• HQ H008101
• Oct 09, 2012

• Type : Valuation • HTSUS :
•  Related:   547197; 546602; 543446; 544957; 545991; 546149; 548167; 544239; 548698; 548574; 548236; 548247; 546941; 546953; H092448; H032883; H029658; H097616; H006576   

OT:RR:CTF:VS H008101 CMR

U.S. Customs and Border Protection
Port of Blaine
9901 Pacific HighwayBlaine, WA 98230
Attn: Fines, Penalties and Forfeitures Office

RE: Internal Advice Request; Transaction Value; Related Parties; 19 U.S.C. § 1401a(b)

Dear Port Director:

This decision is in response to a memorandum from the Fines, Penalties and Forfeitures Office at your port requesting guidance as to the proper appraisement method for entries of an importer from its parent for the period May 1994 through April 1999. You forwarded to us information submitted by current counsel for the importer, along with documents submitted by the importer’s previous counsel.

Counsel has requested confidential treatment for certain information contained in the file, including the identities of the parties. We will extend confidential treatment to information determined to be privileged or confidential commercial or financial information in accordance with 19 C.F.R. 177.2(b)(7). In addition, we will withhold the names of the parties involved in this matter and any information which may reveal their identities. Information for which confidentiality is being accorded will be denoted in brackets in the confidential internal advice response and will be redacted in any public version.

FACTS:

The importer was the subject of an “Assist Audit Report,” number 831-04-AT1-AU-18625, dated June 14, 2005. In this case, your port believes the importer acted as a selling agent of its related parent. By contrast, counsel for the importer argues that there was a sale between the parent and the importer and that transaction value applies. The following has been submitted for our review: A copy of one service and supply contract between the importer and a U.S. customer; a “General Service and Cost Contribution Agreement” between the parent and its worldwide subsidiaries, effective January 1, 2001; a contract regarding the “General Conditions of Sale” with respect to sales between the parent and the importer (subsidiary), effective January 1, 2004; the [Group] “Account Sales Manual”, 1992; the “Local Operation Manual”, 1994; and, the 1990 Revised [Receipt] Manual for the [Group] Group. No agreement between the parent and the importer has been produced which was in force during the time of the entries at issue.

In addition, this office has reviewed a “Request for Advance Pricing Agreement and Customs Valuation Ruling,” dated January 2005, and a draft of the request dated July 23, 2004. It is our understanding from the port that an Advanced Pricing Agreement was never pursued with the Internal Revenue Service. Additionally, while a summary statement of a transfer pricing study by an accounting firm hired by the importer was submitted, the transfer pricing study itself was not submitted to the port. Our office received a 1994 Study of Intercompany Pricing, prepared by an outside accounting firm for the year ending December 31, 1994. In addition, we received copies of a “[Subsidiary] Transfer Pricing Updated for Fiscal Years Ended December 31, 1995 and December 31, 1996”, “[Parent, Subsidiary] Analysis of Intercompany Transactions, December 1998, and “[Subsidiary] Transfer Pricing Updated for Fiscal Year Ended December 31, 1998”, performed by the same accounting firm.

The companies

The parent company had a global network of distributors. In 2005, the parent company was bought by another company. Counsel’s submission of January 6, 2006, explains that during the period May 1994 through April 1999 (the relevant time for the entries at issue) the distributors consisted of three types of companies: (1) separately incorporated trading companies such as the U.S. importer (subsidiaries wholly-owned by the parent) who bought and sold products and services in their own name and owned inventory, (2) unincorporated branch offices or wholly-owned subsidiaries that operated on a commission basis by providing services on behalf of the parent, and (3) independent service providers who were fee-based service agents that did not own any inventory and only sold for the account of the parent company.

Although there was no written contract during the time period at issue, we did receive the “General Service and Cost Contribution Agreement for the [Parent] Group,”

effective January 1, 2001, which defines the “Subsidiaries of [the Parent] and states in relevant part:

. . . The Subsidiaries acting as trading companies (agents/distributors) as well as [the Parent] are hereinafter referred to as “Trading Companies”. The Subsidiaries acting as commissioners (commission agents) operating on a percentage commission are hereinafter referred to as “Commission Companies”. The Subsidiaries acting as commissioners (commission agents) operating on a cost plus basis are hereinafter referred to as “Cost + Commission Companies”. (Bold added.)

The definition of subsidiaries provided in the “General Service and Cost Contribution Agreement for the [Parent] Group” is consistent with the definitions provided by counsel in their May 3, 2006 submission of the types of entities in the [Parent’s] worldwide network during the 1990s, i.e. trading companies, commission companies, and independent service providers. See February 6, 2006, submission by counsel at pages 1-2; See also September 5, 2012 submission by counsel at pages 1-2. The “General Conditions of Sale in respect of internal sales between [the Parent] and [the subsidiary]” (hereinafter, “General Conditions of Sale”) states:

These general conditions of sales (the “General Conditions”) in respect of internal sales between [the Parent, the related chemical manufacturer, and the subsidiary] are effective as of January 1, 2004.

The General Conditions are the same as used for internal sales between all entities within [the Parent] Group worldwide. The agreement further states that “[t]he specific terms of each sale shall be set out in a purchase order, which, after the receiver has accepted it, forms an agreement between the relevant parties. These General Conditions shall form an integrated part of such agreement.” Further in regard to delivery terms, the agreement states:

Delivery Terms according to agreement between ordering and delivering site (EXW, FOB, FCA etc.). In the absence of a specific agreement to the contrary, the Delivery Term will be FCA (sellers warehouse) (Incoterms 2000) for all intercompany transactions.

With regard to payments terms and prices, the agreement provides, respectively:

All payments will be netted against the receivables at the end of each month, and the balance settled.

The prices agreed between the seller and the purchaser shall be fixed for each calendar year. In case of considerable changes in the Sellers purchase prices the parties may agree in an amendment in prices agreed. Price corrections may also happen in situations where the seller has made miscalculations.

The payment process during the time frame at issue has been described as a settlement of intercompany accounts on a monthly basis which is consistent with the description in the agreement. Further, “[p]ricing terms between [the Parent] and [the Subsidiary] were established in the same manner under the 2004 Agreement as during the 1990’s.”

And finally of relevance from this agreement, with regard to warranties, it provides:

If a Customer (ship owner) should set forward claims in connection with the purchase of equipment, chemicals or gases towards the Purchaser, such claims shall be handled in accordance with the overall agreement between [the Parent] and the Customer. The Purchaser towards the customer should make no actions unless [the Parent] has accepted the actions. (Emphasis added.)

“The 2004 Agreement did not change the manner in which warranty claims were handled within the [Parent’s Group] for trading companies, including [the Subsidiary].” However, we note that counsel submits that:

U.S. customers purchased directly for (sic) [the Subsidiary], not [the Parent], and there was no contract between [the Parent] and the [Subsidiary’s] customer. The only possible “overall agreement” referenced in the General Conditions of Sale (2004) was the sales terms printed on the back side of the [Subsidiary’s] invoice.

The transactions

The importer imported various supplies and equipment used in the operation, maintenance and repair of seafaring vessels through various ports in the United States. “Approximately 95 percent of [its] imports from May 1994 through December 1999 were from related parties.” While [the Subsidiary] entered some goods purchased from unrelated parties, those entries are not at issue. In the case of goods shipped from [the Parent], the goods were usually shipped from [the Parent’s] distribution center. However, in the case of chemical shipments, the goods were shipped directly from the related manufacturer of the chemicals to U.S. branches of [the Subsidiary]. The chemical sales, however, were claimed to be between the manufacturer and [the Parent], and then from [the Parent] to [the Subsidiary]. In the case of shipments from related parties, identified as stock transfers, it is claimed that the sales were still sales between [the Parent] and [the Subsidiary], i.e., either the related party never held title to the goods and title remained with [the Parent] or the related party sold the goods back to [the Parent] who then sold the goods to [the Subsidiary]. [The Parent] also bought various goods which were used to supply, maintain and repair seafaring vessels from various unrelated manufacturers. A purchase scenario would start with [the Subsidiary] importing merchandise from [the Parent] or another related party either in response to a purchase order from a customer or to replenish its inventory of certain stock items. The purchase order originated from a customer of [the Subsidiary] or from a customer of another related subsidiary of [the Parent]. In cases of the latter, it is our understanding that the customer placed the order with the subsidiary with whom it contracted for products and services and the order was transmitted to the subsidiary responsible for sales and deliveries at the port where the vessel in need of merchandise was or would be docked. These were account sales. [The Subsidiary] basically made two types of sales to customers – account sales based on account sales agreements and port sales (one-off). [The Subsidiary’s] customers in the U.S. consisted largely of vessels docked at U.S. ports. The ship owners of these vessels could be from anywhere in the world and the ships, likewise, could be of foreign registry.

Counsel has indicated that all [of the Subsidiary’s] related party purchases were placed in a [Subsidiary] warehouse. “The product may have been sent from the warehouse to the vessel almost immediately after it arrived at the warehouse, or it may have remained in the warehouse for months to fulfill a purchase order not yet received.”

It is submitted that goods were shipped from [the Parent] to [the Subsidiary] on a cost, insurance, freight (CIF) basis. [The Parent] paid the freight costs and insurance for the goods during transport; however, [the Subsidiary] assumed risk of loss at the time the goods were placed on board the vessel at the port of departure. It is also submitted that [the Subsidiary] took title to the goods at the same time it assumed risk of loss. Five pro forma invoices from [the Parent’s] distribution center to one of [the Subsidiary’s] branches reflect terms of delivery as CIF. The remaining invoices in the file, pro forma and commercial invoices, for shipments from [the Parent] to [the Subsidiary] or from a related party to [the Subsidiary] do not reflect any terms of delivery on the face of the documents. Documents for approximately 83 entries were reviewed, in addition to 8 sample transactions submitted by counsel of goods shipped from [the Parent] or the related chemical manufacturer to [the Subsidiary].

The commercial invoices sent by [the Parent], or in the case of stock transfers, [Parent] branch offices, to [the Subsidiary], contain terms on the back side of the invoices indicating that title does not pass until payment is received. The language on the back of the commercial invoices states, in relevant part:

All contracts for sales and deliveries (including any offers thereto) by [the parent] or its subsidiaries and/or authorized distributors – hereinafter [“Group”] – are made with the customers concerned on the conditions, mentioned underneath, and where appropriate, understood to be concluded with the registered owners of the vessel(s) to which the sale and deliveries are related.

CONDITIONS OF SALE

1. Price and payment The purchase price for the goods supplied shall be in accordance with the price list current at the time and place of delivery. The purchase price shall be paid in full free of bank charges by the Customer to [Group] at the latest within 30 days after invoice date. The Customer shall pay interest of 2.0% per month on all balances overdue.

* * *

3. Title to the goods. Title to the goods purchased shall only pass to the customer upon receipt by [Group] of the purchase-price thereof and provided [Group] has also received from the customer payment on all invoices, due in relation to other goods purchased or services rendered or deliveries made, in all cases including interest and costs where applicable. Prior to the time of said receipt the title to the goods shall remain with [Group]. In the event that payment is not received by [Group] within the 30 days stated in clause 1 above [Group] shall have the right to take repossession of the goods wherever they may be found without any court order or other process of law. * * * *

In addition, this same language appears on the back of the [Group] Receipt Note, also known as a “[Receipt]”, which is issued whenever a delivery/sale is made by [the Parent or a Group entity].

Further, it is submitted that [the Subsidiary] delivered goods to its customers under delivery terms of “free along side” (FAS) the vessel and the customer loaded the goods onto the vessel at his own risk. The same invoice form used in the transactions between [the Parent] (or other related parties) and [the Subsidiary] were used by [the Subsidiary] in its transactions with its customers. With regard to delivery, the terms on the back side of the invoices indicate that:

[I]n several major ports deliveries over [a certain price range] . . . will be made free of charge (list of ports available from [Group]). For deliveries less than [that certain price range] a transport fee of [during the time frame at issue from approximately X to Y] or its equivalent in other currencies will be charged.

In all ports barge, boat and crane hire as well as overtime and waiting time more than 30 minutes will be charged at cost.

In ports not listed with free delivery . . . all deliveries will be made ex warehouse unless otherwise stated in [Group] order confirmation. For deliveries agreed other than ex warehouse the Customer shall reimburse [Group] all transportation and handling costs from the warehouse to such other agreed place of delivery.

When delivery is agreed to take place alongside a vessel the loading of the goods shall be performed by the Customer at his own cost and risk.

Counsel states that [the Subsidiary] had the authority to modify the standard Terms and Conditions printed on the [Group] invoices and did so frequently in making sales to customers for delivery at U.S. ports. To support this claim, counsel submitted a copy of a 1996 [Subsidiary] proposal to a foreign corporation customer (with offices in California) for worldwide account based sales as an example of an account sale, but was unable to locate a copy of the final agreement. The proposal states with regard to delivery:

Free delivery (F.A.S.) will be made in specific ports as per [Group’s] standard terms and conditions.

This comports with the terms on the [Group] invoices which allows for agreement to have goods delivered FAS. But it also states:

Delivery (FAS) is free in [Group] Branch ports as specified in [Group’s] standard terms and conditions. (Bold added.)

With regard to prices, the sample proposal states:

Prices will be as per the attached discount schedule and [Group] price list [(QAM 3-9-8)] valid at the date of delivery in [Group] ports worldwide, except for supplies in designated Key Ports, which will be subject to the net prices listed within this document . . . .

A copy of a Service and Supply Contract, effective in 2003, between [the Subsidiary] and the same foreign corporation customer, identified by counsel as an extension agreement, was provided.

The 2003 Service and Supply contract states:

Shipment terms and prices for Goods shall be FOB BUYER’S designated facility. Title, risk of loss and responsibility to insure the Goods shall pass from SELLER to BUYER, as applicable, at such delivery points.

Based on the 2003 contract, delivery points included the following locations outside the United States: Vancouver, San Pedro, Tahiti, Southhampton, Hamburg, Athens, Piraeus, Barcelona, Singapore, Sydney, Barbados, Las Palmos, Naples and Copenhagen.

A draft of the “Request for Advance Pricing Agreement and Customs Valuation Ruling,” dated “As of July 23, 2004” contains the statement: “All discounted contracts require [the Parent’s] approval to ensure global consistency.” Counsel states the statement was removed from the final APA request, dated January 2005, because it was misleading. Counsel asserts: [The Parent] reviewed the discounts and special terms in proposed account sales agreements to ensure protection of the interests of each subsidiary and branch that would be called upon to make sales and deliveries under the terms of the world-wide account agreements. . . .The parent company, [ ] was responsible for worldwide corporate governance. In that role, [the Parent] routinely reviewed the terms of every proposed account sales agreement negotiated by its subsidiaries to ensure that the proposal protected the interests of each subsidiary and branch office that would be called upon to make sales and deliveries under the terms of the agreement., 

Copies of the “Account Sales Manual”, 1992, the “Local Operation Manual”, 1994, and the [Group] Annual Reports were also reviewed. With regard to account sales and discounts, we note that the “Account Sales Manual” stated:

The following forms, 7-2.13 [“Suggestion for Approval of Improved Terms Compulsory for all Changes in Contracts”] and 7-2.14 [“Customer Discount Registration Form”] are compulsory forms which must be used for all changes of terms and the approval form must, with a copy of your suggested quotation letter and the customer profile form, be sent to [city A in country where Parent located] prior to presentation to your customer.

The office where the customers [sic] headquarter is situated always conducted the terms in cases of multinational customers.

Bonus must be filled in on credit [Receipt] charge to 470, 471 or 472 as in accordance with instructions sent annually. The [Receipt] is sent to [General Manager Sales, [city B in country where Parent located]] for approval (signed by local G.M.) and subsequent processing of credit note which will be sent via the account office.

Counsel states that this does not evidence control by [the Parent] of the transactions, but rather that review and approval by [the Parent] of the discount approval form, which included a copy of the proposed quotation letter, “prior to presentation to the prospective customer . . . is consistent with [the Parent’s] responsibilities over world-wide operations.” Counsel submits that “[the Parent] set the

parameters within which its subsidiaries negotiate account sales agreements with potential account customers, but the negotiations were conducted at the local level.”

The primary responsibility of the various job positions discussed in the “Account Sales Manual,” is to sell the company’s products, programs, services and equipment to those ship owners and operators assigned to the employee’s care. Also of note is the number of positions in the organizational structure of the subsidiary which report to someone at the parent company in addition to reporting to a superior within the subsidiary. The “Account Sales Manual” states in its introduction, in relevant part:

This manual, however, is to be used as a procedure manual to uniform the routines and understanding of [Group].

Coordination, standardization and communication are all key factors in the [Group] network. . . The message must be that this uniformity is more important than individual excellence in our aim of an optimal acc. sales force in [Group]. * * *

. . . Since our customers using our products and services are continually on the move around the world we should emphasize [Group’s] capability as a single world wide company providing professional solutions and assist in solving their problems.

According to the Account Sales chart of responsibility, the General Manager of [the Subsidiary] was also the Account Sales Manager for North and South America. He reported to the General Manager of Sales at [the Parent]. However, as the General Manager of [the Subsidiary], he had account sales managers for the East coast, West coast, and Gulf coast of the U.S. report to him, along with account sales managers for South America. The “Account Sales Manual” states in the job description for account sales managers that: “The Account Sales Manager reports on a daily basis to his General Manager and has a dual reporting responsibility to the Corp. Account Sales Manager at the H.Q. at [city A].” The job description for the account executives with product responsibility also contained a dual reporting responsibility. Specifically, the “Account Sales Manual” states: “The Account Executive reports on a day to day basis to the area Account Sales Managers (in some cases this is synonymous with the Territory Manager) and has dual reporting responsibility to the Product Management at [city A]. With regard to the port sales/service representative responsibilities concerning sales promotion, the “Account Sales Manual” states:

The representative should look up every opportunity to promote sales, regardless of whether a sale will eventually be made in his port. If all parts of the [Group] organization make their contribution, the benefits will accrue to all.

With regard to handling complaints, the “Account Sales Manual” provides that “the Account Office [i.e., the subsidiary who negotiated the account sale] is granted authority to issue credit orders WITHOUT approval from the branch (port of delivery).” For example, if a ship owner or his representative filed a complaint at a branch office in Brazil where a spare part was purchased claiming the part to be defective, but the account had been negotiated at a branch office in New Orleans, Louisiana, a copy of the complaint form would be sent to the office in New Orleans for it to decide how to handle the complaint. New Orleans would decide if the ship owner received a credit. As the Brazilian office sold the part, it would be charged for the credit and informed of the decision. See “Account Sales Manual” (“If subsequent credit is issued, the port office charged must be informed.”).

In regard to the “Local Operation Manual,” the foreword to the manual states: “The information, all routines and guidelines in this manual is mandatory and shall be implemented in all [Group] organizations around the world.” It is signed by two individuals, one of whom is listed as the Group Director Operations and is listed as a Director of [the Subsidiary] on the Corporation Annual Reports filed with the State of Florida for the years 1995 through 1998.

In the “Local Operation Manual”, at Document No. 8.2, page 3 of 5, with regard to sourcing products, it is stated:

Products shall not be ordered from local suppliers if the product is available through one of the [Group] stockpoints with extended product range, unless delivery time or other circumstances makes this impossible.

In the next section, regarding ordering products from local suppliers, it is again stressed, at Document No. 8.3, page 3 of 4:

Products shall not be ordered from local suppliers if the products are available from [the Parent’s distribution warehouse] or through one of the [Group] stockpoints with extended product range, unless delivery time or other circumstances makes this impossible.

Counsel states that the “Local Operation Manual” did not apply to subsidiaries, but only to unincorporated [Parent] branch offices. Counsel draws attention to the fact that the manual references “branch” and “branches” and never refers to subsidiaries. We note that in the 1990 Revised [Receipt] Manual for the [Parent] Group, at page 10.1, there is a listing - “[Group] BRANCH OFFICE (sic) WITH AREA NUMBERS AND VESSEL NUMBERS.” Among the branch offices listed we find – New Jersey, Philadelphia, Houston, Los Angeles, New Orleans and Miami. The denotation of these locations as “branch” offices is of significance.

Counsel for [the Subsidiary] submits that the average markup for non-chemical “sales” between [the Parent] and [the Subsidiary] ranged from [x%] to [y%] for the years 1996 to 1999 and the average markup for chemical sales for the same time frame ranged from [y%] to [z%]. It is stated that the markups were “more than sufficient” to cover [the Parent’s] costs and provide a profit to meet the all costs plus a profit test for arm’s length transactions between related parties.

We have reviewed all of the documents submitted by your port and by counsel (previous and current) in connection with this matter. On the purchase orders from [the Subsidiary] to [the Parent] and those from [the Subsidiary] to [the Parent’s] branch in [foreign city], number references for specific vessels (identified by numbers) are indicated under the heading “Vessel Reference.” In many of the stock transfers, these numbers appear to refer to specific [Subsidiary] branch offices. However, no explanation of the codes was provided. While nearly all of entries in the file are identified as stock transfers from one [Group] branch to another, that is from [the Group entity] in [foreign city] to a [U.S. Subsidiary] branch in the U.S., some clearly involved entries destined for specific customers in the U.S. at the time of entry. For example, for entry [XXX XXXXXXX-X], entered on October 29, 1997 at the Port of Seattle, the ultimate consignee on the Customs Form (CF) 7501 is identified as [Subsidiary Seattle]. Yet, on the pro forma invoice, the consignee is identified as the [named merchant vessel at specific dock location] c/o (i.e., care of) [Subsidiary Seattle]. The pro forma invoice is dated October 17, 1997. This shipment was clearly destined at the time of entry for the ship known as the [named merchant vessel]. Additional similar entries include:

Entry Entry Date CF 7501 Consignee Pro Forma Consignee

[XXX XXXXXXX-X] 12/6/95 [Subsidiary Seattle] [A company] [XXX XXXXXXX-X] 12/20/95 [Subsidiary Seattle] [named merchant vessel] [XXX XXXXXXX-X] 4/19/95 [Marine Supply Company] [Subsidiary in c/o Marine Supply Company]

Sample transactions were submitted for our consideration in counsel’s January 6, 2006 submission. The sample transactions did not include purchase orders from the customers in the U.S. We note the time frames from entry of the goods to delivery to a customer in the U.S. in the summary of relevant actions for each entry: Chemical sales – related manufacturer to [the Parent] to [the Subsidiary] to customer

Entry Invoice to Payment Delivery Invoice Payment Time Date [Subsidiary] Due (customer) (customer) (customer) Days

12/21/98 11/23/98 12/23/98 3/10/99 3/11/99 4/10/99 79

10/26/98 9/25/98 10/25/98 2/16/99 2/28/99 3/30/99 113

1/21/99 12/22/98 1/21/99 3/10/99 3/19/99 5/3/99 48

Product sales – [the Parent] to [the Subsidiary]

Entry Date Invoice to Payment Delivery Invoice Payment Time [Subsidiary] Due (customer) (customer) (customer) Days 5/20/98 5/7/98 6/6/98 6/4/98 6/23/98 8/7/98 15 2/2/98 12/31/97 1/30/98 2/13/98 2/25/98 4/26/98 11

7/1/98 7/16/98 8/15/98 7/4/98 7/10/98 8/9/98 3

Stock transfers

Entry Date Invoice to Payment [Subsidiary] Due

9/20/99 10/7/99 11/6/99 [Vessel reference number noted on purchase order.] 10/27/99 10/31/99 11/30/99 [Vessel reference number noted on purchase order.]

Unrelated manufacturer sales to [Subsidiary]

Entry Invoice to Payment Paid Delivery Invoice Payment Time Date [Subsidiary] Due (customer) (customer) (customer) Days 1/20/05 1/14/05 1/28/05 2/4/05 1/21/05 1/31/05 3/2/05 1

4/12/05 4/6/05 5/21/05 5/23/05 4/14/05 4/14/05 5/14/05 2

5/21/05 5/18/05 7/2/05 6/29/05 5/23/05 5/27/05 6/26/05 2

Factoring Agreement

It is undisputed that the parties had in place a factoring agreement that governed the transactions between them. When goods (imported and domestically obtained) were sold by [the Subsidiary], the account receivable was immediately sold to [the Parent] and the customer was directed to make payment to [the Parent’s] account. [The Parent] deducted the amount it was owed by [the Subsidiary] for the “purchase” of the imported good and deducted a factoring fee (also referred to as a discount rate) for taking on the responsibility to collect the account receivable and for taking on the risk of loss from the sales price received from the customer, and credited [the Subsidiary’s] account for the amount remaining.

In 1992, the aggregate discount rate was 13%, and in 1993 the aggregate discount rate was 9%. In the January 2005 “Request for Advance Pricing Agreement and Customs Valuation Ruling” it was indicated that [the Subsidiary] paid [the Parent] 1% of total sales for factoring its accounts receivables. An example from a 1993 transaction, utilizing the 9% discount rate (no information has been submitted to indicate any adjustment in the discount rates for the years at issue), illustrates the operation of the factoring agreement. [The parent] “sells” a good to [the Subsidiary] for $301.73. [The Subsidiary] sells the same good to a customer for $552.30. The customer pays [the Parent] $552.30 because [the Parent] is the factor. [The Parent] collects $351.44 (the $301.73 it charged [the Subsidiary] plus 9% of $552.30) and [the Subsidiary] is credited with $200.86 from the sale. There are no documents which show actual payment between one related party to the other. Only intercompany ledger pages (Trading Report pages) and journal pages were provided. The intercompany pages show invoice number, order number, invoice date, delivery date, customer number, vessel number, delivering stockpoint, receiving stockpoint, invoiced value and cost value. The journal pages from [the Subsidiary] list purchases described as “09/99 Interco Purchases” with amounts and identify the cost center involved in the transaction. A single credit equal to the total amount owed is also identified with the same general description as provided for the debits. For the intercompany stock transfers, we were provided with pages from the Trading Report showing Seattle as the stockpoint and listing invoice numbers, order numbers, invoice dates, delivery dates, invoice amounts, budget rates, the stockpoints goods were received from (values in) and the stockpoints goods were delivered to (values out). Also, we were provided with summary pages showing various U.S. stockpoints, the value of goods received intercompany and the value of goods delivered intercompany, and, amounts for freight. In addition to payment for goods received, [the Subsidiary] pays [the Parent] various fees for services including information technology services, insurance, cylinder rental, administrative services (human resources), management services and equipment services.

The factoring agreement included the sale of all accounts receivables generated by [the Subsidiary] from sales of imported merchandise, sales of domestically sourced merchandise, and the rendering of domestic services. Therefore, it was a continuous process of credits and debits between the companies for the sale and purchase of goods and the sale and purchase of accounts receivables. The factoring agreement states:

Seller [the Subsidiary] hereby grants, conveys and sells to buyer [the Parent], without recourse (except as expressly set forth herein) all of the Accounts, as such Accounts arise, at the time Seller bills Buyer for such sale. With regard to collections on the accounts, the agreement states:

Buyer [the Parent] shall be responsible for all collections on the Accounts upon purchase; provided, however, that Seller [the Subsidiary] shall cooperate with Buyer’s reasonable requests that Seller assist in collection of Accounts payable from locations in the United States.

Further, with regard to “Use of Accounts,” the agreement states:

Buyer shall be entitled to possession of the original documentation for all the Accounts, including all ledgers, books and records[,] files and credit applications pertaining to the Accounts, print-outs of all computer records pertaining to the Accounts, and all original invoices, conditional sales contracts, leases, delivery receipts, and other security documents and instruments pertaining to the Accounts. The consideration for the sale of each account receivable was the gross amount of the invoice, discounted based on:

Risk, based on historical factors, that an Account will be uncollectible. Delay in collection from date of invoice evidencing each Account, based on historical factors. Risk of loss (arising from currency exchange) based on payment in currency different from the currency in which Buyer [the Parent] books each purchase.

The 1994 Study of Intercompany Pricing explained the factoring agreement and the breakdown of the 9% discount rate. Per the Study, the rate was calculated by adding 4.0% for basic interest, 2% as a regular risk premium, 0.5% for a bad debt reserve, 1.0% for a currency risk premium, and 1.5% for a profit element. The Study reflected that [the Parent] collected on [the Subsidiary’s] accounts receivable 90 to 120 days after the purchase and that the default rate was approximately 0.5%.

[The Subsidiary] employed credit controllers who dealt with credit control and debt collection. The “Account Sales Manual,” at Document No. 7-1.8B, page 1, provides the responsibilities of area credit controllers. Area credit controllers were responsible for “supervis[ing] the areas total credit control and debt collection force. In addition, area credit controllers and credit controllers were responsible, among other things:

To check and send out monthly updated statements to the customers promptly.

. . . for debt collection in such a way that the budget is obtained as far as outstanding receivables and DSO are concerned – and in a flexible way – so that our relationship with the customers is not unnecessarily jeopardized. . . .

Start legal proceedings against extremely bad payers . . . in co-operation with local management or General Manager/Corp. Credit Manager. . . .

Take initiative to arrest vessels, if all other collection efforts have failed. . . .

. . . for the monthly Customer Credit Report to be sent to local management, General Manager/Financial Manager and Corp. Credit Manager within the 20th each month.

Counsel has submitted a statement by [a gentleman], the Business Application Director at [ABC], to explain the factoring and settlement of accounts between [the Parent] and [the Subsidiary] during the years 1994–1999. [The gentleman] was employed by [the Parent] from September 1, 1990 to October 31, 2005 and was a Chief Accountant from September 1, 1990 to April 30, 1995, and a Financial Manager from May 1, 1995 to December 31, 2000. He participated in implementation of the factoring agreement and in account settlements between [the Parent] and [the Subsidiary].

Information which [the gentleman] provided, which is not reflected in the written factoring agreement, included information regarding customer payments. According to [the gentleman]:

Each customer could pay directly into the [Parent’s] USD account set up to implement the Agreement that was designated on the U.S. customer invoice. Customers, for their convenience, regularly paid [the Subsidiary] directly. [The Subsidiary] retained the direct payments in its U.S. bank account for its own discretionary use, but these payments were booked to the intercompany factoring account as cash payments received by [the Subsidiary].

According to [the gentleman’s] statement, at the end of each month, [the Subsidiary] sold all of its monthly receivables to [the Parent] and booked the sale as an intercompany receivable against [the Parent]. In turn, [the Parent] “booked the purchase of each [Subsidiary] customer receivable as an account receivable from each of [the Subsidiary’s] external customers and as an intercompany account payable to [the Subsidiary].” The factoring fee was settled on a monthly basis. “In [the] monthly settlement, the factoring fee and other payables due from [the Subsidiary] to [the Parent] were credited to the [Parent’s] intercompany account. When the total amount of monthly customer receipts exceeded [the Subsidiary’s] total payables to [the Parent] the remaining balance on account was booked and credited to [the Subsidiary]. [The Parent] and [the Subsidiary] maintained an on-going cumulative and current record of their intercompany accounts payable and receivable.”

[The gentleman] also stated that [the Parent] “always booked the factoring fee as ‘other income,’ an account different and separate from its ‘sales revenue’ account.” [The Parent] booked merchandise sales to [the Subsidiary] as “sales revenue.” He further stated that [the Subsidiary] “always booked the factoring fee as ‘other expenses’ [while it] booked its merchandise purchases from [the Parent] as purchase into inventory and consequently, at the time of its sale, as cost of goods sold.”

Further, with regard to calculating the factoring fee, [the gentleman] stated that it “was calculated by multiplying the total amount of purchased [Subsidiary] accounts by the fee rate fixed in the Agreement. [The Subsidiary] booked the fee as intercompany liability against [the Parent], [and] [the Parent] booked it as an intercompany receivable from [the Subsidiary]. . . .”

The 1994 Transfer Pricing Study contains as Exhibit 1, “selected Annual Financial Data” for [the Subsidiary] for years ending December 1994, 1993, and 1992. With regard to “Total Cost of Goods Sold” it includes three elements – cost of goods sold, networking fee, and finance charge (factoring). In the Notes at the bottom of the document it states: “Networking fees and finance charges paid to [the Parent] are treated as a cost of selling goods.”

In his statement, [the gentleman] averred that “[t]he factoring service was in no way linked to any import transactions or paid as consideration for merchandise that [the Parent] sold to [the Subsidiary].” The factoring fee was paid for the factoring service and “[a] large portion of [the Subsidiary’s] total annual factoring fee payment to [the Parent] represented the fee for factoring [the Subsidiary’s] sales of services and of products sourced locally in the United States.” He stated that “[t]he factoring fee has been set at a rate within the parameters identified by [the Parent’s] outside accounting firm for arm’s length factoring services.” Finally, he asserted that “[the Parent] and [the Subsidiary] bookings of the factoring fee payments were clearly in accordance with Generally Accepted Accounting Principles (“GAAP”) in [the Parent’s country] and in the United States.”

ISSUES:

I. Did [the Subsidiary] act as a buyer and seller of the imported merchandise or was [the Subsidiary] acting as a selling agent for [the Parent]?

II. What is the proper method of appraisement for the entries at issue between May 1994 through April 1999?

III. May the importer use “first sale” for appraisal purposes for the importation of chemical goods from its parent?

LAW AND ANALYSIS:

Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. § 1401a. The preferred method of appraisement under the TAA is transaction value, defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States," plus certain enumerated additions. 19 U.S.C. § 1401a(b)(1). These additions apply only if they are not already included in the price actually paid or payable.

[The Subsidiary] claims that the entries at issue should be appraised based upon transaction value. It argues that there is a bona fide sale from [the Parent] to [the Subsidiary] and that the markup by [the Parent] from the price of its acquisition of goods to establish a sales price of the goods to [the Subsidiary] is sufficient to cover [the Parent’s] costs plus allow for a reasonable profit. [The Subsidiary] argues that an examination of the circumstances of the sale shows that this markup qualifies the entries for appraisement under transaction value as the all costs plus a profit were met. With regard to the chemical entries from the related chemical manufacturer, [the Subsidiary] claims the markup in the sale from the manufacturer to [the Parent], and the markup in the sale between [the Parent] and [the Subsidiary], both meet the all costs plus a profit test, and that the “first sale” transaction value should be the method of appraisement for these entries. It is argued that the appraised value is the transaction value of the sale between the related chemical manufacturer and [the Parent].

There is no dispute that the transactions at issue involve related parties as defined in section 402(g) of the Tariff Act of 1930, as amended by the TAA, codified at 19 U.S.C. 1401a. Under 19 U.S.C. § 1401a(b)(2)(A)(iv), transaction value is used for appraisement of imported merchandise “only if” the buyer and seller are unrelated, or if the buyer and seller are related, transaction value is acceptable under 19 U.S.C. § 1401a(b)(2)(B). Your port has questioned the validity of the use of transaction value for the entries at issue. The importer’s counsel urging appraisement under 19 U.S.C. § 1401a(b), transaction value, or 19 U.S.C. § 1401a(f), using a modified transaction value, for the entries at issue.

Bona Fide Sale of Merchandise for Exportation to the United States

In numerous CBP rulings, we have cited to the decision in J.L. Wood v. United States, 62 CCPA 25, 505 F.2d 1400, C.A.D. 1139 (1974) for the definition of “sale” for CBP purposes. The court in J.L. Wood stated that “there is nothing to indicate that the word ‘sales’ was intended to have other than its ordinary meaning, namely: ‘transfers of property from one party to another for a consideration.’” See J.L. Wood at 505 F.2d 1406 (citing J.H. Cottman & Company v. United States, 20 CCPA 344, 356, T.D. 46114, cert. denied, 289 U.S. 750 (1933)). See also, Greb Industries, Ltd. v. United States, 308 F. Supp. 88, 96 (1970) (citing J.H. Cottman & Company, at 356) wherein the court stated that “a sale is defined as a contract by which the absolute ownership of property is transferred from one person to another for a price, sum of money, or other consideration.” More recently, 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, supra).

To determine whether a transaction between two parties is a bona fide sale, CBP must consider the circumstances of the transaction, including: passage of title, assumption of the risk of loss, payment of consideration, ability of the buyer to instruct the seller, ability of the buyer to resell the merchandise at any price to any customer, and the ability of the buyer to order merchandise for the buyer’s own account, i.e., the overall relationship of the parties and whether it demonstrates that they act as buyer and seller. See HQ H092448, dated May 4, 2010; HQ 547197, dated August 22, 2000; and, HQ 546602, dated January 29, 1997.

The Court in Dorf International, Inc. v. United States, 61 Cust. Ct. 604; 291 F.Supp. 690 (1968) stated with regard to the assessment of the relationship between the parties to a transaction:

. . . It is of course basic that the decisive consideration which distinguishes a principal-agent relationship from a buyer-seller relationship is the right of the principal to control the conduct of the agent with respect to the matters entrusted to him. E.g., Smith v. Cities Service Oil Co., 346 F.2d 349, 352 (7th Cir. 1965); Wasilowski v. Park Bridge Corp., 156 F.2d 612 (2d Cir. 1946); Esmond Mills v. C.I.R., 132 F.2d 753, 755 (1st Cir. 1943), cert. denied 319 U.S. 770. Which of these relationships exists is to be determined by the substance of the transaction – not by the labels the parties attach to it. E.g., Mechem On Agency (2d ed.) § 47. No single factor is determinative; rather, the relationship is to be ascertained by an overall view of the entire situation, with the result in each case governed by the facts and circumstances of the case itself. [Citations omitted.]

Counsel, relying on VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), argues in his March 28, 2011 submission that “[i]t is settled law that the extent of a parent company’s control over a subsidiary company that is a purchaser and importer is immaterial to the determination of whether the price between the related parties is acceptable for transaction value.” Counsel further argues that “it is irrelevant whether the conduct of [the Subsidiary] conforms to certain policies established by its parent company, [ ].” CBP disagrees that [the Subsidiary’s] conduct with regard to its parent is irrelevant; however, we do agree that in the case of related parties, determining whether the parties act as buyer and seller or principal and agent is of less significance under the current value statute as reflected in recent court cases, including VWP.

In La Perla Fashions, Inc. v. United States, 9 F.Supp. 2d 698 (1998), aff’d without opinion, 185 F.3d 885 (Fed. Cir. 1999), the Court of International Trade stated with regard to related parties transactions and agency:

. . . The Court recognizes that the statute emphasizes the focus on the transfer price, not the presence of an agency relationship. Once La Perla stipulated that the transfer price was affected by their relationship with GLP, its burden is to prove approximate value under § 1401a(b)(2)(B).

* * *

. . . The Court reiterates that the locus of valuing imported merchandise is predicated on the price of the same or similar merchandise that is negotiated at arm’s length reflecting market-based influences and does not rely on a finding of agency. . . .

In VWP, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit stated:

. . ., the fact that a parent corporation controls a subsidiary and dictates the price that the subsidiary charges for merchandise it sells does not necessarily mean, under the statute, that the price may not serve as the basis for transaction value.

The Court went on to explain that because the parties in VWP, VWPC and VWPA, were related parties under 19 U.S.C. § 1401a(g)(1)(F), they were “not one and the same” as held by the Court of International Trade. Therefore, sales between the parties could serve as the basis for transaction value appraisement provided the sales met the requirements of 19 U.S.C. § 1401a(b)(1), and the requirements of 19 U.S.C. § 1401a(b)(2)(B) regarding the acceptability of the transaction value were met.

Although the courts, based on the cases previously discussed, no longer focus on the relationship between the related parties, but instead focus on the consideration exchanged between them, the relationship of the related parties has not become irrelevant and a bona fide sale must still occur between them. See La Perla, supra at 704, wherein the Court stated: “Transaction value cannot be based on a transaction that is found not to be a bona fide sale.” Further, in VWP, supra at 1339, the court concluded that “in order for merchandise to be ‘sold’ for purposes of 19 U.S.C. § 1401a(b)(1), there must be a transfer of title from one party to another for consideration [footnote omitted].”

Passage of Title

Counsel argues that title transferred at the time of export to the United States based on the use of the shipping term CIF. CIF is an Incoterm i.e., an international commercial term. Incoterms address the responsibilities of the buyer and seller with regard to the delivery of goods which are the subject of a contract for sale. They indicate at which point in delivery the risk of loss transfers from the seller to the buyer and who has responsibility for freight costs, insurance and customs clearance. They do not indicate when ownership, or title, to the goods transfers. See Incoterms 1990, Entry into Force 1st July 1990, ICC Publishing S.A. (Paris 1990); See also, Incoterms 2000: ICC Official Rules for the Interpretation of Trade Term, ICC Publishing S.A. (Paris 1999), at 6; and, St. Paul Guardian Insurance Co. v. Neuromed Medical Systems and Support, 2002 U.S. Dist. LEXIS 5096 (S.D.N.Y. March 26, 2002), wherein the court states “INCOTERMS, however, only address passage of risk, not transfer of title. [citation omitted].”

Incoterms may be incorporated into a contract and parties may specify that title passes at the same time as risk of loss based on the Incoterm used, but in this case we have no contract. Counsel submits that the related parties intended title to transfer based on the Incoterm CIF; however, of the documents reviewed for 91 entries, only five pro forma invoices indicate CIF delivery terms. As indicated in the facts, the remaining pro forma invoices and all of the commercial invoices are void of delivery terms on the face of the documents. The commercial invoices, however, and the receipt notes, have printed terms on the back as indicated in the facts portion of this decision.

Based on Orbisphere Corporation v. United States, 726 F. Supp. 1344, 1357 (1989), the terms printed on the invoices and receipt notes control the passage of title to the imported goods. In that case, the Court of International Trade stated with regard to terms and conditions printed on the sales invoices for all products at issue therein – “The company therefore was legally bound by these terms and conditions in these transactions . . . .” The terms on the [Group] invoices and receipt notes provide for title retention by the seller until the buyer has paid in full for the goods.

In this case, the United Nations Convention on Contracts for the International Sale of Goods (CISG) is applicable to the transactions between [the Parent] and [the Subsidiary], as both the United States and [the Parent’s country] are signatories., ,  However, except as otherwise expressly provided for in the CISG, the CISG does not address “the effect which the contract may have on the property in the goods sold.” See Article 4, United Nations Convention on Contracts for the International Sale of Goods. In other words, the CISG does not regulate passage of title. We have been told there was no sales contract in effect between the related parties during the time period at issue, 1994-1999. The “General Conditions of Sale” is the earliest written sales agreement between the parties of which CBP is aware; we note, it did not address transfer of title to goods. Counsel argues the terms of sale between [the Parent] and [the Subsidiary] as CIF with title and risk of loss passing from [the Parent] to [the Subsidiary] at the time and place of shipment. Without a sales contract between the parties, we must apply the provisions of the U.C.C. to determine when title to the goods was transferred. In Headquarters Ruling Letter (HQ) 543446 of April 2, 1986, this office relied on § 2-401(2) of the Uniform Commercial Code which, in pertinent part, stated:

Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even though a document of title is to be delivered at a different time or place . . . .

Referring to the quote above from § 2-401(2) of the U.C.C., we concluded “unless the parties otherwise agree, title passes from the seller to the buyer on delivery of the property, irrespective of whether the agreed-upon purchase price has actually been paid.” In the instant case, [the Parent’s] security interest in the goods survives the sale from [the Subsidiary] to the ultimate customer because notice is provided, via the title retention clause in paragraph 3 on the back of the invoice, that prior to receipt of payment on the goods, and payment on all invoices due for other goods or services, title to the goods shall remain with [Group]. The invoice indicates that references to [Group] include [the Parent] or its subsidiaries and/or authorized distributors. See “FACTS” portion of this decision. If we accept [the Subsidiary’s] assertion that the title passed when the risk of loss passed based on the Incoterm CIF, title appears to pass from [the Parent] to [the Subsidiary] at the time the goods crossed the ship’s rail as argued by counsel by application of the U.C.C.; however, due to the retention of title clause in the terms of sale, [the Parent] retained a security interest in the delivered goods until paid in full. We note, again, that only five pro forma invoices indicate CIF delivery terms of 91 entries reviewed.

With regard to a “sale” within the definition of J.L. Wood, the parties have shown a transfer of property by one party to another, that is, goods are physically transferred from [the Parent] to [the Subsidiary]. Although title is claimed to pass when risk of loss passes, we have not yet concluded if there is a sale; and, without a sale, title does not pass. We must still determine if the transfer of goods was accompanied by an exchange of consideration. From Barron’s Law Dictionary, we find “consideration” defined as “the inducement to a contract, something of value given in return for a performance or a promise of performance by another, for the purpose of forming a contract.” Without an exchange of consideration, i.e., payment, promise to pay or some other negotiated performance or promise, there is no sale.

Consideration

With regard to [the Subsidiary’s] payments for goods purchased from [the Parent] and their accounting records, counsel’s January 6, 2006 submission states:

[The Parent] and [the Subsidiary] record each sale/purchase between them by posting the appropriate account receivable/payable in their books and making the appropriate reduction/addition in their inventory records. On a monthly basis, [the Parent] prepares a “Trading Report”, which records all transactions between [the Parent] and [the Subsidiary] by invoice number. The Trading Report is the official inter-company record of product sales and purchases. . . .

In response to our request for evidence of payment between [the Subsidiary] to [the Parent], counsel referenced the above, in part, and portions of an earlier submission regarding the factoring agreement. It is argued the intercompany accounts were settled monthly “based on [the Subsidiary’s] customer/end user payments during the month, which were applied against payables due to [the Parent] for goods purchased by [the Subsidiary] and for the factoring commission. After monthly settlement of payables from [the Subsidiary] to [the Parent], [the Subsidiary] was credited with any remaining balance of account.” No evidence of any payments from [the Subsidiary] to [the Parent] has been presented to CBP although requested by the port and by this office. In response to a request to clarify whether either party transferred funds to the other, this office was informed that cash transfers did take place.

Counsel explained that:

[i]ntercompany payment in a given transaction is recorded in the books and records of the company and becomes a credit or a debit depending on which side of the transaction the company is on. In intercompany accounting, where a company has a positive credit position in the intercompany account . . . it has cash availability within the company’s banking facilities and it is generally able to draw against those facilities when cash is needed. . . .

* * *

. . . [The Subsidiary] drew funds from the intercompany accounts as needed to meet their requirements for working capital. These cash payments were deducted from any balance in the intercompany account in [the Subsidiary’s] favor at the time of cash transfer. If there was no [Subsidiary] balance of account at the time of a cash transfer, such advances were treated as loans. [The Subsidiary] balances or deficits in the intercompany account resulted from offsetting accounts receivable and customer payments against [the Subsidiary’s] liabilities to [the Parent] for goods purchased in sales for exportation and factoring fees. 

Counsel further explained by letter, dated March 6, 2012, that “[e]ach corporate entity maintained its own separate bank account. . . .[The Subsidiary] paid its excess cash into [the Parent’s] separate bank account, and where appropriate [the Parent] remitted cash into [the Subsidiary’s] separate bank account. All such payments were booked in the intercompany accounts in accordance with GAAP.”

The factoring agreement was the method of payment that is supposed to reflect what is described as a sale of goods from [the Parent] to [the Subsidiary]. The transactions were structured by the related parties so that the payment for the goods flowed to the parent directly from the ultimate customer. [The Parent] acted not only as the supplier of the imported goods, but also as the financing agent of the transactions between itself, [the Subsidiary] and the ultimate customer. At the time of importation of the goods to [the Subsidiary], the related parties knew that payment would be structured so that the ultimate customer, not [the Subsidiary], ultimately paid [the Parent] for the imported goods. Money flowed directly from the customer to [the Parent].

With regard to the imported goods sold to a customer in the U.S. by [the Subsidiary] or held in inventory, we have been told the parties reconciled accounts monthly and “[the Subsidiary] was credited with any remaining balance of account.” The crediting of remaining balances to [the Subsidiary], and thus the flow of money from [the Parent] to [the Subsidiary], was due to the fact that all commercial invoices of [the Subsidiary] were factored to [the Parent] and payments for goods were made by the customers to [the Parent]. The only evidence of payment that is offered by counsel is the recordation of transactions in the related parties’ books. However, we note that the intercompany ledger and journal pages that have been provided to us only serve to show that invoices for shipments were logged in, showing the shipments sent and received, and the value of the shipments. Only with regard to the [Subsidiary’s] journal voucher pages submitted with the stock transfer transaction samples, is an offset shown for the debits. Further, that offset is one line for intercompany credit (presumably [the Subsidiary’s] sales to other related parties) showing a total credit which equals the total debit owed for [the Subsidiary’s] intercompany purchases. Recordation of actual invoices and payments for individual invoices are not shown on that document.

Counsel argues that the recordation in the accounting books of the parties is sufficient evidence of a sale. He asserts that the submitted statement by [the gentleman] regarding the monthly reconciliation of accounts by the parties and the maintenance of “an on-going cumulative and current record of their intercompany accounts payable and receivable” satisfies the payment requirement necessary to show bona fide sales occurred and establishes that the parties were seller and buyer of the imported goods for Customs purposes. Counsel cites to HQ 543446, mentioned above, and HQ H032883 of March 31, 2010 to support his argument. In our view, these rulings are not applicable to the instant case.

Transaction value is “the price actually paid or payable for the merchandise when sold for exportation to the United States”, plus certain enumerated additions. See 19 U.S.C. 1401a(b)(1). In HQ 543446, the U.S. subsidiary remitted lump-sum payments to its parent for imported articles, and administrative and other services provided by the parent. The ruling determined that title could pass from one party to the other whether or not the purchase price had been paid. This would follow the language of 1401a(b)(1) previously quoted whereby the price may be “payable.” In HQ 543446, the subsidiary did make payments to its parent. Furthermore, while HQ 543446 found that title passed and therefore bona fide sales occurred between the parent and the subsidiary, the decision also found that because the lump-sum payments by the subsidiary to the parent could not be linked to specific import transactions or invoices, there was insufficient information on which to determine the price actually paid or payable for the merchandise. Therefore, transaction value could not serve as the basis of appraisement. In this case, no evidence of any physical transfer of funds, such as wire transfers, checks, etc., of any kind at any time by the subsidiary to the parent has been presented to CBP.

In the case of HQ H032883, the related parties bought and sold goods from each other. Shipments from the Canadian subsidiary to the Company were recorded in the Company’s intercompany trade account as accounts payable; while shipments from the Company to the Canadian subsidiary were recorded as accounts receivable. On a monthly basis the month-end balance was determined and a debit or credit was issued. The parties used a “payment in kind” system rather than a “cash payment” system and demonstrated to CBP their intercompany account system. In their case, these companies could demonstrate the exchange of consideration to substantiate the sale of goods, i.e., they constantly offset the monies owed, i.e., the payables, to each other in the intercompany books based upon their sales and purchases to each other.

Besides the differences noted above, this case differs from HQ 543446 and HQ H032883 due to the factoring agreement. While counsel claims that the purchase of the accounts receivables is akin to the purchase of goods by the parent company in H032883, the factoring agreement is different. By means of the factoring agreement, the parent company provided financing to its subsidiary, basically financing the “purchase” of its goods by the subsidiary. In counsel’s February 6, 2006, submission, the factoring arrangement is explained. Counsel stated therein: “The [Parent - Subsidiary] factoring arrangement mirrors typical factoring arrangements between unrelated parties in all respects and should be treated accordingly.” We disagree. Just as in the sale of goods between related parties under transaction value, a factoring agreement between related parties must be determined to be at arm’s length to be valid. Counsel urges CBP to treat the factoring arrangement the same as one between unrelated parties.

Even if we were to conclude that sales occurred between [the Parent] and [the Subsidiary], [the Parent] retained a security interest in the goods based on the title retention clause discussed earlier. This ensured [the Parent] the right to payment for the goods from the customer receiving the goods in the U.S. When [the Subsidiary] sold the accounts receivable to [the Parent], [the Parent] received a security interest in the accounts along with title to them. After the factoring of the accounts receivable, [the Parent] had dual security interests, one in the goods and one in the accounts receivable. [The Parent] had two grounds upon which to retrieve payment for the goods shipped to a customer in the U.S. and delivered by [the Subsidiary] to the customer. Under the title retention clause, [the Parent] was entitled to the payment amount owed by [the Subsidiary] and could seek such amount from the customer receiving the goods in the U.S. based on its continuing security interest in the goods; and, under the factoring agreement, [the Parent] was entitled to collect the entire payment owed by the customer receiving the goods in the U.S. However, we note the factoring agreement was not U.C.C. recorded in California. Therefore, the security interest in the accounts receivable was not perfected. Security interests in accounts receivable are secondary to maritime liens in order of payment in the case of the arrest of a vessel.

Factoring Agreement

Factoring is defined in American Factoring Law, by David B. Tatge, David Flaxman, and Jeremy B. Tatge, (BNA Books, 2009), at 794, in relevant part, as:

[t]he sale of trade accounts at a discount, where title to the accounts passes to the purchaser as a matter of law ab initio (i.e., in a true sale). Under prevailing U.S. jurisprudence, this generally occurs where a factor purchases accounts without recourse to its client if a purchased account is not timely collected due solely to the bankruptcy, insolvency, or financial inability to pay of the account debtor; in other words, the factor assumes full credit risk. . . .

Since the factoring agreement is the mechanism by which [the Subsidiary] transferred consideration to [the Parent] for payment of goods and services, if the factoring agreement is not an arm’s length agreement, we have no bona fide sale between the related parties.

The factoring agreement between [the Parent] and [the Subsidiary] was by its terms without recourse. Therefore, it was purported to be a contract for a true sale of the accounts receivable. Title, i.e., ownership, of the accounts receivable, passed from [the Subsidiary] to [the Parent]. Under the factoring agreement between [the Parent] and [the Subsidiary], all of [the Subsidiary’s] accounts receivable are factored, i.e., sold, to [the Parent]. The information presented in the record is somewhat conflicting as to when the sales of the accounts receivable occurred. The factoring agreement indicated that the accounts receivable were sold as they arose, “at the time Seller bills Buyer for such sale.” [The gentleman] states that [the Subsidiary] sold all of the monthly receivables to [the Parent] at the end of each month. However, the 1994 Study of Intercompany Pricing, prepared by an outside accounting firm, stated whenever [the Subsidiary] invoiced a customer, that bill was immediately factored to [the Parent]. Three of the commercial invoices to customers receiving goods from [the Subsidiary] purchased from unrelated parties, in counsel’s submission of January 6, 2006, provide on the face of each invoice that the invoice has been factored to [the Parent]. The related party chemical and product sales invoices to customers receiving the goods in the U.S. do not reflect that the invoices have been factored to [the Parent].

In the 1994 Study of Intercompany Pricing, at 11, it is stated with regard to the factoring of the accounts receivable:

[The Parent] purchases all of [the Subsidiary’s] accounts receivable and assumes responsibility for collecting all payments due to [the Subsidiary]. The change of title of the receivables is instantaneous since [the Subsidiary] issues customer invoices payable directly to [the Parent]. In this way, [the Subsidiary] eliminates the risk and administrative costs associated with receivables, one of the most important functions and risks associated with the distribution activity. [The Parent] assumes a significant amount of foreign currency exchange risk in assuming [the Subsidiary’s] receivables since purchases are converted into the customer’s preferred currency using the official New York rate of exchange at the date of delivery.

The 2005 Request for APA stated at 32:

[The Parent] instantly purchases all of [the Subsidiary’s] accounts receivable and assumes responsibility for collecting all payments due to [the Subsidiary]. Therefore, [the Subsidiary] eliminates the risk and administrative costs associated with accounts receivable.

Based on the factoring agreement, the description of the factoring process in the 1994 Study of Intercompany Pricing and the 2005 Request for APA, in addition to the three commercial invoices to customers submitted which reference the factoring of the invoices on their face, we believe the accounts receivable were factored at the time they were created. For purposes of maintaining the intercompany books, a monthly accounting occurred and the accounts were reconciled.

In response to a question on the purpose of the factoring agreement which supposedly shifted the responsibility for collection of the accounts receivable to [the Parent] when [the Subsidiary] continued to employ individuals to collect debts owed, counsel explained, in part:

. . . If a U.S.-based customer failed to make the required payment for goods or services delivered anywhere in the world, [the Subsidiary] was best positioned to interact with that customer in order to effect payment. Customer credit worthiness and timely collections directly affected the bottom line for [the Subsidiary] and for the Group as a whole. . . .

We note the factoring agreement did indicate that the “Seller shall cooperate with Buyer’s reasonable requests that Seller assist in collection of Accounts payable from locations in the United States”, however, there is no indication that [the Subsidiary] received any compensation for its work in ensuring the payment of the accounts receivable it sold to [the Parent]. In an arm’s length agreement, we would expect the seller to be compensated for efforts made on behalf of the buyer of the accounts receivable. Yet, the factoring agreement did not provide for any compensation to [the Subsidiary] for the expenses it incurred pursuing collection of accounts receivable. These efforts by [the Subsidiary] included filing in court actions against vessels for failure to pay. See e.g., [Maritime court case, (E.D. La. 1999), 1999 AMC [ ]; and [Maritime court case, (E.D. La. 1999), 1999 U.S. Dist. LEXIS [ ].

Further, we note that paragraph 6.a. of the factoring agreement states:

Except as expressly provided herein, Seller and Buyer shall share equally any liability, loss, cost or expense (including attorneys’ fees) arising from the sale and purchase of the Accounts. Paragraphs 6.b. and 6.c. each address indemnification by a party of the other against any and all liabilities, causes of action, claims, demands, costs and expenses, based upon, arising out of, or related to a party’s breach of one’s representations or warranties, or any act or omission by the party or its agents or representatives relating to collection of the accounts. Additionally, [the Subsidiary] indemnifies and holds harmless [the Parent] against any and all liabilities, causes of action, claims, demands, costs and expenses, based upon, arising out of, or related to any sales tax arising from the sales and purchase of the accounts. The language of paragraph 6.a. indicates that the parties, [the Parent] and [the Subsidiary] equally shared any losses, costs or expenses, arising from the sale and purchase of the accounts receivable. We interpret this to mean that if a vessel failed to pay on its account receivable, [the Parent] and [the Subsidiary] equally shared the loss associated with the failure to pay or equally shared the cost or expense of arresting the vessel. When the factoring agreement is considered in light of paragraph 6.a., it no longer appears to be a true sale of accounts receivable.

This office sought clarification of the meaning of paragraph 6.a. and we were informed that it was “not intended and has never been interpreted to modify the ‘no recourse’ terms set forth in paragraph 1.a) of the [factoring] agreement. . . [the] client has not been able to identify any situation in which the indemnity clause . . . was ever invoked by either [the Parent] or [the Subsidiary].” In addition, it was submitted “[t]here is no evidence that [the Parent] and [the Subsidiary] shared equally any costs associated with maritime liens.”  A factoring agreement, without recourse, as this agreement initially appeared to be, as counsel argues it is, and as it was characterized in the 1994 Transfer Pricing Study and the 2001 Request for APA, shifts all loss for failure to pay the accounts receivable to the buyer, in this case, [the Parent]. In a factoring agreement, without recourse, the buyer cannot turn to the seller for compensation should the debtor fail to pay a purchased account receivable.

Notwithstanding counsel’s explanation of paragraph 6.a., we cannot ignore the plain language of the provision. Based on the language of the factoring agreement at issue, neither the buyer nor the seller is protected from loss should the debtor fail to pay unless the buyer or the seller is somehow at fault as described in paragraphs 6.b. and 6.c. Otherwise, they equally share any loss under the agreement.

Counsel has argued that the factoring agreement is a financial arrangement separate and part from the sale of the goods. Counsel likens the factoring fee to interest and argues against the fee being dutiable. Counsel cites to Luigi Bormioli Corp v. United States, 304 F.3d 1362 (Fed. Cir. 2002), and Skechers U.S.A., Inc. v. United States, 27 C.I.T. 1225, wherein the courts recognized the criteria in Treasury Decision (T.D.) 85-111, entitled “Treatment of Interest Charges in the Customs Value of Imported Merchandise,” 50 Federal Register 27886 (July 8, 1985), as a reasonable method of determining the dutiability of interest.

The issue presented is whether the factoring agreement was an arm’s length agreement between the parties for purposes of transferring consideration from the importer/subsidiary to the parent for payment of goods. Counsel argues the factoring agreement was a U.S. financing arrangement for the benefit of [the Subsidiary] and therefore, it was “subject to evaluation based on comparable factoring arrangements available to [the Subsidiary] in the United States.” (Emphasis original) [The Parent] was the supplier to [the Subsidiary] and, as argued by counsel, provided financing to [the Subsidiary] via entries on the intercompany books.

While we agree that factoring agreements, including those that are “true sale” agreements, are methods by which companies may obtain financing, we disagree with counsel’s characterization of the factoring fee as similar to interest. The factoring agreement is written as a sale of the accounts receivable without recourse, i.e., a true sale. The factoring fee, or discount rate, is based on risk of collection on the account, delay in collection and risk of loss due to currency exchange rates. See Agreement for Sale and Purchase of Receivables. Therefore, the information relating to U.S. short term prime lending and commercial paper interest rates from 1994 through 2011, submitted by counsel, is not particularly helpful to us in assessing the discount rate in the factoring agreement.

In addition, the 1994 Transfer Pricing Study comparison of the factoring agreement’s discount rate to U.S. companies’ discount rates to argue the agreement was arm’s length is not persuasive. The comparables used for comparison of the discount rate consisted of 5 companies. As part of the formula for the discount rate in the agreement was the risk of loss based on currency exchange rates; companies which shared that concern would be useful comparisons. However, the comparable companies included one which bought receivables generally consisting of retail installment sales contracts secured by liens on the related motor vehicles. The company’s clients were primarily located in Texas. Only one company appears to buy receivables from the sale of goods and services on a non-recourse basis, but those receivables are generated by related companies. The small base of companies, the failure to indicate whether their factoring was with or without recourse (with the exception of one), and the failure of any to be related to the industry in which [the Parent] and [the Subsidiary] sell goods, i.e., the maritime industry, weakens any relevancy of the transfer pricing report as it pertains to the discount rate. The same is true of the 1996 Transfer Pricing Update which included only 3 companies for comparison purposes, including the one whose clients were primarily in Texas.

In addition, the 1994 study references a rate quote obtained from an unrelated financial institution. The rate quoted was 9% which was identical to the discount rate in the factoring agreement. However, the quote was based upon general assumptions which weaken its reliability as an objective comparable.

The 1998 Transfer Pricing Study included 7 comparables for purposes of assessing the arm’s length nature of the discount rate between [the Parent] and [the Subsidiary]. Four of the comparables dealt with financing in the automobile industry. One company specialized in the purchase, management and collection of used motor vehicle sub-prime credit receivables. Another specialized “in the purchase and retention of receivables originated by franchised automobile dealers from the sale of new and late-model used vehicles to consumers with substandard credit profiles.” Of the other two companies, one provided financing indirectly to borrowers with limited credit histories, low incomes or past credit problems. We note that the 1994 Transfer Pricing Study rejected companies that stated their customer base consisted of customers with sub- or non-prime credit histories, noting that “[w]ith a default rate of only 0.5 percent, [the Subsidiary’s] accounts receivable is not considered sub-prime.” The 1998 Transfer Pricing Study indicated the same default rate for [the Subsidiary’s] accounts receivable as the earlier study. The remaining three companies provided financing to small to medium sized companies through the purchase of their accounts receivables (we note one also provided loans secured by accounts receivable). Eliminating the companies involved with automobile financing because of sub-prime receivables and the distinct nature of their financing, there is no indication that any of the remaining companies shared the currency exchange risk concern that [the Parent] had in factoring receivables. In addition, only one company was indicated to factor without recourse. The study is simply not persuasive as to the arm’s length nature of the factoring agreement’s fee. The accounts receivable were factored to [the Parent], yet [the Subsidiary] employed individuals to collect on the accounts and accepted payments from customers who had notice to pay [the Parent]. As stated by [the gentleman], customers regularly paid [the Subsidiary] directly. The payments were kept by [the Subsidiary] and booked to the intercompany factoring account as cash payments received by [the Subsidiary]. Although the agreement stated that [the Parent] would be responsible for all collections on the accounts payable upon purchase with [the Subsidiary] cooperating with reasonable requests for assistance on collection from U.S. locations, [the Subsidiary] pursued collections in court with no apparent compensation from [the Parent]; certainly none was provided for in the factoring agreement. The agreement in practice did not reflect the representations of the agreement in the transfer pricing studies or the 2005 Request for APA wherein it was clearly represented that the factoring of the accounts receivable eliminated [the Subsidiary’s] risk and administrative costs associated with accounts receivable.

Arm’s Length Standard

The Statement of Administrative Action (SAA) for the TAA discusses the use of transaction value by related parties. It addresses two methods, circumstances of the sale and test values, by which to determine whether transaction value between related parties is acceptable. With regard to the circumstances of the sale, the SAA states: . . . the Customs Service will examine relevant aspects of the transaction, including the way in which the buyer seller organize their commercial relations and the way in which the price in question was arrived at, . . . If it is shown that the buyer and seller, although related, buy and sell to each other as if they were not related, this will demonstrate that the price has not been influenced by the relationship and the transaction value will be accepted.

The SAA goes on to offer examples of how the parties may show their transaction is not influenced by the relationship. The examples are that the price is settled in a manner consistent with the normal pricing practices of the industry in question, or with the way the seller settles prices with unrelated buyers; or, the price is sufficient to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit over a representative period of time in sales of merchandise of the same class or kind. “Statement of Administrative Action,” H.R. Doc. No. 153, 96 Cong., 1st Sess., Pt II, at 449 (1979). These examples are repeated in the CBP Regulations at 19 CFR § 152.103(l). However, as recently stated by CBP in HQ H029658, dated December 8, 2009, “[t]hese are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well.”

The SAA focuses on determining whether the price between the related parties has been influenced by the relationship. However, it also states that CBP will examine relevant aspects of the transaction. Relevant aspects of the transaction include the manner in which consideration is or will be transferred from the buyer to the seller. In the transactions at issue, the factoring agreement between the parties is the mechanism by which [the Subsidiary] transferred consideration to [the Parent] for payment of goods and services and thus, a relevant aspect of the transactions.

When looking to whether the factoring agreement between the related parties is an arm’s length agreement, we consider whether unrelated parties would enter into such a transaction.

Black’s Law Dictionary, defines “at arm’s length” as follows:

Beyond the reach of personal influence or control. Parties are said to deal “at arm’s length” when each stands upon the strict letter of his rights, and conducts the business in a formal manner, without trusting to the other’s fairness or integrity, and without being subject to the other’s control or overmastering influence.

The factoring agreement at issue (which included all accounts receivable, including accounts receivable resulting from the sale of goods obtained from unrelated manufacturers and services performed by [the Subsidiary]) is unlike typical factoring agreements providing for recourse or without recourse. The agreement states the sale is “without recourse,” yet, [the Subsidiary] continued to perform collection activities with no apparent compensation for such work and, per the language of the agreement, shared any loss or expense associated with the accounts receivable with [the Parent]. The purpose of a factoring agreement, without recourse, is to shift the credit risk to the factor and save administrative costs from the collection process. [The Subsidiary] appears to have only shifted half of the credit risk and still bore costs from collections. We would not expect unrelated parties to agree to such terms. Further, [the Parent] was “entitled to possession of the original documentation for all the Accounts, including all ledgers, books and records[,] files and credit applications pertaining to the Accounts, print-outs of all computer records pertaining to the Accounts, and all original invoices, conditional sales contracts, leases, delivery receipts, and other security documents and instruments pertaining to the Accounts.” See “Factoring Agreement” at paragraph 3. While one would expect a factor to have access to records necessary to administer an account receivable, it is unusual that a purchaser of accounts receivable would be entitled to possession of all original records pertaining to the accounts receivable it purchased. In addition, as already discussed, we have not been provided with sufficient information regarding the factoring agreement’s discount rate to find it meets the arm’s length requirement.

For the reasons discussed above, we find the factoring agreement is not an arm’s length agreement. The transactions for goods imported by [the Subsidiary] from [the Parent] were structured so that customers receiving goods in the U.S., not [the Subsidiary], provided consideration for goods to [the Parent]. [The Parent], in essence, financed the “purchase” of its goods by [the Subsidiary] and all payments flowed to [the Parent] from [Subsidiary] customers. The factoring agreement was the means by which consideration was “transferred” from [the Subsidiary] to [the Parent] for payment for imported goods and other fees or charges owed to [the Parent].

Based on a totality of the circumstances, we find there was no bona fide sale of goods between the related parties. We do not find a transfer of consideration between the related parties. As such, there is no sale and title could not pass from [the Parent] to [the Subsidiary]. See HQ H097616, dated November 21, 2011, wherein CBP found the middleman never held title to the goods due to the use of a trust receipt. Further, evidence of passage of title is lacking. While arguing that title passed based on the Incoterm CIF, of the documentation for entries in our files, only 5 documents contained that term. The structure of the transactions may be argued to reflect a sale between the related parties, but the substance of the arrangement reveals [the Subsidiary] acted as a selling agent.

Since there is no sale between [the Parent] and [the Subsidiary], there is no need to address counsel’s argument that the mark-up applied by [the Parent] to goods shipped to [the Subsidiary] to arrive at a transfer price was sufficient to cover all costs and provide a reasonable profit., 

Maritime Lien

With regard to [the Parent’s] security interest in the goods sold to customers in the U.S., counsel asserts “[t]here was no need for a UCC filing because [name common to group] had the unique right to ‘arrest’ any vessel that has failed to pay for goods received . . .” (footnote omitted). Counsel has clarified the reference to [the Group name] meant [the subsidiary], not [the parent] in this statement.

Holders of maritime liens take priority over holders of perfected U.C.C. security interests. See In re Topgallant Lines, Inc., 1993 AMC 2775, 154 B.R. 368 (S.D.Ga. 1993), aff'd, 20 F.3d 1175 (11 Cir. 1994). In Sunrise Shipping Limited v. M/V American Chemist, 1999 AMC 2906, two claimants assigned their claims to others. American Diesel & Ship Repairs indicated to the court it had assigned all of its claims to a bank and had agreed to collect any monies due on their behalf and in its own name for remittance to the bank. The court found American Diesel had a maritime lien for domestic necessaries. With regard to the other party, London Marine International, the court stated that “[i]f London Marine did in fact assign the alleged lien to Thrace, then Thrace should join in future efforts to assert the lien or London Marine should submit evidence that it is authorized to pursue the lien on Thrace’s behalf. 1999 AMC 2906, 2922. Compare, Ambassador Factors Corp. v. Rhein-, Maas-, Und See-Schiffahrtskontor GMBH (Vormals Sanara Reedereikontor GMBH), 1997 AMC 1562 (wherein the court held “that where a contract is indisputably maritime in nature, . . ., and a party to the contract assigns its rights to a third party, the third party may sue in admiralty to enforce the original contract, even though the assignment contract itself might not be within the federal courts’ admiralty jurisdiction.” (footnote omitted). Maritime liens are assignable. See Luckenbach Overseas Corp. v. S.S. Audrey J. Luckenbach, (S.D.N.Y. 1963), 232 F.Supp. 572. In A/S Dan-Bunkering Ltd., 945 F.Supp. 1576, the court determined that A/S Dan-Bunkering (“DB”) held a valid maritime lien even though subcontractors provided bunker fuel to the Zamet and DB had not obtained an assignment of lien from the subcontractors. The court noted that DB was “not an intermediary supplier or unknown the ZAMET, but dealt directly with the charterer.” Id. at 1579. The court held that DB had a maritime lien by virtue of DB providing necessaries to the Zamet.

If in our case we had a true sale of goods between [the Parent] and [the Subsidiary] where title passed to [the Subsidiary], [the Subsidiary] would be the supplier to the vessel and the holder of the maritime lien, not [the Parent]. [The Parent] would be a third party, not connected to the vessel, except for being the factor of the accounts receivable and holder of a security interest in the goods sold. As the owner of the accounts receivable, [the Parent] would hold a security interest in them. While the right to claim a maritime lien may transfer with the sale of the accounts receivable to [the Parent], it also may remain with [the Subsidiary]. See Sunrise Shipping Limited, 1999 AMC 2906. However, only one party, [the Parent] or [the Subsidiary] could exercise the claim – [the Subsidiary] as the supplier of necessaries or [the Parent] as the owner of the accounts receivable, i.e., debt, which give rise to the claim. The factoring agreement makes no mention of maritime lien rights. [The Subsidiary] filed in court actions against vessels for failure to pay based on maritime liens which would appear to support the assertion that it bought and had title to goods it supplied to vessels. Yet, we find support for our position that [the Parent] was the seller of the goods and the ultimate purchaser in the U.S. was the buyer, with [the Subsidiary] acting as a selling agent of its Parent, in the decision of [a 1999 foreign maritime court case].

[Summary - This case involved the arrest of a vessel due to necessaries claims against the vessel. The owners abandoned the vessel and the officers and crew obtained an order for sale pendent elite. Parties with claims against the vessel asserted claims, including the Parent company herein. The Parent asserted a lien based on the supply of necessaries in the late 1990s through its American agent at foreign ports and to sister-ships at ports in the United States and other countries. The foreign court looked at the question of whether goods provided to the arrested vessel, by a non-U.S. ship supplier, acting through an American agent, may claim a maritime lien when goods are delivered to a ship which is not at an American port. The court also considered whether an American maritime lien not against the arrested vessel may be enforced against ships with the same owner using a sister ship procedure.

The court considered and accepted the view of a U.S. expert in maritime law. The expert stated his view that under U.S. laws, as the Parent sold and delivered goods and services to the vessels, the Parent obtained maritime liens against them. The court cited portions of the expert’s affidavit including the relevant U.S. statute.

46 U.S.C. § 31342 provides:

Except as provided in subsection (b) of this section, a person providing necessaries to a vessel on the order of the owner or a person authorized by the owner –

has a maritime lien on the vessel; may bring a civil action in rem to enforce the lien; and is not required to allege or prove in the action that credit was given to the vessel.

The court also referenced the portion of the affidavit which made clear that if an owner’s agent orders supplies from a supplier’s agent in the U.S., a maritime lien is created under U.S. law even though delivery of the supplies occurs outside the United States; and, that the foreign incorporation of the supplier (seller) does not defeat its lien claim.

The court concluded that the Parent, acting through its Subsidiary, an American agent, had maritime liens against the vessels in question whether or not the necessaries were supplied at an American port. The court rejected the claims utilizing the sister ships procedure because such a procedure is not available under U.S. maritime law.]

Counsel argues we should not look to [the 1999 foreign maritime court case] in our consideration of the relationship of [the Parent] and [the Subsidiary] or that of [the Subsidiary] and its customers in the U.S. as it relates to the sales of goods for exportation to the United States. While we do not rely upon [the 1999 foreign maritime court case] in deciding this matter, we find it supportive. Only one party, [the Parent] or [the Subsidiary], can be the supplier of goods to obtain a maritime lien. In [the 1999 foreign maritime court case], [the Parent] did not claim to hold a maritime lien as an assignee or purchaser of the accounts receivable, but as the supplier to the vessels. The question we face is who was the true seller, or supplier, to the vessels obtaining goods through [the Subsidiary] at U.S. ports.

Based on all of the information presented, and the structure of the complete transaction between the related parties including the factoring of accounts receivable, we find that [the Subsidiary] was a selling agent of its Parent and [the Parent] was the true seller of goods to vessels at U.S. ports.

Selling Agent

Your port believes [the Subsidiary] was a selling agent for its parent, [ ]. Of the 9 representative sample transactions (not including the stock transfer transactions) submitted for our consideration, for the imports of products other than chemicals, both from related and unrelated parties, the time frame from entry of the goods to delivery to the customer in the U.S. ranged from 1 to 15 day. The time frame for chemical imports ranged from 48 to 113 days. The short turn around time from entry to delivery of products would tend to indicate the ultimate purchaser was known at the time of ordering and shipment of the goods. While this is an extremely small sampling and not determinative of whether a sale did or did not occur between [the Parent] and [the Subsidiary], the short turn around time in the representative sample product transactions and the 4 entries identified in the FACTS wherein either the pro forma invoice or the CF 7501 identified a merchant vessel or a company as the consignee, in addition to the invoices which indicated payment to another [Group] subsidiary or to [the Parent] with no mention of factoring, lend credence to the port’s concern that [the Subsidiary] acted as a selling agent of [the Parent].

As noted in the FACTS portion of this decision and discussed in the “Passage of Title” section of this analysis, supra, the only evidence submitted to show transfer of title for the goods from [the Parent] to [the Subsidiary] are the shipping terms on the invoices issued to [the Subsidiary]. The only purchase orders from [the Subsidiary] to a related party are those submitted to show stock transfers from related parties and these documents do not include any shipping terms. Of the documentation for approximately 91 entries reviewed by this office, only 5 pro forma invoices reflect shipping terms as CIF. The documentation for the remaining 86 entries does not reflect any shipping terms.

Further, although it post-dates the relevant time period, the “General Conditions of Sale in respect of internal sales” failed to address when title to goods transferred from the seller, [the Parent], to the purchaser, [the Subsidiary]. While the “General Conditions of Sale in respect of internal sales” addresses delivery terms, it makes no mention of when title to goods transfers from the seller to the purchaser. Additionally, while the “General Service and Cost Contribution Agreement” and the “General Conditions of Sale in respect of internal sales” between the parties post-date the time frame at issue, the cited portions provide relevant information regarding the relationship of the parties. When presented with an opportunity to indicate that Incoterms would indicate passage of title, as well as passage of risk of loss, the parties failed to so indicate. Additionally, the “General Conditions” were limited in the agreement, i.e., they did not “apply to internal sales covered by more specific written agreements that by their terms shall prevail over the General Conditions,” and referenced “the overall agreement between [the Parent] and the Customer.” See page 4 of this decision citing warranty language from the agreement. We are not convinced that title to the goods transferred from [the Parent] to [the Subsidiary] based on the information provided.

A selling agent works for a principal to promote sales of the principal’s goods. When we look at the citations from the “Account Sales Manual,” 1992, and the “Local Operation Manual,” 1994, set forth in pages 9 through 11 of this decision, we see that the subsidiary, [ ], was tasked to promote sales, regardless of whether it made the sales or another related party made the sales. [The Parent] took an active role in the activities of the subsidiary, as also reflected in the cited portions of the manuals. In the 1995 [Group] Annual Report, at page 12, in discussing communication between [Group] offices through satellite-based technology, it is stated:

[Summary – The report reflected the organization’s manager’s views on the ease of international communication and the ability to exercise control of the organization.]

In the same report it was reported that “[the Group] has grown to 75 branch offices in 41 countries, 180 agents represent [the Group] in a further 66 countries.” Id. at page 15. We note no reference is made to subsidiaries, just to branch offices and agents. In Oriental Commercial and Shipping Co., Ltd. v. Rosseel, N.V., 702 F. Supp 1005, 1022, (S.D.N.Y.), the court addressed the significance of the designation of an entity as a branch office and cited the following in footnote 7:

“Branch” is commonly defined as “a section, department or division of an organization” or “a subordinate or dependant part of a central system or organization.” Webster’s Third New International Dictionary (1971) 267. Black’s Law Dictionary defines “branch” as a “division, office, or other unit of business located at a different location from main office or headquarters.” Black’s Law Dictionary (5th ed. 1979) 170.

The 1995 Annual Report further describes the organization, at page 33, as:

[having a total of X legal entities, each of which had a number of offices and/or agents within its responsibility. The Report addressed the method for handling of the accounts of these legal entities for the purpose of ascertaining continual control of the entities.]

With regard to sales of products, the 1995 Annual Report addressed the two types of sales previously discussed – account sales and port sales. With regard to account sales, it stated that they were “effected through [Group’s] offices around the world. “These sales are based on annual agreements which specify how many of the owners’ ships are to receive deliveries from [the Group], the products to be supplied, discounts, etc.” These account sales, while negotiated by the “office where the customers headquarter is situated,” were subject to approval by [the Parent].

Further, although counsel submitted an example of an account sale by [the Subsidiary] in the form of the 1996 [Subsidiary] proposal to a foreign corporation, a copy of an extension agreement, and a copy of a 2003 Service and Supply contract, we note that in counsel’s submission of August 18, 2011, in response to a question on the structure of the related party group it was stated:

[The Parent’s] divisions have nothing to do with the authority of [the Parent] or its subsidiaries to negotiate and conclude sales agreements for account or port sales with potential customers. Such agreements are binding on all entities within the [Parent’s] Group.

In the proposal for an account sale submitted for our consideration, we note that the Executive Summary refers to [the Subsidiary]. In the Statement of Purpose reference is made to “[the Group’s] purchasing volume and global supply network.” We also find:

Backing our chemical organization is a network of 80 branch offices and 180 agents in over 80 countries and covering more than 980 ports. Furthermore, [the Group’s] head office in [Parent’s country] provides additional backup in respect to product management, logistics, quality assurance and information technology.

And,

As [the Group’s] purchasing volumes allow us to negotiate cheaper prices for raw materials from our own suppliers, these reductions will then be passed on to [customer] i.e. as when [Group] reduced all chemical prices worldwide by [X]% in November 1994).

Other references in the document make clear that while it may have been presented by [the Subsidiary], [the Subsidiary] represented [the Parent] in this proposal. Additionally, the title of the individual who signed the 2003 Service and Supply contract on behalf of [the Subsidiary] was “Area Vice President Americas.” This is a somewhat curious title for an officer in a U.S. company acting independently of its foreign parent.

Our review of all of the information before us leads to the conclusion that the type of relationship [the Parent] and [the Subsidiary] had falls squarely within the meaning of a principal-selling agent relationship. Although a separate corporate entity, [the Subsidiary] acted as a branch office of its parent and as a selling agent of products it obtained from its parent and other related parties. First Sale – Chemical Importations

Counsel has argued that the chemical importations from the related party manufacturer should be appraised based on a “first sale” analysis, i.e., the price paid by [the Parent] to the manufacturer. A “first sale” argument may apply when we find we have, at a minimum, two bona fide sales of goods for exportation to the United States. See Nissho Iwai American Corp. v. United States, 16 C.I.T. 86, 786 F. Supp. 1002, reversed in part, 982 F. 2d 505 (Fed. Cir. 1992). In Nissho Iwai American Corp. v. United States, the Court of Appeals for the Federal Circuit reviewed the standard for determining transaction value when there is more than one sale which may be considered as being for exportation to the United States. The case involved a foreign manufacturer, a middleman, and a United States purchaser. The court held that the price paid by the middleman/importer to the manufacturer was the proper basis for transaction value. The court further stated that in order for a transaction to be viable under the valuation statute, it must be a sale negotiated at arm’s length, free from any non-market influences, and involving goods clearly destined for the United States. See also, Synergy Sport International, Ltd. v. United States (Ct. of Int’l Trade, 1993).

In keeping with the court’s holding, an importer may request appraisement based on the price paid by the middleman to the foreign manufacturer in situations where the middleman is not the importer. However, it is the importer’s responsibility to show that the "first sale" price is acceptable under the standard set forth in Nissho Iwai. That is, the importer must present sufficient evidence that the alleged sale was a bona fide "arm’s length sale," and that it was "a sale for export to the United States" within the meaning of 19 U.S.C. § 1401a.

In Treasury Decision (T.D.) 96-87, dated January 2, 1997, the Customs Service (now CBP) advised that importers must provide a description of the roles of the parties involved and must supply relevant documentation addressing each transaction that was involved in the exportation of the merchandise to the United States. The documents may include, but are not limited to purchase orders, invoices, proof of payment, contracts, and any additional documents (e.g. correspondence) that establishes how the parties deal with one another. The objective is to provide CBP with "a complete paper trail of the imported merchandise showing the structure of the entire transaction." T.D. 96-87 further provides that the importer must also inform CBP of any statutory additions and their amounts. If unable to do so, the sale between the middleman and the manufacturer cannot form the basis of transaction value. Thus, with regard to counsel’s argument for use of “first sale” transaction value for shipments of chemical goods from the related party manufacturer, we first note that it does not qualify as a “first sale” because we have found no bona fide sale between [the Parent] and [the Subsidiary]. However, we will examine the transaction between the related party manufacturer and [the Parent] in the context of whether it qualifies as a bona fide "arm’s length sale" of goods “for export to the United States” and may therefore serve as the basis for appraisement under transaction value.

CBP has been provided very little documentation regarding the sales between the related party chemical manufacturer and [the Parent]. We were provided with annotated documentation from three separate transactions from 1998, in the January 6, 2006, submission by counsel. Each set of documents consists of a purchase order from [the Subsidiary] to the related party manufacturer; the commercial invoice from the related party manufacturer to [the Parent]; [the Parent’s] commercial invoice to [the Subsidiary]; a page from [the Parent’s] Trading Report, listing the invoice number and the total invoice amount, and showing the delivery stockpoint as the related party manufacturer (it is stated this page shows a sale to [the Parent] from the related party manufacturer); the Entry Summary 7501 and annotated commercial invoices; and, the [Subsidiary] invoice to the end user vessel at a U.S. port.

The terms of delivery are missing on the purchase orders from [the Subsidiary] to the related party manufacturer. The invoices from the related party manufacturer to [the Parent] indicate delivery terms of “ex works” meaning that [the Parent] assumed the risk of loss and all freight related charges from the factory door. Although we have determined that [the Subsidiary] was a selling agent for [the Parent], we note that the various submissions on this matter argue that [the Parent] sold goods, including chemicals, to [the Subsidiary] on a cost, insurance, freight basis meaning [the Parent] was responsible for freight charges and insurance and [the Subsidiary] acquired risk of loss at the place of shipment. Based on the shipping terms, [the Parent] assumed the risk of loss only from the factory door to the means of export, i.e., vessel or plane. Assuming [the Parent] took title to the goods based on the shipping terms, it acquired title at the factory door and, per our analysis above, retained it until the goods were delivered to the vessel in the U.S., and possibly in some cases, until paid in full.

The invoices from [the Parent] to [the Subsidiary] indicate the port of delivery (or shipping point) as the related party manufacturer. These invoices are missing any shipping terms, as are the invoices from [the Subsidiary] to the customer receiving the goods.

Counsel argues that the sales of chemicals between the related party manufacturer and [the Parent], ordered by [the Subsidiary] for delivery at designated U.S. ports, are clearly destined for export to the U.S. at the time of the sales. We agree that the clearly destined requirement has been met for finding the sales fall within transaction value appraisement. However, as the manufacturer and [the Parent] are related, the sales must be bona fide arm’s length sales. Counsel cites to the related party manufacturer’s average pre-tax profit for the period 1996-1999, stating it was the highest in the [Group] Group. Further, counsel submits that the related party manufacturer’s average pre-tax profit was higher than the pre-tax profit of all [Parent country] producers of similar chemicals during the same time period. Counsel argues that “[the related party manufacturer] and [the Parent] made reasonable profits on sales of chemicals during the period. Each company’s level of profit on marine chemicals compared favorably with its overall level of profit during the period.”

The information submitted to show that the related party chemical manufacturer and [the Parent] meet the arm’s length requirements for use of transaction value between related parties is insufficient. We have not been provided with a complete paper trail of the transaction. There is no contract; at least none has been provided. For payment information, we have a copy from a Trading Report which merely shows the shipment recorded. As with the [Parent] and [Subsidiary] transactions, we have information regarding recordation in the intercompany books of the transaction. After requesting information, we were informed that the related party manufacturer “was paid by cash remittances in the same manner that all other suppliers of products distributed by [the Parent] were paid”, but no other information or evidence regarding payment was submitted.

As to pre-tax profit being higher for the related party manufacturer than for any other member of the group, since various factors are considered in determining pre-tax profit, this comparison is not particularly helpful. The related party manufacturer sold goods to parties outside the [Group] group. By letter, dated March 19, 2012, counsel confirmed that the related party manufacturer produced products for marine and industrial applications. “Marine products were sold only to related parties including [the Parent] [now successor company], and all industrial products were sold to unrelated parties.” The 1995 and 1997 [Group] Annual Reports indicate the related party manufacturer was “also a leading manufacturer of auto-care and hygiene products in [a foreign country];” and “produce[d] chemicals for cleaning and water treatment, fuel additives and car care products[.]” Of the manufacturer’s 1997 operating revenue, 44% was sold to external (unrelated) parties. Sales to unrelated parties would impact the profit of the manufacturer and decrease any relevancy comparing its profit to the profit its related parties might have.

In addition, the Profit and Loss Statements which were provided for the years 1997 and 1999 for this manufacturer, distinguish between the operating revenue and the cost of goods sold from related parties and from unrelated parties. The statements also include the contribution margin ratio which is defined by counsel as “the percentage by which the operating revenue exceeds the cost of goods sold.” The 1997 contribution by [the Parent] was reported as 34.38%. However, counsel submits that when overhead is considered, the ratio drops to 19%. The subtraction for overhead changes the figure though into an operating profit margin.

Counsel has argued that the markup for chemical sales by [the Parent] to [the Subsidiary] was between 24% to 30%. Markup does not equate to profit. When considering whether the sales between the related party manufacturer and [the Parent] were arm’s length sales, one basis for consideration is whether the sales prices of the related party manufacturer were sufficient to cover all its costs plus provide it with a profit equivalent to the profit of its parent company. [ ] is the parent company. Based on the information we have and using the three examples of chemical sales in the file, we can compare the operating profit margin of the related manufacturer to the operating profit margin of [the Parent]. Using the three examples provided for chemical sales transactions, we find that the sales prices were marked up from 29.9% to 30.4%. The profit margin on each sale for [the Parent] was from 23% to 23.3%, respectively. In this case, the profit margin may be viewed as the operating profit margin as [the Parent] had no overhead costs, i.e., the goods were shipped directly from the related party manufacturer to [the Subsidiary] with no warehousing expenses incurred by [the Parent]. In the three sample transactions, [the Parent] enjoyed a greater profit than the 19% operating profit of the related party manufacturer. While we recognized this is a limited sample, it does not support the argument that the related party manufacturer met the all costs plus a profit test as it made a lower profit in these sales than did its parent.

In addition, the information comparing the pre-tax profit of the related party manufacturer to other manufacturers of similar goods in its country only tells us that the related party manufacturer performed well. It does not tell us that the party sold goods to related parties at arm’s length prices. A helpful comparison would be to know whether the related party manufacturer’s profit from sales of chemicals to [the Parent] equaled or was greater than [the Parent’s] profit from sales of those chemicals. We have not been provided with that information.

There is insufficient information to conclude that the sales between [the Parent] and the related party manufacturer were conducted at arm’s length. Therefore, these sales do not fall within the scope of transaction value in 19 U.S.C. § 1401a(b) and cannot be the basis of appraisement for the chemical goods imported by [the Subsidiary].

Method of Appraisement

As we have found that there is no sale between [the Parent] and [the Subsidiary] and that the sale is between [the Parent] and the customer in the U.S., we must determine whether the sale is for exportation to the U.S. or occurs after the goods have entered.

It is evident from the information we have reviewed that some goods entered and were quickly delivered to vessels. We have four examples provided where customers in the U.S. were clearly identified as ultimate consignees at the time of entry. With regard to these types of entries, i.e., where the customer in the U.S. was clearly identified as the ultimate consignee at the time of entry, the customer in the U.S. was known to the importer at the time of entry, or the goods were delivered to the customer in the U.S. at or about the time of entry, we believe there is sufficient basis to appraise the goods based upon transaction value and look to the price paid by the customer receiving the goods in the U.S. for appraisement purposes. See HQ 544957, dated April 7, 1995; wherein we ruled that an importation between related parties was not a bona fide sale and the importer acted as a selling agent for its parent; transaction value was to be based on the price actually paid or payable by the ultimate purchaser in the U.S.; HQ 545991, dated June 15, 1995 (affirming HQ 544957); La Perla Fashions, Inc. United States, 22 CIT 393; 9 F.Supp 2d 698 (April 17, 1998). See also, HQ H006576, dated December 19, 2007.

We recognize that some goods were entered into inventory by [the Subsidiary] for later sale. It has been submitted that some goods may have remained in [the Subsidiary’s] warehouse for months. Counsel informed us that inventory remained in stock during the period 2001-2006 for approximately 6 months, based on inventory turnover per year. While no information for the relevant time frame could be retrieved, it was suggested the turnover rate was comparable. These inventory goods should be treated as consignment goods and thus, cannot be appraised under transaction value.

When transaction value cannot be used to appraise imported merchandise, the next methodology under the statute is the transaction value of identical merchandise or the transaction value of similar merchandise. See 19 U.S.C. § 1401a(c). It is unclear why, but the port in January 2003 advised [the Subsidiary] to use deductive value under 19 U.S.C. § 1401a(d) to appraise the transactions at issue. We must assume that the port found it impossible to appraise the merchandise under 19 U.S.C. § 1401a(c).

In March 2003, [the Subsidiary] asserted there were theoretical and practical difficulties in applying deductive value to the entries at issue. The Port requested the Office of Regulatory Audit to examine [the Subsidiary’s] records and provide a reasonable estimate of any undervaluation of declared value and the corresponding loss of revenue for imports from May 1994 through April 1999. Regulatory Audit was unable to use straight deductive value and resorted to a modified deductive value to appraise goods, thus, actually using the fallback method of 19 U.S.C. § 1401a(f). Regulatory Audit resorted to a modified deductive value methodology because certain imported goods were not sold within 90 days of importation and lack of information to determine deductions for general expenses and profit related to the imported goods.

As Regulatory Audit could not use the deductive value method to appraise the goods at issue, computed value under 19 U.S.C. § 1401a(e) would be the next method of appraisement to apply. Computed value is defined as the sum of, inter alia: the cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise, and an amount for profit and general expenses equal to that usually reflected in sales for export to the U.S. by producers in the country of exportation of merchandise of the same class or kind. 19 U.S.C. § 1401a(e)(1). However, as [the Parent] is not the producer of the imported goods, the information needed to use computed value is not available.

This leads us to the fallback method of 19 U.S.C. § 1401a(f) which is what Regulatory Audit used in modifying the deductive value method of appraisement:

(1) If the value of imported merchandise cannot be determined, or otherwise used for the purposes of this chapter, under subsections (b) through (e) of this section, the merchandise shall be appraised for the purposes of this chapter on the basis of a value that is derived from the methods set forth in such subsections, with such methods being reasonably adjusted to the extent necessary to arrive at a value. (2) Imported merchandise may not be appraised, for the purposes of this chapter, on the basis of—

(A) the selling price in the United States of merchandise produced in the United States; (B) a system that provides for the appraisement of imported merchandise at the higher of two alternative values; (C) the price of merchandise in the domestic market of the country of exportation; (D) a cost of production, other than a value determined under subsection (e) of this section for merchandise that is identical merchandise or similar merchandise to the merchandise being appraised; (E) the price of merchandise for export to a country other than the United States; (F) minimum values for appraisement; or (G) arbitrary or fictitious values. * * *

Counsel argues that if we resort to the fallback method, we must first look to transaction value and use a fallback transaction value method. In arguing for fallback transaction value for the non-chemical imported goods, counsel cites to HQ 546149, dated May 29, 1996; HQ 548167, dated August 14, 2002; and HQ 544239, dated November 18, 1988, to argue that a modified transaction value based on the [Parent’s] prices to [the Subsidiary] would be appropriate because the prices include [the Parent’s] mark up over acquisition cost from unrelated suppliers. Counsel also cites to HQ 548698, dated October 4, 2005; HQ 548574, dated March 17, 2005; HQ 548236, dated March 27, 2003; HQ 548247, dated March 10, 2003; HQ 546941, dated August 11, 1999; and HQ 546953, dated May 5, 1999, to further support his argument that a modified transaction value should be based on [the Parent’s] invoice price to [the Subsidiary]. Counsel also argues for a modified transaction value based on the sale from the related chemical manufacturer to [the Parent] price or the [Parent] to [the Subsidiary] invoice price.

We have reviewed the rulings cited by counsel and find them to be distinguishable to the situation herein. In this case, we have determined that [the Subsidiary] acted as a selling agent for its parent. None of the rulings cited by counsel involve a selling agent. The rulings either involve a seller and buyer, the use of inventory management systems creating delayed sales, or, in the case of HQ 548698, parties which did not have separate legal status, i.e., the importer, Cambridge, was a branch office of Cambridge University Press of the United Kingdom (Cambridge UK) and did not have a legal status separate and apart from that of Cambridge UK. As the facts of the rulings cited by counsel differ significantly from the facts of this case, we find the rulings not to be applicable.

Under section 500 of the Tariff Act of 1930, as amended, which constitutes CBP’s general appraisement authority, the appraising officer may:

fix the final appraisement of merchandise by ascertaining or estimating the value thereof, under section 1401a of this title, by all reasonable ways and means in his power, any statement of cost or costs of production in any invoice, affidavit, declaration, other document to the contrary notwithstanding….

19 U.S.C. § 1500(a).

The Statement of Administrative Action (SAA), which forms part of the legislative history of the TAA, provides in pertinent part:

Section 500 is the general authority for Customs to appraise merchandise. It is not a separate basis of appraisement and cannot be used as such. Section 500 allows Customs to consider the best evidence available in appraising merchandise. It allows Customs to consider the contract between the buyer and seller, if available, when the information contained in the invoice is either deficient or is known to contain inaccurate figures or calculations…. Section 500 authorize [sic] the appraising officer to weigh the nature of the evidence before him in appraising the imported merchandise. This could be the invoice, the contract between the parties, or even the recordkeeping of either of the parties to the contract.

In those transactions where no accurate invoice or other documentation is available, and the importer is unable, or refuses, to provide such information, then reasonable ways and means will be used to determine the appropriate value, using whatever evidence is available, again within the constraints of section 402.

Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 67. Section 152.107 of the CBP regulations (19 CFR § 152.107) provides:(a) Reasonable adjustments. If the value of imported merchandise cannot be determined or otherwise used for the purposes of this subpart, the imported merchandise will be appraised on the basis of a value derived from the methods set forth in §§ 152.103 through 152.106, reasonably adjusted to the extent necessary to arrive at a value. Only information available in the United States will be used. (b) Identical merchandise or similar merchandise. The requirement that identical merchandise, or similar merchandise, should be exported at or about the same time of exportation as the merchandise being appraised may be interpreted flexibly. Identical merchandise in any country other than the country of exportation or production of the merchandise being appraised may be the basis for customs valuation. Customs values of identical merchandise, or similar merchandise, already determined on the basis of deductive value or computed value may be used. (c) Deductive value. The “90 days” requirement for the sale of merchandise referred to in § 152.105(c) may be administered flexibly.

We agree with counsel that a modified transaction value method may be used to appraise the goods at issue, though we disagree on the methodology. In this case, we are aware that an internal price list for goods existed, as 4 pages from that price list were provided to the port. In addition, a CD-Rom containing [the Parent’s] complete catalogue, price list and world directory was available to customers in 1999. With regard to the price list, we were informed by counsel that –

The [Parent’s] price list . . . identified the list prices for [the Parent’s] products for each specified [Parent] price zone, worldwide. The [Parent] price list was analogous to any generic company list price posted for use by potential customers within a specified territory if no discounts were applied to the sale. . . .

The [Parent’s] list price was the highest price that the goods could practicably fetch in any market. Only in rare circumstances, such as when a ship without an account sales agreement or discounted port sales agreement had an emergency in port, would the customer be expected to pay the list price. [Parent] subsidiaries, including [the Subsidiary] routinely negotiated discounted prices in order to close deals with prospective customers.

However, we note that the web page where we learned of the CD-Rom noted:

[Summary - The CD simplified sourcing and procurement of the [Parent’s] products and provided technical information on the products and details of the company’s delivery network.] Further, with regard to a price list, in the January 2005, “Request for Advance Pricing Agreement and Customs Valuation Ruling,” at page 31, we find the following information:

[The Parent] publishes a customer price list each year for [the Parent’s] standard product offerings. The price list provides four levels (zones) of prices for each product which are assigned to specific ports based on a combination of the degree of local competition and volume potential.[11] Typically, the larger ports have lower prices and smaller ports have higher prices.

Finally, with regard to prices, the 1995 Annual Report, at page 35, stated:

[Summary – The Parent regarded the market as an international market and believed prices should be the same regardless of where the product were supplied.]

Modified transaction value may serve as the basis of appraisement for the goods which were entered into inventory by [the Subsidiary] for later sale, i.e., goods from entries other than where the customer in the U.S. was clearly identified as the ultimate consignee at the time of entry, the customer in the U.S. was known to the importer at the time of entry, or the goods were delivered to the customer in the U.S. at or about the time of entry. The price list may serve as the basis for determining the appraised value under modified transaction value of 19 U.S.C. § 1401a(f). We believe that use of the price list falls within the scope of 19 CFR 152.107(a) since the information was clearly available in the U.S. as the port was provided with 4 pages from it and the Office of Regulatory Audit was provided with a CD-Rom purportedly containing the information. The port should request a full copy of the price list for the period in question from [the Subsidiary]. We understand a request was made earlier in this matter, but we suggest requesting it again.

Based on the information provided by counsel with regard to [the Parent’s] price list, while it may have been rare for a customer to pay the actual price posted in the list, some customers not provided a discount did pay the price shown. If [the Subsidiary] is unable to provide CBP with the necessary information regarding the prices actually charged customers for the imported goods, it seems reasonable to resort to the price list to appraise the merchandise.

HOLDING:

Based on all of the information in our records, including the use of a factoring agreement whereby payment was sent by the ultimate customer to [the Parent], and our analysis as set forth above, there was no sale of goods between [the Parent] and [the Subsidiary] or other related parties and [the Subsidiary]. Instead we find that [the Subsidiary] acted as a selling agent for its parent.

The proper method of appraisement for goods entered during the period May 1994 through April 1999 is transaction value based upon the sale between [the Parent] and the customer in the U.S, when the customer in the U.S. was clearly identified as the ultimate consignee at the time of entry, the customer in the U.S. was known to the importer at the time of entry, or the goods were delivered to the customer in the U.S. at or about the time of entry. Selling commissions should be added to the price actually paid or payable to the extent not otherwise included therein. However, based on the structure of the transactions, we believe the price paid by the ultimate customer did in fact include any selling commission paid to [the Subsidiary] by [the Parent]. Therefore, the price paid by the ultimate customer should be the basis of appraisement.

For goods which were entered into inventory by [the Subsidiary] for later sale, i.e., goods from entries other than where the customer in the U.S. was clearly identified as the ultimate consignee at the time of entry, the customer in the U.S. was known to the importer at the time of entry, or the goods were delivered to the customer in the U.S. at or about the time of entry, modified transaction value utilizing prices from the [Parent’s] price list, as discussed above, may serve as the basis of appraisement.

If [the Subsidiary] is unable or refuses to provide the price list, then modified transaction value of identical or similar merchandise should be considered. If this is not possible, then modified deductive value method should be considered. The Office of Regulatory Audit utilized a modified deductive value method in their report. We recognize that they may wish to revisit their findings in light of this decision. Sixty days from the date of this letter, Regulations and Rulings of the Office of International Trade will take steps to make this decision available to Customs and Border Protection ("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