OT:RR:CTF:VS H281340 RMC
Assistant Director
Apparel, Footwear & Textiles
Center of Excellence and Expertise
U.S. Customs & Border Protection
1100 Raymond Blvd.
Newark, NJ 07102
Re: Application for Further Review of Protest No. 4601-16-100331; 19 U.S.C. § 1401a; First Sale; Multi-Tiered Transaction
Dear Mr. Landau:
This is in response to your correspondence, dated November 2, 2016, forwarding the Application for Further Review (“AFR”) of Protest No. 4601-16-10031, timely filed by La Perla North America, Inc. (“Protestant”).
FACTS:
The entry at issue in this case involved a multi-tiered transaction with three related parties: (1) Protestant, a U.S. company which is the importer of record and the buyer of the merchandise; (2) La Perla Global Management UK Limited (“Middleman”), a British entity serving as the middleman; and, (3) La Perla Manufacturing S.R.L. (“Supplier”), an Italian garment manufacturer. According to the information provided, all three entities are owned by S.M.S. Finance S.A., a parent company that is incorporated in Luxembourg. The Protestant claims that the imported merchandise, primarily women’s lingerie, should be appraised based on the first-sale price between the Supplier in Italy and the Middleman in the United Kingdom. Alternatively, if first-sale appraisement is rejected, the Protestant requests a refund of duties paid on international freight.
The documents provided by the Protestant describe a transaction structured in the following manner. First, the Protestant collects orders from its unrelated U.S. customers (e.g., Bloomingdales). The Protestant then groups these orders together and submits a purchase order to the Middleman via an intercompany software platform. This software platform allows both the Middleman and the Supplier to access information about the order. The order submitted via the intercompany software identifies the ultimate U.S. customer, quantity of goods ordered, SKU numbers, price, the U.S. customer’s order number, and the Protestant’s purchase order number.
Once the order has been entered into the system, the Supplier issues an invoice and a packing list to the Middleman. Under the terms of a manufacturing agreement, the price between the Supplier and the Middleman is determined based on a price list applying a mark-up on the standard production cost. The Middleman then issues a separate invoice and packing list to the Protestant. All sales documents indicate that the shipping terms are Delivered at Place (“DAP”).
Once the merchandise has been manufactured by the Supplier in Italy, it is sent to Newark on a direct flight from Rome. Payment is accomplished via adjustment of intercompany loans between the parties. The Protestant argues that a bona fide sale occurred between the Supplier and the Middleman, that the goods were clearly destined for the United States, and that the intercompany price was settled in an arm’s-length manner. According to the Protestant, the merchandise should thus be appraised based on the first sale in accordance with Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992).
The Protestant provided the following documentation in support of its claim.
CBP Form 19
Internal memo entitled “Group Transfer Pricing Policy 2015.” The memo states that the methodology applied in the transfer price policy is the Transactional Net Margin Method (“TNNM”), a profits-based method that compares the profitability of a multinational enterprise member with the profits of comparable entities undertaking similar transactions.
2014 Annual Report and Financial Statements for the Middleman.
2014 Financial Statement for the Supplier (in Italian).
Framework Distribution Agreement between the Middleman and the Protestant. Article 5.6 states that “[t]itle to the goods shall pass to [the Protestant] upon delivery of such Products to the agreed place of delivery.”
Framework Manufacturing Agreement between the Supplier and the Middleman. Article 9.1 states that “[t]he [Middleman] shall pay the [Supplier] a price for the Products supplied and sold based on a price list applying a mark-up on the standard production cost (hereinafter the ‘Ordinary Price’) agreed between the Parties for each Sales Season.” The agreement further specifies that the “method to identify the appropriate profitability of the [Supplier] shall be the Transaction Net Margin Method” and that at the end of the year, the Supplier “shall invoice the [Middleman] the amount sufficient to reach such range.”
Entry documentation including CBP Form 7501, air waybill indicating shipment direct from Rome to Newark, and invoices from the Middleman to the Protestant.
Sales orders from the Protestant’s U.S. customers.
Spreadsheet indicating the “Master Bolla” number (6003558) for the shipment.
Invoices from the Supplier to the Middleman with delivery number referencing 6003558.
Invoices from the Middleman to the Protestant with “delivery note” referencing 6003558.
Screenshot from SAP software referencing the Middleman’s invoice.
SAP screenshot of the Supplier’s invoice.
Notice of Loan Repayment from the Middleman to the Supplier.
