OT:RR:CTF:VS H256363 EE
Mr. Damon V. Pike
The Pike Law Firm, P.C.
246 Sycamore Street, Suite 215
Decatur, Georgia 30030-3434
RE: Acceptability of Related Party Price; Transaction Value; Advance Pricing Agreement; Post-Importation Adjustments
Dear Mr. Pike:
This is in response to your letter, dated March 11, 2013, in which you request a ruling on behalf of your client, [X] (the “Importer”), concerning the acceptability of transaction value for certain motor vehicles and parts purchased and imported by the Importer from its related parent company [X] (the “Seller”) in [X].
You have asked that certain information submitted in connection with this ruling 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 and all attachments to this ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling.
FACTS:
The Importer, a U.S. corporation, is the exclusive distributor of motor vehicles, motorcycles, and parts imported from the Seller for re-sale in the U.S. market to unrelated dealers, which in turn sell the imported merchandise to end customers. Its vehicle brands include [X] and [X]. The Importer is owned by [X] (the “Holding Corporation”), which also owns two other U.S. entities: [X] and [X]. One consolidated federal income tax return is filed that includes these three entities. You state that the Importer is related to the Seller within the meaning of 19 U.S.C. § 1401a(g).
You state that the Importer currently imports vehicles through U.S. Customs and Border Protection (“CBP”) Ports of Entry in Newark NJ, Baltimore MD, Charleston SC, Brunswick GA, and Oxnard CA. In the future, the Importer will import through Galveston TX.
The pricing process for vehicles and motorcycles begins with the preparation of a “business case” for each new model to be sold to all of the Importer’s global related distributors and independent importers during the coming year. The Importer is the distributor for the U.S. In determining the price for each new model vehicle and motorcycle to be sold, both the Importer and the Seller contribute specific information as part of the pricing process. The Seller calculates the development, manufacturing, and distribution costs. Through its product and price planning departments, the Seller also reviews the options of the prior model and determines if certain options need to be replaced or if completely new options are warranted. The Seller then defines the standard and optional equipment which play a large role in driving the Manufacturer’s Suggested Retail Price (“MSRP”), and which is critical in determining whether the model will be profitable. The Importer’s role involves verification of the MSRP for potential competitors’ models and making adjustments to the MSRP based on the range of available options for each specific vehicle and motorcycle sold by a potential competitor. It also factors in the proposed profit margin range it must achieve on sales to unrelated distributors (the spread between the “ex works” (“EXW”) price paid by the Importer to the Seller and the MSRP paid by the dealer to the Importer), based on actual profit data from previous years. The Importer then prepares a sales plan over the life cycle of the proposed new vehicle and proposes to the Seller an EXW price for the new vehicle, together with the price for each option. With this information, the Seller convenes a meeting of the Board of Directors to determine if the new model will be built. All of the Seller’s stakeholders hold a seat on the Board and participate in the deliberations over this decision as follows [X]. Once the Board determines that a new model will be built, negotiations then commence to allocate the profit margin between the Seller and the Importer (or other national sales company, as applicable). The ultimate margin split (which begins with the assumption that each party will receive half of the gross profit amount) is reflected in the EXW and “Carriage Paid To” (“CPT”) prices declared to CBP for imported vehicles and motorcycles, respectively. For the Seller, the final EXW/CPT price ensures that it will receive an adequate profit as the manufacturing entity, while for the Importer, the EXW/CPT price ensures that its cost of goods sold figure will be as accurate a figure as possible to begin the calculation of its target operating profit margin under the proposed Advance Pricing Agreement (“APA”) pricing formula. Retail prices are reviewed and adjusted annually, based upon how well the model sold during the previous year and all prior years, how many years remain for the life of the model based on the original sales cycle plan, how the competitors’ prices have evolved in comparison, whether options need to be changed, and changes in manufacturing and distribution costs. Additionally, EXW prices may be adjusted during the year to account for significant fluctuations in currency exchange rates. Negotiations between the Importer and the Seller (like those for new vehicle pricing) ensure that, once these factors have been considered, the ultimate allocation of profit between the two entities is properly determined.
Once the price for new models has been settled (or updated for existing models), orders for new vehicles and motorcycles are placed via one of two methods – either the dealers place orders directly with the Importer, or the Importer orders the merchandise on behalf of a dealer (which the dealer is free to refuse). The placement of the order for the vehicles and motorcycles is the first step in the sales process. The Seller accepts and fills the Importer’s orders at its various manufacturing locations. Once the vehicles and motorcycles are ready to be shipped, the Seller issues an invoice to the Importer. All vehicles and motorcycles imported by the Importer are initially brought into a Foreign Trade Zone (“FTZ”). Eventually, the vehicles and motorcycles leave the FTZ and are entered for consumption into the U.S., at which time the Importer deposits the duties owed on the declared value of the vehicles and motorcycles, which is the value listed on the commercial invoice after conversion from Euros to Dollars. The Importer remits payment for all invoiced vehicles and motorcycles on the 15th day of the second month after receiving the invoice from the Seller.
You state that the automotive industry has a unique pricing approach that is consistent (with minor variations) across the industry. The starting point for determining whether an adequate profit is realized by a distributor is the MSRP – what the end customer would pay the dealer for the vehicle on the open market. This end price takes into account the dealer’s return and the distributor’s return to cover its cost of distribution to the dealers. Any remaining profit or loss goes back to the Seller.
You state that the Holding Corporation voluntarily applied for a bilateral APA with the Internal Revenue Service (“IRS”) in [X] to cover all of its imported items (vehicles, motorcycles, and parts) for the years [X]. The Holding Corporation is in the process of negotiating a new APA with the IRS to cover the years [X]. The foreign Competent Authority is [X]. After negotiations, the IRS and the foreign Competent Authority approved the final APA in [X]. The [X] APA states that no adjustments were necessary during the term of the APA. The APA covers the following four “covered transaction” categories:
Covered Transaction A: Sale of automotive components, parts, and subassemblies by the Seller to [X] and related intercompany services and warranty transactions.
Covered Transaction B: Sale of finished vehicles by [X] to the Seller and related intercompany service and warranty transactions.
Covered Transaction C: Sale of finished vehicles (including motorcycles and after-market parts) by the Seller to the Importer for wholesale distribution to dealers in the U.S. and related intercompany services and warranty transactions.
Covered Transaction D: Provision by [X] to the Importer of financing and leasing services related to the Importer’s distribution activities in the U.S.
Covered Transaction C is the category of transactions at issue in this ruling. The tested party for Covered Transaction C is the Importer. Section 482 of the Internal Revenue Code (“IRC”) (26 U.S.C. § 482) requires that the arm’s length result of a controlled transaction be determined under the method that, given the facts and circumstances, provides the most reliable measure of an arm’s length result. The application of the best method establishes an arm’s length range of prices or financial returns with which to test controlled transactions.
The comparable profits method (“CPM”) for covered Transaction C was identified in the APA as the best method for evaluating the Importer’s related party or controlled transactions. The CPM examines whether the amount charged in a controlled transaction is an arm’s length price for tax purposes by comparing the profitability of the tested party to that of comparable companies. The profit level indicator (“PLI”) selected was the operating margin. The APA defines cumulative operating margin as the Importer’s cumulative operating profits for the APA term divided by its cumulative sales revenue for the APA term. According to the APA, the arm’s length range is between [X]%. The operating margin range proposed by the Importer to the IRS and the foreign tax authority in its Bilateral APA Submission for the APA renewal covering the term [X] through [X] is [X]%. This arm’s length range was established on the basis of objective, third-party pricing data for distributors (comparable companies), which perform similar functions and assume similar risks as the Importer.
In selecting comparables for its analysis, PricewaterhouseCoopers LLP (“PWC”), an independent accounting firm, hired by the Holding Corporation, used the Standard & Poor’s Compustat (“S&P Compustat”) database of North American companies and focused on companies under the following Standard Industrial Classification (“SIC”) codes: 5000-5999 (distribution of durable goods). For the period [X], this search generated 458 potentially comparable companies. In order to limit the search, PWC excluded companies that: did not report at least three years of required data over the most recent five-year period; reported five-year weighted average R&D to sales ratio larger than one percent; yielded revenue outside of the range between $[X] and $[X]; and had a five-year weighted average SG&A to sales ratio over 20 percent. Additionally, PWC eliminated companies that had foreign sales representing over 25 percent of total sales; had significant retail operations; and had significant sales to governmental entities. This search and selection yielded 12 comparable companies whose financial data was used to determine a target operating margin range for the Importer for the term of the proposed APA renewal. To adjust for the impact of differences in the relative levels of operating assets carried by the tested party and the comparable companies, working capital adjustments were made to the comparable companies for accounts receivables; plants, property & equipment; account payables; and inventory. It is important to note that although PWC searched for companies that fit a similar functional, risk and asset profile as the Importer, the final set of comparable companies identified do not necessarily distribute products of the same class or kind as the Importer. You state that comparables of companies which import and sell motor vehicles do not exist. For the period [X] through [X], the interquartile range of comparable North American distributors’ operating margins ranged between [X] and [X] percent at the 75th percentile level, with a median of [X] percent.
