OT:RR:CTF:VS H266618 RMC
Port Director
U.S. Customs & Border Protection
237 West Service Rd.
Champlain, NY 12919
Re: Application for Further Review of Protest 0712-15-100071; Transaction Value; Bona Fide Sale
Dear Port Director:
This is in response to your correspondence dated June 23, 2015, forwarding the Application for Further Review (“AFR”) of Protest 0712-15-100071, timely filed by Do-Gree Fashions USA (“DG USA”).
FACTS:
This AFR arises out of transactions between Do-Gree Fashions Ltd. (“DG Canada”), a Canadian apparel company, and DG USA, a wholly-owned subsidiary that is incorporated in New York. DG Canada sells apparel to Canadian retailers and to DG USA, which distributes its products in the United States. In short, DG USA uses three “contract employees” to solicit orders from U.S. customers at the beginning of each season. DG Canada processes and invoices the orders in Montreal and then sends a bulk shipment of pre-addressed U.S. orders to a FedEx warehouse in Champlain, NY. There, the bulk shipment is broken down and the orders are forwarded to the end customers in the United States.
For the imports at issue, DG Canada charged DG USA an intercompany price based on the price it paid to its unrelated suppliers “plus a markup of 25% to 40%.” Based on the structure of the relationship between the parties and the pricing of the deal, DG Canada claims that a “bona fide sale for export” occurred between DG Canada and DG USA when DG Canada sent the pre-addressed orders from its Canadian warehouse to DG USA’s FedEx warehouse in Champlain. DG Canada thus declared the intercompany price as transaction value for customs purposes instead of the price that DG USA charged the end U.S. customers.
The controversy over the correct valuation of DG Canada’s transactions with DG USA began in 2011 when CBP issued a Notice of Action concluding that no bona fide sale occurred between DG USA and DG Canada. DG USA was thus ordered to declare the price charged to the end U.S. customers when importing merchandise from DG Canada. Nevertheless, DG USA apparently continued to declare the intercompany price.
For example, DG USA imported the merchandise at issue in 2014, declaring the intercompany price from DG Canada on the entry summary. On July 25, 2014, CBP issued a request for information related to the valuation of the transactions between DG Canada and DG USA. DG USA did not respond to the request for information, and on September 10, 2014, CBP issued a Proposed Notice of Action that affirmed the findings of its 2011 Notice of Action, namely, that no bona fide sale occurs between DG Canada and DG USA and that valuation should be based on the price charged to the end U.S. customer.
DG USA subsequently filed a response to the Proposed Notice of Action addressing the questions in the original Request for Information. Specifically, it argues that a bona fide sale occurred between DG USA and DG Canada and that the intercompany price could be used as transaction value. In the alternative, DG USA also argues that if CBP rejects the intercompany price, another method of appraisement in the valuation hierarchy set forth in 19 U.S.C. § 1401a should be used instead of the price charged to the end U.S. customer.
DG USA provided the following documentation in support of its protest:
The CBP Form 7501 for an entry dated July 1, 2014 showing that DG USA imported $14,844 of apparel on June 17, 2014.
Purchase order dated February 14, 2013, corresponding to the entry listed above showing DG Canada as the seller and DG USA as the buyer. The purchase order shows “invoice to” as Do-Gree Fashions USA and “vendor name/address” as Dogree Fashions Inc. with both entities sharing the same address and phone number in Montreal. The order contains instructions to ship to “FTN – Pick and Pack Warehouse” in Champlain, NY on June 16, 2014. The items are to be shipped via Fedex Trade Networks with shipping terms FOB Montreal.
An invoice number 1978 and a revised invoice number 1978 corresponding to the entry listed above. The first version, dated June 10, 2014, shows a sale to DG USA for $14,344.49. The revised version, dated June 16, 2014, shows a sale to DG USA for $14,844, which is the price recorded on the CBP Form 7501.
Invoice “for customs clearance” on Fedex letterhead dated June 16, 2014 corresponding to the entry listed above. The invoice shows DG Canada as the seller and DG USA as the buyer and lists FTN (Fedex Trade Networks) as the place of delivery. The invoice also shows that DG Canada and DG USA share the same Montreal address.
Bank statement for DG USA as of June 30, 2014 showing a payment to DG Canada in the amount of $14,344.49 for invoice number 1978.
Accounts payable report for DG USA as of June 30, 2014 showing payment for invoice 1978 on June 10, 2014 in the amount of $14,344.49.
Invoices for other orders to be shipped to the United States. It is unclear whether the invoices correspond to orders placed with DG Canada or DG USA because they are labeled merely “Do-Gree Fashions” and list the address and phone number that DG Canada and DG USA share. The invoices do, however, include instructions to make checks payable to DG USA. Most of the invoices list “ship to” addresses as various Amazon warehouses. DG USA did not provide information to link any of these invoices to particular entries at issue in this case.
A purchase order showing a “ship to” address of a company in Massachusetts. Like the invoices above, however, there is insufficient information to link this purchase to an import at issue in DG USA’s protest.
ISSUE:
Whether the apparel may be appraised on the basis of the transaction value between related parties DG USA and DG Canada.
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 Headquarters Ruling (“HQ”) 545474, dated August 25, 1995; and HQ 545709, dated May 12, 1995.
Finally, as explained in 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.
DG USA claims that title for the product passed from DG Canada to DG USA when the merchandise was picked up from DG Canada’s warehouse in Canada because the invoice and bill of lading state “FOB – Montreal.” However, DG USA’s only role in these transactions, if any, appears to be its responsibility for cashing checks from U.S. customers, while the buyer was actually the end U.S. customer. For example, no sales agreements or contracts between DG Canada and DG USA set forth the terms of the sale or detail the passage of title for the goods. Furthermore, many of the invoices merely list “Do-Gree Fashions” and a shared address and phone number such that it is ambiguous which entity was actually a party to the sale. Similarly, although DG USA claims that it carries insurance to cover any losses, it is unclear which entity paid for the insurance and which entity was the beneficiary. Moreover, when the merchandise left DG Canada’s custody, it had already been sold to U.S. customers and packaged into individual orders bearing the U.S. addresses of those customers. The merchandise then arrived in a FedEx warehouse that served merely as a forwarding center for orders arriving from DG Canada destined for customers in the United States. We therefore find that “FOB – Montreal” did not indicate a transfer of title and transfer of risk of loss between DG Canada and DG USA. Instead, it indicated that the risk of loss and title passed from DG Canada to the end U.S. customer when the goods were picked up in Montreal. Because the bona fide sale for exportation to the United States for customs purposes occurred between DG Canada and the end U.S. customer, DG USA may not use the intercompany price as transaction value for the merchandise.
Furthermore, even if there were a “bona fide sale” between DG Canada and DG USA, the transaction value proposed by DG USA would not be acceptable. Transaction value between a related buyer and seller is acceptable only if the transaction satisfies one of the two tests: (1) circumstances of the sale; or (2) test values. See 19 U.S.C. §1401a(b)(2)(B); 19 CFR §152.103(l). DG USA provided no evidence that the transaction value of imported merchandise approximates one of the “test values” under 19 U.S.C. § 1401a(b)(2)(B).
Under the “circumstances of the sale” test, CBP looks for evidence showing that the parties’ relationship did not affect the price paid or payable. All relevant aspects of the transaction are analyzed including the way the buyer and seller organize their commercial relations and the way that the price was determined. 19 C.F.R. § 152.103(l) provides three examples that demonstrate that a relationship will not influence the price: (i) the price was settled in a manner consistent with the normal pricing practices of the industry in question; (ii) the price was settled in a manner consistent with the way the seller settles prices for sales to buyers who are not related to it; or (iii) the price is adequate to ensure recovery of all costs plus a profit that is equivalent to the firm’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind.
As for the circumstances of the sale test, DG USA does not argue that the price was settled in a manner consistent with the normal pricing practices of the industry in question or consistent with the way it settles prices with unrelated parties. Instead, it notes that the related-party price is based on the FOB price at which DG Canada purchases goods from unrelated third party sellers plus a markup of 25% to 40%. However, without any proof of DG Canada’s costs and profit levels, it is impossible to determine whether the price was adequate to ensure that DG Canada recovered all costs plus a representative profit. Because DG USA cannot demonstrate that its relationship with DG Canada did not influence the price, transaction value would be unacceptable even if there were a bona fide sale between DG Canada and DG USA.
Lastly, DG USA is incorrect that CBP must apply another method of appraisement in the 19 U.S.C. § 1401a hierarchy merely because we find that the intercompany price is unacceptable. We rejected that argument in HQ H243327, dated Nov. 5, 2014, where the importer argued that CBP must appraise merchandise based on the deductive value if it rejects transaction value between related parties. CBP held that “because we have determined that there is, in fact, a sale for exportation between [the Canadian parent company] and the U.S. customers, under 19 U.S.C. § 1401a, this sale must be used to appraise the merchandise, unless there is a reason why appraisement under this transaction value would be invalid.” As explained above, there was bona fide sale between DG Canada and its U.S. customers in this case. Consistent with H243327, the merchandise must therefore be appraised based on the price that DG Canada charges to the end U.S. customer.
HOLDING:
The protest is denied. The merchandise must be appraised using the transaction value based on the price actually paid or payable by DG Canada’s customers in the United States.
In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs Form 19, to the Protestant no later than sixty (60) days from the date of this letter. Any re-liquidation of the entry or entries in accordance with the decision should be accomplished prior to mailing of this decision. Sixty (60) days from the date of this decision, the Office of International Trade; Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division