VAL RR:IT:VA 546998 LPF
Port Director
U.S. Customs Service
6 World Trade Center
New York, NY 10048
Attn: Mr. Nathaniel Lewis
RE: Application for Further Review of Protest No. 1001-97-101473; Bona Fide Sale For Export; Related Party Transaction; Nissho Iwai
Dear Director:
This is a decision on an application for further review (AFR) of a protest filed February 21, 1997, against your decision concerning the valuation of watches and watch components. On August 31, 1999, a meeting was held with counsel and the importer, Seiko Corporation of America (SCA). Since that time, counsel has provided us with further information concerning this matter.
FACTS:
Roles of the Parties
Seiko Logistics Hong Kong (SLHK), previously Hattori Overseas Limited HR (HOHK), is responsible for the manufacturing function of the watches and related accessories, by subcontracting the actual production based on purchase orders from, its parent, Seiko Corporation of Japan (SCJ). Watch movements and, sometimes, watch cases, are produced by Seiko Epson (SE) and Seiko Instruments (SI) in Japan, and assembled into complete watch heads at SE and SIs Hong Kong entities.
Once components produced by SE and SI are completed in Hong Kong, SLHK arranges for transfer to unrelated band manufacturers/watch assemblers in Hong Kong, mainly Bambi HR Ltd. (Bambi), Bear Zannon Co HR Ltd. (Bear), and Glory Watch Band HR Ltd. (Glory). These entities manufacture finished watches, which subsequently are returned to SLHK.
Counsel provides that SLHR maintains responsibility for coordinating all aspects of the manufacturing functions (e.g., sourcing, shipment of watcheads to band/assembly facilities, coordinating production schedules, quality control, controlling manufacturing costs, etc.). Additionally, counsel indicates that SLHK possesses title to the finished products, coordinating the shipment of the finished goods to U.S.
As the parent company, SCJ is responsible for all product and market strategy efforts. All trademarks and goodwill associated with the product lines also are SCI’s property. SCJ bears the worldwide after-market warranty and servicing obligations. According to counsel, SCJ purchases finished watches from SLHK and is responsible for negotiating with sales subsidiaries and distributors regarding product lines to be offered in particular markets. SCJ also is responsible for coordinating purchase orders received from distributors.
SCJ provides various business functions, with overall corporate direction, and is responsible for corporate services such as: identifying financial needs of business, developing budgets and forecasts, maintaining books and records, preparing and disseminating consolidated financial reports, and providing legal services.
Seiko Corporation of America (SCA) is a wholly owned U.S. subsidiary that markets, distributes and sells watches, clocks and related replacement products. SCA maintains a sales force to deal directly with unrelated U.S. wholesalers and retailers. Once SCA accepts orders from unrelated vendors, SCA must consolidate them and issue purchase orders to SCJ. SCA has served as the importer of record for the transactions at issue.
Documentary Support
Counsel and SCA have provided the following documentation to Customs concerning these tiers of the transaction:
Watch Manufacturers/Assemblers to SLHK or HOHK
1. Invoices, dated May, 1997, from Bambi to SLHR, Order No. Pulsar-9706, for watch bands. Corresponds to payment remittance, dated July 14, 1997 and statement of accounts, dated May 30, 1997, between Bambi and SLHK for the watchbands. (Correspond to purchase orders from SCJ to Bambi, among others, discussed in the next section.)
2. Invoices, dated September, 1996, from SE to HOHK, for local delivery and providing for the sale of watch heads to HOHK, with Bear as consignee. Corresponds to bank transfer, dated December 31, 1996, and statement of accounts, dated October 8, 1996, between SE to HOHK for the watch heads.
SLHK or HOHK to SCJ
1. Invoice from SLHR to SCJ, dated January 27, 1997, with terms of sale FOB Hong Kong, providing for the sale of watches with bands to SCJ, with SCA as consignee.
2. Invoice from HOHR to SCJ, dated September 16, 1996, with terms of sale FOB Hong Kong as well as CIF New York, providing for the sale of watches with bands to SCJ, with SCA as consignee.
3. Invoices from HOHK to SCJ, dated May, 1996, with either terms of sale FOB Hong Kong or both FOB Hong Kong and CIF New York, providing for the sale of watches to SCJ, with SCA as consignee. Corresponds to monthly statements from HOHK to SCJ. dated June 1, 1996, for watches and watchbands.
4. Invoices from HOHK to SCJ, dated April and May, 1996, with terms of sale FOB Hong Kong, providing for the sale of sample watches to SCJ, with Fracht Ltd. of Switzerland and, in some cases, SCI or SE as consignee.
5. Three bank remittance documents, dated September 2, 1997, between HOHK and SCJ as proof of payment for June, 1997 transactions. The documents do not correspond to any individual statements.
6. Purchase orders from SCJ on behalf of SLHK to Bambi, Bear, and Yat Chung, throughout 1997, for watchbands. Correspond to Bambi - SLHK May, 1997 invoices and payment remittance/statement of accounts. (Counsel provides that although a purchase order document covering the order from SCJ to the contract watch manufacturer is not available, these purchase orders serve as evidence of SCJ’s orders placed in connection with the production of the merchandise covered under the subject entry.)
7. Invoice from HOHK to SCJ, dated October 30, 1995, with terms of sale FOB Hong Kong as well as CIF New York, providing for the sale of watches with bands to SCJ, with SCA as consignee.
SCJ to SCA
1. Invoice from SCJ to SCA, dated January 27, 1997, with terms of sale FOB Hong Kong, providing for the sale of watches with bands to SCA as the consignee. Corresponds to January 27, 1997 SLHK - SCJ invoice, with markup price.
2. Invoice from HOHK on behalf of SCJ to SCA, dated September 16, 1996, with terms of sale FOB Hong Kong as well as CIF New York, providing for the sale of watches with bands to SCA as the consignee. This invoice corresponds to the following documents:
- SCA purchase orders, dated April and May, 1996;
- Confirmation Letters or Proforma Invoices, from SCJ to SCA, dated July, 1996, with terms of sale FOB Hong Kong for watches;
- July and August, 1996 SCJ watch head purchase order report, accompanied by invoice reference list;
- September, 1996 SE - HOHK invoices, providing for the sale of watch heads to HOHK, with Bear as consignee. Accompanied by bank transfer and statement of accounts;
- September 16, 1996 HOHK - SCJ invoice, with markup FOB and CW prices, including signature of same manager as September 16, 1996, HOHK/SCJ - SCA invoice. Accompanied by October 1, 1996 payment statement and October 3, 1996 consolidated statement between HOHK and SCJ (total consolidated statement supported by December 30, 1996 bank payment notices); and
- proof of payment via October 7, 1996 payment request and October 15, 1996 bank debit notes between SCJ and SCA.
3. Invoice from HOIIK on behalf of SCJ to SCA, dated October 30, 1995, with terms of sale FOB Hong Kong as well as CIF New York, providing for sale of watches with bands to SCA as the consignee. Corresponds to October 30, 1995 HOHK-SCJ invoice, with markup FOB and CIF prices, including signature of same manager.
Counsel’s Arguments
Counsel provides that the totality of the facts and circumstances reveal that bonafide sales occurred between SLHK and SCJ. Specifically, counsel states that SCJ provides SLHK with instructions for design and manufacturing requirements, quality and materials controls, production schedules, labeling and size requirements, and the direct shipment to SCA. Counsel adds that SCJ is free to resell at any price and does not consult with or require permission from SLHK to sell to SCA. SLHK has no interest or control over SCJ’s choice of distributors or customers, SCJ solely being responsible for negotiating with SCA as to the product line to be offered in a particular market.
SCJ places its own purchase orders for merchandise with SLKK and records it as inventory. SCJ can give alternative routing instructions to SLHK and have goods temporarily inventoried overseas in Japan, prior to exporting them to the U.S. Moreover, SCJ bears warranty claim and risks beyond insurance coverage. SCA does not negotiate prices with SLHK, nor control or influence negotiations between SCJ and SLHK. No privity of contract or payment exists between SCA and SLHK.
Counsel states that title transfers from SLHK to SCJ, although the shipping terms may not reflect the parties’ intent and conduct to this effect. Upon final production and completion of pre delivery preparation at SLHK’s facilities (e.g., packing, preparing documentation etc.), SLHK’s performance is completed as to the sale to SCI. According to counsel, the FOB shipping term only is understood to be a price term.
Furthermore, SCA does not guarantee payment to SLHK if SCJ defaults its obligation to pay for the merchandise. Counsel also notes that SLHK’s agreement precludes the ability to contract for other distributors, therefore, once manufactured, the goods are sold to, and expected to be paid for by, SCJ. Watches are custom-made to SCJ’s specifications, often incorporating intellectual property owned by SCJ, thus limiting sales only to them.
The fact that SLHK performs certain tasks (e.g., both sets of commercial invoices originate from SLHK and contain the same manager’s signature) on behalf of SCJ, does not vilify the bona fides of the sales, according to counsel. SCJ does prepare its own pro-forma invoice, however, SLHK performs such tasks as a convenience for SCJ, because the goods are shipped directly to the U.S. from SLHK facilities. Counsel provides that a transfer of property for consideration, nevertheless, occurs.
Furthermore, counsel provides that because SLHK’s prices are settled in a manner consistent with the normal pricing practices of the industry in question, the circumstances of sale demonstrate acceptability of the related party price between SLHK and SCJ. Counsel provides a range of uncontrolled (arm’s length) adjusted full cost markups observed in the industry as the indicator of normal pricing practices. Counsel asserts this most reliably and accurately captures all direct and indirect costs, plus profit associated with manufacturing watches and timepieces. In essence, the full cost markup is represented by the ratio of operating income to the sum of the operating expense and cost of goods sold. In other words, this figure reflects a percentage factor that would be applied to the total costs incurred in producing the product to arrive at the profit element to be earned. Counsel provides, for example, that a five (5) percent markup provides $5.00 of operating profit for every $100 costs incurred.
Counsel provides a range of adjusted full cost markups in a Comparable Industry Set (CIS) of six (6) companies. The study undertaken by counsel found an initial sample of 23 possible comparable companies using the SIC category for watches, clocks, clockwork, and parts. Those companies engaging in a significant amount of unrelated activities, manufacture of other goods, and without adequate financial data available were dropped, yielding a Worldwide Set of 13 companies. The CIS, which counsel ultimately utilized, was formulated after taking into account different geographic factors (currency, local material/labor costs, distribution, regional business cycles, etc.). In effect, this yielded a set comprised of Eastern Asia companies. Next, the full cost markup was chosen, as the objective profit level indicator (PLI) to be used as an accurate measure of comparability (e.g., ratio of operating income to sum of operating expense and cost of goods sold). Once the figures were normalized (or adjusted), by accounting for disparities in the operation asset levels of the companies (e.g., cash, cash equivalents, accounts receivable, and inventories) the CIS figures were derived based on the interquartile range (middle 50 percent) of data and observations.
While enabling Customs to compare the full cost markup between these company sets, the data also provides the following specific figures for comparison between SLHK and SCJ. The unadjusted comparable industry set provides that SLHK has a full cost markup of 2.1%, while SCJ has one of 1.2%. SCJ’s adjusted figure in the normalized set is 0.0%. The median markup figures for the company sets were 3.3% (unadjusted) and 2.3% (adjusted).
Finally, counsel asserts that the goods are clearly destined to the U.S., based on the manner in which the parties conduct their transactions. Specifically, counsel provides that SCA develops annual purchasing forecasts of style specifications and quantity requirements. Based on various factors, SCA transmits electronic purchase orders to SCJ each month. Upon receipt of monthly electronic purchase orders from SCA, SCJ remits order confirmations based upon factory production capability.
Based on production schedules from SCJ, SLHK develops corresponding schedules for subcontractors and arranges for delivery of the necessary raw materials and components to the sub-contractor facilities. SLHK also relays to the subcontractors, special instructions regarding the watch products to be manufactured (e.g., including all labeling, packaging, and instruction manuals done in English for the U.S. market).
Counsel explains that upon the assemblers’ completion of the production, the products are shipped to SLHK for packing and preparation of the requisite documentation. SLHK invoices SCJ for inventory shipped directly to SCA. SCJ reviews shipping invoices issued by SLHR, matches them to open SCA purchase orders and invoices SCA accordingly.
IS SUE:
Whether the transactions between SLHK and SCJ consist of bonafide sales conducted at arm’s length, wherein the merchandise was clearly destined to the U.S., enabling transaction value to be based on the price actually paid or payable between these parties.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the United States is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 1401a. Section 402(b)(l) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for the enumerated statutory additions.
However, imported merchandise is appraised under transaction value only if the buyer and seller are not related, or if related, the transaction value is deemed to be acceptable. In this case, SLHK and SCJ are related pursuant to section 402(g)(1)(G) of the TAA. Section 402(b)(2)(B) of the TAA provides that a transaction value between related parties will be deemed acceptable if an examination of the circumstances of sale indicates that the relationship between the parties did not influence the price actually paid or payable or where the transaction value closely approximated certain “test” values. In essence, such evidence satisfies Customs that the transacting parties conducted their sales at “arm’s length.” Accordingly, SLHK and SCJ must conduct bonafide sales at arm’s length, wherein the merchandise is destined to the U.S., in order for appraisement of the imported merchandise to be based on the transaction value represented by that price.
First, in determining whether a bonafide sale has taken place between a potential buyer and seller of imported merchandise, no single factor is determinative. Rather, the relationship is to be ascertained by an overall view of the entire situation, with the result in each case governed by the facts and circumstances of the case itself Dorf International, Inc. V. United States, 61 Cust. Ct. 604, A.R.D. 245 (1968). Customs recognizes the term “sale,” as articulated in the case of J.L. Wood v. U.S., 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974), to be defined as: the transfer of property from one party to another for consideration.
However, several factors may indicate whether a bonafide sale exists between a potential buyer and seller. In determining whether property or ownership has been transferred, Customs considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, Customs may examine whether the potential buyer paid for the goods, and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller.
In determining whether the relationship of the parties to the transaction in question is that of a buyer-seller, where the parties maintain an independence in their dealings, as opposed to that of a principal-agent, where the former controls the actions of the latter, Customs may consider whether the potential buyer: (a) provided (or could provide) instructions to the seller; (b) was free to sell the items at any price he or she desired; (c) selected (or could select) his or her own customers without consulting the seller; and (d) could order the imported merchandise and have it delivered for his or her own inventory.
The information and documentation counsel has provided does indicate that the transaction reflects that of a buyer-seller as opposed to that of a principal-agent. Specifically, counsel’s submissions include invoices, purchase orders, and proof of payment between the parties, indicating that payment was made from SCA to SCJ and then from SCJ to SLHK for the merchandise. Additionally, while the terms of sale on the submitted documentation may not, in and of itself, demonstrate that a transfer of title and, hence, risk of loss occurred between SLHK and SCJ, an overall analysis of the situation reveals otherwise. In this regard, we note that SLHK appears to serve as an independent buyer/seller insofar as it maintains the responsibility for fully coordinating the manufacturing functions as well as the actual shipment of the merchandise to the U.S. Only upon final production and completion of pre-delivery preparation at its facilities (e.g., packing, preparing documentation, etc.) is SLHK’s performance completed as to its sale to SCJ. Furthermore, SCJ’s role as an independent buyer/seller is supported by the fact that it negotiates its prices with SCA, determines to whom the merchandise will be sold, and may order the merchandise requesting it be held for delivery as seen fit.
However, consistent with the cases of Nissho Iwai American Corp. v. United Stales, 16 CIT 86, 786 F. Supp. 1002 (CIT 1992) rev’d 982 F.2d 505 (Fed. Cir. 1992) and Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993) in order to base transaction value on the price between SLHK and SCJ as opposed to the price paid by SCA, the importer, to SCJ, Customs must find that the sale between the former parties was one negotiated at arm’s length free from any nonmarket influences and involved goods clearly destined for export to the United States.” Such evidence also may serve to support the previous analysis concerning the bonafides of the sales between the transacting parties.
Customs presumes that an importer’s declared value is based on the price paid by that importer and that transaction value shall be based on that price. However, in situations where the importer is not the middleman, but the importer requests appraisement based on the manufacturer’s price, the importer must demonstrate that the manufacturer’s price is acceptable in accordance with Nissho Iwai.
With regard to whether the sale was negotiated at “arm’s length,” we note that the Statement of Administrative Action (SAA), adopted by Congress with the passage of the TAA, provides that if it is shown that the buyer and seller, although related, buy from and sell to each other as if they were not related, this will demonstrate that the price has not been influenced by the relationship and the transaction value will be accepted. The SAA provides, as an example, that if the price has been settled in a manner consistent with the normal pricing practices of the industry in question, this will demonstrate that the price had not been influenced by the relationship. As a further example, if it is shown that the price is adequate to ensure recovery of all costs plus 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, this will demonstrate that the price has not been influenced. Statement of Administrative Action, HR. Doc. No. 153, Pt. II, 96th Cong., 1st Sess. (1979), reprinted in Department of Treasury, Customs Valuation under the Trade Agreements Acts of 1979 at 54 (1981).
Among the figures and analyses provided to Customs concerning the full cost markup between the various companies’ figures, we find the comparison between SLHK’s 2. 1% markup and SCJ’s 1 .2% markup most relevant for consideration pursuant to the TAA. These amounts show that SLHK’s price adequately ensures its recovery of all costs plus profit equivalent to SCJ’s, or the firm’s, overall profit, over an appropriate time period, for sales of timepieces and clocks, that is, merchandise of the same class or kind. Moreover, the markup comparison between SLHK to SCJ, as well as to the other companies selling merchandise of the same class or kind, indicate that SLHK’s cost and profit figures are consistent with the market as a whole. Such consistency demonstrates that the price between SLHK to SCJ also has been settled in a manner consistent with the normal pricing practices of the industry. Accordingly, the evidence demonstrates that the price has not been influenced by the relationship.
Finally, the submitted evidence also does demonstrate that the merchandise is clearly destined for the U.S. The submitted invoices, purchase orders, proof of payment, sales confirmations, and accompanying documentation, provide a paper trail indicating that the merchandise was clearly destined for export to the U.S. In particular, the invoice from HOHK/SCJ to SCA, dated September 16, 1996, and the enumerated corresponding documents, shows the structure and flow of the entire transaction. Additional support arises from the fact that SCA transmits electronic purchase orders to SCJ on a monthly basis after developing annual purchasing forecasts, style specifications, and quantity requirements. In order to meet SCA’s requirements, SCJ and SLHK must confirm factory production capability, with the latter relaying special instructions regarding the merchandise to the subcontractors (e.g., labeling, packaging, instruction, and English manuals). Moreover, we note that the merchandise is custom-made to SCJ’s specifications, often incorporating intellectual property owned by SCJ, thus limiting sales only to them.
Accordingly, the transactions between SLHK and SCJ consisted of bonafide sales conducted at arm’s length, wherein the merchandise was clearly destined to the U.S.
HOLDING:
Based on the evidence presented, the transactions between SLHK and SCJ consisted of bonafide sales conducted at arm’s length, wherein the merchandise was clearly destined to the U.S. Accordingly, transaction value may be based on the price actually paid or payable between these parties.
The protest should be granted. In accordance with Section 3 A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs 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 Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.treas.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Thomas L Lobred
Chief Value Branch