OT: RR:CTF:VS H263045 YAG
Port Director
Port of Blaine
Petroleum Center of Excellence and Expertise
U.S. Customs and Border Protection
9901 Pacific Highway
Blaine, WA 98230
Attn: Ms. Kimbra E. Miller, Supervisory Import Specialist/TEC
Re: Internal Advice; Bona Fide Sale; Sale for Export; Related Parties
Dear Port Director:
This is in response to your internal advice request, dated March 11, 2015, concerning the valuation of industrial coated woven wrapping products, multi-layer laminated reinforced plastic substrates, and roofing products imported into the United States either by Interwrap, Inc. (“IWI”) or by Interwrap, Corp. (“IWC”).
IWC has requested that confidential treatment be given for certain information contained in their submissions. Inasmuch as the request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the company's request for confidentiality is approved. The information contained within brackets and all attachments to the internal advice request and the supplemental submissions and materials, forwarded to our office will not be released to the public and will be withheld from published versions of this ruling.
FACTS:
IWI is a Canadian company, located in British Columbia, Canada that purportedly sells the imported merchandise to its related party, IWC, located in Charleston, South Carolina. IWC is a wholly owned subsidiary of IWI. IWC also purchases its merchandise from a related party in Barbados, IBCO SRL (“IBCO”). IWC only purchases goods from IWI and IBCO. The merchandise is imported into the United States either by IWI or by IWC.
In 2015, the Office of Regulatory Audit (“Regulatory Audit”) in Charlotte, North Carolina, completed a Non-Audit Service of IWC and IWI. The Regulatory Audit reviewed: (1) transactions where IWI served as the importer of record; (2) purchases from IWI in Canada where IWC was the importer of record; and, (3) purchases from IBCO where IWC was the importer of record. Regulatory Audit determined that the relationship between the parties was affecting the entered value of the merchandise and questioned whether an actual sale occurred between the related companies.
Transactions between IWC in the United States and IWI in Canada
IWC purportedly purchases the imported products from IWI and then resells the products to unrelated U.S. customers. In some instances, the imported products are shipped directly from IWI in Canada to IWC’s customers in the United States. According to IWC, when the imported products enter the United States, the importer declares the value based on the price actually paid or payable by IWC to IWI. To substantiate the bona fide sale for export between IWC and IWI, counsel for IWC provided the companies’ Distribution Agreement, dated October 1, 2005, as well as the following documentation for Entries No. [***], [***], [***], and [***]:
A CBP form 7501 (Entry Summary) and, if applicable, a CBP Form 3461 Entry/Immediate Delivery;
An invoice from IWI's Canadian customs broker to IWI for the entry;
Accounting, customs, and commercial invoices issued by IWI to IWC (a P.O. Box in Washington) for the imported products;
An IWC accounts payable journal entry showing invoice expenses including the imported products at issue;
IWI’s delivery note bill of lading, purportedly illustrating a sale to IWC and through-shipment to IWC’s U.S. customers;
A load plan and a textile declaration for certain products, if required; and,
IWC’s balance sheet, filed with the company’s 2013 tax return, illustrating IWC’s inventory of the imported products in the United States.
Counsel for IWC also provided the following documents to substantiate the sale between IWC and U.S. customers: (1) an invoice issued by IWC to its U.S. customer; (2) an IWC order confirmation to its U.S. customer; (3) the U.S. customer’s purchase order to IWC; and, (4) a U.S. customer’s order sheet (when submitted). Counsel argues that invoice numbers, purchase order numbers, part numbers, product descriptions, quantities, dates, and bill of lading numbers connect the documents substantiating each entry.
According to the Distribution Agreement, counsel argues that the title and risk of loss pass from IWI to IWC when the imported products enter the United States. Counsel states that since the goods are supplied to IWC under the Distribution Agreement, there are no purchase orders between IWC and IWI. Title and risk of loss pass from IWC to its U.S. customers after delivery to the ultimate U.S. destination. Counsel states that even when the products travel directly from IWI to IWC’s U.S. customers, ownership first shifts from IWI to IWC and then remains with IWC between the time the products cross the U.S.-Canada border until the U.S. customer receives them. Moreover, under the Distribution Agreement, IWC must import the products into the United States, distribute the products and maintain substantial operations in the United States.
