• HQ H254164
• Mar 19, 2018

• Type : VALUATION • HTSUS :
•  Related:   545709; 543568; 542580; 544455; 547982; 548503; H213946; H006576; H026063; H235527; H206715   

VAL-2 OT:RR:CTF:VS H254164 RSD

Port Director U.S. Customs and Border Protection 237 West Service Road Champlain, New York 12919

Attn: Protest Section

RE: Application for Further Review (“AFR”) of Protest No. 0712-14-100099; Valuation of Hockey Apparel and Equipment; Transaction Value; Related Party Transactions; Bona Fide Sale

Dear Port Director:

This is in response to your memorandum dated May 9, 2014, forwarding the Application for Further Review (“AFR”) of Protest Number 0712-14-100099, timely filed by the law firm of McGuire Woods on behalf of its client, Reebok-CCM Hockey US, (“Protestant”). We regret the delay in responding. Counsel has made multiple supplemental submissions, dated December 2, 2015; April 29, 2015; August 22, 2016; September 29, 2016; November 10, 2016, and February 2, 2017.

FACTS:

Protestant is an importer and a seller of hockey equipment and wearing apparel. Protestant obtains merchandise that it sells in the United States from a Canadian related party, Sports Maska, Inc. (SMI). The information indicates that Protestant and SMI share officers and directors with some exceptions. The Protestant is a wholly owned subsidiary of Reebok International Ltd., and the Protestant and SMI are part of the Adidas Group of Companies. The Adidas Group consists of over 100 entities located throughout the world. SMI does not own the Protestant and they do not share owners. The sole shareholder of SMI is Adidas International B.V. SMI buys merchandise from various vendors located in Asia. This specific protest covers a shipment of hockey equipment and wearing apparel entered into the United States on May 6, 2013. The entry was liquidated on November 8, 2013. The merchandise was made in various Asian countries, but was shipped through Canada before importation into the United States. On May 16, 2013, Customs and Border Protection (CBP) issued a CBP Form 28 to the Protestant seeking information regarding the relationship between it and the Canadian seller of the merchandise, SMI. Protestant responded on June 21, 2013. On August 21, 2013, CBP issued a Proposed Notice of Action indicating that there was no bona fide sale between the Protestant and SMI. The proposed notice further indicated that the payment made for the merchandise on a monthly basis by a ledger intercompany payment system amounted to a general transfer of funds, and movement of funds was not sufficient to show the transfer of consideration between the parties. Protestant responded on September 24, 2013, to the notice and presented documentation that it claimed was the proof of payment and provided an explanation of the intercompany payment system. The documentation included a schedule of all payments of SMI’s invoice numbers.

Protestant’s counsel explained that a transaction involving the importation of merchandise from Canada will be initiated when the Protestant receives an order from its customers in the United States. In actually purchasing merchandise, a series of orders are aggregated together and a purchase order or a batch order (“PO”) is generated. The PO is sent to SMI, the supplier of the merchandise in Canada. The PO does not indicate the prices SMI charges for the imported merchandise. Rather, the prices for the imported merchandise are found on a price list shared by SMI and the Protestant. Prices are determined during the budget process, occurring in the months of October-November for the following year. Counsel further indicates that the prices will generally remain unchanged for the remainder of the year, unless there is a significant change in SMI’s costs for a particular product. This may happen when there is a product specification change. Once SMI receives the orders, it packages the merchandise in its facility located in Quebec, Canada. The shipping cartons are pre-addressed for delivery to the ultimate U.S. consignees, and the goods are shipped to the World Wide Warehouse in Champlain, New York for eventual distribution to Protestant’s customers.

