HQ H228298
OT:RR:CTF:VS H228298 YAG
Dina M. Amato, Assistant Port Director
U.S. Customs and Border Protection
Miami International Airport, Trade Operations
6601 NW 25th Street
Miami, FL 33122
RE: Internal Advice Request; Transaction Value; Related Party Transactions; Post-Importation Adjustments
Dear Ms. Amato:
This is in response to your internal advice request, dated July 24, 2012, inquiring as to whether the Importer/Buyer’s [***] basis of appraisement of the imported merchandise is acceptable under transaction value. We regret the delay in responding.
The Importer/Buyer has asked that certain information submitted in connection with this internal advice request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 CFR §177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this decision.
FACTS:
The Importer/Buyer [***] is a wholly owned subsidiary of [***] (the “Seller”), a publicly traded Japanese corporation. The Importer/Buyer’s primary business is the sale of machine tools, manufactured by its parent company in Japan, the Seller, through its U.S. distributor network. The company’s products are comprised of certain machine tools and replacement parts, including CNC lathes, grinding machines, accessories, automation, vertical and multi axis machine centers and [***] Advanced Programming Production Systems. The Importer/Buyer uses transaction value method to appraise the imported merchandise, and values are based on sales prices between the related parties (the U.S. Importer/Buyer and its related Seller in Japan).
In accordance to the Importer/Buyer’s submission, the parties establish an annual price list annually at which the Importer/Buyer purchases the machine tools and replacement parts from the Seller. The methodology for determining product prices relies on the Suggested Retail Price as a starting point. The Seller in Japan typically sets customer list prices at the beginning of a product life cycle based on market indicators and research information compiled by the Importer (for example, the company considers average selling price for similar products, production costs, and industry reports). The Importer provides its input in setting the prices. Additionally, in setting the agreed price list, the Seller in Japan considers anticipated end customer prices, as well as the standard costs of the distributor. Prices are set on a model basis in a manner to return an operating margin to the distributor that falls within the acceptable range specified in the company’s bilateral Advance Pricing Agreement (“APA”). Prices may be adjusted based on market conditions. It is stated that the starting point and the elements involved in the price-setting process are dependent on factors external to the parties’ relationship, such as customer end prices, production costs and expected industry operating margins for comparable companies. In other words, it is the cost of production and the market conditions for the products that are controlling factors in deriving the prices paid by the Importer/Buyer to the related Seller.
The Importer/Buyer claims that the company sets its prices in accordance with the normal pricing practices of the industry. The Importer/Buyer further states that the companies in the machine tool industry follow a similar approach to organize their business operations: product innovation, research and development, and manufacturing activities are governed at the parent company’s (foreign manufacturer’s) level. The U.S. distributors primarily perform routine distribution functions. As a result, machine tools manufactured by the global companies in the industry are priced to allow the in-country distributor to recover its costs and receive a consistent and routine return appropriate for the limited risks taken. The balance of the overall profit from sales to end customers is paid by the distributor to the parent company (foreign manufacturer) as the purchase price of the imported machine tool. As support, a paper, “Industry Practice Report – Machine Tool Industry,” dated October 2012 and prepared by Ernst & Young, LLP, was submitted for our review.
Additionally, the Importer/Buyer provided its bilateral APA between the Internal Revenue Service, the Importer, and the Japanese Tax authorities for our review. This APA covers the sales of machine tools and machine tool replacement parts to the Importer/Buyer as well as the Importer/Buyer’s performance of installation, warranty, repair and other services incidental to the sale of such machine tools and parts, and the performance of research and development and technical services by the Importer/Buyer for the Seller. The tested party is the Importer. The term of the importer’s APA is for seven tax years from March 31, 2005 through March 31, 2011.
Section 482 of the Internal Revenue Code (26 U.S.C. §482) requires that the arm’s length result of a controlled transaction be determined under the method that, given the facts and circumstances, provides the most reliable measure of an arm’s length result. The application of the best method establishes an arm’s length range of prices or financial returns with which to test controlled transactions.
In its APA, the Importer/Buyer identified the comparable profits method (“CPM”) as the best method for evaluating its related party or controlled transactions. The profit level indicator selected is the operating margin. The Importer/Buyer’s operating margin is defined as follows: the sum of the Importer/Buyer’s operating profit from the combined results of covered transactions for all years in the APA term, divided by the sum of the Importer/Buyer’s sales revenue from covered transactions for all years in the APA term.
According to the APA, the arm’s length range is between [***]. This arm’s length range was established on the basis of an objective, third-pricing data for distributors (comparable companies) of industrial products, which perform similar functions and assume similar risks as the Importer/Buyer. The search for comparable companies resulted in seven (7) companies that sell their products to a variety of industries. It is important to note that although the companies that perform similar functions, incur similar risks, use similar intangible assets as well as sell similar products were considered for the analysis, the final set of comparable companies represents a set of companies that sell a variety of products from air conditioners and heating equipment to plumbing supplies. While comparable companies sell the industrial products, the Importer/Buyer belongs to the machine tool and metal equipment industry. Its product categories include die cutting machines, drilling and tapping machines, grinding machines, machining centers, turn/mill machines, and turning centers.
Further, the APA states that the Importer/Buyer’s cumulative margin must be tested and if the cumulative margin is outside the acceptable range, then the amounts reported on the Importer/Buyer’s tax return must include an adjustment to bring the cumulative operating margin within the acceptable range. It is the Importer/Buyer’s position that these post-importation adjustments are all part of an objective formula used to determine transaction value. Additionally, the Importer/Buyer asserts that it met the circumstances of the sale test by showing that the prices between the Importer/Buyer and the Seller were not influenced by the relationship between these companies. The Port disagreed with the Importer/Buyer’s analysis, and this internal advice request followed.
The following documents were provided for our review: (1) the Importer/Buyer’s APA for the years 2005 through 2011; (2) Circumstances of the Sale Analysis, issued by Ernst and Young, LLP; (3) copies of Prior Disclosures, dated January 7, 2010 and September 20, 2010; (4) formal response provided by the Importer/Buyer’s counsel to the Port; (5) email correspondence between the Port and the Importer/Buyer; (6) the Importer/Buyer’s U.S. Consolidated Profit and Loss Statement for APA years March 2005 through March 2011; (7) the Importer/Buyer’s FY 2010 Profit and Loss Statement; (8) Office of Regulatory Audit, CBP, Importer Self-Assessment Report; (9) credit memorandums for FY 2010, which detail the post-importation adjustments made; and, (10) copies of reconciliation entries filed by the Importer/Buyer in 2010.
Moreover, in response to CBP’s request for additional information, the Importer provided the following: (1) the Importer/Buyer’s 2010 Income Tax Return; (2) the Importer/Buyer’s work papers to show that the Cost of Goods Sold (“COGS”) amount reported on the tax return included the Cost of Sales in which the FY 2010 transfer pricing adjustment was recorded; (3) screen shot of the accounting entry that was made to record the FY 2010 transfer pricing adjustment; (4) the company’s consolidated financial statement; and (5) the Importer/Buyer’s calculation schedule, illustrating how the post-importation adjustments were determined. The Importer/Buyer reports its adjustments to CBP via the Reconciliation program.
ISSUES:
Is the related party price fixed or determinable pursuant to an objective formula at the time of importation for purposes of determining transaction value?
Do the circumstances of the sale establish that the price actually paid or payable by the Importer/Buyer to the Seller is not influenced by the relationship of the parties and is acceptable for purposes of transaction value?
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised for customs purposes in accordance with Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. §1401a). The primary method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. §1401a(b)(1).
As provided in 19 U.S.C. §1401a(b)(4):
(A) 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.
Section 152.103(a)(1), CBP Regulations (19 CFR §152.103(a)(1)) provides, in pertinent part, as follows:
In determining transaction value, the price actually paid or payable will be considered without regard to its method of derivation. It may be the result of discounts, increases, or negotiations, or may be arrived at by the application of a formula, such as the price in effect on the date of export in the London Commodity Market.
However, rebates, or any other decrease in the price actually paid or payable made or affected after the date of importation are to be disregarded for the purposes of determining transaction value. 19 U.S.C. §1401a(b)(4)(B). Further, in order to use transaction value, there must be a bona fide sale for exportation to the United States. The Port of Miami has not questioned whether a bona fide sale for exportation to the United States has occurred; accordingly, we will only examine the related party price.
Is the related party price fixed or determinable pursuant to an objective formula at the time of importation for purposes of determining transaction value?
As noted above, the annual transfer pricing study has been prepared using the CPM. As a consequence of utilizing the CPM approach, the Importer/Buyer is required to make retroactive price adjustments (downward and upward) to meet its federal tax obligations and to show that its prices are at arm’s length.
In Headquarters Ruling Letter (“HRL”) W548314, dated May 16, 2012, CBP examined the issue of claiming post-importation adjustments to value in related-party sales. CBP held that companies may claim compensating adjustments and other post-importation adjustments based on tax transfer pricing documentation and APAs. In HRL W548314, CBP found that the Importer’s transfer pricing policy constituted an objective formula provided the company’s transfer pricing policy meets certain factors. Thus, effective July 30, 2012, CBP allows both upward and downward post-importation adjustments to related-party sales prices made pursuant to a formal transfer pricing policy that meets the following criteria:
A written “Intercompany Transfer Pricing Determination Policy” is in place prior to importation and the policy is prepared taking IRS code section 482 into account;
The U.S. taxpayer uses its transfer pricing policy in filing its income tax return, and any adjustments resulting from the transfer pricing policy are reported or used by the taxpayer in filing its income tax return;
The company’s transfer pricing policy specifies how the transfer price and any adjustments are determined with respect to all products covered by the transfer pricing policy for which the value is to be adjusted;
The company maintains and provides accounting details from its books and/or financial statements to support the claimed adjustments in the United States; and,
No other conditions exist that may affect the acceptance of the transfer price by CBP.
An adjustment formula must satisfy all five criteria in order for CBP to accept it as objective. In this case, the Importer/Buyer provided certain information to satisfy the above-referenced criteria.
A written transfer pricing policy is in place prior to importation and the policy is prepared taking IRS code section 482 into account
The internal advice request in question involves merchandise imported into the United States in 2010. In 2010, the Importer/Buyer declared downward post-importation adjustment, in the amount of $[***] and requested a refund of duties. The Importer/Buyer provided CBP its bilateral APA for seven tax years March 31, 2005 through March 31, 2011. This APA was executed in 2008, and, thus, became effective in 2008. The transfer price between the Importer/Buyer and its related Seller is determined in accordance with this APA, utilizing section 482 of the IRS code. Therefore, the Importer/Buyer’s written transfer pricing policy existed and the pricing method was agreed upon prior to the importation of goods in 2010.
The U.S. taxpayer uses its transfer pricing policy in filing its income tax return, and any adjustments resulting from the transfer pricing policy are reported or used by the taxpayer in filing its income tax return
In this case, the Importer/Buyer’s APA requires the company to “report its taxable income in an amount that is consistent with Appendix A (covered transactions and transfer pricing method) and all other requirements of this APA on its timely filed U.S. return.” The necessary adjustments are made on an annual basis to ensure compliance with the terms of the APA. The 2010 adjustment was made to the Importer/Buyer’s books prior to year-end closing. Since the adjustment did not result in a book/tax difference, it was not reported separately as a compensating adjustment on the income tax return. Instead, the post-importation adjustment was reported to the IRS as part of the Cost of Goods Sold (“COGS”). The Importer/Buyer provided its 2010 Income Tax Return to show the COGS reported to the IRS, as well as the supporting work papers, indicating that the COGS amount included the transfer pricing adjustment.