Further, counsel submitted IWC’s balance sheet filed with the company’s 2013 Internal Revenue Service (“IRS”) tax return, illustrating that IWC holds some of the imported products as inventory. According to counsel, inventories reside both at IWC’s warehouse/manufacturing operation in Charleston, South Carolina (where IWC also completes semi-finished imported goods) and at third-party warehouses in other U.S. locations (from which IWC also fulfills U.S. customers’ orders). Counsel further states that IWC pays IWI for the imported products following the terms in the Distribution Agreement. Each time IWI issues an invoice to IWC, a trade receivable account records the invoice (a sample account statement was provided for our review). IWC generally makes lump-sum payments, recorded in a general ledger or cash advance account along with other transactions, and then the accounts receivable system allocates the amount paid to specific invoices.
Finally, IWI, through IWC’s counsel, provided information concerning negotiated arm’s length prices between IWI and IWC. Schedule B of the Distribution Agreement sets forth the method for determining prices that IWC pays IWI. According to the Distribution Agreement, the parties agreed to apply the Transactional Net Margin Method (“TNMM”) to ensure that the product purchases occur at an arm’s length price. The arm’s length price, determined by the TNMM, is estimated before the order of the products, using budgeted sales prices, sales volumes, and operating expenses. IWI claims that the two companies consult with each other to determine the arm’s length price. The Gross Profit to Operating Expenses ratio (“Berry ratio”) and the Operating Margin (Return on Sales or “ROS”) were chosen as appropriate measures of the arm’s length operating profitability of the IWC. Pursuant to the Distribution Agreement, the Berry Ratio for the sample of comparable companies ranged from [*] % to [*] % and a median of [*] %, while the ROS for the sample of comparable companies ranged from [*] % to [*] % with a median of [*] %. Under the method utilized by the parties, the prices prior to October 14, 2014, were based on a market minus price taking into account the lowest price at which IWC would resell the products to U.S. customers minus a markup percentage. On October 15, 2015, the pricing was changed to “cost plus” markup, as it is easier to administer according to IWI.
Counsel also provided IWI’s “Transfer Pricing Benchmarking Analysis,” completed on or about March 21, 2014, by [***] for the year ending September 30, 2013. This transfer pricing report identifies [***] companies engaged in distribution activities functionally comparable to IWC’s and constructs an arm’s length range of financial results from those companies over a three year period (2011 to 2013). The distribution activities in which the [*] identified companies engage involve goods such as roofing materials (asphalt shingles, synthetic slates and tiles, clay and concrete tiles, etc.), building products ( vinyl sidings, cedar sidings, etc.), industrial products such as bearings, power transmission components, wood products and building materials (plywood, lumber), specialty metals and plastics, hardwood lumber, etc. The [*] Report concludes that “a reasonable arm’s length return for IWC’s distribution activities for the 2013 taxation year would be a ROS return that lies in the interquartile range of results of comparable companies, between [*] % and [*] %.” The prices that IWI had charged IWC for the products had accordingly enabled IWC to earn a ROS of [*] % during the 2013 fiscal year, a margin within the interquartile range of results from the comparable companies (when IWC sold the products to U.S. customers at market prices). The parties negotiate compensating adjustments, as necessary.
Transactions between IWC in the United States, IBCO in Barbados, and IPP in India
IBCO in Barbados contracts to manufacture coated woven fabrics, building construction materials, industrial fabrics, lumber wraps, or metal wraps, in finished or semi-finished form from International Packaging Products PVT Ltd. (“IPP”), a related manufacturer in India, and Qingdao Novia Polymer Co. Ltd. (“Novia”), a manufacturer in China. It is stated that once IPP or Novia sells the merchandise to IBCO, IBCO sells it to IWC in the United States. IWC, in turn, sells the products to unrelated U.S. customers after finishing operations in the United States, if required. Counsel for IWC states that in all cases, IPP or Novia ships the products directly to IWC or IWC’s U.S. customers, even though IBCO takes title and bears the risk of loss along the way. When the products enter the United States, IWC declares the value based on the “first” sale price actually paid or payable by IBCO to IPP or Novia, rather than the “second” sale price actually paid or payable by IWC to IBCO. In addition, according to counsel, periodic disbursement of compensating adjustments between IWC, IBCO, IPP, and Novia, based on comparisons to margins obtained from otherwise similar transactions between unrelated parties, ensures that prices paid reflect arm’s length principles.
Counsel provided supplemental documents and a narrative concerning factual details about one representative importation, Entry No. [***] (April 21, 2015) at the Port of Charleston, South Carolina. The narrative has three parts, focusing on (a) the sales initially between IPP and IBCO, and then between IBCO and IWC; (b) the related exportation to the United States; and (c) negotiated arm’s length prices. The following documents were provided for our review:
April 1, 2011 Contract Manufacturing Agreement between IWI, IBCO, and IPP;
October 1, 2005 Distribution Agreement between IBCO and IWC;
CBP Form 7501 Entry Summary and CBP Form 3461 Release for Charleston Entry No. [***] (April 21, 2015);
Documents illustrating IPP’s sale to IBCO of products included in Entry No. [***];
Documents illustrating IBCO’s sale to IWC of products included in Entry No. [***];
Documents showing the direct shipment of products included in Entry No. [***] from India to the United States;
[***] transfer pricing analysis of IPP’s sales to IBCO and IWI for the fiscal year ending March 31, 2015;
[***] transfer pricing analysis of IBCO’s and IWI’s sales to IWC for the year ending September 30, 2015;
October 1, 2015 corporate resolution on compensating adjustment between IBCO and IPP;
January 7, 2015 and December 13, 2015 decisions of India’s Deputy Commissioner of Income Tax and Additional Commissioner of Income Tax regarding IPP’s transfer pricing; and,
October 1, 2015 corporate resolution on compensating adjustment between IWC and IBCO.
Counsel states that the Manufacturing Agreement, dated April 1, 2011, between IWI, IBCO, and IPP governs IBCO’s purchases of the merchandise from IPP. The Distribution Agreement, dated October 1, 2005, governs IWC’s purchases of the merchandise from IBCO. According to the Manufacturing Agreement, title, possession, and risk of loss (including market risk, the risk of nonpayment, and regulatory risk) pass from IPP to IBCO as soon as the merchandise crosses the ship’s rail at the Indian port of export. The Distribution Agreement states that title, possession, and risk of loss pass from IBCO to IWC when the merchandise arrives at the U.S. port of entry. Therefore, according to counsel, even though the merchandise is shipped directly from IPP to IWC, IBCO takes title and risk of loss until the merchandise reaches the U.S. port of entry. Counsel states that should any catastrophe afflict the merchandise during this period, IBCO, not IPP or IWC, would be responsible for the damages. No documents were provided to substantiate this statement. Counsel claims that supporting documents from Entry No. [***] exemplify IBCO’s purchases from IPP and link them to the corresponding resales to IWC.
Moreover, the Contract Manufacturing Agreement requires IPP’s invoices to identify IBCO’s corresponding purchase orders, and IBCO to pay IPP for the merchandise within 60 days after invoicing, with interest accruing when a bill for the merchandise becomes overdue. Counsel indicates that IBCO pays IPP as follows: each time IPP issues an invoice to IBCO, IBCO’s accounts payable journal records the invoiced amount. Rather than paying IPP invoice by invoice, IBCO generally makes lump-sum payments, recorded in a general ledger or cash advance account along with other transactions.
Additionally, to show that the merchandise was directly shipped to the United States from India, counsel provided the following: an invoice for Entry No. [***] to importer IWC from its customs broker, showing IPP as shipper and IWC as importer and consignee, and identifying relevant container and master commercial invoice numbers; through waybill [***] from Pantainer Express Line (“Panalpina”), indicating direct delivery from shipper IPP in India to consignee IWC in Charleston, South Carolina; packing lists for each container, again showing direct delivery from IPP to IWC, with references to associated IPP master commercial invoice numbers; and, exporter IPP’s statements of origin and non-preferential certificates of origin from the Indian Merchants’ Chamber, one pair for each master commercial invoice. Counsel claims that as evidenced by this information, IPP sells the Products to IBCO solely for exportation to the United States.