The prices that SMI charges the Protestant for the imported merchandise are determined using a formula containing the following elements: 1) the standard cost for the merchandise; 2) freight; 3) a XXXX percent warehousing fee; 4) the cost of trim items supplied to the producer; 5) a five percent sourcing fee; and 6) royalties. There are two royalties, one for the use of the CCM (Canada Cycle & Motor Co. Ltd.) trademark, and another royalty payment is made related to know-how regarding certain the production of general hockey equipment. The Protestant will pay royalties of XXX percent for the use of the “CCM” trademark, and pay a xxxx percent know-how royalty on certain general hockey equipment. According to counsel, excluding the royalty, SMI’s price to the Protestant represents a markup of xx percent of all costs (purchase price, freight, and trim). Counsel explains that the freight charges included in the price are the costs of shipping the goods from the Asian vendors to SMI’s Canadian facilities, and not the cost of shipping the goods from Canada to the United States.  Using the practice jersey, as an example, when royalties were added to the price of the merchandise, the markup on the merchandise increased by XXXX percent. This return, counsel contends, ensured that SMI was properly reimbursed for the cost of providing the merchandise to Protestant and that it earned a sufficient profit on its sales of the merchandise.

In some cases, rather than obtaining goods from SMI, the Protestant will buy some of its merchandise directly from overseas vendors located in Asia. Counsel explains that this happens when a single customer orders quantities of merchandise that are sufficiently large enough to warrant such direct purchases. Specifically, these direct purchases from Asian vendors occur when one of Protestant’s customers is willing to take a full container load of merchandise. The prices that Protestant pays the Asian vendors for the merchandise are substantially lower than prices it pays to SMI for identical merchandise; however the prices are the same that SMI pays for the merchandise to the same Asian vendors. According to counsel, where the Protestant’s sales to its customers in the United States are in smaller quantities, it is not cost effective to make a direct purchase from the Asian vendors. Counsel further indicates that the direct purchases from the vendors, rather than SMI, are a routine occurrence and there are about 150-200 such purchases a year as compared to about 780 entries of goods obtained from SMI during the same period. In a specific example provided, the unit price of hockey jerseys obtained in a direct purchase from the Asian vendor was about $XXX less than the same merchandise purchased from SMI. As noted above, explains that the reason why the Protestant paid a higher price for merchandise it bought from SMI was that SMI’s price includes certain items that are not included in the Asian vendor party price such as warehousing fees, trim costs, freight costs, etc.

In reviewing the transaction under consideration, your office explains that the invoices between the Protestant and the U.S. purchaser, Exclusive Pro Sports, indicate that payment was remitted to a New York Post Office Box, but the address for the Protestant shown on its invoice was listed as 3400 Raymond Lasnier, Ville St-Laurent, Quebec. The phone number for the Protestant shown on the invoice is a toll free number which connects to the Protestant’s office in Ville St-Laurent, Quebec. The address of the Protestant, as importer of record, is located in Champlain, New York, which is an address for the World Wide Warehouse.

A letter submitted by Adidas explains that both Protestant and SMI follow the policies established for the Adidas Group for the movement of funds between those two entities. In order to optimize the Group’s cash resources, a cash pooling and an in house bank (IHB) system have been established for its bank account structure. The Adidas group also uses what is referred to as a monthly netting process to settle invoices issued from one company in the group to another company within the group. The payment on the Group invoices and debit notes are settled generally 20 days after the issuance of the invoice from the Protestant to the seller. The letter further explains that Adidas Group IHB is not an officially regulated or licensed financial institution, but it operates much like a commercial bank by offering payment processing liquidity management and collections functions to the Adidas Group subsidiaries. It is also stated that many other large global corporations operate in a similar fashion. Counsel has also submitted a copy of a Product Supply Agreement, dated January 1, 2012, concerning the transfer of merchandise between the Protestant and SMI. This supply agreement indicates that the Protestant is a corporation organized and existing under the laws of Vermont, with its registered place of business in Montpelier, Vermont. In the agreement, SMI is referred to as the supplier, and it is a corporation organized under the laws of New Brunswick, Canada, with its principal place of business located in Montreal, Canada. The agreement also indicates that the Protestant is the purchaser who will buy products from the supplier, SMI. The purchaser shall pay the supplier for products it buys from the supplier in U.S. Dollars within and in accordance with the Adidas Group inter-company netting system. Purchaser shall make all purchases by submitting firm purchase orders to the supplier, and it will do so in accordance with the Adidas Group policy and practice. Such purchase orders shall be in writing and in a form reasonably acceptable to the supplier. Section 4.3 of the purchase agreement states that products shall be delivered “FOB Origin” unless such a FOB point is not in a reasonably developed commercial center. In the Memorandum supporting the protest, Counsel further indicates that the term delivery “FOB Origin” means that title and risk of loss passed to the Protestant at SMI’s warehouse. The same terms of sale were also again specified on SMI’s invoices that were issued to the Protestant.

