OT:RR:CTF:VS H292026 EE
Field Director
Attn: Rachel Jack
U.S. Customs and Border Protection
Office of Regulatory Audit
2220 Grandview Drive, Suite 215
Fort Mitchell, KY 41017
RE: Request for Internal Advice; Related Party Transactions; Circumstances of the Sale; All Costs Plus a Profit
Dear Field Director:
This is in response to the letter by Robert Bosch Automotive Steering LLC (“Bosch”), dated November 3, 2017, requesting internal advice on the appraisement of automotive components and raw materials for the production of steering systems, columns, and pumps purchased by ZF Steering Systems LLC (“ZF Steering”) from its parent company, ZF Lenksysteme GmbH (“ZFLS”), during the fiscal year ended December 31, 2014. Bosch was the subject of a Focused Assessment conducted by the Office of Regulatory Audit covering the calendar year 2014. An issue arose regarding whether ZF Steering’s related party purchases from ZFLS were at arm’s length, and your office has requested our review of this matter.
We have taken into consideration the information presented to us in the letter requesting internal advice and materials including an excerpt from ZFLS’ 2014 Consolidated Income Statement, an excerpt from ZFLS’ Segmented Financials, commercial documents between ZFLS and ZF Steering for a sample transaction, and the Focused Assessment Pre-Assessment Survey Report Number 511-15-FA1-P1-25072 on Bosch, prepared by the Office of Regulatory Audit, dated January 23, 2017.
Bosch asked that certain information submitted in connection with this internal advice request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets in Bosch’s request will not be released to the public and will be withheld from published versions of this internal advice decision.
FACTS:
ZFLS, which was acquired by Bosch in 2015, is headquartered in Schwabisch Gmund, Germany, and its primary manufacturing locations in Germany are in Berlin and Schwabisch Gmund. It is a global supplier of steering systems to the automotive industry. The company develops, manufactures and markets innovative steering technology for passenger cars and commercial vehicles. In addition to complete steering systems, steering columns and steering pumps, the product portfolio also features components such as valves, universal joints, steering shafts and gear pumps. ZFLS operations include other locations in Europe as well as North America, South America, and Asia. ZFLS is the parent company and related party supplier of automotive components and finished goods to ZF Steering, the U.S. importer of record. In FY 2014, ZF Steering’s purchases from ZFLS accounted for over 65% of its related party import transactions.
Based in the United States, ZF Steering is a wholly-owned subsidiary of ZFLS and Tier 1 supplier of automotive parts related to steering systems, columns, and pumps. ZF Steering sells its products to a variety of automotive OEMs located in the United States. The majority of ZF Steering’s manufacturing occurs in its Florence, KY plant, and is divided into two product lines: steering columns and steering gears.
ISSUE:
Do transactions between ZFLS and ZF Steering constitute bona fide sales?
Whether transaction value is the appropriate basis of appraisement of the imported merchandise.
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 to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. § 1401a(b)(1).
As provided in 19 U.S.C. § 1401a(b)(4):
(A) 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.
Do transactions between ZFLS and ZF Steering constitute bona fide sales?
In order for transaction value to be used as a method of appraisement, there must exist 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 Headquarters Ruling Letter (“HQ”) 548239, dated June 5, 2003. CBP will consider such factors as to whether the purported buyer assumed the risk of loss for, and acquired title to, the imported merchandise. Evidence to establish that consideration has passed includes payment by check, bank transfer, or payment by any other commercially acceptable means. Payment must be made for the imported merchandise at issue; a general transfer of money from one corporate entity to another, which cannot be linked to a specific import transaction, does not demonstrate passage of consideration. See HQ 545705, dated January 27, 1995. In addition, CBP may examine whether the purported buyer paid for the goods, and whether, in general, the roles of the parties and the circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HQ 547197, dated August 22, 2000; and HQ 546602, dated January 29, 1997.
The documents submitted by Bosch support the existence of a bona fide sale. Bosch submitted a purchase order from ZF Steering to ZFLS which lists EXW terms of delivery. EXW means that the seller fulfills its obligation to deliver when it has made the goods available at its premises to the buyer or at another named place. See Incoterms 2010, International Chamber of Commerce, 15 (2010). Bosch provided a commercial invoice from ZFLS to ZF Steering which corresponds to the purchase order from ZF Steering to ZFLS, also listing EXW Schwabisch Gmund as the delivery terms and “ex-factory, packed” as the pricing terms. Accordingly, ZF Steering will assume title and bear risk of loss at the ZFLS premises in Germany. Additionally, Bosch submitted an air waybill listing ZFLS as the shipper and ZF Steering as the consignee which corresponds to the commercial invoice from ZFLS to ZF Steering. Bosch also submitted a delivery note from ZFLS which corresponds to the commercial documents and lists EXW Schwabisch Gmund terms of delivery. Lastly, Bosch provided a Deutsche Bank statement for payment from ZF Steering to ZFLS which includes an amount that corresponds to ZF Steering payment advice to ZFLS which corresponds to the amount listed on the commercial invoice from ZFLS to ZF Steering. Based on the documents submitted, we find that there is a bona fide sale between ZFLS to ZF Steering.
Do the circumstances of the sale establish that the price actually paid or payable by ZF Steering to ZFLS was not influenced by the relationship of the parties and is acceptable for purposes of transaction value?
There are special rules that apply when the buyer and seller are related parties, as defined in 19 U.S.C. § 1401a(g). Specifically, 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 C.F.R. § 152.103(l).
Under the circumstances of the sale approach, the transaction value between a related buyer and seller is acceptable if an examination of the circumstances of the sale indicates that although related, their relationship did not influence the price actually paid or payable. The CBP Regulations specified in 19 C.F.R. Part 152 set forth illustrative examples of how to determine if the relationship between the buyer and the seller influences the price. See also HQ H029658, dated December 8, 2009; H037375, dated December 11, 2009; and, HQ H032883, dated March 31, 2010. In this respect, CBP will examine the manner in which the buyer and seller organize their commercial relations and the way in which the price in question was derived in order to determine whether the relationship influenced the price. If it can be shown that the price was settled in a manner consistent with the normal pricing practices of the industry in question, or with the way in which the seller settles prices with unrelated buyers, this will demonstrate that the price has not been influenced by the relationship. See 19 C.F.R. § 152.103(l)(1)(i)-(ii). In addition, CBP will consider the price not to have been influenced if the price was adequate to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit realized over a representative period of time (e.g., on an annual basis), in sales of merchandise of the same class or kind. 19 C.F.R. § 152.103(l)(1)(iii). These are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well.
In this case, Bosch contends that the price has not been influenced by the relationship because ZFLS and ZF Steering engage in commercial activities as if they were not related. In support of this position, Bosch states that ZF Steering places orders for product based on its demand requirements. ZFLS manufactures the merchandise and delivers it to ZF Steering as agreed. In turn, ZF Steering makes payment to ZFLS under agreed terms, consistent with industry standards. In other words, Bosch claims that ZF Steering is the buyer of goods as evidenced by agreements, price negotiations, payment procedures, and transactional documents that are consistent with those utilized by unrelated parties. As previously noted, Bosch provided supporting documentation from a sample transaction including a purchase order, commercial invoice, air waybill, a delivery note, and proof of payment. While the description and commercial documents show how the transactions between ZFLS and ZF Steering are structured, this alone is not sufficient for us to conclude that ZFLS settles prices as it does with unrelated buyers.
Bosch also argues that the prices at which ZFLS sells goods to ZF Steering are acceptable transaction values since the price is adequate to ensure the recovery of all costs plus a profit equivalent to ZFLS’ overall profit in sales of the same class or kind of merchandise over the representative period of time under the circumstances of the sale test. 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 HQ H065015, dated April 14, 2011; HQ 546998, dated January 19, 2000; and, HQ 542792, dated March 25, 1983. CBP 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 CBP’s purposes. See HQ H106603, dated July 25, 2011; HQ H065015, dated April 14, 2011; and, HQ 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. Nevertheless, in certain circumstances, gross profit can be considered. See HQ H037375, dated December 11, 2009.
With respect to the profitability analysis, Bosch engaged an outside consultant, [XX], to perform an independent third party evaluation. We note that in this case, ZFLS is both the parent company of ZF Steering and the seller of the imported merchandise. ZFLS’s overall profit was determined through an analysis of its FY 2014 Consolidated Income Statement using a full cost markup (“FCM”) as the uniform and most reliable Profit Level Indicator (“PLI”) for comparison purposes. In this regard, in FY 2014, ZFLS made an operating profit of [X]% in its sales of steering systems, columns, and pumps. Based on ZFLS’ segmented financials for FY 2014, ZFLS made an operating profit of [X]% in its sales of steering systems, columns, and pumps to ZF Steering. According to this information, the operating profit of ZLFS’ sales to ZF Steering exceed the ZFLS’ overall operating profit in sales of merchandise of the same class or kind during the period at issue. As such, we find that the all costs plus a profit example under the circumstances of the sale test is satisfied and that the relationship between ZLFS and ZF Steering did not influence the price. Therefore, transaction value is an acceptable method of appraisement.
HOLDING:
In conformity with the foregoing, transactions between ZLFS and ZF Steering constitute bona fide sales. We also determine that transaction value is the appropriate method of appraisement for these transactions.
Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and to the public on the Customs Rulings Online Search System (CROSS) at https://rulings.cbp.gov/ which can be found on the U.S. Customs and Border Protection website at http://www.cbp.gov and other methods of public distribution.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch