VAL RR:CTF:VS 563326 DCC
Mr. R. Keith Richard
Field Director, Regulatory Audit Division
U.S. Customs and Border Protection
2001 Cross Beam Drive Charlotte, NC 28217
RE: Request for Internal Advice; Transaction Value; Sourcing Fees; Commissions; Royalties; Research and Development; Freight and Insurance
Dear Field Director:
This is in response to your memorandum, dated August 15, 2005, in which you request internal advice regarding several customs valuation issues that arose during a Focused Assessment, Pre-Assessment Survey (the “Focused Assessment”) of an importer. Specifically, you request guidance regarding the appropriate basis of appraisement, and the treatment of certain payments, i.e., commissions, royalties, research and development costs, freight, and insurance, for transactions between [ ], the “Foreign Manufacturer,” and [
], the “U.S. Manufacturer,” and other related companies in the United States.
In addition to the materials you provided we also received comments from counsel for the U.S. Manufacturer in two submissions dated September 6, 2005, and May 1, 2006. Business proprietary information furnished in connection with this matter will be accorded confidential treatment pursuant to 19 C.F.R. § 177.2(b)(7). Such information is designated by brackets, and will be redacted from the public version of this letter.
FACTS:
The U.S. Manufacturer is a wholly-owned subsidiary of [ ], located in [ ], USA, the “U.S. Parent,” which is wholly owned by the Foreign Manufacturer. The U.S. Manufacturer obtains parts from the Foreign Manufacturer for the production of [ ] and [ ], the finished goods, at its facility located in [ ] USA. The U.S. Manufacturer is also related to another manufacturing company [ ], the “Affiliated U.S. Manufacturer,” which is located in [ ], USA. The U.S. Parent owns 98% of the Affiliated U.S. Manufacturer, and the Foreign Manufacturer owns the remaining 2%.
The Foreign Manufacturer issues invoices to the U.S. Manufacturer. According to a sample invoice, the “Unit Price” is “FOB [foreign country of origin].” The Foreign Manufacturer’s invoices also provide a delivered price for the imported goods indicated as “CIF [location of the U.S. Manufacturer]” and include itemized amounts for ocean freight and insurance.
Support Service Agreement
The U.S. Manufacturer receives technical support from the Affiliated U.S. Manufacturer pursuant to the “Support Service Agreement.” According to this agreement, Affiliated U.S. Manufacturer provides know-how, including technical information, data, formula, designs, drawings, standards, specifications, technical records, material lists, process manuals and direction maps that are necessary for the manufacturing, testing, inspection, sale, maintenance, repair and service of finished goods. The Service Agreement also covers “all services which, at the request of [the U.S. Manufacturer], are provided by [the Affiliated U.S. Manufacturer] pursuant to this Agreement in order effectively and efficiently to facilitate the practical application by [the U.S. Manufacturer] of the Know-How, including the provision of experts’ support.”
According to counsel, the technical support provided under the Support Service Agreement includes procurement support for purchases from unrelated suppliers. Support for the U.S. Manufacturer’s procurement includes the following services:
Select the best supplier by obtaining a drawing of the product and determining which supplier is able to produce the product according to quality, development, cost management, competitive pricing;
Negotiate pricing on behalf of the U.S. Manufacturer;
Monitor supplier by checking supplier’s quality on a monthly basis and documenting quality history;
Conduct supplier factory visits to ensure compliance with Foreign Manufacturer’s guidelines and production capacity; and
Select freight carrier and schedule deliveries.
In addition, the U.S. Manufacturer pays [ ], the Foreign R&D Unit and the [ ], the U.S. R&D Unit for research and development in the United States.
Loan Agreement
To cover the cost of ongoing operations, the U.S. Parent loans operating capital to the U.S. Manufacturer. The terms of this loan are governed by a Loan Agreement between the U.S. Manufacturer and the U.S. Parent. In addition, the U.S. Parent provides short-term credit, through a Short-Term Loan Account, to the U.S. Manufacturer for the purchase of goods from the Foreign Manufacturer. The U.S. Manufacturer makes payments on this loan through the sales of goods to U.S. customers with the proceeds of these sales deposited directly to U.S. Parent’s account. To minimize transaction costs, the U.S. Parent relies on a netting process to settle the accounts of the various U.S. subsidiaries and the Foreign Manufacturer.
Manufacturing License and Technical Assistance Agreement
The U.S. Manufacturer also has an agreement (i.e., the Manufacturing License and Technical Assistance Agreement) with the Foreign Manufacturer regarding the provision of technical guidance in the form of technical documents and experts. Under Article 2 of this agreement, the Foreign Manufacturer grants a license to the U.S. Manufacture to assemble the subject imported merchandise and locally-sourced materials to produce finished goods. Specifically, Article 2 states:
Subject to the terms and conditions herein contained, the [Foreign Manufacturer] hereby grants to the [U.S. Manufacturer] an indivisible, non-transferable and non-exclusive right and license, to manufacture, produce and assemble in the [United States], or to have manufactured, produced and assembled for it in the [United States] by parties not otherwise entitled to do so, the [finished goods and parts manufactured by the U.S. Manufacturer] and [parts manufactured by other parties in the United States and procured by the U.S. Manufacturer] for sale primarily to the [U.S. Parent] under the [patents, design patents, trademarks, service marks, copyrights and other statutory intellectual propriety rights relating to the manufacture of the finished goods and parts manufactured by the [U.S. Manufacturer] and by using [drawings, standards, specifications, material lists, process manuals and direction maps, technical information, service materials, which directly relate to the finished goods and parts manufactured by the [U.S. Manufacturer]. The [U.S. Manufacturer] shall not grant sublicenses without the prior written consent of the [Foreign Manufacturer].
In consideration of the license to use such technical information, the U.S. Manufacturer agrees to pay the Foreign Manufacturer a royalty. The amount of the royalty is equal to 1.5% of the value added in the United States of all finished goods sold by the U.S. Manufacturer.
Parts, Machinery & Equipment Supply Agreement
The U.S. Manufacturer also entered into an agreement with the Foreign Manufacturer regarding the supply of parts, accessories, and equipment for the production, testing, inspection, and servicing of goods (the “Supply Agreement”). According to this agreement, the purchase price of covered parts, accessories, and equipment are to be negotiated by the Foreign Manufacturer and the U.S. Manufacturer. The agreement also addresses ordering, payment, warranties, trademarks, and indemnification.
ISSUES:
Whether the transfer price between the Foreign Manufacturer and the U.S. Manufacturer is an acceptable basis of appraisement.
Whether fees for sourcing materials, royalties, and research and development paid by the U.S. Manufacturer to a party related to the Foreign Manufacturer should be included in, or added to, the price actually paid or payable.
Whether charges for ocean freight and insurance should be deducted from the price actually paid or payable for the imported merchandise.
LAW AND ANALYSIS:
1. Basis of Appraisement
The preferred method of appraising merchandise imported into the United States is transaction value pursuant to 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)(1) 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 enumerated statutory additions.
Bona Fide Sale
The term “sale,” as articulated in the case of J.L. Wood v. United States, 62 C.C.P.A. 25, 33, 505 F.2d 1400, 1406 (1974), is defined as the transfer of property from one party to another for consideration. In considering whether a bona fide sale has taken place between a potential buyer and seller of imported merchandise, however, no single factor is determinative. Rather, the relationship is to be ascertained by an overall view of the entire situation, with the result in each case governed by the facts and circumstances of the particular case itself. See Dorf International, Inc. v. United States, 61 Cust. Ct. 604, 291 F. Supp. 690 (1968).
Several factors may indicate whether a bona fide sale exists between an alleged buyer and seller. In determining whether property or ownership has been transferred, Customs and Border Protection (“CBP”) considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, CBP may examine whether the potential buyer paid for the goods, and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller.
The Regulatory Audit Division (“RAD”) of CBP determined that there was insufficient information to substantiate the existence of a bona fide transaction between the Foreign Manufacturer and the U.S. Manufacturer. RAD based this determination on the U.S. Manufacturer’s inability to negotiate prices and the subsidiaries’ lack of autonomy as reflected in the terms of the agreements.
In addition, RAD determined that the related party pricing was unacceptable because there was no direct payment for the imported merchandise by the U.S. Manufacturer to the Foreign Manufacturer. The proceeds from the sale of finished goods by the U.S. Manufacturer are transferred to the U.S. Parent from which they are used to pay for the imported merchandise and pay down the operating capital debt owed by the U.S. Manufacturer to the Foreign Manufacturer. As a result of this netting process through the U.S. Parent, there is no direct transfer of funds from the U.S. Manufacturer to the Foreign Manufacturer.