In addition, Counsel presented a copy of a price list prepared by the Protestant for its customers for the year 2012. The price list specifies that all warehouse orders are shipped FOB shipping point (Reebok-CCM loading dock). It further indicates that unless otherwise directed by the customer in writing, the Protestant will use the carrier designated by the customer, and the customer is responsible for all payments due to the carrier for delivering the merchandise. The customer also assumes all risk of loss upon delivery of the products by the Protestant to the customer’s carrier, in the case of warehouse orders. The Protestant is under no obligation to insure the shipment unless specifically requested by the customer in writing and then only at the customer’s expense and valuation. In other words, according to the documents submitted, the Protestant will assume the risk of loss at SMI’s point of shipment, and it will be transferred to the Protestant’s customers when the merchandise is delivered to its customer’s carrier in the United States. Furthermore, the delivery of the merchandise to the Protestant’s customers will occur in the United States after the merchandise has cleared U.S. Customs. According to the submissions provided, the Protestant and SMI maintain separate books and records. Although the Protestant’s accounting work is handled at its headquarters, which it shares with SMI in Montreal, Canada, each firm makes a separate report in terms of both work flow and financial results to the Adidas Group corporate headquarters. SMI and the Protestant are treated as separate entities for all internal reports and responsibility purposes. Counsel submitted a letter from the accounting firm of KMPG dated February 4, 2015, which indicates that the Protestant and SMI maintain separate books and records and that Protestant’s accounting records are distinct from SMI in that the Protestant’s accounts are not commingled with those of SMI. The Protestant does not file a separate U.S. tax return because its tax information is included in the Reebok International Ltd. consolidated return. Because SMI is a Canadian company with no operations in the United States, it files a tax return in Canada rather than in the United States.

The two firms also maintain separate bank accounts. The Protestant has its own lock box to receive customer payments at the JP Morgan Chase Bank in New York. Payments are made to the Protestant via the lock box or through a wire transfer made to a U.S. bank account at HSBC Bank, in which the Protestant is the beneficiary. SMI’s customers remit their payments to its physical address or via an electronic payment made to its account at the Canada-based HSBC Bank. The payments to SMI are denominated in Canadian dollars and the beneficiary is SMI. Counsel also indicates that Protestant has made arrangements that allow its customers to pay for merchandise by credit. The application for payment by credit is handled by the Protestant not by SMI or other members of the Adidas family of companies.

The Protestant has 20 employees, who are located throughout the United States. The majority of these employees are engaged in selling products and for customer relations. In addition, the Protestant has contracts with eight independent sales agents. Employee payroll, benefits, holiday policy and other personnel matters are administered by Reebok International and not by SMI. Protestant employees include the Field Activation Service Team who deals with retailers and customers.

Protestant has also entered into numerous contracts with other parties in its own name. These contracts include a lease for real estate located in Minnesota, and a car lease agreement with the Chrysler Corporation. Another example of a contract that was submitted to show that the Protestant entered into agreements in its own name is a sponsorship and a supplier agreement with US Hockey, Inc. and the University of North Dakota athletics program. A further instance of a contract in which the Protestant has entered into under its own name is an agreement it signed with the National Hockey League (NHL) Enterprises and the National Hockey League Players Association. In this agreement, the Protestant is specifically mentioned as a separate party to the agreement.

ISSUE:

Whether the merchandise may be appraised using transaction value based on the transactions between the related parties, Reebok–CCM Hockey and SMI.

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). When transaction value cannot be applied, then the appraised value is determined based on the other valuation methods in the order specified in 19 U.S.C. § 1401a(a).

In order for transaction value to be used as a method of appraisement, there must be a bona fide sale between the buyer and seller. 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)).

