• HQ H235553
• Dec 23, 2014

• Type : Valuation • HTSUS :
•  Related:   545709; 543633; 545611; 543708; 543446; 543511; 543441; 542673; 547019; 545659; 547144; 546037; H026063; H006576; H032883; H092560; H119858; H119857; H057716; W563462   

VAL-2 OT:RR:CTF:VS H235553 HkP

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

RE: Application for Further Review of Protest 0712-12-100174; Method of Appraisement; Related Parties; Bona Fide Sale for Exportation; Identical or Similar Merchandise

Dear Port Director:

This is in response to the Application for Further Review of Protest 0712-12-100174, dated September 25, 2012, filed on behalf of Fernsten Worldwide, Inc. At issue is the proper method of appraisement of merchandise imported from Canada. In reaching our decision we have taken into consideration information previously submitted to the port, as well as information presented by counsel to this office during a meeting held on November 12, 2014.

FACTS:

Fernsten Worldwide Inc. (“Fernsten Canada”) is a non-resident importer based in Montreal, Canada. It is also the exporter of the merchandise at issue. Fernsten Worldwide USA (“Fernsten USA”) is the U.S. consignee. It is incorporated in the United States but does not have a physical presence in the U.S., and its legal address is the same as Fernsten Canada’s in Canada. Fernsten USA uses a UPS warehouse in New York State as a shipping address. For purposes of the U.S. Customs Laws, Fernsten Canada and Fernsten USA are related.

Between October 4, 2010, and April 6, 2012, the importer, Fernsten Canada, made almost daily entries of merchandise from Canada. The entry documents for an entry made on October 4, 2010, which is taken as representative of all the entries at issue, consisted of:

A pro forma invoice, dated October 4, 2010, for: caps at $[xxx] each; tuques (a type of knitted hat) at $[xxx] each; scarves at $[xxx] each, commercial catalogues at $[xxx] each; women’s pullovers at $[xxx] each; and, women’s polo shirts at $[xxx] each. The seller is listed as Fernsten Canada and the buyer as Fernsten USA; A textile declaration; and, An HTS and Consignee List, dated October 4, 2010, listing various U.S. customers. The shipper was listed as Fernsten USA, the U.S. consignee. On May 16, 2011, the port issued a Request for Information (CBP Form 28) to the importer requesting: an explanation of the selling policy between Fernsten Canada and Fernsten USA, including how invoice values were determined; all the commercial documents relating to the importation of the goods, including documents issued by Fernsten Canada to Fernsten USA and by the ultimate U.S. purchasers to Fernsten USA; and, the location in the United States where Fernsten USA is incorporated, the number of its employees, the nature of the operations that it performs in the U.S., and the location of its bank account. On July 15, 2011, the port informed the importer through a Notice of Action (CBP Form 29) that, based on the importer’s response to the request for information, there did not appear to be a bona fide sale between the importer, Fernsten Canada, and the U.S. consignee, Fernsten USA. Accordingly, the port proposed to reappraise the entry as detailed in the notice.

On November 14, 2011, counsel for the importer (at the time) made a submission to the port addressing the port’s concerns about the fact that the parties shared bank accounts, and the potential undervaluation of caps. Counsel stated that although two companies sharing banking facilities was unusual from a Customs perspective, the practice was in accordance with generally accepted accounting principles (GAAP) in Canada. Counsel also stated that the inter-company transfers between Fernsten Canada and Fernsten USA, reflecting both the purchases and sales between the parties, was a commercially acceptable practice, and that title passed to Fernsten USA when the goods were delivered to the UPS warehouse in New York. In support of this position, counsel submitted a letter prepared by the auditors for Fernsten Canada and Fernsten USA that further explained the transactions between the companies. The letter was prepared based on Fernsten USA’s 2009 U.S. tax return and its unaudited Financial Statement for FY ending October 31, 2010, and stated, in relevant part:

Fernsten USA has designated U.S. sales representatives, dedicated US account executives responsible for all sales in the U.S.; Purchase orders from U.S. customers are entered and recorded in the Fernsten USA database as U.S. sales; Daily pro forma invoices are prepared by Fernsten Canada recording the sale to Fernsten USA; A sale from Fernsten USA to the end customer in the U.S. is recorded as a Fernsten USA Accounts Receivable and is shipped via UPSCS [UPS Supply Chain Solutions], which in turn ships the goods on behalf of Fernsten USA to the end customer. At all times, these customers are doing business with Fernsten USA; The U.S. customer mails a check for U.S. $[xxx] to an address in New York and UPSCS delivers the checks to Fernsten Canada; All bank accounts (US and Canadian currencies) are in the name of Fernsten Canada, and no bank account exists in the name of Fernsten USA. Deposits are recorded by Fernsten Canada on behalf of Fernsten USA in a U.S. Dollar account. Payments are applied to the Fernsten USA Accounts Receivable account. Expenses incurred by Fernsten USA (selling expenses, commissions, trade show costs, etc.) are paid by Fernsten Canada from the US Dollar account on behalf of Fernsten USA. Reconciliation of inter-company purchases, deposits of US Dollar receipts, and expenses paid on behalf of Fernsten USA are recorded using an inter-company loan account. The inter-company loan account for the year ending October 31, 2010, shows that Fernsten Canada received $[xxx] in its USD account, which represented the accounts receivables due to Fernsten USA. At the same time, Fernsten Canada expensed on behalf of Fernsten USA a total of $[xxx], consisting of an opening balance of $[xxx], $[xxx] for cost of goods, and $[xxx] for administrative costs and business expenses. This left Fernsten USA owing Fernsten Canada $[xxx] at the end of the year. On the other side of the ledger, at the start of the fiscal year, Fernsten USA had an Accounts Receivable balance of $[xxx], and sales for the year of $[xxx], for a total of $[xxx]. Credited to Fernsten USA was the $[xxx] noted above as collected on their behalf by Fernsten Canada, which left an Accounts Receivable balance due to Fernsten USA from its customers of $[xxx].

The auditors stated that through this system of recording inter-company transactions, two separate financial statements and corporate tax returns were filed with the respective U.S. and Canadian governments, and that this method was a common, accepted practice in Canada for the Canadian Federal government authorities, for the Quebec and provincial tax authorities, and for the U.S. Internal Revenue Service. The auditors also stated that the Toronto Dominion (“TD”) Bank (where the shared accounts are held) was in full acceptance of the described method of recording transactions, that Fernsten USA had granted legal security, specifically against the US Accounts Receivables account to TD Bank, and that a UCC statement (financing statement) was filed in the U.S. against the U.S. company. The auditors explained that copies of the UCC statement and Bank Guaranty provided by Fernsten USA to TD Bank were required by the bank because the bank recognized a bona fide sale between the parties, and also that Fernsten USA owned the receivables in connection with the sales by Fernsten USA to its customers. Accordingly, in order to protect itself against a default by the seller, Fernsten Canada, on its line of credit, the bank took a security interest in the inventory and receivables of the U.S. consignee, Fernsten USA.

Concerning the valuation of the hats, counsel conceded in his November 14, 2011, submission that the declared values incorrectly failed to take into account embroidery charges. In addition, counsel alleged that prior to 2011, the value for at least two styles of hats was less than $[xxx], and that the declared inter-company value of $[xxx] was chosen for simplicity’s sake. According to counsel, a lower inter-company price could have been charged for the hats that would still have resulted in Fernsten Canada earning a reasonable profit.

In a letter to the port, dated January 30, 2012, the auditors for both companies explained that the difference between the amounts representing the Cost of Goods Sold reported on Fernsten USA’s 2010 tax return ($[xxx]) and the total amount of pro forma invoices for the same period ($[xxx]) was due to costs for: executive salaries ($[xxx]), traffic department ($[xxx]), freight and brokerage ($[xxx]), financing and general expenses ($[xxx]), and embroidery charges ($[xxx]). A copy of the tax return was submitted with the protest.

On March 28, 2012, the port reappraised the merchandise as proposed in its July 15, 2011, notice. The entries were liquidated on March 30, and April 6, 2012. The protest was timely filed by current counsel on September 25, 2012.

According to the memorandum and other documents submitted in support of the protest, the importer, Fernsten Canada, buys merchandise from unrelated overseas suppliers. The merchandise is warehoused in Canada pending orders from U.S. customers. When orders are received, Fernsten Canada packages the merchandise, addresses it to the U.S. customer, and ships it to a UPS warehouse in New York from which UPS delivers it directly to the U.S. customer. The U.S. customers, in turn, send payment to Fernsten Canada through UPS. Counsel states that these transactions are documented in both companies’ books and, at the end of the fiscal year, Fernsten Canada makes a lump sum transfer of U.S. customer payments received throughout the year to Fernsten USA. Counsel also states that Fernsten Canada sells merchandise to Fernsten USA on Delivered Duty Paid (“DDP”) Canada terms of sale, which includes the foreign purchase price plus freight, duty and brokerage into Canada, and an [xx]% markup ([xx]% for administrative costs and [xx]% net profit) that is consistent with Fernsten Canada’s overall profit.

