Application for Further Review and Protest 4601-07-102332; denial of adjustments; Reconciliation entries

HQ H022287 December 30, 2010 VAL-2 OT:RR:CTF:VS H022287 CMR CATEGORY: Valuation U.S. Customs and Border Protection Port of New York/Newark 1100 Raymond BoulevardNewark, NJ 07102 RE: Application for Further Review and Protest 4601-07-102332; denial of adjustments; Reconciliation entries Dear Port Director: This is in response to an Application for Further Review of Protest 4601-07-102332, received by Customs and Border Protection (CBP) on November 21, 2005. The protest is against your port’s liquidation of certain reconciliation entries submitted by the importer (also the protestant), [Party A] (hereinafter, “the importer”). The protest was timely filed against your decision to liquidate the entries based on the original entered value and to reject any adjustments to value reflected in the reconciliation entries. The Application for Further Review was properly approved pursuant to 19 CFR §§ 174.24 and 174.25 as the protestant argues the port’s decision in this matter is inconsistent with previous rulings issued by Customs and Border Protection (CBP) Headquarters regarding the acceptability of transfer pricing between related parties and the significance of an Advanced Pricing Agreement (APA) in considering whether the parties’ relationship influenced the price. The rulings argued to be inconsistent with the port’s decision are not merely cited, but discussed in the memorandum in support of the protest and application for further review. Protestant has requested confidential treatment be extended to certain information presented in support of the protest. In response to a request from CBP to specifically identify the information for which confidentiality is sought and after meeting with CBP personnel to discuss the substantive issues in this protest, including the request for confidentiality of certain information, Protestant’s counsel has clarified and submitted justification for the extension of confidentiality for certain information contained herein. Therefore, CBP will extend confidential treatment to certain exhibits and information regarding the subject merchandise. With regard to the memorandums of November 18, 2005 and June 25, 2008, CBP will withhold any numeric information, such as percentages or values. Information contained in this decision that is to be redacted prior to release of a public version of this decision is identified by means of bracketing and underlining. Under the provisions of 31 CFR 1.6, if a Freedom of Information Act request is made for the Protestant’s submission, Protestant will be notified and given an opportunity to further justify the request for confidentiality with regard to specific information contained therein and, if appropriate, an opportunity to prevent disclosure of information through judicial action. FACTS: The entries at issue are reconciliation entries filed under the Customs and Border Protection (CBP) Automated Commercial System (ACS) Reconciliation Prototype Program. As explained on the CBP web site: “Reconciliation allows the importer, using reasonable care, to file entry summaries with CBP with the best available information, with the mutual understanding that certain elements, such as the declared value, remain outstanding. At a later date, when the specifics have been determined, the importer files a Reconciliation which provides the final and correct information. The Reconciliation is then liquidated, with a single bill or refund, as appropriate.” The importer purchases, among other things, [certain merchandise] from its parent, [Party B]. As the parties are related, they used transfer prices under transaction value as the method of appraisement for the imported merchandise. The importer flagged entries of merchandise for later reconciliation and then filed reconciliation entries to reconcile the value for the merchandise. During the time of the filing of the reconciliation entries at issue, the importer was in the process of negotiating a new Advance Pricing Agreement (APA) with the IRS to cover the taxable years ending December 31, 1999 through December 31, 2005. This APA covered the same goods purchased by the importer [certain merchandise] from its parent. The APA is a bilateral APA as the IRS and the [foreign] Tax Administration reached agreement on its implementation. The period of the APA includes the time during which the underlying entries subject to the reconciliation entries were filed. The transfer prices for the entries at issue were therefore subject to the APA between the importer and the Internal Revenue Service (IRS) for tax purposes. The subject protest involves four reconciliation entries involving multiple underlying entries. Counsel for the importer asserts that the adjustments to the transfer prices are required under the APA and that section 1059A of the Internal Revenue Code (IRC) requires the importer to apply the APA adjusted value for Customs purposes. Counsel submits that the downward adjustments to transaction value were the result of lump-sum payments required by the APA. If