RR:IT:VA 547108 KCC
Field Director, Regulatory Audit Division
U.S. Customs Service
10 Causeway Street, Suite 603
Boston, MA 02222-1059
RE: Internal Advice; Peerless; transaction value; additional payments for management salaries, data entry salaries, office salaries and supplier, computer supplies, telephone, buying salaries, warehouse costs, shipping salaries, ship truck rental, selling expense, and traveling and selling expense; related parties
Dear Field Director:
This is in response to your memorandum (AUD-1:RA MH) dated June 3, 1998, regarding the dutiability of certain payments made to Peerless Clothing Inc. (“Peerless”), Montreal, Quebec, Canada, by its U.S.-subsidiary Peerless Clothing International (“Peerless Intl.”), St. Albans, Vermont. This inquiry emanates from an audit conducted by your office of Peerless concerning the dutiability of certain expenses contained in several invoices issued by Peerless to Peerless Intl. during its fiscal years of 1995, 1996, and 1997. You state that this inquiry stems from your office’s participation in conducting audits of Canadian wool manufacturers, who have been utilizing the Trade Preference Level (“TPL”) provisions of the North American Free Trade Agreement (“NAFTA”).
Information presented by Counsel at a meeting and in additional submissions was taken into consideration in reaching this decision. We regret the delay in responding.
FACTS:
Peerless is a manufacturer of men’s suits, pants, and sport coats which are primarily sold to U.S. consumers. Peerless operates a manufacturing plant in Montreal, which produces the garments primarily from imported fabric. The garments are subsequently sold to Peerless Intl., who re-sells them to U.S. consumers. The merchandise is shipped from the Montreal factory to Peerless Intl.’s warehouse in St. Albans, Vermont. You state that Peerless Intl. is the importer of record for the importations of the subject merchandise, and the basis of appraisement used for Peerless Intl.’s importations has been transaction value.
You state that, during the audit of Peerless, you found that the company issues three types of invoices to Peerless Intl. for the merchandise. They are as follows:
Cut, Make & Trim (“CMT”) - This invoice covers the basic manufacturing costs incurred in producing the garments. It is issued to receive reimbursement for direct and indirect labor along with plant and equipment expenses.
Material Purchase Recovery (“MPR”) - Peerless purchases the bolts of fabric used to produce the garments from foreign suppliers. The fabric is then sold to Peerless Intl., who thereby becomes the owner of the fabric prior to its use in the production process. This invoice covers the sale of the fabric to Peerless Intl.
Warehousing and Expense Allocation (“WEA”) - This invoice covers warehousing and general and administrative expenses.
Upon entry of merchandise into the U.S., Peerless Intl. declares the sum contained in the CMT and the MPR invoices as the price for imported merchandise. It does not include the sum contained in the WEA invoice. The expenses included in the WEA invoice from Peerless to Peerless Intl. are as follows:
Warehousing – an expense for storage costs of the fabric used to manufacture the merchandise and post-production storage costs for the merchandise awaiting shipment to the U.S.;
Management Salaries – for the salaries of Peerless’ owners, who are based in Montreal;
Data Entry Salaries – an expense for computer and computer-related data entry work in Montreal;
Office Salaries and Supplies – for expenses to cover the salaries of Peerless? accounting and general office employees and the supplies used by those employees;
Computer Supplies - expenses for the computer and computer supplies used in Montreal;
Telephone – expenses incurred in Montreal for general business operations;
Buying Salaries – for Peerless employees purchasing the fabric bolts used in Peerless’ manufacturing operation;
Shipping Truck Rental – an expense for trucks which are used to transport the merchandise to Peerless Intl.’s warehouse in St. Albans;
Shipping Salaries – represent the employees involved in the process of: assembling the merchandise for shipment, packing the merchandise to make it ready for shipment and loading the merchandise onto the trucks;
Selling Expenses – expenses incurred for the Montreal toll-free number which is used by U.S. and Canadian customers to order merchandise; and
Traveling and Selling Expenses – expenses incurred by the Montreal-based employees which relate to travel to customers and other selling activities.
Although the parties are related, it is the position of both you and Peerless Intl. that transaction value is the acceptable method of appraisement. It appears that you determined that the price calculated using all three invoices, the CMT, the MPR, and various cost in the WEA, indicates that the relationship does not influence the price because the price is adequate to ensure the recovery of all costs plus a profit. Therefore, transaction value is an acceptable method of appraisement.
With regard to the costs included in the WEA invoice, it is your position that the expenses for shipping truck rental, selling expenses and traveling and selling expenses are not included in the price. Therefore, these expenses are not at issue in the instant case. Additionally, it is your position that the total cost for the warehouse and the shipping salaries are included in the price. You state that the shipping salaries are packing costs which by statute are added to the price actually paid or payable, if not already included in the price. You cite to Headquarters Ruling Letter (“HRL”) 543622 dated June 23, 1986, as authority for including the warehousing expense in the price actually paid or payable.
With regard to the remaining costs in the WEA invoice, you state that the management salaries, data entry salaries, office salaries and supplier, computer supplies, telephone and buying salaries are related to the imported merchandise because they are required general and administrative expenses which were incurred in the normal course of producing the garments. You believe that it is appropriate to allocate these general expense costs based on a percentage determined from the costs associated with manufacturing expenses by Peerless and the costs associated with Peerless Intl.’s selling expenses. Based on your analysis of the costs, it is your position that 92.2 percent of the management salaries, data entry salaries, office salaries and supplies, computer supplies, telephone and buying salaries are included in the price of the imported merchandise.
It is Peerless Intl.’s opinion that price for the imported goods is represented by the CMT invoice and the MPR invoice. Peerless Intl. states that the WEA invoice is not associated with the direct production expense and, therefore, are not included in the price in determining transaction value. Peerless Intl. states that the expenses listed in the WEA invoice are expenses which bear no relationship to the manufacture of the imported merchandise. Peerless Intl. could undertake these cost on its own and, had they done so, none of these expenses would exist within Peerless. In support of its position, six affidavits prepared by the officers and by the Director of Sale of Peerless Intl. were submitted for our review. Peerless Intl. states that the affidavits provide a picture of the activities of each of the management individuals as they perform their daily tasks and clearly provide support for why the management salaries, data entry salaries, office salaries and supplies, computer supplies, telephone and buying salaries expenses are properly allocated in the amounts shown by Peerless to Peerless Intl.
ISSUE:
What part of the payments for the WEA invoice made from the buyer to the supplier are considered part of the price actually paid or payable in determining transaction value of the imported clothing?
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in accordance with §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 under the TAA is transaction value under §402(b)(1), defined as "the price actually paid or payable for the merchandise when sold for exportation to the United States," plus the enumerated statutory additions, which, in part, are:
(A) the packing costs incurred by the buyer with respect to the imported merchandise;
§402(b)(4(A) of the TAA provides that the term "price actually paid or payable" means:
the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation 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.
Thus, the first inquiry is whether the payments at issue are part of the price actually paid or payable for the imported merchandise. Based on Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990), Customs presumes that all payments made by the buyer to the seller are part of the price actually paid or payable for imported merchandise. In Generra, the Court of Appeals held that the term “total payment” is all inclusive and that "as long as the quota payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods." The court also stated:
Congress did not intend for the Customs Service to engage in extensive fact finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, are for the merchandise or for something else. As we said in Moss Mfg. Co. v. United States, 896 F.2d 535, 539 (Fed. Cir.1990), the “straightforward approach [of section 1401a(b)] is no doubt intended to enhance the efficiency of Customs’ appraisal procedure; it would be frustrated were we to parse the statutory language in the manner, and require Customs to engage in the formidable fact finding task, envisioned by [appellant].
Generra, 905 F.2d at 380 (brackets in original).
However, the presumption that all payments made by the buyer to the seller are part of the price actually paid or payable may be rebutted. In Chrysler Corporation v. United States, 17 CIT 1049 (1993), the Court of International Trade (“CIT”) applied the standard in Generra and determined that certain shortfall and Special Application fees which the buyer paid to the seller were not a component of the price actually paid or payable for the imported merchandise. The Court found that the evidence established that these fees were independent and unrelated costs assessed because the buyer failed to purchase other products from the seller and not a component of the price of the imported engines. The burden of establishing that the payments are totally unrelated to the imported merchandise rests with the importer. Generra, 905 F.2d at 380.
