• HQ H016585
• Dec 30, 2008

• Type : • HTSUS :
•  Related:   547332; 546979   

VAL-2 OT:RR:CTF:VS H016585 KSG

Port Director
U.S. Customs & Border Protection
1 East Bay Street
Savannah, Georgia 31401

RE: Application for Further Review of Protest # 1703-07-100224; sale for exportation to the United States; Nissho Iwai; related party transaction

Dear Port Director:

This is in reply to your correspondence forwarding the Application for Further Review of Protest 1703-07-100224 timely filed by Tumi, Inc. Two supplemental submissions dated March 5, 2008, and October 17, 2008, are also incorporated as part of the file in this case. At the request of counsel, a conference was held on this matter at Headquarters on April 16, 2008. A second telephone conference was held on September 19, 2008.

FACTS:

This case involves certain textile luggage imported by Tumi, Inc. (“Tumi”). Tumi purchased luggage from WWT International, Limited (“WWT”), a company unrelated to Tumi incorporated in the British Virgin Islands. WWT, a wholesaler of luggage products, purchased the merchandise from a related manufacturer in Thailand, TWT Manufacturing Company, Ltd. (“TWT Thailand”). The initial submission (and the pricing study) stated that WWT and TWT are owned by the same parent company, Universal Worldwide Business, Inc. However, in the October 17, 2008, submission, counsel stated that for the period of 2004 to 2006, WWT was the parent company of TWT. The merchandise was manufactured in accordance with designs and specifications provided by Tumi.

Tumi’s purchase of the luggage from WWT is documented with a written purchase order. The Tumi purchase orders include descriptions of the merchandise, style numbers, quantities, delivery dates and the purchase prices. It also provides that merchandise is to be delivered “directly to the United States from the factory.”

This entry includes six Tumi purchase orders issued between September 21, 2005 and March 9, 2006, which is reflected in six WWT purchase orders to TWT, issued between September 23, 2005 and March 13, 2006. The WWT purchase orders state that shipment is to be from Thailand to the U.S. on an Ex Factory basis and that “title and risk of loss pass to WWT at the factory door.” The WWT purchase orders reference the Tumi purchase order numbers, style numbers and prices. Also, the WWT purchase orders state that “these goods must be marked and labeled in accordance with U.S. country of origin and marking regulations.”

One of the Tumi purchase orders stated that the “order must be sent directly from the factory to the Tumi Foreign Trade Zone in the USA and require that the goods on the order be marked and labeled in accordance with U.S. country of origin and marking regulations.”

Upon receipt of the WWT purchase order, TWT manufactured the luggage based on Tumi’s specifications as provided by WWT. Upon production of the goods, WWT paid for the inland freight to deliver the goods to the Port of Bangkok, Thailand. Title and risk of loss transferred to WWT at the manufacturer’s facility.

TWT invoiced WWT for the goods at the negotiated Ex Factory purchase price. WWT then invoiced Tumi for the goods at the negotiated FOB Bangkok purchase price. WWT paid TWT by wire transfer. Tumi issued a wire transfer to pay WWT.

Tumi submitted documentation as evidence of the shipment of the merchandise from Thailand to the U.S., including a packing list, country of origin certificate of origin, the forwarder’s cargo receipt, and a bill of lading. All the above documentation was submitted in support of the shipment of the merchandise from Thailand to the U.S. As evidence of Tumi’s payment to WWT, it submitted a payment request from WWT, a Tumi “foreign funds transfer form” authorizing a wire transfer, a letter from Tumi’s bank stating that Tumi’s account was debited for that sum of money to WWT’s bank in Taiwan, and a document in a foreign language (some translation in hand notation in ink) indicating the same sum of money.

As evidence of WWT’s payment to TWT Thailand, documentation submitted included: a payment list prepared by WWT, a document in a foreign language (some translation in hand notation in ink), and a document showing a transfer from WWT to TWT Thailand which does not show the sum transferred.

As further support to demonstrate the claim that the prices between TWT and WWT were at arm’s length, Tumi presented documentation during the 2004-2006 period, showing that WWT, which counsel stated is the parent corporation, realized an operating profit of 6.1% for 2004, 6.3% for 2005 and 5.4% for 2006. According to counsel, TWT realized an operating profit of 1.2% for 2004, 1.5% for 2005 and 1.6% for 2006. TWT submitted cost worksheets (breakdown of all manufacturing costs associated with producing the merchandise) and a bill of material for each style of luggage pertaining to the shipment under examination. Tumi also submitted TWT financial statements for 2004-2005 and 2005-2006, WWT income statements for 2004 and 2005, and a KPMG transfer pricing study.

Tumi submitted information to support TWT’s unit cost for direct labor including overhead and information to support TWT’s profit margin. Tumi states that no assists were provided by it to WWT or TWT in this case. ISSUE:

Whether the sale between TWT and WWT constitutes a sale for exportation for purposes of determining the transaction value of the imported luggage.

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”), codified at 19 U.S.C. 1401a. Transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for five enumerated statutory additions. 19 U.S.C. 1401a(b). In order for imported merchandise to be appraised under the transaction value method, it must be the subject of a bona fide sale between a buyer and seller, and it must be a sale for exportation to the United States. We will assume for the purposes of this decision that transaction value is the appropriate basis of appraisement.

In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the U.S. Court of Appeals for the Federal Circuit reviewed the standard for transaction value when there was more than one sale which may be considered as being a sale for exportation to the United States. The court ruled that for merchandise imported pursuant to a three-tiered transaction to be appraised on the basis of the manufacturer-middleman sale, the transaction must be conducted at arm’s length and the merchandise must be clearly destined for export to the United States at the time of the sale. The court reaffirmed the principle established in E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that the manufacturer’s price, rather than the middleman’s price, is

valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. In upholding the McAfee standard the court stated that in a three-tiered distribution system, “the manufacturer’s price constitutes a viable transaction value when the goods are clearly destined for export to the United States and when the manufacturer and the middleman deal with each other at arm’s length, in the absence of any non-market influences that affect the legitimacy of the sales price.”

As a general rule, CBP presumes that the price paid by the importer is the appropriate basis for determining transaction value, and the burden is on the importer to rebut this presumption. See Treasury Decision (“T.D.”) 96-87, 30 Cust. Bull. 52/1 (January 2, 1997). To rebut this presumption, the importer must, in accordance with the court’s standard in Nissho, provide evidence that at the time the middleman purchased, or contracted to purchase, the imported merchandise, the goods were clearly destined for exportation to the United States and that the manufacturer and middleman dealt with each other at arm’s length. This documentary evidence must satisfy the requirements set forth in Nissho Iwai.

T.D. 96-87 sets forth the documentation and information needed to support a determination that transaction value should be based on a sale involving a middleman and the manufacturer or other seller rather than on the sale in which the importer was a party. First, “a complete paper trail of the imported merchandise showing the structure of the entire transaction” must be provided. Second, if the parties to the requested transaction are related, the importer must provide CBP with information which demonstrates that transaction value may be based on the related party sale as provided in 19 U.S.C. 1401a(b)(2)(B), i.e., the circumstances of the sale indicate that the relationship did not influence the price or that the transaction value closely approximates certain test values. Finally, sufficient information must be provided with regard to the statutory additions set forth in 19 U.S.C. 1401a(b)(1), i.e., packing costs, selling commissions, assists, royalty or license fees, and proceeds of any subsequent sale.

In this case, the presumption is that transaction value is based on the price the importer, Tumi, paid to WWT. In order to rebut this presumption and to base transaction value on the price WWT paid to TWT Thailand, the foreign manufacturer, there must be sufficient evidence which shows: 1) that the WWT-TWT Thailand transaction is a bona fide sale; 2) that the luggage was clearly destined for exportation to the U.S. when WWT purchased the luggage from TWT Thailand; 3) that the sale between WWT and TWT Thailand is an arms length sale and 4) whether there are any amounts to be added to the price actually paid or payable based on the statutory additions.

Bona Fide Sale

The first issue to be addressed is whether the transaction between WWT and TWT Thailand, the foreign manufacturer, is a bona fide sale. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit found that the term “sold” for purposes of 19 U.S.C. 1401a(b)(1) means a transfer of title from one party to another for consideration, (citing J.L. Wood v. United States, 62 CCPA 25, 505 F.2d 1400 (1974). However, several factors may indicate whether a bona fide sale occurs between a potential buyer and seller of imported merchandise. In determining whether property or ownership has been transferred, CBP considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, CBP may examine whether the potential buyer paid for the goods, and whether, in general, the roles of the parties and the circumstances of the transaction indicate that the parties are functioning as buyer and seller. See Headquarters Ruling Letter (“HRL”) 547197, dated August 22, 2000.

In this case, the purchase orders and commercial invoices suggest that TWT Thailand transferred ownership of the merchandise to WWT in exchange for consideration. According to the documentation submitted, WWT assumed title and the risk of loss for the merchandise at TWT Thailand’s factory door pursuant to the terms of sale (Ex Works basis). For purposes of this decision, we assume that there was a bona fide sale between TWT and WWT.

Clearly Destined

Both Tumi and WWT instructed the manufacturer to ship the merchandise directly to the U.S. This is supported by Tumi’s purchase orders, WWT’s purchase orders, the manufacturer’s invoice, and the bill of lading. The purchase orders (both Tumi and WWT) indicate that all goods were to be labeled in accordance with U.S. country of origin and marking requirements. The goods were clearly destined for the U.S. throughout the transaction.

Arm’s Length

Counsel contends that even though the parties are related, the price that WWT pays TWT Thailand for finished merchandise is agreed upon through arms length negotiation and competitive market forces. TWT Thailand provided cost worksheets, and a bill of materials for each style pertaining to this shipment. Based on this information, counsel states that TWT’s price allowed TWT to recover all of its costs plus a profit. TWT’s average mark-up on its total cost for nylon luggage was 0.27%.

In the March 5, 2008, submission, counsel provided further support for the direct labor costs for three selected styles of merchandise. The cost worksheets show the manufacturer’s (TWT Thailand) actual cost to produce the styles which are derived from the actual costs recorded in TWT Thailand’s general ledger accounts for FY 2006. This includes the direct labor costs (hourly rate x average number of hours spent to produce each style which was based on weekly production reports for FY 2006) and factory overhead. Tumi submitted audited Income Statements for TWT for 2005 and 2006 that show that it had an operating profit of 1.5% in 2005 and 1.4% in 2006. We note that TWT’s net profit was 0.95% in 2005 and 0.84% in 2006. Tumi submitted information showing that TWT realized an operating profit of 1.2% for 2004. However, according to the Tumi submission, the parent corporation, WWT, realized an operating profit ranging from 5.4% to 6.3% for the same period. Since TWT did not realize an operating profit equivalent to the parent firms’ profit over the same period of time, we find that Tumi has not shown that that the transaction between TWT Thailand and WWT was an arm’s length transaction. Further, we note that Tumi has not provided complete financial statements for WWT for the period in question. Moreover, the income statement that was provided only shows pre-tax income. Also, there is no indication whether the statement was prepared on a consolidated basis. In summary, Tumi has not shown that the price that TWT charged was adequate to ensure its recovery of all costs plus profit that is equivalent to the firm’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind.

Tumi also submitted a pricing study conducted by KPMG covering the fiscal year 2002. In HRL 547332, dated January 22, 2002, Customs considered whether there was an arm’s length transaction in a sale between a related manufacturer of copiers and the middleman. The importer submitted a transfer pricing study performed by an outside accounting firm to show that Customs’ circumstances of the sale test was met in that case. The study analyzed the price between the manufacturer and the middleman using a comparable profits method under the Internal Revenue Code section 482. Using the comparable profit method, an arm’s length price is derived by measuring the profitability of unrelated taxpayers that are engaged in similar businesses with other unrelated parties. CBP stated in HRL 547332 that the comparable businesses need only be broadly similar in applying the comparable profits method so the reliability of this method is dependent on the completeness and accuracy of the data, the assumptions made, and the degree of comparability between the related party transactions and unrelated party transactions.

In this case, the transfer pricing study was also based on the comparable profits method. The study was based on the identification of 12 Thai luggage manufacturers for the period of 2000-2002. A second document refers to luggage produced in 2004. However, as in HRL 547332, we were not provided the complete data or any information on the companies used as a comparison to determine if they in fact produce goods that are of the “same class or kind” as defined by CBP in 19 CFR 152.102(h). Further, we caution that documentation in support of the arm’s length nature of a transaction should be contempora- neous with the transaction and that an analysis on an Internal Revenue Code (“IRC”) method is only valid where it is used to set the price.

Even if the IRC method had been used in setting the price in this case, we note that its use alone is not adequate evidence to establish that the circumstances of the sale were such that the relationship did not influence the price. In HRL 546979, dated August 30, 2000, CBP explained that while an IRC method may be acceptable for deriving a transfer price, the mere use of such a method is inadequate to substantiate the CBP related party test. The rationales behind the requisites of the IRC and the CBP regulations are distinct in their focus. Additionally, we note that the transaction between TWT and WWT is a foreign transaction that would not necessarily fall within the auspices of the IRC, but rather the foreign taxing authority. Thus, the transactions would not be subject to the same regulatory standards. Accordingly, the mere fact that the importer claims to have analyzed the transactions in question using an IRC method is insufficient to substantiate the circumstances of the sale test. In addition, we do not find the conclusory statements submitted by the importer to be evidence of the nature of the transaction and whether it was conducted at arm’s length. The importer has not established that the prices paid by the middleman in the related party transaction were at arm’s length. The prices were not shown to be consistent with the industry in question; nor was the evidence sufficient to show that the prices contained all costs plus a profit equivalent to the firm’s overall profit as a whole for the same class or kind of merchandise. Without this information, we find that the price between the middleman and the related manufacturer is influenced by the relationship. HOLDING:

Based on the facts presented above, the protest should be denied. The information submitted does not support a finding that the sale between WWT and TWT was an arms length sale free from non-market influences. Accordingly, the WWT-TWT sale does not constitute a sale for exportation for purposes of determining transaction value. Therefore, the merchandise should be appraised under transaction value on the basis of the sale between Tumi and WWT. In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2007), please promptly mail this decision, together with the Customs Form 19, to the protestant, but in no event later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision, the office of Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Myles B. Harmon, Director
Commercial & Trade Facilitation Division