Customs Ruling HQ H290680 - Internal Advice; Transaction Value; Related Party Transactions;

Star
Send

HQ H290680
Mar 12, 2018

Type : Valuation • HTSUS :
Related: 545474; 545709; 547006; H065028; H100056

OT:RR:CTF:VS H290680 JMV

Field Director
Office of Trade
Regulatory Audit
1 World Trade Center
New York, NY 10007

Re: Internal Advice; Transaction Value; Related Party Transactions;

Dear Field Director: This is in response to your September 25, 2017 request for internal advice regarding whether it is appropriate for Uniqlo USA LLC to base transaction value on the sale between the unrelated manufacturers and the importer’s related company, Uniqlo Co., Ltd. FACTS: Uniqlo is a global brand specializing in men’s, women’s, and children’s clothing and accessories with over 1,600 retail stores worldwide. Fast Retailing Co Ltd. (“FRJP”), based in Japan, is a parent company of Uniqlo Co., Ltd (“UQJP”), also based in Japan, and Fast Retailing USA Inc. (“FRUSA”). FRUSA, in turn, is the parent company of Uniqlo USA LLC (“UQUSA”). FRJP is the owner and holding company for the Uniqlo group of companies. FRJP maintains control and management of overall group activities. UQUSA has been importing wearing apparel into the United States since 2012. For the period of September 20, 2012 to September 30, 2014, UQUSA acquired imported merchandise exclusively from its related company UQJP. UQJP is the purchasing arm of the Uniqlo group of companies and is not related to the foreign manufacturers or vendors. UQUSA, the importer of record, purchased merchandise from UQJP, allegedly on a post import basis. According to UQUSA, UQJP and its parent company, FRJP, were responsible for all transactions with the foreign factories. The foreign manufacturer here is a Chinese manufacturer, Changzhou Hualida Garments Group Co. Ltd. UQJP developed product lines specific to each country selling Uniqlo merchandise. Each item has two style numbers: the first number starting with “04” is a reference number indicating the item is destined for the United States, and the second 6-digit number is used internally for catalogs and inventory. Only items going to the United States have the “04” prefix. According to UQUSA, UQJP dictated the entire transaction with the foreign manufacturer. UQJP negotiated prices with the unrelated foreign factories and ordered merchandise for its global stores. UQJP placed orders for UQUSA based on UQJP’s projections of sales and inventory levels. UQUSA had a very limited role in the overall transaction and did not issue purchase orders to UQJP. UQJP’s purchase orders and manufacturer’s invoice state that the goods were to be shipped directly to the United States. The shipment terms were FOB foreign port. Only the foreign manufacturer and UQUSA were listed as parties to the non-negotiable waybill. However, UQJP claims to have retained title when the goods arrived in the United States. The goods were allegedly transferred domestically, on a post-importation basis, to UQUSA. UQUSA’s Product Purchase Agreement with UQJP indicated that title and risk of loss shall pass from UQJP to UQUSA “once the products have both arrived within the jurisdictional limits of the United States and have been cleared by U.S. Customs and Border Protection.” Additionally, the insurance policy, which names FRJP and UQJP as beneficiaries, but not UQUSA, states “Regardless of the terms of purchase, sale, bill(s) of lading or other documentation issued to the contrary . . . this insurance covers from warehouse to warehouse . . . .” At the time of entry, UQUSA declared the purchase price between UQJP and the unrelated manufacturer plus a production control fee of 2.5% to Toray International, a Japanese supply chain company, on the CF7501. The 2.5% fee was not indicated on the manufacturer’s invoice but UQUSA claims that the production control fee was declared because it was dutiable as part of the price actually paid or payable. UQJP issued all payments to foreign vendors for merchandise. These costs were then passed on to UQUSA. UQJP did not mark up the price from the foreign manufacturer on its transaction with UQUSA. UQJP invoiced UQUSA on a monthly basis for goods imported into the United States during the previous month, plus applicable fees and interest. UQJP’s monthly invoice indicates that the costs are for “Reimbursement of products and trade charges paid on behalf of Fast Retailing USA Inc,” the parent company of UQUSA and first-tier subsidiary of FRJP. Specifically, the invoiced amount is the product cost from the manufacturer (without mark-up), plus the following charges: A fee for quality control relating to production. This fee ranges from 2.5% to 5.5% of the manufacturer’s price, depending on the manufacturer/vendor used. A $7 per sample fee for classification charges. System Service Fees at 0.9% of Net Sales. Confirmation of Service Menu & Charges at 0.1% of Net Sales. Uniqlo Know-how License Agreement at 0.015% of Net Sales. Uniqlo Trademark and Know-how License Agreement at 0.015% of Net Sales. A 0.135% interest fee (quarterly rate) on all merchandise, applicable whether or not UQUSA pays in a timely manner. UQJP and UQUSA each maintain their own accounting books and records. After UQJP pays its vendors for merchandise and passes the cost to UQUSA, UQUSA records the cost of merchandise in its account for “Purchase in the Term (Merchandise).” UQUSA indicated that this account was used to book reimbursements to UQJP for imported merchandise. UQUSA also pays the abovementioned interest on all purchases and fees charged by UQJP. There is no formal interest agreement, but interest is charged on a simple interest basis without regard to time. UQUSA’s position is that there is only one sale for export to the United States: the sale between the foreign manufacturer and UQJP. As such, UQUSA did not include the foreign classification fee, interest, servicing fees, and licensing fees in the entered value. UQUSA claims that the transactions between UQUSA and UQJP are not relevant to CBP since the alleged sale to the importer occurred after importation. As such, UQUSA’s position is that this is not a situation where more than one sale has occurred involving the imported merchandise and they are not required to declare the importer’s price actually paid or payable based on a post importation transaction. After Regulatory Audit questioned UQUSA’s use of transaction value based on a sale where they are neither the buyer nor the seller, Uniqlo Group changed its business practices. UQJP began filing entries for its wearing apparel as a non-resident importer of record and UQUSA continues to import supplies and retail fixtures, each under its own importer number. ISSUE: Whether the importer may declare the sale price between its related vendor (UQJP) and the unrelated manufacturer as the basis for 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 “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, 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 for exportation to the United States. 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)). In this instance, the importer maintains that there was only one bona fide sale for exportation to the United States: that between the foreign manufacturer and UQJP. The importer insists that any sale that happened between UQJP and UQUSA happened after the goods were imported into the United States. First, we find UQUSA has shown that the sale between UQJP and the Chinese Manufacturer was for export to the United States. The purchase orders include instructions to ship the merchandise directly from the factory to the United States. The invoices also show that the manufacturer intended to ship the goods directly to the United States. Finally, the style numbers also demonstrate that the goods were destined for U.S. markets. Next we examine whether a bona fide sale occurred between UQJP and the Chinese manufacturer. 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 HQ 545474, dated August 25, 1995; and HQ 545709, dated May 12, 1995 (examining the circumstances of the transaction when considering whether the parties functioned as buyer and seller). We find UQUSA has sufficiently demonstrated that UQJP and the foreign manufacturer were functioning as buyer and seller. UQUSA provided CBP with UQJP’s bank statements, invoices from the manufacturer to UQJP, payment notices from UQJP to the manufacturer, an e-mail exchange between UQJP and the manufacturer, and a sales agreement between UQJP and the manufacturer. These documents demonstrate that consideration was passed from UQJP to the manufacturer in exchange for the merchandise. UQJP also developed the product lines, monitored merchandise and projected sales, placed purchase orders based on their projections, and negotiated with and paid the foreign manufacturer. While UQJP and the foreign manufacturer functioned as buyer and seller, what remains unclear is whether UQJP assumed the risk of loss and received title to the imported merchandise. 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. Here, as stated in the commercial invoices, we have a shipment contract with the terms of FOB foreign port, meaning title and risk of loss transfer when the goods are loaded onto the carrier. However, the goods were shipped directly to UQUSA, and UQJP never took physical control of the goods. When goods are shipped directly to the ultimate consignee, the question of which party—the buyer or the ultimate consignee—holds title and risk of loss becomes less certain. In situations where merchandise is shipped directly from the manufacturer to the ultimate U.S. consignee, rather than from the manufacturer to the middleman and then to the ultimate U.S. consignee, the terms of sale may indicate that a “simultaneous passage of title” or “flash title” has occurred; meaning, title and risk of loss pass from the manufacturer to the middleman, then immediately from the middleman to the ultimate U.S. consignee. Therefore, the middleman is considered to hold title for only a moment, if at all, and not to have borne the risk of loss. In these instances, based solely on the shipping terms, a bona fide sale would not appear to have occurred between the manufacturer and middleman. In determining whether a bona fide sale occurred in these situations, CBP will consider other pertinent evidence or documentation if made available by the parties to the transactions. Here, we also have documentation showing that the parties intended for UQJP to retain title and risk of loss after UQUSA retained physical possession at the U.S. port. The Product Purchase Agreement between UQJP and UQUSA indicates that title and risk of loss shall pass from UQJP to UQUSA “once the products have both arrived within the jurisdictional limits of the United States and have been cleared by U.S. Customs and Border Protection.” Additionally, the insurance policy states “Regardless of the terms of purchase, sale, bill(s) of lading or other documentation issued to the contrary . . . this insurance covers from warehouse to warehouse . . .” The fact that the insurance policy, which UQUSA is not a beneficiary of, covers the goods until they arrive at UQUSA’s warehouse suggests that UQJP retains the risk of loss until the goods arrive at their final destination. Therefore, the parties have an explicit understanding that title and risk of loss is held by UQJP at least until the goods clear U.S. Customs as outlined in the Product Purchase Agreement. Based on the rights and obligations of the parties involved in the transaction, we find that UQJP received title and risk of loss of the merchandise during shipment from the foreign port to the United States. Thus, we find the transaction between UQJP and the manufacturer is a bona fide sale. The parties also clearly intended for the merchandise to be shipped directly to the United States, and the information submitted reveals that UQJP and the foreign manufacturer are not related; accordingly, we will assume that the sales between the manufacturers and UQJP are independent, arm's length transactions. Therefore, based on the evidence presented, we conclude that the sale between UQJP and the foreign manufacturers is a bona fide “sale for exportation to the United States” within the meaning of section 402(b)(1) of the TAA. We note HQ 545474 involved a transaction very similar to the case at hand. There, CBP found that the middleman held title and risk of loss during shipment and, therefore, a bona fide sale transpired between the manufacturer and the middleman. Fila, the U.S. company, and Fila Hong Kong (“Fila HK”), the foreign intermediary, were related parties. Fila HK contracted with an unrelated foreign manufacturer to produce shoes for Fila. Fila HK located manufacturers and negotiated terms before placing production orders. The terms of shipping on the bill of lading were FOB ex-works, meaning the manufacturer handed over title and risk of loss when the goods left the manufacturing facility. CBP ruled that the appropriate sale for transaction value was the sale between Fila HK and the manufacturer even though Fila was the named party on the bill of lading. In making this decision, CBP noted the lack of involvement of Fila in negotiations and in procuring manufacturers. CBP highlighted the substance of the transactions and the corresponding rights, remedies, obligations and economic risks of the parties, which supported the claim that risk of loss and title to the merchandise passed to Fila HK at the time the merchandise was manufactured. CBP stated that it was explicitly understood between the parties that risk of loss and title to the shoes passed to Fila HK as soon as the merchandise was manufactured, and before the goods were delivered by the factory to a carrier at the port of exportation. Therefore, the transaction value of the sale between the manufacturer and the middleman, Fila HK, was considered the appropriate basis of appraisement. Your office raised the concern that the interest paid by UQUSA to UQJP, which is paid regardless of whether payments were late or on-time, might be a strategy by the Uniqlo Group to avoid paying higher tariffs while continuing to ensure that UQJP receives a profit. However, given that the sale from the foreign manufacturer to UQJP is an appropriate basis for transaction value, we find