Internal Advice Request; Applicability of Transaction Value; Related Party Transactions

U.S. Department of Homeland Security Washington, DC 20229 U.S. Customs and Border Protection July 24, 2015 HQ H223036 OT:RR:CTF:VS H223036 YAG CATEGORY: Valuation Port Director U.S. Customs and Border Protection Port of Charlotte 1901 Crossbeam DriveCharlotte, NC 28217 Attn: Mr. Wilbert D. Jones, Supervisory Import Specialist, Team 414 Re: Internal Advice Request; Applicability of Transaction Value; Related Party Transactions Dear Port Director: This is in response to your request for internal advice, transmitted to our office on May 16, 2012, regarding the proper method of appraisement of merchandise imported by Biesse America, Inc. (“Biesse America”) from its parent company, Biesse SpA, located in Italy. We regret the delay in responding. We determined that certain information submitted in connection with this internal advice request should be treated as confidential. Therefore, pursuant to the requirements of 19 CFR §177.2(b)(7), the information contained within brackets and all attachments to this internal advice request, forwarded to our office, will not be released to the public and will be withheld from published versions of this decision. FACTS: Biesse America is an importer of machinery and systems for working materials like wood, glass, stone, aluminum, and solid surfaces. Biesse America purchases the imported parts and machinery from its parent company, Biesse SpA, located in Italy. Imported Parts According to Biesse America, Biesse SpA sets its prices for parts (produced by wood, stone, and glass machinery divisions) based on a wholesale price list, applicable to all sales of parts at the wholesale level. The wholesale price list is established in Euros; however, the list is issued in local currencies and updated every six months or reissued periodically. The exchange rate applied is fixed monthly by the company’s management software. The wholesale price list applies to all sales of parts by Biesse SpA regardless of whether the purchaser is related or unrelated to Biesse SpA. The wholesale price list is established by marking up part costs according to the category. Biesse America provided documentation for a sample transaction, chosen by Regulatory Audit, showing a mark-up of [***]%. The price list is maintained electronically, and the system marks up the part cost, applies the distributor’s discount, and converts the final price into the distributor’s local currency. The wholesale price list constitutes a suggested sales price; however, distributors may deviate from the price list on their own initiative. Biesse America indicates that they make all final pricing decisions for sales to customers. Biesse SpA issues a retail price list for its own use where it makes direct sales to end customers in territories where no distributor exists. Examples of these territories are Italy and South America. The retail price list is based on a mark-up of the wholesale price list. Biesse SpA sells parts at the wholesale price plus any applicable discount, if any, to both related and unrelated buyers. The discounts are based on the level of technical service support a wholesaler provides to end-users, the volume of parts it maintains to support the machines, and the volume of merchandise and parts the wholesaler purchases. The discounts range from [***] to [***]%. According to Biesse SpA, the final discount rates are the result of negotiations between the wholesale purchaser and Biesse SpA. The rates are finalized prior to the sale of the goods for export to the United States. The invoice from Biesse SpA to Biesse America shows that Biesse America receives a [***]% discount on the parts purchased. In support of its argument that the prices for the imported parts are at arm’s length and meet the circumstances of the sale test, Biesse America provided the following: (1) invoice from the Supplier to Biesse SpA; (2) receipt of a part in the Biesse SpA System; (3) payment from Biesse SpA to Supplier; (4) Purchase Order from Supplier to Biesse SpA; (5) invoice from Biesse SpA to Biesse America; and, (6) Technical Documents Explaining the Use of the item for 6 samples. Imported Machinery Biesse America also purchases and imports finished machinery from Biesse SpA. These machines are produced according to end-user specifications, which are generally unique; and, therefore, usually include various features that distinguish the machines from one another. They are, nevertheless, built up from particular base configurations. In this regard, units built on the same base configuration are comparable at that base configuration level. Biesse America provided sample documents indicating that the base price is the same price that its parent company charges Biesse America and unrelated parties. Biesse America sells custom ordered machines with unique features specified by the end-user. Final prices for machines include features that are added to the base configuration. Biesse SpA provides discounts based on volume, investment in spare parts inventory, the commitment made by the intermediary to its product, and the level of product support provided to the end user, including the technical ability to service the machines. Generally, a discount of [***]% plus another [***]% is provided to its intermediaries whether related or unrelated for the sale of machinery. It also provides additional discounts based on the criteria above and other circumstances. The purchase order form shows that discounts of [***]%, [***]%, and [***]% were given to both related and unrelated distributors. The operating profit margin for the sale of machines from Biesse SpA to unrelated companies outside of the United States was [***]%, as compared to the higher operating profit margin of [***]% for machines sold to Biesse America. Biesse America claims that the price Biesse America pays to its related party for the imported machines is not influenced by the relationship of the parties because it is fully adequate to ensure the recovery of all costs plus a profit that is equivalent to the firm’s overall profit realized over a representative period of time in sales of the merchandise of the same class or kind. Additionally, Biesse America argues that the related party prices are settled in a manner consistent with the way Biesse SpA settles prices in sales to unrelated buyers. In support of these statements, Biesse America provided the following documentation for our review: (1) Biesse SpA’s Income Statement for the year ended December 31, 2010; (2) financial breakout analysis; (3) Purchase Order confirmation; (4) Purchase Order detail form referred to as MTOs; (5) invoice from Fintec to Biesse America (related party sale); and, (6) invoice from Biesse SpA to Antera Industria e Comercio LTDA (unrelated party). ISSUE:   What is the proper method of appraisement for the transactions between Biesse America and its parent company? LAW AND ANALYSIS: Merchandise imported into the United States is appraised for customs purposes in accordance with Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. §1401a). The primary method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. §1401a(b)(1). 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 the 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); 19 CFR §152.103(l). While the fact that the buyer and seller are related is not in itself grounds for regarding transaction value as unacceptable, where CBP has doubts about the acceptability of the price and is unable to accept transaction value without further inquiry, the parties will be given the opportunity to supply such further detailed information as may be necessary to support the use of transaction value pursuant to the methods outlined above. “Test values” refer to values previously determined pursuant to actual appraisements of imported merchandise. Thus, for example, a deductive value calculation can only serve as a test value if it represents an actual appraisement of merchandise under section 402(d) of the TAA. Headquarters Ruling Letter (“HRL”) 543568, dated May 30, 1986. In this instance, no information regarding test values has been submitted or is available; consequently, the circumstances of the sale must be examined in order to determine the acceptability of transaction value. Under this approach, the transaction value between a related buyer and seller is acceptable if an examination of the circumstances of the sale indicates that although related, their relationship did not influence the price actually paid or payable. The Customs Regulations specified in 19 CFR Part 152 set forth illustrative examples of how to determine if the relationship between the buyer and the seller influences the price. See also HRL 029658, dated December 8, 2009; H037375, dated December 11, 2009; and, HRL H032883, dated March 31, 2010. 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 has not been influenced by the relationship. See 19 CFR §152.103(l)(1)(i)-(ii). In addition, CBP will consider the price not to have been influenced if 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. 19 CFR §152.103(l)(1)(iii). See HRL H018314, dated March 18, 2013. These are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well. The related party prices are settled in a manner consistent with the way the seller settles prices in sales to unrelated buyers Biesse America states that Biesse SpA sells the imported parts and machinery to unrelated parties outside of the United States. Although CBP generally requires that the comparison sales to unrelated buyers be sales to buyers in the United States, CBP will consider evidence regarding sales to unrelated buyers in other countries, provided the importer presents an adequate explanation as to why it is relevant to the transaction at issue. See HRL W548314, dated May 16, 2012. In HRL H024857, dated January 7, 2014, the foreign manufacturer/seller granted the same discounts based on the global price list and the criteria established in the transfer pricing study to both related and unrelated buyers. As evidence of this practice, the importer presented the global price list and invoices from its related manufacturer/seller to unrelated foreign buyers showing the base price for the merchandise and the discounts granted. See also HRL 546953, dated May 5, 1999 and HRL 547019, dated March 31, 2000. The importer also provided us with the Marketing Contracts between the manufacturer/seller and two of its unrelated distributors. These Marketing Contracts further showed that the manufacturer/seller settled its prices to the importer in a manner consistent with those to unrelated distributors - both used pricing formulas that sought to return a profit to the manufacturer/seller based on the global price list price minus the discount. These documents indicated that the manufacturer/seller charged all of its unrelated distributors and the related importer the same price, with the only difference being that the provisional price to the related distributors was settled after importation due to post-importation adjustments made in accordance with income-tax mandated requirements. Therefore, CBP determined that the foreign manufacturer/seller dealt with unrelated buyers in the same way that it dealt with related buyers. In HRL H160935, dated February 11, 2015, the importer purchased equipment, machinery and components from related and unrelated parties for use in building manufacturing process equipment for customers. To show that the importer met the circumstances of the sale and that the prices, or discounts on prices, reflected the normal pricing practices of the industry, the importer submitted numerous examples of negotiations between it and related and unrelated parties for the purchase of goods.  The importer also submitted examples of related party sales to it and to unrelated parties where comparable discounts were given on the price of goods.  Based on the submitted information, CBP was satisfied that the related parties dealt with one another as if not related and that the prices were settled in a manner consistent with the normal pricing practices of the industry.  Therefore, transaction value was an acceptable method of appraisement for the goods imported by the importer from related parties.  In HRL H260036, dated February 24, 2015, the price in one mature market where the product was sold to an unrelated distributor was virtually identical to the unit price charged by the foreign manufacturer to the related importer/buyer. Nonetheless, when considering the question as to whether the related party prices were settled in a manner consistent with the way the seller settled prices in sales to unrelated buyers, CBP determined that comparing the prices for one product imported in 2013 was not enough to show how the company settled prices to unrelated buyers for other product lines, imported since 2006. Accordingly, CBP was unable to conclude that the related party prices were settled in a manner consistent with the way the seller settled prices in sales to unrelated buyers. The case at issue is analogous to our decision in HRL H260036. As stated in the FACTS portion of this ruling, most sales of machines by Biesse SpA are sold through intermediaries. An analysis of settlement of prices to a related and unrelated party are, therefore, made at the intermediary wholesale level. Machines are produced according to end-user specifications which are generally unique, and, therefore, usually include various features that distinguish one from another. They are, nevertheless, built up from particular base configurations. In this regard, units built on the same base configuration are comparable at that base configuration level. For illustrative purposes, Biesse America identified a model machine imported by Biesse America along with its base configuration. Biesse America then identified the same model with the same base configuration for that model that was sold through an unrelated intermediary in Brazil. As demonstrated by the submitted documents (such as purchase orders and invoices), the same base configuration was sold at the same gross list price with the same discounts with respect to both Biesse America, a related party, and in Brazil to an unrelated party. The documents also show the same discounts of [***]% plus [***]%, which are generally given to intermediaries, whether related or unrelated. An additional [***]%, was given to both Biesse America and an unrelated party in Brazil. While we acknowledge that some documentation was provided to substantiate Biesse America’s argument that the prices between related parties were settled as though they were unrelated, we note that there were no global price lists or any type of contracts provided between Biesse SpA and its related and unrelated distributors to support the company’s assertion that Biesse SpA charged all of its unrelated distributors and the related parties the same price, including the same discount. Additionally, there were no examples of documents submitted to show negotiations between Biesse SpA and related and unrelated parties for the purchase of the imported machines. Accordingly, as in HRL H260036, we conclude that comparing the prices for one machine is not enough to show how the company settled prices to unrelated buyers for other imported machines on a regular basis. Similarly, with respect to the imported parts, Biesse America states that Biesse SpA consistently uses a particular detailed pricing system for both related and unrelated buyers. Unfortunately, there is no sufficient information to show that the related party prices were settled in a manner consistent with the way the seller settled prices in sales to unrelated buyers. Even though Biesse America refers to the wholesale list price to set its prices for both related and unrelated parties in its submission, there was no list provided for our review. Moreover, there is no evidence of applicable contracts or negotiations between Biesse SpA and related and unrelated parties for the purchase of the imported parts. Thus, we find that the submitted information, as referenced in the FACTS portion of this decision with respect to the imported parts, is not sufficient to show that Biesse America and Biesse SpA settle prices as though they were unrelated. Price adequate to ensure recovery of all costs plus a profit test 19 CFR §152.103(l)(1)(iii) examines whether a related party price compensates the seller for all its costs plus a specified amount of profit. A very important consideration in the all costs plus a profit example is the “firm’s” overall profit. In applying the all costs plus a profit test, CBP normally considers the “firm’s” overall profit to be the profit of the parent company. See HRL 542792, dated March 25, 1983; HRL 546998, dated January 19, 2000; and HRL H065015, dated April 14, 2011. The regulations do not give us a definition of “equivalent” profit; however, if the profit of the seller is equal to or higher on the U.S. imports than the firm’s overall profit, the purchase price would not be artificially low for Custom’s purposes. See HRL H106603, dated July 25, 2011 and HRL H065024, dated July 28, 2011. Finally, CBP Regulations do not define what profit we are to consider – gross profit or operating profit. However, CBP is of the view that the operating profit margin is a more accurate measure of a company’s real profitability because it reveals what the company actually earns on its sales once all associated expenses have been paid. In order to show that the price was not influenced by the relationship of the parties in sales of machines between Biesse America and Biesse SpA, Biesse America provided Biesse SpA’s financial reports for our review. The representative period of time is fiscal year 2010. The information for the machines was isolated from these financial reports and presented to CBP in a Breakout Financial Analysis, provided for our review, in which the information was converted to be consistent with both the required elements of 19 U.S.C. §1401a as well as to ensure conformity with U.S. Generally Accepted Accounting Principles (“GAAP”). In the Financial Breakout Analysis, Biesse America further segregated the machine data by income and expenses pertaining to sales of machines from Biesse SpA to Biesse America and income and expenses pertaining to sales of machines from Biesse SpA to the rest of the world. According to Biesse America, the Financial Breakout Analysis is based upon the same general ledger used in the preparation of the company’s financial statements. While in most cases the general ledger provided a breakout between sales to Biesse America and sales elsewhere, where it did not (usually with respect to indirect costs), the costs were allocated to Biesse America based upon the relative value of machine sales by Biesse SpA to Biesse America during 2010. Thus, Biesse America provided Biesse SpA’s operating profit for the sale of merchandise to the United States and Biesse SpA’s operating profit for sales to the rest of the world. We note that in this case, Biesse SpA is both the parent company of Biesse America and the seller of the imported merchandise. We also note that Biesse SpA’s overall operating profit margin was not provided for our review. Therefore, we are unable to compare the operating profit margin for Biesse SpA’s sales to the United States to the operating profit margin of Biesse SpA’s global sales, including the United States. Furthermore, with respect to Biesse America’s purchase of parts from its parent company, Biesse of America claims that under its purchase discount system, the prices are fully adequate to ensure the recovery by Biesse SpA of all costs plus a profit such that the invoice prices should be deemed acceptable as a transaction value between these related parties. We note that Biesse America failed to provide its operating profit margins as well as the overall operating profit margins of Biesse SpA with respect to the imported parts. Thus, the all costs plus a profit illustrative example is not applicable when it comes to the importation of parts. In conclusion, upon our review of numerous documents identified in the FACTS portion of this decision and submitted to CBP in support of profit calculations for purposes of satisfying the all costs plus a profit example, we find that the all costs plus a profit example is not applicable in this case, and the imported merchandise may not be appraised under the transaction value method of appraisement. When transaction value is eliminated as the appropriate method of appraisement, imported merchandise must be appraised in accordance with the remaining methods of valuation, applied in sequential order. 19 U.S.C. §1401a(a). The alternative bases of appraisement, in order of precedence, are: the transaction value of identical or similar merchandise (19 U.S.C. §1401a(c)); deductive value (19 U.S.C. §1401a(d)); computed value (19 U.S.C. §1401a(e)); and, the “fallback” method (19 U.S.C. §1401a(f)). Pursuant to 19 U.S.C. §1401a(a)(2), if the value cannot be determined on the basis of the transaction value of identical or similar merchandise, the merchandise shall be appraised on the basis of the computed value, rather than the deductive value, if the importer makes a request to that effect to the customs officer concerned at the time of the filing of the entry summary. See also 19 CFR §152.102(c). There is no information in the record before us to indicate that the imported parts and machines can be appraised under the transaction value of identical or similar merchandise, computed, or deductive methods of appraisement. However, if Biesse America, Biesse SpA, the Port of Charlotte, or CBP’s Regulatory Audit office have access to such information or such information is acquired upon request from Biesse America, the imported merchandise may be appraised under the alternative methods of appraisement, applied in sequential order. Specifically, given the fact that Biesse America sells the merchandise to end-users in the United States, the company should have records and provide such records to CBP to allow the appraisement of the imported merchandise under the deductive value method of appraisement. HOLDING: In conformity with the foregoing, we find that transaction value is not the appropriate method of appraisement for sales between Biesse America and its parent company. The imported merchandise must be appraised in accordance with the remaining methods of valuation, applied in sequential order. 19 U.S.C. §1401a(a). Specifically, given Biesse of America’s resale of the imported merchandise in the United States, deductive method of appraisement may be applicable in this case. This decision should be mailed by your office to the party requesting Internal Advice no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to CBP personnel, and to the public on the 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.   Please do not hesitate to contact us at (202) 325-0042 if you have any questions or concerns. Sincerely, Monika R. Brenner, Chief Valuation and Special Programs Branch