OT:RR:CTF:VS W548419 CRS
Mr. Robert Sencel
Port Director
U.S. Customs and Border Protection
200 East Bay Street
Charleston, SC 29401
RE: AFR of Protest No. 1601-03-100288
Dear Sir:
This is in response to an application for further review of Protest No. 1601-03-100288, filed by the importer of record, [XXXXXXXXXXXXXXXXXXX] (hereinafter, the “protestant”), concerning the appraisement of certain merchandise imported under entry numbers [XXXXXXXXXXXXXXXXXXXXXXX], dated [XXXXXXXXX]. The protested entries serve as the lead protest in this matter. A meeting to discuss this matter was held at CBP Headquarters on June 3, 2005. We regret the delay in responding.
The protestant has advised that the disclosure of certain information relative to this matter could potentially cause substantial harm to the competitive position of the parties involved. Based on our review of the matter we have concluded that the information in question is eligible for confidential treatment under 19 C.F.R. § 103.12; accordingly, we have granted the request for confidentiality. Appropriate steps will therefore be taken to ensure that the information remains confidential and, to this end, the bracketed portions of the text will be redacted from any published versions of this decision. A public version of this decision is enclosed for your files.
However, the protestant should note that U.S. Customs and Border Protection will be guided in this regard by the laws relating to confidentiality and disclosure, to include the Freedom of Information Act (FOIA), as amended (5 U.S.C. § 552), the Trade Secrets Act (FOIA) (18 U.S.C. § 1905) and/or the Privacy Act of 1974, as amended (5 U.S.C. § 552a). The provisions of the FOIA, the TSA and the Privacy Act will prevail in any conflict concerning the confidentiality and disclosure of information. Accordingly, any information submitted in connection with this matter will be disclosed, if requested, where, e.g., it is administratively determined that the information is not protected by the TSA, the Privacy Act or an exemption of the FOIA.
FACTS:
The protestant is a member of the [XXXXXXXXX] group of companies (hereinafter, the “Group”), a large multinational enterprise that manufactures, distributes and sells a wide range of [XXXXXXXXX] products. The protestant imports [XXXXXXXX] products in a multi-tiered transaction involving the manufacturer of the goods, [XXXXXXXXXXXXXXXXXXXX] (hereinafter, the “manufacturer”), and the middleman, [XXXXXXXXXXXX] (hereinafter the “middleman”).
The manufacturer is responsible for purchasing raw materials, owning and maintaining the manufacturing equipment, monitoring the flow and maintenance of materials necessary for an efficient manufacturing process, packing and labeling the finished product and coordinating the shipment of the goods to the U.S. The merchandise is packaged specifically for the U.S. retail market. The finished goods are held at the manufacturer’s plant pending collection by the carrier for shipment to the U.S. The manufacturer prepares the transport documents and an invoice that references the protestant’s purchase order. The terms of sale are ex works. The manufacturer is also the owner of certain marketing intangibles, viz., trademarks which it licenses to the middleman.
The middleman collects orders from global distributors, including the protestant, and places them with the manufacturer. It holds title to – but not possession of – the merchandise until it is sold for distribution and bears most of the financial risk associated with the transaction including credit risk, price changes, foreign exchange fluctuations, warranty claims and inventory obsolescence. The middleman owns all production related intangibles, e.g., designs, patents and know-how, and also manages brand development and recognition, and advertising and marketing.
Transfer Pricing Policy
The manufacturer’s price is set according to the Group’s transfer pricing policy. Specifically, the price is determined per product on the basis of a standard cost calculation. The standard cost includes: raw materials; packaging materials; direct labor; direct maintenance; energy; warehousing; certain unusable material; and indirect costs. The sum of these represents the “full cost” price of the merchandise. The full cost price is increased by the amount of a management or service fee that the middleman pays a member of the Group [XXXXXXXXXXXXXXXXXXXXXXXXXXXXX] pursuant to a service agreement, and decreased by the amount of a sugar restitution allowance. This amount forms the cost base of the transfer price, to which is added a [XXXXX] percent markup. The resulting figure constitutes the transfer price of the specific product. As provided for in section 4.1 of the supply agreement, the amount of individual products is set forth in an intercompany price list which attached to the supply agreement as Exhibit B.
The restitution allowance consists of an adjustment to the manufacturer’s standard costs in order to adjust for a cost element that does not apply with respect to merchandise manufactured for export from the European Union (EU), viz., the cost of sugar price supports charged in accordance with the EU’s Common Agricultural Policy (CAP). For products sold within the EU the sugar levies are fully integrated into production cost. However, for products sold for export the manufacturer receives a refund, or restitution, of these costs in accordance with the CAP’s export subsidy regime. Initially, the cost of the CAP levy is included in the manufacturer’s standard cost. In order to correct for this, the transfer pricing formula adjusts the standard costs values to deduct the amount of the sugar restitution received under the CAP. Thus, the intercompany price paid by the middleman reflects the standard cost of product manufactured for export from the EU.
The Group’s transfer price methodology is based on the cost plus method, but factors in an appropriate operating margin in accordance with the transactional net margin method (TNMM). The reason for this, according to the protestant, is that under the cost plus method it can be difficult to determine the appropriate gross margin due to (1) differences in the manner in which certain costs are classified, which means that gross margin percentages are not always comparable and (2) because third party pricing information is often unavailable. The protestant therefore contends that it is appropriate to effect the markup at the operating margin level, i.e., using the TNMM approach, since this would eliminate the impact of any differences arising from cost classifications.
In support of the application for further review, the protestant submitted a comparison of the manufacturer’s full cost markup with the weighted average full cost markups of twelve European companies in the same general industry group as determined by four digit standard industrial classification (SIC) codes. The interquartile range of the companies surveyed, i.e., the middle fifty percent of the full cost markups, was between [XXXX] percent and [XXXXX] percent. The
manufacturer’s weighted average full cost markup for the period 2002-2004 was [XXXX] percent. On an annual basis, the manufacturer’s weighted average full cost markup was [XXXX] percent in 2002, [XXXX] percent in 2003 and [XXXX] percent in 2004. On this basis the protestant contends that the manufacturer’s profit is consistent with the firm’s overall profit realized over a representative period of time.
The Agreements
Three agreements are relevant to the matter in question: a sales and distribution agreement between the middleman and the protestant; a supply agreement between the manufacturer and the middleman; and a service agreement between the middleman and [XXXXXXXXXXXXXXXXXXXX] (hereinafter, “Holding”). The supply agreement, dated February 1, 2002, sets forth the terms of sale of the [XXXXXXXXXX] between the manufacturer and the middleman. Under section 4.3, the manufacturer agrees to sell merchandise ex works in the country of production, with the middleman taking title and assuming the risk of ownership when the goods are delivered to the carrier at the manufacturer’s premises. In addition, section 3.1 of the supply agreement provides that the manufacturer is the owner of the trademarks with respect to the particular products covered by the agreement. The supply agreement stipulates that the middleman is responsible for developing, maintaining and implementing the trademarked brand, brand positioning and brand strategy. Based on information on the U.S. Patent and Trademark Office web site, the manufacturer owns the [XXXXXXXXX] trademark in the United States and elsewhere.
Pursuant to the terms of the sales and distribution agreement, also dated February 1, 2002 (hereinafter, the “sales” agreement), the protestant is the exclusive distributor of certain [XXXXXXXXX] products in the United States and Mexico. Section 5.3 provides that the protestant will take title and assume the risk of ownership upon delivery by the middleman or the middleman’s agent to the vessel in the country of production. The protestant is responsible for paying all freight costs, insurance and customs duties.
Besides the sales and supply agreements, the middleman and Holding, a party related to the seller, entered into a service agreement, dated February 1, 2002, pursuant to which the middleman pays Holding a quarterly fee based on the cost of the services provided plus a markup of [XXX] percent. The fee is paid for services relating to the specific products covered by the supply agreement.
[The middleman] agrees to pay [Holding] a quarterly fee, which will be based on the actual costs incurred by [Holding] in the performance of the services, including a markup of [XXX]. The fee will also include disbursements and direct expenses incurred by [Holding] in connection with the provision of the specific services rendered. To these costs, no markup will be added.
Service Agreement, § 3.2. The services covered by the agreement are identified in Exhibit A thereto and consist of: marketing property; international customer relations; and marketing intelligence. The service agreement does not refer to either the sales agreement or the supply agreement. The protestant advises that “marketing property” refers to the registration and renewal of copyright and trademarks owned by the manufacturer, and the enforcement of intellectual property owned by the members of the Group.
ISSUE:
The issues presented are: (1) whether the price paid to the manufacturer by the middleman constitutes a sale for exportation to the United States such that it can be used for purposes of determining the transaction value of the imported merchandise; (2) whether the amount of the sugar restitution constitutes part of the total payment for the imported merchandise such that it forms part of the price actually paid or payable; and (3) whether the service fee is included in transaction value as part of the price actually paid or payable or as an addition thereto.
LAW AND ANALYSIS:
As a preliminary matter, we note that the protest and application for further review was timely filed under the statutory and regulatory provisions for protests (19 U.S.C. § 1514; 19 C.F.R. pt. 174). We also note that the issues raised are protestable (19 U.S.C. § 1514) and that the protestant qualifies as the importer of record for purposes of 19 U.S.C. § 1484.
Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; codified at 19 U.S.C. § 1401a). The primary method of appraisement under the TAA is transaction value, defined as the price actually paid or payable for the merchandise when sold for exportation to the United States, plus amounts in respect of certain statutorily enumerated additions thereto. 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). See Generra Sportswear Co. v. United States, 905 F.2d 377 (1990). Transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, an examination of the circumstances of sale indicates that the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain "test values." 19 U.S.C. § 1401a(b)(2)(B).
Sale for Exportation
In Nissho Iwai American Corp. v. United States, 786 F. Supp. 1002 (Ct. Int’l Trade 1992), rev’d in part, aff’d in part, 982 F.2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit reviewed the standard for determining transaction value when there is more than one sale that may be considered as being a sale for exportation to the United States. In so doing, the court reaffirmed the principle of E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that the manufacturer's price, rather than the middleman's price, is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. Nissho Iwai, 982 F.2d 505, 511. In reaffirming the McAfee standard the court stated that in a three-tiered distribution system:
The manufacturer's price constitutes a viable transaction value when the goods are clearly destined for export to the United States and when the manufacturer and the middleman deal with each other at arm's length, in the absence of any non-market influences that affect the legitimacy of the sales price . . . . [T]hat determination can only be made on a case-by-case basis.
Id. at 509. See also, United States v. Getz Bros. & Co., 55 C.C.P.A. 11 (1967), Synergy Sport International, Ltd. v. United States, 17 C.I.T. 18 (1993). In the particular circumstances of this case the evidence supports a finding that the merchandise was clearly destined for export to the United States. Moreover, based on the evidence submitted it is our position that the transaction between the manufacturer and the middleman constitutes a bona fide sale. See VWP of America, Inc., v. United States, 175 F.3d 1327, 1339 (Fed. Cir. 1999), citing J.L. Wood v. United States, 505 F.2d 1400, 1406 (C.C.P.A. 1974) (the term "sale" means the transfer of title from one party to another for a consideration).
However, the manufacturer and the middleman are related parties. Thus, in order for the manufacturer-middleman price to be acceptable for purposes of transaction value, the evidence must also support a finding that the manufacturer and the middleman dealt with each other at arm's length, absent any non-market influences affecting the legitimacy of the sales price. As noted above, this can be established under the test value method or the circumstances of sale method. The record does not indicate that any test values, i.e., no previously accepted customs values, are available; consequently, the circumstances of sale approach must be employed in order to determine whether the relationship influenced the price actually paid or payable. Under this approach, if it can be shown that the circumstances of sale indicate that while related, the parties buy and sell from one another as if they were unrelated, transaction value will be deemed to be acceptable. In this respect, CBP will examine the manner in which the buyer and seller organize their commercial relations and the way in which the price in question was derived in order to determine whether the relationship influenced the price. If it can be shown that the price was settled in a manner consistent with the normal pricing practices of the industry in question, or with the way in which the seller settles prices with unrelated buyers, this will demonstrate that the price was not influenced by the relationship. 19 C.F.R. § 152.103(l)(1)(i)-(ii). In addition, CBP will consider the price not to have been influenced if it was adequate to ensure recovery of all costs plus a profit equivalent to the buyer's overall profit realized over a representative period of time. 19 C.F.R. § 152.103(l)(1)(iii).
In this case, we note that the manufacturer’s full cost markup falls within the range earned by similarly situated companies in the industry and is above the median. In this regard, the information submitted supports a finding that the price was settled in a manner consistent with the normal pricing practices of the [XXXXXXXXXXX] industry. Although the data submitted indicates that the consolidated return for the Group is higher than the manufacturer’s markup, the middleman bears greater risk in the transaction. In light of and adjusting for the additional risk borne by the middleman in the particular circumstances of this case, we find that the information submitted supports a finding that the price was adequate to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit realized over a representative period of time.
Restitution Allowance
The restitution allowance consists of an adjustment to the manufacturer’s standard costs in order to adjust for a cost element that does not apply with respect to merchandise manufactured for export from the European Union (EU), viz., the cost of sugar price supports charged in accordance with the EU’s Common Agricultural Policy (CAP). For products sold within the EU, the sugar levies are fully absorbed in the manufacturer’s standard costing model and, where the products are sold in the EU, integrated into the manufacturer’s production cost. However, for products sold for export the manufacturer receives a restitution of these costs in accordance with the CAP’s export subsidy regime. Initially, the cost of the CAP levy is included in the manufacturer’s standard cost. In order to correct for this, the transfer pricing formula adjusts the standard costs values to deduct the amount of the sugar restitution received under the CAP. Thus, the CAP levy costs are not actually incurred by the manufacturer in respect of sales ex-EU and in this regard the intercompany price paid by the middleman reflects the standard cost of product manufactured for export from the EU. Accordingly, it is our position that the restitution payment is not part of “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)(A).
Service Fee
Under the terms of the service agreement, the middleman pays Holding a fee based on the actual costs, plus a markup, incurred by Holding in respect of services related to branded products sold by the manufacturer and imported by the protestant. The work performed includes services related to marketing property, international customer relations and marketing intelligence. The marketing property services relate to the registration and renewal of intellectual property rights owned by the Group, including trademarks, and in the enforcement of such rights. The manufacturer owns trademarks affixed to the products covered by the sales and supply agreements. The trademarks are specifically referenced in exhibits A and C to the sales agreement, and exhibit A to the supply agreement. All three agreements are dated the same day. Inasmuch as the fee is paid by the middleman-buyer to the manufacturer’s parent company in respect of services for rights owned by the middleman, it is our position that the service fee, to the extent that relates to the marketing services, constitutes part of the price actually paid or payable for the merchandise.
HOLDING:
In conformity with the foregoing, the protest is allowed in part and denied in part. The imported merchandise may be appraised under the transaction value method based on the sale between the manufacturer and the middleman. The amount of the sugar restitution is not included in the price actually paid or payable for the imported merchandise. The portion of the service fee that relates to marketing services, apportioned in accordance with generally accepted accounting principles, is included in the price actually paid or payable.
In accordance with Protest/Petition Processing Handbook (HB 3500-08A, Dec. 2007), you are to mail this decision, together with CBP Form 19, to the protestant no later than sixty days from the date of this letter. Any reliquidation of the entry in accordance with this decision must be accomplished prior to the mailing of the decision. Sixty days from the date of this letter, the decision will be made available to CBP personnel and to the public via the CBP Home Page at www.cbp.gov, by means of the Freedom of Information Act, and by other methods of public distribution.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch