Internal Advice Request; Transaction Value; Related Parties; 19 U.S.C. § 1401a(b)

HQ H008101 October 9, 2012 OT:RR:CTF:VS H008101 CMR CATEGORY: Valuation U.S. Customs and Border Protection Port of Blaine 9901 Pacific HighwayBlaine, WA 98230 Attn: Fines, Penalties and Forfeitures Office RE: Internal Advice Request; Transaction Value; Related Parties; 19 U.S.C. § 1401a(b) Dear Port Director: This decision is in response to a memorandum from the Fines, Penalties and Forfeitures Office at your port requesting guidance as to the proper appraisement method for entries of an importer from its parent for the period May 1994 through April 1999. You forwarded to us information submitted by current counsel for the importer, along with documents submitted by the importer’s previous counsel. Counsel has requested confidential treatment for certain information contained in the file, including the identities of the parties. We will extend confidential treatment to information determined to be privileged or confidential commercial or financial information in accordance with 19 C.F.R. 177.2(b)(7). In addition, we will withhold the names of the parties involved in this matter and any information which may reveal their identities. Information for which confidentiality is being accorded will be denoted in brackets in the confidential internal advice response and will be redacted in any public version. FACTS: The importer was the subject of an “Assist Audit Report,” number 831-04-AT1-AU-18625, dated June 14, 2005. In this case, your port believes the importer acted as a selling agent of its related parent. By contrast, counsel for the importer argues that there was a sale between the parent and the importer and that transaction value applies. The following has been submitted for our review: A copy of one service and supply contract between the importer and a U.S. customer; a “General Service and Cost Contribution Agreement” between the parent and its worldwide subsidiaries, effective January 1, 2001; a contract regarding the “General Conditions of Sale” with respect to sales between the parent and the importer (subsidiary), effective January 1, 2004; the [Group] “Account Sales Manual”, 1992; the “Local Operation Manual”, 1994; and, the 1990 Revised [Receipt] Manual for the [Group] Group. No agreement between the parent and the importer has been produced which was in force during the time of the entries at issue. In addition, this office has reviewed a “Request for Advance Pricing Agreement and Customs Valuation Ruling,” dated January 2005, and a draft of the request dated July 23, 2004. It is our understanding from the port that an Advanced Pricing Agreement was never pursued with the Internal Revenue Service. Additionally, while a summary statement of a transfer pricing study by an accounting firm hired by the importer was submitted, the transfer pricing study itself was not submitted to the port. Our office received a 1994 Study of Intercompany Pricing, prepared by an outside accounting firm for the year ending December 31, 1994. In addition, we received copies of a “[Subsidiary] Transfer Pricing Updated for Fiscal Years Ended December 31, 1995 and December 31, 1996”, “[Parent, Subsidiary] Analysis of Intercompany Transactions, December 1998, and “[Subsidiary] Transfer Pricing Updated for Fiscal Year Ended December 31, 1998”, performed by the same accounting firm. The companies The parent company had a global network of distributors. In 2005, the parent company was bought by another company. Counsel’s submission of January 6, 2006, explains that during the period May 1994 through April 1999 (the relevant time for the entries at issue) the distributors consisted of three types of companies: (1) separately incorporated trading companies such as the U.S. importer (subsidiaries wholly-owned by the parent) who bought and sold products and services in their own name and owned inventory, (2) unincorporated branch offices or wholly-owned subsidiaries that operated on a commission basis by providing services on behalf of the parent, and (3) independent service providers who were fee-based service agents that did not own any inventory and only sold for the account of the parent company. Although there was no written contract during the time period at issue, we did receive the “General Service and Cost Contribution Agreement for the [Parent] Group,” effective January 1, 2001, which defines the “Subsidiaries of [the Parent] and states in relevant part: . . . The Subsidiaries acting as trading companies (agents/distributors) as well as [the Parent] are hereinafter referred to as “Trading Companies”. The Subsidiaries acting as commissioners (commission agents) operating on a percentage commission are hereinafter referred to as “Commission Companies”. The Subsidiaries acting as commissioners (commission agents) operating on a cost plus basis are hereinafter referred to as “Cost + Commission Companies”. (Bold added.) The definition of subsidiaries provided in the “General Service and Cost Contribution Agreement for the [Parent] Group” is consistent with the definitions provided by counsel in their May 3, 2006 submission of the types of entities in the [Parent’s] worldwide network during the 1990s, i.e. trading companies, commission companies, and independent service providers. See February 6, 2006, submission by counsel at pages 1-2; See also September 5, 2012 submission by counsel at pages 1-2. The “General Conditions of Sale in respect of internal sales between [the Parent] and [the subsidiary]” (hereinafter, “General Conditions of Sale”) states: These general conditions of sales (the “General Conditions”) in respect of internal sales between [the Parent, the related chemical manufacturer, and the subsidiary] are effective as of January 1, 2004. The General Conditions are the same as used for internal sales between all entities within [the Parent] Group worldwide. The agreement further states that “[t]he specific terms of each sale shall be set out in a purchase order, which, after the receiver has accepted it, forms an agreement between the relevant parties. These General Conditions shall form an integrated part of such agreement.” Further in regard to delivery terms, the agreement states: Delivery Terms according to agreement between ordering and delivering site (EXW, FOB, FCA etc.). In the absence of a specific agreement to the contrary, the Delivery Term will be FCA (sellers warehouse) (Incoterms 2000) for all intercompany transactions. With regard to payments terms and prices, the agreement provides, respectively: All payments will be netted against the receivables at the end of each month, and the balance settled. The prices agreed between the seller and the purchaser shall be fixed for each calendar year. In case of considerable changes in the Sellers purchase prices the parties may agree in an amendment in prices agreed. Price corrections may also happen in situations where the seller has made miscalculations. The payment process during the time frame at issue has been described as a settlement of intercompany accounts on a monthly basis which is consistent with the description in the agreement. Further, “[p]ricing terms between [the Parent] and [the Subsidiary] were established in the same manner under the 2004 Agreement as during the 1990’s.” And finally of relevance from this agreement, with regard to warranties, it provides: If a Customer (ship owner) should set forward claims in connection with the purchase of equipment, chemicals or gases towards the Purchaser, such claims shall be handled in accordance with the overall agreement between [the Parent] and the Customer. The Purchaser towards the customer should make no actions unless [the Parent] has accepted the actions. (Emphasis added.) “The 2004 Agreement did not change the manner in which warranty claims were handled within the [Parent’s Group] for trading companies, including [the Subsidiary].” However, we note that counsel submits that: U.S. customers purchased directly for (sic) [the Subsidiary], not [the Parent], and there was no contract between [the Parent] and the [Subsidiary’s] customer. The only possible “overall agreement” referenced in the General Conditions of Sale (2004) was the sales terms printed on the back side of the [Subsidiary’s] invoice. The transactions The importer imported various supplies and equipment used in the operation, maintenance and repair of seafaring vessels through various ports in the United States. “Approximately 95 percent of [its] imports from May 1994 through December 1999 were from related parties.” While [the Subsidiary] entered some goods purchased from unrelated parties, those entries are not at issue. In the case of goods shipped from [the Parent], the goods were usually shipped from [the Parent’s] distribution center. However, in the case of chemical shipments, the goods were shipped directly from the related manufacturer of the chemicals to U.S. branches of [the Subsidiary]. The chemical sales, however, were claimed to be between the manufacturer and [the Parent], and then from [the Parent] to [the Subsidiary]. In the case of shipments from related parties, identified as stock transfers, it is claimed that the sales were still sales between [the Parent] and [the Subsidiary], i.e., either the related party never held title to the goods and title remained with [the Parent] or the related party sold the goods back to [the Parent] who then sold the goods to [the Subsidiary]. [The Parent] also bought various goods which were used to supply, maintain and repair seafaring vessels from various unrelated manufacturers. A purchase scenario would start with [the Subsidiary] importing merchandise from [the Parent] or another related party either in response to a purchase order from a customer or to replenish its inventory of certain stock items. The purchase order originated from a customer of [the Subsidiary] or from a customer of another related subsidiary of [the Parent]. In cases of the latter, it is our understanding that the customer placed the order with the subsidiary with whom it contracted for products and services and the order was transmitted to the subsidiary responsible for sales and deliveries at the port where the vessel in need of merchandise was or would be docked. These were account sales. [The Subsidiary] basically made two types of sales to customers – account sales based on account sales agreements and port sales (one-off). [The Subsidiary’s] customers in the U.S. consisted largely of vessels docked at U.S. ports. The ship owners of these vessels could be from anywhere in the world and the ships, likewise, could be of foreign registry. Counsel has indicated that all [of the Subsidiary’s] related party purchases were placed in a [Subsidiary] warehouse. “The product may have been sent from the warehouse to the vessel almost immediately after it arrived at the warehouse, or it may have remained in the warehouse for months to fulfill a purchase order not yet received.” It is submitted that goods were shipped from [the Parent] to [the Subsidiary] on a cost, insurance, freight (CIF) basis. [The Parent] paid the freight costs and insurance for the goods during transport; however, [the Subsidiary] assumed risk of loss at the time the goods were placed on board the vessel at the port of departure. It is also submitted that [the Subsidiary] took title to the goods at the same time it assumed risk of loss. Five pro forma invoices from [the Parent’s] distribution center to one of [the Subsidiary’s] branches reflect terms of delivery as CIF. The remaining invoices in the file, pro forma and commercial invoices, for shipments from [the Parent] to [the Subsidiary] or from a related party to [the Subsidiary] do not reflect any terms of delivery on the face of the documents. Documents for approximately 83 entries were reviewed, in addition to 8 sample transactions submitted by counsel of goods shipped from [the Parent] or the related chemical manufacturer to [the Subsidiary]. The commercial invoices sent by [the Parent], or in the case of stock transfers, [Parent] branch offices, to [the Subsidiary], contain terms on the back side of the invoices indicating that title does not pass until payment is received. The language on the back of the commercial invoices states, in relevant part: All contracts for sales and deliveries (including any offers thereto) by [the parent] or its subsidiaries and/or authorized distributors – hereinafter [“Group”] – are made with the customers concerned on the conditions, mentioned underneath, and where appropriate, understood to be concluded with the registered owners of the vessel(s) to which the sale and deliveries are related. CONDITIONS OF SALE 1. Price and payment The purchase price for the goods supplied shall be in accordance with the price list current at the time and place of delivery. The purchase price shall be paid in full free of bank charges by the Customer to [Group] at the latest within 30 days after invoice date. The Customer shall pay interest of 2.0% per month on all balances overdue. * * * 3. Title to the goods. Title to the goods purchased shall only pass to the customer upon receipt by [Group] of the purchase-price thereof and provided [Group] has also received from the customer payment on all invoices, due in relation to other goods purchased or services rendered or deliveries made, in all cases including interest and costs where applicable. Prior to the time of said receipt the title to the goods shall remain with [Group]. In the event that payment is not received by [Group] within the 30 days stated in clause 1 above [Group] shall have the right to take repossession of the goods wherever they may be found without any court order or other process of law. * * * * In addition, this same language appears on the back of the [Group] Receipt Note, also known as a “[Receipt]”, which is issued whenever a delivery/sale is made by [the Parent or a Group entity]. Further, it is submitted that [the Subsidiary] delivered goods to its customers under delivery terms of “free along side” (FAS) the vessel and the customer loaded the goods onto the vessel at his own risk. The same invoice form used in the transactions between [the Parent] (or other related parties) and [the Subsidiary] were used by [the Subsidiary] in its transactions with its customers. With regard to delivery, the terms on the back side of the invoices indicate that: [I]n several major ports deliveries over [a certain price range] . . . will be made free of charge (list of ports available from [Group]). For deliveries less than [that certain price range] a transport fee of [during the time frame at issue from approximately X to Y] or its equivalent in other currencies will be charged. In all ports barge, boat and crane hire as well as overtime and waiting time more than 30 minutes will be charged at cost. In ports not listed with free delivery . . . all deliveries will be made ex warehouse unless otherwise stated in [Group] order confirmation. For deliveries agreed other than ex warehouse the Customer shall reimburse [Group] all transportation and handling costs from the warehouse to such other agreed place of delivery. When delivery is agreed to take place alongside a vessel the loading of the goods shall be performed by the Customer at his own cost and risk. Counsel states that [the Subsidiary] had the authority to modify the standard Terms and Conditions printed on the [Group] invoices and did so frequently in making sales to customers for delivery at U.S. ports. To support this claim, counsel submitted a copy of a 1996 [Subsidiary] proposal to a foreign corporation customer (with offices in California) for worldwide account based sales as an example of an account sale, but was unable to locate a copy of the final agreement. The proposal states with regard to delivery: Free delivery (F.A.S.) will be made in specific ports as per [Group’s] standard terms and conditions. This comports with the terms on the [Group] invoices which allows for agreement to have goods delivered FAS. But it also states: Delivery (FAS) is free in [Group] Branch ports as specified in [Group’s] standard terms and conditions. (Bold added.) With regard to prices, the sample proposal states: Prices will be as per the attached discount schedule and [Group] price list [(QAM 3-9-8)] valid at the date of delivery in [Group] ports worldwide, except for supplies in designated Key Ports, which will be subject to the net prices listed within this document . . . . A copy of a Service and Supply Contract, effective in 2003, between [the Subsidiary] and the same foreign corporation customer, identified by counsel as an extension agreement, was provided. The 2003 Service and Supply contract states: Shipment terms and prices for Goods shall be FOB BUYER’S designated facility. Title, risk of loss and responsibility to insure the Goods shall pass from SELLER to BUYER, as applicable, at such delivery points. Based on the 2003 contract, delivery points included the following locations outside the United States: Vancouver, San Pedro, Tahiti, Southhampton, Hamburg, Athens, Piraeus, Barcelona, Singapore, Sydney, Barbados, Las Palmos, Naples and Copenhagen. A draft of the “Request for Advance Pricing Agreement and Customs Valuation Ruling,” dated “As of July 23, 2004” contains the statement: “All discounted contracts require [the Parent’s] approval to ensure global consistency.” Counsel states the statement was removed from the final APA request, dated January 2005, because it was misleading. Counsel asserts: [The Parent] reviewed the discounts and special terms in proposed account sales agreements to ensure protection of the interests of each subsidiary and branch that would be called upon to make sales and deliveries under the terms of the world-wide account agreements. . . .The parent company, [ ] was responsible for worldwide corporate governance. In that role, [the Parent] routinely reviewed the terms of every proposed account sales agreement negotiated by its subsidiaries to ensure that the proposal protected the interests of each subsidiary and branch office that would be called upon to make sales and deliveries under the terms of the agreement.,  Copies of the “Account Sales Manual”, 1992, the “Local Operation Manual”, 1994, and the [Group] Annual Reports were also reviewed. With regard to account sales and discounts, we note that the “Account Sales Manual” stated: The following forms, 7-2.13 [“Suggestion for Approval of Improved Terms Compulsory for all Changes in Contracts”] and 7-2.14 [“Customer Discount Registration Form”] are compulsory forms which must be used for all changes of terms and the approval form must, with a copy of your suggested quotation letter and the customer profile form, be sent to [city A in country where Parent located] prior to presentation to your customer. The office where the customers [sic] headquarter is situated always conducted the terms in cases of multinational customers. Bonus must be filled in on credit [Receipt] charge to 470, 471 or 472 as in accordance with instructions sent annually. The [Receipt] is sent to [General Manager Sales, [city B in country where Parent located]] for approval (signed by local G.M.) and subsequent processing of credit note which will be sent via the account office. Counsel states that this does not evidence control by [the Parent] of the transactions, but rather that review and approval by [the Parent] of the discount approval form, which included a copy of the proposed quotation letter, “prior to presentation to the prospective customer . . . is consistent with [the Parent’s] responsibilities over world-wide operations.” Counsel submits that “[the Parent] set the