Bona Fide Sale For Export; Related Party Transaction; Transfer Pricing Study; Nissho Iwai American Corporation v. United States Dear Ms. Haage: This is in response to a letter of March 1, 2000 submitted by PriceWaterhouseCoopers (PWC) on behalf of Vol

HQ 547672 May 21, 2002 RR:IT:VA 547672 LR CATEGORY: Valuation Kathleen M Haage Area Director New York/Newark U.S. Customs Service 1210 Corbin Street Elizabeth, N.J. 07210 RE: Bona Fide Sale For Export; Related Party Transaction; Transfer Pricing Study; Nissho Iwai American Corporation v. United States Dear Ms. Haage: This is in response to a letter of March 1, 2000 submitted by PriceWaterhouseCoopers (PWC) on behalf of Volvo Cars of North America (VCNA) regarding the appraisement of imported vehicles (Model V/S 70). Specifically, PWC requests appraisement of the imported vehicles based on the alleged sale between Volvo Car Corporation (VCC) and Volvo Cars Europe Industry NV (VCEI). Although the request was for a prospective ruling pursuant to 19 CFR §177.2, there are now current importations of the described merchandise in Newark, Los Angeles, Baltimore and Jacksonville. Accordingly, this request is being treated as a request for internal advice. With the assistance of VCNA's Account Manager, we have been in contact with each of these ports and informed them of the pending request. We have received some comments from Newark and Los Angeles regarding this matter. According to PWC, although VCNA considers that appraisement should be based on the VCEI-VCC transaction, the imported vehicles at issue are being entered based on the transaction between VCNA and VCC. In many instances, liquidation has been suspended pending this decision. Where liquidation has not been suspended, VCNA has filed protests. In concert with our office, the ports decided that action on the protests would be withheld pending this decision. On August 22, 2001, a meeting was held with representatives of PWC, VCC and VCNA's parent company, Ford Motor Company. In response to issues raised during the meeting, additional information was submitted by PWC in a letter dated October 23, 2001 and by Ford, in a letter dated December 19, 2001. This decision takes into account all the information submitted on behalf of VCNA along with comments received from the ports. Confidential treatment has been requested by VCNA for certain information in its submission on the grounds that these materials contain confidential business information. This request has been granted. Therefore, the confidential information included in this ruling is bracketed and will be deleted from the published version. FACTS: This case involves the importation of Volvo vehicles (Model V/S70) pursuant to a multi-tiered transaction between three related companies, Volvo Cars of North America (VCNA), Volvo Car Corporation (VCC) and Volvo Cars Europe Industry NV (VCEI). Relationship of the Parties According to PWC, from March 1, 2000 to the present, VCNA and VCC are wholly owned subsidiaries of Ford Motor Company and VCEI is a wholly owned subsidiary of VCC. Roles of the Parties VCNA is the U.S. importer and American distributor of finished automotive vehicles. PWC states that VCNA is responsible for placing vehicle orders with VCC based on projected dealer forecasts; for purchasing and importing the finished vehicles from VCC; and distributing said vehicles in the United States. VCC is a distinct legal Swedish entity, primarily responsible for all product and market strategy efforts. PWC states that with respect to the imported vehicles at issue, VCC is responsible for coordinating the orders placed by sales subsidiaries and distributors worldwide (e.g. VCNA) and for the corresponding purchase of the vehicles from VCEI for resale to the distributors (e.g., it orders, pays for, and holds legal title to the finished vehicles prior to their resale to VCNA). With respect to the imported vehicles, it is claimed that VCC's responsibilities include: research and development, design and technology; provision of technical advice to manufacturer and suppliers; coordinating production schedules based on vehicle orders; setting quality standards; developing delivery specifications; holding inventory stock of finished vehicles on its books until sold for worldwide distribution; bearing most of the financial risk, including credit risk, changes in price, foreign exchange fluctuations, warranty claims and inventory obsolescence; marketing and advertising PWC states that VCEI is an independent legal entity authorized under the laws of Belgium. PWC indicates that with respect to imported merchandise, VCEI operates as a contract manufacturer, producing finished vehicles in accordance with the designs and know-how provided by VCC. Specifically, PWC claims that VCEI is responsible for the following functions with respect to the production of the vehicles: local control of costs and financial needs; ownership and maintenance of production tools and equipment; purchasing of raw materials and components required to assemble the cars flow and maintenance of materials and components stock necessary for an efficient manufacturing process; implementation and enforcement of VCC derived quality control procedures and standards; packing and labeling the finished vehicle, in a condition ready for export to the U.S.; coordinating shipment of the finished goods to the U.S. ordering, installing maintenance and repair of the machinery and equipment used to produce the vehicles. It is claimed that VCEI possesses title to the merchandise, from components to the finished goods state (i.e., the point at which the vehicle is designated as "factory complete" during the production process). PWC describes in detail the ordering process, the flow of goods and invoicing and payment process as follows: The Ordering Process All orders for finished vehicles are placed by the respective parties on a centralized electronic system developed and maintained by VCC known as the Order Management System (OMS). VCNA places its order for vehicles electronically under OMS Market code 31, which signifies that