Application for Further Review of Protest No. 0712-17-100230; Valuation of Apparel; Bona Fide Sale

HQ H283094 August 15, 2023 OT:RR:CTF:VS H283094 RMC/JW CATEGORY: Valuation U.S. Customs & Border Protection Attn: Jason LemieuxApparel, Footwear and Textiles Center237 West Service Rd.Champlain, NY 12919 Re: Application for Further Review of Protest No. 0712-17-100230; Valuation of Apparel; Bona Fide Sale Dear Center Director: This is in response to the Application for Further Review (“AFR”) of Protest No. 0712-17-100230, timely filed by Sandler, Travis & Rosenberg, P.A. on behalf of the importer, Capital Garment Co. USA Inc. (“CG USA”). CG USA has asked that certain information submitted in connection with this AFR be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets will not be released to the public and will be withheld from published versions of this response. FACTS: This AFR arises out of transactions between Capital Garment Co. Inc. (“CG Canada”), an outerwear wholesaler based in Saint-Laurent, Quebec, Canada, and its related U.S. subsidiary, CG USA. While some of those transactions are not strictly at issue in this AFR, certain information available as a result of those transactions is nonetheless relevant to the question presented in this AFR. Entry of October 26, 2014 On October 26, 2014, CG USA entered a shipment of women’s outerwear, listing itself as the buyer on the entry documents and claiming the invoice price from the transaction between it and CG Canada, the seller, as the transaction value. Subsequently, on November 19, 2014, the Apparel, Footwear and Textiles Center issued a Request for Information (CBP Form 28) related to this entry. The Center requested documentation to establish that a bona fide, arm’s-length sale occurred between CG Canada and CG USA and that transaction value was the appropriate method of valuation. a. CG USA’s December 19, 2014 Response to the CBP Form 28 In its initial response, dated December 19, 2014, CG USA stated that there is “common ownership between the two companies”, i.e., CG USA and CG Canada. However, CG USA suggested that “the relationship does not influence price.” CG USA further explained its position that a bona fide sale occurred between CG Canada and itself and provided information in support of its position that transaction value was appropriate in the import transaction under consideration. Specifically, CG USA claimed that “generally speaking, the selling policy between the two companies is that of buyer and seller.” According to CG USA, the merchandise at issue in this entry consisted of closeout goods that CG Canada had agreed to sell to CG USA at the original FOB price for which CG Canada had acquired the goods from an unrelated manufacturer in China. After the goods arrived at CG USA’s contract warehouse in Massachusetts, they were subsequently sold to U.S. retailers. CG USA’s initial response further indicated that the pricing for the closeout merchandise under consideration was an exception to its normal pricing policies. CG USA stated that “[u]nder normal circumstances, for goods sold out of its Canadian inventory,” CG Canada would normally sell to CG USA at the FOB price at which CG Canada acquired the goods, plus a [ ]% markup. For goods that “are purchased by [CG] Canada that are shipped directly to the United States where CG USA is the importer of record,” pricing is based on the first sale FOB value (i.e., the price that CG Canada would pay the unrelated foreign manufacturer) plus a [ ]% markup. Finally, in cases where goods were sold for export to CG USA (presumably from China or a third country), but first held in a bonded warehouse in Montreal pending export to the United States, pricing is based on the first sale FOB value plus a [ ]% markup. Included with its initial response was information on (i) CG USA’s U.S. operations, (ii) transfer of title and risk of loss for the merchandise from CG Canada to CG USA, and (iii) proof of payment, insurance information, and other information on the subsequent transactions between CG USA and its U.S. customers. This information shows that CG USA was incorporated in the Commonwealth of Massachusetts on April 12, 1995. The address listed on the incorporation documentation provided appears to list a residence in Newton, Massachusetts as the location of the principal office. However, CG USA explained that it uses a UPS Store postbox as an address in the United States “as a convenience.” CG USA stated that it has one employee in Massachusetts who serves as the company’s treasurer and manager of U.S. operations. The employee is responsible for overseeing all of CG USA’s operations including warehousing of arriving merchandise, shipping to U.S. customers, and managing three U.S. sales representatives. The incorporation documentation lists this U.S. employee as the registered agent and secretary of CG USA, while the president, treasurer, and director have Canadian addresses. A paystub submitted with the information above indicated that the U.S. employee is paid on a biweekly basis. CG USA further explained its position that title and risk of loss transferred from CG Canada to CG USA when the goods arrived at the border in Champlain, New York. CG USA claimed that the shipping terms were Delivery Duty Unpaid (DDU). In support, CG USA provided a freight bill issued to CG Canada listing the “pick up” point as CG Canada and the “delivery” point as CG USA’s contract warehouse in New Bedford, Massachusetts. The contract warehouse is responsible for receiving, storing, picking, and shipping the merchandise to the end U.S. customer. According to CG USA, the warehouse generally has an inventory between $[ ] to $[ ]. As for proof of payment, CG USA noted that as of its December 19, 2014 response, payment for the goods at issue in the CBP Form 28 had not yet been made, but CG USA “enclosed proof of payment for earlier shipments” and provided three checks made out to CG Canada: the first dated October 15, 2014, in the amount of $[ ]; the second dated November 15, 2014, in the amount of $[ ]; and the third dated November 24, 2014, in the amount of $[ ]. Additionally, a “Memorandum of Insurance” issued by Seymour Alper, Inc. listed the period of insurance as March 30, 2014 to March 30, 2015, and those identified on the list as the insured included both CG Canada and CG USA. b. Center’s Proposed Notice of Action of January 29, 2015 After considering the information CG USA provided, the Center issued a Proposed Notice of Action (CBP Form 29) on January 29, 2015. In the notice, the Center concluded that CG USA was a selling agent for CG Canada and, therefore, that no bona fide sale had occurred between the parties. Accordingly, the Center proposed rejecting the declared transaction value. c. CG USA’s March 9, 2015 Response and Prior Disclosure In response, CG USA provided additional information and arguments on March 9, 2015. CG USA claimed that “there is no reasonable basis for a rejection of the price between the related foreign seller and U.S. importer for the closeout merchandise.” The documentation submitted to support this position included, inter alia, (1) purchase orders for closeout merchandise that CG USA issued to CG Canada, dated October 31, 2014 and November 30, 2014; (2) a pro-forma invoice issued by CG Canada to CG USA, dated October 22, 2014, (3) intercompany invoices between CG Canada and CG USA, dated October 31, 2014 and November 30, 2014, and (4) the invoices to the U.S. retailers, dated October 30, 2014 and December 18, 2014. The pro-forma invoice and the intercompany invoices all correspond directly to the purchase orders (shown through numbering annotations added by CG USA). The invoices to the U.S. retailers, which do not appear to have similar annotations from CG USA that demonstrate direct correlation, were provided by CG USA “to support the prices at which Capital USA resold the closeout merchandise to its unrelated U.S. customers.” On the same day, CG USA filed a prior disclosure informing CBP that it had failed to include a [ ]% design fee and a [ ]% quality control fee in 56 of its entries. d. Center’s Notice of Action of April 13, 2015 Having considered this additional documentation, on April 13, 2015, the Center issued a Notice of Action (CBP Form 29) (Taken) concluding that “[t]he documents and information presented to CBP failed to demonstrate a bona fide sale between related parties Capital Garments Co USA and Capital Garments Co, wherein the parties acted as independent buyer and seller.” Accordingly, the Center stated that “[t]he referenced entry will be value advanced to reflect the transaction value of the sale for export to the U.S. between CG and the U.S. [retailers].” Despite its disagreement with this decision, as reflected in its initial and subsequent responses to the CBP notices mentioned above, CG USA did not file a protest challenging CBP’s decision with respect to this entry. The Entries at Issue in the Protest and this AFR According to the information provided in relation to the October 26, 2014 entry, the Port of Champlain began rejecting entries that CG USA attempted to make at the related company price. In conformity with the position adopted in the CBP Form 29 (Taken) from April 13, 2015, the Port directed CG USA to enter the merchandise at the price charged to the end U.S. customer. On January 11, 2016, the Center issued a Request for Information (CBP Form 28), subsequently replaced with a separate CBP Form 28 (dated February 19, 2016), requesting “commercial billing invoices that [CG USA] issued to its U.S. buyers which are associated with the import of goods to the U.S. under the attached list of entry numbers.” The CBP Form 28 identified the original entry from October 26, 2014, for which action had already been taken pursuant to the CBP Form 29 of April 13, 2015, as well as 117 other entries. Those entries included the 56 entries identified in the prior disclosure as well as some, but not all, of the 20 entries that are the subject of this protest. In the following months, the Center and CG USA exchanged numerous messages about the scope of information requested and the validity of the prior disclosure. Following these discussions, the Center issued a CBP Form 29 (Proposed) indicating that it intended to value advance the entries previously identified. In its response, CG USA provided additional information and arguments and incorporated its previous submissions related to the October 26, 2014 entry that was the subject of the CBP Form 28 from November 19, 2014. a. Center’s Notice of Action of June 15, 2016 for the 20 Entries at Issue in this AFR In the CBP Form 29 (Taken), dated June 15, 2016, the Center stated that the entries “will be value advanced to reflect the transaction value of the sale for export to the U.S. between [CG Canada] and its customers.” Moreover, the notice stated that “[i]n the case where no customer invoices were provided to indicate the exact values, CBP will advance values by 187%, which is the lowest average mark-up for which actual values were obtained.” In reviewing the entries listed in the June 15, 2016 CBP Form 29, counsel for CG USA identified “three different types of entries.” The first type of entry consisted of goods that were entered in accordance with CBP’s prior instruction, contained in the April 2015 CBP Form 29, to declare the price paid by the end U.S. customer. The second type of entry consisted of goods that “had not been resold to anyone in the U.S. beyond the sale to CG USA, i.e., a shipment of inventory.” The declared value of those entries was established on the basis of a transfer price of “cost +[ ]%,” which counsel has stated covers “costs plus a reasonable profit.” The third and last type of entry consisted of goods that were presumably pre-sold to U.S. customers but were also declared on a “cost +[ ]%” basis. On September 14, 2016, CG USA requested, pursuant to 19 C.F.R. § 152.101(d), a written explanation of how CBP had determined the value for entries that were declared at the price paid by the end U.S. customer and for merchandise that was imported for inventory. CBP provided an Excel spreadsheet showing the calculations used and further explained in an email (dated September 26, 2016) that “[s]ince the requested U.S. buyers’ invoices were not provided to be used as actual values, the Import Specialist appraised the merchandise as follows: 187% of the declared value which is the average increase in the value of the declared values, as compared to U.S. Buyer Invoice values provided by [counsel] on March 9, 2015 . . .” In other words, an average mark-up had been calculated based on previous information relating to the declared value and the price paid by the end U.S. customer, and that mark-up was applied to the entries at issue here to arrive at a customs value. b. CG USA’s Protest of January 11, 2017, its AFR, and Subsequent Submissions On January 11, 2017, counsel for CG USA timely protested the liquidation of the entries identified in the June 15, 2016 CBP Form 29 (Taken) and sought further review of its protest. In sum, CG USA argues that, whether or not the merchandise was presold to U.S. customers at the time of entry, the transactions between CG Canada and CG USA constitute bona fide sales for export to the United States. Therefore, the entries should be appraised on the basis of the transfer price between CG Canada and CG USA. In the alternative, counsel argues that if the transfer price is found to be unacceptable, the proper method of appraisement is the deductive value method. In subsequent submissions and an in-person meeting, counsel provided additional information to substantiate its claim that a bona fide sale occurred and that the related-party price is acceptable as the transaction value in the entries at issue in this protest. In response to a request for documents establishing when title and risk of loss for the merchandise transferred from CG Canada to CG USA, CG USA noted that no sales contract exists between the parties. However, it pointed to the shipping terms and a letter from its insurance agent as evidence of a bona fide sale. In contrast to its previous transactions, which CG USA stated were conducted on a DDU basis, the CG Canada invoices submitted in connection with the protested entries list the shipping terms as “C&F” (Cost and Freight). CG USA states that “while C&F is not an activeIncoterm, it is nearly equivalent to CIF, but for the insurance.” In other words, under the C&F shipping term, the seller pays for freight but not for insurance, which is the buyer’s responsibility. CG USA also notes that “[u]nder any of the ‘C’ [Incoterms], risk of loss passes to the buyer once the seller delivers the goods to the first carrier.” CG USA also points to a letter provided by Seymour Alper Inc., CG Canada’s insurance agent, as evidence that risk of loss transfers to CG USA when the goods are picked up from CG Canada’s premises. The letter contains a sample invoice from one of the entries covered by the protest and the following comments: . . . the attachment of insurance and ownership would always be determined based on the documentation and terms for each particular case. But it is clear on our policy that goods owned by [CG USA] are insured at the [CG USA] wholesale selling price. Based on the attached invoice it is clear [CG USA] owns those goods outright [when they are loaded at CG Canada’s premises] and there is no issue. i.e. the documentation issued is C&F. . . . In response to CBP’s questions about proof of payment, CG USA noted that it makes lump sum payments to CG Canada for merchandise as its cash flow permits. The payments are made against a ledger of invoices, which is required to be reconciled at the end of each season. CG USA states that this is normal industry practice and is consistent with how CG Canada pays its unrelated vendors and how CG USA is paid by its unrelated customers. Regarding payments for the entries at issue in this protest, CG USA provided the “vendor accounts payable ledger” for the winter 2014-2015 season (which covers the period of October 1, 2014 to February 16, 2015) and copies of corresponding checks from CG USA to CG Canada. The ledger contains columns for the date of payment, invoice number, debit, credit, and balance. Payments from CG USA to CG Canada are reflected as “debits” and invoices are reflected as “credits.” In sum, the ledger shows that on October 10, 2014, CG USA incurred a credit of $[ ], which corresponds to CG Canada invoice numbers 1891 to 1920. At that point, the balance on the ledger was therefore -$[ ]. The next day, CG USA made a payment of $[ ] via check number 7306. This payment was reflected on the ledger as a debit of $[ ], bringing the balance to -$[ ]. This process was continued for all the invoices until, on February 16, 2015, CG USA made a final payment of $[ ], bringing the balance for the 2014-2015 winter season to zero. Regarding the acceptability of the transfer price, CG USA argues that the “cost +[ ]%” policy supports a finding that its relationship with CG Canada did not influence the price paid for the imported merchandise. The cost basis for “cost +[ ]%” pricing is the FOB cost of the merchandise (in the sale between CG Canada and an unrelated seller in Asia), plus a [ ]% mark-up. CG USA states that this results in a gross margin of approximately [ ]%, which allows CG Canada to recover all of its costs plus a profit that is representative of its overall profit in sales of merchandise of the same class or kind. In support of this contention, CG USA provided a letter dated August 14, 2018, from the Fuller Landau accounting firm, which serves as the auditor for CG Canada. The letter states, in pertinent part: Beginning in 2008, [CG Canada] increased the price at which it sold merchandise to [CG USA] from a pricing structure of cost (i.e., its FOB cost from its foreign vendors) plus a [ ]% gross margin, to cost plus [ ]% plus another [ ]% for operating expenses, which includes a [ ]% design fee and [ ]% administrative services charge to [CG USA]. The estimated gross margin on the sales to USA is [ ]%. Since that time, [CG Canada] has maintained a consistent pricing strategy with [CG USA], and for the time period currently under review. We attest that the gross margin for the fiscal years ended March 31, 2014 and 2015 were [ ]% and [ ]%, respectively. CG USA provided an Excel spreadsheet containing detailed information about how CG Canada actually priced certain merchandise in the entries covered by this protest. Specifically, it shows the FOB prices at which CG Canada acquired merchandise from unrelated foreign vendors and the prices at which it subsequently resold the merchandise to CG USA. As an example, CG Canada acquired garments identified as “Style No. 7714RM-44” at an FOB price of $[ ]. This style was then resold to CG USA under invoice number 1900. To establish the transfer price, CG Canada increased the FOB price by $[ ] (representing a [ ]% design fee), $[ ] (representing a [ ]% quality control fee)0F and $[ ] (representing a [ ]% markup over the FOB price plus the design fee and the quality control fee). The resulting transfer price in the sale between CG Canada and CG USA was therefore $[ ] per unit. CG Canada’s gross margin percentage is determined by applying the formula ((Revenue – Cost of Goods Sold) / (Revenue)) * 100. Taking the example of Style No. 7714RM-44, CG Canada therefore earned a gross margin percentage of (($[ ] - $[ ]) / ($[ ])) * 100 = [ ]%. The Excel spread