RR:IT:VA 547825er
Michel Picard, Ph.D
Werner Kreissl, MBA
Ernst & Young
1, Place Ville Marie
Bureau 2400
Montreal, Canada H3B 3M9
RE: Request for a Ruling; Sale for Exportation; Clearly Destined; Contingency of Diversion.
Dear Sirs:
This is in response to your correspondence dated September 27, 2000, submitted on behalf of your client, [ ], in which you ask for a ruling regarding the appraisement of imported [ ]. This is your second request for a ruling on this matter. Your first request was initiated in October 1998. In response to that submission we issued an information letter (file number 547242) in which we explained that additional information was needed in order to issue a ruling. The facts set forth below incorporate the contents of your previous submission as well as the most recent submission. In accordance with your request for confidential treatment of certain information, all language appearing in brackets will be deleted from the published version of this decision.
FACTS:
[ ] operates a large chain of outlets in the U.S. that markets and sells imported [ ]. According to your submission, [ ] prepares and forwards its merchandise forecast for each season to its sister company in Canada, [ ]. [ Canada] places a single consolidated purchase order with a buying agent or, in some cases, directly to foreign suppliers, covering the requirements of both [ U.S.] and [ Canada.] Where agents are used, you state a commission fee based on a percentage of the supplier’s invoice price is paid. You provided copies of two buying agency agreements, one between [ Canada and U.S.] and [ ] in the U.S. and the other between the same [ ] parties and [ ] of Switzerland.
You provided an extensive description of the process used to determine the merchandise forecast requirements for both [ U.S.] and [ Canada.] [ ] You state that the purchasing process is performed separately by [ U.S.] and [ Canada.] Specifically, the individual markets in Canada and the U.S. and their respective stores are evaluated based on the previous season’s inventory patterns and sales performance for each [ .] Historical trends and projected sales are also factored into the equation. All planning reports and tools are created separately by [ U.S.] and [ Canada] and once the requirements of both parties are respectively identified and calculated a consolidated purchase order is prepared by [ Canada] for the foreign suppliers.
You state that in order to minimize the freight and handling charges, the shipments from the foreign suppliers which contain the merchandise intended both for the Canadian and U.S. markets are consigned to a central warehouse located in a suburb of Montreal for temporary storage and deconsolidation. [ Canada] acts as the importer of record. Because each shipment also contains [ ] which has been ordered for [ U.S.] and which will be shipped to the U.S., [ Canada] uses the Canadian Duty Deferral Program that defers the payment of duty at the time of importation. Canadian duty is imposed only when merchandise is subsequently sold in Canada; accordingly, the [ ] exported from Canada is not subject to Canadian duty.
In addition to issuing the consolidated purchase order, [ Canada] opens a letter of credit and pays for the merchandise. [ Canada] invoices [ U.S.] on a monthly basis for the merchandise it receives. [ Canada] is also reimbursed for services associated with the [ ]it ordered for [ U.S.] as part of a cost sharing agreement. A copy of the cost sharing agreement was provided with your submission.
ISSUE:
Whether the merchandise may be appraised under transaction value based on the transaction between [ Canada] and the foreign suppliers or whether, instead, the merchandise should be appraised under transaction value based on the transaction between [ U.S.] and [ Canada]?
LAW AND ANALYSIS:
Section 402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreement Act of 1979 (TAA; 19 U.S.C. 1401a) 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 enumerated additions. The “price actually paid or payable” is defined in section 402(b)(4(A) of the TAA as the “total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise…) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of the seller.”
We note that as a general matter, Customs assumes that the importer’s sales price is the basis of transaction value. As Customs explained in a General Notice entitled, “Determining Transaction Value in Multi-tiered Transactions,” T.D. 96-87, 30/31 Cust. Bull 52/1, January 2, 1997:
Customs presumes that the price paid by the importer is the basis of transaction value and the burden is on the importer to rebut this presumption. In order to rebut this presumption, in accordance with the Nissho Iwai standard, the importer must prove that at the time the middleman purchased or contracted to purchase, the goods were “clearly destined for the United States” and the manufacturer (or the seller) and middleman dealt with each other at “arm’s length.”
