VAL:RR:IT:VA 547382 KDW
Damon V. Pike, National Director
Customs Services
Deloitte & Touche LLP
Suite 1500, 191 Peachtree Street, N.E.
Atlanta, Georgia 30303-1924
RE: sale for export; transaction value; HQ545313; Nissho Iwai v. United States; J.L. Wood v. United States; Synergy Sport International, Ltd. v. United States; related parties
Dear Mr. Pike:
We are writing in response to your letter dated May 14, 1999, requesting a ruling on behalf of [XXXX] USA LLC, concerning the appraisement of footwear imported into the United States. In addition, we have reviewed your request for confidentiality pursuant to section 177.2(b)(7) of the Customs Regulations chapter 19, with respect to certain information submitted. Accordingly, that information has been bracketed and will be deleted from any published versions. In making our determination, we considered your original submission in addition to your four subsequent submissions dated November 7, 2000, November 16, 2000, December 11, 2000, and December 13, 2000.
FACTS:
The importer, [XXXXXXXXX] USA LLC (“[XXXX] USA”) is based in Portland, Oregon, and primarily imports through that port, although a small number of shipments are imported through the ports of New York, Charleston, Chicago, and San Francisco. While [XXXXX] USA imports a variety of merchandise, you have requested that we only address certain footwear imports from [XXXXX] Ltd. (“[XXXX] UK”).
The subject transaction involves three parties: [XXXXX] USA, [XXXXX] UK, and [XXXXX]. The imported footwear is manufactured in the United Kingdom by [XXXXXXX] The vendor for the imported merchandise is [XXXXXX] UK, a wholly owned subsidiary of [XXXXXXXX], which also owns [XXXXXXXX] [XXXXX] USA is a subsidiary of [XXXXX] UK. Previously [XXXXX] USA used the transaction value of the sale between it and [XXXX] UK as the basis for its Customs valuation.
You describe the transaction as follows. [XXXXX] USA submits purchase orders electronically to [XXXX] UK, a distributor for [XXXXXX]. [XXXXX] UK submits the purchase order to [XXXXXXX] for processing. [XXXXX] UK is responsible for marketing, operations, product distribution, sales and some product design and development with the [XXXXXXXX] network. All U.S. customer purchase orders that are submitted to [XXXXXX] UK are designated with an order number that is linked to various documents throughout the manufacturing cycle, shipment to [XXXXX] UK, and subsequent shipment to [XXXXX] USA. We note that no sample purchase orders from the U.S. importer were submitted for our review.
According to the sample Order Acknowledgement, the terms of sale between [XXXXX] UK, the middleman, and [XXXXX] USA are Ex Works Warehouse with [XXXXX] UK maintaining title until all payments are made in full. (See your Exhibit E1) You state that the shoes are stamped with a customer number assigned by [XXXXX] UK, and that the retail boxes and cartons in which the shoes are packed also contain the customer number. You state also, that the outer cartons contain the ultimate customer’s delivery address. In addition, you have submitted a sample packing list issued by [XXXXX] UK that states the same quantity for a certain style listed on the order acknowledgement and manufacturing order.
[XXXX] UK submits a manufacturing order to [XXXXXXXX] using the same number as the Order Acknowledgement. The Order Acknowledgement and the manufacturing order both contain the name of the U.S. importer with a delivery address in the United States. In addition, [XXXXX] UK provides the manufacturer with product development and design work necessary for the production of the imported merchandise. You state that you believe the cost of this work is a dutiable assist and will need to be added to the transaction value of the merchandise sold by [XXXXXXX] to [XXXXX] UK. [XXXXXXX], the parent company, pays a licensing fee based on .5 percent of the net sales price on footwear products for the right to use the “[XXXXXX]” trademark. However, in your letter dated December 21, 1999, you state that the fee is included on the books of [XXXXXXX] as a separate line item in the cost of goods sold account, and is thus already included in the price of the merchandise purchased by [XXXX] UK. Thus, you conclude that the licensing fee does not need to be added to the price actually paid or payable. For purposes of this ruling we assume that the fee is in the price. Therefore, we have not reviewed the royalty agreement in connection with this ruling request.
Once the footwear is manufactured, [XXXXXXXX] inspects the shoes for quality control and packages the footwear in the retail boxes. The retail boxes are then placed in larger shipment cartons on pallets that are shrink-wrapped for shipment. [XXXXX] invoices [XXXXXX] UK and ships the merchandise to the [XXXXXX] UK warehouse. [XXXXX] UK adds the merchandise to its inventory and pays [XXXXX] the price agreed. The invoices reference the despatch numbers that are linked to the order acknowledgement and manufacturing order. The [XXXX] UK warehouse is designated for all non-domestic shipments, of which you state that [X]% is comprised of shipments bound for the United States. Upon receipt in the warehouse, the shrink-wrap is removed and the cartons are assigned to a certain location until enough cartons are received to fill a standard container. Once the container is filled it is trucked to the seaport for exportation.
You state that the price negotiated between [XXXXX] UK and [XXXXX] is negotiated at arms-length. You submit costing sheets generated by [XXXXXXX], which itemize manufacturing costs in detail for each style of footwear produced. The costing sheets break down the costs according to the various operations performed such as clicking and closing, the production for the upper portion of the footwear including material, labor, and overhead. The costing sheets are used to determine the base price for the merchandise plus profit allocation. You claim that [XXXXXXXXX]’s markup on the imported merchandise is adequate to ensure “recovery of all costs plus a reasonable profit that is proportionate to the firm’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind.” [XXXXXXXX] sells products only to [XXXXX] UK. You state, therefore, that [XXXXXXXX]’s profit is exclusively derived from the sales to [XXXXXX] UK.
You assert that the best method under Internal Revenue Code section 482 for assessing this related party transaction is the comparable profit method (CPM). The CPM examines whether the amount charged in the related party transaction, is at arm’s length by comparing the profitability of the tested party with the profitability of comparable uncontrolled, unrelated companies. You submit an economic analysis to support your conclusion.
ISSUE:
Is the transaction between [XXXXX] UK and [XXXXXX] a bona fide sale for export to the U.S. conducted at arm’s length and therefore an acceptable basis for appraisement using transaction value?
LAW AND ANALYSIS:
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 (19 USC 1401a; TAA). The preferred method of appraisement is transaction value. Transaction value is defined as the “price actually paid or payable” for the imported merchandise when sold for exportation to the United States, plus certain enumerated additions. §402(b)(4)(A) of the TAA.
Prerequisite to the use of transaction value is a finding that a sale for exportation has occurred. The facts stated present a multi-tiered transaction with merchandise being sold from [XXXXXXXX] to [XXXXXX] UK and then from [XXXXX] UK to [XXXXX] US. All parties are related. You claim that the sale for exportation is that between [XXXXX] and [XXXXX] UK.
In Nissho Iwai American Corp. v. United States, 16 CIT 86; 786 F.Supp. 1002 (1992), reversed in part, 982 F.2d 505 (1992), and Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993), the U.S. Court of Appeals for the Federal Circuit and the Court of International Trade, addressed the methodology for determining the transaction value of merchandise imported pursuant to a three-tiered transaction. In each case, the courts held that the price paid by the middleman could serve as the basis for transaction value for the shipments in question. However, pursuant to §402(b)(2)(A)(iv), the courts also found that for the transaction to be viable in accordance with the statute, the sale must be negotiated at arm’s length, free from non-market influences, and involve goods clearly destined for the United States.
In accordance with the courts’ decisions in the cases cited above, Customs presumes that the transaction value reported on Customs’ Form (CF) 7501, by the importer, is based on the price paid by the importer. Further, where the importer requests that appraisement be based upon the price paid by the middleman to the foreign manufacturer, and the importer is not the middleman, the importer bears the burden of showing that the price is acceptable based upon the Nissho standard. The importer must present sufficient evidence that the alleged sale is a bona fide arm’s length sale involving “goods clearly destined for export to the United States.” In the present case, [XXXX] US is not the middleman. [XXXXX] UK is the middleman, and thus, [XXX] US must present sufficient evidence that the sale between [XXXXXX] and [XXXXX] UK is a bona fide arm’s length sale of “goods clearly destined for export to the United States.”