You claim that the Importer’s transfer pricing policy constitutes an objective formula for purposes of applying transaction value and claiming post-importation adjustments. In support of this position, you submitted the following documents: (1) Memorandum addressing the five factors, dated March 11, 2013; (2) The APA between the Holding Corporation and the IRS covering taxable years ending (“TYE”) [X] through [X], and TYE [X]; (3) two Intercompany Memorandums (“MOU”) between the Seller and the Importer, dated February 2, 2009 and September 10, 2012; (4) [X] Transfer Pricing Principles effective [X] which set forth [X]’s global transfer pricing system; and (5) records related to the [X] adjustment.
Finally, you submitted the following documents: an outline of the negotiation process for a new vehicle model between the Importer and the Seller; sample documents of representative sales transactions for a car and a motorcycle; payment documents for the two sample transactions; and the bilateral APA renewal submission dated [X].
ISSUES:
Do the transactions between the Importer and the Seller constitute bona fide sales?
Is it acceptable to take post-importation price adjustments (upward and downward) into account in determining transaction value?
Do the circumstances of sale establish that the price actually paid or payable by the Importer to the Seller is not influenced by the relationship of the parties and is acceptable for purposes of transaction value?
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 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).
Do transactions between the Importer and the Seller 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 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.
Finally, pursuant to the CBP’s Informed Compliance Publication, entitled “Bona Fide Sales and Sales for Exportation,” CBP will consider whether the buyer provided or could provide instructions to the seller, was free to sell the transferred item at any price he or she desired, selected or could select its own downstream customers without consulting with the seller, and could order the imported merchandise and have it delivered for its own inventory.
As noted in the FACTS section of this ruling, the Importer provided numerous sample documentation to substantiate its claim that there was a bona fide sale between the Importer and the Seller. For the sample vehicle transaction, the commercial invoice from the Seller to the Importer lists EXW term of sale. EXW is a term of sale which means that the seller fulfills its obligation to deliver when it has made the goods available at its premises to the buyer. See Incoterms 2010, International Chamber of Commerce, 15 (2010). Consequently, the buyer assumes all risk of loss or damage involved in taking the goods from the seller’s premises. Id. You state that the Seller and the Importer have no contract governing the terms of sale of the vehicles, motorcycles, and parts, but the commercial summary invoices for vehicles and motorcycles always indicate the Incoterm EXW for vehicles and parts and CPT for motorcycles. Uniform Commercial Code § 2-401(2) provides that “[u]nless otherwise explicitly agreed, title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods...”. As such, in the instant case, title from the Seller to the Importer passes at the Seller’s premises for the vehicle and part sales. The payment records correspond to the sample commercial invoice submitted. Accordingly, based on the description of the Importer’s sales process substantiated by the numerous documents submitted by the Importer, we find that there is a bona fide sale between the Seller and the Importer. Additionally, there is a sale for exportation to the U.S. since the waybill lists the port of loading as [X] and the port of discharge as California.
For the sample motorcycle transaction, the commercial invoice from the Seller to the Importer lists “CPT Easton Nazareth” term of sale. “CPT” is a term of sale which means that the seller fulfills its obligation to deliver when it hands the goods over to the carrier. See Incoterms 2010, International Chamber of Commerce, 33 (2010). The buyer assumes all risk of loss or damage to the goods from the time they have been delivered to the carrier; however, the seller pays the costs of carriage necessary to bring the goods to the named place of destination. Id. In the instant case, since no contract exists governing the terms of sale for the motorcycles, title from the Seller to the Importer passes at the carrier. The payment records correspond to the price listed on the commercial invoice. Accordingly, we find that there is a bona fide sale between the Seller and the Importer. Additionally, there is a sale for exportation to the U.S. since the waybill lists the port of loading as [X] and the port of discharge as New York.
Is it acceptable to take post-importation price adjustments (upward and downward) into account in determining transaction value?
On May 30, 2012, CBP published a notice concerning the treatment of post-import adjustments made pursuant to a formal transfer pricing policy. See Customs Bulletin, Vol. 46, No. 23, dated May 30, 2012. Prior to the Customs Bulletin notice, effective date of July 30, 2012, CBP allowed adjustments, but not under the transaction value basis of appraisement. CBP consistently held that transaction value in the transfer pricing context did not apply because the price was not fixed or determinable pursuant to an objective formula prior to importation. See HQ 547654, dated November 8, 2001 (revoked by HQ W548314, dated May 16, 2012). Nevertheless, sometimes these adjustments were allowed under the “fallback” method of appraisement. In other instances, CBP disallowed the adjustments completely because they were considered to be a post-importation rebate or decrease under 19 U.S.C. §1401a(b)(4)(B).
In HQ W548314, CBP reviewed this matter and proposed a broader interpretation of what is permitted under transaction value to allow a transfer pricing policy/APA to be considered a “formula” in the transfer pricing context provided certain criteria are met. HQ W548314 specifically referred to the adjustments made pursuant to a company’s formal transfer pricing policy or APA. In order to claim the post-importation adjustments (upward and downward), all of the following factors must be met:
A written transfer pricing policy is in place prior to importation and the policy is prepared taking IRS code section 482 into account;
The U.S. taxpayer uses its transfer pricing policy in filing its income tax return, and any adjustments resulting from the transfer pricing policy are reported or used by the taxpayer in filing its income tax return;
The company’s transfer pricing policy specifies how the transfer price and any adjustments are determined with respect to all products covered by the transfer pricing policy for which the value is to be adjusted;
The company maintains and provides accounting details from its books and/or financial statements to support the claimed adjustments in the United States; and,
No other conditions exist that may affect the acceptance of the transfer price by CBP.
Therefore, if the Importer meets the above referenced factors, CBP will accept the adjusted values, provided these adjusted values meet the circumstances of the sale (or test values) test, because the prices would be established pursuant to a “formula,” even though the prices were not fixed at the time of the importation.
A written transfer pricing policy is in place prior to importation and the policy is prepared taking IRS code section 482 into account
In the instant case, a written transfer pricing policy is set out in the [X] APA which was approved by the IRS and the foreign tax authority in [X]. Additionally, the MOU between the Seller and the Importer, dated February 2, 2009, was in place to document the intercompany pricing practices applicable to sales of merchandise from the Seller to the Importer pending the conclusion of the [X] APA. An updated MOU was executed on September 10, 2012 directing that the formula continue to be used pending the approval of the APA renewal request. These documents set forth the intercompany pricing formula for transactions between the Importer and the Seller and they are dated prior to the importations which are the subject of this prospective ruling request.
The U.S. taxpayer uses its transfer pricing policy in filing its income tax return, and any adjustments resulting from the transfer pricing policy are reported or used by the taxpayer in filing its income tax return
The Importer, is a wholly owned subsidiary of the U.S. taxpayer, the Holding Corporation, which files a consolidated tax return for all of its subsidiaries. The Holding Corporation applies the transfer pricing methodology established by the [X] APA in filing the consolidated returns for all of its U.S. entities.
The company’s transfer pricing policy specifies how the transfer price and any adjustments are determined with respect to all products covered by the transfer pricing policy for which the value is to be adjusted
In this case, the [X] APA specifies how the transfer price between the Seller and the Importer is established. The bilateral APA covers all imported merchandise (vehicles, motorcycles, and parts) for the years [X]. The covered transactions for the proposed APA renewal are identical to the covered transactions for the [X] APA. The Importer proposes to apply the same approaches to determine the transfer pricing methods as agreed to in the [X] APA to determine the arm’s length prince for the covered transactions for the APA renewal. If, at the end of the term, the intercompany transfer prices between the Seller and the Importer must be adjusted in order to meet the arm’s length profit range established by the APA, any such adjustments are made pursuant to the APA’s guidelines. Additionally, the MOU between the Seller and the Importer, dated September 10, 2012, directs that the intercompany pricing formula between the Seller and the Importer specified in the [X] APA continue to be used pending the approval of the APA renewal request.
The company maintains and provides accounting details from its books and/or financial statements to support the claimed adjustments in the United States
The Importer maintains complete details of any adjustments via the appropriate accounts for Cost of Goods Sold and other relevant accounts in its books. Any accounting adjustments are reflected in the Importer’s financial statements.
No other conditions exist that may affect the acceptance of the transfer price by CBP
Pursuant to our review of the documents submitted, there are no other conditions that may affect the acceptance of the transfer price by CBP. In this case, the Importer provided detailed information to satisfy the above-referenced criteria. As long as the Importer maintains and provides accounting details from its books and/or financial statements to support the post-importation adjustments upon making a claim with CBP, the Importer may claim downward and upward post-importation adjustments. Accordingly, post-importation adjustments (both upward and downward), to the extent they occur, may be taken into account in determining the transaction value under 19 U.S.C. §1401a(b).
Do the circumstances of sale establish that the price actually paid or payable by the Importer to the Seller is not influenced by the relationship of the parties and is acceptable for purposes of transaction value?
In HQ W548314, CBP determined that the importer needed to show that the relationship of the parties did not influence the adjusted prices. Thus, having established that the Importer's transfer pricing policy constitutes a formula and that there is a bona fide sale for exportation to the U.S. in this case, we must determine whether the imported merchandise may be appraised under 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). In this case, you provided information regarding the circumstances of the sale.
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. 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. 19 C.F.R. § 152.103(l)(1)(iii). Nonetheless, these are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well. See 19 C.F.R. § 152.103(I); see also HQ H037375, dated December 11, 2009; HQ H029658, dated December 8, 2009; and, HQ H032883, dated March 31, 2010.
In support of its claim that the related party prices are settled in a manner consistent with the normal pricing practices of the industry, the Importer states, as previously noted, that the automotive industry has a unique pricing approach that is consistent (with minor variations) across the industry. The Importer claims that the starting point for determining whether an adequate profit is realized by a distributor is the MSRP, which is the price the end customer would pay the dealer for the vehicle on the open market. This end price takes into account that the dealer must earn a certain return, and that the Importer (as the distributor) must earn a return to cover its cost of distribution to the dealers. Any remaining profit or loss goes back to the seller.
CBP has noted that the importer must have objective evidence of how prices are set in the relevant industry in order to establish the “normal pricing practices of the industry” in question, and present evidence that the transfer price was settled in accordance with these industry pricing practices. See HQ H029658; HQ 547672, dated May 21, 2002; HQ 548482, dated July 23, 2004; and, HQ 542261, dated March 11, 1981 (TAA. No. 19) (stating that where the transfer price was defined with reference to prices published in a trade journal (the posted price) and the posted price was commonly used by other buyers and sellers as the basis of contract prices, the transfer price was acceptable).
However, in HQ H029658, while the information presented was not entirely objective, based on the totality of the information considered, CBP held that the importer showed that the sales price was not influenced by the relationship for purposes of the circumstances of the sale test, and, as a result, transaction value was the proper method of appraisement for the related-party import transaction. In HQ H029658, the importer provided various evidence to show that the prices were at arm’s length, including: (1) a detailed description of its sales process and price negotiations; (2) a bilateral APA that was approved by the IRS (the importer was a tested party under the APA, with CPM chosen as the best method to evaluate intercompany transactions); and, (3) a paper, prepared by their accountants, which provided details with respect to the pricing practices in the automotive industry. The evidence presented by the importer did not fall strictly within a single illustrative example, specified in 19 C.F.R. §152.103(l)(1)(i)-(iii), such as the normal pricing practices of the industry. Nevertheless, taken together, the documents provided by the Importer assisted CBP in reaching its conclusion that the relationship of the parties did not influence the price.
The Importer has set forth certain statements describing the “market driven” pricing of how the automobile industry sets its prices. While the evidence provided by the Importer is not entirely objective, as determined by our previous rulings, we acknowledge that the vehicle pricing at all levels is based on the market driven MSRP. Once a vehicle has been produced, pricing through the chain of manufacturing, assembly, marketing, and retail sale is based on actual retail prices paid by consumers, and not any hypothetical or expected prices or costs used in the development stage. See HQ H029658.
