counterfeit goods except as an agent acting on behalf of the trademark owner, i.e., the Seller. The trademark is intrinsically linked to the imported merchandise and imparts value to the merchandise based upon consumers’ perception of the brand. Therefore, we have held that a fee related to trademark protection is part of the price actually paid or payable for the goods. See HQ 548419, dated December 27, 2009, wherein we stated a fee paid by a buyer to a party related to the seller for “marketing property services,” i.e., the registration and renewal of copyright and trademarks owned by the manufacturer and the enforcement of intellectual property owned by the members of the Group, constitutes part of the price actually paid or payable for the merchandise.

Additionally, with regard to advertising and marketing support, the Service Agreement states that advertising services provided by the Seller consist principally with regard to worldwide advertising campaign and media program, including technical

services with respect to advertising, while marketing services consist of public and press relations.

The Distribution Agreement requires the Importer to actively and continuously advertise and promote the Products in the Territory. It also requires the Importer to obtain the Seller’s prior written approval of any proposed advertising and promotional program before it is implemented. See Article 8.1 of the Distribution Agreement. Article 8.2 of the Distribution Agreement states that the Seller is responsible for advertising outside the Territory. However, it also provides that the Importer is obliged “to use any publicity tools that may be provided to it by the [Seller]” and such tools must be used according to the Seller’s instructions and cannot be modified by the Importer. Therefore, the Importer is charged a service fee for advertising support which consists of advertising outside of the United States and requires the Importer to use materials and tools provided to it by the Seller in its advertising which, in this case, benefits of the Seller in controlling the advertising of its goods.

19 CFR § 152.103(a)(2) states, in discussing indirect payments to the seller: “Activities such as advertising, undertaken by the buyer on his own account, other than those for which an adjustment is provided in § 152.103(b) [referring to additions to the price actually paid or payable, which includes the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller], will not be considered an indirect payment to the seller though they may benefit the seller.” Despite the claim that the Importer may choose to not use services offered by the Seller, based on the language of the agreements between the parties, the Importer does not have an option regarding advertising and marketing. The Importer must “use any publicity tools that may be provided to it by the Company” as the Seller directs. Therefore, the portion of the service fee related to advertising and marketing, prorated to account for only the imported merchandise, would be considered part of the price actually paid or payable.

While some services provided by the Seller are dutiable, others are not. As discussed above, the portion of the fee related to trademark protection would normally be part of the price actually paid or payable for the goods. The portion of the fee related to advertising and marketing would be part of the price actually paid or payable for the goods as a condition of sale based on the language in the Distribution Agreement. However, other services are not as intrinsically related to the imported merchandise so as to be directly related to its sale and importation. For instance, legal services related to lease agreements, local legal matters, drafting of agreements and financial services related to cash flow analysis, negotiations with banks and credit card companies, are services which would not be dutiable as the nexus between the services and the imported merchandise is simply not strong enough. Therefore, although the fees for legal and financial services are derived from proceeds of subsequent sales of imported, and domestic, merchandise, such fees would normally not be dutiable under transaction value as additions to the price actually paid or payable.

Consideration for which a value cannot be determined 19 U.S.C. 1401a(b)(2)(A)(ii)

The Seller also provides additional services beyond those discussed herein. However, it is sufficient to find that some are dutiable and some are not dutiable. We need not discuss each service individually. In Generra Sportswear Company v. United States, 905 F.2d 377(CAFC 1990), the Court stated:

Congress did not intend for the Customs Service to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, are for the merchandise or something else. As we said in Moss Mfg. Co. v. United States, 896 F. 2d 535, 539 (Fed. Cir. 1990), the “straightforward approach [of section 1401a(b)] is no doubt intended to enhance the efficiency of Customs’ appraisal procedure; it would be frustrated were we to parse the statutory language in the manner, and require Customs to engage in the formidable fact-finding task, envisioned by [appellant].

Generra, 905 F. 2d at 380 (brackets in original).

In this case, we have a service fee assessed for multiple services; some dutiable, some not. While the Importer endeavored to explain the methodology for ascertaining the service fee amount, the complexity and subjectivity between the parties of the calculation raises doubt as to its reliability. In fact, with regard to trademark protection, the Service Agreement states that with regard to the time and actions involved in defending the trademark, including actions against counterfeits, allocations cannot be made to specific countries. Therefore it would seem to follow that if cost allocations cannot be made to specific countries, such cost allocations cannot be made to specific related parties either, including the Importer. If one service cannot be accurately allocated, we must question the reliability of the allocation method for all services.

19 U.S.C. § 1401a(b)(2)(A)(ii) precludes the use of transaction value if the imported merchandise is subject to any condition or consideration for which a value cannot be determined. As stated in Generra, it is not for Customs to engage in formidable fact-finding and, for the reasons stated above, we cannot rely on the information presented by the Importer regarding the amounts attributable to the various services provided through the Service Agreement. As we have certain services where we would have held that they would be part of the price actually paid or payable and for

which we cannot determine the value, pursuant to 19 U.S.C. § 1401a(b)(2)(A)(ii), this is another reason why transaction value may not be used for appraisement purposes.

