VAL:OT:RR:CTF:VS H208055 RSD
U.S. Customs and Border Protection
Port Director
301 E. Ocean Blvd. Suite 1400 Long Beach, CA 90802
RE: Request for Internal Advice concerning Protest Number 2704-11-101487 regarding Valuation of Merchandise Based on a First Sale Between Related Parties
Dear Port Director:
This is in response your memorandum dated February 18, 2012, requesting internal advice with regard to the above referenced protest. J.C. Penney, Inc. filed the protest concerning the valuation of imported women’s knit tops with regard to a first sale claim involving related parties. J.C. Penney’s representative, Expeditors Tradewin LLC., filed the protest on its behalf. On June 6, 2012, a meeting was held at our offices with representatives from J.C. Penney, Expeditors Tradewin, and KPMG to discuss the issues involved in the protest. J.C. Penney made a submission addressed to your office dated January 26, 2012. We also received a supplemental submission from J.C. Penney dated July 12, 2012. J.C. Penney has requested confidential treatment of certain documents and information contained in the record. Pursuant to 19 C.F.R. 177.2(b)(7), the information has been specifically identified, bracketed and will be redacted in the public version of this decision.
FACTS:
This internal advice concerns a protest filed on behalf of J.C. Penney Purchasing Corporation (JCPPC), a wholly owned subsidiary of J.C. Penney Corporation (J.C. Penney), a large national retailer. JCPPC is the international sourcing arm of J.C. Penney, and acts as the importer of record for J.C. Penney’s customs entries. The protest specifically concerns the valuation of imported women’s knit tops entered through the Port of Los Angeles. For the transactions under consideration, the importer of record was JCPPC. There are two other parties involved in the protested transaction. The first party is the vendor/middleman, “Poong In Trading Co. Ltd., (“Poong In Trading”) headquartered in Seoul, Korea, and the other party is its related manufacturer PT Poongin Indonesia (PT Poongin). J.C. Penney purchased the subject merchandise from Poong In Trading, who obtained it from PT Poongin.
In this instance, JCPPC placed a purchased order with Poong In Trading for J.C. Penney branded garments for sale in the United States. In turn, Poong In Trading contracted with its related manufacturer, PT Poongin, to produce those garments. Specifically, Poong In Trading contracted with PT Poongin for cut, make and trim (CMT) services to produce the garments. Once the order was placed and agreed upon by all parties, Poong In Trading purchased fabric and other raw materials from various unrelated suppliers. These items were then sent directly to the factory. After the production of the garments was completed, they were given to a carrier for shipment to the United States.
On July 18, 2011, J.C. Penney’s representative filed a protest on its behalf requesting a refund of duties on 12 entries. It is claimed that the actual value of the imported merchandise should be based on the first sale price and not on price that JCPPC paid to the middleman. Upon review of the protest it was discovered that JCPPC had not indicated what the relationship was among all of the parties involved in the transaction.
The record contains a purchase order dated October, 6, 2009, from JCPPC to Poong In Trading for merchandise with a description of “KNIT TOP”. The document indicates the price and quantity of the merchandise ordered. It also lists four different addresses in the United States as the final destination of the merchandise. The terms of sale shown on the document are FOB-APL Logistic Jakarta, Indonesia.
J.C. Penney submitted a second purchase order between Poong In Trading and its supplier, PT Poongin Indonesia. The date of the order shown on this document is October 8, 2009. The final destination indicated is J.C. Penney Purchasing Corporation in Lathrop, CA USA. The terms of sale on the purchase order was shown as “EX-FTY”. The document also states “THESE GOODS ARE SOLD FOR EXPORT to the U.S. ONLY.”
J.C. Penney also submitted two invoices. The first invoice is the manufacturer’s invoice from PT Poongin Indonesia showing the buyer was Poong In Trading Co. in Seoul, Korea. It is dated March 13, 2010. The second invoice is a commercial invoice from Poong In Trading Co. for the Account of JC Penney Purchasing Corporation. It shows the port of entry as being Los Angeles and that the merchandise was sold on or about March 14, 2010. The terms of sale on the invoice are FOB APL Logistic –Jakarta Indonesia.
In addition, J.C. Penney submitted a cost build-up worksheet and a value summary cost. The record also contains evidence of payment from Poong In Trading to PT Poongin for the finished goods and JCPPC’s payment to Poong In Trading for the finished goods. The record also contains financial statements for Poong In Trading and PT Poongin for year 2010.
