OT:RR:CTF:VS H323585 JMV
Director Juan Porras
Machinery Center of Excellence and Expertise
U.S. Customs and Border Protection
109 Shiloh Drive, Suite 300
Laredo, TX 78045
RE: Internal Advice; First Sale Valuation and Related Party Pricing
Dear Director:
This letter is in response to a request for Internal Advice (IA), dated February 14, 2022, made pursuant to § 177.11 of Title 19 of the Code of Federal Regulations (19 CFR § 177.11). The IA request was initiated by U.S. Customs and Border Protection’s (CBP) Machinery Center of Excellence and Expertise (CEE). This IA concerns [XXXXXXXXXXXXXXX] (“Importer”), represented by PricewaterhouseCoopers LLP (“PwC”), and the proper appraisement of their imported product.
The importer has asked that certain information submitted in connection with this ruling be treated as confidential. Inasmuch as this confidentiality request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), it is approved. The information contained within brackets in this ruling will not be released to the public and will be withheld from published versions of this ruling letter.
FACTS:
[XXXXXXXXXXXXXXXXXXX] (“Manufacturer”) is a Chinese manufacturer and distributor of metal, woodworking, and industrial tools, which it sells to a related entity, Importer, through a related middleman, [XXXXXXX] (“Middleman”) based in Hong Kong. Importer is the U.S. Importer of Record. Manufacturer, Middleman, and Importer are legally independent parties, and all parties involved in the sale to the United States maintain their own independent financial statements and cost accounts, file their own tax returns, and operate businesses in their names.
PWC stated that Manufacturer owns its own buildings, machinery, equipment, and assets. Manufacturer is responsible for all activities involved in the manufacture of the finished products, including the purchasing of raw materials. Middleman orders the imported products from Manufacturer and directs that they be delivered to the United States.
PWC provided the following documents:
Purchase orders between Middleman and Manufacturer,
Purchase orders between Importer and Middleman,
Invoices between Importer and Middleman,
Invoices between Middleman and Manufacturer, which state “CONSIGNEE: [Importer] . . . These goods must be sent directly to the United States,”
Sea Waybills,
An insurance policy, which identifies [XX] (“Parent Company”) as the policy holder and names all parties involved as insured,
Proof of payment from Middleman to Manufacturer,
The Supplementary Terms and Conditions of Purchase between Importer and Middleman and its translation,
The Purchasing Agreement between Middleman and Manufacturer and its translation,
The Distribution Agreement between Middleman and Importer, and
A presentation claiming that the sale between Middleman and Manufacturer is a bona fide sale for exportation to the United States and that the relationship of the parties did not affect that sales price.
The Purchase order from Middleman to Manufacturer states that the goods should be exported directly to the United States. The international commercial (“INCO”) terms on the invoice between Middleman and Manufacturer are FOB [XXX] (“Foreign Port”), and state that the destination port is Long Beach, California.
The INCO terms on the packing list, purchase order, and invoice from Middleman to Importer are DDP, the Port of Lading is Foreign Port, and the goods are shipped directly to the United States. The Sea Waybills identify Importer as the consignee.
ISSUE:
Whether the transaction at issue may be appraised using the transaction value between Middleman and Manufacturer as a bona fide sale for export to the United States.
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). When transaction value cannot be applied, then the appraised value is determined based on the other valuation methods in the order specified in 19 U.S.C. § 1401a(a).
In order to use transaction value, there must be a bona fide sale for exportation to the United States. However, special rules apply when the buyer and seller are related parties, as defined in 19 U.S.C. § 1401a(g). Specifically, transaction value between a related buyer and seller is acceptable only if the transaction satisfies one of two tests: (1) circumstances of sale, or (2) test values. See 19 U.S.C. § 1401a(b)(2)(B). “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. Headquarters’ Ruling Letter (“HQ”) 543568, dated May 30, 1986. The purpose of these rules is to ensure that the relationship between the parties does not affect the price. In this instance, the transaction involves related parties. However, no information is available concerning previously accepted test values. Consequently, the circumstances of the sale approach must be used to determine the acceptability of transaction value.
Under the “circumstances of the sale” test, CBP looks for evidence showing that the parties’ relationship did not affect the price paid or payable. All relevant aspects of the transaction are analyzed including the way the buyer and seller organize their commercial relations and the way in which the price was determined. The regulations, as set out in 19 C.F.R. § 152.103(l), provide three illustrative examples that demonstrate that a relationship did not influence the price: (i) the price was settled in a manner consistent with the normal pricing practices of the industry in question; (ii) 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; or (iii) the price is adequate to ensure recovery of all costs plus a profit that is equivalent to the firm’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind.
In a presentation provided to CBP, PwC argued that the transfer prices between Manufacturer and Middleman were not influenced by the relationship of the parties because the price is adequate to ensure recovery of all costs plus a profit that is greater to the firm’s overall profit. PwC compared the profit made by Manufacturer on the sales price to the overall profits of the Parent Company. However, as a holdings company, the parent in this case holds controlling interest in the securities of other companies and does not produce or sell goods itself. Therefore, it cannot be said, based on the information provided, that the price is adequate to ensure recovery of all costs plus a profit that is equivalent to the firm’s overall profit in sales of merchandise of the same class or kind. Therefore, PwC has not sufficiently demonstrated that the sales between Middleman and Manufacturer are arm’s length transactions.
Additionally, it is unclear whether a bona fide sale occurred between Manufacturer and Middleman, which, as stated above, is required to use transaction value as the basis of appraisement. 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. Id. (citing J.L. Wood v. United States, 62 C.C.P.A. 25, 505 F.2d 1400 (CCPA 1974)). No single factor is decisive in determining whether a bona fide sale has occurred and CBP makes each determination on a case-by-case basis. See HQ 548239, dated June 5, 2003. CBP will consider such factors as whether the purported buyer assumed the risk of loss for, and acquired title to, the imported merchandise. Also, 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 a buyer and a seller. See HQ H005222, dated June 13, 2007.
Here, PwC argues that title and risk of loss to the goods passes from Manufacturer to Middleman in accordance with FOB Port of Export INCO terms when the product is loaded onto the shipping vessel at the port of export. PwC further argues that title and risk of loss to the goods passes from Middleman to Importer in accordance with DDP INCO terms, upon delivery to the named place of destination.
While it does appear, based on the INCO terms, that Middleman took title and risk of loss of the goods at the Port of Foreign Port and transferred title and risk of loss of the goods to Importer at the Port of Long Beach, CBP often looks at other commercial documents to determine when title and risk of loss transferred from the buyer to the seller. See HQ H290680, dated March 12, 2018 (determining whether title and risk of loss transferred from the buyer to the seller by reviewing the sales contracts and insurance policy). Here, a review of the Purchasing Agreement between Middleman and Manufacturer suggests that the parties agreed that Manufacturer would maintain title and risk of loss of the imported goods until the goods were delivered to the United States. The purchasing agreement between Middleman and Manufacturer states:
3.1 The supplier shall be responsible to transport the Products to the place designated in the purchase order in a timely manner, deliver the Products to Buyer or any designated person by Buyer, and carry out the hand-over of the Products.
. . .
3.3 All expenses and costs for insurance, packaging, transportation, loading and unloading and all risks of damage, injury or loss of the Products prior to the arriving if Products at the delivery place and delivery to Buyer or its designated person shall be borne by the Supplier.
3.4 Except as otherwise agreed to by the Parties, title to and risk of loss of Products shall pass from Supplier to Buyer at the port of export.
Emphasis added. According to Article 3.1 and 3.3, Manufacturer is responsible for freight and bears the risk of loss until the goods are delivered to the place designated in the Purchase Order, which in this instance is the United States. Although Article 3.4 states that title and risk of loss pass at the point of export, the purchase order states that the products should be exported to the United States, the first clause in Art. 3.4 states “except as otherwise agreed to by the parties . . .” We see that the parties have come to another agreement as to which party bears title and risk of loss when Articles 3.1, 3.3 and the purchase order are read in conjunction: Manufacturer bears title and risk of loss until the goods are delivered to the United States. Therefore, we find the second clause in Article 3.4 to be irrelevant and that Middleman has not received title or risk of loss. Since Middleman has not received title or risk of loss, we find that there was no bona fide sale between the manufacturer, Manufacturer and the middleman, Middleman and thus, the customs value cannot be based on the first sale price.
HOLDING:
We find that insufficient detail has been provided to demonstrate that the sales price between the middleman, [XXXXXXXX] and the manufacturer, [XXXXXXXX] was not influenced by the relationship of the parties.
We further find that the sale between Middleman and Manufacturer was not a bona fide sale for export to the United States.
Sixty days from the date of this decision, the Office of Trade, Regulations and Rulings, will make this decision available for CBP personnel, and to the public on the CBP Home Page at http://www.cbp.gov by means of the Freedom of Information Act, and other methods of publication.
Sincerely,
Monika Brenner, Chief
Valuation and Special Programs Branch