Further, we cannot accept the transfer price between the parties as the requirements of 19 U.S.C. § 1401a(b)(2)(A)(i) through (iv) must be met for transaction value to be acceptable. As we have determined that transaction value may not be used for appraisement purposes, we see no need to discuss the service fee paid to the parent holding company.

Other Methods of Appraisement

When imported merchandise cannot be appraised on the basis of transaction value, it is appraised in accordance with the remaining methods of valuation, applied in sequential order. See 19 U.S.C. § 1401a(a)(1). The alternative bases of appraisement, in order of precedence, are: the transaction value of identical or similar merchandise (19 U.S.C. § 1401a(c)); deductive value (19 U.S.C. § 1401a(d)); computed value (19 U.S.C. § 1401a(e)); and the “fallback” method (19 U.S.C. § 1401a(f)). The transaction value of identical or similar merchandise requires sales of identical or similar merchandise at the same commercial level and in substantially the same quantity, exported to the United States at or about the same time as the merchandise being appraised. See 19 U.S.C. § 1401a(c). These sales must be previously accepted for appraisement purposes under transaction value. Treasury Decision (T.D.) 91-15, dated March 29, 1991. “Identical merchandise” is defined in 19 U.S.C. § 1401a(h)(2) as:

merchandise that is identical in all respects to, and was produced in the same country and by the same person as, the merchandise being appraised; or,

if merchandise meeting the requirements under subparagraph (A) cannot be found..., merchandise that is identical in all respects to, and was produced in the same country as, but not produced by the same person as, the merchandise being appraised.

“Similar merchandise” is defined in 19 U.S.C. § 1401a(h)(4) as:

(A) merchandise that – (i) was produced in the same country and by the same person as the merchandise being appraised, (ii) is like the merchandise being appraised in characteristics and component material, and (iii) is commercially interchangeable with the merchandise being appraised; or

(B) if merchandise meeting the requirements of subparagraph (A) cannot be found..., merchandise that – (i) was produced in the same country as, but not produced by the same person as, the merchandise being appraised, and (ii) meets the requirement set forth in subparagraph (A) (ii) and (iii).

While the statute allows for some flexibility in applying this provision, i.e., allowing for adjustments in commercial level and quantity, the identical or similar merchandise must be produced in the same country as the merchandise to be appraised. As we have no information on previously accepted transaction values for identical or similar merchandise on which we can base appraisement of the merchandise at issue, we must consider deductive and computed value, i.e., § 1401a(d) and § 1401a(e).

19 U.S.C. § 1401a(2) provides:

If the value referred to in paragraph (1)(C) [referring to the transaction value of similar merchandise which follows the transaction value of identical merchandise in hierarchical order] cannot be determined with respect to imported merchandise, the merchandise shall be appraised on the basis of the computed value provided for under paragraph (1)(E), rather than the deductive value provided for under paragraph (1)(D), if the importer makes a request to that effect to the customs officer concerned within such time as the Secretary shall prescribe. If the computed value of the merchandise cannot subsequently be determined, the merchandise may not be appraised on the basis of the value referred to in paragraph (1)(F) unless the deductive value of the merchandise cannot be determined under paragraph (1)(D).

Counsel for the importer argues that should CBP determine that the merchandise cannot be appraised based upon transaction value, it should be appraised using computed value set forth in 19 U.S.C. § 1401a(e) using the Seller’s general expenses and profits in calculating the value. Counsel proffers that the Seller “is the producer who sells the merchandise for exportation since, ‘But for’ the activities that [the Seller] has undertaken, the subcontractors, who do the actually manufacturing, could not manufacture the merchandise.” Counsel submits that the computed value equals the invoiced prices used by the Importer as the transaction value for appraisement purposes.

19 U.S.C. § 1401a(e) provides:

The computed value of imported merchandise is the sum of –

the cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise; an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind as the imported merchandise that are made by the producers in the country of exportation for export to the United States;

any assist, if its value is not included under subparagraph (A) or (B); and

the packing costs.

For purposes of paragraph (1) –

The cost or value of materials under paragraph (1)(A) shall not include the amount of any internal tax imposed by the country of exportation that is directly applicable to the materials or their disposition if the tax is remitted or refunded upon the exportation of the merchandise in the production of which the materials were used; and

The amount for profit and general expenses under paragraph (1)(B) shall be based upon the producer’s profits and expenses, unless the producer’s profits and expenses are inconsistent with those usually reflected in sales of merchandise of the same class or kind as the imported merchandise that are made by producers in the country of exportation for export to the United States, in which case the amount under paragraph (1)(B) shall be based on the usual profit and general expenses of such producers in such sales, as determined from sufficient information.

