OT:RR:CTF:VS H336783 RRB
Assistant Center Director
Apparel, Footwear, and Textiles
Center of Excellence and Expertise (CEE)
U.S. Customs and Border Protection
1100 Raymond Blvd.
Newark, NJ 07102
RE: Internal Advice Request; Method of Appraisement for “Obsolete Merchandise”; Related Parties; Fallback Method; 19 U.S.C. § 1401a(f)
Dear Assistant Center Director:
This is in response to the request for internal advice (“IA”), initiated by counsel for Giorgio Armani Corporation, (“GAC”), on September 20, 2023, concerning the appropriate appraisement of merchandise transferred between related parties under 19 U.S.C. § 1401a.
FACTS:
GAC is a distributor and retailer of high-end fashion apparel, footwear, handbags, and accessories. Giorgio Armani Japan Co. Ltd. (“GAJ”) is a party related to GAC. At issue are two entries that were shipped by GAJ and imported by GAC. The merchandise was sourced by GAJ from various vendors worldwide between 2017 and 2021. It was offered for sale both at retail stores and outlets in Japan. GAC explains that even with deep discounts at the outlets in Japan, the merchandise, which GAC refers to as “obsolete merchandise,” could not be sold in Japan. Consequently, the merchandise was transferred to GAC to be sold in the United States at GAC factory outlets to retail customers at deep discounts. For purposes of the intercompany transaction, each piece of merchandise was assigned an intercompany price of $1.00.
The “obsolete merchandise” at issue is comprised of 35,727 pieces and 6,280 different styles. GAC explains that the merchandise is “obsolete” because it consists of old and outdated inventory, some of which is six years old and some of which shows signs of use or damage. GAC further states that the notion of obsolete inventory is well known within the fashion industry.
The entered values of the two entries, dated March 22, 2023, and March 23, 2023, were appraised at the retail prices of the goods, less a 35% markdown. GAC asserts that because of this appraisement, the entered value has resulted in the shipments being grossly overvalued and duties grossly overpaid.
GAC subsequently filed Post Summary Correction (“PSCs”) for the two entries, dated March 22, 2023, and March 23, 2023,, appraising the merchandise under the “fallback method” described in 19 U.S.C. § 1401a(f) based on a modified deductive value.
GAC asserts that the intercompany transfer price of $1.00 per unit would not be an acceptable transaction value. GAC also states that transaction value of identical or similar merchandise is not an appropriate method of appraisement because it does not believe there is any merchandise that is identical or similar to the obsolete inventory. GAC further asserts that deductive value as a basis of appraisement is inappropriate because most of the obsolete inventory will not be sold at GAC’s factory outlets in the United States within 90 days after the date of importation as required by 19 U.S.C. § 1401a(d)(2)(A)(ii). Moreover, GAC states that it is unable to use computed value as a basis of appraisement because it does not have information available on which to base a computed value for the obsolete inventory (e.g., cost of materials and processing costs, an amount for profits and general expenses equal to that usually reflected in sales of merchandise of the same class or kind, the value of any assists, and packing costs).
Because the obsolete merchandise cannot be appraised under any of the methods set forth in 19 U.S.C. § 1401a(a)-(e), GAC asserts that the value of the obsolete merchandise must be determined based on a fallback method set forth in 19 U.S.C. § 1401a(f). Accordingly, GAC has proposed a fallback method of appraisement using a modified deductive value. In support of this proposed method, GAC has provided information suggesting the average sales discounts to customers in the U.S. factory outlets as a starting point for modified deductive value, with deductions for GAC’s general expenses and profit, international freight charges, and duties in accordance with 19 C.F.R. § 152.105.
ISSUE:
Whether the correct method of appraisement of the “obsolete merchandise” is the modified deductive value under 19 U.S.C. § 1401a(f).
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).
To use transaction value, there must be a bona fide sale for exportation to the United States. 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 CCPA, 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). Without a sale for exportation to the United States, transaction value must be eliminated as a means of appraisement.
Here, GAC states that the goods are not actually sold, but instead are transferred from GAJ to GAC via an intercompany transaction of $1.00 per unit. GAC also notes that at the time of the PSC submissions, the merchandise has not been sold through GAC’s outlets in the United States. An intercompany transaction price of $1.00 per unit is clearly not indicative of the “price actually paid or payable” for purposes of a bona fide sale for exportation. Therefore, transaction value cannot be used as the basis of appraisement.
When imported merchandise cannot be appraised on the basis of transaction value, it is appraised in accordance with the remaining methods of valuation, applied in sequential order. The alternative bases of appraisement, in order of precedence, are: transaction value of identical merchandise (19 U.S.C. § 1401a(c)); transaction value of similar merchandise (19 U.S.C. § 1401a(c)); deductive value (19 U.S.C. § 1401a(d)); computed value (19 U.S.C. § 1401a(e)); and the fallback method (19 U.S.C. § 1401a(f)).
Transaction value of identical or similar merchandise 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. Under 19 U.S.C. § 1401a(c), transaction value of identical or similar merchandise should be based on sales of merchandise at the same commercial level and in substantially the same quantity as the sales of merchandise being appraised. If no such sale is found, sales of merchandise at either a different commercial level or in different quantities, or both, should be used, but adjusted to take account of any such difference. In this matter, GAC does not believe that there is any merchandise that is identical or similar to the obsolete inventory at issue.
If transaction value of identical or similar merchandise cannot be determined, then the Customs value will be based upon deductive value, unless the importer has elected computed value at the time of entry. 19 U.S.C. § 1401a(a)(2). Nothing in the submitted request indicates that GAC has elected the application of computed value before deductive value.
Deductive value under 19 U.S.C. § 1401a(d) is based upon the price at which the merchandise is sold in the United States in its condition as imported and in the greatest aggregate quantity either at or about the time of importation, or before the close of the 90th day after the date of importation. 19 U.S.C. § 1401a(d)(2)(A)(i)-(ii). This price is subject to certain enumerated deductions. 19 U.S.C. § 1401a(d)(3). Here, because most of the merchandise will not be sold at GAC’s factory outlets in the United States within 90 days of the date of importation, deductive value is not available as a method of appraisement.
The computed value method of appraisement in 19 U.S.C. § 1401a(e) is based upon, among other things, information regarding the cost of materials, processing, profit and general expenses. GAC has no such information available upon which a computed value for the subject merchandise can be determined. Accordingly, computed value in not available as a method of appraisement.
Pursuant to the fallback method of valuation in 19 U.S.C. § 1401a(f)(1):
If the value of imported merchandise cannot be determined, or otherwise used for the purposes of this chapter, under subsections (b) through (e), the merchandise shall be appraised for the purposes of this chapter on the basis of a value that is derived from the methods set forth in such subsections, with such methods being reasonably adjusted to the extent necessary to arrive at a value.
Certain limitations exist under this method, however. For example, merchandise may not be appraised on the basis of the price in the domestic market of the country of export, the selling price in the United States of merchandise produced in the United States, minimum values, or arbitrary or fictitious values. 19 U.S.C. § 1401a(f); 10 C.F.R. § 152.108.
Under Section 500 of the Tariff Act of 1930, as amended, which constitutes CBP’s general appraisement authority, the appraising officer may:
fix the final appraisement of merchandise by ascertaining or estimating the value thereof, under section 1401a of this title, by all reasonable ways and means in his power, any statement of cost or costs of production in any invoice, affidavit, declaration, other document to the contrary notwithstanding…. 19 U.S.C. § 1500(a).
In this regard, the Statement of Administrative Action (“SAA”), which forms part of the legislative history of the TAA, provides in pertinent part:
Section 500 is the general authority for Customs to appraise merchandise. It is not a separate basis of appraisement and cannot be used as such. Section 500 allows Customs to consider the best evidence available in appraising merchandise. It allows Customs to consider the contract between the buyer and seller, if available, when the information contained in the invoice is either deficient or is known to contain inaccurate figures or calculations….Section 500 authorize [sic] the appraising officer to weigh the nature of the evidence before him in appraising the imported merchandise. This could be the invoice, the contract between the parties, or even the recordkeeping of either of the parties to the contract.
Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 67. The SAA further explains that the determination of usual profit and general expenses under the provisions of deductive value would be carried out utilizing information prepared in a manner consistent with generally accepted accounting principles (“GAAP”) in the United States. Under 19 C.F.R. § 152.107(a), “[i]f the value of imported merchandise cannot be determined or otherwise used for the purposes of this subpart, the imported merchandise will be appraised on the basis of a value derived from the methods set forth in §§ 152.103 through 152.106, reasonably adjusted to the extent necessary to arrive at a value. Only information available in the United States will be used.”
GAC has proposed to value the imported merchandise under the fallback method of 19 U.S.C. § 1401a(f) by using a method derived from deductive value. Under this proposed valuation method, the value of the imported merchandise would be determined based on the prices from sales of the obsolete inventory at deep discounts at its factory outlets. Additionally, under 19 C.F.R. § 152.107(d), the requirement that merchandise being appraised under a deductive value approach must have been sold within 90 days from the date of importation can be relaxed. Thus, the subject obsolete inventory that is sold outside the 90-day statutory period can be appraised under an appropriate modified deductive value approach. See Headquarters Ruling Letter (“HQ”) H304125, dated August 2, 2019.
In determining the price at which the obsolete inventory will be sold at GAC’s factory outlets, GAC expects that much of this merchandise might not be sold within the next year, and that some of the merchandise is damaged or worn and cannot be sold. Thus, GAC explains that it will not know the prices for which the subject merchandise will be sold at retail in the United States for a long time.
Nevertheless, GAC states that historically, merchandise at GAC factory outlets have been sold at an approximately 70% discount from its retail price. In support of this figure, GAC provided a statement, dated June 5, 2023, from its Chief Financial Officer (“CFO”), wherein its CFO states that in 2022, the average markdown from retail price to outlet sale price at GAC’s outlet stores was 66.9%, and that for 2021, the average markdown from retail price to outlet sale price at was 71.0%. Accordingly, GAC suggests that for purposes of determining modified deductive value, it is reasonable to use the two-year average markdown from retail price to outlet sale price of 68.9% as the starting point for appraisal of the obsolete inventory. We agree.
From this proposed starting point, GAC suggests additional deductions derived from the deductive value method of appraisement in 19 C.F.R. § 152.105(d)-(e). In order to determine reasonable deductions for profit and general expenses under a modified deductive approach, GAC relies on 19 C.F.R. §152.105(e), which provides that “[t]he deduction made for profit and general expenses (taken as a whole) will be based upon the importer’s profits and general expenses, unless the profit and general expenses are inconsistent with those reflected in the United States of imported merchandise of the same class or kind from all countries, in which case the deduction will be based on the usual profit and general expenses reflected in those sales, as determined from sufficient information.” According to the signed statement, dated June 5, 2023, from GAC’s CFO, general expenses consisted of 33% of net sales at GAC’s outlet stores in 2022 while its profits consisted of 15.1% of net sales. For 2021, general expenses consisted of 35.4% of net sales at its outlet stores while its profits were 8.4% of net sales. Based on these figures, GAC’s average general expenses for 2021 and 2022 were 34.2% of net sales, and average profit for these years was 11.8% of net sales. Accordingly, GAC proposes combining its two-year average profit and general expense—i.e., 46%—as the basis for the statutory deductions for profit and general expense, which it believes are consistent with industry standard in accordance with GAAP. We find this basis for statutory deductions for profit and general expenses to be reasonable in accordance with the SAA.
GAC suggests additional deductions under 19 C.F.R. § 152.105(d). For example, it proposes a deduction of 0.35% of net sales based on actual and associated transportation costs incurred with respect to international shipments of the subject merchandise from Japan to the United States. 19 C.F.R. § 152.105(d)(2). It bases this deduction on the international freight costs associated with this shipment as reflected in the bill of lading associated with one of the two entries at issue. In accordance with 19 C.F.R. § 152.105(d)(4), which calls for deductions of Customs duties and other federal taxes currently payable on the subject merchandise by reason of its importation, GAC explains that it has divided out the Customs duties to come up with an appropriate modified deductive value.
To illustrate these various deductions under 19 C.F.R. § 152.105(d)-(e), GAC has submitted a detailed spreadsheet of 11,688 different articles of merchandise. Based on the total retail value of each article, the spreadsheet posits an initial deduction of 68.9% to determine the outlet selling price, followed by a deduction of 34.2% for general expenses, 11.8% for profit, 0.35% for international freight, and the amount of duties to be deducted for each item.
After reviewing the information presented, we find that GAC’s proposed method of valuing the imported merchandise under 19 U.S.C. § 1401a(f), using a form of modified deductive value, satisfies the requirements of the Customs valuation law under 19 U.S.C. § 1401a. Thus, GAC’s proposed valuation utilizing a modified deductive value approach under the fallback provision of 19 U.S.C. §1401a(f) of the valuation law is an acceptable method of appraisement for the imported merchandise under consideration.
We note that due to the nature of the merchandise at issue, which in some instances, may not be sold for over a year, it is difficult for the importer to accurately assess the value of the merchandise until it arrives in the United States. As such, we strongly encourage the importer to use Reconciliation to report any changes in the value of the imported articles. Reconciliation is the process that allows an importer, at the time an entry summary is filed, to identify undeterminable information (other than that affecting admissibility) to CBP, and provide the outstanding information at a later date. Modification and Clarification of Procedures of the National Customs Automation Program Test Regarding Reconciliation, 67 Fed. Reg. 61201 (Sept. 27, 2002). Importers notify CBP that an entry summary is subject to Reconciliation by flagging the entry summary for Reconciliation. The flagged entry summary is liquidated for all aspects of the entry except those issues that were flagged. The means of providing the outstanding information at a later date relative to the flagged issues is through the filing of a Reconciliation entry.
HOLDING:
In accordance with the above analysis, we find that appraising the imported merchandise under the fallback method, using a modified deductive value, as proposed by the importer, would be acceptable under the Customs valuation law of 19 U.S.C. § 1401a.
You are to mail this decision to the internal advice requester no later than 60 days from the date of the decision. At that time, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and to the public on the Customs Rulings Online Search System (CROSS) at https://rulings.cbp.gov/ which can be found on the U.S. Customs and Border Protection website at http://www.cbp.gov and other methods of public distribution.
Sincerely,
Monika R. Brenner Chief, Valuation and Special Programs Branch