In the instant case, we find that the transactions between the Foreign Manufacturer and the U.S. Manufacturer constitute bona fide sales. According to invoices issued by the Foreign Manufacturer to the U.S. Manufacturer the terms of sale were FOB [ ]. Under an FOB contract, the buyer pays the freight for the carriage of the goods and cargo insurance from the named port of export, and title and the risk of loss are transferred from the seller to the buyer at the point when the goods are delivered to the custody of the carrier. See Incoterms, International Chamber of Commerce (2000).
Furthermore, the U.S. Manufacturer pays for the merchandise by making payments to the U.S. Parent, which subsequently nets the payments against the U.S. Manufacturer’s debt obligations to the Foreign Manufacturer. Section 402(b)(4) of the Tariff Act defines the term “price actually paid or payable” to include direct and indirect payments that are made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. This definition of price actually paid or payable includes payments for the satisfaction of an outstanding debt owed by the buyer to the seller. See Headquarters Ruling Letter (“HRL”) 543766, dated September 30, 1986 (holding that a credit owed to the importer by the seller that was applied toward the payment for imported ceiling fans should be included in the transaction value of the imported merchandise as an indirect payment). Although the U.S. Manufacturer pays the U.S. Parent for the imported merchandise and the U.S. Parent offsets its remittance to the Foreign Manufacturer by amounts paid by the Foreign Manufacturer to the U.S. Parent, we find that the payments by the U.S. Manufacturer to the U.S. Parent constitute indirect payments for the benefit of the Foreign Manufacturer and therefore represent consideration for the imported merchandise.
Arm’s Length Transaction
According to the Statement of Administrative Action: “The fact that the buyer and seller are related is not in itself grounds for regarding the transaction value as unacceptable.” Statement of Administrative Action (“SAA”), H.R. Doc. No. 103-316, 103rd Cong., 2d Sess. (1994), reprinted in Customs Valuation under the Trade Agreements Act of 1979 at 54; Section 152.103(j)(2), Customs Regulations (19 C.F.R. 152.103(j)(2)). Pursuant to section 402(b)(2)(B) of the TAA, there are two tests under which the transaction value between related parties may be used as a basis of appraisement: the circumstances of sale method or the test values method.
Under the test values method, related party transaction values may be accepted if the subject transaction value closely approximates certain test values set forth in 19 U.S.C. § 1401a(b)(2)(B). Factors considered in determining whether the transaction value closely approximates the test values include the nature of the imported merchandise, the nature of the industry itself, the season in which the goods are imported, whether the difference in value is commercially significant, and whether the difference in value is attributable to internal transport costs in the country of exportation. See 19 C.F.R. 152.103(l)(2).
Under the circumstances of sale method, related party prices may be acceptable if the price was not affected by the relationship between the parties. The SAA provides examples that apply the circumstances of sale test. Under the first example, the circumstances of sale test may be satisfied if the pricing between the related parties is consistent with normal industry pricing practices, or with the way the seller deals with unrelated buyers. To make this determination, CBP examines the manner in which the buyer and seller organize their commercial relations and the manner in which the sales price was derived. See 19 C.F.R. 152.103(l)(1)(i).
According to the second example, the related party transactions may be acceptable if an examination of the sale demonstrates that the transfer price is adequate to ensure recovery of all costs plus a profit that is equivalent to the exporter’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind. See HRL 546449, dated January 6, 1998; and 19 C.F.R. 152.103(l)(1)(iii).
RAD raised concern that the transaction between the Foreign Manufacturer and U.S. Manufacturer was not conducted at arm’s length. The Focused Assessment report states that the Foreign Manufacturer exercised extraordinary influence over the U.S. Manufacturer in the transaction as demonstrated by the terms of the Manufacturing License and Technical Assistance Agreement. Under that agreement, the Foreign Manufacturer may perform quality inspections of the finished goods and locally-sourced parts. If the quality of the finished good or part is found to be unacceptable, the U.S. Manufacturer may not sell that finished good or use that part in the production of finished goods. Furthermore, RAD states that there is insufficient evidence of price negotiations between the U.S. Manufacturer and the Foreign Manufacturer.
Counsel claims that the related party transactions between the U.S. Manufacturer and the Foreign Manufacturer are bona fide transactions conducted at arm’s length. Counsel contends that the process for determining the transfer price between the Foreign Manufacturer and the U.S. Manufacturer satisfies the arm’s length criterion by meeting the circumstances of sale test. Specifically, counsel claims the Foreign Manufacturer’s pricing methodology ensures that the transfer price is adequate to ensure recovery of all costs plus a profit that is equivalent to the exporter’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind.
According to counsel’s submission, the process for determining the firm’s overall cost of production—referred to as the [ ], i.e., the Costing Process—is used by the functional divisions of the firm to negotiate and establish the overall cost structure of a particular finished good. The Costing Process involves a series of events from approval of the business concept to pre-production manufacturing and post-production market analysis. During this process, representatives of the [ ] functional divisions negotiate and reach agreement on the components of the product development, including cost and pricing issues. This Costing Process involves review of detailed information regarding the target product market, competing products, cost of parts from unrelated suppliers, manufacturing costs, and sales and distribution costs. Through the Costing Process, counsel states the costs of production used to determine the price to be paid by the U.S. Manufacturer are established by the time of importation.
Once the Foreign Manufacturer and the U.S. Manufacturer determine the production costs through the Costing Process, the parties multiply these costs by a fixed ratio, i.e., the “FOB Ratio,” to calculate the price paid of the exported merchandise. The FOB Ratio includes the costs of packing, freight, export charges, SGA (i.e., selling, general, and administrative expenses), and net profit. According to counsel, the FOB Ratio applied to the costs of production is the same for sales of all merchandise from the Foreign Manufacturer to the U.S. Manufacturer.
Counsel claims that the FOB Ratio ensures that the Foreign Manufacturer recovers all costs plus a representative profit on sales to the U.S. Manufacturer. According to counsel, the FOB Ratio applied to the costs of production as derived through the Costing Process reflects the total costs of production or procurement, plus the costs of packing, inland freight, customs clearance, the Foreign Manufacturer’s overhead expenses, and profit. Profit is based on an estimate of the Foreign Manufacturer’s profit and an estimate of a reasonable rate of return for the Foreign Manufacturer’s sales to the U.S. Manufacturer. For the period under review, the profit calculated for the FOB ratio was 2.0%. According to counsel, this figure compares favorably to the 2.5% profit realized by the Foreign Manufacturer in its global [ ] business, of which the [ ] and [ ] business are a part.
We find, based on the information provided, that the circumstances of sale indicate that the price paid by the U.S. Manufacturer is sufficient to ensure recovery of all costs plus a profit that is equivalent to the Foreign Manufacturer’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind. We note that the Costing Process and FOB Ratio are designed to capture all of the Manufacturer’s direct and indirect costs and that the amount for profit is comparable to the Foreign Manufacturer’s profit on sales of the same class or kind.
2. Sourcing Fees, Royalties, and Research and Development
The second issue is whether certain fees paid by the U.S. Manufacturer to a related party for services related to the sourcing of materials should be included in, or added to, the price actually paid or payable. As noted above, pursuant to section 402(b)(4) of the TAA, the term “price actually paid or payable” is defined in pertinent part as “the total payment (whether direct or indirect . . .) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.” 19 U.S.C. § 1401a(b)(4).
Sourcing Fees
The U.S. Manufacturer pays the Affiliated U.S. Manufacturer a fee for services related to the procurement of materials from unrelated suppliers located in [ ]. Depending on whether the Affiliated U.S. Manufacturer performs as an agent, and if so, whether the sourcing fees are most appropriately deemed buying or selling commissions, will determine whether the sourcing fees should be added to the price actually paid or payable.
Selling commissions incurred by the buyer constitute an addition to the price actually paid or payable. See 19 U.S.C. § 1401a(b)(1)(B). Bona fide buying commissions, however, are not an addition to the price actually paid or payable. See Pier 1 Imports, Inc. v. United States, 708 F. Supp. 351, 354, 13 CIT 161, 164 (1989); Rosenthal-Netter, Inc. v. United States, 679 F. Supp. 21, 23, 12 CIT 77, 78 (1988); and Jay-Arr Slimwear, Inc v. United States, 681 F. Supp. 875, 878, 12 CIT 133, 136 (1988).
The existence of a bona fide buying commission depends upon the relevant factors of the individual case. See J.C. Penney Purchasing Corp. v. United States, 451 F. Supp. 973, 983, 80 Cust. Ct. 84, 95, C.D. 4741 (1978); Rosenthal-Netter, 679 F. Supp. at 23 (Ct. Int’l Trade 1988) (“The Court must examine all relevant factors in deciding whether a bona fide agency relationship exists.”). The importer, however, has the burden of proving the existence of a bona fide agency relationship and that the payments to the agent constitute bona fide buying commissions. See New Trends v. United States, 645 F. Supp. 957 (Ct. Int’l Trade 1986) (“It is not questioned that plaintiff [importer] has the burden of proof as to the existence of a bona fide agency relationship.”).
As described above, under the Support Service Agreement the U.S. Manufacturer pays the Affiliated U.S. Manufacturer a fee for procurement support for purchases from unrelated suppliers in [ ]. These services include selecting suppliers, negotiating prices, monitoring the quality of suppliers’ products, conducting supplier factory visits, selecting freight carriers, and scheduling deliveries.
Counsel argues that the payments for these services should not be treated as commissions because these services are internal by nature. Except for the fact that these services were outsourced to the purchasing department of a related company, counsel asserts that they otherwise would have been performed internally by employees of the U.S. Manufacturer. As with other outsourced services, counsel claims that the payments for procurement services should not be treated as buying or selling commissions and, therefore, are not dutiable. If the payments are deemed to be commissions, however, counsel maintains that they should be considered buying commissions.
The RAD raised concern about the sourcing payments because the U.S. Manufacturer was unable to provide information necessary to determine whether the payments should be treated as buying or selling commissions. Your office also noted that pursuant to the Support Service Agreement, the Foreign Manufacturer is able to exercise control over selection of the suppliers. Consequently, your office was unable to determine whether these payments should be added to the dutiable value of goods purchased from the unrelated suppliers in [ ].
Based on the terms of the Support Service Agreement, we find that the Affiliated U.S. Manufacturer is a buying agent of the U.S. Manufacturer. The Affiliated U.S. Manufacturer facilitates the purchase of materials and components on behalf of the U.S. Manufacturer by identifying suppliers, negotiating terms, ensuring quality, conducting factory visits, and arranging delivery. These functions are typically associated with the role of an agent in a sales transactions. See Jay-Arr Slimwear, Inc. v. United States (finding compilation of market data, gathering samples, translation of documents, placing orders, procuring merchandise, assisting in negotiations with manufacturers, inspection and packing of merchandise, and arranging for shipment and payment were characteristics of services provided by an agent).
Furthermore, because the Affiliated U.S. Manufacturer is related to the importer but not the foreign suppliers in [ ], we may presume that the Affiliated U.S. Manufacturer acts for the benefit of the U.S. Manufacturer in negotiating with the unrelated suppliers. Although the sourcing services could have been performed internally by the staff of the U.S. Manufacturer, the services were in fact outsourced to a related entity which acted as an agent on behalf of the U.S. Manufacturer. We therefore determine that the Affiliated U.S. Manufacturer was a bona fide buying agent for the U.S. Manufacturer. The fact that the agent works to ensure that the materials from unrelated suppliers meet the quality standards of the Foreign Manufacturer does not alter this analysis. The sourcing fees paid to the affiliate therefore constitute a buying commission which is not added to the price actually paid or payable.
Royalties
The next issue is whether certain payments paid by the U.S. Manufacturer to a related party should be added to the price actually paid or payable for the merchandise. Pursuant to section 1401a(b)(1) of the customs valuation statute, the transaction value of imported merchandise is the price actually paid or payable for merchandise plus “any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States.” 19 U.S.C. § 1401a(b)(1)(D).
The Statement of Administrative Action (“SAA”) to the Trade Agreements Act of 1979, provides, in pertinent part, that:
Additions for royalties and license fees will be limited to those that the buyer is required to pay, directly or indirectly, as a condition of sale of the imported merchandise for exportation to the United States. In this regard, royalties and license fees for patents covering processes to manufacture the imported merchandise will generally be dutiable, whereas royalties and license fees paid to third parties for use, in the United States, of copyrights and trademarks related to the imported merchandise will generally be considered as selling expenses of the buyer and therefore will not be dutiable. However, the dutiable status of royalties and license fees paid by the buyer must be determined on case-by-case basis and will ultimately depend on: (i) whether the buyer was required to pay them as a condition of sale of the imported merchandise for exportation to the United States; and (ii) to whom and under what circumstances they were paid. For example, if the buyer pays a third party for the right to use, in the United States, a trademark or copyright relating to the imported merchandise, and such payment was not a condition of sale of the merchandise for exportation to the United States, such payment will not be added to the price actually paid or payable. However, if such payment was made by the buyer as a condition of the sale of the merchandise for exportation to the United States, an addition will be made. As a further example, an addition will be made for any royalty or license fee paid by the buyer to the seller, unless the buyer can establish that such payment is distinct from the price actually paid or payable for the imported merchandise, and was not a condition of the sale of the imported merchandise for exportation to the United States.
Statement of Administrative Action, H.R. Doc. No. 153, Pt. II, 96th Cong., 1st Sess. (1979), reprinted in Customs Valuation Under the Trade Agreements Act of 1979 at 48-49.
Although the SAA provides that determinations about the dutiability of royalty payments are to be made case-by-case, it is more likely that a royalty will be dutiable when the licensor of the technology and the seller of the merchandise are one and the same and the royalty is paid directly to the seller. Under these circumstances, payment of the royalty is more likely to be a condition of the sale for exportation of the imported merchandise than when the royalty is paid to an unrelated third party. See HRL 545361, dated July 20, 1995 (trademark royalties dutiable when paid to the seller/licensor but not when paid to a third party unrelated to the seller).
Based on Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990), CBP presumes that all payments made by a buyer to the seller are part of the price actually paid or payable. See HRL 547532, dated November 2, 2001. In Generra, the U.S. Court of Appeals for the Federal Circuit held that the term “total payment” in the definition of the phrase “price actually paid or payable” was intended to be all inclusive. See Generra at 379. The reasoning underlying the court’s decision is based on the language of section 1401a(b)(4)(A) which states that the price actually paid or payable is the “total payment” for imported merchandise whether the payments are “direct or indirect.”
Generra further held that, “Congress did not intend for [CBP] to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, are for the merchandise or for something else.” Generra at 380. The court, quoting Moss Mfg. v. United States, 896 F. 2d 535, 539 (Fed. Cir. 1990), concluded that the “straightforward approach [of section 1401a(b)] is no doubt intended to enhance the efficiency of [CBP’s] appraisal procedure; it would be frustrated were we to parse the statutory language . . . and require [CBP] to engage in [a] formidable fact-finding task.” Generra at 380.
The presumption that payments to the seller, or parties related to the seller, are part of the price actually paid or payable may be rebutted by evidence that clearly establishes that the payments are totally unrelated to the imported merchandise. See Chrysler Corp. v. United States, 17 CIT 1049 (1993) (certain shortfall and special application fees paid by the buyer to the seller were independent and unrelated costs assessed because the buyer failed to purchase other products from the seller).
Although the presumption that payments made by a buyer to a seller are part of the price actually paid or payable is rebuttable, the importer has the burden of demonstrating that the payments are unrelated to the imported merchandise. See Chrysler, 17 CIT at 1053 (“Customs’ appraisal value is presumed to be correct and the burden of proof is upon the party challenging the decision.”).
Counsel notes that pursuant to the Manufacturing License and Technical Assistance Agreement, the royalties are paid for certain intellectual property rights that the Foreign Manufacturer licenses to the U.S. Manufacturer. Counsel states that the royalties are for the right to produce merchandise bearing the trademark of the Foreign Manufacturer, and for technical information provided by the Foreign Manufacturer to the U.S. Manufacturer to assist in the production of the finished goods in the United States. According to the Manufacturing License and Technical Assistance Agreement, as amended, in return for the royalty payments the U.S. Manufacturer receives:
a right and license to manufacture in the United States certain [finished goods] and related parts and accessories, utilizing [Intellectual Property Rights and Technical Information] (as defined in the Agreement), and [the U.S. Manufacturer] agreed to pay [the Foreign Manufacturer] consideration for such right and license based upon rates set for in Exhibit I to the Agreement.
Counsel explains that because the royalty calculation is a percentage applied to the value added in the United States the amount of the royalty payment is unrelated to the value of the imported merchandise and, therefore, should be excluded from the value of the imported goods.
In this case, it does not appear as if the payments pursuant to the Manufacturing License and Technical Assistance Agreement relate sufficiently to the imported merchandise to be included in the transaction value. The payments are for the right to manufacture the finished goods in the United States utilizing Intellectual Property Rights and Technical Information. The amount of the royalty is calculated as a percentage of the value added by the U.S. Manufacturer for production in the United States. The method of calculating the royalty in this case is similar to the one described in HRL 547761, dated March 14, 2002. In HRL 547761 we found that a royalty based on sales of the finished product rather than a resale of the imported parts should not be added to the transaction value of the imported merchandise.
Furthermore, we note that the agreement to purchase the imported merchandise exists independently of the technical assistance agreement. Consequently, the U.S. Manufacturer incurs the obligation to pay the royalty regardless of the quantity of imported merchandise. Therefore, we find that the royalty paid pursuant to the Manufacturing License and Technical Assistance Agreement is not related to the imported merchandise, and that the payments are not part of the price actually paid or payable in the determination of transaction value. Research & Development
In addition to royalties, RAD also identified certain payments for research and development (R&D) as an area of concern. According to the information provided, the transfer price paid by the U.S. Manufacturer for the imported merchandise includes an amount for research and development costs.
The U.S. Manufacturer also pays a flat fee to U.S. R&D Unit, a research and development company related to the Foreign Manufacturer. According to counsel, this R&D payment is remitted on a monthly basis for design and development expenses incurred in the United States. Counsel also states that the research and development work performed by the U.S. R&D Unit relates to the U.S. Manufacturer’s production process of the finished goods and does not contribute to the design or development of imported merchandise produced by the Foreign Manufacturer.
Counsel states that the payments by the U.S. Manufacturer are either 1) part of the transfer price paid by the company determined by the Costing Process and FOB Ratio; or 2) part of the monthly royalty payments through the netting process. Counsel claims that all payments for R&D are included in the transfer price and consequently included in the value declared at the time of entry.
Payments for R&D are not among the enumerated transaction value additions of subparagraphs (A) through (E) of section 1401a(b)(1), nor are they expressly excluded pursuant to section 1401a(b)(3). However, the transaction value may include R&D payments if CBP determines that such payments are part of the “price actually paid or payable.” CBP has long held the position that all monies paid to a foreign seller or to a party related to a seller are part of the price actually paid or payable for imported merchandise pursuant to the transaction value method of appraisement.
Based on the information presented, it appears the amount paid by the U.S. Manufacturer to the Foreign Manufacturer for R&D related to the imported merchandise is captured fully in the transfer price. Based on the Costing Process, the cost of production used to determine the transfer price incorporates the cost of the research and development function in the third component of the [ ] process. Therefore, the cost of product-specific R&D is included in the transfer price and, consequently, included in the declared value of the imported merchandise. Furthermore, because the research and development work performed by the U.S. R&D Unit is unrelated to the imported merchandise, the U.S. Manufacturer’s payments to the U.S. R&D Unit would not be added to the price actually paid or payable to determine the transaction value of the imported goods.
Ocean Freight and Insurance
The final issue is whether certain charges for ocean freight and insurance should be deducted from the price paid for the imported merchandise. Although the imported merchandise was sold on an FOB basis, the Foreign Manufacturer arranged for international freight and insurance and charged the U.S. Manufacturer for these costs. In the Focused Assessment report, RAD expressed concern regarding the terms of sale and importer’s inability to substantiate that the claimed deductions for freight and insurance were based on actual costs. The report notes that the bills of lading stated only that the freight was “prepaid,” and did not include the actual amount for ocean freight.
As previously noted, pursuant to 19 U.S.C. § 1401a(b)(4)(A), the term “price actually paid or payable” is defined as:
the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.
By definition, the costs of ocean freight and insurance is excluded from the price paid for imported merchandise to the extent these costs are paid by the importer.
The Foreign Manufacturer’s invoice indicates both a FOB unit price and a total CIF price that itemizes the costs of ocean freight and insurance. Based on the invoice and other documents we find that the terms of sale are FOB and that the CIF price is provided to separately identify expenses related to the international transportation of the merchandise. Payments for the ocean freight and insurance constitute part of the total payment from the U.S. Manufacturer to the Foreign Manufacturer. Pursuant to 19 U.S.C. § 1401a(b)(4)(A), the actual cost of the ocean freight and insurance must be deducted from, to the extent it is included in, the total payment.
In a General Notice entitled “Actual Freight and Insurance Deductions,” Vol. 31, No. 8 Customs Bulletin at 21 (February 19, 1997), CBP reiterated its long-established position concerning nondutiable charges. The Notice noted that the amount to be deducted from transaction value for freight, insurance and other costs incidental to the international shipment of merchandise is the actual, as opposed to estimated, costs. The Notice explained that actual costs constitute those amounts ultimately paid to the international carrier, freight forwarder, insurance company or other appropriate provider of such services. Furthermore, it was stated that proof of such actual costs would include commercial documents to and from the service provider such as an invoice or written contract separately listing such costs, a freight/insurance bill, a through bill of lading or proof of payment of the charges (i.e., letters of credit, checks, bank statements).
In HRL 544538, dated December 17, 1992, CBP stated that the cost of international transportation is to be excluded from the price actually paid or payable for imported merchandise. However, CBP explained that in determining the cost of the international transportation, it relies on documentation from the shipping company, as opposed to the documentation between the buyer and the seller. Information from the buyer and seller often contains estimated transportation costs or charges, while documentation from the shipping company contains the actual cost for shipment. It is the actual cost that CBP excludes from the price actually paid or payable.
In support of excluding international freight and insurance costs from the price actually paid or payable, counsel provided bills of lading and records of payment (including remittance statements and payment ledgers), that indicate that the U.S. Manufacturer paid the Foreign Manufacturer the CIF invoice price for the imported merchandise.
We find that based on the Foreign Manufacturer’s invoices which indicates a FOB amount for the “unit price” of the imported merchandise, the terms of sale for the subject transaction were FOB [foreign country of origin]. The fact that these invoice also provide a delivered price for the imported goods does not alter the fact that the parties intended the U.S. Manufacturer to assume title and risk of loss from the time the merchandise left the foreign port of export.
Regarding the treatment of ocean freight, it appears that the amount remitted by the U.S. Manufacturer to the Foreign Manufacturer includes an amount for international freight based on the CIF price. This amount may be deducted from the total payment provided that the importer is able to substantiate the claimed freight charge is the actual amount paid to the shipping company.
Regarding the cost of insurance, counsel claims that the U.S. Manufacturer pays the Foreign Manufacturer for the cost of marine insurance. This amount is calculated by multiplying the FOB price by a factor of 0.0062%, which is derived from the actual annual premium paid for the marine insurance allocated on a shipment-specific basis. Based on the information provided, we find that the allocated insurance premium paid by the U.S. Manufacturer for insurance may be deducted from the total payment paid to the Foreign Manufacturer in order to determine the price actually paid or payable.
HOLDING:
An analysis of the circumstances of sale indicate that transactions between the U.S. Manufacturer and the Foreign Manufacturer are not influenced by the relationship between the parties. We therefore determine that the price between the U.S. Manufacturer and the Foreign Manufacturer is an appropriate basis for determining transaction value according to 19 U.S.C. 1401a.
We find that the amount paid by the U.S. Manufacturer to the Affiliated U.S. Manufacturer for sourcing materials from unrelated suppliers constitutes a buying commission and therefore is not added to the price actually paid or payable for the imported merchandise from [ ]. We also find that the royalties paid by the U.S. Manufacturer to the Foreign Manufacturer are unrelated to the imported merchandise and therefore should be excluded from the value of the imported goods.
The research and development work performed by the U.S. R&D Unit is unrelated to the imported merchandise and payments for this R&D, therefore, should not be added to the price actually paid or payable. Lastly, the cost of international freight should be deducted from the total payment provided the importer is able to substantiate the cost of ocean freight. The cost of insurance should be deducted from the total payment from the U.S. Manufacturer to the Foreign Manufacturer
You are to mail this decision to the internal advice applicant no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to CBP personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch