Application for Further Review of Protest 0712-14-100085; Method of Appraisement; Related Parties; Bona Fide Sale for Exportation

HQ H255620 November 10, 2018 VAL-2 OT:RR:CTF:VS H255620 RSD CATEGORY: VALUATION Port Director Port of Champlain U.S. Customs and Border Protection 237 Service Road Champlain, New York 12919 RE: Application for Further Review of Protest 0712-14-100085; Method of Appraisement; Related Parties; Bona Fide Sale for Exportation Dear Port Director: This is in response your memorandum dated July 14, 2014, forwarding the Application for Further Review of Protest 0712-14-100085 dated April 11, 2014, filed on behalf of Bond Street, Ltd., by the law firm of Sandler, Travis & Rosenberg. At issue is the proper method of appraisement of merchandise imported from Canada. We have been advised that Sandler Travis & Rosenberg is no longer representing Bond Street, and the law firm of Stafford, Owens, Piller, Murnane, Kelleher & Trombley PLLC is the new counsel representing Bond Street. We regret the delay in responding. FACTS: This protest involves transactions between two related parties, Bond Street Ltd., a New York State Ltd., Company (BS US) and Bond Street Ltd. Canada (BS CAN). At the time this protest was filed, both companies were owned by the same holding company, whose sole owner and officer was Mr. Michael Schwartz. According to the information contained in the record, both companies do business at the same address located in Montreal, Quebec, Canada. The importer, BS US was organized as a New York Limited Corporation. According to BS US’s previous counsel, Bond Street was originally formed in 1992 for purposes of selling products in the United States. Mr. Schwartz purchased the assets of Bond Street in 1992 with the primary intention of selling leather goods, and servicing U.S. customers in the retail and office products industry. BS US existed prior to BS CAN, while BS CAN was an existing entity that operated under another name prior to being purchased by Mr. Schwartz. According to the previous counsel’s submission, at one time BS US had offices in the United States. In addition, BS US also had a showroom and a warehouse in the United States for holding inventory for its U.S. sales, but because of the evolution of online sales, the U.S. showroom was eliminated. In addition, BS US stopped using a U.S. warehouse to store inventory because warehousing in the United States became too expensive compared to using a duty deferred warehouse in Canada. As a result, BS US ceased operation of its New York warehouse, and instead utilized the services of third party warehouses for certain functions. A large portion of its warehousing operations were moved to Canada, and BS CAN also took over many of BS US’s administrative services. This meant that BS US used a Canadian address for its operational matters. BS US operated as a distributor to wholesalers, such as United Stationers, a supplier of products to retailers like Office Depot. BS US acquired goods that it sold in the United States from BS CAN on an as-needed basis, based on both weekly sales forecasts for its well-known wholesale customers and pre-orders. Goods were imported for inventory or pre-labeled for distribution to BS US’s customers. In some cases, BS US also purchased and imported merchandise for direct shipment from suppliers located in China. Counsel explains that the invoices for the direct shipments made to the U.S. and shipments sent to Canada were identical because BS US and BS CAN submitted collective purchase orders to the Chinese vendors. BS US generally controlled the volume of purchase orders from China because it had a far higher volume of sales than BS CAN did. To take advantage of volume discounts, BS US and BS CAN orders were often made together. The purchase orders to the Chinese vendors from BS CAN allegedly indicated which goods were intended for the U.S. and which were intended for Canada. In this protest, the goods that BS Canada purchased from the Chinese venders were warehoused in its duty deferral warehouse in Canada, and were later transfer to BS US with a mark-up. BS US claims that it paid more for the same merchandise when it obtained them from BS CAN than when it bought directly from the Chinese suppliers. This was because the price BS CAN charged BS US for the merchandise included a number of additional costs and charges to a landed Canadian cost of the merchandise from China such as profits, commissions and freight. It is further noted that Bond Street was also a wholesaler distributor, and it had a website on which it sold products to consumers at retail prices. BS CAN and BS US shared the website platform selling the same products under the same brand names, but U.S. customers would click on a U.S. flag to enter the U.S. website to make purchases, while Canadian customers used a link to the Canadian site to make a purchase. The prices for the same products may have been different on the U.S. website than they were on the Canadian website. According to the information provided by Bond Street’s previous counsel, the prices at which BS US sold its goods in the United States were wholesale prices, but the net price was lower than a listed wholesale price because certain costs, including catalog costs, damage costs, and volume discount rebates were subsequently factored in. BS US negotiated these prices with its customers without input from BS CAN. The result of these post-purchase price adjustments resulted in BS US issuing rebate checks drawn from its U.S. bank account to certain customers. The merchandise involved in the transactions under review in this protest was purchased by BS CAN from unrelated sellers in China, and subsequently imported into Canada. It does not appear that there were U.S. orders prior to the importation of the merchandise into Canada, and it is unclear that the merchandise was clearly destined to the United States when it was exported from China or imported into Canada. The terms of sale on the purchase orders between the seller in China and BS CAN were “FOB Yantian”. After the goods were imported into Canada, they were stored in a duty relief warehouse in Canada pending subsequent orders. The U.S. buyers submitted their purchase orders for the goods to Bond Street operations in Canada. At the time the goods were released from the Canadian warehouse, they were destined for a U.S. buyer. When orders for the merchandise were received, the items were removed from the warehouse and shipped directly to the U.S. customer. In its submission, BS US’s previous counsel states that the merchandise was purchased “F.O.B. Canadian warehouse” and that BS US paid for all transportation costs, customs duties, fees, and other related charges for entry into the United States. The value of the merchandise reported to Customs and Border Protection (CBP) was based on the transactions that occurred between BS CAN and BS US. The purchase orders between the U.S. purchasers and BS US show that the prices for goods were higher than the values declared to CBP for the merchandise. In HQ H023094, dated July 22, 2010, CBP issued an internal advice decision concerning Bond Street Ltd. concerning the valuation of other products that were imported and sold in the United States. Although the entries and the merchandise involved in this protest are different from those considered in H023094, the mechanics of how the transactions were conducted appear to be similar. ISSUE: Whether the imported merchandise may be appraised under 19 U.S.C. §1401a based on the transactions between the related parties. 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 (19 U.S.C. §1401a; TAA). The preferred method of appraisement of imported merchandise for customs purposes is transaction value. Transaction value is the price actually paid or payable for the merchandise when sold for export to the United States, plus certain enumerated additions. 19 U.S.C. §1401a(b)(1). The term “price actually paid or payable” means the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C §1401a(b)(4)(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)). However, several factors may indicate whether a bona fide sale occurs between a potential buyer and seller of imported merchandise. 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 HQ 545474, dated August 25, 1995; and HQ 545709, dated May 12, 1995. In the previous decision, HQ H023094, involving BS US and BS CAN, we were unable to ascertain if there was, in fact, a bona fide sale between the related parties. We recognized that there appeared to be a movement of funds between BS US and BS CAN; however, BS CAN did not present any sales agreements or contracts between the parties with the terms of sale, or detail the passage of title and risk of loss for the imported merchandise. Furthermore, the sample set of documents that BS US presented, including a purchase order, confirmation and invoice did not indicate the terms of sale, nor did the documents indicate that there was a passage of title of the merchandise from BS CAN and BS US. Thus, we determined that the evidence did not establish that BS US ever held title to the imported merchandise, and thus, we did not find a bona fide sale between BS CAN and BS US. In the present protest, Bond Street’s previous counsel submitted additional documents from what is stated to be a representative transaction to claim that a bona fide sale between BS US and BS CAN had occurred. The submission includes orders placed with Chinese manufacturers for merchandise that eventually would be sold in the United States. The submission also contains invoices from International Industrial Company Limited in Panyu Guzanghou, China. The invoice from the Chinese supplier shows the names of both Bond Street Ltd. Canada and Bond Street Ltd. USA C/O and a bonded warehouse in Montreal, Canada. The terms of sales specified on the invoice are F.O.B. Yantian. The submission also contains a purchase order dated July 13, 2013. It is not clear who issued this purchase order, but it shows the name Bond Street, Ltd. with a Montreal, Quebec address on it, so it appears that it was between BS US and BS CAN. The purchase order also contains the language “This PO is issued by Bond Street Ltd. Canada for Bond Street Ltd. – A New York State Company.” An invoice for Bond Street Ltd. Canada and Bond Street Ltd. USA specifies that the “Terms” are “Ship to Bond Street”. The invoice submitted from the transaction under review shows the phrase “sold to Bond Street Ltd.”, 24 Margaret St. Plattsburg New York 12901, shipped by Bond Street Ltd. at an address in Montreal. While the terms of sale are shown as F.O.B. Montreal, we note that the names of the buyer and the shipper shown on the document are identical, which was “Bond Street Ltd.” In other words, there is no indication that the merchandise was sold to a different entity. In addition, the proof of payment is shown by a check dated April 24 2014. The payer shown on the check is Bond Street Ltd. with the address located in St Laurent, Quebec, Canada. The payee shown on the check is also Bond Street Ltd. MDSE Canada, which is located in Montreal, Quebec. Counsel argues that the shipping term F.O.B. Montreal on the invoices between BS CAN and BS US, indicates that BS US took title to the merchandise from BS CAN and assumed the risk of loss at the BS CAN warehouse in Montreal, Canada. At that point, it is further claimed that BS US became responsible for the freight costs for shipping the merchandise to the United States. Documents were also submitted to demonstrate that there was a freight contract between BS US and a freight carrier. However, despite the appearance of a sale between BS Canada and BS US, specific declarations contained in the presented transaction documents negate a finding of the existence of bona fide sales between BS CAN and BS US. In order to have a sale under 19 U.S.C. § 1401a(b)(1), there must be a buyer that is separate from the purported seller. The transaction documents do not show that BS US was acting as a separate distinct buyer, who was purchasing merchandise from BS CAN, who in turn was acting as a separate distinct seller. The purchase order from BS US to BS Canada contains the statement “this PO is issued by Bond Street Ltd. Canada for Bond Street Ltd.-A New York State Company.” This casts doubt that BS US is acting as a separate entity in buying merchandise from its related party, BS CAN. Instead, the purchase order indicates that BS CAN is actually ordering merchandise from itself and assigning it to its related party, BS US. We also note that the evidence of payment between the related parties is not adequate to demonstrate that there was valid consideration paid by BS US to BS CAN for the merchandise. On the copy of the check presented as proof of payment, the names of payee and payer on the check are identical. In fact, the actual name of the payer on the check is Bond Street Ltd. at an address in Montreal, Canada. In other words, it appears that BS CAN was paying itself for the merchandise that was shipped to the United States. It is alleged that the similar name on the check was just an oversight, and the name of the payer on subsequent checks was changed to BS US with an additional reference to the phrase New York Ltd. as part of the name of the payee. No such documents were provided to verify this claim. More importantly, just altering the name of the payee on the checks would not be sufficient. Simply creating a separate bank account under a different name does not establish that there was a true payment for the goods with funds changing between different entities, if both bank accounts are fully controlled by the same party. In this case, the information indicates that both bank accounts were fully under the control of BS CAN through their sole owner, Mr. Michael Schwartz. We also note that at the time the transactions under protest occurred, Bond Street’s entire operation was situated in Canada with virtually no presence in the United States. According to Bond Street’s counsel, BS US ceased the operation of its own New York warehouse, and instead utilized the services of third party warehouses for certain functions. A large portion of its warehousing operations were moved to Canada to take advantage of the financial benefits of its pre-existing Canadian warehouse, which is also a duty deferral warehouse owned by BS CAN. BS CAN also took over many of BS US’s administrative services. This meant that BS US used a Canadian address for operational matters. The address listed for BS US was at the offices of a local accountant in New York State so that the requirements for the service of legal process were satisfied. Thus, it appears BS US had no real employees, facilities or other physical assets located in the United States. In addition, the information provided indicates that both BS US and BS CAN were entirely operated and controlled in Canada by one person, Mr. Michael Schwartz. Consequently, in this instance we find that the use of the shipping term F.O.B. Montreal” on the invoice from BS CANADA to BS US, is not sufficient to demonstrate that there was, in fact, a bona fide sale between these two entities. In this case, CBP finds BS US is not functioning a true separate distinct buyer of the merchandise from its related party, BS CAN. Accordingly, we conclude the necessary requirements for a bona fide sale on which to base transaction value between BS US and BS CAN have not been met in this case. Therefore, we find that the transaction between BS US and BS CAN cannot be used as the basis of appraisement under 19 U.S.C. §1401a(b)(1). In order to determine how to appraise the imported merchandise, your office should assess whether there were bona fide sales for exportation between the BS CAN directly to the U.S. buyers. If it is found that there were sales for exportation between BS CAN and the U.S. buyers, then the imported merchandise should be appraised based on the price actually paid or payable that the U.S. purchasers paid for the imported merchandise in those sales. If the transactions between BS CAN and the U.S. buyers are not acceptable sales for exportation, then transaction value cannot be used for appraising the imported merchandise. When imported merchandise cannot be appraised on the basis of transaction value, it is appraised in accordance with the remaining methods of valuation, applied in sequential order. 19 U.S.C. § 1401a(a)(1). The alternative bases of appraisement, in order of precedence, are: the transaction value of identical or similar merchandise (19 U.S.C. § 1401a(c)); the deductive value (19 U.S.C. § 1401a(d)); the computed value (19 U.S.C. § 1401a(e)); and the “fallback” method (19 U.S.C. § 1401a(f)). We note that Bond Street’s prior counsel has suggested that if transaction value based on the transactions between BS US and BS CAN cannot be used to appraise the imported merchandise, then the merchandise should be appraised using the transaction value of identical or similar merchandise using sales in which BS US purchased goods directly from Chinese suppliers in which they were exported directly to the United States. Section 402(c) of the TAA provides that the transaction value of identical or similar merchandise is the transaction value, accepted as the appraised value under section 402(b), of merchandise identical or similar to the merchandise currently being appraised which was exported to the U.S. at or about the time that the merchandise currently being appraised was exported to the U.S. Furthermore, section 402(c) provides that such transaction values are based on sales of identical or similar merchandise at the same commercial level and in substantially the same quantity as the sales of the merchandise being appraised. However, if no such sale is found, then the merchandise shall be appraised based on sales of identical or similar merchandise at either a different commercial level or in different quantities, adjusted to take account of any such difference. While the merchandise from the Chinese suppliers may be identical to merchandise imported from Canada, such transactions would not satisfy the requirements of section 402(c) because they are sales at different commercial levels and there is not sufficient information available to make the necessary adjustments. Therefore, the merchandise that is the subject of this protest, cannot be appraised using the transaction value of identical or similar merchandise based on the direct sales of similar and identical merchandise from the Chinese suppliers to BS US. HOLDING: The protest is denied.  In accordance with the analysis set forth above, the merchandise at issue cannot be appraised based on the transactions between the related parties, BS US and BS CAN. Your office should attempt to appraise the merchandise using transaction value based upon sales from BS CAN to the U.S. buyers. If it is determined that the sales between BS CAN and the U.S. buyers were not valid sales for exportation that can be used to appraise the imported merchandise, the merchandise should be valued in accordance with an appropriate valuation method following the valuation hierarchy as set forth in 19 U.S.C. § 1401a. In accordance with Sections IV and VI of the CBP Protest/Petition Processing Handbook (HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the protestant, through its counsel, no later than 60 days from the date of this letter.  Any reliquidation of the entry, in accordance with the decision, must be accomplished prior to mailing of the decision. Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and to the public on the Customs Rulings Online Search System (“CROSS”) at https://rulings.cbp.gov/, which can be found on the CBP website at http://www.cbp.gov and other methods of public distribution.           Sincerely, Myles B. Harmon, DirectorCommercial and Trade Facilitation Division