VAL-2 OT:RR:CTF:VS H235527 RSD
Port Director
U.S. Customs and Border Protection
4477 Woodson Road
St. Louis, Missouri 68134
RE: Request for Internal Advice concerning the Valuation of Imported Vacuum Pumps Imported from China; Related Parties; Circumstances of the Sale; All Costs plus Profits; Same Class or Kind; 19 C.F.R. §152.102(h); 19 C.F.R. 152.103(l)(iii)
Dear Port Director:
This is in response to your memorandum dated November 2, 2012, forwarding an internal advice request your office requested concerning the proper valuation of vacuum pumps imported by Masport, Inc. (Masport) from China. Masport’s counsel made several submissions in support of it position, with the most recent dated February 16, 2015.
The Importer has requested that certain information submitted in connection with this internal advice request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this internal advice request, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling.
FACTS:
Skellerup Holdings Limited (Skellerup) is a New Zealand based company that owns a subsidiary, Masport along with 17 other companies. Masport is a company that sells and distributes vacuum pumps and various components for those vacuum pumps in the United States. From October 1, 2010, to June 30, 2011, Masport imported vacuum pumps made in China into the United States. Masport purchased the vacuum pumps from its parent company, Skellerup, and imported them into the United States for sale through its system of distributors and through the Masport website. Skellerup produced the imported pumps in a factory located in China. The pumps which Skellerup manufactured were all vacuum pumps. In addition to selling pumps to the United States, Skellerup sold its pumps in several other countries including China, New Zealand, Ireland, the United Kingdom, and Australia.
On September 2, 2011, Masport Inc. submitted a prior disclosure to the Port of Saint Louis, but it tendered no money with the prior disclosure. Masport disclosed additional unreported payments totaling $[xxxxxxxxxxxx] were received due to transfer price adjustments during the period of October 2010 to June 2011 for the vacuum pumps purchased from their initially claimed unrelated company, Skellerup Industries MID: Skellerup Jiangsu Limited (CN). Masport initially claimed that it was not related to Skellerup, but it later disclosed that the two companies were, in fact, related to each other. On January 16, 2012, Masport presented additional information concerning their agreement with the related parent company, Skellerup, with additional follow-up information being presented on April 4, 2012. A prior disclosure referral was forwarded to the Office of Regulatory Audit on May 29, 2012. Your office is seeking guidance on whether the transfer pricing agreement and the methodology used to determine the price paid for the imported pumps is an acceptable basis of appraisement under the customs valuation law.
As already stated, the merchandise involved in this case were vacuum pumps manufactured at Skellerup’s plant in China. The products can be divided into two basic categories: pumps used for industrial purposes, and pumps used in the dairy industry. Although both types of pumps operate using the same basic vacuum pump principles, separate characteristics apply to each industry sector; the industrial vacuum pumps are larger and must work at a higher vacuum level, while the dairy vacuum pumps are usually smaller and operate with lower levels of vacuum power. The industrial vacuum pumps were usually sold by Masport to customers who typically fit the pumps onto mobile vacuum trucks and trailers, which are designed to shift and transport large volumes of liquid waste.
After the industrial pumps were imported into the U.S., they were sold to end users who used them to perform various tasks, including removing sewage and other liquid waste backups. They were a critical component in the operation of mobile vacuum trucks. For the industrial vacuum pumps, Masport usually added additional value by installing products to the pumps such as manifolds, exhausts, brackets and frames that aided in the quick installation of the fully functioning finished industrial vacuum pump onto the mobile vacuum truck. Masport manufactured and assembled a kit in its plant in Nebraska, which was mounted onto the pump. This pump plus the kit combination was then sold. The industrial vacuum pumps were manufactured exclusively under the Masport brand. According to counsel, in selling the industrial pumps in the U.S., Masport bore several risks, including the risk of non-payment by its customers and the risk of possible product liability law suits. Masport also set the price at which it sold each pump to its customers.