We also note that since the adjustments are reported in the Importer/Buyer’s accounting books as adjustments to COGS, these adjustments affect the profit margins of the imported goods and specifically result in lower declared values for the merchandise. In each case, at the end of the year the transfer pricing study confirms that the prices, as adjusted, are within the arm’s length range determined by the transfer pricing study. Consequently, the adjusted prices are actually used for both financial accounting and income tax purposes. To support this assertion, the Importer/Buyer’s APA confirms that the year-end adjusted operating margin falls within the interquartile range of comparable firms’ operating margin. The Importer/Buyer uses the final financial numbers in preparing the tax returns.
Upon review of the documents submitted by the Importer/Buyer, we find that there is a link between the adjusted COGS and the tax returns, the company indeed uses its transfer pricing policy in filing its income tax returns, and the adjustments are reported to the IRS and used by the Importer/Buyer in filing its income tax return.
The company’s transfer pricing policy specifies how the transfer price and any adjustments are determined with respect to all products covered by the transfer pricing policy for which the value is to be adjusted
Based on the information provided by the Importer/Buyer, the related party price (and the adjustments thereto) are determined pursuant to the company’s transfer pricing policy, which is based on the bilateral APA. The Importer/Buyer provided CBP with documentation showing that adjustments are made on an entry-by-entry basis and, therefore, related to specific entries. Additionally, the Importer/Buyer’s APA confirms how the transfer price and any adjustments are determined with respect to all products covered by the APA (i.e. machine tools and machine tool replacement parts) for which the value is adjusted.
The company maintains and provides accounting details from its books and/or financial statements to support the claimed adjustments in the United States
The Importer/Buyer provided financial and accounting records to support the claimed adjustments, as well as the detailed description of the profit allocation to individual products. The adjustments are allocated equally to all imports for the year. In other words, the Importer/Buyer applies a fixed percentage across all imported products. The Importer/Buyer reviews preliminary sales and profit annually before the books are closed and performs the following: (1) determines the required operating margin/profit based on the APA range; and (2) compares pre-adjustment profit with the required operating margin/profit to determine the amount of adjustment needed. Since the APA requires the cumulative operating margin to be within the appropriate range, the calculation is based on a cumulative formula that considers results of all APA years (years of the APA that predate the APA approval and the current year). In this case, the Importer/Buyer reviewed its Profit and Loss statement for the 2010 fiscal year in isolation and determined that a single credit of $[***] was required to increase profits earned on imports during 2010 in order to bring the operating margin for that year to the bottom of the APA range. Separately, because of delays in concluding the bilateral APA, an additional credit in the amount of $[***] was provided by the Seller with respect to the 2010 fiscal year. This amount equals one-third of the cumulative profit shortfall for the years covered by the APA but concluded before the APA was finalized (2005-2008). This represents the calculated profit amount needed to be earned in 2010 in order to make up one-third of the profit shortfall for the years prior to APA finalization. Therefore, the resulting adjustment for the fiscal year 2010 (both for the 2010 year and for the prior years) brings the cumulative operating margin within the APA range. The Importer/Buyer provided its calculation schedule, illustrating how the adjustment was determined, as well as its Profit and Loss Statement that indicate the pre and post adjustment operating margins for 2010. The Importer/Buyer also provided an intercompany credit note from the Seller in the amount of the adjustment, dated March 31, 2010 and financial statements supporting the calculations and reflecting the amount on the credit note.