Several factors may indicate that a bona fide sale exists between the purported buyer and seller. In determining whether property or ownership has been transferred, CBP considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, CBP may examine whether the purported buyer paid for the goods and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. See Headquarters Ruling (HQ) 545474, dated August 25, 1995; and HQ 545709, dated May 12, 1995.

Your office contends that that there was no bona fide sale for the imported merchandise between the Protestant and SMI. It is your position that these related parties are so closely intertwined with each other that it is not possible to conclude that Protestant acts separately from SMI. In support of this proposition, you point out that the invoice from the Protestant to Exclusive Pro Sports states that payment should be remitted to a New York, NY post office box, but the address for the protestant on the invoice is listed as 3400 Raymond Lasnier, Ville St-Laurent, Quebec. You also call attention to the fact that the Protestant’s phone number shown on the invoice is a toll free number which connects to SMI’s office in Ville-St-Laurent, Quebec. In addition, the importer of record’s address for the Protestant is that of the World Warehouse in Champlain, New York; however, the Protestant’s registered place of business indicated in the Products supply Agreement is in Montpelier, Vermont, which is the same address as its attorney. Based on this information, your office believes that the Protestant does not appear to have a physical presence in the United States. Your office also claims that the Protestant has not provided any evidence that it maintains its own financial records, because SMI appears to do the Protestant’s financial recordkeeping in Montreal, Canada. For example, the bank statement for the Protestant is from HSBC Bank Canada in Toronto, Ontario. It is also noted that the Protestant’s lack of autonomy from SMI is demonstrated by the fact that all of the orders to the final U.S. customers are packaged by SMI. The pre-addressed boxes are sent to the World Warehouse in Champlain, New York for delivery to U.S. customers.

Your office believes limited evidence was provided that the Protestant could provide instructions to the seller, and that it has not been sufficiently demonstrated that the Protestant was free to sell the imported merchandise at any price it desired, selected or could select its own customers without consulting the seller. There was also no support that it could order the imported merchandise from the supplier and have it delivered for its own inventory. It is pointed out that the Protestant does not maintain its own inventory of merchandise. Accordingly, your office concluded that there is no evidence of a bona fide sale between SMI and the Protestant.

The fact one party is a subsidiary of another will not necessarily preclude a transaction between related parties from serving as a basis of transaction value. See VWP of America, Inc. v. United States, supra. The court further explained that ("[T]he fact that a parent corporation controls a subsidiary . . . does not necessarily mean, under the statute that the price may not serve as the basis for transaction value." 175 F.3d at 1336. In related party transactions, however, importers must demonstrate that the related party price was not influenced by the relationship or that the price closely approximates certain test values in order to use the transaction value method to appraise the merchandise.

Specifically in VWP of America, Inc. v. United States, Victor Woolen Products of America, Inc. (VWPA) imported products from Canada from its related supplier, Victor Woolen Products, Ltd. of Quebec, Canada ("VWPC"). The products were then sold to U.S. customers. The court had to decide whether the goods should be appraised at the price paid from VWPA to VWPC or the price paid by the U.S. customers to VWPA. Thus, an important issue was whether there were sales for exportation from VWPC to VWPA. The court found that every requirement for a sale, as defined in J.L. Wood, was present in the transactions between VWPC and VWPA. The court stated an indication that sales did occur was that VWPC issued invoices to VWPA and VWPA made payment to VWPC against those invoices. Moreover, the court also noted that the transactions were recorded in the books of the companies as sales. Under the terms of sale, VWPC transferred title to, and possession of, the fabrics to VWPA at the factory in St. Victor, Quebec, and in consideration of the transfer of ownership, VWPA promised to pay the selling price. To support your office’s position that there is no sale between the related parties, you have looked to the analysis set forth in HQ H213946, dated October 12, 2012. In that decision, CBP issued a response to a request for reconsideration of HQ H006576, dated December 19, 2007 and HQ H026063, dated August 17, 2010, to the same importer, and a challenge to the holdings in those decisions that the valuation of the imported merchandise should be based on the price paid or payable by the U.S. customers. Specifically in H213946, the importer was a U.S. company that purportedly purchased merchandise from its related foreign seller for sale to customers located in the United States. The seller was a Canadian company with warehouse, distribution, manufacturing, and office facilities in Canada. The importer was the sole distributor of the seller’s products in the United States. The seller and the importer were related by common shareholders and officers. The importer outsourced certain services to the seller’s personnel in Canada: 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 maintained and supported the telecommunications infrastructure (e.g. computer network, voice mail, email, hardware, and software applications) used in connection with the importer’s selling and marketing operations. The importer paid a fee for the administrative services rendered by the seller and also reimbursed the seller for processing orders. The ordering process was generally initiated by the importer’s sales representatives who solicited and took orders from U.S. customers. The seller maintained a large inventory of finished merchandise at its warehouse and was responsible for processing and shipping orders placed by U.S. customers. Invoices were mailed to customers by the seller via the U.S. postal service and did not accompany the merchandise. The U.S. customers mailed checks (payment) to the importer at a drop box location in the United States, which were retrieved and processed by the seller’s employees and then deposited into the importer’s account at a bank located in Canada. Ultimately, CBP found that the seller exercised too much control over the importer to establish that there was a bona fide sale for exportation between the parties, as there was not enough evidence that they were acting as an independent buyer and seller. CBP concluded in both HQ H006576 and HQ H026063 that the sale for exportation on which to base appraisement of the imported merchandise was the sale to the U.S. customer.

The basis of the challenge in H213946 was additional information concerning the importer’s status as a U.S. tax-paying entity, the number of its U.S. employees, the ordering process between the importer and the seller, a transfer pricing study that stated that the terms of sale between the parties were Ex Works, and the handling/packaging of goods by the importer after importation. In reaching its decision, CBP noted that the importer had not presented any transaction sales agreements or contracts between the related parties that showed the terms of sale or indicated that there was a passage of title and risk of loss for the imported merchandise between the seller and the importer. CBP also stated that the fact that the importer filed an income tax return with the United States Internal Revenue Service (“IRS”) did not necessarily mean that it functioned as an independent buyer and seller of the imported merchandise under the Customs valuation law. Based on the facts, CBP concluded that the importer functioned more like a sales agent than as an independent buyer and reseller. CBP concluded that the related parties were so closely intertwined financially and administratively that it was difficult to conclude that the importer acted separate and apart from its parent company in Canada.

The facts of HQ H213946 contain some similarities to the situation occurring in this case. We note that in this case, as in HQ H213946, the company in Canada provides a number of important services to the related company that distributes merchandise in the United States. For example, in both cases accounting and other important administrative services are provided to its related company in the United States at the selling company’s offices in Canada. In addition, as in H213946, a phone number listed on transaction documents used in the United States connects to the related company’s offices in Canada. It also appears in both situations, merchandise is shipped from Canada to a third-party owned U.S. warehouse for the eventual distribution to ultimate customers in the United States. In both cases, the address of the warehouse is listed as the place of business for the U.S. company.

While these factors may indicate that SMI and Protestant are linked together, we note that the corporate structure used by the companies in this case is different from the corporate structure used by the companies in H213946. In H213946, the Canadian company was the parent of the U.S. company. In this case, SMI and the Protestant are so called “sister companies” within a much larger corporate network of companies of the Adidas Group of companies. Thus, according to counsel, unlike in H213946, SMI does not have direct operational control over the Protestant.

Although your office claims that SMI and Protestant are so closely intertwined that it is difficult to conclude they act separately from each other, we do not believe that the evidence presented establishes that the Protestant is under the control of SMI when it sells products to its customers in the United States. In HQ H213946, we pointed out that no evidence was presented to show that a separate set of books were kept for the two companies during the years under review. The Office of Regulatory Audit observed that the U.S. company maintained none of its own financial records and that for the years under review, only one set of books for both companies were kept. While you indicate that the Protestant has not provided any evidence that it maintains its own financial records, as previously noted, counsel submitted a letter from the accounting firm of KMPG dated February 4, 2015, which indicates that the Protestant maintains separate books and records from SMI and that its accounting records are not commingled with those of SMI. In addition, SMI and the Protestant are treated as separate entities for all internal reporting responsibility purposes. There are also separate banking operations between the two companies. The evidence presented also indicates that Protestant is more than a paper or a shell company. It has its own employees and also hires sales agents to sell its products in the United States. Protestant has entered into agreements and contracts, such as sponsorships, in its own name rather than under the name of SMI or another member of the Adidas Group of companies.