no basis for the interest payment to be included as the payment is not going to the foreign manufacturer as the seller. CBP auditors are also concerned with a production control fee declared at the time of entry as an addition to value. The auditors stated that “UQUSA’s payment of production control fees is an indication that the merchandise is not merely domestically transferred on a post importation basis.” However, quality control is a dutiable expense. CBP has found that where services entail quality control along the lines of production related design or development, and intimate involvement in the nature of the goods produced, the service fees may be dutiable either as part of the price actually paid or payable or as an assist. HQ 547006 dated April 28, 1998. UQUSA states that “when a production control fee was paid, it was included in the dutiable value of merchandise. This fee was paid by [UQJP] to third parties [i.e. Japanese company, Toray International] or to vendors in connection with quality control of the purchased merchandise. [UQUSA] reimbursed [UQJP] for these fees. . . . [T]hese fees were added to the price paid or payable in arriving at the transaction value.” The fact that UQUSA reimbursed UQJP for all costs related to the shipment of goods into the United States does not suggest that the transaction is anything more than a transfer of goods and money from one corporate entity to another. Finally, the Port raises the concern of whether an importer may base transaction value on a sale to which they were not a party. According to 19 U.S.C. § 1484(a)(1)), parties qualified to serve as the “importer of record” are the “owner or purchaser of the merchandise, or, when appropriately designated by the owner, purchaser, or consignee of the merchandise, a person holding a valid license under section 1641 of this title” (i.e., a licensed customs broker). (emphasis added). In HQ H065028, dated January 8, 2014, CBP found that, although the importer was not a party to the transaction which governed appraisement, it met the technical requirements for serving as importer of record by virtue of its post-importation acquisition of the goods and its status as consignee. This case involved three parties: 1) the U.S. importer, Country Sales Organization (“CSO”), 2) Global Buying Company (“GBC”) which purchased the goods, and, 3) unrelated suppliers. GBC served as the purchasing arm for the family of companies of which it was a member. It ordered apparel from various unrelated foreign suppliers. GBC had the U.S.-bound merchandise shipped directly from the suppliers to the United States. GBC retained title and risk of loss after the goods reached the U.S. warehouse, at which point they were sold to CSO for sale/distribution to the U.S. retail stores. GBC issued a monthly invoice to CSO for goods shipped during the previous month. CSO (not GBC) served as importer of record as ultimate consignee and eventual purchaser of the goods. CBP recognized that CSO could serve as importer of record because of its financial interest in the merchandise. Further, even though it was not a party to the sale between GBC and the unrelated supplier, that sale price was the proper basis for transaction value. See also HQ H100056 of November 15, 2010 (“Company A” was the importer of record by virtue of its function to, among other things, import and store the merchandise at its facility in a foreign trade zone; however, the sale for exportation was a purchase by an entity identified as “Partnership” from “Company C”). Similarly, because UQUSA has a post-importation interest in the merchandise at issue, it has the right of entry. UQUSA did not reimburse UQJP for the merchandise until a month after the merchandise was received. The transaction between UQUSA and UQJP appears to be an intercompany transfer of money between UQUSA and UQJP. UQJP issues a monthly accounting invoice seeking reimbursement for goods imported in the previous month. Additionally, the fact that UQUSA is not a party in the bona fide sale of the goods for export to the United States does not prevent UQUSA from declaring the transaction value on the sale of goods from the foreign manufacturer to UQJP. HOLDING:

Based on the information presented, the sale between UQJP and the foreign manufacturer is a bona fide sale for exportation to the United States. Additionally, UQUSA may declare the sale price between UQJP and the foreign manufacturer as the basis for transaction value. You are to mail this decision to the internal advice requester no later than 60 days from the date of the decision. At that time, Regulations and Rulings of the Office of International Trade 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,

Monika R. Brenner, Chief
Valuation and Special Programs Branch