OT:RR:CTF:VS H326633 AP
Robert J. Leo, Partner
Meeks, Sheppard, Leo & Pillsbury LLP
570 Lexington Avenue, Ste. 2405
New York, NY 10022
RE: Request for Reconsideration of HQ H314296; Related Parties; Unrelated final customer; Transaction Value
Dear Mr. Leo:
This is in response to your letter dated May 18, 2022, on behalf of the U.S. importer, requesting reconsideration of Headquarters (“HQ”) internal advice decision H314296, dated August 12, 2021. We have reviewed your request and our previous decision, and affirm our position adopted in HQ H314296.
In HQ H314296, we concluded that the merchandise should be appraised using transaction value based on the price paid or payable by the final U.S. customer. You disagree and assert that the merchandise should be appraised under transaction value based on the price paid or payable by the U.S. importer or under the computed or fallback appraisement method. You maintain that each of the parties to the transaction had proper title to the imported merchandise and acted as a bona fide seller and/or buyer, and the final customer only interacted with the U.S. importer. You argue that there is no requirement under customs law that title has to pass before importation to find a bona fide sale for exportation.
As we already explained in HQ H314296, a “sale” is the transfer of property from one party to another for consideration, i.e., payment for the imported merchandise. In determining whether ownership in property has been transferred from a seller to a buyer, U.S. Customs and Border Protection (“CBP”) considers whether the potential buyer has assumed the risk of loss and acquired legal title to the imported merchandise. CBP reviews and interprets the terms of the sale consistent with the International Chamber of Commerce’s (“ICC”) Incoterms and the Uniform Commercial Code (“UCC”). Contracts, distribution and other similar agreements, invoices, purchase orders, bills of lading, proof of payment, correspondence between the parties, and company reports all may serve as evidence that a party possesses title in and assumes the risk of loss for the imported merchandise and functions as a buyer or a seller. Such documentation should be consistent in its entirety and with the transaction.
The manufacturing agreement between the related manufacturer and middleman became effective on July 1, 2005. The term of the agreement was for three years until July 1, 2008. The agreement could be automatically extended for another year if it were not terminated in the previous year. It is unclear whether the agreement was still in effect when the entry was made in September 2015. The 2005 manufacturing agreement provides that, “Unless otherwise agreed, risk and title should pass to [the middleman] ex works manufacturer’s factory.” The agreement also provides that payments from the middleman to the manufacturer will be made “according [to] agreed payment conditions” and that interest “at 8% per annum” will be payable by the middleman “in the event of late payment of the invoice.”
The purchase order from the middleman to the manufacturer identifies the manufacturer as the vendor of the laser machine, the price, and the September 4, 2015 delivery date to the middleman. The purchase order is the offer made by the middleman. The importer has not provided a copy of the sales order confirmation and the standard terms and conditions as proof of acceptance of the offer. However, the importer has submitted the invoices from the manufacturer to the middleman, which reflect that both the manufacturer and the middleman authorized the sale. The shipment of the merchandise by the manufacturer and the invoices issued by the manufacturer demonstrate that the manufacturer accepted the middleman’s offer when it engaged in performance based on the requirements and specifications of the purchase order. The invoices embody the agreement between the parties as to the terms and conditions of the sale. The invoices from the manufacturer indicate that the terms of delivery are “FCA [location in Switzerland],” meaning the manufacturer was responsible for getting the goods to the agreed upon location in Switzerland and the risk of loss from that point transferred to the middleman. The invoices include a title retention agreement between the parties by noting that the payment terms are 30 days from the time of delivery and “delivery is subject to retention of title at [the manufacturer’s] conditions.” We do not know what the manufacturer’s conditions were because the importer never submitted the standard terms and conditions of the sale between the manufacturer and middleman. The middleman paid for the goods on October 23, 2015 and on February 19, 2016, which was after the goods became part of the middleman’s inventory on September 4, 2015, and after their delivery to the final customer on October 15, 2015. Therefore, based on the documents in front of us, payment to the manufacturer was not made in full within 30 days from the time of delivery to the middleman and, in accordance with the retention of title clause, the middleman had no title to the goods when they were delivered to the middleman and to the final customer.
The distribution agreement between the middleman and the U.S. importer became effective on July 1, 2005. The term of the agreement was for three years until July 1, 2008, and could be renewed for another year. It is unknown whether the agreement was still in effect when the entry was made in September 2015. According to the 2005 distribution agreement between the middleman and the related U.S. importer, the products delivered to the importer “remain in the legal ownership of [the middleman] until [the importer] has fully paid all outstanding invoices of [the middleman] that are due for payment ….” Pursuant to the distribution agreement, payment was to be made by the importer to the middleman “according [to] agreement payment conditions” and “interest at 8% per annum shall be payable by the [importer] in the event of late payment of the invoice.” Thus, the distribution agreement reflects that there is a title retention agreement between the middleman and the importer meaning the middleman retains title to the goods until the importer pays in full the invoiced price.