Furthermore, the Importer claims that the Seller’s prices to the Importer are set in accordance with the normal pricing practices of the industry because the Importer earns an operating margin comparable to that of the 12 distribution companies, which formed the basis of the CPM analysis for tax purposes. We reviewed the Importer’s Bilateral APA Submission, dated [X], as well as the Importer’s APA and the Importer’s valuation methodology. The Importer also submitted [X] Transfer Pricing Principles which set forth [X]’s global transfer pricing system. In this case, a set of 12 functionally comparable companies was used to determine a target operating margin range for the Importer for the term of the proposed APA. This set of comparable companies was chosen from publicly available databases using the distribution of durable goods SIC codes. Although PWC searched for companies that fit a similar functional, risk and asset profile as the Importer, the final set of comparable companies distribute a variety of products from air conditioners and heating equipment to tires to roofing and building materials. The Importer, on the other hand, is an exclusive distributor of motor vehicles and parts and, therefore, a member of the automobile industry. CBP does not consider the industry in question to consist of other functionally equivalent companies if those companies do not sell goods of the same class or kind. CBP has ruled that the mere fact that the Importer allegedly earned an operating profit comparable to other functionally equivalent companies was not sufficient to establish either the normal pricing practice of the industry or that the related party price was settled in a manner consistent with the normal pricing practices of the industry in question. See HQ 548482 and HQ 548095, dated September 19, 2002. Thus, in this case, we find that this information does not definitely establish that the price was settled in a manner consistent with the normal pricing practices of the automotive industry; however, we find that the information presented gives insight on how the automobile industry determines the price, and, therefore, provides some evidence that the price was settled in a manner consistent with the normal pricing practices of the industry. See HQ H029658.
CBP has noted that whether the Importer’s transfer pricing methodology has been reviewed and approved by the IRS is a significant factor. See HQ H037375; and HQ 546979, dated August 30, 2000. In this case, the IRS reviewed and accepted the Importer’s transfer pricing analysis. In fact, the Importer entered into a bilateral APA with the IRS and the foreign tax authority. We find that the information submitted to the IRS and the fact that there is a bilateral APA constitute valuable information in evaluating the circumstances of the sale. See HQ 546979 and HQ 548233, dated November 7, 2003. We note that all of the Importer’s imported products are covered by the APA, reducing the possibility of profit manipulation. Thus, the Importer has chosen to have all of its related party transactions covered by the APA. Consequently, even though the CPM method reviews profitability on an aggregate basis and not a product-by-product basis, in the particular circumstances of this case we will not require the Importer to provide CBP with a further breakdown of product line profitability for comparability purposes. Additionally, CBP participated in the APA pre-filing conference with the IRS on [X] and the Importer executed a waiver with the IRS so that the documents that were submitted to the IRS in the APA process that support the facts and statements made by the Importer in the course of this ruling request could be disclosed to CBP.
The fact that the foreign tax authorities have approved the APA mandated profit levels for the Importer is another factor to show that the relationship between the parties did not affect the price. We also take note of the rigorous negotiations between the Importer and Seller to determine an EXW/CPT price that permits the Importer’s operating profit to fall within the interquartile range established by a reference to unrelated comparable companies.
Therefore, based on the totality of the information considered and our examination of all relevant aspects of the transaction, including the way in which the Importer and Seller organize their commercial relations and the way in which the price in question was arrived at, as specified in 19 C.F.R. § 152.103(l)(1)(i), we find that the Importer has demonstrated that the price has not been influenced by the relationship for purposes of the circumstances of the sale test. As a result, we determine that transaction value is the proper method of appraisement for these related party transactions.
HOLDING:
In conformity with the foregoing, the transactions between the Importer and the Seller constitute bona fide sales. We also determine that transaction value is the appropriate method of appraisement for these transactions. Finally, we find that the Importer may take into account downward and upward post-importation adjustments to the provisional values of the imported merchandise declared to CBP.
This decision should be mailed to the internal advice applicant no later than sixty days from the date of this letter. On that date, Regulations and Rulings of the Office of International Trade will make the decision available to CBP personnel and to the public via the CBP Home Page on the World Wide Web at www.cbp.gov, through the Freedom of Information Act, and by other methods of public distribution.
Sincerely,
Monika R. Brenner
Chief
Valuation & Special Programs Branch