In HQ H213946, the information presented indicated that the importer’s sales personnel merely electronically forwarded orders that were placed by U.S. retail customers directly to its related Canadian supplier. In essence, CBP was unable to determine if there were actual orders from the U.S. importer to the Canadian supplier, which indicated the conditions of the transaction, including the price of the merchandise, and the terms of sales for merchandise before the merchandise was shipped to the United States. Although invoices were eventually issued from the Canadian seller to the related U.S. importer, they were issued only after the merchandise was delivered to a U.S. customer. Therefore, CBP determined that there was insufficient evidence to establish that the related parties had entered into an agreement to buy and sell imported merchandise before it was exported to the United States.

In the case at hand, a crucial distinction from what occurred in HQ H213946 was that in this case the related parties entered into a product supply agreement, which specifies the specific roles of SMI and the Protestant in the transactions between them. The supply agreement indicates that Protestant is the purchaser who will purchase products from the supplier, SMI. Under the supply agreement, the Protestant as the purchaser is obligated to pay SMI as the supplier for the products it buys from SMI. The agreement also indicates that the purchaser shall make all purchases hereunder by submitting firm purchase orders to the supplier. The purchase orders shall be in writing and in a form reasonably acceptable to supplier. The record contains examples of purchase orders which are referred to as batch orders, which show the Protestant placed actual orders for merchandise with SMI. On these documents, the terms of sale are clearly specified. The supply agreement and batch orders between the parties, states that products shall be delivered FOB point of origin. Therefore, the terms of sale are clearly specified in the transaction documents executed between the parties before the merchandise moves from Canada to the United States

Once the merchandise was delivered, SMI issued invoices indicating the amount of money that the Protestant owed SMI for the merchandise that was shipped to the United States. A determination of when title and risk of loss pass from the seller to the buyer in a particular transaction depends on whether the applicable contract is a “shipment” or “destination” contract. FOB point of shipment contracts and all CIF and C&F contracts are “shipment” contracts, while FOB place of destination contracts are “destination” contracts. Unless otherwise agreed by the parties, title and risk of loss pass from the seller to the buyer in “shipment” contracts when the merchandise is delivered to the carrier for shipment, and in “destination” contracts when the merchandise is delivered to the named destination. The question of whether the proposed transactions involved are shipment contracts or destination contracts depends on the shipment terms specified in the documentation. The submitted price list between the Protestant and its U.S. customers specifies that all warehouse orders are shipped FOB shipping point (Reebok-CCM loading dock). It further indicates that unless otherwise directed by the customer in writing, the Protestant will use the carrier designated by the customer, and the purchaser is responsible for all payments due to the carrier for delivering the merchandise. Customer also assumes all risk of loss upon delivery of products by the Protestant to the customer’s carrier in the case of warehouse orders. In other words, according to the documents submitted, the Protestant will assume the title and the risk of loss to the merchandise at SMI’s point of shipment, and it will be transferred from the Protestant to its customers when the merchandise is delivered to Protestant’s customer’s carrier. Based on the totality of the circumstance, we find the title to the imported merchandise transferred from SMI to the Protestant.

Although there may be a transfer of title from SMI to the Protestant, in order to have a sale of merchandise, there must also be an exchange of consideration paid from the buyer to the seller. In other words, the buyer must make payment to the seller for the merchandise. Although the price that the Protestant pays SMI for the merchandise is not shown on the batch order form, the prices that are to be paid for merchandise are contained on a separate price list that the parties have previously agreed to and exchanged. This means that the parties were fully aware of the price of the goods ordered when the batch order was submitted from the Protestant to SMI. In this case, there was some confusion because the Protestant made its payments to SMI for the imported merchandise through their parent company in a process known as “netting”. The website Accountingtool.com describes the practice of intracompany netting:

The significance of netting is to reduce the amount of paperwork, risk and expense. All the franchises or subsidiaries of a single firm spread out around the globe do their intercompany business through a single billing system and currency. This minimizes foreign exchange risk, and time and bureaucratic expense because everything is sent through a single accounting software package. It also maximizes the amount of oversight the central accounting department of the firm and management in general have over intercompany expenses and billing. In a letter, a senior Vice President of the Adidas Group states that SMI and the Protestant are both subsidiaries of the Adidas Group, and they use a cash pooling and an in-house-bank (IHB) system for their bank account structure. They use a monthly netting process to settle the invoices issued from one company in the Adidas Group to another company in the Adidas Group. They provided an example of an IHB statement showing a payment from the Protestant to SMI for merchandise that the Protestant obtained from SMI in January 2016. In this transaction, the Protestant was paying SMI for the merchandise, because the funds were transferred in the IHB from the Protestant to SMI. The letter explains that this is called a netting process internally because from an accounting point of view, funds received by one group company, SMI, are deposited in the IHB to be applied or netted against the payables of the another group company, in this case, the Protestant. An actual payment is transacted because funds come from cash generated by Protestant’s operations, which are deposited in the IHB. In other words, the money that the Protestant obtains from its sales to its customers in the United States is used to pay the amounts that it owes SMI for purchasing merchandise from SMI. The money moves electronically from Protestant’s account at the Adidas IHB, and it is credited to SMI’s account in the IHB. We are satisfied that this movement of funds from the Protestant to SMI in the Adidas IHB constitutes a payment for the purchase of merchandise between the Protestant and SMI, and is not a lump sum payment. Accordingly, we find that there is a payment of consideration for the imported merchandise from the Protestant to SMI. Consequently, because there are significant differences in the way the related parties transacted business in the present case from the way the parties transacted business in HQ H213946, we find that HQ H213946 should not be considered to govern this case. Because there was a transfer of title for the imported merchandise for consideration between the Protestant and SMI, we find that there is a sale of merchandise between SMI to the Protestant. Therefore, we find that there was a sale for exportation to the United States between Protestant and SMI. Although we have determined that there is a sale for exportation to the United States between the Protestant and SMI, transaction value still may not be the acceptable method for appraising the imported merchandise. 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 C.F.R. §152.103(l). While the fact that the buyer and seller are related is not in itself grounds for regarding transaction value as unacceptable, where CBP has doubts about the acceptability of the price and is unable to accept transaction value without further inquiry, the parties will be given the opportunity to supply such further detailed information as may be necessary to support the use of transaction value pursuant to the methods outlined above. See HQ H235527 dated August 4, 2015. In this case, it is not disputed that the seller, SMI, and the buyer, Reebok-CCM U.S. Hockey, of the imported hockey equipment and apparel were related parties. When the buyer and seller are related, the CBP regulations provide several methods for determining whether transaction value is an acceptable basis of “appraisement for imported merchandise. The first method uses “test values.” “Test values” refer to values previously determined pursuant to actual appraisements of imported merchandise. Thus, for example, a deductive value calculation can only serve as a test value if it represents an actual appraisement of merchandise under section 402(d) of the TAA. See HQ 543568, dated May 30, 1986.

The importer or the buyer may demonstrate that the transaction value in a related party transaction is acceptable by showing, that the value closely approximates any one of the following “test values” provided these values relate to merchandise exported to the United states at or about the same time as the imported merchandise: (1) transaction value of identical merchandise or of similar merchandise, in sales to unrelated buyers in the United States; (2) the deductive value or computed value for identical merchandise or similar merchandise; or (3) the transaction value of imported merchandise in sales to unrelated buyers of merchandise, for exportation to the United States, that is identical to the imported merchandise under appraisement, except for having been produced in a different country. 19 U.S.C. §1401a(b)(2)(B); 19 CFR §152.103(j)(2)(i). If one of the “test values” is met, it is not necessary to examine the question of whether the relationship influenced the price. 19 CFR §152.103(l)(2)(iii).

In interpreting the test values provisions specified in the valuation law, it has been CBP’s longstanding position that test values refer to values previously determined pursuant to actual appraisements of imported merchandise. See HQ 542580, dated November 4, 1981; HQ 543568, dated May 30, 1986; HQ 544455, dated March 19, 1995; HQ 547982, dated May 20, 2002; HQ 548503, dated June 2, 2004, etc. Thus, for example, a deductive value calculation can only serve as a test value if it represents an actual appraisement of merchandise under section 402(d) of the TAA. See HQ 542580, dated November 4, 1981; and HQ 543568, dated May 30, 1986. As we stated in HQ 544455, dated March 14, 1995, we have no legal authority to utilize values for the same entries of merchandise, based on different valuation methods, as evidence that the questioned transaction value closely approximates a test value. See also HQ H206715, dated January 29, 2015.

In this instance, we note that Protestant made direct purchases of merchandise from unrelated Asian vendors that are either identical or similar to the merchandise that it purchased in the sales from its Canadian related party, SMI. According to counsel, the direct purchases from the Asian vendors occurred on a regular basis, when a U.S. customer agreed to purchase a full container load of merchandise. While there may be some superficial differences in the merchandise, such as the team names on hockey jerseys, these differences were inconsequential for customs appraisement purposes. Therefore, we find that the merchandise in the transactions with Asian vendors was identical to the merchandise obtained in the sales from SMI.

It is assumed for the purposes of this decision, that CBP has previously accepted and reviewed the use of transaction value in the direct sales between the unrelated Asian vendors and the Protestant to appraise the imported merchandise. While the prices, the Protestant paid for the merchandise in the transactions with SMI were higher than in the direct sales with the Asian vendors, this can be explained by the fact that several items included in the SMI prices were not included in the Asian vendors’ prices. The information available shows that the Protestant made direct purchases of merchandise from unrelated overseas vendors on a fairly routine basis. Such purchases occurred about 150-200 times, during the same time period that the Protestant made approximately 780 entries involving identical merchandise purchased from its related seller, SMI. The Protestant has also provided a specific example, in which the price of hockey jerseys directly purchased from an unrelated Asian vendor was $3.22 less or about 20 percent lower than the prices it paid in sales of the identical merchandise purchased from its related party, SMI. Counsel explains the reason why the prices of the merchandise purchased directly from the Asian vendors were lower than prices that SMI’s charged for the identical merchandise is that SMI’s prices included certain items not included in the unrelated party price, such as warehousing fees, trim costs, freight costs, etc. As a result, the prices protestant paid to SMI were higher than the prices it paid for the identical merchandise purchased from the unrelated Asian sellers. Section 152.103(j)(2)(ii) notes that in applying the values used for comparison, differences with respect to the sales involved may be taken into account for certain reasons and if based on sufficient information supplied by the buyer or otherwise available to CBP. With this understanding that the prices SMI charged the Protestant were greater because of noted extra costs that were not included in the direct sales with the Asian vendors, we find that the higher prices should not preclude a finding that the transaction values of the merchandise in the Asian vendor sales closely approximate the values calculated in the related party transactions between SMI and the Protestant. After a review, if the port finds that the direct sales with the unrelated Asian vendors were acceptable sales for exportation, then based on the information available, we are satisfied that the direct sales with the Asian importers may serve as test values that can be used to establish the acceptability of using transaction value to appraise the imported merchandise in the related party sales between the Protestant and SMI.

HOLDING: The protest is granted. The transactions between the Protestant and its related party supplier, SMI, constitute bona fide sales for exportation to the United States. The information presented indicates that there were sales for exportation to United States of identical and similar merchandise between the Protestant and unrelated Asian vendors. Protestant has shown that these sales occurred during the time period as the transactions under consideration in this protest. Accordingly, after a review of these sales, they are determined to be acceptable sales for exportation, they may be used as test values to establish the validity of using transaction value to appraise the imported merchandise in the related party transactions between the Protestant and SMI under consideration in this protest.

In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs Form 19, to the Protestant no later than sixty (60) days from the date of this letter. Any re-liquidation of the entry or entries in accordance with the decision should be accomplished prior to mailing of this decision. Sixty (60) days from the date of this decision, the Office of International Trade; Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP 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,

Myles B. Harmon, Director Commercial and Trade Facilitation Division