ISSUE:
Does the submitted documentary evidence support the appraisement of the imported merchandise on the basis of the “first sale” transaction between the related parties?
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; 19 U.S.C. § 1401a). The preferred 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 certain statutory additions. 19 U.S.C. § 1401a(b)(1).
In Nissho Iwai American Corp. v. United States, 16 C.I.T. 86, 786 F. Supp. 1002, reversed in part, 982 F. 2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit reviewed the standard for determining transaction value when there is more than one sale which may be considered as being for exportation to the United States. The case involved a foreign manufacturer, a middleman, and a United States purchaser. The court held that the price paid by the middleman/importer to the manufacturer was the proper basis for transaction value. The court further stated that in order for a transaction to be viable under the valuation statute, it must be a sale negotiated at arm’s length, free from any non-market influences, and involving goods clearly destined for the United States. See also, Synergy Sport International, Ltd. v. United States (Ct. of Int’l Trade, 1993).
In accordance with the Nissho Iwai decision and our own precedent, we presume that transaction value is based on the price paid by the importer. In further keeping with the court’s holding, we note that an importer may request appraisement based on the price paid by the middleman to the foreign manufacturer in situations where the middleman is not the importer. However, it is the importer’s responsibility to show that the "first sale" price is acceptable under the standard set forth in Nissho Iwai. That is, the importer must present
sufficient evidence that the alleged sale was a bona fide "arm’s length sale," and that it was "a sale for export to the United States" within the meaning of 19 U.S.C. § 1401a.
In Treasury Decision (T.D.) 96-87, dated January 2, 1997, the Customs Service (now Customs and Border Protection (CBP)) advised that the importer must provide a description of the roles of the parties involved and must supply relevant documentation addressing each transaction that was involved in the exportation of the merchandise to the United States. The documents may include, but are not limited to purchase orders, invoices, proof of payment, contracts, and any additional documents (e.g. correspondence) that establishes how the parties deal with one another. The objective is to provide CBP with "a complete paper trail of the imported merchandise showing the structure of the entire transaction." T.D. 96-87 further provides that the importer must also inform CBP of any statutory additions and their amounts. If unable to do so, the sale between the middleman and the manufacturer cannot form the basis of transaction value.
With respect to the protest before your port, J.C. Penney submitted purchase orders, invoices, shipping documents to show shipment from the manufacturer to the importer, and proof of payment. In addition, information was presented regarding various assists provided to the actual manufacturer of the merchandise. We note that for some of the assist documentation, the middleman is identified as the buyer, yet on other documents the buyer is identified as the importer.
In order to benefit from a “first sale” value at importation, an importer must be able to establish all the elements of transaction value set forth in 19 U.S.C. § 1401a(b). From the shipping documents, we find that it is clear that the goods at issue were clearly destined for the United States at the time the middleman contracted with its related manufacturer for CMT services to have the garments produced. However, in order to be able to use a first sale as a basis of appraisement in a multi-tiered transaction, there must be a bona fide sale between the middleman and the manufacturer. Therefore, we must determine if a bona fide sale occurred between the middleman and its Indonesian related party.
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 CCPA, 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 stated in HQ 546192, dated
February 23, 1996, that “the relationship is to be ascertained by an overall view of the entire situation, with the result in each case governed by the facts and circumstances of the case itself.”
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. 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 H005222, dated June 13, 2007.
In this instance, Poong In Trading contracted with PT Poongin to make the garments by utilizing PT Poongin’s “CMT” services. As described in the submissions, the imported merchandise was assembled by PT Poongin at its factory located in Indonesia. Once the order was placed, Poong In Trading purchased fabric and other raw materials from various unrelated suppliers and had these items supplied directly to its related factory free of charge. These materials were then incorporated into the imported merchandise. The prices paid for these materials by the middleman were delineated in the cost calculation sheets included with J.C. Penney’s submission. There are also documents indicating proof of payment for the fabric and the other materials.
Regarding assembled merchandise, CBP Regulations at Section 152.103(a)(3) 19 CFR § 152.103(a)(3)) provides:
Assembled Merchandise. The price actually paid or payable may represent an amount for the assembly of imported merchandise in which the seller has no interest other than as the assembler. The price actually paid or payable in that case will be calculated by the addition of the value of the components and required adjustments to form the basis for the transaction value.
CBP has applied this provision where the price paid by the importer is for processing of the imported merchandise, meaning that payment to the manufacturers of a fixed amount for CMT services may be used for appraisement of imported merchandise under the transaction value method. See HQ 545550 dated September 13, 1995.
In this case, the price that Poong In Trading paid to PT Poongin’s for its assembly services to produce the garments may serve as the basis of transaction value for appraising the subject merchandise pursuant to 19 CFR § 152.103(a)(3). In addition, pursuant to that regulation, we find that the fabric, materials, and other components supplied to the factory free of charge constitute assists, which must be properly valued and added to the price paid for the assembly services to determine the final appraisement of the subject merchandise. The middleman owns the raw materials throughout the manufacturing process. It also maintains title and bears the risk of loss to these materials during their transit from the raw material suppliers’ warehouse to the factory and while the raw materials are in the factory. We note that the terms of sale between the factory and middleman are ex-factory, while terms of sale between the middleman and importer are FOB Indonesia. In the case of an ex-factory sale, also known as “ex-works”, the buyer assumes the responsibility for transporting the merchandise from the factory to the port of lading. Using the shipping term “ex-factory” in the purchase order indicates that the buyer takes delivery of the merchandise at the factory door. The buyer takes on the risk of loss and all costs related to the merchandise from the point of delivery at the factory door. Under an FOB sale, the risk of loss transfers when the goods pass the ship’s rail. See HQ H097035 dated November 15, 2011. In this case, the risk of loss passed from the factory to the middleman upon completion of the manufacturing process and title to the finished goods remained with the middleman, while the goods were at the factory, which is typical in CMT transactions. This means that Poong In Trading, the middleman, took sole ownership of the property for a definitive time period which was separate and apart from the importer.
We also note that there are separate documents for the two transactions. Poong In Trading provided a purchase order to PT Poongin specifying the goods ordered and the price to be paid. In addition, Poong In Trading provided specific instructions to PT Poongin regarding the specifications of the quality of the materials used, production schedules, labeling and other United States requirements and the direct shipment requirements to the United States. PT Poongin also provided Poong In Trading with an invoice for its CMT assembly services. We note that once it obtained the merchandise, there was nothing to prevent Poong In Trading from selling the goods manufactured by PT Poongin at any price, and that it could select its own downstream customers without consulting with the manufacturer. This also means that Poong In Trading could order the imported merchandise and have it delivered for its own inventory. Significantly, J.C. Penney provided evidence of payment that Poong In Trading provided to PT Poongin for the CMT services that were provided in making the subject merchandise. The record also contains documents from the transaction between Poong In Trading and J.C. Penney. These documents include a purchases order from J.C. Penney to Poong In Trading, an invoice from Poong In Trading to J.C. Penney and evidence of payment from J.C. Penney to Poong In Trading. Accordingly, we find, based on the totality of the information presented and the above analysis, that the transaction between the manufacturer, PT Poongin, and the middleman, Poong In Trading, does constitute a bona fide sale.
Related Parties
According to the decision in Nissho Iwai, in order for a transaction to be viable for transaction value purposes, it must be a sale negotiated at arm’s length, free from any non-market influences. There is a presumption that a transaction will meet this standard if the buyer and seller are unrelated. See T.D. 96-87, supra. In the instant case, it is not disputed that PT Poongin is a subsidiary of Poong In Trading, and thus they are related parties for purposes of section 402(g) of the TAA. However, transaction value between a related buyer and seller can be considered acceptable if the importation meets either of two tests: 1) circumstances of sale or 2) test values.
The circumstances of the sale test must be applied on a case-by-case basis. The CBP Regulations at 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; HQ H037375, dated December 11, 2009; and, HQ H032883, dated March 31, 2010. As provided in 19 CFR 152.103(l), the following circumstances demonstrate that the relationship has not influenced the price actually paid or payable: (1) the price was settled in a manner consistent with the normal pricing practices of the industry in question; (2) 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 (3) 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 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. These are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well.
In this case, there were no sales to unrelated parties. Moreover, the protestant did not submit information related to the normal pricing practices of the industry in question or a transfer pricing study. Rather, Protestant contends that the transaction between the manufacturer and the middleman satisfied the “all costs plus a profit” methodology. This method examines whether a related party price compensates the seller for all its costs plus a specified amount of profit (i.e., 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).
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. Thus, if the seller of the imported goods is a subsidiary of the parent company, the price must be adequate to ensure recovery of all the seller’s costs plus a profit that is equivalent to the parent company’s overall profit. See HQ H106603 dated July 25, 2011. The 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 Customs transaction value purposes.
To satisfy the all costs plus a profit test, in the transaction between Poong In Trading and PT Poongin, the price charged by PT Poongin for its CMT services must be sufficient so that it recovers all costs plus a profit that closely approximates Poong In Trading’s overall profit realized during the same time period in sales of similar type merchandise. J.C. Penney first points out that both PT Poongin and Poong In Trading only sell merchandise in the apparel industry of the same general price range and quality level.
The subject merchandise was entered into the U.S. in April 2010. J.C. Penney presented information regarding the profit that PT Poongin made on the subject transaction with Poong In Trade and compared these results to Poong In Trading’s audited financial data for the 2010 fiscal year. The financial information that J.C. Penney submitted was a financial statement for Poong In Trading for the year 2010 prepared by a third party auditing firm, Baker Tilly International. This financial audit indicated that the operating profit realized by the parent company (Poongin In Trading) for 2010 was [xxx] according to the financial statement submitted, for the year 2010, PT Poongin realized a higher operating profit of [xxx] on the subject transaction. PT Poongin’s financial statement is managed by PT Ever Green, a local accounting firm not related to PT Poongin or Poong In Trading.
Further, in arguing that the middleman and its related factories organized their commercial relations and arrived at prices in a manner that was not influenced by their relationship, J.C. Penney alleges that the related parties engage in active negotiations with each other. In support of this position, J.C. Penney submitted an affidavit from the President of Poong In Trading Co. Ltd., who alleges that Poong In Trading currently utilizes 3 related factories and 8 unrelated factories to produce merchandise for J.C. Penney in the United States. According to the affidavit, the selection of the producers for merchandise is based on a number of factors including 1) price; 2) capacity; 3) quality; 4) technical ability; 5) transfer of title; and 6) risk of loss. The affiant states that the pricing and profit factors are similar for both related and unrelated parties. In addition, it is claimed that all the manufacturers generally operate to recover all their costs plus a profit. The President of Poong In Trading further explains that the negotiation process included a listing or requested price changes and the final amount agreed upon by Poong In Trading and the manufacturer. It is also asserted that Poong In Trading also received quotes for assembly services from a number of different manufacturers, and it always had the option to eliminate a manufacturer from consideration if its instructions are not followed.
In a follow up email, J.C. Penney representative stated that the negotiations are conducted by several different communication methods including by phone, email, sending printed documents by courier, and in person when necessary. Either party to the transaction can refuse to accept an offer. If PT Poongin Indonesia refused to accept an offer, Poong In Trading would first try to continue to negotiate in order to find an alternative offer that is acceptable to both parties. If PT Poongin Indonesia still refuses to accept an offer or come up with its own new offer, Poong In Trading will then consider using other related and unrelated factories to process the order and produce the merchandise.
In this case, based on the above information and descriptions of the transaction, we conclude that the circumstances of the sale test have been met. Consequently, we find that the financial information furnished is sufficient to establish that the price PT Poongin charged Poong In Trading 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 in sales of merchandise of the same class or kind. Thus, the requirements for establishing the acceptability of transaction value based on the related party sale as set forth in 19 CFR § 152.103(l)(1)(iii) have been met. Accordingly, we find that J.C. Penney has demonstrated that the price paid by the middleman to the manufacturer was not influenced by the relationship between PT Poongin and Poong In Trading. Since J.C. Penney has demonstrated that the relationship between the middleman and the manufacturer did not influence the price actually paid or payable, the transaction value based on the related party sale is acceptable. Therefore, in accordance with the Nissho Iwai decision, we find that the imported merchandise may be appraised based on the first sale price paid by the middleman to the manufacturer. HOLDING:
On the basis of the information submitted, J.C. Penney .has established that there was a sale for export to the United States between Poong In Trading and its related manufacturer PT Poongin in regard to the CMT services performed by PT Poongin on behalf of Poong In Trading. Furthermore, the accompanying documents demonstrate that the merchandise was clearly destined to the United States at the time of the sale between Poong In Trading and PT Poongin. We also find that the price that Poong In Trading paid to PT Poongin for the CMT services was not influenced by the relationship between these parties. Therefore, the evidence supports that the appraisement of the imported merchandise should be based on the "first sale" prices paid by the middleman, Poong In Trading to its related manufacturer PT Poongin. In determining the final transaction value for the imported merchandise, an addition should be made to the price paid by the middleman for the values of the fabric and other materials used in producing the goods that were supplied to the manufacturer free of charge as assists.
Please mail this decision to the internal advice applicant no later than sixty (60) days from the date of this letter. Sixty days from the date of this letter, the Office of International Trade: Regulations and Rulings will take steps to make the
public version of this decision available to 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 & Special Programs Branch