The dairy pumps were vacuum pumps created for use for milking cows. The dairy vacuum pumps were made in China in the same Skellerup plant where the industrial vacuum pumps were manufactured. Outside of the United States, these dairy pumps were not sold to a distributor like Masport. Instead, they were sold exclusively to a number of global dairy original equipment manufacturers, who incorporated these dairy pumps into dairy milking shed installations which were sold throughout the world. There was also a large replacement pump market for sales to the same customer base as the original equipment manufacturers of the dairy equipment.
The dairy pumps were normally manufactured to include the name of the original equipment manufacturer, although in some cases the pumps were branded and sold directly to its dairy customers under the Skellerup name. Skellerup Industries in New Zealand had a customer relationship with the dairy original equipment manufacturers. These dairy original equipment manufacturers were distributors of their own dairy equipment. Because of this, Skellerup was under price pressure to provide these customers (the dairy original equipment manufacturers) with a distributor margin to cover the customers’ own selling costs. In addition, the dairy vacuum pump was a very minor part of the cost of a complete dairy shed installation. Because of these two factors, according to counsel, the dairy vacuum pumps were generally not sold at a premium price.
According to Masport’s counsel, Skellerup manufactures 31 different types of pumps, seven of which were sold to dairy equipment manufacturers who incorporated them into the dairy equipment. Five of these seven pumps used in the dairy industry were also sold to Masport, who sold these type of pumps to original equipment manufacturers for incorporation into dairy equipment. This corrects earlier information counsel provided, which indicated that Masport did not import any pumps used in the dairy industry. In other words, according to counsel’s submission of January 12, 2015, Skellerup sold pumps to Masport used for both dairy equipment and pumps used in handling industrial liquids. However, in the United States, Masport was the only purchaser of the Skellerup manufactured pumps.
The seven pumps used in the dairy industry were capable of pumping from a low of 30 cubic feet per minute of liquid to a high of 201 cubic feet per minute. Masport sold the pumps other than the seven indicated pumps to pump dealers who in turn sold them to end users. The pumps were used by the end user for a variety of uses. As already explained, when Masport imported the pumps, they lacked the mechanism which enabled them to easily connect to a pipe or the object which contained the substance to be pumped. To remedy this problem, Masport manufactured and assembled a kit which it offered to sell with the pump to work as a connecting apparatus. The pump purchasers could then either make their own kit or buy one from Masport.
Skellerup kept its books so that it could determine the profits it earned on its pump sales by the different countries where it sold pumps. Counsel determined that during the applicable time period between 2010 and 2011, Skellerup sold a total of [xxxx] pumps. This sales number included sales of both the dairy and the industrial pumps. Specifically, it sold [xxx] pumps to China, in which it earned a gross profit margin of [xx] percent. It sold [xxxx] pumps to Australia and to the United States, on which it earned a [xx] percent gross profit margin. Counsel lumped sales to Australia with sales to the United States because the amount of pumps sold in Australia was a fairly small number, (only [xx, which was less than one percent of Skellerup’s total pump sales for the period. Finally, Skellerup sold [xxxx] pumps in its home market of New Zealand, in which it earned a gross profit margin of [xx] percent. Based on these profit figures, counsel calculated an average profit margin for all of Skellerup pump sales of [xxxx] percent. With respect to the pumps sold to Masport and imported into the United States, counsel determined that Skellerup earned a profit rate of [xx] percent.
ISSUE:
Whether transaction value is the appropriate of appraisement for the imported vacuum pumps?
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised for customs purposes in accordance with Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. §1401a). The primary method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. §1401a(b)(1). In this case, although no specific evidence was presented establishing the existence of sales for exportation between the two parties, since this has not been questioned by your office, we will assume that there were bona fide sales for exportation between the related parties.
Transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, an examination of the circumstances of the sale indicates that the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain “test values.” 19 U.S.C. §1401a(b)(2)(B); 19 C.F.R. §152.103(l). While the fact that the buyer and seller are related is not in itself grounds for regarding transaction value as unacceptable, where Customs and Border Protection (CBP) has doubts about the acceptability of the price and is unable to accept transaction value without further inquiry, the parties will be given the opportunity to supply such further detailed information as may be necessary to support the use of transaction value pursuant to the methods outlined above. In this case, it is now not disputed that the seller, Skellerup and the buyer of the imported vacuum pumps, Masport, were related parties.
When the buyer and seller are related, the CBP regulations provide several methods for determining whether transaction value is an acceptable basis of appraisement for imported merchandise. The first method uses “test values”. “Test values” refer to values previously determined pursuant to actual appraisements of imported merchandise. Thus, for example, a deductive value calculation can only serve as a test value if it represents an actual appraisement of merchandise under section 402(d) of the TAA. See Headquarters Ruling Letter (“HQ”) 543568, dated May 30, 1986. In this case, no information regarding test values has been submitted or is available. Consequently, the circumstances of the sale approach must be used in order to determine the acceptability of transaction value.
Under this approach, the transaction value between a related buyer and seller is acceptable if an examination of the circumstances of the sale indicates that although related, their relationship did not influence the price actually paid or payable. CBP Regulations specified in 19 C.F.R. Part 152 set forth illustrative examples of how to determine if the relationship between the buyer and the seller influences the price. In this respect, CBP will examine the manner in which the buyer and seller organize their commercial relations and the way in which the price in question was derived in order to determine whether the relationship influenced the price. If it can be shown that the price was settled in a manner consistent with the normal pricing practices of the industry in question, or with the way in which the seller settles prices with unrelated buyers, this will demonstrate that the price has not been influenced by the relationship. See 19 C.F.R. §152.103(l)(1)(i)-(ii). These are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well. See 19 C.F.R. §152.103(I).
All costs plus a profit
Counsel contends even though Skellerup and Masport are related parties, the imported merchandise should be appraised using transaction value based on the sales transactions between the related parties, the seller, Skellerup, and the buyer, Masport, because the “all costs plus a profit” methodology shows that the prices that Masport paid for the imported pumps under consideration were not influenced by their relationship. 19 C.F.R. §152.103(l)(1)(iii) states that “if it is shown that the price is adequate to ensure recovery of all costs plus a profit which is equivalent to the firm’s overall profit realized over a representative period of time (e.g., on an annual basis), in sales of merchandise of the same class or kind, this would demonstrate that the price has not been influenced.” (Emphasis added). See HQ H037375, dated December 11, 2009; and HQ H032883, dated March 31, 2010. In other words, the “all costs plus a profit” methodology examines whether a related party price compensates the seller for all its costs plus a specified amount of profit.
A very important consideration in the all costs plus a profit example is the “firm’s” overall profit in sales of merchandise of the same class or kind. In applying the all costs plus a profit test, CBP normally considers the “firm” to be the parent company. Thus, if the seller of the imported goods is a subsidiary of the parent company, the price must be adequate to ensure recovery of all the seller’s costs plus a profit that is equivalent to the parent company’s overall profit in sales of merchandise of the same class or kind. See HQ 546998, dated January 19, 2000. In this case, the firm that we will consider is the parent company, Skellerup, who was also the seller of pumps. The CBP regulations do not provide a definition of “equivalent” profit; however, if the profit of the seller is equal to or higher on the U.S. imports than the firm’s overall profit, the purchase price would not be artificially low for Custom’s purposes. See HQ H106603, dated July 25, 2011; HQ H065015, dated April 14, 2011; and, HQ H065024, dated July 28, 2011.
Additionally, CBP Regulations also do not define what profit we are to consider – gross profit or operating profit. However, CBP is of the view that the operating profit margin is generally a more accurate measure of a company’s real profitability because it reveals what the company actually earns on its sales once all associated expenses have been paid. Nevertheless, in certain circumstances, gross profit can be considered. See HQ H037375, dated December 11, 2009. In this instance, the only information that referenced Skellerup’s profits for the applicable period concerned is its gross profits and no information was provided regarding Skellerup’s net profits. Therefore, in analyzing whether the all costs plus a profit test has been satisfied, we will use the gross profit information provided.