Concerning the related party issue between IPP and IBCO, the TNMM is used to determine the arm’s length character of transfer prices in a controlled transaction (i.e., a sale by IPP to related party IBCO) by testing the profit results of one participant and by comparing these results to the results realized by a sample of comparable companies engaged in transactions with unrelated parties. In this instance, IPP was chosen as the tested party, rather than IBCO. [***] compared IPP’s profitability to that of [*] functionally comparable Indian manufacturers. According to the transfer pricing analysis, [***] could not identify contract manufacturers in the plastic packaging industry; therefore, it broadened the analysis to include companies engaged in carrying out manufacturing activity in the plastic packaging industry. The database of Indian manufacturers in the plastics and rubber industry was searched. We note that IPP’s Operating Profit/Total Cost (“OP/TC”) for the year ended March 31, 2015, was higher than the weighted average of OP/TC of comparable companies ([*] % to [*] %, with a median of [*] %). After [***] completes its transfer pricing analysis before each fiscal year ends, the parties negotiate the compensating adjustments, as necessary.
For IBCO’s sales to IWC, too, the TNMM tests the arm’s length price of the transactions. However, [***] has chosen the purchaser, IWC, as the tested party, and compared its profitability to that of [*] functionally comparable [***] distributors. As with IWI’s transfer pricing analysis previously submitted for the year 2013 to illustrate the arm’s length price between IWI and IWC, the distribution activities in which the [*] identified companies engage involve goods such as roofing materials (asphalt shingles, synthetic slates and tiles, clay and concrete tiles, etc.), building products (vinyl sidings, cedar sidings, etc.), industrial products such as bearings, power transmission components, wood products and building materials (plywood, lumber), specialty metals and plastics, hardwood lumber, etc. The [***] Report concludes that “a reasonable arm’s length return for IWC’s distribution activities for the 2015 taxation year would be a ROS return that lies in the interquartile range of results of comparable companies, between [*] % and [*] %. Just as IPP and IBCO do, IBCO and IWC consult before each fiscal year ends to determine whether that year’s prices have produced a result consistent with the Distribution Agreement’s and the [***] transfer pricing analysis. Again, if discrepancies arise, IBCO and IWC make compensating adjustments, paid within 30 days, as necessary to bring the inter-company pricing in line with arm’s length terms.
ISSUES:
Whether the transaction between IWI and IWC, a related party, may be used to determine the transaction value of the imported merchandise.
Whether the transaction between IBCO and IPP, a related party manufacturer, may be used to determine the transaction value of the imported merchandise.
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised for customs purposes in accordance with Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. § 1401a). The primary method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. § 1401a(b)(1). 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).
To use transaction value, there must be a bona fide sale for exportation to the United States. 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)). Several factors are relied on to determine whether a bona fide sale exists. See Headquarters Ruling Letter (“HQ”) 546067, dated Oct. 31, 1996. 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 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.
Finally, pursuant to 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 downstream customers without consulting with the seller, and could order the imported merchandise and have it delivered for its inventory.
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 the passage of consideration. See HQ 545705, dated January 27, 1995.
Whether the transaction between IWI and IWC, a related party, may be used to determine the transaction value of the imported merchandise.
In the instant case, IWC is declaring values for the imported merchandise based on the transaction value of alleged sales with its related seller, IWI. In its response to CBP’s requests for information, Counsel for IWC provided much information and documents related to the transactions between the parties; however, we note that the supporting evidence does not corroborate the company’s arguments and assertions. It is claimed that title and risk of loss pass per the Distribution Agreement; thus, there are no purchase orders between IWI and IWC. The Distribution agreement states that title and risk of loss pass from IWI to IWC when the imported products enter the United States. Title and risk of loss are supposed to pass from IWC to its U.S. customers after the delivery to the ultimate U.S. destination. Even when the products travel directly from IWI to IWC’s U.S. customers, ownership first shifts from IWI to IWC and then remains with IWC between the time the products cross the U.S.-Canada border and the time the U.S. customer receives them.
However, none of the invoices provided between IWI, IWC, and IWC and U.S. customers state the terms of sale or indicate the incoterms to illustrate the passage of risk of loss. No documents were provided to illustrate what entity pays for freight charges or carries insurance to cover any losses. Therefore, since we are unable to determine what entity paid for the insurance and which entity was the beneficiary, it is unclear when the risk of loss passes from IWI to IWC. The only invoice for Entry No. [***] contains the terms of sale to U.S. customers. The terms of sale are “FOB Destination Prepaid Allowed.” According to this term of sale, the seller pays and bears the freight charges and owns the goods while they are in transit. Title passes at the buyer’s location. IWC is the seller on this invoice; however, the location of the seller is in Canada. Many of the submitted invoices list “IWC” and IWI’s address and phone number, making it ambiguous which entity was a party to the sale.
Similarly, the customs broker invoices their services to IWI, and the invoices are addressed to the Canadian address of IWI (further, a power of attorney used by the primary broker, lists IWI as the importer, not IWC). As there are no purchase orders between IWI and IWC, the invoices from IWI are addressed merely to IWC P.O. Box in Washington. According to Regulatory Audit, there was no business operating in the state using the name Interwrap Corp. at the time these alleged sales supposedly occurred.
Furthermore, and contrary to counsel’s arguments, the following findings by Regulatory Audit support the proposition that IWC did not have a role in the transactions in question: (1) there were importations to the United States that the person at IWC, who was responsible for receiving documents, was not aware of; (2) in certain situations, purchase orders and contracts were located indicating an agreement existed between IWI and a U.S. customer (for example, with respect to IWI’s purchase order with Louisiana Pacific, dated December 23, 2013, where IWI handled the sale to the U.S. customer and IWI was identified as a seller (U.S. customer also made the payment to IWI in Canada)); (3) pursuant to a credit request form obtained by Regulatory Audit, IWI approved credit memos for IWC; (4) IWC’s bank accounts were addressed the same as IWI’s in British Columbia, and according to the findings, IWC only maintained approximately $2,000 in petty cash (all other money was handled by IWI, and some of the payments were made to a P.O. Box in Washington); (5) examples in bank accounts were found where the total deposits equaled the exact withdrawals for the month (money went in and out of IWC’s account at the same time); (6) multiple IWC employees were identified that were actually listed as IWI employees, and all cross border paperwork for IWC was sent to an employee of IWI, according to his business card; and, (7) IWI used the Canadian and U.S. address interchangeably in import documentation and in contract negotiations with its customers. Finally, the audit team discovered that at least some of the U.S. customers placed orders through the Interwrap.com website and contacted sales representatives located in Canada. As a follow up, one of the U.S. customers was contacted, and they indicated they were a customer of IWI, not IWC, and had a contract with IWI. Therefore, at least some U.S. customers purchased directly from IWI, further supporting the proposition that IWC did not have a role in the transactions in question.
With respect to the payment records, counsel for IWC provided some evidence of payment for the imported merchandise at issue between IWI and IWC. However, Regulatory Audit findings indicated that payments made by IWC to IWI were usually cleared against an inter-company loan. Moreover, the auditors found two examples from 24 sample invoices where a payment had not been made at all, contrary to the language in the Distribution Agreement requiring payments within 30 days. After reviewing the documents provided by counsel, we are not able to link the payments to specific customs transactions.
Accordingly, based on the information provided, we find that the terms stated in the Distribution Agreement are not indicative of a transfer of title and risk of loss between IWI and IWC. Instead, all information and documents presented, as well as the findings of Regulatory Audit, lead us to conclude that the bona fide sale for exportation to the United States for customs purposes occurred between IWI in Canada and the end U.S. customer. Therefore, IWC may not use the intercompany price as the transaction value for the merchandise.
Furthermore, even if there was a “bona fide sale” between IWI and IWC, the transaction value proposed by the parties would not be acceptable. Transaction value between a related buyer and seller is acceptable only if the transaction satisfies one of the two tests: (1) circumstances of the sale; or (2) test values. See 19 U.S.C. § 1401a(b)(2)(B); 19 C.F.R. § 152.103(l). IWC provided no evidence that the transaction value of imported merchandise approximates one of the “test values” under 19 U.S.C. § 1401a(b)(2)(B).
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 that the price was determined. 19 C.F.R. § 152.103(l) provides three examples that demonstrate that a relationship will 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.
Here counsel argues that the “way in which the buyer and seller organize their commercial relations” prevents the relationship between IWI and IWC from influencing the price between them. As an example, counsel points out that IWI and IWC negotiate compensatory adjustments, envisioned by the Distribution Agreement and the memorandum in which IWC, using the range of financial results from functionally comparable distributors, formally requests [***]. Additionally, counsel argues that the parties’ pricing practices are normal for the industry in question because: (1) the [***] Report documents the financial results of unrelated distributors with comparable functions and products, and (2) the market-minus approach’s consistency with IRS and OECD requirements makes it a typical provision to put in transfer-pricing agreements. Counsel cites to HQ 547382, dated February 14, 2002; and HQ H238990, dated April 7, 2014, to support his assertions.
In HQ 547382, CBP considered an economic analysis, based upon the IRS standards; a financial statement for the seller showing its accounting for trading, profit and loss during the period; a profit and loss statement for the U.S. importer/buyer; and a listing of profitability for independent U.K. contract manufacturers of footwear to determine that the prices between the related parties were at arm's length. CBP found that based on the analysis presented, the price set between the related parties would be adequate to ensure recovery of all manufacturing costs, and the profit appeared to be in line with the industry practice (identified companies were considered comparable based on their manufacturing functions, and similar product output).
In HQ H238990, the sellers earned a higher profit in their sales of the imported product to their related company in the United States than the parent company made in its sales of goods of the same class or kind during the applicable years in which those sales occurred. Since the sellers’ operating profits were higher than the profits of the parent company, the all costs plus a profit test was satisfied, and the companies satisfied the circumstances of the sale test. Accordingly, transaction value was an acceptable method of appraisement.
Counsel’s reliance on HQ 547382 and HQ H238990 is misplaced. In HQ 547382, the data identified companies considered comparable based on their manufacturing (emphasis added) functions, and similar product output. Therefore, in that ruling, in addition to the seller’s financial statements and the buyer’s profit and loss statements, the U.S. importer/buyer presented the analysis of comparable manufacturers selling similar products. This is not the case here. Further, HQ H238990 is not applicable because it concerns with the application of all costs plus a profit methodology.
In this case, counsel encourages CBP to accept that the relationship did not influence the prices because the related parties set their prices based on the TNMM methodology stated in the transfer pricing analysis performed for tax purposes. This argument is contrary to CBP’s longstanding position that the mere fact that an importer provides CBP with an Advance Pricing Agreement (“APA”) or transfer pricing study is not sufficient to establish that a related party transaction value is acceptable. Additionally, CBP has repeatedly ruled that the mere fact the importer/buyer allegedly earned an operating profit comparable to other functionally equivalent companies is not sufficient to establish compliance with the normal pricing practices 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, dated July 23, 2004; HQ 548095, dated September 19, 2002; HQ H029658, dated December 8, 2009; HQ H037375, dated December 11, 2009; HQ H138203, dated October 11, 2011; and, HQ H260036, dated February 24, 2015. We also note that the pricing practices must relate to the industry in question, which generally includes the industry that produces goods of the same class or kind as the imported merchandise. See HQ 546998, dated January 19, 2000; see also HQ 548095, dated September 19, 2002.
In this case, the prices are set pursuant to the TNMM methodology (specified in the Distribution Agreement). Counsel claims that the price determined by the TNMM is estimated using budgeted sales prices, sales volumes, and operating expenses and that the parties consult with each other to determine that arm’s length price. There is no evidence presented to support any negotiations between the parties. Furthermore, in this instance, a set of functionally comparable companies was used to determine a target margin range. However, our review of the [***] comparable companies identified in [***] analysis for the fiscal year 2013, indicates that these companies were chosen based on their functional comparability with IWC. The comparable companies, none of which is in a coated woven products market, sell a variety of lumber and other construction materials, industrial supplies, and non-durable goods. On the other hand, IWC operates in a coated woven products market, distributing extrusion coated woven and diverse multi-layer laminated plastic substrates for packaging purposes. Accordingly, in line with previous rulings, we find that IWC has failed to show that the prices were settled in a manner consistent with the normal pricing practices of the coated woven industry. We are also unable to determine that the related party price was not influenced by the relationship for purposes of the circumstances of the sale test, based on the totality of the information provided and our review and examination of all relevant aspects of the transaction. Our general approach takes into account every aspect of the transactions at hand to determine whether the transaction value is adequate. However, in this case, apart from the provisions in the Distribution Agreement and the transfer pricing analysis prepared for tax purposes, there is no information as to the profitability of IWC versus that of its competitors (there is no qualitative review of IWC’s industry to confirm that companies in the industry price products in a consistent manner). Moreover, there is no available quantitative data of other companies in the coated woven industry that would further support the profitability figures presented to CBP in IWC’s transfer pricing analysis, prepared for tax purposes. Accordingly, even if there were a “bona fide sale” between IWI and IWC, the transaction value proposed by the parties would not be acceptable.
Whether the transaction between IBCO and IPP, a related party manufacturer, may be used to determine the transaction value of the imported merchandise.
Counsel for IWC claims that the merchandise at issue should be appraised based upon the transaction value of the sales between IBCO in Barbados and its related manufacturer in India, IPP.
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 a sale 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 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, 17 C.I.T. 18 (1993).
Under the Nissho Iwai decision and our 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 a middleman to a 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 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.
Based on the documentation presented to CBP, there is no question that the merchandise manufactured in India was clearly destined for the United States. In order to have the imported merchandise appraised based on the first sale, we must determine, however, whether the transactions between IPP in India and IBCO were bona fide sales, i.e., whether IBCO was an actual buyer/seller of the merchandise; and, if yes, whether the related parties conducted their transactions at arm’s length.
Counsel claims that bona fide sales occur between IPP and IBCO, as well as between IBCO and IWC. According to counsel, the paper trail provided links specific merchandise imported into the United States to both IBCO’s payments to IPP and IWC’s payments to IBCO, as memorialized in accounts payable journal entries, trade receivable account statements, general ledger or cash advance account records, and bank statements, as well as the Contract Manufacturing Agreement’s and Distribution Agreement’s passage of title and risk of loss and the payment obligations. Title and risk of loss allegedly passed from IPP to IBCO as soon as the goods crossed the ship’s rail at the Indian port of export, as set forth in the Contract Manufacturing Agreement, and the same risks, in addition to possession, passed from IBCO to IWC as soon as the goods entered the United States, as set forth in the Distribution Agreement.
Similar to transactions between IWI and IWC, we note that the documentation submitted does not support the terms of the Contract Manufacturing and Distribution Agreements and the assertions made by counsel. Section 2.9 of Contract Manufacturing Agreement between IPP and IBCO states that the products will be shipped and delivered in strict accordance with the delivery method specified in IBCO’s purchase order, and IPP will bear all freight and insurance costs to IBCO’s port of delivery. However, the purchase orders between IBCO and IPP did not contain the terms of sale or delivery method. Concerning freight and insurance, the Distribution Agreement between IBCO and IWC provides that IBCO ships the products following IWC’s instructions to the point of entry to the United States, and IWC is responsible for the costs of such delivery. The terms of the agreements are contradictory and shed no light as to when IBCO and IWC assume the risk of loss. No documents were provided to illustrate what entity paid for the freight charges or carried insurance to cover any losses. In fact, the payment records between IPP and IBCO and IBCO and IWC show that the payments were only made for merchandise, with no expense for freight.
Additionally, the transport waybills for the sample entry list IPP as the shipper and IWC as a consignee, and indicate “Freight Collect” under the “Freight and Charges” field. “Freight Collect” is a term used to show that the person or company that receives the goods pays the cost of transporting the goods at the time they are received, which illustrates that assuming IWC received the goods, IWC would pay for the freight to Charleston, North Carolina. These facts indicate that IBCO never assumed the risk of loss as specified in the Contract Manufacturing Agreement. Moreover, there are no purchase orders between IBCO and IWC. Although the invoices for all transactions were submitted for our consideration, the set of invoices between IPP and IBCO states the terms of delivery as “FOB North Charleston, South Carolina.” This appears to be a misuse of the FOB term of sale and further supports the proposition that IBCO was not a legitimate buyer in the transactions in question. Accordingly, based upon our review of the facts, we do not believe the requirements for the “first sale” appraisal have been met in this case. To have a sale under 19 U.S.C. § 1401a(b)(1), we must have a buyer and a seller. In this case, IBCO is not an actual buyer of the merchandise from the manufacturer.
Furthermore, even if there were “bona fide sales” between IPP and IBCO and IBCO and IWC, the transaction value proposed by the parties would not be acceptable. As previously stated in this decision, transaction value between a related buyer and seller is acceptable only if the transaction satisfies one of the two tests: (1) circumstances of the sale; or (2) test values. See 19 U.S.C. § 1401a(b)(2)(B); 19 C.F.R. § 152.103(l). With respect to the related party issue, counsel argues that the Contract Manufacturing Agreement between IPP and IBCO, the Distribution Agreement between IBCO and IWC, a transfer pricing analysis by [***] of IPP’s sales to IBCO and IWI for the fiscal year ending March 31, 2015, and a [***] transfer pricing analysis of IBCO’s and IWI’s sales to IWC for the year ending September 30, 2015, set forth the methods actually used to determine prices that the related entities pay for the merchandise. Counsel claims that consistent with IRC Section 482 and OECD transfer pricing principles, the methods employed aim to ensure that the prices are arm’s length, as the Contract Manufacturing Agreement, the Distribution Agreement, and [***] transfer pricing analyses reference.
Similar to the IWI and IWC related party analysis, we observe that the mere fact that an importer provides CBP with an APA or a transfer pricing study is not sufficient to establish that a related party transaction value is acceptable. Contrary to the arguments presented in this case, none of the documents provided are sufficient to establish compliance with either the normal pricing practices 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. As stated in the transfer pricing analysis, IPP is primarily engaged in manufacturing or coated/printed woven products. [***] indicates in its report that “their strategy covered one broad segment, namely, manufacturers from the plastics and rubber industry, and therein a broad similarity in nature/features/characteristics were also considered. Therefore, the comparability analysis identified independent Indian manufacturers who were broadly comparable to those of IPP.” As a result, the comparable companies are involved in the manufacture of woven sacks/fabric, film covers, fabrics, polypropylene bags, etc. This is a broader industry than considered by CBP for customs purposes. See HQ 546998 and HQ 548095. We also note that [***] utilized Prowess and CapitalinePlus databases in their search for comparable manufacturers in India. While we provide no opinion on the validity of the search and the results of the analysis, we note the following limitations that [***] encountered, which make the analysis questionable for customs purposes: (1) [***] has not tested the validity of the search engine employed by the database; (2) they have not in general, examined the published financial statements of the companies in the comparable set, nor have they otherwise enquired into the nature of their circumstances, activities or results; and, (3) the financial data provided in the databases are not complete in all respects for all companies. These statements indicate to us that [***] cannot attest to the validity of their transfer pricing study. We also note that IBCO is a company that appeared to have been created for offshore purposes, maintaining small rented office space in Barbados (the address of which is shared by other entities). Moreover, despite the transfer pricing analysis in place, establishing the arm’s length price, the potential increase in entered value is estimated to be between 40 and 50 percent for transactions made between IWC and IBCO as compared to transactions between IPP and IBCO. Finally, taking into account that IPP’s OP/TC for the year ended March 31, 2015, was higher than the weighted average of OP/TC of comparable companies, and the fact that no information was submitted with respect to compensating adjustments, we are not persuaded that IPP and IBCO set their prices at arm’s length. Accordingly, pursuant to the Nissho Iwai decision and our precedent, we normally presume that transaction value is based on the price paid by the IWC. Nonetheless, since the bona fide sale between IBCO and IWC is also suspect, and these related party transactions are not at arm’s length, we are left with the amount paid by U.S. customers for the goods, and this amount should be used for appraisement purposes. HOLDING:
Based on the totality of the information presented, we find that the transactions between IWI and IWC, IPP and IBCO, and IBCO and IWC cannot be used to appraise the imported merchandise. The merchandise should be appraised based on the price paid by U.S. customers in the United States.
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Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch