OT:RR:CTF:VS 548600 RFC
Area Port Director
ATTN: Edward A. Ernst, III
Port of New Orleans
U.S. Bureau of Customs and Border Protection
423 Canal Street, Suite 245
New Orleans, LA 70130
RE: Internal Advice Request; Transaction Value; Related Parties
Dear Mr. Owen:
This letter is in reference to an October 11, 2004, letter, submitted by Lear Corporation to the Office of Regulations and Rulings of U.S. Customs and Border Protection (CBP) requesting internal advice on the proper method of appraisement for certain imported merchandise involving related parties. In addition to the above-mentioned letter, the Lear Corporation made three additional written submissions, two dated May 13, 2005, and another one dated October 12, 2007.
Lear Corporation made a request for confidential treatment. Consistent with the applicable law, confidential treatment will be granted with respect to privileged or confidential commercial or financial information. See 5 U.S.C. § 552; 19 CFR § 177. The information determined to be privileged or confidential commercial or financial information will be contained within brackets in this internal advice ruling, and it will be redacted from the published version of the ruling.
FACTS:
A compliance assessment of United Technologies Automotive, Inc. was undertaken by the CBP (then known as the U.S. Customs Service) to determine if the company met an acceptable level of compliance with the applicable regulations and laws. During the review, Lear Corporation acquired United Technologies’ automotive parts business including United Technologies Automotive, Inc. The name of the United Technologies Automotive, Inc. was changed to “Lear Corporation EEDS and Interiors.”
This internal advice request is the result of questions initially raised on or about March 14, 2003, regarding the validity of the basis of appraisement of certain wire harnesses (for use by the automotive industry) imported by Lear Corporation EEDS and Interiors from its facilities in Honduras and the Philippines.
The Honduras facility (Lear Automotive EEDS Honduras, S.A.) and the Philippines facility (Lear Automotive Services (Netherlands) B.V.-Philippines Branch, formerly Lear Corporation (EEDS) Philippines, Inc.) (hereinafter “Lear Philippines”) are said to be wholly owned subsidiaries of Lear Corporation EEDS and Interiors. Lear Corporation EEDS and Interiors is said to be a wholly owned subsidiary of Lear Corporation. (It should be noted that in the various documents associated with this case, Lear Corporation EEDS and Interiors is referred to by several different names and abbreviations: LEED, LEEDS, Lear US, Lear Corporation EEDS Interiors, Lear E.E.D.S., and Lear E.E.D.S. Interiors. Lear Philippines is also sometimes referred to as “Lear PH.”)
The sale of the merchandise under consideration is described as follows: Wire harnesses are produced in related party facilities in Honduras and the Philippines. The wire harnesses are imported by and sold to Lear Corporation EEDS and Interiors, which, in turn, sells them to original equipment manufacturers (OEM) in the United States that are customers of Lear Corporation. The process is said to be initiated when an OEM customer places an order with Lear Corporation EEDS and Interiors. The purchase price of the wire harnesses as sold to Lear Corporation EEDS and Interiors is said to be based on a purchase price formula, which, in turn, is said to be based on a resale minus methodology (involving the price paid for the wire harnesses by the OEM customers of Lear Corporation).
In a February 2, 2001, CBP compliance assessment report, it indicates that Lear Corporation EEDS and Interiors’s use of computed value for merchandise imported from its facilities in Honduras and the Philippines did not meet an acceptable level of compliance.
In a May 14, 2004, CBP compliance assessment follow-up, it indicates that Lear Corporation EEDS and Interiors had switched from computed value to transaction value for the merchandise that it imports from its facilities in Honduras and the Philippines. The follow-up report further indicates, in part, that:
BASIS OF APPRAISEMENT/VALUE—The importer switched from computed value to transaction value for the Philippines and Honduras importations. The evidence submitted to support the switch was deemed inconclusive. Therefore, a decision on the appropriateness of the change cannot be determined at this time.
o o o
The appropriateness of transaction value could not be determined due to lack of sufficient evidence provided by Lear Corporation EEDS to substantiate the change from computed value. The lack of sufficient evidence is deemed an unacceptable risk in reporting complete and accurate Customs transactions.
In a July 18, 2003, response by Lear Corporation EEDS and Interiors to a June 12, 2003, CBP inquiry concerning the use of transaction value for sales transactions conducted with the Honduras and Philippines facilities, it states, in part, that:
Lear utilized the circumstances of sale approach to determine that transaction value was the appropriate basis of appraisement for related party sales transactions involving Lear's operations in Honduras and the Philippines with Lear in the US.
Lear Automotive EEDS Honduras, S.A. (“Honduras”) and Lear Automotive Services (Netherlands) B.V.-Philippines Branch (“Philippines”) (formerly Lear Corporation (EEDS) Philippines, Inc.) are wholly owned subsidiaries of Lear Corporation EEDS and Interiors (“LEED”). LEED is a wholly owned subsidiary of Lear Corporation (“Lear”). The Plymouth, IN facility is part of LEED’s operations in the US.
The Honduras and Philippines operations manufacture automotive wire harnesses (electrical distribution systems). These finished products are sold to customers in Asia, Europe and North America. Both the Honduras and Philippines operations purchase their production materials directly
from suppliers. For all North American sales, the plants sell the products to LEED and LEED, in turn, sells the products to unrelated vehicle manufacturers for installation in new motor vehicles. In this capacity LEED acts as the distribution and sales entity to such unrelated customers. LEED does not further manufacture the products in any way. Thus, in the case of both Honduras and the Philippines there is a sale of goods to LEED. (Emphasis added.)
The CBP team that conducted the follow-up report recommended that a ruling be obtained from the Office of Regulations and Rulings with respect to the use of transaction value by Lear Corporation EEDS and Interiors to value its merchandise imported from its facilities in Honduras and the Philippines. Despite this recommendation, and the fact that the Honduras facility produces for exportation to the United States the same merchandise as the facility in the Philippines, the instant request for internal advice only concerns the method of appraisement of automotive wire harnesses imported by Lear Corporation EEDS and Interiors from the facility in the Philippines (Lear Philippines). In an October 22, 2004, email message from Larry Amrich, Director of Purchasing and Customs LMO, Lear Corporation to a CBP official with the Regulatory Audit Division, Office of Strategic Trade, it states as concerns a ruling with respect to the Honduras facility as follows:
[P]lease note that we will not be submitting an internal advice request for the use of Transaction Value for Lear purchases from Lear Honduras. Our analysis of the operational and financial aspects of those transactions was less conclusive that Transaction Value is the appropriate valuation method. Accordingly, we are supplementing our current customs compliance program with controls and procedures to ensure the appropriate declaration under the computed value appraisement method. We are also using the ACS reconciliation program to ensure that all entries going back to January 2003 are liquidated at the appropriate computed values. We are working with our local Honduras personnel to properly determine the computed values for these importations.
As indicated above and according to the initial submission, the purchase of the wire harnesses by Lear Corporation EEDS and Interiors from Lear Philippines is done pursuant to an agreement known as the “Lear Corporation Intercompany Sales and Supply Agreement.” A copy of the agreement was included with the initial submission as attachment 1. The agreement was entered into and executed on January 1, 2001, between “Lear Corporation EEDS and Interiors
(Plymouth, Indiana facilities), a Delaware, United States corporation (the ‘Purchaser’) and Lear Automotive (EEDS) Philippines, Inc., a Philippines Corporation (the ‘Supplier’).” In footnote 1 to the initial submission, it states with respect to the parties to the agreement that:
Lear Automotive Services (Netherlands) B.V.-Philippines Branch began commercial operations in the U.S. on January 1, 2003. Previously, the company was a wholly owned indirect subsidiary of Lear Corporation, and known as Lear Automotive (EEDS) Philippines, Inc. The Agreement was signed in October 2001, and therefore references the previous corporate name.
Pertinent sections from the body of the agreement include the following ones:
Section 2.6. Delivery, Title and Risk of Loss. Supplier shall supply Products to Purchaser FOB Supplier’s Factory. Title to Product shall shift at time of shipment from Supplier’s Factory, however, Supplier shall be responsible for all costs related to freight, transportation, customs, duties, other costs of transporting Product to Purchaser’s Plymouth, Indiana facility. (Emphasis added.)
According to Lear Corporation, the price for the wire harnesses is determined according to a purchase price formula set forth in the above-mentioned sales and supply agreement (as exhibit B). The formula states as follows:
Purchase price will be based upon a Resale Minus methodology. The % will initially be [xx%] ([xx%] to cover profit and distribution/warehousing costs plus [xx%] to cover freight from Supplier to Purchaser). Custom Duties and brokers expenses are to be paid and borne by the Supplier (even though the Purchaser may be the importer of record (IOR)). The % for freight may be modified by mutual agreement if it is determined that the [xx%] is not covering actual freight costs. Expedited freight (e.g., air shipments) will be paid for by the Supplier.
The Sales price is the price sold by Purchaser to the OEM customers of Lear Corporation and is reduced for any adjustments, modifications (including LTA and other rebates and concessions) or non-payment made by the customers.
Any rework on product shipped to Purchaser (Plymouth) will be billed back to Supplier at an hourly rate that will allow Plymouth to cover costs and include a [xx%] profit margin.
With respect to the purchase price formula and the ordering and payment process, it states in Lear Corporation’s October 11, 2004, submission that:
The terms of LEEDS’ purchase of wire harnesses from Lear PH are dictated by the Lear Corporation’s Intercompany Sales and Supply Agreement. (See Attachment 1 for a copy of the Lear Corporation Intercompany Sales and Supply Agreement completed between LEEDS and Lear PH.) The prices for these wire harness sales are determined according to the methodology outlined in Exhibit B—Purchase Price Formula of the Intercompany Sales and Supply Agreement between LEEDS and Lear PH. Pursuant to this agreement, LEEDS employs a resale minus methodology to set its transfer price. This methodology requires LEEDS to deduct a fixed percentage for distribution functions performed by LEEDS, actual freight costs absorbed by LEEDS, and profit from the sales price to LEEDS customers to arrive at the transfer price. For the sales of wire harnesses between LEEDS and Lear PH, LEEDS deducts [xx%] overall from the sales price to their customers, which encompasses [xx%] for functions performed in the U.S. plus profit and an additional [xx%] for freight from the Philippines to Plymouth, Indiana.
With regards [sic] to the ordering and payment process, LEEDS issues individual purchase orders to Lear PH for wire harnesses based on customer demand. Lear PH purchases components from LEEDS and various other vendors for use in the manufacture of the wire harnesses. Lear PH assembles the final wire harnesses and generates a commercial invoice stating the price as indicated on the LEEDS’ purchase order to accompany the shipments of wire harnesses to LEEDS’ facility in Plymouth, Indiana. To affect payment on these invoices, LEEDS undergoes an inter-company netting process with Lear PH on a monthly basis. Values indicated on all purchase orders, commercial invoices, and in the payment process are based on the pricing methodology outlined in the Intercompany Sales and Supply Agreement between LEEDS and Lear PH.
o o o
Section 2.6 of the Intercompany Sales and Supply Agreement sets the terms of sale as FOB-Supplier’s Factory, where title to the wire harnesses is transferred from Lear PH to LEEDS at time of shipment from Lear PH’s factory. (Emphasis added.)
In its October 11, 2004, submission, Lear Corporation states with respect to the related-party transactions between LEEDS and Lear PH that:
As detailed in 19 U.S.C. § 1402a, there are two tests under which the price agreed upon between related parties may be used as a basis of appraisement if the requirements are met: test values and circumstances of sale. Since in this case there are no previously accepted test values, the “circumstances of sale” approach is the only means to show that the price was not influenced by the relationship.
Also, in its October 11, 2004, submission, Lear Corporation included (as attachment 2) a copy of a document designated as “Consolidated Financial Statements and Supplementary Data.” Lear Corporation refers to this document in its submission as a copy of Lear Corporation’s consolidated financial statements for fiscal year 2003. In the body of the submission, there are two charts designated as “Lear PH-Sales of Automotive Wire Harnesses (FY03)” and “Lear PH-COGS for Automotive Wire Harnesses (FY03).” For each chart, it states “source-extracted from Lear Corporate consolidated financial statements for fiscal year 2003.” With respect to the information presented in the charts, the Lear Corporation states that:
As the above data indicates, Lear PH fully recovered all costs related to its production of automotive wire harnesses in fiscal year 2003. This fact, when coupled with the fact that the operating profit recorded by Lear PH on it sales of wire harnesses to LEEDs is higher than Lear PH’s overall operating profit on total wire harness sales, clearly demonstrates that the price paid to Lear PH (and declared to CBP upon importation) is adequate to ensure recovery of all costs plus a profit which is equivalent to the Lear PH’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind.
Lear Corporation then concludes that the transfer price between LEEDS and Lear PH satisfies the circumstances of sale test. Therefore, it further concludes, the transfer price is not affected by the relationship of the parties and is an acceptable transaction value.
Other than a document submitted as attachment 3 that is stated to contain “a full breakdown of all the cost elements for Lear PH that are incorporated into Lear Corporation’s consolidated financial statements,” no financial or accounting documents were included as part of the October 11, 2004, submission that substantiate the data or figures presented in the above-mentioned charts.
As indicated above, in addition to its October 11, 2004, internal advice request, Lear Corporation has made two additional submissions—both dated May 13, 2005. One submission deals with whether bona fide sales occurred between Lear Philippines and Lear Corporation EEDS and Interiors and the second one deals with whether the price for the imported wire harnesses was affected by the relationship of the parties.
With respect to the submission dealing with bona fide sales, there are a number of photocopied exhibits that are purported to represent a complete document trail for a sample transaction involving Lear Philippines, Lear Corporation EEDS and Interiors, and an ultimate U.S. customer [X Corporation)]: Exhibit 1 consists of a document entitled “purchase contract.” [X Corporation’s] name appears at the top and Lear Corporation, Detroit, Michigan is designated as the supplier. It lists a contract number 180300093. It has an effective date of August 11, 2000 and an expiry date of December 31, 2008. There is no apparent date on which the particular order was issued. The document identifies two item codes (57094AA & 57206AA) under which the term “wire harness” is listed. These two item codes are also listed as “Suppl. Part No.” Delivery is “FOB DEST FRT PPD.” Neither Lear Corporation EEDS and Interiors nor Lear Philippines is listed on the document.
Lear Corporation states that exhibit 1 is a blanket purchase contract issued by [X Corporation] to Lear Corporation EEDS and Interiors for specific parts which call for Lear Corporation EEDS and Interiors to supply [X Corporation] with wire harnesses with a part number of 57094AA and at a customer unit price of [US $4.00].
Exhibit 2 consists of a document entitled at the top as “Lear Corporation--Automated Invoice-Order Master.” Neither Lear Corporation EEDS and Interiors nor Lear Philippines is listed on the document.
Lear Corporation states that Lear Corporation EEDS and Interiors receives the purchase contracts from [X Corporation] and enters the data into its order master system. It further states that exhibit 2 is an “order master inquire” screen print from Lear Corporation EEDS and Interiors’s order master system that lists the purchase order number, part number and customer purchase price. It is said that Lear Philippines has access to the system and can use it to determine what products to produce for “the end use customer in question.” No formal purchase order is said to be sent from Lear Corporation EEDS and Interiors to Lear Philippines.
Exhibit 3 consists of a document entitled “Lear Corporation—Master Production Scheduling Cust/Lear Part Cross Reference.” It lists the following relevant information: “plant NRB 224”; “customer [X]”; “cust part 57094AA”; and “Lear part YL84 18C673.” There are several blank columns on the document. There is no indication on the face of the document as to when the information was received and entered into the Lear Corporation system. Neither Lear Corporation EEDS and Interiors nor Lear Philippines is listed on the document.
Lear Corporation states that exhibit 3 is a screen print from Lear Corporation EEDS and Interiors’s master production scheduling system that shows that [X Corporation’s] part number 57094AA corresponds to Lear part number YL84 18C673 AD. Lear Corporation further states that this information is available to Lear Corporation EEDS and Interiors and Lear Philippines as well as to other Lear entities, and it is intended to ensure that the correct parts are produced for the end customer.
Exhibit 4 consists of an invoice (number 224-02161) with the entity “Lear Corporation” listed on the top. It indicates that the merchandise was shipped from Lear Philippines to Lear Corporation in Plymouth, Indiana. The document indicates that payment is to be remitted to Lear Corporation in Detroit, Michigan. The invoice is dated October 18, 2004, but October 14, 2004, is listed as the date the merchandise was shipped. The terms are “DDP Plymouth IN.” It is for wire harnesses. The document lists a number of part numbers, which includes part number YL84 18C673. It also indicates that inquiries should be referred to “Lear Automotive Services (Netherlands) B.V. Philippines Branch.” There is also a notation relating to broker instruction: “Broker instructions-use LEED importer number.”
Lear Corporation states that exhibit 4 is a commercial invoice from Lear Philippines to Lear Corporation EEDS and Interiors.
Exhibit 5 consists of a document entitled “Finished Goods Shipped From Plant to Plymouth.” It lists, among others, two different plant numbers on the document: 223 and 224. Neither Lear Corporation EEDS and Interiors nor Lear Philippines is listed on the document.
Lear Corporation states that exhibit 5 is a screen print from Lear Philippines’s “finished goods shipped from plant to Plymouth” report that shows the details on part number YL84 18C673 AD shipped on October 14, 2004, under packing slip number 224200402275 and commercial invoice number 224-02161.
Exhibit 6 consists of a document entitled “Lear Corporation—Finished Goods Receiving Log Report.” Neither Lear Corporation EEDS and Interiors nor Lear Philippines is listed on the document.
Lear Corporation states that exhibit 6 is a screen print that shows Lear Corporation EEDS and Interiors received the goods shipped under commercial invoice number 224-02161 and packing slip number 224200402275 on November 6, 2004. It also states that the total quantity of containers received matches that of the commercial invoice and Lear Philippines’s report.
Exhibit 7 consists of three documents. The first document is entitled at the top “Lear Corporation—Plant 224—Summary of Finished Goods & Sample Sales for October Shipments.” It contains a list of figures sorted by three columns: “invoice number,” “date” and “inv. amount.” Neither Lear Corporation EEDS and Interiors nor Lear Philippines is listed on the document. Lear Corporation states that this is a report that captures commercial invoice number 224-02161 and shows an invoice payable amount of [US $X]. The total monthly payables for invoices from plant 224 are also listed.
The second document is entitled at the top “Lear Corporation-CEBU Plants Citinetting Payables for December 2004.” It contains a list of payables referenced presumably by plant numbers: 222, 223, 224, and 361. Neither Lear Corporation EEDS and Interiors nor Lear Philippines is listed on the document. Lear Corporation states that this document lists the total monthly payable amounts to the various Lear Philippines’s plants.
The third document is entitled at the top “Consolidated Netting Report with Base Currency Equivalent-Final.” It is dated December 12, 2004 and lists a period of December 7 to 21, 2004. There is a row on the upper portion that lists company “459—LEED INTL Distribution Center.” There is also a row in the middle portion for “payables-outflows” that lists two participants with an “ID” and name. There is an ID listed as “417” as well as the name “417-Lear Auto EEDS Philippines.” On the same row, under columns identified as invoice amount and USD amount is the monetary figure [$X]. Lear Corporation states that this document verifies that the full amount from the second document was transferred from Lear Corporation EEDS and Interiors to Lear Philippines on December 21, 2004.
Exhibit 8 consists of an invoice (number P583691) from Lear Corporation to [X Corporation]. The document indicates on its face that payment is to be remitted to Lear Corporation in Detroit, Michigan. The apparent terms are “FOB Plymouth Philippines.” Neither Lear Corporation EEDS and Interiors nor Lear Philippines is listed on the document.
Lear Corporation states that once the goods have been received by Lear Corporation EEDS and Interiors and entered into inventory, they are available to be resold to the end customer. Exhibit 8 is said to be a copy of a sales invoice from Lear Corporation EEDS and Interiors to [X Corporation]. The sale of [xx] units of part number YL84 18C673 AD are listed on the invoice together with part number 57094AA.
Exhibit 9 consists of a document entitled “Lear Corporation Billings and Returns Register—Wire Systems Division—Period Ending 11-23-04.” Neither Lear Corporation EEDS and Interiors nor Lear Philippines is listed on the document. Lear Corporation states that this document is a screen print that shows the units of part number 57094AA that were shipped on November 9, 2004, under invoice number P583691.
Exhibit 10 consists of two documents. One document is entitled at the top “Receivable History Report.” The second document is entitled at the top “Allocation Activity Inquiry.” Neither document lists the name of any entity.
Lear Corporation states that the first document is a report for invoice number P583691 which show that Lear Corporation EEDS and Interiors received a payment of [US $X]. Lear Corporation states that the second document is a report from Lear Corporation EEDS and Interiors’s accounts receivable system that identifies payment made by check.
With respect to the May 13, 2005, second submission dealing with whether the price was affected by the relationship of the parties, there are three exhibits: Exhibit 1 is entitled at the top “Lear Automotive Services (Netherlands) B.V., Philippines Branch, Consolidated Philippines (404.TPL2), 2003 Sales and Standard Cost of Sales.” Exhibit 2 is entitled “Lear Automotive Services (Netherlands) B.V. - Philippines Branch, Financial Statements, December 31, 2003 and Report of Independent Auditors.” Exhibit 3 is entitled at the top “Lear Automotive Services (Netherlands) B.V., Philippines Branch, Consolidated Philippines (404.TPL2), 2003 Reconciliation of Cost of Sales (Std/Acutual per Hyperion & Financial Statement).”
ISSUES:
1. Whether there are bona fide sales for exportation to the United States of the imported merchandise (1) between Lear Philippines and Lear Corporation EEDS and Interiors or (2) between Lear Philippines and Lear Corporation’s OEM customers (ultimate consignees or customers) in the United States for the purpose of determining the price actually paid or payable pursuant to the transaction value method, as provided for under 19 U.S.C. § 1401a(b)(1).
2. Whether the relationship of the parties to the transactions influenced the price actually paid or payable such that the transaction value of the imported merchandise is unacceptable as a method of appraisement under 19 U.S.C. § 1401a(b), if bona fide sales for exportation of the imported merchandise are found to occur between Lear Philippines and Lear Corporation EEDS and Interiors.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the United States is the transaction value of the imported merchandise 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. Section 402(b)(l) of the TAA provides, in pertinent part, that the 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 the enumerated statutory additions. 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. The imported merchandise can be appraised under transaction value only if the buyer and seller are not related, or if related, the transaction value is deemed to be acceptable. 19 U.S.C. § 1401a(b)(2)(A)(iv).
1. Bona Fide Sales
In the instant case, Lear Corporation contends that the alleged transfer price between related parties Lear Philippines and Lear Corporation EEDS and Interiors constitutes an acceptable transaction value for the merchandise under consideration. In determining whether that contention is correct, the first question to be considered is whether there were, in fact, bona fide sales between Lear Philippines and Lear Corporation EEDS and Interiors. For customs purposes, a “sale” generally is defined as a transfer of ownership in property from one party to another for consideration. See J.L. Wood v. U.S., 62 CCPA 25, 33; 505 F.2d 1400, 1406; C.A.D. 1139 (1974); J.H. Cottman & Co. v. United States, 20 CCPA 344, 356 T.D. 46114 (1932), cert. denied, 289 U.S. 750 (1933).
Although several factors may indicate whether a bona fide sale has taken place between a potential buyer and seller of imported merchandise, no single factor is determinative. Rather, the relationship of the parties involved in the transaction is to be evaluated by an overall view of the entire situation, with the result in each case governed by the facts and circumstances of the individual case—and not by the labels that the parties may attach to the relationship. See Dorf International, Inc. v. U.S., 61 Cust. Ct. 604, 610; 291 F. Supp. 690, 694; A.R.D. 245 (1968).
Several factors may indicate whether a bona fide sale occurred between a potential or alleged seller and buyer. In determining whether property or ownership in property has been transferred, CBP considers whether the alleged buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, CBP may examine whether the alleged buyer paid for the goods, whether such payments are linked to specific importations of merchandise, 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 545705 (January 27, 1995).
Evidence or documentation that indicates whether a bona fide sale has occurred includes contracts, distribution and other similar agreements, invoices, purchase orders, bills of lading, proof of payment, correspondence between the parties, and company reports or brochures. This documentation must establish that a party possesses title in and assumed the risk of loss for the imported merchandise and functions as a buyer or a seller, thus indicating that a bona fide sale has occurred with respect to the transaction under consideration. Such documentation should be consistent in its entirety and with the transaction in general (i.e., consistent prices, dates, parties and merchandise). Further, the documentation and language included therein should reveal the substance of the transaction, including the obligations and roles of each of the parties. While formal sales contracts and other types of memorialized agreements (such as distribution or production agreements) generally are most revealing in this regard, other documentation (such as purchase orders, invoices, and proof of payment) evincing or establishing the structure of the entire transaction are crucial, especially in the absence of any written agreements. The terminology used in such agreements and documentation (i.e., “buyer,” “seller,” “principal,” or “agent”), although indicative, is not dispositive of the role played by each of the parties in the transactions under consideration. See CBP Informed Compliance Publication entitled, “What Every Member of the Trade Community Should Know About: Bona Fide Sales and Sales for Exportation to the United States” (August 2005).
Upon review, the evidence in the instant case does not establish that bona fide sales occurred between Lear Philippines and Lear Corporation EEDS and Interiors (or Lear Corporation). Initially, the “Lear Corporation Intercompany Sales and Supply Agreement” raises questions as to whether bona fide sales occurred. First, there is contradictory information in the record concerning the date the agreement was entered into or signed. The agreement indicates that it was entered into or executed on January 1, 2001, whereas in the above-mentioned footnote to the October 11, 2004, submission it states that agreement was signed in October 2001. Lear Corporation EEDS and Interiors explains that the Agreement between LEEDS and Lear Philippines was drafted to manifest the way the parties had been doing business for some time. It maintains that regardless of the date the contract was signed, it does accurately represent the way in which the two parties were conducting business not only as of January 1, 2001 but even before that date. Additionally, the transactions at issue occurred after October 2001 after the Agreement had been executed.
Second, section 2.4 of the agreement discusses how, among other things, requests for a credit or deduction by the purchaser for damage of the merchandise in transit should be processed, whereas section 2.6 of the agreement indicates that risk of loss and title to the merchandise shifts at the time of shipment from the supplier’s factory (FOB Supplier’s Factory). Allowing a purchaser to request a credit or deduction for merchandise damaged in transit when the title and risk of loss for the merchandise has actually passed to the purchaser before transit is not consistent with a bona fide sale.
When this inconsistency was brought to Lear’s attention, the company responded that section 2.4 only gives the purchaser the right to request credit, and does not require that credit be given. While acknowledging the inconsistency, the company argues that such an option is not unreasonable in a contract in which the seller makes the shipping arrangements. According to Lear, this clause alone does not negate the specific provision in section 2.6 transferring title from the supplier to the purchaser when the goods leave the factory. We take note of Lear’s position on this matter, but in our view this remains one of several factors that calls the existence of sales between Lear Philippines and Lear Corporation EEDS and Interiors into question. Furthermore, even if it were ultimately determined that Lear Philippines did, indeed, sell the wire harnesses to Lear Corporation EEDS and Interiors, then these very favorable terms extended to a related purchaser are an indication that the sales were not conducted at arm’s length. This is because it is unlikely that a supplier, in the ordinary course of business, would agree to reimburse a purchaser for damage incurred in transit when, by the terms of the sales agreement, risk of loss had already passed from the supplier to the purchaser.
Third, section 2.6 of the agreement also indicates that the supplier is responsible for freight costs (i.e., “Supplier shall be responsible for all costs related to freight, transportation…other costs of transporting Product to Purchaser’s Plymouth, Indiana facility.”) There is a provision in the purchase price formula, however, for deducting the freight costs. It would appear from the agreement that the freight costs are being charged to or paid by the supplier and then also deducted from the price paid by Lear Corporation EEDS and Interiors to Lear Philippines (under the purchase price formula). We note that the purchase price formula also contains a provision that states that “[e]xpedited freight (e.g., air shipments) will be paid for by the supplier.” When asked to explain these ambiguous and inconsistent provisions, Lear advised that the reason for the deduction in the transfer pricing formula is that in practice Lear Corporation EEDS pays for the freight for each shipment and then gets reimbursed for the freight by Lear Philippines through the deduction. This explanation is satisfactory.
Moreover, as discussed above, the purchase price formula (as found in exhibit B to the agreement) specifies that three percent will be deducted under the resale minus methodology “to cover freight from Supplier to Purchaser” but the percent “for freight may be modified by mutual agreement if it is determined that the 3% is not covering actual freight costs.” Clearly, the three percent deduction is based on the premise that the freight cost for each shipment of the wire harnesses will always equal three percent of the OEM purchase price, unless the three percent deduction is changed as needed by agreement of the two parties to reflect the actual freight costs. There is no indication, however, as to how often modification of the three percent deduction occurs (i.e., on a shipment-by-shipment basis or on an entry-by-entry basis) or as to the procedure used by the parties to ensure the accuracy of that deduction for each shipment of the merchandise. (Lear Corporation EEDS and Interiors argues that the term “modified by mutual agreement” is a common contractual phrase and indicates that either party upon agreement of the other can revise the 3%). If the three percent deduction is not modified or changed as needed to reflect the actual freight costs for each shipment of the wire harnesses, the issue arises as to how the use of a purchase price formula with a fixed percent for freight costs can consistently result in an accurate and correct price actually paid or payable for the wire harnesses by Lear Corporation EEDS and Interiors to Lear Philippines. (We note that with respect to freight costs, the CBP has held that an importer can only deduct the actual costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise. See, e.g., HQ 545422 (March 13, 1995). Logically, the freight costs should be the same for purposes of the above-mentioned purchase price formula and the customs value declared to the CBP for the wire harnesses. Therefore, Lear Corporation EEDS and Interiors would not be exercising reasonable care when declaring the customs value of an importation of the wire harnesses to the CBP if it deducted freight costs that were not the actual ones but rather a fixed three percent of the OEM purchase price.)
Further Considerations
With respect to the May 13, 2005, submission dealing with bona fide sales, the documents purporting to be a complete paper trail for a sample transaction do not establish that bona fide sales occurred between Lear Philippines and Lear Corporation EEDS and Interiors. First, as indicated above, the pertinent documents on their face identify “Lear Corporation” rather than “Lear Corporation EEDS and Interiors” or “Lear Philippines.” Lear Corporation EEDS and Interiors for Lear counters that it is possible to track the involvement of Lear Philippines and Lear Corporation EEDS and Interiors because both companies are identified in the transaction documents by their respective addresses and plant codes. The plant codes, it is explained, are a feature of Lear’s financial system.
In addition, in Exhibit 1, Lear Corporation of Detroit, Michigan is listed as the “supplier” on the purchase contract, and not Lear Corporation EEDS and Interiors. Lear Corporation EEDS and Interiors explains that as with many subsidiary and parent companies, both share a common ordering system. It also maintains that it cannot control what [X Corporation] puts on its purchase contract. A close scrutiny of this particular document, however, shows that not only is the supplier identified as Lear Corp of Detroit, Michigan, but also that the contact telephone number associated with several named contacts on the purchase contract has a Detroit area code. This calls into question the assertion that Lear Corporation EEDS and Interiors is an independent buyer and seller with which [X Corporation] contracted to purchase the imported goods.
Third, the “purchase contract” has an effective date of August 11, 2000, whereas the above-mentioned “Lear Corporation Intercompany Sales and Supply Agreement” indicates on its face that it was entered into or executed on January 1, 2001. In one of the May 13, 2005, submissions, it states that the purchase contract calls for LEEDS (i.e., Lear Corporation EEDS and Interiors) to supply [X Corporation] with wire harnesses and that the contract is “valid from August 11, 2000 through December 13, 2008.” This raises the question of why Lear Corporation EEDS and Interiors would enter into a contract to supply wire harnesses to [X Corporation] without having a contract with Lear Philippines for obtaining the wire harnesses to sell to [X Corporation]. Moreover, how did Lear Corporation EEDS and Interiors perform under the contract with [X Corporation] prior to entering into the contract with Lear Philippines on January 1, 2001? On this point Lear Corporation EEDS and Interiors again mentions that the January 1, 2001 agreement between itself and Lear Philippines was a manifestation of the actual business transactions which the two companies were conducting prior to an actual agreement being in place. It maintains that this is further evidence that a sale takes place.
Fourth, in its October 11, 2004, submission, Lear Corporation states that “[w]ith regards to the ordering and payment process, LEEDS issues individual purchase orders to Lear PH for wire harnesses based on customer demand.” In contrast, in its May 13, 2005, submission, in its commentary for exhibit 2, Lear Corporation states that “no formal purchase order is sent from LEEDS to Lear PH.” No explanation was provided for these contradictory statements.
Fifth, in exhibit 4, the entity “Lear Corporation” is listed at the top of the invoice. It also indicates that the goods were sold to and shipped to “Lear Corporation” in Plymouth, Indiana (rather than Lear Corporation EEDS and Interiors). By the terms of the invoice, payment is to be remitted to the Lear Corporation in Detroit, Michigan (rather than Lear Philippines). Moreover, the shipping or trade terms are “DDP Plymouth IN.” This is inconsistent with the sales and supply agreement, which requires that Lear Philippines supply the merchandise to Lear Corporation EEDS and Interiors “FOB Supplier’s Factory.” Lear Corporation EEDS and Interiors explains that Lear Corporation is often used as an abbreviation for the Lear Corporation EEDS and Interiors, which is an “indirect” subsidiary of the parent Lear Corporation. With regard to the payment, Lear Corporation EEDS and Interiors notes that Lear Corporation EEDS and Interiors pays Lear Philippines through a monthly intercompany netting process which is facilitated by Lear Corporation. According to Lear Corporation EEDS and Interiors, this payment is accounted for in the books and records of Lear Corporation EEDS and Interiors. On the issue of the inconsistent terms of sale, Lear Corporation EEDS and Interiors argues that in substance they are the same, for although the supply agreement specifies the use of FOB factory terms, the agreement also places responsibility for transportation costs and duties on Lear Philippines. Lear Corporation EEDS and Interiors maintains that this is, in essence, a DDP transaction.