In this case, the information indicates that during the applicable period from October 1, 2010 through June 30, 2011, Skellerup sold pumps to four different countries: the United States, Australia, New Zealand and China. Counsel claims that Skellerup was able to recover all its costs incurred in producing the pumps plus earn a profit. As stated previously, the total profit earned in these sales of the pumps is [xxxx] percent, while the profits it made on sales to Masport in the United States were calculated at [xx] percent. Accordingly, Skellerup earned a [x] percent higher profit on its sales of its vacuum pumps to Masport in the United States then it did on its total sales of all the vacuum pumps it sold during the applicable period under review.
Finally, in deciding whether the all costs plus a profit test has been satisfied, we must consider whether Skellerup’s overall profits that we are using as a comparison were calculated from sales of merchandise which were of the same class or kind, as the merchandise that Skellerup sold to Masport in the United States in the importations under review. The dairy pumps were not identical to the industrial pumps in that they were smaller and less powerful. However, in the January 15, 2015, submission, counsel corrected previously presented material concerning the types of pumps that Skellerup sold to Masport. Originally, counsel indicated that Skellerup did not sell any pumps to Masport in the United States for use in the dairy industry. However, in the revision, counsel corrected this information, and indicated that Skellerup manufactured 31 different pump models, seven of which were sold to manufacturers who incorporated them into dairy equipment. Five of these seven pump models used in dairy industry were also sold to the Masport and were imported into the United States during the applicable period under review. In other words, only two of dairy pump models that Skellerup sold during the applicable period were not sold to Masport for importation into the United States. Although Skellerup sales to Masport did not include all the varieties of the different pump models that Skellerup was selling at that time, it nevertheless included the two basic types of pumps that it sold, i.e., pumps for the dairy industry and the industrial waste vacuum pumps. We note that all the pumps that Skellerup sold both to Masport and to its customers in other countries shared a number of common characteristics. They were intended to perform the same function of pumping fluids. They were produced in the same factory, had the same basic design, and operated using the same basic mechanical principles of vacuum pumps. The chief difference in the dairy pumps from industrial pumps was that they were smaller in size and had less power. Thus, we conclude, that the pumps that Skellerup sold to Masport were of the same class or kind as the pumps that it sold to all its other customers. We note that during the course of the period being analyzed, Skellerup earned an average gross profit of [xx] percent in it sales of pumps to Masport, while it earned an average gross profit of [xxxx] percent on its overall sales of its pumps to all its customers. Therefore, we are satisfied that Skellerup earned profits in its sales to Masport which were greater than its overall profits in sales of the same class or kind of merchandise realized over a representative period of time. Thus, we conclude that the price that Skellerup charged Masport for the imported vacuum pumps compensates the seller for all its costs to produce the imported merchandise plus a sufficient amount of profit to satisfy the circumstances of the sale test as set forth in 19 C.F.R. §152.103(l)(1)(iii). Accordingly, even though the parties are related, we find that the prices of the vacuum pumps in the sales between Skellerup and Masport can serve as the basis of appraisement under transaction value.
HOLDING:
Based on the information presented, we find that the all costs plus a profit test has been satisfied in the sales of pumps between Skellerup and Masport that occurred in the period from October 1, 2010, to June 30, 2011. Accordingly, we also find the "circumstances of the sale" test has been met during the period under consideration. Thus, the appropriate method of appraisement for the imported vacuum pumps is transaction value based on the price paid for the vacuum pumps in the related party sales between the seller, Skellerup, and the buyer, Masport. Please note that this decision is issued on the assumption that all of the information furnished in connection with the consideration of this matter, including the internal advice request, is accurate and complete in every material respect. Further, the application of this decision is subject to verification by the Office of Regulatory Audit should an audit be conducted.
This decision should be mailed by your office to the party requesting Internal Advice no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch