VAL OT:RR:CTF:VS H243327 HkP
Port Director
Port of Champlain
U.S. Customs and Border Protection
237 West Service Road
Champlain, NY 12919
ATTN: Rebecca Rabideau
RE: Internal Advice on Application for Further Review of Protest 0712-13-100079; 19 U.S.C. § 1401a – Method of Appraisement; Related Parties; Bona Fide Sale for Exportation
Dear Port Director:
This is in response to the Application for Further Review of Protest 0712-13-100079, dated June 5, 2013, filed on behalf of White Wave USA, Inc. The protest does not meet the criteria for further review detailed in 19 CFR § 174.24 because, although counsel alleges that the protested decision is inconsistent with a ruling issued by U.S. Customs and Border Protection (“CBP”), he does not cite the ruling and instead cites an Informed Compliance Publication as evidence of the alleged inconsistency. In order for a protest to qualify for further review, 19 CFR § 174.24 requires that the importer allege that the port’s decision was inconsistent with a CBP ruling or with the port’s decision on the same or substantially similar merchandise. Nevertheless, due to the nature of the issue raised, we have decided to respond to the submission by providing internal advice.
FACTS:
The importer, White Wave USA (“WWU”) is a clothing distributor that imports apparel obtained from the seller, White Wave Canada (“WWC”). The seller purchases the apparel from various countries, imports it into Canada and then sells it to customers in Canada or supplies them to the importer, WWU. WWU is incorporated in the United States, is wholly-owned by the seller, WWC, and has the same address, and telephone and fax numbers in Canada as the seller. WWU and WWC are related parties under the customs laws.
The importer, WWU, made several entries of merchandise between March 3, 2011, and March 8, 2012, and declared values based on the invoice prices between WWC and WWU. The documents submitted in support of one of the entries, made on September 30, 2011, were as follows:
A consolidated pro forma invoice, dated September 21, 2011, for 250 boxes of apparel from various manufacturers in China, Vietnam, Thailand, Indonesia, and Vietnam, at various Canadian Dollar prices totaling $[xxx], “FOB Border”. The exporter was listed as WWC, the importer as WWU at a New York address, and the buyer as WWU at a Colorado address. The shipping address was listed as FedEx in Plattsburgh, New York.
A Declaration of Manufacturer, Producer, Exporter or Importer of Textile/Textile Products, concerning the countries in which manufacturing or processing operations took place, completed by WWC.
An invoice summary generated by WWC listing the goods exported by style number, tariff number, description, total quantity, and total value.
A Listing of Invoices for Manifest Number 002015. Invoice numbers were P003153, P003155, and P003291 through P003455; however, the invoices themselves were not submitted.
Invoice K000230, dated September 21, 2011, issued by WWC to WWU at the companies’ Canadian address for an “intercompany transfer” of merchandise totaling CAD 114,304, “sold to White Wave USA Inc. … re invoice # P3291 – 3455, P3153, P3155,” to be shipped to WWU in care of FedEx in Champlain, NY. Shipping costs were listed as free.
On January 5, 2012, the Port of Champlain issued a proposed Notice of Action that referred to a Request for Information for an entry made on October 31, 2011, a copy of which was not provided. The Notice advised the importer that the information and documentation submitted by the importer on December 29, 2011, in response to the request was insufficient evidence of a bona fide sale between WWC and WWU. In particular, the Port noted that none of the following were provided: documentation from the foreign manufacturer to WWC, purchase orders between WWC and WWU, bank statements or other payment information, bills of lading, or WWU’s U.S. tax returns. The Port further stated that the documentation provided by the importer concerning the related party transaction failed to sufficiently support the all costs plus a profit circumstances of the sale test for the acceptability of transaction value of related party sales. As a result, the port advised that the goods would be appraised “to reflect the value of the transaction that caused the sale of goods for export to the U.S. (transaction value as invoiced between White Wave USA and U.S. buyers).” A handwritten notation on the notice indicates that the proposed action was taken on February 21, 2012. Another Notice of Action was issued to the importer on February 23, 2012, advising that CBP had increased the appraised value of another entry made on October 31, 2011.