“Sale” means a transfer of ownership from one to another for consideration. J.L. Wood v. U.S., 505 F.2d 1400, 1406 (1974). Several factors may indicate whether a bona fide sale exists between a potential buyer and seller. In determining whether property or ownership has been transferred, Customs considers whether such payments are linked to specific importations of merchandise, the terms of sale, and whether the roles of the parties indicate that they are functioning as buyer and seller. See Headquarters Ruling Letter (“HRL”) 545705 dated January 27, 1995.
Based upon the information stated and documents submitted it appears that the transaction between [XXXXXX] UK and [XXXXXXXXXXX] is a bona fide sale. You state that the title and risk of loss for the merchandise passes from [XXXXXX] to [XXXXX] UK at the factory. The stated terms of sale are ex-works. You submit two invoices, works tickets, order acknowledgements, manufacturing orders, and dispatch notes in support of your assertion. In addition, you submit payment information covering the merchandise, including internal remittance advice memo, bank statements, and deposit receipts. Finally, you state that the merchandise is transferred to the inventory of [XXXXXX] UK. Thus, we conclude that the paper trail and circumstances in this case identify a sale between [XXXX] UK and [XXXXXX]
Next, we address whether the merchandise is “clearly destined for export to the United States. In this case, the merchandise is shipped into a warehouse in the UK directly from the manufacturer. Our prior rulings indicate that we hesitate to find a sale for export where the merchandise is not shipped directly to the United States. See HRL 542310, dated May 22, 1981 (drill bits manufactured in Italy and stored in France for an indefinite period, are not sold for exportation to the United States because when sold they could end up either with a U.S. or European customer). See also, HRL 542962, dated December 29, 1982 (no sale for exportation when a motorcycle was purchased in Japan for the purpose of being used for an extended period overseas before being imported.) Most recently, see HRL 547197 dated August 22, 2000, and 547349 dated May 6, 2000.
The presumption is that merchandise shipped to a foreign party and location is not sold for export to the United States. The importer must present sufficient evidence to show that the merchandise is clearly destined for the U.S. at the time of the sale to the middleman. In this case, the merchandise is sold ex-works from [XXXXXX] to [XXXX] UK and ex-works warehouse to [XXXXXXX] USA, indicating that in either instance the merchandise is not directly shipped to the United States. This factor is considered with the other evidence presented. See HRL 546069, dated August 1, 1996.
In E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), the CIT indicated that where clothing is made-to-measure for individual United States customers and ultimately sent to those customers, the reality of the transaction between the distributors and the tailors is that the goods, at the time of the transaction are for exportation to the United States. Again, in Nissho, the Court of Appeals found that the subway cars in question were ordered and manufactured specifically and only for use in the United States. The courts tend to base their determinations not on one factor or the other, but on both factors: intended direct shipment to the United States and a unique quality in the merchandise itself that limits its destination to the United States.
We note that although the merchandise in this case is fungible, you state that the shoes are always stamped with the U.S. customer identification number. You stress that the stamping of the shoe with a number assigned to a U.S. purchaser is sufficient evidence that the shoes are destined only for the U.S. market. While we disagree that this factor alone establishes the merchandise as clearly destined for exportation to the U.S., we find that coupled with the document trail, box and carton labeling, exclusive distributorship, tracking system, etc. the shoes are intended for exportation to the United States throughout the transaction.
Having established that a bona fide sale for exportation to the United States occurs between the middleman and the manufacturer, we now examine the arm’s length nature of the sale. We find the evidence is sufficient to support a finding that the transaction is at arm’s length. Section 402(b)(2)(B) of the TAA sets forth two tests under which a transaction value between related parties, as here, will be deemed acceptable. The first test is that 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 approximates certain “test” values. 19 USC §1401a(b)(2)(B).
The first approach envisions that the transaction value between related parties will be considered acceptable if the parties buy and sell from one another as if they were unrelated. Customs examines the manner in which the buyer and seller organize their commercial relations and the way they derive a price, to determine whether the relationship influenced the price. If the parties can show that the price is settled in a manner consistent with 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 may find the price is not influenced by the relationship if it is adequate to ensure recovery of all the seller’s costs plus a profit equivalent to its overall profit realized over a representative period of time in sales of merchandise of the same class or kind. 19 CFR §152.103(l)(1)(iii).
In support of your claim, you submit: an economic analysis you state is based upon the IRS standards, a financial statement for [XXXXXX] UK showing its accounting for trading, profit and loss during the period ending November 1, 1998, a profit and loss statement for [XXXXXXXXXXX], and a listing of profitability for independent U.K. contract manufacturers of footwear. You state that the use of the Comparable Profits method for determining the transfer price is the best method consistent with the IRS regulations. As we explained in a recent ruling, HRL 546979 dated August 30, 2000, Customs’ approach to related party transactions differs from that of the IRS. Specifically, the method you describe reviews profitability on an aggregate basis, where as Customs’ examines profitability on a product by product basis. Nonetheless, Customs’ accepts that the IRS methodologies may be used as evidence to substantiate the circumstances of sale test in some instances where the method is actually used by the parties, and where any adjustments required by the method are accurately reported to Customs.
In this case, you state that the profit level for [XXXXXXXXX], which is determined by the analysis using the IRS methodology, is consistent with industry norms. (See page 9 of May 14, 1999, submission) Based on the analysis presented, it appears that the price charged by [XXXXXXX] to [XXXXXX] UK would be adequate to ensure recovery of all manufacturing costs, and the profit appears to be in line with the industry practice. The data presented identifies companies considered comparable based on their manufacturing functions, and similar product out put. While [XXXXXX]’s profit is not necessarily equivalent to that of the firm’s overall profit percentage, it does appear to fall within the average net profit mark-up range for comparable transactions by similarly situated manufacturers. As such, we consider the price to be settled in a manner consistent with the normal pricing practice of the industry in question. Assuming that the data and analysis presented are technically accurate and verifiable, we consider the transactions between [XXXXX] UK and [XXXXXXXXXXXX] to be at arm’s length based on the industry norms.
As stated above, the court in Nissho observed that the rule for using a first sale between a middleman and a manufacturer applies only where there is a legitimate choice between two statutorily viable transaction values. In order for the manufacturer’s price to constitute a viable transaction value, all elements must exist: 1) bona fide sale; 2) merchandise must be clearly destined for export to the United States; and 3) the transaction must be at arm’s length. Based upon the information submitted, and assuming verifiable technical accuracy we conclude that the price between [XXXXX] UK and [XXXXXXXXXX] is a statutorily viable transaction value.
As stated above, you are aware that certain product development and design assists which [XXXXXXXXXX] provides to [XXXXXXXXXX] are dutiable as assists and should be added to the price actually paid or payable if they are not already included in that price in accordance with 19 U.S.C. §1401a(b)(1). We note that sufficient information must be presented to Customs with respect to the amounts related to those assists, or the transaction value of the imported merchandise shall be treated as one that cannot be determined. Id. We reiterate that we have assumed for the purposes of this ruling that the royalty previously mentioned is not required to be paid by the buyer, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States, or is already included in the price of the goods.
HOLDING:
Based upon the information submitted, we find that the sale between [XXXX] UK and [XXXXXXXXXXX] constitutes a bona fide sale for export to the United States conducted at arm’s length. The merchandise is clearly destined for the United States at the time of the sale between the parties, and the transaction documents demonstrate that the sale is bona fide in nature. Further, the price between the parties appears to be settled in a manner consistent with the practices of the industry in question. Thus, the price between [XXXXXX] UK and [XXXXXXXX] plus any necessary statutory additions under 19 U.S.C. §1401a(b)(1) may serve as the basis for appraisement under transaction value for the imported merchandise.
Sincerely,
Virginia L. Brown
Chief, Value Branch