In this case, the WEA invoice payment is made by Peerless Intl. to its related seller, Peerless. Therefore, pursuant to Generra, it is presumed that this invoice payment is part of the price actually paid or payable. This presumption can be rebutted by evidence which establishes that the payment is totally unrelated to the imported merchandise. With regard to the costs for warehousing, shipping salaries, management salaries, data entry salaries, office salaries and supplies, computer supplier, telephone, and buying salaries, we find no evidence to establish that these costs are unrelated to the imported merchandise.
As stated by Peerless Intl., the shipping salaries related to salaries for the Peerless employees in Canada who are involved in the process of packing the imported merchandise for shipment to the U.S. Specifically, the shipping salaries are for assembling the merchandise for shipment, packing the merchandise to make it ready for shipment and loading the merchandise onto the trucks. Pursuant to §402(b)(1)(A), packing costs, if not already included in the price actually paid or payable, are added to the price as a statutory addition. In this regard, §402(h)(3) of the TAA provides:
The term "packing costs" means the cost of all containers and coverings of whatever nature and of packing, whether for labor or materials, used in placing merchandise in condition, packed ready for shipment to the United States.
We agree that the salary costs associated with assembling the merchandise for shipment and packing the merchandise for shipment are added to the price actually paid or payable in determining the transaction value as a packing cost. However, Peerless Intl. states that 50 percent of the shipping salaries are associated with loading the imported merchandise onto trucks for delivery to the U.S. Peerless Intl. states that pursuant to the ex-factory terms of sale, this portion of the shipping salaries are not included in the price actually paid or payable. An ex-factory price is the cost of the goods at the seller's loading dock and usually includes export packing, but no other costs. See, International Chamber of Commerce, Incoterms 2000, at pgs. 27-31. Thus, the cost of loading the merchandise onto the trucks is not included in the price actually paid or payable.
We have determined that unless the importer provides Customs with documentation in support of allocating its costs, Customs must necessarily find the total payment is part of the price actually paid or payable. See, HRL 545320 dated February 28, 1995, regarding the allocation of the Research and Development costs over numerous prototypes. Peerless has allocated 50 percent of its shipping salaries to loading the merchandise onto trucks for shipment to the U.S. Peerless Intl. states that this allocation is based on the time spent in performing the various services in connection with loading the merchandise. We find that allocation acceptable. Therefore, 50 percent of the shipping salaries are added to the price actually paid or payable as a packing cost in determining transaction value.
With regard to warehouse costs, we addressed whether payments from the importer to an unrelated third party as well as to the seller (a foreign cut, make, and trim, or CMT, vendor) for pre production warehouse storage were part of the price actually paid or payable. In HRL 544758, dated February 21, 1992, citing Generra, we determined that in the instance when the importer paid the warehousing charges to the seller, but not to the unrelated third party, the charges were part of the price actually paid or payable for the merchandise. Additionally, in HRL 545663 dated July 14, 1995, we determined that fees paid to the warehouse proprietor, a party related to the manufacturer, for pre-production warehousing costs incurred for raw materials were part of the price actually paid or payable for the imported merchandise. As the warehousing expense, in this case, is for storage of the fabric pre-production and storage of the merchandise before shipment, this expense is related to the imported merchandise. Additionally, as stated above, it is paid by the buyer directly to the seller. Therefore, we find that the entire warehouse expense is included in the price actually paid or payable.
Although Peerless Intl. cites to HRL 544323, issued March 8, 1990, in support of its position, we find the factual scenario addressed in that decision is distinguishable from the present matter. Particularly, we note that in HRL 544323, the importer actually provided the foreign warehousing for the materials (i.e., fabric, yarn, thread, etc.) upon their arrival at the manufacturer's plant. In HRL 544323, no payments were made from the buyer/importer to the seller or a party related to the seller for such services, as is the case in the instant matter.
Next, we are left to determine whether the expenses for management salaries, data entry salaries, office salaries and supplies, computer supplies, telephone supplies and buying salaries are related to the imported merchandise. The evidence in the form of six affidavits prepared by the officers and by the Director of Sale of Peerless Intl. was submitted to indicate that Peerless Intl. could have undertaken these costs on their own and, if they had done so, none of these expenses would exist within Peerless.
Based on the affidavits submitted, it is our opinion that these expenses are related to the imported goods. This opinion is based on our understanding of the transactions between Peerless and Peerless Intl. and the operations of the Peerless Group. The Peerless Group, which includes Peerless Intl. and Peerless, is primarily located, including the corporate headquarters, in Montreal, Quebec, Canada. Peerless incurs the overwhelming majority of the expenses in conjunction with the production and sale of the clothing. Peerless operations include design of the clothing, production forecasting, purchase of raw materials, receipt into warehouse inventory, production of clothing, staging of the clothing to fill orders and packing of the clothing for shipment. Peerless employs over 2,500 employees in support of its operations in Canada. Peerless Intl. is the purchaser of the clothing and generally the clothing is delivered either to a U.S. customer or Peerless Intl. warehouse in St. Albans, Vermont. Peerless Intl. expenses are sales expenses in the U.S. These include travel and selling commissions due sales personnel employed in the New York sales office.
With regard to management salaries, if Ronald Wurtzburger’s salary is included in this amount, it is our position that it is not included in the price actually paid or payable. Mr. Wurtzburger is the director of sales for Peerless Intl. and is based out of the New York sales office. However, with regard to the other five management salaries, we find that a majority of their time and effort is associated with Peerless operations. First, all five management employees are domiciled in Canada, receive their compensation from Peerless and spend approximately 85 percent of their time in Montreal. Alvin Segal, Joel Segal and Darrell Henson indicate that their primarily roles in the Peerless Group are to conduct strategic planning. We find that their meetings with sales personnel, discussion with clients, and attendance at trade shows is part of the process to design the next quarter’s clothing lines. The management of Peerless Group is required to anticipate the future environment to design clothing to meet customer needs, purchase quality fabric, set sales forecast to obtain the required raw material and schedule production to meet the sales demand, and streamline the logistics systems to timely deliver product to customers.
Additionally, Barbara Segal indicates that her primarily responsibilities are to oversee the computer operations of the Peerless Group. Peerless Intl. states that allocation of this management salary should be based on sales volume to the U.S. However, the computer at Peerless is not just used for sales to Peerless Intl. The entire Peerless corporation utilizes the computer, including accounting, purchasing, inventory, production, designing and shipping.
Robert Roy indicates that he oversees the financial and accounting functions of the Peerless Group. It is also Peerless Intl. contention that Mr. Roy’s salary should be allocated based on sales to the U.S. However, an examination of Peerless indicates that the accounting function at Peerless includes the recording of revenues and expenses. The revenues relate to both sales by Peerless Intl. to U.S. customers, and sales from Peerless to Peerless Intl. As stated previously, the majority of expenses are incurred by Peerless. Peerless employs in excess of 2,500 employees, along with plant expenses and machinery acquisitions and related depreciation. This requires substantial budgeting and forecasting which would be a responsibility of Robert Roy, who oversees the financial and accounting functions. It is our position that the management responsibilities relate to the business as a whole and not just to sales to individual customers. As a result, the salaries and compensation should be allocated pursuant to the business expenses between Peerless and Peerless Intl.
With regard to data entry salaries (expenses for computer and computer-related data entry work in Montreal), office salaries and supplies (expenses to cover the salaries of Peerless’ accounting and general office employees and the supplies used by those employees), computer supplies (expenses for the computer and computer supplies used in Montreal) and telephone expenses, Peerless Intl. states that these expenses are related to Peerless Intl. because 96 percent of the sales are made to the U.S. However, based on our understanding the Peerless’ operation, it is our position that these expenses are also used to support the production facility. You indicated that your observation of Peerless showed that the computer is extensively used to support the production process. Additionally, there are over 2,500 employees in Canada for which payroll input and expense recording must be accomplished. Additionally, production supplies must be ordered and negotiated, and vendors contacted relating to billing which would require use of the telephone, supplies, computer and employees time. We do not agree with Peerless Intl. that 96 percent of these costs are associated with U.S. sales. It is our position that these costs should be allocated pursuant to the business expenses between Peerless and Peerless Intl.
Next, Peerless Intl. states that the buying salaries, which are for Peerless Intl. employees’ (Darrell Henson and Alvin Segal) activities in purchasing fabric bolts used in the manufacture of the clothing, should not be considered as part of the fabric value. However, the fabric material is purchased by Peerless and later resold to Peerless Intl. Additionally, as stated above, Darrell Henson and Alvin Segal are domiciled in Montreal Canada and compensated in Canadian funds. It is our position that this information indicates that Darrel Henson and Alvin Segal when purchasing fabric are acting on behalf of Peerless. The buying salaries were incurred to facilitate the production of the imported merchandise. It is our position that the buying salaries should also be allocated pursuant to the business expenses between Peerless and Peerless Intl.
The CIT in Chrysler, 17 CIT 1049, held that payments can be allocated. In Chrysler, the CIT considered whether to apportion certain tooling payments over the total number of products contemplated to be imported, or over the actual number of items manufactured, holding ultimately that the payments should be apportioned over the total number of engines to be produced. As a general matter, payments should be allocated in a reasonable manner appropriate to the circumstances of the case. See, e.g., 19 CFR §152.103(e)(1), regarding the apportionment of assists. Additionally, we determined that allocation of an additional payment for design costs is acceptable. See, HRL 544694 dated February 14, 1995, in which we found that the design costs should be apportioned between imported and domestic components.
With regard to the appropriate allocation of these general expense costs, we agree with your opinion that the allocation should be based on a percentage determined from the costs associated with manufacturing expenses by Peerless and the costs associated with Peerless Intl.’s selling expenses. We believe that this allocation is acceptable because it is commensurate with the work performed and risk taken by Peerless and Peerless Intl. In this case, the bulk of the work performed is done by Peerless which also incurs the majority of risk in the form of personnel, facilities and investment. Additionally, you state that it is also in accordance with recognized cost accounting criteria for allocation of costs of benefit, cause or ability to bear. You determined that the ratio of costs incurred by Peerless to Peerless Intl. is approximately 9.2 to 1. Accordingly, 92.2 percent of the management salaries, data entry salaries, office salaries and supplies, computer supplies, telephone and buying salaries are included in the price of the imported clothing.
However, the imported merchandise can be 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 situation, the parties are related pursuant to §402(g) of the TAA. §402(b)(2)(B) of the TAA provides that transaction value between related parties is acceptable only if an examination of the circumstances of the sale indicates that the relationship between the parties does not influence the price actually paid or payable or, if the transaction value of imported merchandise closely approximates the transaction value of identical or similar merchandise in sales to unrelated buyers in the U.S. or the deductive or computed value for identical or similar merchandise.
Under the circumstances of sales approach, if the parties buy and sell from one another as if they were unrelated, transaction value will be considered acceptable. Thus, if the price is determined in a manner consistent with normal industry pricing practice, or with the way the seller deals with unrelated buyers, the price actually paid or payable will be deemed not to have been influenced by the relationship. Furthermore, the price will not be influenced if it is shown that 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. Statement of Administrative Action, reprinted in Customs Valuation under the Trade Agreements Act of 1979, Department of the Treasury, U.S. Customs Service (October 1981) at 54; 19 CFR §152.103(j)(2)).
It is your position and that of Peerless Intl. that transaction value is the acceptable method of appraisement. You indicate that an examination of the circumstances of the sale indicates that the relationship between the parties does not influence the price actually paid or payable. You state that when the price is determined using the prices on all three invoices, i.e., the CMT, the MPR and the appropriate costs on the WEA, as outline above, the total price paid by the buyer to the related seller is adequate to ensure the recovery of all costs plus a profit. Therefore, it is your opinion that transaction value is acceptable. We see no reason to disturb this finding. Therefore, the transaction value between the related parties is the sum total of the three invoices, i.e., the CMT, the MPR and the appropriate costs on the WEA, as outline above.
HOLDING:
Based on the evidence available, the transaction value between the related parties is represented by the three invoices, i.e., the total CMT, the total MPR and certain expenses, as outlined above, in the WEA invoice.
You are to mail this decision to the internal advice applicant no later than 60 days from the date of this letter. On that date, 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.gov by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Thomas L. Lobred
Chief, Value Branch