[Bold added.] ` The flaw with counsel’s argument is that the Seller in this case is not the producer of the merchandise. Related and unrelated manufacturers produce merchandise which the Seller buys and then sells. The Seller provides assists to the actual manufacturers of the merchandise. We note that of 13 items of merchandise on which the Importer provided information, only three were produced by related parties.

The statute is clear. In order to utilize computed value, CBP must be provided with and use information from the actual producers of the merchandise. In addition, 19 U.S.C. § 1401a(e)(2)(B) requires that the profit and general expenses that are used in the calculation for computed value be based on the producer’s profits and expenses, unless the amounts are inconsistent with the amounts reflected in sales of the same class or kind made by producers in the country of export for export to the U.S. As the Seller is not the producer, CBP cannot use the profit and general expenses of the Seller in calculating the computed value. As computed value may not be used to appraise the merchandise at issue, pursuant to 19 U.S.C. § 1401a(2), deductive value must be considered. Only if appraisement cannot be accomplished using the deductive value method, is resort made to the “fallback” method set forth in 19 U.S.C. § 1401(f).

Under deductive value, the subject merchandise is appraised based on the price at which the “merchandise concerned” is sold in the U.S in its condition as imported, in the greatest aggregate quantity at or about the date of importation of the merchandise being appraised. 19 U.S.C. § 1401a(d)(2)(A)(i). If the merchandise concerned is sold in the U.S. in its condition as imported, but not sold at or about the date of importation, the price at which the merchandise is sold in the greatest aggregate quantity after the date of importation, but before ninety days after such importation, is utilized. 19 U.S.C. § 1401a(d)(2)(A)(ii). The unit price at which merchandise is sold in the greatest aggregate quantity means the unit price at which it is sold to unrelated persons at the first commercial level after importation. 19 U.S.C. § 1401a(d)(2)(B).

The price determined under 19 U.S.C. § 1401a(d) is to be reduced by an amount equal to the following:

(i) any commission usually paid or agreed to be paid, or the addition usually made for profit and general expenses, in connection with sales in the United States of imported merchandise that is of the same class or kind, regardless of the country of exportation, as the merchandise concerned;

(ii) the actual costs and associated costs of transportation and insurance incurred with respect to international shipments of the merchandise concerned from the country of exportation to the United States;

(iii) the usual costs and associated costs of transportation and insurance with respect to shipments of such merchandise from the place of importation to the place of delivery in the United States, if such costs are not included as a general expense under clause (i);

(iv) the customs duties and other Federal taxes currently payable on the merchandise concerned by reason of its importation, and any Federal excise tax on, or measured by the value of, such merchandise for which vendors in the United States are ordinarily liable. . . .

19 U.S.C. § 1401a(d)(3)(A).

Deductive value is addressed in the CBP Regulations at 19 CFR § 152.105. Section 152.105(e)(1), which implements 19 U.S.C. § 1401a(d)(3)(B)(i) and (ii), provides:

Profit and general expenses; special rules. (1) The deduction made for profit and general expenses (taken as a whole) will be based upon the importer's profit and general expenses, unless the profit and general expenses are inconsistent with those reflected in sales in the United States of imported merchandise of the same class or kind from all countries, in which case the deduction will be based on the usual profit and general expenses reflected in those sales, as determined from sufficient information. Any State or local tax imposed on the importer with respect to the sale of imported merchandise will be treated as a general expense. (2) In determining deductions for commissions and usual profit and general expenses, sales in the United States of the narrowest group or range of imported merchandise of the same class or kind, including the merchandise being appraised, for which sufficient information can be provided, will be examined.

As the use of deductive value is dependent on sales of the merchandise being appraised, or sales of identical or similar merchandise, occurring within the statutorily specified timeframe, it is necessary to obtain further information from the Importer in order to determine if the technical requirements are satisfied to appraise the merchandise under the deductive value. Further, it is necessary to obtain the information regarding deductions to the price determined under 19 U.S.C. § 1401a(d) as set forth in 19 U.S.C. § 1401a(d)(3)(A). If the technical requirements stated in 19 U.S.C. § 1401a(d) are not met, then appraisement would fall to the fallback method, i.e., 19 U.S.C. § 1401a(f). A modified transaction value would not be an option for the same reasons transaction value is not applicable. Therefore, a modified form of deductive value under the fallback should be used to appraise the merchandise.

HOLDING:

The merchandise at issue cannot be appraised under transaction value. It should be appraised using the deductive value method. If deductive value cannot be used, then an adjusted form of deductive value under 19 U.S.C. § 1401a(f), should be used to appraise the merchandise.

Sixty days from the date of this letter, Regulations and Rulings of the Office of International Trade will take steps to make this decision available to Customs and Border Protection ("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.

Sincerely,

Monika R. Brenner, Chief
Valuation and Special Programs Branch