RR:IT:VA 545800 RSD
Port Director
United States Customs Service
P.O. Box 610
112 Stutsman Street
Room 110
Pembina, North Dakota 58271-0610
RE: Internal Advice 92/93, bona fide sale; related parties;
transfer price; deductive value
Dear Sir:
This is in response to a memorandum from the District
Director of the former Pembina District to the Customs
Information Exchange, dated October 18, 1993, concerning the
appraisement of wool sweaters imported from Canada by Tundra
Knitwear (hereinafter Tundra). The National Import Specialist
forwarded this memorandum to our office for a decision on the
issue. Attached was a memorandum outlining his opinion on the
matter. Tundra's attorney has made a number of submissions. The
most recent submission was made by fax on May 31, 1996. We met
with counsel for Tundra on September 14, 1995. Counsel's request
that the submitted cost figures be kept confidential has been
granted. We have received a sample of one the imported sweaters.
We regret the delay in responding.
FACTS:
Tundra is a wholly owned subsidiary of Standard Knitting
Ltd. (hereinafter Standard), a company based in Winnipeg,
Manitoba, Canada. Tundra is the exclusive U.S. distributor for
all products exported to the U.S. by Standard. Tundra was
incorporated in North Dakota in 1985 and shares corporate offices
with Standard in North Dakota. The accounting records for both
companies are kept in Standard's office in Winnipeg, Canada.
However, each company maintains separate bank accounts. In this
case, Standard and Tundra are represented by the same counsel.
In selling products in the United States, Tundra employs
sales representatives who reside in different states and have
responsibilities for certain designated territories. Tundra only
does business in its own name so that the goods it sells bear the
Tundra name. Tundra receives goods from Standard at a warehouse
operated by a local Customs broker. Tundra takes legal
possession of the imported goods upon arrival at the warehouse
and pays for all the warehousing costs. The goods are then
shipped to Tundra's customers by U.P.S. and Federal Express.
However, in some
circumstances, the goods are shipped directly form Standard to
Tundra's customers. Tundra establishes its selling price to its
customers based upon what the market will bear, and at levels
intended to earn a profit in the United States.
According to counsel, the primary reason that Standard
created Tundra was to satisfy the desire of U.S. customers to do
business with a United States based company. Counsel further
explains that Tundra is perceived by customers to provide a
higher level of service than could otherwise be achieved by a
non-United States company. Tundra's customers have no
relationship, contractual or otherwise, with Standard, and the
only legal recourse they have in case a problem should arise is
against Tundra, not Standard.
Standard has established a pricing formula to determine the
sales price to Tundra. Tundra buys the goods from Standard at
approximately [xx] percent of the price at which Tundra intends
to resell the goods to its United States customers. Tundra
provides this information to Standard when it contemplates
placing an order with Standard. The merchandise is then invoiced
from Standard to Tundra at an amount equaling Tundra's U.S.
wholesale list price less a discount of [xx] percent. The [xx]
percent discount is supposed to cover the expense of Tundra's
operation. These expenses include the cost of hiring a sales
agent and the showroom in New York, commissions, advertising
brochures, trade insurance, and all credit costs. Counsel
explains that if Standard is unable recover its costs and earn a
profit at the price proposed by Tundra, Tundra will adjust its
anticipated re-sale price or the item will not be purchased. In
addition to the invoiced price, Tundra make lump sum payments to
Standard which allegedly cover management fees and repayment of
loans.
Counsel's most recent submission is an affidavit from George
Groumoutis, Vice President for Finance and Chief Financial
Officer for Standard, regarding the lump sum payments made to
Standard. He states that the lump payments cover the management
fees and interest and principal payments covering the repayment
of loans Standard extended to Tundra to make up deficits in the
years when Tundra was not profitable. The management fees are
for services that Standard provides to Tundra such as accounting,
credit management, customer service, and executive management
services. According to the affidavit, these fees would be
charged even if Tundra sold only other manufacturer's sweaters.
Mr. Groumoutis also says that because Tundra did not operate
profitably until 1992, Standard was required to fund Tundra's
loses. Standard's management decided that the funding of
Tundra's losses should be treated as loans with interest rates
similar to those charged by Standard's bank. The repayment of
principal and interest is disclosed in the books of both Tundra
and Standard in the General Ledger account number 2400.
In support of its claim that transaction value is
acceptable, counsel has provided two sets of costs figures. The
first set of cost figures are expenses incurred by Tundra in
selling the merchandise in the United States. The second set of
numbers shows the costs and profits earned by Standard on sales
of like merchandise in Canada and Standard's net return on its
sales of the imported merchandise to Tundra.
ISSUES:
Whether there is a bona fide sale between Standard and
Tundra?
If there is a bona fide sale between Standard and Tundra,
whether such sale between these related parties is acceptable for
purposes of transaction value?
LAW AND ANALYSIS:
As you know, merchandise imported into the United States is
appraised in accordance with section 402 of the Tariff Act of
1930, as amended by the Trade Agreements Act of 1979 (TAA: 19
U.S.C. 1401a). The preferred method of appraisement is
transaction value, which is defined as the "price actually paid
or payable for merchandise when sold for exportation for the
United States," plus certain enumerated additions. There must be
a bona fide sale of the imported merchandise for it to appraised
pursuant to transaction value.
For Customs purposes, a "sale" generally is defined as a
transfer of ownership in property from one party to another for a
consideration. JL Wood v. United States, 62 CCPA 25, 33; C.A.D.
1139 (1974). Although JL Wood was decided under the prior
appraisement statute, Customs recognizes this definition under
the TAA. Several factors may indicate whether a bona fide sale
exists between potential seller and buyer. In determining
whether property or ownership has been transferred, Customs
considers whether the alleged buyer has assumed the risk of loss
and acquired title to the imported merchandise. In addition,
Customs may examine whether the alleged buyer paid for the goods,
whether such payments are linked to specific importations of
merchandise, and whether, in general, the roles of the parties
and circumstances of the transaction indicate that the parties
are functioning as buyer and seller. See HRL 545705, January 27,
1995.
In support its claim that there is a bona fide sale, counsel
points to a number of factors which indicate that the parties do
function as seller and buyer. Counsel claims that Tundra
maintains its own warehouse and office, has its own bank
accounts, filed and paid its own income taxes, hired and paid its
own sales representatives, paid Standard from its own account,
accepted shipments of the merchandise, and delivered merchandise
to its customers. Counsel further contends that Tundra also
takes title to the merchandise and bears the risk loss for the
merchandise. In addition, it is alleged that Tundra deals in its
own name with U.S. customers, accepts payment for the
merchandise, and bears responsibility for any problem which may
arise with merchandise purchased by its customers. Assuming the
evidence supports these claims, we would agree that the parties
function as seller buyer and that a bona fide sale has occurred.
Accordingly, for the purposes of this decision, we will assume
that there is a bona fide sale for exportation between Tundra and
Standard.
However, imported merchandise is appraised under transaction
value only if the buyer and the seller are not related, or if
related, the transaction value is deemed to be acceptable. Here,
the parties are related pursuant to section 402(g)(1)(G) of the
TAA in that Tundra is a wholly-owned subsidiary of Standard.
Section 402(b)(2)(B) of the TAA sets forth two conditions
under which a transaction value between related parties will be
deemed acceptable. The first is where an examination of the
circumstances of sale indicates that the relationship between the
parties did not influence the price actually paid or payable.
The second is where the transaction value closely approximate
certain "test" values. 19 U.S.C. 1401a(b)(2)(B).
Under the first approach, if the circumstances of sale
indicate that while related, the parties buy and sell from one
another as if they were unrelated, transaction value will be
considered to be acceptable. In this respect, Customs will
examine the manner in which the buyer and seller organize their
commercial relations and the way in which the prices in question
were 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. 19 CFR
152.103(l)(1)(ii). In addition, Customs 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
CFR 152.103(l)(1)(iii).
Counsel maintains that under transaction value, the transfer
prices between Standard and Tundra should be the accepted as the
basis of appraisement for the imported merchandise. In this
regard, Counsel has presented another affidavit from George
Groumoutis. In the affidavit, Mr. Groumoutis states that the
statistical data prepared by Dun & Bradstreet shows that the
gross profit realized by Tundra through the application of the
Standard/Tundra pricing formula is similar to the normal gross
profit in the men's and boys' apparel industry, the SIC (Standard
Industrial Code) classification into which Tundra's business
activities fall. Mr. Groumoutis further states that he has
reviewed other competitor companies, including Canadian men's and
boys' apparel manufacturers and U.S. men's and boys' apparel
distributors, but he was not at liberty to disclose the
identities of those companies at this time. However, his
conclusion, based upon knowledge gained from examination of the
books and records of such other companies, is that the general
expenses and profit realized by Tundra are within the range of
what constitutes the usual general expenses and profits of the
relevant industry in the relevant marketplace.
We find that the arguments and the evidence from Standard
and counsel are unpersuasive. As indicated above, if it can be
shown that the price in question was settled in a manner
consistent with the normal pricing practice of the industry in
question or with the way the seller settles prices with unrelated
buyers this will show that the price has not been influenced by
the relationship. As explained above, the pricing formula
utilized to determine the transfer price between Standard and
Tundra is that the transfer price shall equal [xx]% of Tundra's
resale price. No evidence has been presented to establish that
the pricing formula employed by Tundra and Standard is a normal
practice among unrelated parties in the industry in question,
presumably the men's and boys' sweater industry. The information
provided on the gross profit of the men's and boys' apparel
industry also fails to show that the circumstances of sale
between Tundra and Standard indicate that the price actually paid
or payable for the imported merchandise was not influenced by the
relationship of the parties. Even if the general expenses and
profit realized by Tundra are within the range of what
constitutes the usual general expenses and profits of the
relevant industry, this would not show that the price between
Standard and Tundra was settled in a manner consistent with
normal pricing practice in the industry.
Standard has also provided certain information regarding
sales in its home market of Canada, including the total sales in
Canadian dollars for the year 1991-1994, the total costs incurred
by Standard on a yearly and "net return" on such (i.e., total
price less total costs). Standard compares its "net return" on
sales of like merchandise to Tundra. Customs has previously
found that evidence from foreign sales will not establish that
the circumstances of sale test has been met. See HRL 545274,
March 9, 1995. However, even if the information from Canadian
sales was relevant, it does not support the contention that the
relationship between the parties in this case did not influence
price of the merchandise. In reviewing the material we note that
no information was provided regarding the actual price at which
the merchandise was sold in Canada or the volume of such sales.
Only the total dollar amount was provided. Also there is no
indication of how Standard determines its price to Canadian
purchasers. Finally, no information was provided regarding the
costs incurred by Standard in its sales of sweaters to Tundra.
Based on the information provided there is no way to make any
valid comparisons between the home market sales in Canada and the
U.S. sales.
In addition, the evidence submitted by counsel is not
sufficient to show that the price of the imported merchandise was
sufficient to recover all costs plus a profit equivalent to the
firm's overall profit realized over a representative period time.
Counsel has provided information regarding costs that Tundra
incurs in selling the merchandise to its customers. However,
this cost information does not indicate whether the price charged
by Standard is sufficient to cover all its costs and earn a
profit equal to its overall profit over a representative period
of time. In other words, the relevant consideration would be
Standard's costs in producing the imported sweaters not Tundra's
costs in reselling the sweaters in the United States. Since no
evidence has been
submitted on how much it costs for Standard to produce the
imported sweaters, we cannot ascertain whether it has been able
to recover all its costs plus earn a profit equal its overall
profit over a representative period of time through its pricing
practices with Tundra.
It appears that counsel may have provided data and
information regarding Tundra's costs in an effort to show that
the transfer price between Standard and Tundra closely
approximates values that would be determined by appraising the
merchandise under deductive value of the same or similar
merchandise. The information largely concerns the costs and
profits involved with Tundra reselling the imported merchandise
in the United States. However, the term "test values" refers to
values previously determined pursuant to actual appraisements of
imported merchandise. Accordingly, it continues to be Customs'
position that in determining whether a test value closely
approximates an instant transaction value, the test value must
reflect a previously accepted Customs value. Thus for example a
computed value calculation can only serve as a test value it if
represents an actual appraisement of imported merchandise
determined pursuant to section 402(e) of the TAA. See HRL
544686, August 31, 1994. In this case, no previously accepted
Customs values of the identical or similar merchandise on which
to determine a test value exist. Accordingly, information
related to deductive value, such as Tundra's costs and profits in
reselling the merchandise will not establish the acceptability of
using transaction value based on the transfer price between
Standard and Tundra.
Lastly, the manner in which the lump sum payments are
handled further illustrates that the relationship between
Standard and Tundra influences their business conduct with each
other. These lump sum payments are supposed to be paid for
management services Standard provides to Tundra and for loan
repayments made to Tundra when it was not profitable. However,
no written agreement regarding the management services and fees
and no receipts or bills documenting the services and fees have
been provided. Similarly, no loan documents have been submitted.
We also have no evidence to show that the parties attempted to
negotiate on the management fees and services or on the loan
repayment terms. Rather, Mr. Groumoutis says in his affidavit
that Standard's management made the determination what interest
rate to charge for the loan repayments based on the interest rate
that Standard's bank charged, but there is no indication that
Tundra had any real input in this decision. The informal way the
management services are provided and paid and the loans are
repaid further demonstrates that Standard and Tundra do not act
in a manner consistent with arms length transactions.
Based on the above considerations, we find that the evidence
does not demonstrate that the parties buy and sell from one
another as if they were unrelated nor that the transaction value
closely approximates a previously accepted Customs value.
Accordingly, the merchandise cannot be appraised based on
transaction value.
When imported merchandise cannot be appraised on the basis
of transaction value, it is appraised in accordance with the
remaining methods of valuation, applied in sequential order.
19 U.S.C. 1401a(a)(1). The alternative bases of appraisement, in
order of precedence, are: the
transaction value of identical or similar merchandise (19 U.S.C.
1401a(c); deductive value (19 U.S.C. 1401a(d)); computed value
(19 U.S.C. 140la(e)); and the "fall back" method (19 U.S.C.
1401a(f)).
Based on the description of the unique qualities of the
imported merchandise presented by counsel, we assume that there
are no previously accepted and adjusted transaction values of
identical or similar merchandise on which to base appraisement of
the imported sweaters. However, counsel has furnished data
regarding Tundra's costs and profits in reselling the merchandise
in the United States. It may possible to use this information to
appraise the imported merchandise under deductive value (19
U.S.C. 1401a(d)). If the technical requirements for appraising
under deductive value as specified in 19 U.S.C. 1401a(d) cannot
be met, and there is no information regarding computed value,
then an adjusted form of deductive value under 19 U.S.C. 1401a(f)
should be used to appraise the merchandise. Therefore, an
attempt should be made to appraise the imported merchandise under
deductive value. If in subsequent importations, the transfer
price between Standard and Tundra closely approximates the
previously accepted Customs value, the transaction value will be
deemed acceptable and the merchandise can be appraised under
transaction value.
HOLDING:
Assuming the evidence supports the claims raised on the
issue of bona fide sale, we find that there is a bona fide sale
between Standard and its subsidiary, Tundra. However, the
acceptability of using transaction value based on the related
party sale between has not been demonstrated. The evidence
presented is not sufficient to establish that the relationship
between Standard and Tundra did not influence the price of the
imported merchandise. In addition, no previously accepted
Customs values for identical or similar merchandise is available
to serve as a test value. Accordingly, an alternative basis of
appraisement must be used. It appears that there is enough
information to appraise the merchandise using deductive value
under 19 U.S.C. 1401a(d).
Sincerely,
Acting Director
International Trade Compliance Division