According to the submitted information, the U.S. consignee, Fernsten USA, sells apparel and headwear obtained from Fernsten Canada to authorized distributors across the U.S. Fernsten USA orders merchandise from Fernsten Canada using the same commercial invoices issued by Fernsten USA to U.S. customers. The invoice header lists both a U.S. and Canadian address for “Fernsten Worldwide,” one website, one email address, telephone and fax numbers in Canada (514 area code), as well as toll-free (1-800) telephone and fax numbers. Counsel explains that the invoice is issued by Fernsten USA, which does not have separate purchase order documents.

The following documents were submitted in support of the protest:

Proforma Invoice, dated October 22, 2010, issued by Fernsten Canada to Fernsten USA for various articles of headwear and apparel ranging in price from $[xxx] to $[xxx], hangers at $[xxx] each, and mail (no charge). The invoice stated that it included duties and brokerage fees, but no amounts were listed, and that customs charges were to be billed to Fernsten Worldwide. Invoices issued by “Fernsten Worldwide” (previously described) to various U.S. customers, and respective customer ledger pages. The invoices indicate that the goods were to be shipped directly to U.S. customers, and in some cases included freight charges. Some invoices were for goods provided free of charge or at a discount, and some included charges for extra services, such as embroidery and taping. Invoice 528490, dated October 22, 2010, for a beanie (no charge), a knitted cap (“tuque”) with cuff (no charge), and embroidery for each item (no charge). There were no freight charges. Invoice 528485, dated October 22, 2010, for various shirts with units prices of between $[xxx] and $[xxx], not including a 50% samples discount, a foam sign (no charge), hangers (no charge), and freight costs of $13.98. Invoice 528491, dated October 22, 2010, for caps with different colored trim at a unit cost of $[xxx], and freight costs of $28.86. Invoice 528489, dated October 22, 2010, for 2 styles of caps priced at $[xxx] and $[xxx], not including a 20% samples discount. There were no freight charges. Invoice 528546, dated October 22, 2010, for embroidery charges at $[xxx] per unit with a 10% discount, caps priced at either $[xxx] or $[xxx], “custom option” (customer supplied private labels to be sewn on) at $[xxx] per unit, “custom option” (special airfreight charges of $0.75 per unit), a tape charge (no charge), not including a 10% “off end column pricing” discount, and freight charges of $177.63. Invoice 528492, dated October 22, 2010, for cap samples at a unit cost of $[xxx], not including a 20% samples discount. There were no freight charges. Invoice 528493, dated October 22, 2010, for 2 sample tuques (no charge) and embroidery (no charge). There were no freight charges. Invoice 528470, dated October 22, 2010, for one sweater at $[xxx], not including a 20% samples discount, plus $10.31 for freight charges. Invoice 528468, dated October 22, 2010, for 3 shirts (no charge), and with no freight costs. The invoice states, “the value of all products and/or services on this invoice totals $[xxx] and will be deducted from your sample allocation.” Invoice 528469, dated October 22, 2010, for two sweaters at $[xxx] each, not including a 20% sample discount, plus freight costs of $6.61. Invoice 528466, dated October 22, 2010, for one cap (no charge) and embroidery (no charge). There were no freight costs. Invoice 528463, dated October 22, 2010, for caps at $[xxx] each, embroidery charges of $[xxx] per unit, a tape charge of $[xxx], and freight charges of $115.35. Invoice 528563, dated October 22, 2010, for shirts at $[xxx] each, not including a 20% inventory guarantee discount, and freight charges of $6.19. Invoice 528488, dated October 22, 2010, for caps at $[xxx] each, not including a 20% line discount, embroidery charges at $[xxx] per unit and freight charges of $11.68. Invoice 528484, dated October 22, 2010, for 3,800 caps (only 2,800 are listed as shipped) at $[xxx] each (“special pricing B as per JE”). There were no freight charges. Invoice 528486, dated October 22, 2010, for caps at $[xxx] each, not including a 3% discount (“off end column pricing”), and freight charges of $104.43.

Fernsten USA Inter-Company Loan Account balances and Accounts Receivable balances as at November 1, 2009, and October 31, 2010. According to the accompanying summary of journal entries: $[xxx] was debited from the inter-company loan account and credited to Accounts Receivable “to record cash receipts initially recorded by Fernsten Cda on behalf of Fernsten USA for the year (Nov. 1, 2009 - Oct. 31, 2010)” $[xxx] was debited from the Purchases Account and credited to the Inter-Company Loan Account “to record purchases made by Fernsten USA for the year, Nov. 1, 2009 - Oct. 31, 2010” $[xxx] was, in total, debited from the Overhead Expenses, Selling Expenses and Administrative accounts and credited to the inter-company loan account “to record overhead, selling and admin expenses paid by Fernsten Cda on behalf of Fernsten USA.”

Information on commission payments to U.S. sales staff.

ISSUE:

Whether the merchandise may be appraised on the basis of the transaction between the related parties.

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 (19 U.S.C. §1401a; TAA). The preferred method of appraisement of imported merchandise for customs purposes is transaction value. Transaction value is the price actually paid or payable for the merchandise when sold for export to the United States, plus certain enumerated additions. 19 U.S.C. §1401a(b)(1). The term “price actually paid or payable” means the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C §1401a(b)(4)(A).

In order for transaction value to be used as a method of appraisement, there must be a bona fide sale between the buyer and seller. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit found that the term "sold" for purposes of 19 U.S.C. § 1401a(b)(1) means a transfer of title from one party to another for consideration, (citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)).

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

The port is of the opinion that bona fide sales have not occurred between Fernsten Canada and the U.S. consignee, Fernsten USA, and that the goods should be valued based on the prices paid by the ultimate purchasers in the United States. The port notes that the goods were warehoused in Canada pending orders from U.S. customers, and then packaged and addressed to the ultimate U.S. customer and shipped to the UPS warehouse for delivery to the U.S. customers, and believes that the orders from the U.S. customers are the only sales for exportation to the United States. The port also notes Fernsten USA’s lack of autonomy from Fernsten Canada with respect to warehousing, purchaser processing, invoicing and distribution of merchandise, which the port describes as being similar to the situation in HQ H026063, dated August 17, 2010. The port also takes issue with the fact that the commercial invoices issued to the ultimate U.S. purchasers were separately entered from the merchandise and declared as mail. According to the port, these customer invoices more accurately reflect the actual prices paid for the hats and shirts than the pro forma invoices submitted with the merchandise. The port explains that all Fernsten Canada’s entries had a flat value, determined only by the type of merchandise being imported. For example, all hats were valued at $[xxx], which the port states was below the FOB China price and also did not take into account shipping costs between China and Canada or the cost of importing the goods into Canada. No documents were provided concerning the FOB China prices of the goods.

HQ H026063 was a response to a request for reconsideration of HQ H006576, issued on December 19, 2007. The importer was a U.S. company that purportedly purchased merchandise from its related foreign seller for sale to customers located in the United States. The seller was a Canadian company with warehouse, distribution, manufacturing, and office facilities in Canada. The importer was the sole distributor of the seller’s products in the United States. The seller and the importer were related by common shareholders and officers. The importer outsourced certain services from the seller’s personnel in Canada: customer service, management information systems, new accounts, order processing sales, sales liaison, trade show coordination, mail service reception and communication payroll, accounts collection, and shipping. The seller also maintained and supported the telecommunications infrastructure (e.g. computer network, voice mail, e-mail, hardware and software applications) used in connection with the importer’s selling and marketing operations. The importer paid a fee for the administrative services rendered by seller and also reimbursed the seller for processing orders. The ordering process was generally initiated by the importer’s sales representatives who solicited and took orders from U.S. customers. The seller maintained a large inventory of finished merchandise at its warehouse and was responsible for processing and shipping orders placed by U.S. customers. Invoices were mailed to customers by the seller via the U.S. postal service and did not accompany the merchandise. The U.S. customers mailed checks (payment) to the importer at a drop box location in the United States and the checks were deposited into the importer’s account at a bank located in Ontario, Canada. Regulatory Audit determined that the payments sent to the drop box were picked up by the seller’s employees and recorded in the seller’s Toronto office before being deposited into the importer’s bank account in Canada. CBP found that although the seller and the importer had separate bank accounts, the accounts were maintained by the seller’s employees and were under the control of the seller. Ultimately, CBP found that the seller exercised too much control over the importer to establish that there was a bona fide sale for exportation between the parties, as there was not enough evidence that they were acting as independent buyer and seller. CBP concluded that the sale for exportation on which to base appraisement of the imported merchandise was the sale to the U.S. customer.

In H026063, counsel made additional arguments or clarifications concerning the transfer of title and the autonomy of the importer from the seller. These arguments were ultimately found by CBP to be unsubstantiated and unpersuasive. CBP reaffirmed it findings in HQ H006576, that the seller exercised too much control over the importer to establish that there was a bona fide sale for exportation between the parties, and that the sale for exportation on which to base appraisement of the imported merchandise was the sale to the U.S. customer.

Counsel in this case argues that there are a number of factors that demonstrate that bona fide sales took place between Fernsten Canada and the U.S. consignee, Fernsten USA. Specifically, Fernsten USA issued purchase orders to Fernsten Canada for merchandise and Fernsten Canada issued corresponding invoices to Fernsten USA, which Fernsten USA then paid at the end of the year through intra-company accounting. In addition, according to counsel, Fernsten USA assumed title and risk of loss immediately following importation and upon delivery of the goods to the UPS warehouse, per Delivered Duty Paid (“DDP”) terms of sale. In support of this point, counsel cites Article 2, section 401 of the New York Code (Uniform Commercial Code) (N.Y. UCC. Law § 2-401), which states in relevant part:

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[.]

In our meeting, counsel also stated that Fernsten USA retains title to the goods for one to three days that they remain in the UPS warehouse, during which time it is responsible for shrinkage, damage, or loss, until they are loaded onto the truck that delivers them to the U.S. customer under FOB Champlain or Delivered at Place (customer) terms of sale. Counsel also stated that if Fernsten Canada ships the wrong or damaged goods to Fernsten USA, Fernsten USA will make a claim to Fernsten Canada. In this regard, counsel stated that Fernsten USA was insured for losses, in that, it was listed as an insured party under a global insurance policy. No documents were submitted to support any of these assertions.

As further evidence of bona fide sales, counsel points to Fernsten USA’s tax return, which showed the Cost of Goods Sold (goods purchased from Fernsten Canada) as $[xxx]. Counsel made the point in the meeting that an agent would declare its commission on its tax returns, not the Cost of Goods Sold; accordingly, Fernsten USA could not be the selling agent of Fernsten Canada. Counsel states the transaction was appropriately recorded in both companies’ accounting records and that at the end of the year Fernsten USA paid Fernsten Canada for the goods. In addition, counsel argues that the UCC Financing Statement and the Bank Guaranty issued against Fernsten USA is evidence of Fernsten USA’s ownership interest in the goods, in that, there would have been no need for either document if the bank did not recognize that Fernsten Canada had sold goods to Fernsten USA. Finally, counsel argues that Fernsten USA is not a mere instrument of Fernsten Canada, and that Fernsten USA maintains the appropriate corporate formalities, including filing taxes, accounting for a portion of the president’s salary, and maintaining and paying regular commissions to its sales representatives.

Similar to the facts in HQ H026063, in this case the U.S. consignee is a U.S. company that purportedly purchases merchandise from its related foreign seller for sale to customers located in the United States. The seller is a Canadian company with warehouse, distribution, and office facilities in Canada. The consignee is the distributor of the seller’s products in the United States. As evidenced by the information in the invoice header, the seller also maintains and supports the telecommunications infrastructure (e.g. the website, telephone and fax lines, and e-mail,) used in connection with the consignee’s selling and marketing operations. The ordering process is initiated by the consignee’s sales representatives who solicit and take orders from U.S. customers. The seller maintains a large inventory of finished merchandise at its warehouse and is responsible for processing and shipping orders placed by U.S. customers. The seller prepares the U.S. customer invoices on behalf of the consignee, and mails the invoices separately from the merchandise to the U.S. customers. However, unlike in H026063, in this case the payments by U.S. customers for merchandise allegedly sold by Fernsten USA were mailed directly to the seller and deposited into the seller’s bank account in Canada.

In our meeting, counsel argued that a shared address, common officers and the provision of administrative services are acceptable and do not impact the existence of a bona fide sale between related parties. In support of this position, counsel cited Peerless Clothing International, Inc. v. United States (“Peerless”), 602 F. Supp.2d 1309 (Ct. Int’l Trade 2009), and HQ 543633, dated July 7, 1987. Counsel also argued that a physical corporate presence in the United States is not a requirement, and does not impact the existence of a bona fide sale. Counsel noted that Fernsten USA has sales representatives in the U.S., to whom it pays commissions, and that it also pays a portion of officers’ salary, UPS for its services, and Fernsten USA’s portion of overhead and administrative service costs.

Peerless concerned, in relevant part, the issue of Peerless’ method of allocating Warehouse and Expense Allocation (“WEA”) expenses between Peerless USA, the importer, and Peerless Canada, its related seller. The court found that although Peerless complied with Generally Accepted Accounting Principles in Canada, CBP appropriately found the warehousing expenses to be entirely dutiable. However, for the remaining WEA expenses found dutiable, i.e., expenses other than warehousing, CBP improperly replaced Peerless’ allocation, and CBP was instructed by the court to reallocate the duties for named expense categories. See Peerless at 1324. The bona fides of the related party transactions between Peerless USA and Peerless Canada were not at issue and, therefore, not addressed by the court. Accordingly, we find that Peerless does not assist us in resolving the question of whether there was a legitimate sale between Fernsten Canada and Fernsten USA.

In HQ 543633, the importer, a U.S. company, imported electronic equipment and components from a related Canadian company. Title and risk of loss passed to the importer when the goods left the warehouse in Canada. The importer paid the costs for transporting the goods to the U.S., and if the goods were lost or damaged in transit, the importer bore the loss. After importation, the goods were held in the importer’s inventory in public warehouses from three days to several weeks or longer to fill orders from U.S. purchasers. The two companies maintained separate bank accounts, and accounting and other records in Canada, and the importer provided evidence that it paid its own bills for its own account, was responsible for its own payables and receivables, and entered into contracts on its own behalf. The Canadian company supplied administrative services to the importer for a fee, and evidence of periodic payments by the importer for these services was provided. The importer’s financial statement reflected these administrative expenses, salaries, commission payments, advertising and other expenses. The importer employed a national sales manager based in the U.S., and regional representatives throughout the U.S. that received purchase orders on behalf of the importer. The orders were called-in to the importer’s administrative Canada, but when possible, filled using existing inventory held in the U.S. The importer’s sales staff was salaried and/or commissioned. Based on the entirety of the evidence in HQ 543633, Customs concluded that the transactions between the importer and its related Canadian supplier were bona fide sales.

In this case, unlike in HQ 543633, we have no evidence of when, if ever, Fernsten USA took title to the goods, as there is not enough evidence that the parties were acting as independent buyer and seller. Although it is alleged that the parties file separate financial statements and tax returns, Fernsten Canada controls Fernsten USA’s money, by having deposits on behalf of Fernsten USA made into Fernsten Canada’s bank account, and by paying all of Fernsten USA’s expenses, which is then reimbursed at the end of the year through inter-company accounting. In HQ 543633, the importer and its related supplier maintained separate financial records and the importer was able to conduct separate business transactions with third parties. We note counsel’s assertion that TD Bank’s security interest in the receivables of Fernsten USA to secure against the default of Fernsten Canada was evidence of Fernsten USA’s ownership of the receivables. However, it is more noteworthy that Fernsten Canada had more control over the receivables than Fernsten USA. Moreover, in this case, we cannot rely on the pro forma invoices submitted on entry as these types of invoices are inherently subject to change, and there are no purchase orders or other commercial documents to substantiate a sale between Fernsten Canada and Fernsten USA. N.Y. UCC. Law § 2-401 applies to situations in which there is a buyer and a seller, but the roles of the parties in this case have not been proven. We note that, in our meeting, counsel alleged that Fernsten USA is able to select its own customers, has the ability to negotiate prices with Fernsten Canada, is free to buy from other vendors, and that its sales representatives can negotiate prices, secure pricing programs and create special orders for U.S. customers, and that Fernsten Canada does not retain approval of U.S. customers or contracts. However, no evidence of any of these allegations was provided. Also, in this case, merchandise is warehoused in Canada pending orders from U.S. customers, and it is only when orders are received that Fernsten Canada packages the merchandise, addresses it to the U.S. customer, and ships it to the UPS warehouse in New York from which UPS delivers it directly to the U.S. customer. In other words, orders from U.S. customers trigger the importations. In HQ 543633, the importer maintained its own inventory that, whenever possible, it used to fill its customer’s orders, although sometimes inventory had to be obtained from Canada. Given the dissimilarity between the facts in this case and in HQ 543633, HQ 543633 does not assist us in resolving the question of whether there was a legitimate sale between Fernsten Canada and Fernsten USA.

Based on the facts and evidence in this case, we find that the seller exercises too much control over the U.S. consignee to establish that there were bona fide sales for exportation between these parties. There is not enough evidence that they were acting as independent buyer and seller, despite the fact that they are separate corporate entities. The fact that the importer is not resident in the United States is not a factor in this determination.

Furthermore, the attempt to appraise the merchandise on the basis of the transactions between the importer and the U.S. consignee fails on another ground. In order to show the existence of a bona fide sale, it is also necessary to demonstrate that payment was made for the imported merchandise; general transfers of money from one corporate entity to another which cannot be linked to a specific import transaction are not sufficient to show passage of consideration. See, for example, HQ 545611, dated January 2, 2001; HQ 543708, dated April 21, 1998; HQ 543446, dated April 2, 1986; HQ 543511, dated May 29, 1986; HQ 543441, dated March 15, 1985; and, HQ 542673 (C.S.D. 82-137), dated June 10, 1982.

In HQ H032883, dated March 31, 2010, 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.

However, in 545611, funds were transferred by the importer to its subsidiaries on an "as needed" basis. That is, funds were not transferred as payment for the merchandise, but rather as a means of providing the subsidiaries with working capital. As such, these transfers were merely general transfers of funds and were not linked to specific import transactions. Accordingly, CBP found that there were no sales between the importer and its subsidiaries for purposes of determining transaction value.

Likewise, 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 decision determined that title could pass from one party to the other whether or not the purchase price had been paid, based on the language of 19 U.S.C. § 1401a(b)(1) whereby the price may be “payable.” However, while CBP found that title passed and, therefore, bona fide sales occurred between the parent and the subsidiary, CBP 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, funds are transferred from Fernsten Canada to Fernsten USA on a yearly basis. Funds are not transferred as payment for the merchandise but are merely general transfers of funds not linked to specific import transactions. Accordingly, we find that there were no sales between the importer and the U.S. consignee for purposes of determining transaction value.

Based on the reasons above, the entries may not be appraised based on the transactions between the seller/importer and the U.S. consignee. As explained below, we find that some of the entries at issue may be based on U.S. customer invoices, adjusted as appropriate. See La Perla Fashions, Inc. v. United States, 22 Ct. Int’l Trade 393 (1998), aff’d 185 F.3d 885 (1999), in which the court found that transaction value was based on the U.S. reseller’s (La Perla’s) price to its U.S. customers.

Concerning the U.S. customer invoices, we note that there are instances in which merchandise was provided to U.S. customers free of charge, and therefore no sales took place. In other cases where sales transactions occurred between the importer and the U.S. customers, some invoices list a separate freight charge but there are no actual freight invoices provided, various discounts are awarded, or special services such as taping and embroidery are provided.

Freight Charges

The term "price actually paid or payable" is defined in 19 U.S.C. § 1401a(b)(4)(A) as:

[T]he total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.

In Treasury Decision (“T.D.”) 00-20 (34 Customs Bull. & Dec. No.13, at 85, March 29, 2000), CBP reiterated its longstanding position that with regard to freight, insurance and other costs incident to international shipment, including foreign inland freight, the importer of record must deduct the actual costs for these charges from the price actually paid or payable in determining transaction value, if these costs are included in the price actually paid or payable. The notice advised that CBP considers actual costs to constitute those amounts ultimately paid to the international carrier, freight forwarder, insurance company or other appropriate provider of such services. Commercial documents to and from the service provider such as an invoice or written contract separately listing freight/insurance costs, a freight/insurance bill, a through bill of lading or proof of payment of the freight/insurance charges (i.e., letters of credit, checks, bank statements) are examples of some documents which typically serve as proof of such actual costs. Other types of evidence may be acceptable.

In addition, CBP has previously determined that the 10+2 management fee, carrier agent booking fee, carrier bill of lading, CFS receiving, foreign customs clearance, CY monitoring, documentation fee, equipment management fee, FCR/HBL issuance, LCL handling, port construction charge, port security charge, supply chain security fee, terminal handling charge, and wharfage fees are charges incident to the international shipment of the merchandise. See HQ H092560, dated April 7, 2010; see also HQ H119858, dated September 9, 2010; and HQ H119857, dated September 9, 2010.

Moreover, the transaction value of imported merchandise does not include reasonable charges for post-importation transportation and for customs duties and taxes, and other specified charges, provided that such charges are separately identified from the price paid or payable. 19 U.S.C. § 1401a(b)(3).

In this case, some U.S. customer invoices list a freight charge separate from the price of the merchandise. However, no documents have been provided to substantiate these charges. In the absence of commercial documents that substantiate the freight charges, the freight charges must be included in the appraised value of the good as part of the total payment.

Discounts

CBP Regulations provide that the price actually paid or payable "will be considered without regard to its method of derivation. It may be the result of discounts, or negotiations, or may be arrived at by the application of a formula ...." 19 C.F.R. § 152.103(a)(1). Thus, where a seller discounts its price for certain merchandise to a buyer, and the discount is agreed to and effected prior to importation of the merchandise, the discounted price constitutes the "price actually paid or payable" for the merchandise. See HQ 547019 (Mar. 31, 2000), and HQ 545659 (Oct. 25, 1995). CBP has consistently enumerated three criteria in determining whether a discount or price adjustment should be considered part of the transaction value of imported merchandise. See HQ H057716, dated June 30, 2009, and HQ W563462, dated October 11, 2006. First, the discount or price adjustment must be agreed on prior to the importation of the merchandise. See Allied International v. United States, 16 Ct. Int’l Trade 545, 795 F. Supp. 449 (1992) (The importer was required to affirmatively show that there was a pre-importation agreement for the claimed discount). The second criterion is that the importer must be able to furnish CBP with sufficient documentary evidence to support the existence of the discount and establish that it was agreed to before the time of entry. See HQ 547144, dated November 20, 1998 (appraised value may reflect discount when supplier's invoices indicated total price, 5 percent reduction and the discounted price); HQ 545659, dated October 25, 1995 (unconditional discount factored into the value declared at the time of entry and reflected on the invoice presented to Customs may be taken into account in determining transaction value); and HQ 546037, dated January 31, 1996 (discount disallowed when importer failed to submit evidence that it took advantage of 2 percent discount for payment within 45 days of invoice date). The third criterion requires that the discount or price adjustment be unconditional, or if conditional, all the conditions must be met prior to importation. This criterion was discussed in HQ 545659 supra, in which Customs determined that a discount was unconditional when there were no specified purchasing obligations placed on the customer. In that case, Customs held that unconditional discounts, which were reflected on the invoices presented to Customs, could be factored into the declared value of the merchandise. Customs also concluded that, if a conditional discount is agreed to before entry at the time of order placement, and the discount is reflected on the entry documentation presented to Customs, the conditional discount may be used to determine transaction value.

In this case, the invoices issued to U.S. customers actually served as the purchase orders submitted to Fernsten Canada. This means that the discounts reflected on the invoices were agreed to prior to importation. In addition, there are no conditions specified on the purchase orders concerning the discounts. Given these facts, we find that the three criteria used to determine whether a discount or price adjustment should be considered part of the transaction value of the imported merchandise may be satisfied in this case, provided that the importer is able to provide U.S. customer invoices for all the merchandise. In such cases, the discounted price may constitute the price actually paid or payable for the imported merchandise.

Taping and Embroidery Charges

As earlier stated, the price paid or payable for imported merchandise is the total payment made by the buyer to the seller. In this case, some of the merchandise is embroidered or taped at an extra charge. Consequently, the total payment for the merchandise must include the taping or embroidery charges. No Sale

The transaction value method requires a sale for exportation to the United States. In the instant case, some U.S. customers are not charged for the imported merchandise (see, for example, invoices 528490, 528493, and 528466). As there is no sale for exportation to the United States in these circumstances, the transaction value method is inapplicable to these transactions.

Under the TAA it is necessary to proceed sequentially through the remaining bases of appraisement to determine the appropriate valuation method. 19 U.S.C. §1401a(a)(1). The second appraisement method in order of statutory preference is transaction value of identical and similar merchandise under 19 U.S.C. §1401a(c). This method refers to a previously accepted transaction value of identical or similar merchandise that was exported at or about the same time as the merchandise being valued. Treasury Decision (T.D.) 91-15, dated March 29, 1991. The term “identical merchandise” is defined in 19 U.S.C. §1401a(h)(2) as:

[M]erchandise that is identical in all respects to, and was produced in the same country and by the same person as, the merchandise being appraised; or, if merchandise meeting the requirements under subparagraph (A) cannot be found..., merchandise that is identical in all respects to, and was produced in the same country as, but not produced by the same person as, the merchandise being appraised.

The term “similar merchandise” is defined in 19 U.S.C. §1401a(h)(4) as:

[M]erchandise that – (i) was produced in the same country and by the same person as the merchandise being appraised, (ii) is like the merchandise being appraised in characteristics and component material, and (iii) is commercially interchangeable with the merchandise being appraised; or if merchandise meeting the requirements of subparagraph (A) cannot be found..., merchandise that – (i) was produced in the same country as, but not produced by the same person as, the merchandise being appraised, and (ii) meets the requirement set forth in subparagraph (A) (ii) and (iii).

In this case, it appears the Fernsten Canada imports identical or similar merchandise directly into the United States from Canada that are able to be appraised under transaction value. Accordingly, the merchandise may be appraised pursuant to 19 U.S.C. § 1401a(h)(2) or (4) using those previously accepted transaction values. Please note that in T.D. 91-15, it was explained that the information necessary for the determination of the transaction value of identical or similar merchandise under section 402(c) could be made on the basis of information provided by the importer or already available to CBP. Thus, the port should determine if merchandise identical or similar to the merchandise to be appraised was imported; if none, request that Fernsten Canada provide this information. If the transaction value of identical or similar merchandise can be established, by showing that the products are identical or similar, involve the same or a different producer in the same country of export, and were exported at or about the same time as the merchandise being appraised, CBP should appraise the merchandise on the basis of transaction value of identical or similar merchandise, subject to adjustments for commercial level or quantity if supported by sufficient documentation.

HOLDING:

Merchandise purchased by U.S. customers may be appraised on the basis of the U.S. customer’s invoice value, taking into account deductions for applicable discounts, and additions for freight and applicable taping or embroidery charges.

Merchandise provided free of charge may be appraised based on the transaction value of identical or similar merchandise. This Protest should be denied. In accordance with the Protest/Petition Processing Handbook (CIS HB, December 2007), you are to mail this decision together with the CBP Form 19 to the protestant no 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 the mailing of the decision. Sixty days from the date of the decision, the Office of International Trade, Regulations and Rulings, will make the decision available to CBP personnel and to the public 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