The purchase order from the U.S. importer to the middleman describes the terms of payment as 90 days month end and the terms of delivery as “EXW Ex Works,” and indicates that the production plant is the manufacturer’s plant in Switzerland. Delivery is to the final customer in Alabama. The purchase order was revised to change the pricing and discount. The purchase order here again was the offer made by the U.S. importer to the middleman. The importer has not provided a copy of the standard terms and conditions and the sales order confirmation to confirm that the middleman accepted the importer’s offer. The importer has submitted the invoices from the middleman to the importer reflecting that the parties authorized the sale. The loading of the merchandise on the ship in Hamburg, Germany and the invoices issued by the middleman to the importer demonstrate that the middleman accepted the importer’s offer when it engaged in performance based on the requirements and specifications of the purchase order. Thus, the invoices embody the agreement between the middleman and the importer as to the terms and conditions of the sale.
The terms of the sale between the middleman and the U.S. importer, as reflected on the invoices, were free on board (“FOB”) German Port meaning that the risk of loss transferred from the middleman to the importer when the goods passed the ship’s rail in Hamburg, Germany. The payment terms in the transaction between the middleman and the U.S. importer were “up to 12/30/2015 without deduction.” The entry invoice submitted to CBP states that, “Title will not pass until payment is received in full” and the final customer’s shipment address in Alabama is included. The invoice constitutes a written confirmation of the parties’ agreement and includes the payment terms and sales terms agreed upon by the parties. Thus, both per the invoice and the 2005 distribution agreement, title would pass to the U.S. importer after the importer pays the invoiced price for the merchandise to the middleman in full, which was on December 18, 2015. Both the middleman and the importer had no title to the goods when the U.S. entry/immediate delivery was filed on September 23, 2015, and when the goods were delivered to the final customer on October 15, 2015. Therefore, neither the middleman nor the U.S. importer had title to the merchandise when it was delivered to the final customer.
The purchase order from the final customer in Alabama to the importer states that the terms of the sale are “FOB [location in] CT.” The payment terms are “10% Payment with Order. Balance Net 30 Days after Delivery.” The purchase order instructs the importer to “send two copies of the invoice” to the final customer and to “enter this order in accordance with the prices, terms, delivery method, and specifications listed above [in the purchase order].” The invoice from the importer to the final customer states that the laser machines ship from “[a location in], CT, USA” to the final customer’s location in Alabama. The terms of delivery are “FOB [location in], CT.” The payment terms are “10% Deposit, Balance Due Net 30 Days.” The invoice states that the importer “quotes and accepts orders for Equipment and Automation only on [the importer’] Terms and Conditions of Services.”
Under the U.S. importer’s Terms and Conditions of Services, “All [domestic] orders are FOB [Free on Board] Seller’s plant in [location in], Connecticut (or FOB such warehousing facilities as Seller may establish).” The payment terms are “10% deposit with purchase order, 90% Net 30 Days from Shipment … The risk of loss passes to Buyer upon delivery of the goods to the carrier … The validity, interpretation and performance of this contract for sale shall be governed by the laws of the State of Connecticut.” The importer “reserves a security interest in the goods (and the proceeds thereof) as security for the payment of the unpaid balance of the purchase price and … If Buyer shall not pay the full purchase price within 30 days from the date of shipment of the goods; Buyer will pay Seller thereafter an additional one and one-half percent (1-1/2%) per month on the unpaid balance of the purchase price until paid in full ….” Therefore, the invoice reflects that the importer accepted the offer and authorized the sale, and contains the terms and conditions of services between the parties. The final customer paid in full for the goods on October 14, 2015. Title to the merchandise passed directly from the manufacturer to the final customer upon delivery of the goods to the final customer on October 15, 2015.
Therefore, HQ H314296 correctly concluded that the related manufacturer, middleman and U.S. importer were not functioning as bona fide buyers and sellers because the middleman had no title to the merchandise when it was shipped to the importer and delivered to the final customer. Title to the merchandise transferred directly from the manufacturer to the final customer and the relationship between the related parties (manufacturer, middleman and importer) affected the price.
In your view, the fact that title to merchandise passed after importation would not disqualify the sale from being a bona fide sale for exportation to the United States. You cite to
HQ 542930, dated Mar. 4, 1983 and HQ H012659, dated Nov. 14, 2007. However, unlike here, in these decisions there was a bona fide sale. HQ 542930 involved a contract for the supply of components and their assembly into chemical plants and pulp and paper systems in the United States. The manufacturer completed the design and supply of all components. The purchaser was not related to the manufacturer and the price agreed upon before importation was based on the complete project including the testing and assembly in the United States and not on only the supply of the individual items. The contract provided for payment of 10% immediately upon acceptance of the order and presentation of the invoice. The final payment was contingent upon completion of the testing and assembly in the United States. There was a transfer of property for consideration at the time of export, which consisted of the mutual promises to sell and purchase, plus the 10% partial payment. In the instant matter, the importer has not submitted the general terms and conditions of the sale and the sales order confirmations for the sale between the manufacturer and the middleman and between the middleman and the U.S. importer, and the middleman and the U.S. importer did not make any partial payment immediately upon acceptance of the order and presentation of the payment invoice. In HQ H012659, the seller issued a pro forma invoice on the date the merchandise left the seller’s plant. The seller subsequently issued a commercial invoice that was timed and reconciled to the pro forma invoice. The seller retained title to the merchandise until it was delivered to the importer or the pro forma invoice aged 63 days. The importer was required to pay for the merchandise on the 63rd day of the pro forma invoice. The contract specified that the manufacturer would retain ownership of the merchandise until it was delivered to the importer or 63 days from the pro forma invoice date. In the instant case, there are retention of title clauses and the title could only pass from the manufacturer to the middleman and from the middleman to the U.S. importer upon full payment. The invoices did not specify that title would pass upon delivery or at a specific time frame from the issuance of an invoice.
It should be also noted that the final customer is the ultimate consignee. The invoices from the importer to the final customer indicate that country of origin of the merchandise is Switzerland. The invoices did not override the agreement reached between the parties but embodied the parties’ agreement. All invoices list the address of the final customer’s location as the shipping address for the merchandise and the importer delivered the merchandise from the manufacturer to the final customer. The European Union Transit/Security Shipping Slip lists the manufacturer as the shipper, the final user as the consignee, the Switzerland as the shipping country and loading location, Hamburg as the transit point and the final customer’s address in Alabama as the ultimate consignee’s address. The final customer is unrelated to the other parties in the transaction and the sale to it is presumed to be at “arm’s length.” The merchandise is “clearly destined” for the U.S. when sold to the final customer because it was made per order and the only possible destination for the imported merchandise was the United States.
In terms of the circumstances of sale test, the importer still has not demonstrated that the price was settled in a manner consistent with the normal pricing practices of the industry in question. The submitted Transfer Pricing Guidelines provide that the prices within the company group must be based on prices as would be used by third parties (market and arm’s length principles) and that sales between the related companies within the group are generally based on the comparable uncontrolled price method, cost plus method, or the resale price transfer pricing method. However, adherence to these guidelines or use of these transfer pricing methods for tax purposes does not automatically indicate that the transactions between the related parties were at arm’s length for customs purposes. The importer has not demonstrated that it earned an operating profit during the relevant period that is comparable to other functionally equivalent companies that are direct competitors. There is no indication that the Internal Revenue Service (“IRS”) has reviewed the transfer pricing methods used by the company for IRS purposes. The middleman gave the U.S. importer a related party sale discount despite the late payment and earned a 0% profit on this sale. It is not a normal industry practice for a seller to sell merchandise to an unrelated buyer at cost and to earn 0% profit.
Regarding the circumstances of sale test, known as the “all costs plus a profit” method, you want us to compare the manufacturer’s profitability on the product-line level to the manufacturer’s total profit in the sale of the merchandise of the same class or kind into the United States. As you are aware, the parent holding company holds 100% direct interest in the middleman and a 100% indirect interest in the manufacturer and in the importer. As we explained in HQ H314296, the importer needs to demonstrate that the price charged by the seller (here the manufacturer) was sufficient to recover all costs associated with the production of the laser machine plus a profit equivalent to the “firm’s overall profit” over a representative period of time. Since the manufacturer is a subsidiary of the holding company, the holding company is the parent and we need to compare the manufacturer’s profits to the parent’s overall profits over the representative time period. The manufacturer’s gross profit margin is less than the parent’s overall gross profit margin. Thus, the price between the manufacturer and the middleman was not adequate to recover all costs plus a profit equivalent to the parent’s overall profit realized over the representative period of time in sales of merchandise of the same class or kind.
Regarding “test values,” the importer does not have any sales of identical or similar merchandise to unrelated buyers in the U.S. and CBP does not have any test values for the subject merchandise. As we concluded in HQ H314296, in the absence of previously accepted test values, we have insufficient information to determine whether the related party prices closely approximate the price of merchandise of the same class or kind in sales to unrelated parties.
Since the merchandise can be appraised by using the transaction value based on the price paid by the unrelated final U.S. customer, there is no need to go down the hierarchy of valuation methods. Accordingly, HQ H314296, dated August 12, 2021, is affirmed.
Gregory S. Connor, Acting Division Director
Commercial and Trade Facilitation Division