Application for Further Review (“AFR”) of Protest No. 0712-14-100099; Valuation of Hockey Apparel and Equipment; Transaction Value; Related Party Transactions; Bona Fide Sale

HQ H254164 March 19, 2018 VAL-2 OT:RR:CTF:VS H254164 RSD CATEGORY: VALUATION Port Director U.S. Customs and Border Protection 237 West Service Road Champlain, New York 12919 Attn: Protest Section RE: Application for Further Review (“AFR”) of Protest No. 0712-14-100099; Valuation of Hockey Apparel and Equipment; Transaction Value; Related Party Transactions; Bona Fide Sale Dear Port Director: This is in response to your memorandum dated May 9, 2014, forwarding the Application for Further Review (“AFR”) of Protest Number 0712-14-100099, timely filed by the law firm of McGuire Woods on behalf of its client, Reebok-CCM Hockey US, (“Protestant”). We regret the delay in responding. Counsel has made multiple supplemental submissions, dated December 2, 2015; April 29, 2015; August 22, 2016; September 29, 2016; November 10, 2016, and February 2, 2017. FACTS: Protestant is an importer and a seller of hockey equipment and wearing apparel. Protestant obtains merchandise that it sells in the United States from a Canadian related party, Sports Maska, Inc. (SMI). The information indicates that Protestant and SMI share officers and directors with some exceptions. The Protestant is a wholly owned subsidiary of Reebok International Ltd., and the Protestant and SMI are part of the Adidas Group of Companies. The Adidas Group consists of over 100 entities located throughout the world. SMI does not own the Protestant and they do not share owners. The sole shareholder of SMI is Adidas International B.V. SMI buys merchandise from various vendors located in Asia. This specific protest covers a shipment of hockey equipment and wearing apparel entered into the United States on May 6, 2013. The entry was liquidated on November 8, 2013. The merchandise was made in various Asian countries, but was shipped through Canada before importation into the United States. On May 16, 2013, Customs and Border Protection (CBP) issued a CBP Form 28 to the Protestant seeking information regarding the relationship between it and the Canadian seller of the merchandise, SMI. Protestant responded on June 21, 2013. On August 21, 2013, CBP issued a Proposed Notice of Action indicating that there was no bona fide sale between the Protestant and SMI. The proposed notice further indicated that the payment made for the merchandise on a monthly basis by a ledger intercompany payment system amounted to a general transfer of funds, and movement of funds was not sufficient to show the transfer of consideration between the parties. Protestant responded on September 24, 2013, to the notice and presented documentation that it claimed was the proof of payment and provided an explanation of the intercompany payment system. The documentation included a schedule of all payments of SMI’s invoice numbers. Protestant’s counsel explained that a transaction involving the importation of merchandise from Canada will be initiated when the Protestant receives an order from its customers in the United States. In actually purchasing merchandise, a series of orders are aggregated together and a purchase order or a batch order (“PO”) is generated. The PO is sent to SMI, the supplier of the merchandise in Canada. The PO does not indicate the prices SMI charges for the imported merchandise. Rather, the prices for the imported merchandise are found on a price list shared by SMI and the Protestant. Prices are determined during the budget process, occurring in the months of October-November for the following year. Counsel further indicates that the prices will generally remain unchanged for the remainder of the year, unless there is a significant change in SMI’s costs for a particular product. This may happen when there is a product specification change. Once SMI receives the orders, it packages the merchandise in its facility located in Quebec, Canada. The shipping cartons are pre-addressed for delivery to the ultimate U.S. consignees, and the goods are shipped to the World Wide Warehouse in Champlain, New York for eventual distribution to Protestant’s customers. The prices that SMI charges the Protestant for the imported merchandise are determined using a formula containing the following elements: 1) the standard cost for the merchandise; 2) freight; 3) a XXXX percent warehousing fee; 4) the cost of trim items supplied to the producer; 5) a five percent sourcing fee; and 6) royalties. There are two royalties, one for the use of the CCM (Canada Cycle & Motor Co. Ltd.) trademark, and another royalty payment is made related to know-how regarding certain the production of general hockey equipment. The Protestant will pay royalties of XXX percent for the use of the “CCM” trademark, and pay a xxxx percent know-how royalty on certain general hockey equipment. According to counsel, excluding the royalty, SMI’s price to the Protestant represents a markup of xx percent of all costs (purchase price, freight, and trim). Counsel explains that the freight charges included in the price are the costs of shipping the goods from the Asian vendors to SMI’s Canadian facilities, and not the cost of shipping the goods from Canada to the United States.  Using the practice jersey, as an example, when royalties were added to the price of the merchandise, the markup on the merchandise increased by XXXX percent. This return, counsel contends, ensured that SMI was properly reimbursed for the cost of providing the merchandise to Protestant and that it earned a sufficient profit on its sales of the merchandise. In some cases, rather than obtaining goods from SMI, the Protestant will buy some of its merchandise directly from overseas vendors located in Asia. Counsel explains that this happens when a single customer orders quantities of merchandise that are sufficiently large enough to warrant such direct purchases. Specifically, these direct purchases from Asian vendors occur when one of Protestant’s customers is willing to take a full container load of merchandise. The prices that Protestant pays the Asian vendors for the merchandise are substantially lower than prices it pays to SMI for identical merchandise; however the prices are the same that SMI pays for the merchandise to the same Asian vendors. According to counsel, where the Protestant’s sales to its customers in the United States are in smaller quantities, it is not cost effective to make a direct purchase from the Asian vendors. Counsel further indicates that the direct purchases from the vendors, rather than SMI, are a routine occurrence and there are about 150-200 such purchases a year as compared to about 780 entries of goods obtained from SMI during the same period. In a specific example provided, the unit price of hockey jerseys obtained in a direct purchase from the Asian vendor was about $XXX less than the same merchandise purchased from SMI. As noted above, explains that the reason why the Protestant paid a higher price for merchandise it bought from SMI was that SMI’s price includes certain items that are not included in the Asian vendor party price such as warehousing fees, trim costs, freight costs, etc. In reviewing the transaction under consideration, your office explains that the invoices between the Protestant and the U.S. purchaser, Exclusive Pro Sports, indicate that payment was remitted to a New York Post Office Box, but the address for the Protestant shown on its invoice was listed as 3400 Raymond Lasnier, Ville St-Laurent, Quebec. The phone number for the Protestant shown on the invoice is a toll free number which connects to the Protestant’s office in Ville St-Laurent, Quebec. The address of the Protestant, as importer of record, is located in Champlain, New York, which is an address for the World Wide Warehouse. A letter submitted by Adidas explains that both Protestant and SMI follow the policies established for the Adidas Group for the movement of funds between those two entities. In order to optimize the Group’s cash resources, a cash pooling and an in house bank (IHB) system have been established for its bank account structure. The Adidas group also uses what is referred to as a monthly netting process to settle invoices issued from one company in the group to another company within the group. The payment on the Group invoices and debit notes are settled generally 20 days after the issuance of the invoice from the Protestant to the seller. The letter further explains that Adidas Group IHB is not an officially regulated or licensed financial institution, but it operates much like a commercial bank by offering payment processing liquidity management and collections functions to the Adidas Group subsidiaries. It is also stated that many other large global corporations operate in a similar fashion. Counsel has also submitted a copy of a Product Supply Agreement, dated January 1, 2012, concerning the transfer of merchandise between the Protestant and SMI. This supply agreement indicates that the Protestant is a corporation organized and existing under the laws of Vermont, with its registered place of business in Montpelier, Vermont. In the agreement, SMI is referred to as the supplier, and it is a corporation organized under the laws of New Brunswick, Canada, with its principal place of business located in Montreal, Canada. The agreement also indicates that the Protestant is the purchaser who will buy products from the supplier, SMI. The purchaser shall pay the supplier for products it buys from the supplier in U.S. Dollars within and in accordance with the Adidas Group inter-company netting system. Purchaser shall make all purchases by submitting firm purchase orders to the supplier, and it will do so in accordance with the Adidas Group policy and practice. Such purchase orders shall be in writing and in a form reasonably acceptable to the supplier. Section 4.3 of the purchase agreement states that products shall be delivered “FOB Origin” unless such a FOB point is not in a reasonably developed commercial center. In the Memorandum supporting the protest, Counsel further indicates that the term delivery “FOB Origin” means that title and risk of loss passed to the Protestant at SMI’s warehouse. The same terms of sale were also again specified on SMI’s invoices that were issued to the Protestant. In addition, Counsel presented a copy of a price list prepared by the Protestant for its customers for the year 2012. The price list specifies that all warehouse orders are shipped FOB shipping point (Reebok-CCM loading dock). It further indicates that unless otherwise directed by the customer in writing, the Protestant will use the carrier designated by the customer, and the customer is responsible for all payments due to the carrier for delivering the merchandise. The customer also assumes all risk of loss upon delivery of the products by the Protestant to the customer’s carrier, in the case of warehouse orders. The Protestant is under no obligation to insure the shipment unless specifically requested by the customer in writing and then only at the customer’s expense and valuation. In other words, according to the documents submitted, the Protestant will assume the risk of loss at SMI’s point of shipment, and it will be transferred to the Protestant’s customers when the merchandise is delivered to its customer’s carrier in the United States. Furthermore, the delivery of the merchandise to the Protestant’s customers will occur in the United States after the merchandise has cleared U.S. Customs. According to the submissions provided, the Protestant and SMI maintain separate books and records. Although the Protestant’s accounting work is handled at its headquarters, which it shares with SMI in Montreal, Canada, each firm makes a separate report in terms of both work flow and financial results to the Adidas Group corporate headquarters. SMI and the Protestant are treated as separate entities for all internal reports and responsibility purposes. Counsel submitted a letter from the accounting firm of KMPG dated February 4, 2015, which indicates that the Protestant and SMI maintain separate books and records and that Protestant’s accounting records are distinct from SMI in that the Protestant’s accounts are not commingled with those of SMI. The Protestant does not file a separate U.S. tax return because its tax information is included in the Reebok International Ltd. consolidated return. Because SMI is a Canadian company with no operations in the United States, it files a tax return in Canada rather than in the United States. The two firms also maintain separate bank accounts. The Protestant has its own lock box to receive customer payments at the JP Morgan Chase Bank in New York. Payments are made to the Protestant via the lock box or through a wire transfer made to a U.S. bank account at HSBC Bank, in which the Protestant is the beneficiary. SMI’s customers remit their payments to its physical address or via an electronic payment made to its account at the Canada-based HSBC Bank. The payments to SMI are denominated in Canadian dollars and the beneficiary is SMI. Counsel also indicates that Protestant has made arrangements that allow its customers to pay for merchandise by credit. The application for payment by credit is handled by the Protestant not by SMI or other members of the Adidas family of companies. The Protestant has 20 employees, who are located throughout the United States. The majority of these employees are engaged in selling products and for customer relations. In addition, the Protestant has contracts with eight independent sales agents. Employee payroll, benefits, holiday policy and other personnel matters are administered by Reebok International and not by SMI. Protestant employees include the Field Activation Service Team who deals with retailers and customers. Protestant has also entered into numerous contracts with other parties in its own name. These contracts include a lease for real estate located in Minnesota, and a car lease agreement with the Chrysler Corporation. Another example of a contract that was submitted to show that the Protestant entered into agreements in its own name is a sponsorship and a supplier agreement with US Hockey, Inc. and the University of North Dakota athletics program. A further instance of a contract in which the Protestant has entered into under its own name is an agreement it signed with the National Hockey League (NHL) Enterprises and the National Hockey League Players Association. In this agreement, the Protestant is specifically mentioned as a separate party to the agreement. ISSUE: Whether the merchandise may be appraised using transaction value based on the transactions between the related parties, Reebok–CCM Hockey and SMI. 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). When transaction value cannot be applied, then the appraised value is determined based on the other valuation methods in the order specified in 19 U.S.C. § 1401a(a). In order for transaction value to be used as a method of appraisement, there must be a bona fide sale between the buyer and seller. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit found that the term “sold” for purposes of 19 U.S.C. § 1401a(b)(1) means a transfer of title from one party to another for consideration, (citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). Several factors may indicate that a bona fide sale exists between the purported buyer and seller. In determining whether property or ownership has been transferred, CBP considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, CBP may examine whether the purported 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. See Headquarters Ruling (HQ) 545474, dated August 25, 1995; and HQ 545709, dated May 12, 1995. Your office contends that that there was no bona fide sale for the imported merchandise between the Protestant and SMI. It is your position that these related parties are so closely intertwined with each other that it is not possible to conclude that Protestant acts separately from SMI. In support of this proposition, you point out that the invoice from the Protestant to Exclusive Pro Sports states that payment should be remitted to a New York, NY post office box, but the address for the protestant on the invoice is listed as 3400 Raymond Lasnier, Ville St-Laurent, Quebec. You also call attention to the fact that the Protestant’s phone number shown on the invoice is a toll free number which connects to SMI’s office in Ville-St-Laurent, Quebec. In addition, the importer of record’s address for the Protestant is that of the World Warehouse in Champlain, New York; however, the Protestant’s registered place of business indicated in the Products supply Agreement is in Montpelier, Vermont, which is the same address as its attorney. Based on this information, your office believes that the Protestant does not appear to have a physical presence in the United States. Your office also claims that the Protestant has not provided any evidence that it maintains its own financial records, because SMI appears to do the Protestant’s financial recordkeeping in Montreal, Canada. For example, the bank statement for the Protestant is from HSBC Bank Canada in Toronto, Ontario. It is also noted that the Protestant’s lack of autonomy from SMI is demonstrated by the fact that all of the orders to the final U.S. customers are packaged by SMI. The pre-addressed boxes are sent to the World Warehouse in Champlain, New York for delivery to U.S. customers. Your office believes limited evidence was provided that the Protestant could provide instructions to the seller, and that it has not been sufficiently demonstrated that the Protestant was free to sell the imported merchandise at any price it desired, selected or could select its own customers without consulting the seller. There was also no support that it could order the imported merchandise from the supplier and have it delivered for its own inventory. It is pointed out that the Protestant does not maintain its own inventory of merchandise. Accordingly, your office concluded that there is no evidence of a bona fide sale between SMI and the Protestant. The fact one party is a subsidiary of another will not necessarily preclude a transaction between related parties from serving as a basis of transaction value. See VWP of America, Inc. v. United States, supra. The court further explained that ("[T]he fact that a parent corporation controls a subsidiary . . . does not necessarily mean, under the statute that the price may not serve as the basis for transaction value." 175 F.3d at 1336. In related party transactions, however, importers must demonstrate that the related party price was not influenced by the relationship or that the price closely approximates certain test values in order to use the transaction value method to appraise the merchandise. Specifically in VWP of America, Inc. v. United States, Victor Woolen Pr