On May 10, 2012, the port issued a Request for Information, requesting copies of the commercial invoices issued by WWU to its U.S. customers for multiple entries beginning on September 21, 2011. The importer provided the following documents for an entry made on October 5, 2011:
A pro forma invoice, dated September 23, 2011, for 3150 style s150066 ski jackets at CAD [xxxx] each, “FOB Border” terms of sale. The exporter was listed as WWC, the exporter reference number as 3603-3606, and the buyer as WWU;
Invoice K000230, dated September 23, 2011, issued by WWC to WWU for an intercompany transfer of merchandise “sold to White Wave USA Inc. …re invoice # P3603 - 3606”. We note that this is the same invoice number as the invoice submitted in the September 30, 2011, entry package but the date and underlying invoice numbers are different; and,
Invoices P003603 - P003606, dated September 23, 2011, issued by WWU to a single U.S. customer, for a total of 3,150 style s150066 ski jackets at $[xxx] each.
On June 26, and November 21, 2012, the port issued Notices of Action to the importer advising that all the covered entries had been revalued based on the price paid by WWU’s U.S. customers. The entries were all liquidated on December 7, 2012.
The importer timely filed the instant protest on June 5, 2013, on the basis that there were bona fide sales between WWC and WWU, and that the prices paid were sufficient to ensure a profit. In support of the protest, counsel submitted the underlying transactional documents for the entry made on September 30, 2011, that had been referred to by the port in its January 5, 2012, Notice of Action:
Purchase orders, dated December 17, 2010 through March 4, 2011, issued by WWC to vendors in Vietnam and China for various items of apparel at various prices to be paid by wire transfer. No terms of sale are listed and each invoice, regardless of vendor, states among other things, “paid [xxx]% commission on Woolvet inv# IN00639.” The shipping address for each order is WWC in Canada, and arrival dates are listed as June 15, through October 15, 2011. The purchase orders have the same address, and telephone and fax numbers as the invoices issued by WWU to U.S. customers. See, for e.g., Purchase Orders P003603 – 3606.
Letters of Credit issued by the Toronto Dominion (“TD”) Bank on behalf of White Wave Sportswear and corresponding invoices from or on behalf of Vietnamese and Chinese sellers, with FOB Vietnam or China terms of sale, respectively. In all cases, the final destination is listed as Montreal, Canada. Each Letter of Credit is marked, “due to the irregularities listed below, we are unable to accept/pay the relative drawing.” Various discrepancies are noted on each letter of credit.
A one-page “Historical Detailed Trial Balance by Period for 2012” from WWU’s general ledger detailing bad debt expenses for February, April and May 2012.
Landed Cost breakdowns for certain styles:
Style Total Cost Cost breakdown, Wholesale Price, Retail Markup %
(USD)
150080 [xxx]
158090 [xxx]
153090 [xxx]
150092 [xxx]
155066 [xxx]
153018 [xxx]
153016 [xxx]
158072 [xxx]
Style Total Cost Cost Breakdown, Wholesale price, Retail Markup%
(USD)
153076 [xxx]
155062 [xxx]
150016 [xxx]
155066 [xxx] Purchase price CAD [xxx] at USD exchange rate of
0.9479 + CAD [xxx] (transportation cost) + [xxx] (brokerage fees) = total cost USD [xxx];
Wholesale price = USD [xxx];
Retail markup = [xx]%
150062 [xxx]
The same documents submitted in support of the September 30th entry, previously listed.
A spreadsheet listing unit prices, landed costs, WWC invoice prices, and markup percentages for various styles included in the September 30th entry. For style 155066, the WWC invoice price is listed as $[xxx], the markup as [xxx]%, and a column labeled “proof of payment” states “yes,” that $[xxx] was paid. No actual proof of payment was provided.
Three pages of a 130-page invoice, dated October 17, 2011, issued by FedEx to WWU at its Canadian address, for Express and Ground transportation charges and fees.
WWU U.S. tax returns for 2010 through 2012.
WWU’s General Ledger Bad Debt Expense Report for the period June 1, 2011 to May 31, 2012. According to the report the total amount debited (i.e., owed to WWU) was USD [xxx] and the total credited was USD [xxx], leaving an outstanding credit (balance owed to WWU) of USD [xxx].
Counsel also stated in the protest memorandum that there were no formal purchase orders between the importer, WWU and the seller, WWC.
ISSUE:
Whether the merchandise may be appraised on the basis of the transactions between related parties WWC and WWU.
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). When transaction value cannot be applied, then the appraised value is determined based on the other valuation methods in the order specified in 19 U.S.C. § 1401a(a).
In order for transaction value to be used as a method of appraisement, there must be a bona fide sale between the buyer and seller. 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 HQ 545474, dated August 25, 1995; and HQ 545709, dated May 12, 1995.
Finally, pursuant to the CBP’s Informed Compliance Publication, entitled “Bona Fide Sales and Sales for Exportation,” CBP will consider whether the buyer provided or could provide instructions to the seller, was free to sell the transferred item at any price he or she desired, selected or could select its own downstream customers without consulting with the seller, and could order the imported merchandise and have it delivered for its own inventory.
Counsel states that there was a bona fide sale between the seller, WWC, and the importer, WWU, and that the price was acceptable because it was sufficient to ensure a profit. In support of his position, he supplied the documents mentioned in the FACTS above. However, counsel did not make any legal arguments on the issue of bona fide sale and only addressed the issue of whether the price was sufficient to ensure a profit.
The port’s position is that the importer has failed to substantiate that a bona fide sale took place between the seller, WWC, and the importer, WWU, because the importer did not provide a sales agreement or other transactional documents that show the terms of sale. Accordingly, the port states that there is no evidence that WWU ever assumed the risk of loss for the imported merchandise or acquired title to it. Moreover, the port notes that the filing of separate tax returns does not necessarily prove that parties function as independent buyer and seller. In addition, it is the opinion of the port that the financial records of the importer appear to be controlled by the seller, WWC. The port notes that the invoices from WWU to U.S. customers list the Canadian address shared by the parties, and that WWU does not appear to have a physical presence in the U.S. or any U.S. employees. The port states that the importer has not provided any information to prove that it could instruct the seller, was free to sell the merchandise at any price it desired, could select its own customers, or could order the merchandise for its own inventory. Rather, the imported merchandise was shipped by the seller, WWC, to FedEx in New York pre-labeled with the U.S. customers’ names and addresses. The port is of the view that the circumstances in this case are similar to those described in Headquarters Ruling Letter (“HQ”) H213946, issued on October 12, 2012.
HQ H213946 was issued in response to a request for reconsideration of HQ H006576 (Dec. 19, 2007) and HQ H026063 (Aug. 17, 2010), issued to the same importer, and challenged the holdings in those decisions that the valuation of the imported merchandise should be based on the price paid or payable by the U.S. customers. 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 to 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, Email, 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, which were retrieved and processed by the seller’s employees and then deposited into the importer’s account at a bank located in Canada. 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 in both HQ H006576 and HQ H026063 that the sale for exportation on which to base appraisement of the imported merchandise was the sale to the U.S. customer.
The basis of the challenge in H213946 was additional information concerning the importer’s status as a U.S tax-paying entity, the number of its U.S. employees, the ordering process between the importer and the seller, a transfer pricing study that stated that the terms of sale between the parties were Ex Works, and the handling/packaging of goods by the importer after importation. In reaching its decision, CBP noted that the importer had not presented any transaction sales agreements or contracts between the related parties that show the terms of sale or indicate that there was a passage of title and risk of loss for the imported merchandise between the seller and the importer. CBP also stated that the fact that the importer filed an income tax return with the United States Internal Revenue Service (“IRS”) did not necessary mean that it functioned as an independent buyer and seller of the imported merchandise. CBP gave the example of a selling agent in the United States that earns income that must be reported to the IRS for federal income tax purposes but does not function as a separate buyer and seller under the Customs valuation law. Based on the facts, CBP concluded that the importer functioned more like a sales agent than as an independent buyer and reseller. CBP once again concluded that the related parties were so closely intertwined financially and administratively that it was difficult to conclude that the importer acted separately and apart from its parent company in Canada.
In this case, the importer 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 importer is the distributor of the seller’s products in the United States. 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. We were not given any information on the ordering process between WWU and WWC, other than that there is no formal purchase order, but based on the reference to U.S. customer purchase order numbers in WWC’s invoice to WWU it appears that the same invoices issued to U.S. customers serve as the purchase orders to WWC. Consequently, it appears that the ordering process is initiated by the importer’s sales representatives who solicit and take orders from U.S. customers. In addition, based on a comparison of WWC’s purchase orders issued to foreign vendors and WWU’s invoices to U.S. customers, the seller also maintains and supports the telephone and fax lines used in connection with the importer’s selling and marketing operations.
In addition, there appears to be little or no separation between WWC and WWU when it comes to other business dealings. WWU has access to WWC’s purchase orders to overseas suppliers as well as to WWC’s landed cost calculations, usually considered to be confidential business information that is not normally supplied to independent purchasers. Further, the price charged to the U.S. customer appears to have been set by the seller, WWC, not the importer. For the entry of 3,150 style s155066 jackets made on October 5, 2011, the landed cost (Canada) of the jackets was USD [xxx] each, and the WWC invoice price was USD [xxx]. If the jackets were sold to WWU based on WWC’s invoice price, assuming FOB Border terms of sale per the pro forma invoice, the invoice to WWU would have been for USD [xxx], not CAD [xxx]. No justification for this lower invoiced amount was provided. The jackets were sold to the U.S. customer at a unit cost of USD [xxx], at a [xxx]% markup over the WWC invoice price of USD [xxx]. According to counsel, the markup was made by WWU. However, because WWU did not pay the WWC invoice price for the jackets, we believe that the markup over the invoice price was taken by WWC rather than by WWU.
For all these reasons, we find that the seller exercised too much control over the importer for it to be established that there was a bona fide sale for exportation between the WWC and WWU. There is not enough evidence that the seller and the importer were acting as a buyer and seller independent from each other. The evidence indicates that the importer acted as a selling agent for the seller.
Concerning the transfer of title and risk of loss, the pro forma invoices submitted on entry state “FOB Border” terms of sale between WWC and WWU. Counsel provided three pages of a 130 page invoice from FedEx as proof that it was the responsibility of the importer to transport the goods, both from the standpoint of paying for the post-importation transportation and to show that the importer bore the risk of loss after importation.
In HQ H023094, related parties in Canada and the U.S. did business at the same address in Montreal, Quebec, Canada. The U.S. party was organized as a New York Limited Corporation but the companies had no actual presence in the United States, such as employees or a warehouse, but used an address in New York to serve as its place of contact in the United States. The U.S. party maintained separate bank accounts and the two companies maintained separate financial statements. All general administrative functions for the U.S. party were performed by the Canadian party for a fee. The merchandise involved in the transaction reviewed was purchased by the Canadian party from unrelated sellers in Taiwan and China, and imported into Canada. There were no U.S. orders prior to importation of the merchandise into Canada, and there was no evidence that the merchandise was destined to the U.S. when it was imported into Canada. After the goods were imported into Canada, they were stored in a duty relief warehouse in Canada pending subsequent orders. The U.S. purchaser orders were submitted to the Canadian party, which fulfilled the orders from its warehouse and shipped the goods directly to the U.S. customer. CBP found that it was unable to ascertain if there had been a bona fide sale between the related parties, due to a lack of documented evidence of the terms of sale and the passage of title and risk of loss for the imported merchandise, and that it had no way of determining if the U.S. party ever held title to the imported merchandise. Accordingly, CBP found that the sales for exportation were between the Canadian party and the U.S. customers and that these transactions were the proper bases of appraisement.
In this case, there are no purchase orders or other commercial documents to substantiate the FOB Border terms of sale alleged by the importer. We cannot rely on the pro forma invoice, which by its nature is subject to change, or make an informed decision based on a partial FedEx invoice. In addition we note that the FedEx invoice was sent to the Canadian address shared by the companies, which again raises the issue of the parties’ lack of independence from each other.
The information presented indicates that the importer had virtually no presence in the United States. U.S. purchasers’ orders were submitted to the seller, WWC, in Canada, through the importer, WWU, and the seller fulfilled the orders. The seller exercised significant control over the importer’s operations, for example, the seller appears to have set the price charged to U.S. customers, controlled communication with U.S. customers, and was responsible for order fulfilment and shipping. Given these facts, there is insufficient evidence to conclude that WWC and WWU acted as independent buyers and sellers. In addition, the U.S. customers’ orders caused the goods to be exported to the United States and constituted the sales for exportation on which appraisement must be based. Consequently, we find that the merchandise should be appraised under transaction value using the sales from WWC in Canada to the ultimate consignees in the United States.
HOLDING:
The transactions between the related parties WWC and WWU cannot be used to appraise the imported merchandise. The merchandise should be appraised based on sales from WWC in Canada to the U.S. purchasers.
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, Regulations and Rulings, Office of International Trade, will make the decision available to CBP personnel and the public at www.cbp.gov, by means of the Freedom of Information Act and other methods of public distribution.
Sincerely,
Monika R. Brenner, Chief
Valuation & Special Programs Branch