Freight bill from the Supplier showing the Protestant as the recipient.
Loan Agreement between the Middleman as the lender and the Protestant and borrower.
Loan Sale and Purchase Agreement between Pacific Capital S.a.r.l, the Middleman, and a related parent company.
Duty refund estimates for the entry at issue.
ISSUES:
Whether the transaction between the Middleman and the Supplier, a related party, may be used to determine the transaction value of the imported merchandise.
If not, whether the Protestant is entitled to a refund of duties paid on international freight.
LAW AND ANALYSIS:
First Sale Appraisement
Merchandise imported into the U.S. 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, 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 U.S. The case involved a foreign manufacturer, a middleman, and a U.S. 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 U.S. See also Synergy Sport International, Ltd. v. United States, 17 C.I.T. 18 (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 U.S. 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 U.S. The documents may include, but are not limited to purchase orders, invoices, proof of payments, contracts, and any additional documents (e.g. correspondences) 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.
First, we must determine if indeed a “sale” occurred. 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 Headquarters Ruling Letter (“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 H005222, dated June 13, 2007. Finally, pursuant to the CBP’s Informed Compliance Publication, entitled “Bona Fide Sales and Sales for Exportation,” CBP will consider whether the buyer provides or could provide instructions to the seller, is free to sell the transferred item at any price he or she desires, selects 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 explained in HQ H016966, dated December 17, 2007, “[w]henever there is a purported series of sales, and the same terms of sale are used in both transactions, there is a concern that the middleman obtains risk of loss and title only momentarily or never at all, and thus has nothing to sell to the ultimate purchaser. In such situations the middleman may be a buying or selling agent rather than an independent buyer/seller and the sale will be said to occur between the party identified as the first seller and the ultimate U.S. purchaser.” By itself, simultaneous or flash transfer of title does not equate to failure to show a bona fide sale. However, it may cause CBP to more closely scrutinize a transaction.
Counsel for the Protestant argues that, because the contracts and transaction documents refer to the Middleman as the “purchaser,” the Middleman is an independent buyer and seller. Regardless of how the protestant refers to the entities involved in this multi-tier transaction, however, CBP examines whether a sale has occurred on a case-by-case basis, examining the various factors discussed above. The references to the Middleman as a “purchaser” therefore do not resolve the question of whether a bona fide sale has occurred in this case.
Counsel also analogizes to the first-sale transaction in HQ H278748, dated March 17, 2017. Counsel states that, in HQ H278748, “CBP reiterated the guidance” of HQ 545271, dated March 4, 1994, in stating that:
[in HQ 545271], the manufacturers shipped the merchandise directly to the importer per the terms of the purchase orders between the middleman and the manufacturers. A review of the entire transaction and the documentary evidence . . . led CBP to conclude a bona fide sale of merchandise for export to the United States occurred between the manufacturers and the middleman even though the middleman never took physical possession of the merchandise.
In contrast to HQ H278748, in which CBP considered an arm’s-length, multi-tiered transaction between unrelated parties, the Protestant and the Supplier in this case are wholly owned by the same parent company. HQ 545271 is also distinguishable because the related entities in that case were not parties to any of the transactions under consideration. Furthermore, HQ 545271 is silent on when the risk of loss passed from the buyer to the seller, which is a factor that must be considered in this case.
As noted above, the terms of sale between all parties in this case are DAP. According to the INCOTERMS 2010 rules, DAP “means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing goods to the named place.” See Incoterms 2010, International Chamber of Commerce, https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-rules-2010/ (last visited June 1, 2017). Consistent with this definition of DAP shipping terms, the distribution agreement between the Middleman and the Protestant specifies that “the title to the goods shall pass to [the Protestant] upon delivery of such Products to the agreed place of delivery.”
Although multiple identical shipping terms normally suggest that a flash transfer of title may have occurred, counsel for Protestant argues that “the totality of the circumstances show that LP Italy transferred ownership of the merchandise to LP UK at the overseas airport, and LP UK transferred ownership to [the protestant] at the U.S. place of delivery.” Under this theory, the merchandise’s place of delivery for the transaction between the Supplier and the Middleman is the airport in Rome. Accordingly, title transferred from the Supplier to the Middleman when the truck (i.e., the “arriving means of transport”) carrying the merchandise from elsewhere in Italy made the merchandise available at the airport in Rome (i.e., the “named place”). Title then transferred from the Middleman to the Protestant when the goods were delivered to the Protestant in the United States.