Additionally, the initial submission states that “Lear PH…generates a commercial invoice stating the price as indicated on the LEEDS’ purchase order to accompany the shipments of wire harnesses to LEEDS’ facility in Plymouth, Indiana.” The above-mentioned invoice, however, is dated October 18, 2004, but indicates on its face that the merchandise was shipped on October 14, 2004. Clearly, the invoice did not “accompany the shipments of wire harnesses” to the facility in Plymouth, Indiana. No explanation was provided for these inconsistencies and contradictions.
Sixth, page 3 of exhibit 7 is said to show that a certain amount of money listed on the second document was transferred from Lear Corporation EEDS and Interiors to Lear Philippines on December 21, 2004. The alleged recipient of the money, however, is not Lear Philippines but “Lear Auto EEDS Philippines.” There is no explanation for this discrepancy.
Finally, exhibit 8 is said to be a sales invoice from Lear Corporation EEDS and Interiors to [X Corporation]. The name on the document, however, is Lear Corporation, and it states on the face of the document that payment is to be remitted to that entity in Detroit, Michigan (rather than to Lear Corporation EEDS and Interiors). Neither Lear Corporation EEDS and Interiors nor Lear Philippines is listed on the document. The shipping terms are “FOB Plymouth Philippines.” No explanation was provided for these multiple places. The question arises as to why the Philippines is listed together with Plymouth with the terms “FOB” if Lear Corporation EEDS and Interiors (located in Plymouth) has allegedly purchased the wire harnesses from Lear Philippines (i.e., taken title to and assumed the risk of loss for them) and has now sold and is shipping the wire harnesses to [X Corporation]. The listing of “FOB Plymouth Philippines” is not consistent with a bona fide sale of the wire harnesses from Lear Philippines to Lear Corporation EEDS and Interiors. Lear Corporation EEDS and Interiors disputes the notion that the two companies are not listed on the invoice. In this regard it notes that the “Lear Corporation Electronics & Electrical Division” is at the center top portion, and that this is the division in which that Lear Corporation EEDS and Interiors resides. The invoice also lists the plant codes of Lear Philippines and that Lear Corporation EEDS and Interiors. The shipping term “FOB Plymouth Philippines” is acknowledged as a simple mistake.
In light of the above and based on the record before us, we cannot conclude (1) that Lear Philippines and Lear Corporation EEDS and Interiors acted as seller and buyers, respectively, or (2) that bona fide sales for exportation to the United States of the imported merchandise occurred between them. Rather, we conclude from the record (1) that Lear Corporation EEDS and Interiors (or the Lear Corporation) acted as a selling agent for Lear Philippines and (2) that bona fide sales occurred between Lear Philippines and the ultimate U.S. consignees or customers (Lear Corporation’s OEM customers). Accordingly, the merchandise should be appraised under the transaction value of the imported merchandise method based on the sales between Lear Philippines and the ultimate U.S. consignees or customers of the merchandise. See, e.g., HQ 545571 (April 28, 1995) (The totality of the circumstances indicates that a foreign manufacturer and related U.S. importer did not act as buyer and seller. Rather, for purposes of determining a transaction value, the “sale for exportation to the United States” occurred between the foreign manufacturer and the ultimate U.S. purchaser.). See also, e.g., HQ 548609 (April 19, 2005); HQ 546858 (June 2, 2000); HQ 545865 (August 25, 1995); HQ 545542 (December 9, 1994); HQ 544659 (July 3, 1991); and HQ 544383 (January 18, 1991).
2. Related Parties
The second issue raised in the internal advice request is whether the relationship between the parties has influenced the price of the merchandise. In light of the above-mentioned decision with respect to bona fide sales, the issue of the relationship of the parties is not relevant because it only becomes an issue under the transaction value method of appraisement when there is a sale between related parties. See 19 U.S.C. § 1401a(b)(2)(A)(iv); 19 CFR §152.103. See also, Statement of Administrative Action, Trade Agreements Act of 1979, 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 52-54; General Notice, “Transfer Pricing; Related Party Transactions,” Vol. 27, No. 4, Cust. B. & Dec. at 4, (January 27, 1993). Lear Philippines and the ultimate U.S. consignees or customers are apparently not related parties. This conclusion notwithstanding, we reiterate our earlier point that, even had we determined that there were sales between Lear Philippines and Lear Corporation EEDS and Interiors, there are indications that those sales were not at arm’s length. Specifically, the unusually favorable terms under the sales agreement allowing Lear Corporation EEDS and Interiors to request credit for damage incurred in transit after risk of loss had already transferred, calls this issue into question.
HOLDING:
The above-mentioned merchandise must be appraised under the transaction value of the imported merchandise method based on the sales between Lear Philippines and the ultimate U.S. consignees or customers of the merchandise.
This internal advice should be mailed by your office to the requester no later than sixty days from the date of this letter. Sixty days from the date of this letter, Regulations and Rulings of the Office of International Trade will take steps to make this decision available to CBP personnel and to the public on the CBP’s web site, and by means of the Freedom of Information Act as well as by other means of public distribution.
Sincerely,
Myles Harmon, Director
Commercial and Trade Facilitation Division