the vehicle is manufactured for the U.S. market. Once the order is electronically input into the system, it is assigned a retail order number and variant code. The OMS confirms acceptance of the order by assigning a corresponding Factory Order Number to the retail order. VCC does not physically re-issue paper orders to VCEI for the orders placed by VCNA. Instead, it maintains the OMS, which processes VCNA's order information into a production order, and transmits it directly to VCEI's plant. PWC states that VCC ensures that the orders received do not exceed VCEI's production capacity and, if necessary, VCC delays or cancels the initial order. Upon receipt of an order by VCEI, VCEI provides an order confirmation and status updates to VCC, via OMS, throughout the assembly process up until the point where the vehicle is loaded on the vessel for exportation. After the order is received by VCEI, the vehicle is then assembled and a Vehicle Identification Number (VIN) is assigned. Flow of Goods and Invoicing Once the vehicle is assembled a Factory Complete Signal (FC) is reported by VCEI on the OMS. The FC signal causes the vehicle to be invoiced to VCC in the Order Price System (OPS). Subsequently, VCEI delivers the vehicle to the port of exportation at Antwerpen, Belgium, for shipment to the U.S. It is claimed that ownership is transferred from VCEI to VCC when the FC is reported from VCEI on the OMS. Once the vehicle is loaded on the vessel, VCC's Financial Department initiates the electronic invoice to VCNA. The invoice request is then sent from OMS to the OPS, which decides per country the specific content and layout for the invoice. Payment Process VCC processes the invoices it receives from VCEI through the use of an on-line netting process whereby a "Netting System Report" consolidates the invoices payable to VCEI, by VCC, during the particular period in question. When payment becomes due, the invoice payables are netted against the invoice receivables from VCEI, and the difference is then cleared on-line. Payment is made by VCC though a Swedish bank. VCNA uses the same on-line netting process to pay VCC. When payment becomes due, the invoice payables are netting against the invoice receivables from VCC, and the difference is the cleared-on-line. Payment is made by VCNA though a U.S. bank. PWC submitted a complete paper trail pertaining to a representative VCEI-VCC and VCC-VCNA transaction. These documents are described on pages 24-26 of PWC's March 1, 2000 submission. In addition, a work study report which includes a flow chart of the process described above and a description of the ordering and billing process, was submitted. PWC also provided a Car Assembly Agreement (Agreement) between VCEI and VCC which pertains to VCC's purchase of vehicles from VCEI. The Agreement describes in detail the obligations of VCEI and VCC, remuneration, and payment terms. Finally, PWC submitted a Transfer Pricing Industry Comparability Report (Transfer Pricing Report) which it uses to support its claim that the alleged VCEI-VCC sale is an arm's length sale. PWC claims that the totality of the facts reveal that bona fide sales occurred between VCEI and VCC; and, that this sale is an arm's length sale involving goods clearly destined for exportation to the U.S. Therefore, PWC claims that in accordance with the Nissho-Iwai decision, transaction value must be based on this sale. ISSUE: Whether the evidence presented is sufficient to establish that transaction value of the imported vehicles should be based on the alleged sale between VCEI and VCC. LAW AND ANALYSIS: 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)(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 transaction value it must be the subject of a bona fide sale between the buyer and seller and it must be a sale for exportation to the United States. In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed Cir. 1992) the Court of Appeals for the Federal Circuit addressed the method for determining transaction value in a three-tiered distribution system involving a middleman. The Court indicated that a manufacturer's price for establishing transaction value is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. In this regard, 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 influence that affect the legitimacy of the sale price. Id. at 509. See also, Synergy Sport International, Ltd. v. United States, 17 C.I.T. 18 (1993) . In T.D. 96-87, Determining Transaction Value in Multi-Tiered Transactions, Cust. Bull 52/1, January 2, 1997, Customs clarified some of the issues that arise in multi-tiered transactions in determining which is the sale for exportation to the United States for the purposes of determining transaction value. Specifically, T.D. 96-87 states that: in fixing the appraisement of imported merchandise, Customs presumes that the price paid by the importer is the basis of transaction value and the burden is on the importer to rebut this presumption. In order to rebut this presumption, . . . the importer must prove that at the time the middleman purchased, or contracted to purchase, the goods were 'clearly destined for export to the United States' and the manufacturer (or other seller) and middleman dealt with each other at 'arm's length.' In reaching a decision, Customs must ascertain whether the transaction in question falls within the statutory provision for valuation, i.e., that it is a sale, that it is a sale for exportation to the United States . . . , and that the parties dealt with each other at 'arm's length'. T.D. 96-87 also sets forth the documentation and information needed to support a ruling request that transaction value should be based on a sale involving a middleman and the manufacturer or other seller than on the sale in which the importer is a party. First, a complete paper trail of the imported merchandise showing the structure of the entire transaction must be provided. Second, if the parties to the requested transaction are related, the importer must provide Customs with information which demonstrates that transaction value may be based on the related party sale as provided in 19 U.S.C. 1401a(b)(2)(B) (i.e., that the circumstances of sale indicate that the relationship did not influence the price or that the transaction value closely approximates certain test values). Finally, sufficient information must be provided with regard to the statutory additions set forth in 19 U.S.C. 1401a(b)(1) (i.e., packing costs, selling commissions, assists, royalty or license fees, and proceeds of any subsequent sale). In this case, the presumption is that transaction value is based on the price the importer, VCNA, pays to VCC. In order to rebut this presumption, and to base transaction on the price VCC pays to VCEI, there must be sufficient evidence which shows: 1) that the VCEI-VCC transaction is a bona fide sale; 2) if so, that the imported vehicles were clearly destined for exportation to the United States when VCC purchased or contracted to purchase the vehicles from VCEI; 3) if so, that the sale between VCC and VCEI is an arm's length sale; and 4) the amounts to be added to the price actually paid or payable for assists, royalties, etc. Bona Fide Sale The term “sale,” as articulated in the case of J.L. Wood v. U.S., 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974), is defined as the transfer of property from one party to another for consideration. However, in considering 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 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 case itself. Dorf International, Inc. v. United States, 61 Cust. Ct. 604, A.R.D. 245 (1968). Several factors may indicate whether a bona fide sale exists between a potential buyer and seller. In determining whether property or ownership has been transferred, Customs considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, Customs 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. Based on the information provided, we conclude that the VCEI-VCC transaction constitutes a bona fide sale. First, the submitted Car Assembly Agreement between VCEI and VCC xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx] A detailed agreement such as this which specifies the roles of the parties must be given substantial weight. Second, as evidenced by the document trail, the parties carry out the intent of the Car Assembly Agreement. The submitted documentation demonstrates that VCC orders the vehicles from VCEI and pays VCEI for the imported vehicles. In addition, evidence was submitted which shows that after the vehicle is complete, it is placed on VCC's inventory records until delivery to VCNA. This is consistent with the claim that title transfers to VCC. Although there was some question regarding the applicable terms of sale relating to the VCC-VCVEI transaction, based on the explanation provided by PWC in its March 1, 2000, and further clarified in its October 23, 2001 submission, we are satisfied that VCC acquires title to the vehicles. Based on the totality of the evidence, we find that the described VCC-VCEI transactions constitute bona fide sales. Clearly Destined The next question to be addressed is whether the imported vehicles are clearly destined for exportation to the United States when VCC purchases them from VCEI. We find that they are. In this case, a complete paper trail pertaining to both the VCNA-VCC and the VCC-VCEI transactions was submitted as required by T.D. 96-87. The submitted documentation indicates that the imported vehicles are destined for exportation to the U.S. throughout the ordering process. As explained by PWC, the process begins with VCNA ordering vehicles which are intended only for distribution to U.S. dealers. Prior to production by VCEI, each vehicle is designated by a manufacturing/market code that specifies the end market in which the vehicle is to be sold. MC 31 is applied to vehicles produced and labeled for the U.S. market. According to PWC, MC 31 vehicles are only sold for export to the United States. In particular, MC 31 vehicles are designed to meet the U.S. Department of Transportation and U.S. Environmental Protection Agency standards and other relevant requirements for the U.S. market (e.g., left-hand steering). PWC claims that only VCNA's dealers can order vehicles produced under MC 31. The MC 31 designation is readily apparent within Volvo's Order Management System (OMS) and appears on all corresponding invoices. The document trail also shows that the imported vehicles are custom manufactured by VCEI in accordance with the specifications indicated by VCNA when its order is placed. In addition, the vehicles are transported by truck from VCEI's factory to the port of exportation where they are shipped directly to VCNA. Based on the evidence presented, we conclude that throughout the process, the imported vehicles are clearly destined for exportation to the United States. Arm's Length The next and more difficult issue to be addressed is whether the VCEI-VCC sale is an arm's length sale which can serve as the basis for transaction value. Pursuant to 19 U.S.C. §1401(b)(2)(B), a transaction value between a related buyer and seller is acceptable if an examination of the circumstances of sale indicates that the relationship does not influence the price paid or payable. The statute also provides for another method of establishing the acceptability of a related party price (test value method), but no evidence was provided regarding this method. Therefore, our analysis is limited to the former. Under the circumstances of sale test, the transaction value between related parties will be considered acceptable if the parties buy and sell from one another as if they were unrelated. Customs examines the manner in which the buyer and seller organize their commercial relations and the way they derive a price to determine whether the relationship influenced the price. To meet the circumstances of sale test, VCEI may demonstrate that its transfer price has been settled in a manner consistent with the normal pricing practices of the industry in question. 19 CFR §152.103(l)(1)(ii). Alternatively, VCEI may demonstrate that its price is adequate to ensure recovery of al