The documentation provided, however, indicates that the “place of delivery” is the United States. For example, the invoice between the Supplier and the Middleman indicates that the “shipment to” party is the Protestant and the Protestant’s U.S. address is listed as the destination. Furthermore, the invoice lists the means of transportation as “airfreight,” which suggests that the truck carrying the merchandise to the airport in Rome was not the “arriving means of transport” for purposes of the DAP shipping term. Instead, the DAP “place” is the United States and the “arriving means of transport” is the aircraft.
The documentation provided also suggests that “flash” title occurred when the merchandise is delivered to the United States. While flash title does not necessarily equate to a failure of a bona fide sale, here we find that no bona fide sale occurred between the Supplier and the Middleman, which are related parties. Instead, the information provided indicates that the Middleman operates as an agent rather than an independent buyer. This relationship is indicated from the time the goods are ordered until the goods are delivered to the Protestant in the United States.
At the beginning of the ordering process, the Protestant’s order is submitted by an internal software platform that, as related parties, the Protestant, the Middleman, and the Supplier share. Although it is true that separate sales documentation was created for the transaction between the Supplier and the Middleman and the Middleman and the Protestant, the shared access to customer orders via the shared software system suggests that the Middleman could not choose the factory that would produce the goods. Furthermore, this arrangement also suggests that the Middleman could not sell the goods to any other party or at any other price.
In addition, no evidence was provided that the Middleman has any dealings with any other buyers or could initiate transactions on its own behalf. Here, as the merchandise was shipped directly from Italy to the United States, the Middleman, which is based in the United Kingdom, never took physical possession of the merchandise and only received title simultaneously with the Protestant. Moreover, no evidence was provided that the Middleman could have merchandise delivered for its own inventory or that the Middleman had any inventory at all.
In sum, this case involves a three-tiered transaction in which all parties are related, the Middleman never took physical possession of the merchandise, title passed simultaneously from the Supplier to the Middleman to the Protestant, and no evidence was provided to show that the Middleman could conduct business with other unrelated entities or in an independent manner. Under these circumstances, we find that no bona fide sale occurred between the Supplier and the Middleman. Appraisement should therefore be based on the transaction between the Middleman and the Protestant.
Refund of Duties Paid on International Freight
Since first-sale appraisement is not appropriate in this case, we consider the Protestant’s second argument, i.e., that international freight charges should be deducted from the price actually paid or payable by the Protestant.
As noted above, merchandise imported into the U.S. 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).
The term “price actually paid or payable” is defined as:
[T]he total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.
19 U.S.C. § 1401a(b)(4)(A).
In Treasury Decision (“T.D.”) 00-20, CBP reiterated its longstanding position that with regard to freight, insurance and other costs incident to international shipment, including foreign inland freight, the importer of record must deduct the actual costs for these charges from the price actually paid or payable in determining transaction value, if these costs are included in the price actually paid or payable. The notice advised that CBP considers actual costs to constitute those amounts ultimately paid to the international carrier, freight forwarder, insurance company or other appropriate provider of such services. Commercial documents to and from the service provider such as an invoice or written contract separately listing freight/insurance costs, a freight/insurance bill, a through bill of lading or proof of payment of the freight/insurance charges (i.e., letters of credit, checks, bank statements) are examples of some documents which typically serve as proof of such actual costs. Other types of evidence may be acceptable.
Here, the Protestant has provided sufficient evidence that the international freight costs were included in the price actually paid or payable and adequate documentation of the actual freight costs incurred in the transaction. All the sales documentation provided indicates that the terms of sale were DAP. Under a DAP contract, the invoice price normally includes charges for international freight and insurance. Furthermore, the air waybill indicates that the freight was “prepaid,” which also suggests that the invoice price included charges for international freight.
Finally, the Protestant has provided evidence of the actual, as opposed to estimated, international freight costs. The freight bill from the forwarding company indicates that freight charges from Rome to Newark were prepaid in the amount of €4,322.15. Since €4,322.15 represents the actual costs of international freight, this amount may be deducted from the price actually paid or payable.
HOLDING:
The protest is denied in part and allowed in part. The merchandise is not eligible for appraisement based on the first sale between the Supplier and the Middleman. However, international freight charges may be deducted from the price actually paid or payable between the Middleman and the Protestant.
In accordance with Sections IV and VI of the CBP Protest/Petition Processing Handbook (HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the Protestant no later than 60 days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision. Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings, will make the decision available to CBP personnel, and to the public on the CBP website at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division