profit margins of the importer fell outside a specified range, counsel argues the APA required that funds be allocated as adjustments to the transfer pricing between the related companies. Counsel asserts that the parties meet the circumstances of the sale test to show the related party prices were not influenced by the relationship. However, the only evidence cited by counsel to support this assertion is the existence of the bilateral APA. Counsel cites to Headquarters Ruling Letter (HQ) 548482, dated July 23, 2004, to argue that his client “is entitled to rely upon the APA valuation of its products for establishing the appropriate transaction value.” See Protest Addendum and Memorandum in Support of Application for Further Review, dated November 18, 2005. Counsel also cites to HQ 546979, dated August 30, 2000; and HQ 548233, dated November 7, 2003, for support. In addition, in supplemental arguments submitted in support of the protest, counsel argues that the APA constitutes a valid formula for purposes of transaction value appraisement under 19 U.S.C. § 1401a(b). Citing 19 CFR § 152.103(a)(1), which states: (a) Price actually paid or payable – (1) General. In determining transaction value, the price actually paid or payable will be considered without regard to its method of derivation. It may be the result of discounts, increases, or negotiations, or may be arrived at by the application of a formula, such as the price in effect on the date of export in the London Commodity market . . . [;] counsel argues that the importer’s APA adjustments meet the requirements to qualify as formula adjustments. He argues the agreement for post-entry adjustments is in writing, subject to objective contingencies outside of the importer’s control and made pursuant to a formula. Finally, counsel claims that his client has an established treatment of the valuation of its merchandise as CBP accepted and liquidated its reconciliation entries filed during the years 1999 through 2001 in which adjustments in value were made pursuant to its APA. During those years, the adjustments were generally upward adjustments resulting in the tender of additional customs duties. However, in support of the treatment claim, counsel submitted three CF-28s in which the port sought additional information regarding downward adjustments in reconciliation entries. In response to the CF-28s, the importer cited to the APA which was in the process of being finalized with the IRS as the basis for the adjustments in the reconciliation entries. All three reconciliation entries were liquidated with duty refunds issued. In addition, in his July 12, 2010, supplemental submission, counsel submits that the importer is entitled to treatment for entries during 2003 through 2005 based on the treatment established in the period 1999 through 2003. Further support for the treatment claim was submitted in the form of a spreadsheet identifying entries, the year (and quarter of that year) the entry was made, the products, dates of liquidation, the downward percentage change, whether CBP issued a CBP Form 28 seeking additional information, and the actual refund amount issued. The liquidations with refunds occurred between May 23, 2002 and December 5, 2003. The adjustments for the reconciliation entries at issue are downward adjustments which would result in the importer receiving duty refunds. Your port rejected the reconciliation entries and liquidated the entries as entered because of a failure on the part of the protestant to justify the downward adjustments. The line item spread sheets for two of the reconciliation entries were included in the information forwarded to this office for consideration of the protest. We note for many items that the value has been reduced down to zero. We note that in one of the reconciliation entries, we found goods classifiable in provisions clearly outside the scope of the APA. Specifically, under the Harmonized Tariff Schedule (HTS) column of the spread sheet we found listed subheading 4911.10.00, Harmonized Tariff Schedule of the United States (HTSUS), which in the 2003 HTSUS provided for “Other printed matter, including printed pictures and photographs: Trade advertising material, commercial catalogs and the like.” In reaching our decision in this matter, this office has considered the materials in the record reflecting the view of the port and the arguments submitted on behalf of the importer by counsel, including the Protest and counsel’s addendum in support of the protest and application for further review, dated November 18, 2005 (including a copy of the APA between the importer and the IRS); the Customs Protest and Summons Information Report, dated January 11, 2008; supplemental arguments submitted by counsel, dated June 25, 2008, and July 12, 2010; a Technical Assist Review Report, prepared by the Office of Regulatory Audit, dated March 30, 2007; and the discussion with counsel and his client during a meeting with CBP personnel on June 16, 2010 at our offices. ISSUE: Is the importer entitled to the downward adjustments as claimed under transaction value for the reconciliation entries at issue? Is the importer entitled to liquidation of the reconciliation entries as submitted to CBP under a claim of treatment? LAW AND ANALYSIS: 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 preferred 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 certain enumerated additions set forth in the statute. We note that in this case, the existence of a bona fide sale between the parties is not at issue and therefore we will not address it here. When the importer entered the subject merchandise, the entries were flagged for reconciliation on value. In filing the reconciliation entries, the importer seeks downward adjustments for the value of the entered merchandise. For numerous items, the importer seeks to adjust the value down to zero. Your port has questioned the validity of these adjustments. Circumstances of the sale test The reconciliation entries at issue involve related parties as defined in section 402(g) of the Tariff Act of 1930, as amended by the TAA, codified at 19 U.S.C. § 1401a. Under 19 U.S.C. § 1401a(b)(2)(A)(iv), transaction value is used for appraisement of imported merchandise “only if” the buyer and seller are unrelated, or if the buyer and seller are related, transaction value is acceptable under 19 U.S.C. § 1401a(b)(2)(B). Section 1401a(b)(2)(B) provides that transaction value is acceptable between related parties only if an examination of the circumstances of the sale indicates that the relationship did not influence the price or the price closely approximates certain test values, i.e., the price of identical or similar merchandise sold to unrelated buyers for export to the United States at or about the same time as the imported merchandise or the deductive value or computed value for identical or similar merchandise exported to the United States at or about the same time as the imported merchandise. The Statement of Administrative Action (SAA) for the TAA discussed the use of transaction value by related parties. It addressed the two methods, circumstances of the sale and test values, by which to determine whether transaction value between related parties would be acceptable. With regard to the circumstances of the sale, the SAA stated: . . . the Customs Service will examine relevant aspects of the transaction, including the way in which the buyer seller organize their commercial relations and the way in which the price in question was arrived at, . . . If it is shown that the buyer and seller, although related, buy and sell to each other as if they were not related, this will demonstrate that the price has not been influenced by the relationship and the transaction value will be accepted. The SAA goes on to offer three examples of how the parties may show their transaction is not influenced by the relationship. The examples are that the price is settled in a manner consistent with the normal pricing practices of the industry in question, or with the way the seller settles prices with unrelated buyers; or, the price is sufficient to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit over a representative period of time in sales of merchandise of the same class or kind. “Statement of Administrative Action,” H.R. Doc. No. 153, 96 Cong., 1st Sess., Pt II, at 449 (1979). These examples are repeated in the CBP Regulations at 19 CFR § 152.103(l). However, as recently stated by CBP in HQ H029658, dated December 8, 2009, “[t]hese are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well.” Counsel for the importer relies heavily on HQ 546979, dated August 30, 2000, and HQ 548233, dated November 7, 2003, in arguing that the bilateral APA is evidence that the parties meet the circumstances of the sale test. In these rulings, CBP allowed the use of transaction value between related parties who had bilateral APAs in which the transfer pricing methodology used in the APAs was the Comparable Profits Method (CPM). The importer’s APA transfer pricing methodology is the CPM. Counsel cites relevant excerpts from these rulings which support his argument regarding the significance of a bilateral APA. However, while acknowledging other factors were present in HQ 546979, counsel fails to recognize that the additional factors in that ruling and in HQ 548233 make those cases clearly distinguishable from the transactions under consideration. In HQ 546979, CBP stated with regard to the bilateral APA: While we agree that the Importer supplied a great deal of information to both taxing authorities, we do not agree that this should be sufficient for Customs to determine that the related party tests established in the TAA do not need to be applied. While the goal of both the TAA and section 482 of the Tax Code is to ensure that the transactions between related parties are at arm’s length, the method of making that determination is under a different law. CBP went on to acknowledge that “the information submitted to the IRS and the fact that there is a bilateral APA constitute valuable information in applying the circumstances of the sale test in 402(b)(2)(B)(1) of the TAA.” APAs look at profitability on an aggregate basis and CBP looks at entry transactions on a product by product basis. This difference alone makes reliance only upon a bilateral APA as a basis for meeting the circumstances of the sale test of 19 U.S.C. § 1401a(b)(2)(B) not possible. In HQ 546979 all of the importer’s imported products were covered by the APA. In addition to the existence of the bilateral APA covering all of the imported merchandise, CBP’s attendance at the APA prefiling conference and review of information submitted to the IRS, pursuant to a waiver from the company, allowed CBP the ability to review all relevant aspects of the transaction, including the way the related parties organized their commercial relations and arrived at a price for the imported merchandise. Due to the circumstances of the case and CBP’s ability to review relevant information, it was determined that more specific product by product information need not be submitted to CBP for an assessment of whether the profit earned by each product line fell within the agreed range specified in the APA, but CBP expected the importer to be able to provide such information in the future if requested to do so. In HQ 548233, all of the merchandise produced by the manufacturer for the importer was covered by the bilateral APA. As in HQ 546979, CBP was able to review information submitted to the IRS, pursuant to a waiver from the company, which allowed CBP to examine all relevant aspects of the transaction. Due to the coverage of all of the imported merchandise and the ability to review relevant information presented to the IRS with regard to the APA, CBP was able to determine that the related party price was not influenced by the relationship and the parties met the circumstances of the sale test. While counsel indicates his client is willing to provide CBP with a waiver to allow the agency access to documentation submitted to the IRS in the APA process, we note that this is a protest and it is incumbent upon the protestant to substantiate the values on their reconciled entries when they are questioned by the port. No other evidence has been submitted to support the claim that the parties meet the circumstances of the sale test for acceptance of transaction value between related parties. No contracts, distribution agreements or any other documentation has been submitted to show how the parties structure their commercial transactions or arrive at a price. In contrast, in a recent decision by this office involving transfer pricing between related parties, HQ H029658, dated December 8, 2009, the importer submitted various documents related to the transactions at issue including, purchase orders, commercial invoices, packing lists, freight invoices, shipping advices, bank advices of acceptance and debit advices reflecting payment, broker invoice, and a detailed description of the sales process and how the prices were set. In this case, Protestant appears to rely solely on the existence of its APA and that is simply insufficient. It is the responsibility of the protestant to identify the information submitted in support of the APA application which would be relevant to whether the parties meet the circumstances of the sale test. Only then can CBP determine whether a waiver so that we may review the IRS file is worthwhile. It is not CBP’s responsibility to search out relevant information in the IRS file to support protestant’s argument. Formula Further, we would also note with regard to HQ 546979 and HQ 548233, while each ruling alerted the importer that any compensating adjustments, whether upward or downward, needed to be immediately reported to CBP, the rulings only referenced the payment of any additional duties resulting from such adjustments. CBP has rejected the allowance of downward adjustments under transaction value because 19 U.S.C. § 1401a(b)(4)(B) provides that any rebate of, or other decrease in, the price actually paid or payable between the buyer and seller after the date of importation of the merchandise into the United States is to be disregarded in determining transaction value under 19 U.S.C. § 1401a(b)(1). See HQ 547612, dated December 27, 2001, citing HQ 547027, dated September 17, 1999; HQ 547273, dated April 22, 1999; and HQ 542797, dated May 18, 1982 as evidence of our position that retroactive downward price adjustments made after the importation of merchandise do not affect the transaction value of the merchandise. See also HQ 545618, dated August 23, 1996; HQ 545242, dated April 16, 1995; and, HQ H021424, dated February 3, 2009. While CBP has been considering the issue whether an APA or transfer pricing study may constitute a formula, such that downward adjustments may be considered, the protestant has failed to make an attempt to explain the circumstances of the sale, as noted above. Section 1059A In the supplemental submission of June 25, 2008, counsel proffered the argument that the importer’s downward price adjustments pursuant to the APA met the requirements for a formula permissible under transaction value pursuant to 19 CFR 152.103(a)(1). Counsel argues that the adjustments are objective because they are required by the APA in order to meet certain specified financial ratios. CBP has the authority to appraise merchandise under a formula using transaction value provided that the final sales price is determinable at a later date based on some future event or occurrence over which neither the buyer nor seller have any control. See HQ 545242, dated April 16, 1995, citing HQ 543089, dated June 20, 1984. In this case, it appears that the parties determined to devalue certain imported merchandise to a zero value in order to meet the adjustments required by the APA. With regard to counsel’s argument that section 1059A of the I.R.C. requires the importer to apply the APA adjusted value for CBP purposes and apply downward adjustments to the values of the merchandise subject to the reconciliation entries at issue, section 1059A provides, in relevant part: In general If any property is imported into the United States in a transaction (directly or indirectly) between related persons (within the meaning of section 482), the amount of any costs— (1) which are taken into account in computing the basis or inventory cost of such property by the purchaser, and (2) which are also taken into account in computing the customs value of such property, shall not, for purposes of computing such basis or inventory cost for purposes of this chapter, be greater than the amount of such costs taken into account in computing such customs value. Counsel states that “…Section 1059A of the IRC requires that a U.S. taxpayer treat the value of imported merchandise consistently for customs and tax purposes.” This infers that the value of imported merchandise must be the same for both customs appraisement purposes and tax purposes. This is simply not true. While CBP recognizes that adjustments may be made to the valuation of imported merchandise pursuant to adjustments made for tax purposes under an APA, the adjustments may not necessarily result in the same values for customs and tax purposes. Any adjustments to the value on imported merchandise for customs purposes must still meet the requirements or limitations of 19 U.S.C. § 1401a. The application of section 1059A and the existence of differing values for customs and tax purposes is made clear by § 1.1059A-1 of the IRS Regulations (26 CFR § 1.1059A-1). The basis or inventory cost is not the same as the customs value. For instance, in § 1.1059A-1(c)(2), a taxpayer is allowed to add to the customs value of imported merchandise for purposes of determining the limitation on claimed basis or inventory cost of property certain costs which are included in inventory cost, but which are not part of transaction value under 19 U.S.C. § 1401a(b), i.e., freight charges; insurance charges; construction, erection, assembly, or technical assistance provided after importation of the merchandise into the United States; and “[a]ny other amounts which are not taken into account in determining the customs value, which are not properly includible in customs value, and which are appropriately included in the cost basis or inventory cost for income tax purposes.” See § 1.1059A-1(c)(2)(iv). Furthermore, for purposes of calculating the limitation on claimed basis or inventory cost, adjustments to a customs value under § 1.1059A-1(c)(2) must be reduced “by amounts that properly reduce the cost basis of inventory and that are not taken into account in determining customs value,” such as post-importation rebates or other reductions. See § 1.1059A-1(c)(3). Section 1.1059A-1(c)(7) states in relevant part: “Neither does this section or section 1059A permit a taxpayer to adjust upward its cost basis or inventory cost for property appropriately determined under section 482 because such basis or inventory cost is less than the customs value with respect to such property.” Clearly, the customs value of merchandise may be greater than the basis or inventory cost of the same merchandise for tax purposes. Therefore, counsel’s argument that section 1059A requires the importer to make the downward adjustments in value in the reconciliation entries at issue falls short. No explanation has been provided with regard to how the prices are established or how the adjustments under section 482 justify the downward adjustments in the entries at issue. Nonetheless, where no profit is made for tax purposes and adjustments are claimed pursuant to the APA, we still fail to see how the items at issue may be valued down to zero, or conceivably at an amount less than zero (if full account of the APA were taken into account). Furthermore, we note that certain merchandise not within the scope of the APA is included in the reconciliation entries with downward adjustments. Specifically, merchandise of subheading 4911.10, HTSUS, “Other printed matter, . . .,” is not within the scope of the APA. In addition, merchandise classified in subheading 4911.10, HTSUS, is not subject to section 1059A as section 1059A does not apply to imported property which is not subject to any customs duty based on value. See § 1.1059A-1(c)(1). The protestant has failed to successfully explain the validity of the downward adjustments for the reconciliation entries at issue. Accordingly, we disagree with counsel that the protest should be granted. Treatment Nonetheless, counsel for the protestant also argues his client is entitled to treatment under 19 U.S.C. § 1625 because of prior liquidations of substantially identical transactions. If CBP determines that the importer has acquired treatment with regard to the use of transaction value with upward and downward adjustments in liquidations of reconciliation entries, then we must allow this protest. Under the provisions of 19 U.S.C. § 1625, treatment may be modified or revoked only after CBP provides public notice and allows for the submission of comments on the proposed action. With regard to treatment and the evidentiary requirements to substantiate a treatment claim, the CBP Regulations provide, in relevant part, at 19 CFR § 177.12(c)(1): (i) There must be evidence to establish that: (A) There was an actual determination by a Customs officer regarding the facts and issues involved in the claimed treatment; (B) The Customs officer making the actual determination was responsible for the subject matter on which the determination was made; and (C) Over a 2-year period immediately preceding the claim of treatment, Customs consistently applied that determination on a national basis as reflected in liquidations of entries or reconciliations or other Customs actions with respect to all or substantially all of that person's Customs transactions involving materially identical facts and issues[.] Determinations of whether a treatment occurred will be made by CBP on a case-by-case basis and will involve consideration of all relevant factors, including whether the past transactions were reviewed by CBP personnel. See 19 CFR § 177.12(c)(1)(ii). With regard to the evidence required for establishing a treatment, 19 CFR § 177.12(c)(1)(iv) provides: The evidentiary burden as regards the existence of the previous treatment is on the person claiming that treatment. The evidence of previous treatment by Customs must include a list of all materially identical transactions by entry number (or other Customs assigned number), the quantity and value of merchandise covered by each transaction (where applicable), the ports of entry, the dates of final action by Customs, and, if known, the name and location of the Customs officer who made the determination on which the claimed treatment is based. In addition, in cases in which an entry is liquidated without any Customs review (for example, the entry is liquidated automatically as entered), the person claiming a previous treatment must be prepared to submit to Customs written or other appropriate evidence of the earlier actual determination of a Customs officer that the person relied on in preparing the entry and that is consistent with the liquidation of the entry. In this case, it is argued that the importer’s reconciliation entries were liquidated for approximately 3 years under the APA methodology. In support of the argument, it is claimed that from 1999 through 2001, entries were liquidated through the Reconciliation Program with upward and downward adjustments resulting in additional duties paid to CBP. Furthermore, three CF-28 Request for Information forms were submitted as exhibits wherein CBP requested documentation to support downward adjustments in certain reconciliation entries. These requests were made on September 4, 2001; May 16, 2002; and December 4, 2002 by the same import specialist. This office has confirmed that the entries for which additional information was sought were liquidated with benefit of refunds. In addition, 19 CFR § 177.12(c)(1)(iii) provides, in relevant part, that CBP will not find a treatment existed if: (A) The person's own transactions were not accorded the treatment in question over the 2-year period immediately preceding the claim of treatment; * * * The submitted information is insufficient to support the treatment claim. The treatment claim goes to the acceptance of downward adjustments and issuance of refunds by CBP. The time span of the liquidation of the identified entries liquidated with downward adjustments is only 1 year and 7 months, thus falling short of the 2-year period required by the CBP regulations. In addition, with regard to these entries liquidated with benefit of refunds, although ten were the subject of requests for additional information via a CBP Form 28 prior to liquidation, these requests were all issued and considered by a single import specialist. Thus, these liquidations do not establish that CBP extended this acceptance of downward adjustments for the requisite 2-year period. Based on the information provided by the protestant, we believe the protestant has not established that treatment existed. HOLDING: The protest is denied. In accordance with the Protest/Petition Processing Handbook (CIS HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with this decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision Regulations and Rulings of the Office of International Trade will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Myles B. Harmon, Director Commercial and Trade Facilitation Division