For purposes of this decision, we will assume that two bona fide sales exist, the first between [ Canada] and the foreign suppliers and the second between [ U.S.] and [ Canada]. We assume that the foreign suppliers are not related to [ Canada], such that the transaction between the two parties is at arm’s length. As for the other tier of the transaction, no information was submitted to evidence that the relationship between [ U.S.] and [ Canada] did not influence the price. See 19 U.S.C. 1401a(b)(2)(B).
As for the “clearly destined” requirement, you state that the goods should be appraised under transaction value, because at the time they are sold to [ Canada], they are destined for the United States market. In support of this claim, you have provided a very detailed description of the ordering process, including a description of how the market forecasts are determined for both the U.S. and Canadian markets. Once the ordering requirements are individually determined for both markets, [ Canada] places a consolidated purchase order with the foreign suppliers. The merchandise is sold to [ Canada] and is placed in a warehouse in Canada for deconsolidation before shipment to the U.S. and before withdrawal for the Canadian market.
In HRL 546069, dated August 1, 1996, notwithstanding the fact that the purchasing sequence, the product descriptions and quantities set forth in the commercial documents provided evidence that the imported cheese was destined for the U.S. at the time of the first sale, that the packaging had the name of the U.S. purchaser and that the cheese was labeled in accordance with U.S. requirements Customs determined that based on the totality of the evidence, the imported cheese was not clearly destined to the U.S. In reaching this conclusion, Customs stressed that the cheese was shipped from the factory to Holland for quality testing before being shipped to the U.S., that the terms of the contract provided that the cheese could be rejected if not of sufficient quality, and that none of the commercial documents pertaining to the first sale referenced the ultimate U.S. destination of the cheese.
In the instant matter there is nothing on the commercial documents pertaining to the sale from the manufacturer that references the U.S. destination of the commingled merchandise. Although you have provided us with a very detailed description of how the ordering processing is performed, and your submission otherwise provides some evidence that set quantities of merchandise are ordered for sale to [ U.S.] there is no evidence to refute the possibility that a contingency of diversion may exist when the merchandise is shipped to the Canadian warehouse for deconsolidation. Moreover, there is nothing unique about the purportedly U.S.-destined merchandise that would prevent it from being diverted into the Canadian market at the time of deconsolidation. (See, e.g. HRL 547349 dated May 5, 2000, where the absence of anything unique about the merchandise shipped to a warehouse for consolidation and quality control inspection contributed to a determination that the merchandise was not “clearly destined” for the U.S. market.)
Additionally, you submit that the goods are clearly destined to the United States because while warehoused in Canada, the Canadian duty deferral program is used. We disagree. In HRL 545254 (November 22, 1994), Customs ruled that a sale between a foreign company and a United States company which included an intermediate shipment through a Canadian bonded warehouse operation was found to be a sale for exportation to the United States, and the transaction value was determined to be the proper method of appraisement. Hence, the fact that goods are first shipped to Canada and placed in a bonded warehouse does not preclude the use of transaction value.
However, in the instant matter, a bonded warehouse is not used; rather, the goods are entered into a Canadian duty deferral program. Under this program imported goods intended for ultimate export from Canada can qualify for duty relief (meaning the duties are deferred until exportation) for up to four years. However, the guidelines state that “the amount of relief becomes payable once the goods no longer qualify for this program, i.e., are no longer intended for exportation.” It does not appear that any penalties result from selling the goods in Canada. Thus, in the instant case, the fact that the goods qualify for the deferral of duty program at the time they enter Canada does not mean that the goods can’t ultimately be sold in Canada. The Canadian company would only be required to pay the duties it owes at such time. In short, qualification for the Canadian deferral of duty program does not guarantee that the goods will be exported to the United States. Under the circumstances, we find that the “clearly destined” standard in Nissho Iwai has not been satisfied, and, accordingly, that the merchandise may not be appraised based on the price paid by [ Canada] to the foreign suppliers.
As the presumption that the price paid by the importer should form the basis of the price actually paid or payable has not been rebutted, the merchandise should be appraised under transaction value based on the price actually paid or payable by [ U.S.] to Canada], assuming their relationship did not influence the price. As noted earlier, because no information has been submitted regarding how the related parties transacted with each other, at the time of entry you may be asked to provide additional information in accordance with the circumstances of sale and related party tests as described under 19 U.S.C. 1401a(b)(2)(B).
As to the buying agency agreements, although a cursory review of the submitted copies supports a finding that the buying agency arrangements are bona fide, we will not rule on their legitimacy as the arrangements appear to be outside the scope of the transaction between [ Canada] and [ U.S.], contemplating remuneration to the agents by [ Canada] based on a percentage of the supplier’s invoice. Given the fact that the buyer and seller are related parties and that this decision does not address whether the parties transact as though unrelated, at the time of entry you may be asked to submit additional information regarding the buying agency arrangements. For more information regarding buying and selling commissions and specifically how buying commissions should be shown on commercial documents and what documentary evidence is needed to prove the existence of a bona fide buying agency, please refer to the Informed Compliance Publication entitled “Buying and Selling Commissions”, published in 34 Customs Bulletin No. 25, dated June 21, 2000.
Last, regarding the cost sharing agreement between the [ ] parties, paragraph 3 provides:
All costs and expenses relating to the sourcing, purchasing and distribution of the Products, including without limitation, purchase price, taxes, duties, shipping, handling, communications, overhead, administration, financing, etc. (collectively the “Cost”), shall be allocated among the Companies on a fair and equitable basis. Subject to the foregoing, except in the event of an express agreement among the Companies to the contrary, the Cost shall be allocated among the Companies in the proportion that the purchase price for the Products allocated to each particular Company bears to the aggregate purchase price for all Products purchased on behalf of the Purchasing Group during the period in questions.
As noted above, the “price actually paid or payable” is defined as the “total payment (whether direct or indirect, and exclusive of any costs, charges or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise…” made, or to be made, for the imported merchandise by the buyer to , or for the benefit of, the seller.”
Two recent court cases have addressed the meaning of the term “price actually paid or payable.” In Generra Sportswear Co. v. United States, 8 CAFC 132, 905 F. 2d 377 (1990), the court considered whether quota charges paid to the seller on behalf of the buyer were part of the price actually paid or payable for the imported goods. The appellate court 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 explained that it did not intend that Customs 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, were for the merchandise or something else.
In Chrysler Corporation v. United States, Slip Op. 93-186 (Ct. Int’l Trade, decided September 22, 1993), the court of International Trade applied the Generra standard and determined that although tooling expenses incurred for the production of the merchandise were part of the price actually paid or payable for the imported merchandise, certain shortfall and special application fees which the buyer paid to the seller were not a component of the price actually paid or payable. With regard to the latter fees, the court found that the evidence established that the 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.
Accordingly, it has been our position that based on Generra, there is a presumption that all payments made by a buyer to a seller are part of the price actually paid or payable for the imported merchandise. However, this presumption may be rebutted by evidence which clearly establishes that the payments, like those in Chrysler, are completely unrelated to the imported merchandise.
Accordingly, the presumption in this matter is that all monies remitted by [ U.S.] to [ Canada] pursuant to the cost sharing agreement, with the exception of amounts specifically excluded under 19 U.S.C. 1401a and 19 CFR Part 152, shall constitute part of the transaction value of the imported merchandise. This presumption may be rebutted by evidence which clearly establishes that the payments, like those in Chrysler, are completely unrelated to the imported merchandise.
HOLDING:
Based on the information submitted, the imported merchandise should be appraised under transaction value based on the transaction between [ Canada] and [ U.S.] provided the relationship between the parties did not influence the price.
Sincerely,
Virginia L. Brown
Chief, Value Branch