Application for Further Review and Protest No. 4701-16-100236; related parties; no sale

HQ H283150 September 7, 2018 OT:RR:CTF:VS H283150 CMR CATEGORY: Valuation Port Director Attention: Chief, Trade Operations Branch D U.S. Customs and Border Protection Building 77 JFK International Airport Jamaica, New York 11430 RE: Application for Further Review and Protest No. 4701-16-100236; related parties; no sale Dear Port Director: This is in response to your memorandum forwarding the Application for Further Review (AFR) of Protest No. 4701-16-100236, filed by Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt, LLP, on behalf of their client, Zanella Ltd., against your decision to liquidate four entries based upon the commercial invoice price submitted with the entry under transaction value appraisement. An AFR was filed claiming that this matter qualified for further review under 19 C.F.R. § 174.24(b) in that it involves questions of law or fact which have not been ruled upon by the Commissioner of Customs or his designee or by the Customs courts. Your office approved the AFR and, based upon the facts in this case, we agree that the approval was proper. FACTS: Zanella Ltd, the protestant, imported men’s trousers and dress shirts from its related Italian manufacturer, Zanella Confezioni S.p.A. (hereinafter, Zanella Italy), during the years at issue, i.e., 2014 and 2015. In those years, Zanella Italy incurred significant losses. The commercial invoices accompanying the entries identify the imported merchandise by style numbers, descriptions, prices per unit and total prices. Zanella Italy’s invoices were addressed to Zanella Ltd.; indicated payment was due within 120 days from the date of the invoice; that the delivery was ex-factory; and identified Zanella Ltd. as an “agent.” Furthermore, the commercial invoices identified retailers in the United States to whom the merchandise was ultimately destined, i.e., identified as “shipped to” on the invoices, along with certain merchandise “shipped to” Zanella Ltd. Counsel submits that all of the merchandise was shipped to Zanella Ltd. The port liquidated the entries based upon the values on the commercial invoices accompanying the entries and reflected on the Customs and Border Protection (CBP) Entry Summary form (CBP 7501). Subsequent to liquidation, a protest was timely filed wherein Zanella Ltd. claimed the value for the merchandise was overstated and that the goods should be reappraised. Counsel for the protestant has submitted documentation and arguments in support of the subject protest and related protests. Zanella Ltd. acted as a distributor in the United States for its related party manufacturer, Zanella Italy. Counsel submits that Zanella Ltd. obtained title and assumed risk of loss for the merchandise based on the Incoterm “ex-factory,” i.e., at the factory door. Copies of freight bills were submitted to show that Zanella Ltd. paid the international freight for the imported merchandise. In addition, Zanella Ltd. carried insurance for the merchandise. This was required by the company to which Zanella Ltd. factored its accounts receivable. The factoring agreement that Zanella Ltd. entered into was “with full recourse” for “client risk receivables,” so it was, in part, in the nature of a loan agreement. For “Credit Approved Receivables,” the factor assumed the risk of nonpayment. Zanella Ltd. sold merchandise at wholesale to its customers, which included various retailers in the United States. The merchandise imported by Zanella Ltd. was either delivered to a third party warehouse where seasonal units were received, confirmed for count, and then shipped to customers, or delivered to Zanella Ltd.’s office location where replenishment units were stored and packed prior to sale to customers. Counsel further explained that Zanella Ltd. purchased three categories of merchandise from Zanella Italy – seasonal wholesale merchandise, “cut-ups” and “replenishment items.” The seasonal wholesale merchandise comprised about 40% of the imported merchandise. Counsel explained that “[o]n average, Zanella Ltd. stored these goods in inventory for approximately 30 to 60 days prior to delivery to Zanella Ltd.’s retail customers.” The “cut-up” merchandise, which was made from excess fabric sourced for the seasonal collections, was also entered into inventory and stored in the third party warehouse. These goods were sold to outlet stores and usually shipped to these customers within 30 days of importation. The “replenishment items” consisted of Zanella’s most common and popular trouser styles. Zanella Ltd. entered the imported styles “into inventory and stored them at its New York City offices[.]” These replenishment items “typically remained in Zanella Ltd.’s inventory for about six to twelve months prior to resale to the U.S. customer.” Counsel initially submitted that there was no sale between the related parties. Now, counsel asserts that there was a sale as there was a transfer of title and risk of loss; however, the sale does not qualify for transaction value appraisement as the related parties did not deal with one another at arm’s length and their relationship influenced the price. Counsel indicates that the invoice prices “were not subject to price negotiations or market forces, and the companies did not operate under a formal distribution agreement.” Counsel states that the related manufacturer dictated the prices. Counsel explains that Zanella Ltd. did not pay for the merchandise on an invoice-by-invoice basis, but “made periodic maintenance payments to cover certain operating expenses of its sister company.” Additionally, counsel asserts that the relationship between the related parties affected the price of the goods. There is no evidence that the transfer prices were settled in accordance with industry norms. Zanella Italy did not sell to unrelated parties so no comparison can be made of its dealings with related versus unrelated parties. Finally, Zanella Italy did not recover its production costs and earn a profit equal to the firm’s overall profit in sales to Zanella Ltd. Instead, Zanella Italy incurred significant operating losses as a result of its transactions with Zanella Ltd. For all of these reasons, counsel asserts that transaction value does not apply to the transactions at issue. Counsel for Zanella Ltd. initially proposed appraisement based upon the deductive value method, 19 U.S.C. § 1401a(d), or computed value method, 19 U.S.C. § 1401a(e), for styles where sales and other documents required for deductive value are unavailable. However, counsel now proposes only the use of the deductive value method of appraisement. Various documents have been submitted to support the arguments by counsel and to respond to CBP’s questions. These documents include, among other things, Zanella Italy’s Financial Statement for the period ending December 31, 2014; Zanella Italy’s Profit and Loss Statement as of June 30, 2015; information from Zanella Ltd.’s accounts payable ledger; various bank statements for Zanella Ltd.; various documents related to a representative transaction; representative deductive value and representative computed value calculations; invoices from two representative sales by Zanella Ltd. with related documents; tax returns for Zanella Ltd.; a copy of the factoring agreement; and a “Computed Value Methodology Report;” (submitted to support “usual profit and general expenses” under a computed value calculation). In support of deductive value appraisement, counsel submitted a worksheet for a representative style of men’s dress pants, of which 59 units were imported in one entry. The worksheet identifies the selling price of the merchandise in the United States, as well as Zanella Ltd.’s general and administrative expenses, the actual cost of transportation incurred in shipping the merchandise from Italy to the United States, and the applicable duties and fees. Counsel submits that the selling price on the worksheet is supported by Zanella Ltd.’s sales records. Counsel also provided relevant pages from the company’s sales log and shipping journal. The selling, general and administrative expenses ratio used in the worksheet was derived from the company’s 2015 income statement. Finally, the international freight charges on the worksheet were derived from the airway bill for the imported merchandise. On June 27, 2018, counsel for the importer, along with a representative of the company, met with members of this office to discuss this matter. By letter, dated July 12, 2018, counsel submitted additional information to address concerns discussed at the meeting. The submission includes a statement from the factoring company that Zanella Ltd.’s ownership of receivables sold and assigned to the factor, which consisted of all of their receivables, “was free and clear of all security interests, lien, claims or disputes of the receivable arising from the sale of the underlying goods.” Further, the factoring company stated that it “would not have entered into this factoring arrangement if Zanella Ltd., had been a selling agent. In such case, [it] would have required that the actual owner be a party to the factoring agreement.” Your office believes that there was a bona fide sale between the related parties and that transaction value was not precluded because the buyer failed to pay for the goods. Thus, your office believes that appraisement based on the invoiced price from Zanella Italy to Zanella Ltd. was appropriate under transaction value. ISSUE: Whether the merchandise at issue should be appraised based upon transaction value or another method of appraisement. 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; 19 U.S.C. § 1401a). The preferred 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 certain statutory additions. 19 U.S.C. § 1401a(b)(1). As stated above, your office believes that there was a bona fide sale between Zanella Italy and Zanella Ltd. and that Zanella Ltd.’s importations of merchandise should be appraised under transaction value using the commercial invoice prices. After receiving additional information from the protestant, this office is in agreement that there was a bona fide sale between the related parties. Counsel for Zanella Ltd. asserts that the imported merchandise cannot be appraised based upon transaction value because the related parties did not deal with one another at arm’s length. The relevant portion of the valuation statute, 19 U.S.C. § 1401a(b)(2)(B), states: The transaction value between a related buyer and seller is acceptable for the purposes of this subsection if an examination of the circumstances of the sale of the imported merchandise indicates that the relationship between such buyer and seller did not influence the price actually paid or payable; or if the transaction value of the imported merchandise closely approximates the transaction value of identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United States; or the deductive value or computed value for identical merchandise or similar merchandise; but only if each value referred to in clause (i) or (ii) that is used for comparison relates to merchandise that was exported to the United States at or about the same time as the imported merchandise. When examining a related-party transaction under the circumstances of the sale approach to determine whether the parties’ relationship influenced the price, one should refer to the illustrative examples, i.e., “Interpretative Notes,” set forth in the CBP Regulations at 19 C.F.R. § 152.103(l)(1). See also HQ H029658, dated December 8, 2009; HQ H037375, dated December 11, 2009; and, HQ H032883, dated March 31, 2010. 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 C.F.R. § 152.103(l)(1)(i) and (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 (e.g., on an annual basis), in sales of merchandise of the same class or kind. 19 C.F.R. § 152.103(l)(1)(iii). These are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well. Herein, the importer alleges that the relationship between the related parties influenced the price of the merchandise sold by Zanella Italy to Zanella Ltd. With regard to the circumstances of the sale test, counsel asserts there is “no evidence that the prices between Zanella Italy and Zanella [Ltd.] were ‘settled in a manner consistent with the normal pricing practices of the industry’[.]” Nor is there evidence of Zanella Italy settling prices between the related parties in the same way as prices with unrelated parties, as Zanella Italy did not sell to unrelated parties. Finally, Zanella Italy did not recover all of its costs plus make a profit equivalent to the firm’s overall profit in sales of merchandise of the same class or kind, as evidenced by Zanella Italy’s operating losses during 2014 and 2015. In this case, we must agree with counsel for the importer. As stated in Macclenny Products v. United States, 963 F. Supp. 2d 1348, 1379 (Ct. Int’l Trade, 2014): Customs has underscored that appraisement based on transaction value is not permitted in a related party transaction absent “sufficient information” to demonstrate satisfaction of either the circumstances of the sale test or the test values. See Customs Guidance on Acceptability of Transaction Value in Related Party Transactions at 17. It is submitted that the manufacturer dictated the prices to Zanella Ltd. The manufacturer continued selling merchandise to its U.S. distributor while experiencing operating losses and while receiving lump-sum payments falling short of the invoiced amounts owed. There is no objective evidence upon which CBP can rely to refute the assertion of the importer that the related parties’ prices were influenced by the relationship. Therefore, transaction value cannot serve as the basis of appraisement for the imported merchandise. As CBP has no information with regard to identical or similar merchandise exported to the United States from Italy at or about the time of the merchandise at issue, appraisement cannot be based upon the value of identical or similar merchandise. As the importer seeks valuation under deductive value, which is the next method in the hierarchy of the valuation statute, to the extent that the importer is able to provide the necessary information upon which to value the merchandise, we agree that it should be appraised under the deductive valuation method. The submitted deductive value worksheet for the men’s dress pants appears to provide the necessary information for that style. If the importer is unable to present the necessary information appraisement of select merchandise under the deductive value method, appraisement of that merchandise should be accomplished by either the computed value method (19 U.S.C. § 1401a(e)), if sufficient information is available, or the fallback method of valuation set forth at 19 U.S.C. § 1401a(f). HOLDING: The protest should be granted. The imported merchandise should be appraised utilizing the deductive value method set forth at 19 U.S.C. § 1401a(d), provided the importer is able to present sufficient information upon which to base such appraisement. If sufficient information is not available for all of the merchandise, the merchandise that cannot be appraised under the deductive value method should be appraised under the computed value method, if sufficient information is provided, or the fallback method of appraisement. 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, 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 U.S. Customs and Border Protection website at http://www.cbp.gov and other methods of public distribution. Sincerely, Myles B. Harmon, Director Commercial and Trade Facilitation Division