Nonetheless, we note the cumulative nature of the adjustments claimed. In other words, in addition to the adjustment for 2010 (correctly reported to CBP and related to the merchandise imported in 2010), the Importer/Buyer is claiming an adjustment in the amount of $[***] for the prior years before the Importer/Buyer’s APA was finalized. Thus, this adjustment, previously not reported to CBP, pertains to the merchandise imported in the years prior to 2010. In this instance, we find that the additional adjustment in the amount of $[***] pertains to the imported merchandise imported in the prior years and should not be part of the reconciled value in 2010.
No other conditions exist that may affect the acceptance of the transfer price by CBP
Upon our review of the information provided by the Importer/Buyer, we determine that the transactions in question are not subject to any other considerations or conditions that may affect transaction value.
While the allocation of profit between the related parties might be considered to be within the “control” of the parties under CBP’s prior interpretation of “control” in its decisions, the satisfaction of the criteria in W548314 reduces the possibility of price manipulation and subjectivity in claiming post-importation adjustments. Here, the operating profit the companies have to earn is set in advance and later allocated to individual entries. Therefore, since the Importer/Buyer satisfied the criteria specified in W548314 to claim the post-importation adjustments in the year that the merchandise was actually imported, we conclude that in this particular case and based on the above referenced factors, the Importer/Buyer’s transfer pricing policy may be considered an objective formula in place prior to importation for purposes of determining the price within the meaning of 19 CFR §152.103(a)(1).
Accordingly, CBP is of the view that post-importation adjustments (both upward and downward), to the extent they occur and with the exception of the post-importation adjustments claimed for the merchandise imported in the years prior to 2010, may be taken into account in determining the transaction value under 19 U.S.C. §1401a(b). Further, similar to our analysis in W548314, we find the downward adjustments in the transfer price made pursuant to the valid transfer pricing study are not rebates of, or other decreases in, the price actually paid or payable that are made or otherwise effected between the buyer and seller after the date of importation of the merchandise into the United States (see 19 U.S.C. §1401a(b)(4)(B)). Instead, the post-importation adjustments represent an element of the determination of the price actually paid or payable in accordance with 19 CFR §152.103(a)(1). Therefore, the post-importation adjustments made pursuant to the transfer pricing policy in this case simply reflect what should have been reported as the invoice price upon entry, had the exact pricing information of the imported merchandise been available at the time. See W548314, dated May 16, 2012.
The Importer/Buyer uses Reconciliation to report upward and downward post-importation adjustments to the value initially declared upon the importation of the merchandise. The Importer/Buyer should continue to report all of its adjustments to CBP via Reconciliation.
Do the circumstances of the sale establish that the price actually paid or payable by the Importer/Buyer to the Seller is not influenced by the relationship of the parties and is acceptable for purposes of transaction value?
Having established that the Importer/Buyer’s transfer pricing policy constitutes a formula, we must determine whether the imported merchandise may be appraised under transaction value. There are special rules that apply when the buyer and seller are related parties, as defined in 19 U.S.C. §1401a(g). Specifically, transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, an examination of the circumstances of the sale indicates that the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain “test values.” 19 U.S.C. §1401a(b)(2)(B); 19 CFR §152.103(l). In this case, there are no “test values” available to us; therefore, the Importer provided information regarding the circumstances of the sale.
Under this approach, the transaction value between a related buyer and seller is acceptable if an examination of the circumstances of the sale indicates that although related, their relationship did not influence the price actually paid or payable. The Customs Regulations specified in 19 CFR Part 152 set forth illustrative examples of how to determine if the relationship between the buyer and the seller influences the price. In this respect, Customs will examine the manner in which the buyer and seller organize their commercial relations and the way in which the price in question was derived in order to determine whether the relationship influenced the price. If it can be shown that the price was settled in a manner consistent with the 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. See 19 CFR §152.103(l)(1)(i)-(ii). In addition, Customs will consider the price not to have been influenced if the price was adequate to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit realized over a representative period of time. 19 CFR §152.103(l)(1)(iii). Nonetheless, these are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well. See 19 CFR §152.103(I); see also HRL H037375, dated December 11, 2009; HRL H029658, dated December 8, 2009; HRL H032883, dated March 31, 2010; and, HRL H219515, dated October 11, 2012.
In this case, the Importer/Buyer argues for a general approach that takes into account every aspect of the transactions at hand to determine whether transaction value is adequate. See HRL H219515, dated October 11, 2012. The Importer/Buyer states that it met the circumstances of the sale test because: (1) its transfer pricing methodology calls for a consistent U.S. list price for the imported products; (2) the method of setting prices considers the anticipated unrelated customer price; and, (3) the Importer/Buyer’s pricing is determined in accordance with a bilateral APA, under which the operating margin of the Importer/Buyer must be in line with the operating margins of companies with equivalent functions (the Importer/Buyer claims that these companies are in the same industry as the Importer/Buyer).
In HRL H029658, CBP held that the Importer showed that the sales price was not influenced by the relationship for the purposes of the circumstances of the sale test, based on the totality of the information considered, and, as a result, transaction value was the proper method of appraisement for the related-party import transaction. In HRL H029658, the Importer provided various evidence to show that the prices were at arm’s length, including: (1) a detailed description of its sales process and price negotiations; (2) a bilateral APA that was approved by the IRS (the Importer was a tested party under the APA, with CPM chosen as the best method to evaluate inter-company transactions); and, (3) a paper, prepared by the Importer/Buyer’s accountants, which provided details with respect to the pricing practices in the automotive industry. The evidence presented by the Importer did not fall strictly within a single illustrative example, specified in 19 CFR §152.103(l)(1)(i)-(iii), such as the normal pricing practices of the industry. Nevertheless, taken together, the documents provided by the Importer assisted CBP in reaching its conclusion that the relationship of the parties did not influence the price.
In the present case, the Importer/Buyer explained how it sets its price. As noted in the FACTS portion of this decision, the price is set annually and the methodology for determining product prices relies on the Suggested Retail Price as a starting point. The Seller in Japan typically sets customer list prices based on market indicators, research, and information provided by the Importer/Buyer. In setting the agreed price list, the Seller in Japan considers anticipated end customer prices, as well as the standard costs of the distributor and the input from the Importer/Buyer. Prices are set on a model basis in a manner to return an operating margin to the distributor that falls within the acceptable range specified in the company’s APA prices and may be adjusted based on market conditions. The starting point and the elements involved in the price-setting process are dependent on customer end prices, production costs and expected industry operating margins for comparable companies.
In support of this pricing structure, the Importer/Buyer submitted a paper, prepared by Ernst & Young, LLP which details pricing practices in the machine tool industry. This report identifies a normal industry pricing practice for machine tools sold for distribution in the United States and confirms that the Importer/Buyer sets its price similar to its direct competitors (which have similar structures and react similarly to industry challenges and trends). The key value drivers in the machine tool industry encourage companies to centralize their strategic operations, and the parent manufacturers hold the responsibility of establishing the direction of the firm. According to the report, all of the companies in the machine tool industry price goods for exportation to the United States in a manner that allows the U.S. distributor to recover costs and receive a consistent and routine arm’s length return appropriate for the limited risk taken by the U.S. distributor. The residual profit from the U.S. sales to end customers is earned by the parent company (foreign manufacturer) and is paid by the U.S. distributor to the foreign manufacturer as the U.S. distributor purchase price for the product. Additionally, the Importer/Buyer’s supplemental submission to the industry’s report, dated April 30, 2014, analyzed the financial results of the dominant industry players (direct competitors) of the Importer/Buyer. The operating profit (as well as gross margins) of the Importer/Buyer’s direct competitors in the machine tool industry is within consistent range and comparable to the Importer/Buyer’s required APA range.
