OT:RR:CTF:VS H286286 SMS
Port Director
U.S. Customs and Border Protection
301 East Ocean Boulevard
Long Beach, CA 90802
Attn: Brenda Cruz, Import Specialist
RE: Application for Further Review of Protest Number 2704-16-101142; First Sale; Related Parties; All Costs Plus a Profit
Dear Port Director:
This is in response to your correspondence forwarding the Application for Further Review (“AFR”) of Protest 2704-16-101142 to this office for our review. The protest was filed on September 13, 2016, by Sandler, Travis, and Rosenberg, P.A., (“Counsel”) on behalf of their client, against your liquidation of 46 entries of merchandise. The protest challenges the appraised value used for purposes of liquidation and assessment of duties and fees. This protest has been designated as a lead protest and Protest 2704-16-100745, dated June 15, 2016, against the liquidation of another four entries, is pending under it. We note initially that the refusal to re-liquidate an entry and the appraised value of an entry are protestable pursuant to 19 U.S.C. § 1514(a), and the instant protests were timely filed, within 180 days from the date of liquidation. See 19 U.S.C. § 1514(c)(3)(A).
FACTS:
The Protestant is engaged in the design, marketing, sale, and distribution of footwear in the United States. Between February 3, 2015 and September 16, 2015, Protestant made fifty entries of footwear. The Protestant sources a significant portion of its merchandise from Asia. The Protestant/Importer explains its sourcing structure as follows: it issues a purchase order to an unrelated vendor (“Vendor”), a registered trading company in Macau, China, who then issues a purchase order to its related intermediary (“Middleman”), registered in the British Virgin Islands, who then issues a purchase order to the related manufacturer (“Manufacturer”), also registered in Macau. Counsel explained, via an August 24, 2017, conference call, that the Middleman is the parent/owner of the Manufacturer. Once the merchandise is produced in the Manufacturer’s subcontracting factory, the Manufacturer ships the finished product directly from China to the Importer in the United States. “All subject goods are tagged and packed for shipment at the factory and sent directly to the U.S. without an opportunity of diversion.” Once the goods are shipped, the Manufacturer issues a corresponding invoice to the Middleman for the goods at the “first sale” value. The Middleman then issues a commercial invoice to the Vendor, at the “second sale” price, who then issues a commercial invoice to the Importer at the “third sale” price. The Middleman acts as a buyer and a seller in this transaction.
After reviewing its transactions, the Protestant now protests the original entered value of its previous fifty entries, and requests that U.S. Customs and Border Protection (“CBP”) re-liquidate the entries at the “first sale” value charge between the Middleman and its related Manufacturer. Counsel asserts that the related party transaction is at arm’s length and meets the “all costs plus a profit test.” Your office denied the instant protests and contends that the entities involved in the first sale, appear to be agents, with the potential of unreported commissions, which would affect the transaction value. Your office asserts that because no evidence was provided to support that the transaction is at arm’s length, the protest should be denied.
Financial Documentation:
Provided with the lead protest, to substantiate the first sale claim, the Importer submitted one sample set for one of the entries under protest, which includes:
Importer’s September 9, 2014, purchase order number 87942 to Vendor for 1,056 shoes (third sale), which lists the Manufacturer’s subcontracting factory as the facility. The terms of sale are Free-on-Board (“FOB”) “any port unknown”;
Vendor’s October 10, 2014, purchase order to the Middleman, for the corresponding 1,056 shoes at a price difference of $1.15 less the third sale price per unit (second sale), with the instructions to ship to the Importer’s address in the United States and the statement “Goods for Export to the US only”, and listing the Manufacturer’s subcontracting factory. The terms of sale are Free Alongside Ship (“FAS”) Tianjin;
Middleman’s October 10, 2014, purchase order to the Manufacturer, for the corresponding 1,056 shoes at a price difference of $0.29 less than the second sale price per unit and $1.44 less than the third sale price, per unit (first sale), with the instructions to ship to the Importer’s address in the United States and the statement “Goods for Export to the US only”, and listing the Manufacturer’s subcontracting factory. The terms of sale are Free Carrier (“FCA”) consolidator’s warehouse;
Corresponding December 30, 2014, invoice from the Manufacturer to the Middleman, at the first sale price, which lists the Importer’s address in the United States as the ultimate “ship to” address, including the statement “Goods for Export to the US only” and referencing the purchase order between the Importer and Vendor. The terms of sale are FCA consolidator’s warehouse;
The Sales Summary of the first sale price includes a $0.10 tooling assist and a $0.02 raw material assist added to the purchase price.
Corresponding January 4, 2015, invoice between the Middleman and Vendor, at the second sale price, with instructions to ship to the Importer’s address in the United States and the statement “Goods for Export to the US only.” The terms of sale are FAS Tianjin;
Corresponding January 4, 2015, invoice between the Vendor and Importer at the third sale price. The ex-factory date is December 30, 2014, with an expected shipment date of January 2, 2015, and an estimated arrival date of January 21, 2015. The terms of sale are FOB Tianjinxingang, Tianjin, China;
Sea Waybill, dated January 3, 2015, identifying the Manufacturer’s subcontractor factory in China as the shipper and the Importer as the ultimate consignee;
Vendor’s Packing List dated December 12, 2014, listing Importer as the buyer and consignee, and the Manufacturer’s subcontractor factory as the shipper;
Bank Internal Transfer/Proof of payment, dated March 24, 2015, from the Middleman to the Manufacturer;
Bank Internal Transfer/Proof of payment, dated March 24, 2015, from the Vendor to the Middleman; and
Bank Inward Remittance/Proof of payment, dated March 4, 2015 from the Importer to the Vendor.
On February 1, 2017, after CBP requested more information, Counsel provided the audited income statements for the related Middleman and Manufacturer for the fiscal year ending in 2015, transaction value cost buildup documentation, bill of materials (“BOM”) for the relevant styles, and another sample set of documents. The commercial documents are for a near identical transaction to those listed above, and were for the Importer’s December 22, 2014, purchase order number 88589 of 3,024 shoes. The Vendor’s corresponding December 22, 2014, purchase order to the Middleman, was at a price difference of $0.78 less the third sale price per unit (second sale). Middleman’s December 22, 2014, purchase order to the Manufacturer, for the corresponding 3,024 shoes was at price difference of $0.19 less than the second sale price per unit and $0.97 less than the third sale price, per unit (first sale). The documents contained the instructions to ship to the Importer’s address in the United States and the statement “Goods for Export to the US only”, as well as references to the Importer’s purchase number 88589, and to the Manufacturer’s subcontracting factory.
The 2015 income statements provided show that the Manufacturer realized an operating profit margin of 1.33 percent and the Middleman realized a profit margin of .84 percent. The statements do not go into detail, but only list the companies’ revenue, sales and returns, cost of sales, gross profit, other income, administrative expenses, taxes, and profit for the year. No taxes are shown as paid from either company. The cost breakdown provided lists the materials used to produce the style purchased at the first sale value. Also included in this submission is an April 19, 2016, e-mail between Counsel and the Vendor, which requests documentation regarding “tooling and raw material assists” provided to Manufacturer’s subcontracting factory, as well as payment amount discrepancies.
After an in-person meeting with Regulations and Rulings, on February 1, 2018, and a request for more information to document title and risk of loss, Counsel submitted additional documentation to further outline the transaction and to substantiate the costs and charge backs to each party in accordance with their respective terms of purchase on April 12, 2018. In this submission, Counsel expounds that the Manufacturer buys the goods from the factory at “Ex-Factory” terms, and title and risk of loss transfers to the Manufacturer at the factory door in Hebei, China. The Manufacturer is responsible for the trucking fee from the factory to the Consolidators Terminal in the port of export in Shanghai, China. The invoice is charged to the logistics company, but it is borne by the Manufacturer through charge back. The Middleman then buys the goods from the Manufacturer at “FCA Consolidator Terminal” and the risk of loss transfers to the Middleman at the Consolidator Terminal in the port of export in Shanghai. The Middleman is responsible for the port handling charges and the consolidation fee. The invoice is first charged to the logistics company and then is charged back to the Middleman. Title and risk of loss then transfer from the Middleman to the Vendor beside the ship at the port of export in Shanghai. The Vendor is responsible for loading the goods and bears the risk of loss or damage to the goods, and is responsible to pay for the terminal handling charges, including loading fees and the customs clearance fee. The transportation cost is charged to the logistics company and then charged back to the Vendor. The Vendor then sells to the Importer at FOB Shanghai, and title and risk of loss transfers to the Importer when the goods are loaded on board the vessel at the port of export in Shanghai.
Included in the April 12, 2018 submission was:
Shipment Summary of three shipments dated October 9, 2017, with an estimated arrival of October 22, 2017;
Party invoices from October 3, 5, and 9, 2017;
Illegible logistic company invoices;
Summary of transportation related costs allocations;
Payment request from the logistics company to the factory, dated October 14, 2017;
Payment advanced by the factory to the logistics provider on October 17, 2017;
Breakdown of associated logistics and transportation costs for each party;
November 25, 2017 debit note issued by factory to the Manufacturer for the full amount of all the transaction logistics and transportation fees;
November 25, 2017 debit note from Manufacturer to Middleman for its portion of the fees, approximately 11 percent of the total fee; and
November 25, 2017 debit note from the Middleman to Vendor for approximately 50 percent of the fees charged to the Middleman.
All costs are originally charged to the logistics company, which charges the Manufacturer’s subcontracting factory. The factory then issues debit notes to the Manufacturer for all the transportation costs. The Manufacturer issues a debit note to the Middleman for the port handling fees and other filing fees, and lastly, the Middleman issues a debit note to the Vendor for terminal handling and customs clearance fees. Lastly, CBP reviewed the Vendor’s 2015 Annual Report online, which listed the Manufacturer as the related party from which it purchases footwear products, and failed to mention the Middleman as a related transacting party. The report listed $132,494 worth of footwear product purchases from the Manufacturer, these amounts represent prepayments for the purchase of goods and are unsecured and interest free.
The Vendor’s 2015 Annual Report also listed the Manufacturer as an associate, with $36,863 outstanding due to Vendor.
ISSUE:
Whether the entries at issue may be appraised based upon the transaction value between the Manufacturer and its related Middleman Buyer as sales for export to the United States.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”), codified at 19 U.S.C. § 1401a. Transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for five enumerated statutory additions. 19 U.S.C. § 1401a(b). In order for imported merchandise to be appraised under the transaction value method, it must be the subject of a bona fide sale between a buyer and seller, and it must be a sale for exportation to the United States. We will assume for the purposes of this ruling that transaction value is the appropriate basis of appraisement.
In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992) and Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993), the Court of Appeals for the Federal Circuit and the Court of International Trade (“CIT”), respectively, reviewed the standard for determining transaction value when there is more than one sale which may be considered as being a sale for exportation to the United States. Both cases involved a foreign manufacturer, a middleman, and a United States purchaser. In each case, the court held that the price paid by the middleman/importer to the manufacturer was the proper basis for transaction value. Each court further stated that in order for a transaction to be viable under the valuation statute, it must be a sale conducted at arm’s length, free from any non-market influences, and involving merchandise clearly destined for export to the United States at the time of the first sale. In accordance with the Nissho Iwai and Synergy decisions, we presume that transaction value is based on the price paid by the importer. In further keeping with the courts’ holdings, we note that an importer may request appraisement based on the price paid by the middleman to the foreign manufacturer in situations where the middleman is not the importer. However, it will be the importer’s responsibility to show that the “first sale” price is acceptable under the standard set forth in Nissho Iwai and Synergy. That is, the importer must present sufficient evidence that the alleged sale was a bona fide “arm’s length sale,” and that it was “a sale for export to the United States,” within the meaning of 19 U.S.C. § 1401a.
In Treasury Decision (“T.D.”) 96-87, 30 Cust. Bull. 52/1 (January 2, 1997), CBP set forth the documentation and information needed to support a ruling request that transaction value should be based on a sale involving a middleman and the manufacturer or other seller rather than on the sale in which the importer was a party. CBP advised that the importer must provide a description of the roles of the parties involved and must supply relevant documentation addressing each transaction that was involved in the exportation of the merchandise to the United States. The documents may include, but are not limited to purchase orders, invoices, proof of payment, contracts, and any additional documents (e.g. correspondence) that establishes how the parties deal with one another. The objective is to provide CBP with “a complete paper trail of the imported merchandise showing the structure of the entire transaction.” T.D. 96-87 further provides that the importer must also inform CBP of any statutory additions and their amounts. If unable to do so, the sale between the middleman and the manufacturer cannot form the basis of transaction value.
According to Nissho Iwai, in order for a transaction to be viable for transaction value purposes, it must be a sale negotiated at arm’s length, free from any non-market influences. There is a presumption that a transaction will meet this standard if the buyer and seller are unrelated. See T.D. 96-87. If the parties are related, then “it is necessary to provide Customs with information which demonstrates that transaction value may be based on the related party sale as provided in 19 U.S.C. § 1401a(b)(2)(B) (stating that the circumstances of the sale indicate that the relationship did not influence the price or that the transaction value closely approximates certain test values). See T.D. 96-87, supra. “Test values” refer to values previously determined pursuant to actual appraisements of imported merchandise. Furthermore, transaction value between a related buyer and seller may be 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. The CBP Regulations specified in 19 CFR Part 152 set forth illustrative examples of how to determine if the relationship between the buyer and the seller influences the price. See also Headquarters Ruling (“HRL” or “HQ”) H241090 (Dec. 23, 2013); HRL H029658 (Dec. 8, 2009); H037375 (Dec. 11, 2009); and, HRL H032883 (March 31, 2010). 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 CFR § 152.103(l)(1)(i)-(ii). In addition, CBP will consider the price not to have been influenced if the price was adequate to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit realized over a representative period of time. 19 CFR § 152.103(l)(1)(iii). These are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well.
Clearly Destined for Export to the United States
The U.S. Court of Appeals for the Federal Circuit has established that for merchandise imported pursuant to a three-tiered transaction to be appraised on the basis of the first sale, the merchandise must be clearly destined for export to the United States. In Nissho Iwai, the court reaffirmed the rationale established in M.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that in a three-tiered distribution system, “the manufacturer’s price constitutes a viable transaction value when the goods are clearly destined for export to the United States and when the manufacturer and the middleman deal with each other at arm’s length, in the absence of any non-market influences that affect the legitimacy of the sales price.” Nissho Iwai, at 509. In multi-tiered transactions, CBP has previously been hesitant to find a sale for export where merchandise is not shipped directly to the United States. See e.g., HRL 547382 (Feb. 14, 2002).
Here Counsel cites to HQ 545420, dated May 31, 1995, in support of their claim. In HQ 545420, CBP noted that the following information would support a finding that merchandise was clearly destined for exportation to the United States:
(1) The factory produces the garments to fulfill a pre-existing purchase order issued by the U.S. retailer; (2) the factory places labels in the garments which identify or represent the trademarks of U.S. retailers; (3) the factory packs the garments in shipping cartons which identify the U.S. retailer, by marks and numbers, as the ultimate destination; and (4) the export licenses controlling the volume of garments shipped to the U.S. cover specific garments. Customs will also require a copy of the factory invoice.
HQ 545420. To support its claim that the merchandise was clearly destined for export to the United States, the Protestant/Importer provided purchase orders, invoices, seaway bills, packing lists, and payment records for the transaction underlying the protest. Counsel notes that all of the purchase orders in the transaction reference the Importer’s U.S. style/item number and a description of the merchandise. Additionally, all of the invoices, including that, between the Manufacturer and the Middleman reference the corresponding U.S. style/item number and product description. The invoice between the Manufacturer and Middleman also contains a statement that the “goods for export to the US only” and list the Importer’s address in the United States as the ship to location. Lastly, Counsel explains that the Chinese factory places labels on the merchandise identifying the Importer’s U.S. trademarks and the goods are tagged and packed in shipping cartons identifying the Importer’s address in the United States as the ultimate consignee. Then the merchandise is “sent directly to the [Importer] in the U.S. without an opportunity for diversion.”
Based on the submitted commercial documentation, we determine that the subject merchandise was clearly destined for export to the United States. As outlined in HQ 545420, the commercial documents provided by Counsel establish a clear paper trail that shows at all times the merchandise was clearly intended for export to the United States. The information contained in the purchase orders, invoices, seaway bills, packing lists and payment records consistently list the quantity, price, and product descriptions of the merchandise ordered by the Importer. The purchase orders and invoices indicate that the merchandise was to be shipped directly to the Importer in the United States. In addition, the Manufacturer’s subcontracted factory places the Importer’s U.S. trademarks and address on shipment containers for shipment directly from China to the United States. Based on these facts and documents, we find that the United States was the destination of the merchandise. See e.g., HQ 547071 (Nov. 1, 2001).
Bona Fide Sale
The second prong of the Nissho standard is whether the merchandise was exported pursuant to a bona fide sale conducted at arm’s length. For customs purposes, the term “sale,” as articulated by the court in J.L. Wood v. United States, 505 F.2d 1400, 1406 (1974), is defined as the transfer of property from one party to another for consideration. 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. Id. (citing J.L. Wood v. United States, 505 F.2d 1400). No single factor is decisive in determining whether a bona fide sale has occurred. CBP makes each determination on a case-by-case basis and will consider such factors as whether the purported buyer 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 the circumstances of the transaction indicate that the parties are functioning as buyer and seller. See, e.g., HRL 545709 (May 12, 1995) and HRL 545474 (Aug 25, 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. See HQ H067846 (March 15, 2010), and HQ 546192 (Feb. 23, 1996).
Simultaneous or flash transfer of title, where the middleman and the buyer obtain title at virtually the same moment, as evidenced by both parties having the same terms of sale, may cause CBP to more closely scrutinize a transaction. By itself, flash transfer of title does not equate to a failure to show a bona fide sale, but this factor along with who carries the risk of loss are considered by CBP in its determination of whether or not a bona fide sale has occurred. See HQ H097616 (Nov. 21, 2011). In HRL H016966, dated December 17, 2007, CBP stated that “Whenever there is a purported series of sales, and the same terms of sale are used in both transactions, there is a concern that the middleman obtains risk of loss and title only momentarily or never at all, and thus has nothing to sell to the ultimate purchaser. In such situations the middleman may be a buying or selling agent rather than an independent buyer/seller and the sale will be said to occur between the party identified as the first seller and the ultimate U.S. purchaser.” HRL H016966.
In HQ 546192, CBP considered whether the middleman 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. The terms of sale showed the seller responsible for the costs, insurance and freight necessary to bring the merchandise to the named port of destination, and the risk of loss or damage to the merchandise was transferred from the seller to the middleman, at the port of shipment, for an instant. However, the middleman stated that insurance was arranged by the U.S. purchaser, which meant that the risk of loss immediately transferred from the seller to the U.S. purchaser. CBP noted that the goods were shipped directly from Sweden to the U.S., and the middleman neither held title nor bore the risk of loss of the merchandise. Accordingly, CBP concluded that based on these facts, the only sale was between the U.S. purchaser and the foreign seller, and the middleman was merely acting as the agent for the U.S. purchaser.
In HQ H266540, dated September 8, 2016, there were three “sales” between the related parties, with multiple simultaneous passages of title between the supplier to the foreign seller, to the middleman, and to the importer. Based on the documents submitted, the foreign seller, middleman, and importer took title at the same time under a FOB Ningbo, China, term of sale. In a FOB port of export term of sale, the risk of loss transfers from the seller to the buyer upon lading on the outgoing carrier. See Id. (citing Incoterms 2010, International Chamber of Commerce, 87 (2010)). In the absence of a written instruction to the contrary, it is commonly accepted that title passes simultaneously with the assumption of risk of loss. The foreign seller was invoiced by the supplier and the factory on the same day, both for the same price, and neither the supplier’s nor the factory’s invoice referenced the other party. In HQ H266540, CBP could not conclude that there was a bona fide sale for export between the foreign seller and middleman, and between the middleman and importer. While the importer provided purchase orders, invoices, and proof of payment, they were insufficient to show a bona fide sale for export. The documents were silent as to the passage of title and the risk of loss between the foreign seller and middleman and importer. Therefore, CBP did not find that there was a bona fide sale for export between the foreign seller, middleman, or importer, and the simultaneous transfer of title from the parties indicated the possible existence of an agency relationship.
In HQ H097616, a transaction was initiated by a Jordache order sheet containing the product’s specifications and naming both the middleman and the factory to be used to produce the garments. The terms of sales were both FOB Vietnam, and the middleman never had physical possession of the goods, which were shipped directly from the factory to Jordache. The middleman financed the purchase of the garments with a trust receipt, where the bank retained ownership of the merchandise. The foreign manufacturer was paid after the goods were imported and after Jordache took possession of the goods, and the bank was not paid until several months after the imported goods were entered by Jordache. CBP found that the middleman did not hold title to the goods prior to the sale to Jordache and never took delivery of the goods. Further, the protestant did not show that the middleman ever had risk of loss. Additionally, there was evidence that the middleman did not look for a buyer for the goods, did not choose the factory to produce the goods, and the protestant did not submit any documents to show the middleman could sell the goods to any other party or at another price, or that the middleman had any dealings with any other buyers or initiated transactions on its own behalf. Accordingly, CBP found that the protestant did not show that the middleman ever had clear title to the goods.
Here, Counsel asserts that the commercial documentation demonstrates that as soon as a purchase order is issued, the parties immediately enter into a corresponding sales contract, and subsequently commercial invoices are issued. Counsel also contends that in each case, the Middleman provides instructions to the Manufacturer and “is free to select its own customers and to sell the items to the Vendor at any price that it desires. In turn, [the Vendor] provides instructions to the [Middleman] and is free to select its own customers and to sell the items to [the Importer] at any price it desires.” Counsel explains that the Middleman is responsible to the Vendor for any defects or non-conforming merchandise and the Vendor is responsible to the Importer. The Importer takes monetary “claim deductions” against the Vendor and the Middleman takes monetary “claim deductions” as part of its invoicing and payment transaction. Should an issue arise with the shipment of merchandise, the Importer would seek financial recourse from the Vendor, and not from the Middleman or Manufacturer. Counsel asserts that this demonstrates that the Middleman takes risk of loss. Counsel indicates that the bona fide sale is also supported by the fact that the Middleman records its income and expenses relating to the transaction as “Sales” or “Cost of Goods Sold.”
Unlike counsel’s claim that the Middleman is free to select its own customers, the fact is that, similar to HQ H097616, the transactions were initiated by the Importer’s original purchase order containing the shoe’s specifications and naming both the Manufacturer and the factory to be used to produce the products. Moreover, the documentation between the parties does not indicate when title for the merchandise transferred from the factory to the Manufacturer or to the Middleman. The terms of delivery on the Middleman’s invoices to the Manufacturer are “FCA consolidator’s warehouse.” The Incoterm FCA means “the seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place. The parties are well advised to specify as clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.” See Incoterms 2010, ICC Official Rules for the interpretation of Trade Terms, at page 33. The seller is required to clear the goods for export, where applicable. Incoterms do not address transfer of title. See St. Paul Guardian Ins. Co. v. Neuromed Med. Sys. & Support, GmbH, No. 00 Civ. 9344, 2002 U.S. Dist. LEXIS 5096, 2002 WL 465312, at *4 (S.D.N.Y. Mar. 26, 2002). However, the parties claimed that title passed with risk of loss. The term of delivery on the Vendor and Importer’s invoice is FOB Tianjinxingang, Tianjin, China, which suggests that the title and risk of loss pass from the seller (Vendor) to the buyer (Importer) when the merchandise was delivered to Tianjin, the point of shipment.
Counsel asserts, for the subsequent information submitted to our office for the 2017 transaction, that the Manufacturer assumed the title and risk of loss at the factory door in Hebei, China. The Middleman then bought the goods from the Manufacturer at “FCA Consolidator Terminal” and the title and risk of loss transferred to the Middleman at the Consolidator Terminal in the port of export in Shanghai. While the term of delivery on the Middleman’s invoice is FCA consolidator’s warehouse, or terminal, Counsel explains that this location is within the port of export. It is then alleged that title and risk of loss transferred from the Middleman to the Vendor beside the ship at the port of export in Shanghai, China, at “FAS Shanghai;” and then again, when the Vendor loaded the goods on board the vessel at the port of export in Shanghai, the risk transferred to the Importer at FOB Shanghai.
For the transactions under protest, Counsel failed to submit any transportation documents to demonstrate the merchandise stopped at the consolidator’s warehouse, or evidence of insurance as proof of the risk of loss regarding the merchandise and transactions subject to the instant protest between February 3, 2015 and September 16, 2015, as requested during the February 2018 meeting. As the documents illustrate, there is only one delivery of the goods from the factory to the port of shipment. The title and risk of loss transfers to the Middleman at the port of shipment, and the Importer assumes risk shortly after when the goods arrive beside the ship. Additionally, based on the 2017 sample transaction, the logistics company bore all the financial obligation of the transactions at the time of shipment, as the Manufacturer was not billed for any costs related to the transaction and shipments until over 30 days after shipment and arrival to the United States had occurred. However, the logistic company invoices were all illegible.
Accordingly, as CBP held in H097616 and H266540, we cannot find that there existed any bona fide sales between the related Manufacturer and Middleman and the failure to demonstrate the assumption of the risk of loss by the Middleman possibly indicates the existence of an agency relationship. Additionally, Counsel submitted illegible documentation, which is inadequate to further support their position, and the Vendor’s 2015 Annual Report listed the Manufacturer as the related party from which it purchases footwear products, and failed to mention the Middleman as a related transacting party. Although finding no bona fide sale between the Middleman and its related Manufacturer, we briefly address why the related party transactions also fail under the statute’s requirement that related party transactions must be arm’s length, i.e., an examination of the circumstances of the sale must indicate that the relationship of the parties did not influence the price. See 19 U.S.C. § 1401a(b)(2)(B).
All Costs Plus Profit Test
As indicated above, if it can be shown that the related party price is adequate to ensure recovery of all costs plus a profit equal to the firm’s overall profit realized over a representative period of time, in sales of merchandise of the same class or kind, then the circumstances of the sale test is met when the analysis reveals that the relationship between the buyer and seller did not influence the prices paid. In applying the all costs plus a profit test, CBP normally considers the “firm’s” overall profit to be the profit of 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 goods of the same class or kind. See HQ 546998 (Jan. 19, 2000). 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 Customs purposes.” HQ H106603 (July 25, 2011); see also, HQ H065015 (April 14, 2011); and, HQ H065024 (July 28, 2011). Finally, CBP Regulations 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 a more accurate measure of a company’s real profitability, as it reveals what the company actually earns on its sales once all associated expenses have been paid. See HQ H037375 (Dec. 11, 2009). In evaluating the all costs plus a profit test in the past, CBP has examined companies’ income statements, transfer pricing studies, and other financial information relating to companies’ profits and losses. See, e.g., H215658, dated June 11, 2012, for a discussion of the financial information submitted in CBP’s prior rulings on the all costs plus a profit test.
In support of its claim that the imported merchandise can be appraised using transaction value based on the sales transactions between the related parties, Counsel contends that the “all costs plus a profit” test is satisfied between the Manufacturer and Middleman. Nineteen 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.” 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. See HQ H238990 (April 7, 2014); HQ H037375 (Dec. 11, 2009); and HQ H032883 (March 31, 2010.) The 2015 income statements provided show that the Manufacturer realized an operating profit margin of 1.33 percent and the parent Middleman realized a profit margin of .84 percent. Apart from the above assertion, Counsel did not supply any documentation or evidence to substantiate its claim that the sale between the Middleman and Manufacturer meets the requirements of 19 CFR 152.103(l)(1)(iii). Moreover, the income statements were one-page lists of random income amounts, which did not contain any information to ascertain from where these amounts were derived. While it is not clear what products were being sold to generate the listed income and whether it was from the sales of merchandise of the same class or kind as the merchandise under protest, during the February meeting, Counsel asserted that the parties only produce and sell the same like products. Additionally, no written agreements were provided to address the listed income, or to explain the potential assists and statutory additions, as indicated in the e-mail between Counsel and Vendor, nor the transfer of title to the goods. However, when CBP reviewed the Vendor’s 2015 Annual Report online, it demonstrated that the Vendor listed the Manufacturer as the related party, from which it purchases footwear products, and failed to mention the Middleman as a related transacting party, which supports the conclusion that the Middleman was selling or buying the merchandise, but merely an agent.
In order for the sale between the Manufacturer and Middleman to qualify as a sale for appraisement purposes, it must be an arm’s length, bona fide sale of goods clearly destined for the United States. While the evidence shows that the merchandise was clearly destined for the United States, it is not clear that all transactions involved bona fide sales and there is not a complete paper trail as required by T.D. 96-87. Further, we find there is insufficient evidence to support that the transactions between the Middleman and Manufacturer were bona fide sales conducted at arm’s length. Accordingly, the protests at issues should be denied.
HOLDING:
Based on the above discussion, there is insufficient support for the conclusion that the transactions between the related Middleman and Manufacturer are bona fide sales or conducted at arm’s length. Accordingly, the protests at issue should be DENIED.
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Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division