VAL-2 OT:RR:CTF:VS H026063 RSD
Mr. Fred R. Lowenberg
Assistant Field Director
Regulatory Audit Division
U.S. Custom and Border Protection
72 Exchanges Street, Suite 400
Buffalo, New York 14210
RE: Internal Advice H006576 on Transaction Value for Related Parties
Dear Field Director:
This is in response to a letter submitted by Cowan, Leibowitz & Latman, P.C., dated April 10, 2008, on behalf of its U.S. client, Ganz US, the Importer, requesting reconsideration of Headquarters Ruling (HQ) H006576, dated December 19, 2007. The request for reconsideration challenges the decision that the imported merchandise should be appraised using the transaction value based on the price actually paid or payable by the U.S. Customers. Counsel claims that some of the facts presented in HQ H006576 were inaccurate. A meeting was held with counsel and an official from Ganz’s Canadian offices on March 23, 2010. Subsequently, counsel made a supplemental submission dated April 23, 2010.
FACTS:
Although counsel contends that certain facts regarding the transactions described in HQ H006576 were inaccurate, a number of items presented in the internal advice decision remain undisputed. It is uncontested that the Importer, Ganz US, is a U.S. company that purportedly purchases merchandise from its related foreign seller for sale to customers located in the United States. Ganz Canada, the seller, is a Canadian company with warehouse, distribution, manufacturing, and office facilities in Canada. The importer is the sole distributor of the seller’s products in the United States. The Seller and the Importer are related by common shareholders and officers.
On November 16, 2006, your office, the Office of Regulatory Audit, issued an audit report concerning the Importer’s import transactions. The audit report concluded that there were inadequate internal corporate controls over the reporting of the complete transaction value for imported merchandise.
It is also not disputed that the Importer outsources certain services from the Seller’s personnel in Canada. These services are provided on behalf of the Importer and relate to: customer service, management information systems, new accounts, order processing sales, sales liaison, trade show coordination, mail service reception and communication payroll, accounts collection, and shipping. The Seller also maintains and supports the telecommunications infrastructure (e.g. computer network, voice mail, e-mail, hardware and software applications) used in connection with the importer’s selling and marketing operations. The Importer pays a fee for the services rendered by Seller’s personnel.
According to information provided, the ordering process is generally initiated by the Importer’s sales representatives who solicit and take orders from U.S. customers (namely gift stores). Sales representatives typically enter the orders in an electronic hand-held device which subsequently transmits them electronically to the Seller’s customer service personnel. In contrast to what was indicated in our internal advice decision, counsel contends that the U.S. customer’s orders are not processed by the Sellers’ customer service personnel. Instead counsel describes a process in which customer orders are transmitted by faxed or couriered by Ganz US sale employees and are received and processed by personnel employed by Ganz Canada to perform services on behalf of Ganz US. The cost of processing the Ganz US orders is reimbursed by Ganz US to Ganz Canada.
We noted in our internal advice decision that the seller maintains a large inventory of finished merchandise at its warehouse and is responsible for processing and shipping orders placed by U.S. customers. Counsel has attempted to clarify how orders are processed by claiming that Ganz Canada is not responsible for processing and shipping orders placed by Ganz US. According to counsel, the seller’s order department prepares an entry package that accompanies the shipment for Customs’ purposes. After picking up the shipment at Ganz Canada’s warehouse, it is the responsibility of Ganz US to clear the shipment through U.S. Customs and Border Protection (CBP). Counsel concedes that Ganz Canada’s service personnel prepare the customer orders on behalf of Ganz US and the customer invoices do not accompany the shipment. Instead, the invoices are mailed to customers via the U.S. postal service in Buffalo, New York. Ganz US is responsible for shipping the products to their customers, usually by using the United Parcel Service (UPS). It has an agreement with UPS in which it pays UPS directly for the shipping services. Under the agreement, Ganz US will submit claims for damaged inventory to UPS, if merchandise is damaged while in possession of UPS prior to title transfer to Ganz’s customers.
Relying on a Transfer Pricing Review for the Year Ending December 31, 2003, prepared by the consulting firm of Price Waterhouse Coopers, we indicated in our internal advice decision that the importer takes title at the sellers loading dock and title then immediately passes to the U.S. customer. However, according to counsel, the paragraph in question was amended in 2005, in a subsequent Transfer Pricing Report also prepared by Price Waterhouse Coopers. The amended Transfer Pricing Report indicates that Ganz US takes title to the product when the shipment is picked up in Toronto by Ganz US’s contracted carrier. According to this amended report, Ganz US retains title to the product until it is delivered to/or picked up by their customer. Payment for service provided by Ganz US’s contract carrier is paid directly by Ganz US. Counsel further states that although Ganz US utilizes just in time shipping best practices, Ganz US owns and has title and risk of loss for the inventory from the time it is picked up at Ganz Canada’s Toronto warehouse until it is delivered to Ganz US’ customers.
Counsel states that Ganz US does not send payment directly to Ganz Canada’s Canadian Bank Account. Payments of the invoices for goods purchased from Ganz Canada by Ganz US are made by way of check, drawn on a Ganz US bank account. Upon receipt by Ganz Canada, the check is entered onto a deposit slip and deposited to the Ganz Canada bank account. US customers make their payments to their supplier of the products, Ganz US. Ganz US deposits the U.S. customers check directly to its bank account. Ganz Canada and Ganz US maintain separate and distinct bank accounts.
ISSUE:
Should the imported merchandise be appraised based on the price paid or payable by the U.S. Customers or the importer and the related seller?
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 U.S.C. §1401a; TAA). The preferred method of appraisement of imported merchandise for customs purposes is transaction value. Transaction value is the price actually paid or payable for the merchandise when sold for export to the United States, plus certain enumerated additions. 19 U.S.C. §1401a(b)(1). 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, insurance, 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. 19 U.S.C §1401a(b)(4)(A).
In order for transaction value to be used as a method of appraisement, it must first be established that there is a “sale” between the parties. Without a sale for exportation to the United States, transaction value must be eliminated as a means of appraisement. In VWP of America, Inc. v. United States,175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit found that the term "sold" for purposes of 19 U.S.C. 1401a(b)(1) means a transfer of title from one party to another for consideration, (citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). No single factor is decisive in determining whether a bona fide sale has occurred. See HQ 548239, dated June 5, 2003. CBP will consider such factors as to whether the purported buyer assumed the risk of loss for, and acquired title to, the imported merchandise. Evidence to establish that consideration has passed includes payment by check, bank transfer, or payment by any other commercially acceptable means. Payment must be made for the imported merchandise at issue; a general transfer of money from one corporate entity to another, which cannot be linked to a specific import transaction, does not demonstrate passage of consideration. See also HQ 545474, dated August 25, 1995; and HQ 545709, dated May 12, 1995.
In HQ H006576, after reviewing the information presented by your office and the importer, we determined that the transaction between the Seller and Importer did not constitute a bona fide sale. Therefore, we ruled that the transaction between the Importer and the Seller could not form the basis of appraisement of the imported merchandise. In our decision, it was our understanding that there was an apparent simultaneous transfer of title from the Seller to the Importer and then to the U.S. customer which suggested that there was only one sale; “namely”, between the Seller and the ultimate U.S. customer. Counsel maintains that this understanding of the transactions is incorrect as Ganz US takes title to the product when the shipment is picked up in Toronto by Ganz US’ contracted carrier. It is claimed that Ganz US retains title to the product until it is delivered to or picked up by the U.S. customer. However, the only evidence supporting Counsel’s contention concerning when title and risk of loss for the imported merchandise is transferred was contained in a transfer pricing report prepared by the consultant Price Waterhouse Coopers. According to a memorandum attached to the Price Waterhouse Coopers’ transfer pricing report, the information regarding transfer of title was amended in April 2008. A previous version of the report indicated “Title passes to both the Canadian and
U.S. customers at the loading dock of GC warehouse.” There is no indication as to why the transfer price report was amended in 2008. Your office points out that in conducting the audit, you were shown the prior version of the Transfer Pricing Report which did not contain the changes regarding the passage of title
and that most of the entries reviewed in the audit report occurred before April 2008. We note that it appears the change in report was based solely on discussions with Ganz’s management without any other supporting documentation. In any case, we believe that the actual transaction documents between the parties would control the transfer of title of the merchandise.
As pointed out in HQ H006576, the transaction documents such as invoices and purchase orders do not indicate the terms of sale between the importer and the foreign Seller. The importer did not present sales agreements or contracts between the parties which set forth the terms of sale or detail the passage of title and risk of loss for the imported merchandise. Subsequent information received from counsel also does not show the terms of sale. We also note that the carrier agreement with UPS entered into 2003 indicated Ganz Inc. as the party shipping merchandise. Counsel has presented subsequent emails from April 2, 2007, to show that the name on the Ganz accounts was changed to Ganz US. However, we give these documents little weight because we have no indication about who the parties were on the email and what their authority was to make any changes. Additionally, the nature of the email messages is difficult to understand because there is no explanation as to what the email messages were referring to and what the significance of the name change was. Therefore, it is our view that Ganz US has not sufficiently demonstrated that it obtained title or bore the risk of loss for any discernable period of time.
Next, counsel contends that we erred in HQ H006567, when we indicated that the seller and buyer share certain financial books. Counsel strongly asserts Ganz US and Ganz Canada maintain separate books such as payroll ledgers and that all other ledgers are company specific. In support of this position, counsel presented trial balances for Ganz Inc. and Ganz US for the years 2004 through 2008. Counsel further indicates that Ganz Inc. was formed in 1992, while Ganz USA LLC was formed in April 2007. We first note that the trial balances for Ganz US were presented only for the years 2007 and 2008. The trial balances for the years prior to 2007 were from Ganz Inc. not Ganz US., and thus there is no indication that separate books were kept in those years. Based on the information, it is not clear if Ganz Inc. and Ganz US are identical companies with a different name. According to the Office of Regulatory Audit, when they did review company records, they observed that only one set of books for both companies were kept. We note that no evidence was presented to authenticate the submitted trial balances. Even if we assume that the trial balances represent accurate statements of the accounts for Ganz US for the years 2007 and 2008, it is still significant that Ganz US maintained none of its own financial records. During the time of the audit, all of the Ganz US’ financial records were kept in Toronto, Canada at Ganz Canada’s facilities under the auspices Ganz Canada’s employees. Ganz Canada’s employees maintained the general ledger. The accounts payable records were also maintained by Ganz Canada. As such, there appears to be very little separation between Ganz Inc. and Ganz US in handling the financial records.
Counsel further indicates that orders are processed by employees of Ganz Canada after they are transmitted by Ganz US sales employees. However, according to the Regulatory Audit Division, Ganz Canada has a room in its Toronto headquarters where their employees process the orders from the sale representatives in the U.S. and Canada. Ganz has no employees located in the U.S. that perform the processing of orders for the U.S. company. The trucks carrying merchandise are loaded by Ganz Canada’s employees. Counsel points out that invoices are issued for Ganz US’ customers. These invoices show an address in Cheektowaga, New York, a separate toll free telephone number and a separate fax number. However, the Office of Regulatory Audit points out that the fax number shown on the Ganz US’ invoices contains the Ontario, Canada area code of 905. Moreover, the Office of Regulatory Audit visited the Ganz facility in Cheektowaga, New York and found that no inventory merchandise was stored there and that it functioned only as a location for returned merchandise.
Counsel furnished a number of checks written to Ganz US or Ganz Inc. from U.S. Customers as evidence of proof of payment from the U.S. customers to Ganz US for the imported merchandise. The checks are mailed to Ganz’s warehouse in Cheektowaga. While, the payments are not deposited directly into the Ganz Canada’s bank account, we note that the checks were deposited in Ganz US’ account at a bank located in Ontario, Canada. This supports the Office of Regulatory Audit’s observation that in Cheektowaga there is a drop box where the payments are picked up by Ganz Canada’s employees recorded in Ganz Canada’s Toronto office and deposited in Canada in a Canadian Bank. While there may be separate bank accounts, these accounts are maintained by Ganz Canada’s employees and are under the control of Ganz Canada.
As we stated in HQ H006576, Ganz US’ lack of autonomy from Ganz Canada is further evidenced by the fact that Ganz Canada as the Seller handles all of the warehousing, purchaser processing, invoicing (including preparation of invoices to U.S. customers) and distribution of merchandise. It is also not disputed that Ganz Canada maintains and supports the telecommunication infrastructure used in connection with the Ganz US selling and marketing operations, and the Importer relies on Seller’s personnel to perform virtually all of its administrative services. While Ganz US pays Ganz Canada for the services it provides, the compensation for the administrative services is based on a percentage of merchandise sold in the United States. There is no indication that the parties ever engage in negotiations or use any other means to determine what the arms length value for these services should be.
Based on information presented, it appears that Ganz US is a U.S. sales force that merely acts as a conduit in transmitting orders from customers in the United States to the Ganz Canada. No evidence has been presented to show that Ganz US can independently decide what merchandise to buy from the seller.
In addition, there is no indication that Ganz US is free to set its own prices for the imported merchandise, when the merchandise is sold to buyers in the United States.
After reviewing the additional documents and arguments presented by the counsel, we are not persuaded that Ganz US and Ganz Canada are acting as independent buyer and seller. We believe that Ganz Canada exercises too much control over Ganz US to establish that there was a bona fide sale for exportation between these parties. Therefore, we reiterate our finding that the transaction between Ganz US and Ganz Canada may not be used as the basis of appraisement. Instead, we again conclude that the sale for exportation on which to base appraisement of the imported merchandise is the sale to the U.S. customers. Therefore, we continue to find that the merchandise should be appraised under transaction value based on the price actually paid or payable by the ultimate U.S. customer.
HOLDING:
After reviewing the additional documentation presented, we find that a bona fide sale has not occurred between the Importer and the related foreign Seller. Therefore, we find that the transaction between these parties cannot form the basis of appraisement of the imported merchandise. Instead, we hold that the merchandise should be appraised using the transaction value based on the price actually paid or payable by the U.S. customers. Therefore, the holding of HQ H006576 is affirmed.
This decision should be mailed by your office to the party requesting internal advice no later than 60 days from the date of this letter. On that date, Regulations and Rulings will make the decision available to CPB personnel, and to the public on the CPB Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Monika R. Brenner, Chief Valuation and Special Programs Branch