While this evidence provided by the Importer/Buyer is not entirely objective, as determined by our previous decisions, we find that the report, detailing the pricing practices of the machine tool and equipment industry, is highly relevant for our overall analysis of the Importer/Buyer’s pricing structure because it further substantiates the Importer’s practice of setting its prices.
The Importer/Buyer also submitted its bilateral APA for our review. The APA utilizes the CPM methodology, with the Importer/Buyer as a tested party. CBP has noted that whether the Importer’s transfer pricing methodology has been reviewed and approved by the IRS is a significant factor. HRL H029658, dated December 8, 2009 and HRL 546979, dated August 30, 2000. In this case, the Importer/Buyer’s transfer pricing analysis has been reviewed and accepted by the IRS. In fact, the Importer/Buyer entered into a bilateral APA with the IRS and the foreign tax authority. We find that the information submitted to the IRS and the fact that there is a bilateral APA constitutes valuable information in evaluating the circumstances of the sale. See HRL 546979, dated August 30, 2000 and HRL 548233, dated November 7, 2003. We note that all of the Importer/Buyer’s imported products are covered by the APA, reducing the possibility of profit manipulation. Thus, the Importer/Buyer has chosen to have all of its related party transactions covered by the APA. Consequently, even though the CPM method reviews profitability on an aggregate basis and not a product-by-product basis, in the particular circumstances of this case we will not require the Importer/Buyer to provide CBP with a further breakdown of product line profitability for comparability purposes. Nevertheless, CBP did not participate in the APA pre-filing conference (or in the APA process), and accessing the documents that were submitted to the IRS in the APA process that support the facts and statements made by the Importer/Buyer in the course of this internal advice request is not an option at this time. However, the fact that the foreign tax authorities have approved the APA mandated profit levels for the Importer/Buyer and have made the determination that the Seller is earning an overall profit that will allow it to cover its costs, is another factor to show that the relationship between the parties did not affect the price.
We also reviewed the comparable companies selected by the Importer/Buyer’s APA and conclude that the products sold by the comparable companies are not of the same class or kind as the imported merchandise. The comparable companies distribute a range of goods, none of which belong to the machine tools industry. The industry report provided for our consideration defines a machine tool as “a power-driven machine, not portable by hand, and powered by an external source of energy.” The report also states that the primary function of machine tools is to cut or form metal, with accessories used in support of this function. The comparable companies produce a wider range of industrial products, a range acceptable for tax purposes, but too broad to be considered as an industry for customs valuation. Under these circumstances, the comparison between the Importer/Buyer and these other companies cannot be considered consistent with the market as a whole. However, even though the bilateral APA by itself is not sufficient to show that a related party transaction value is acceptable for Customs purposes, the underlying facts and the conclusions reached in this APA contain relevant information in examining the circumstances of the sale, since this APA confirms the operating margins of the Importer/Buyer (adjusted to comply with the APA), as set by the Importer/Buyer and verified through the independent review of the machine tool industry, submitted by Ernst & Young, LLP.
Accordingly, even though none of the information provided strictly falls under the three illustrative examples in 19 CFR §152.103(l)(1)(i)-(iii), we find that the adjusted sales price is not influenced by the relationship for purposes of the circumstances of the sale test, based on the totality of the information considered and our review and examination of all relevant aspects of the transaction, including the way in which the Importer/Buyer and its related Seller organize their commercial relations and the way in which the price in question is arrived at. As a result, we determine that transaction value is the proper method of appraisement.
HOLDING:
In conformity with the foregoing, transaction value is the appropriate method of appraisement in respect to sales between the Importer/Buyer and the Seller. The Importer/Buyer may take into account certain downward and upward post-importation adjustments to the provisional values of the imported merchandise declared to CBP for the years in which the merchandise was actually imported into the United States.
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, the Office of 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.
Please do not hesitate to contact us at (202) 325-0042 if you have any questions or concerns.
Sincerely,
Monika R. Brenner, Chief
Valuation & Special Programs Branch