Application for Further Review of Protest No. 0712-16-100169; Related Parties; Bona Fide sale; Selling Agent

HQ H285847 July 12, 2018 OT:RR:CTF:VS H285847 CMR CATEGORY: Valuation U.S. Customs and Border Protection Apparel, Footwear and Textiles Center Attn: Jason Lemieux 237 West Service Rd Champlain, NY 12919 RE: Application for Further Review of Protest No. 0712-16-100169; Related Parties; Bona Fide sale; Selling Agent Dear Center Director: This is in response to the referral of the Application for Further Review (“AFR”) of Protest No. 0712-16-100169 to this office for our review. The protest is against the action taken by the Port of Champlain liquidating 33 entries of merchandise based upon the price paid by the U.S. customer, as opposed to the transfer price between a Canadian party and its related importer of record. The entries occurred from December 2014 through December 2015, and were liquidated between May 27, 2016 and July 1, 2016 (with one exception). We note that the protest was timely filed by counsel, Sandler, Travis, & Rosenberg, P.A., on behalf of the protestant, Group JS International Ltd. with regard to all but one entry. That entry [XXXXXXXXXXX] was liquidated on March 2, 2018. A protest filed on November 23, 2016, against the liquidation of this entry is premature and, as such, invalid. The AFR was properly approved as the protestant has argued that the port’s action is inconsistent with decisions made by the port with respect to substantially similar transactions. In addition, the protestant asserts that any action by the port on this protest should be suspended because of pending litigation in the Court of International Trade by another importer which protestant believes impacts the question of law at issue here, though the protestant failed to specify the litigation. Finally, protestant’s claim of treatment previously accorded to substantially identical transactions presents new facts and arguments not considered previously by U.S. Customs and Border Protection (“CBP”). Protestant has met the requirements for AFR under 19 CFR § 174.24(a), (b) and (c). A conference call was held with counsel by this office on March 15, 2018. In reaching our decision, we have considered all information submitted in the protest package, and all supplemental submissions received by this office. Supplemental submissions were made on March 15, 2018; May 17, 2018; and June 7, 2018. FACTS: The protestant, Group JS International Ltd., acts as the importer of record. The parties involved in the importations include the foreign seller, Groupe JS International (registered as 8647313 Canada Inc.) (hereinafter, “JS Canada”), the related U.S. distributor, Group JS International Ltd. (hereinafter “JS US”), and U.S. customers (retailers). Initially, JS US claimed “first sale” transaction value, but now claims transaction value between the related parties, JS Canada and JS US, as the basis of appraisement for the imported merchandise based upon the transfer price between the parties. Counsel explains in a submission to the port, dated November 16, 2015, that the transfer price between the parties is established at [xx]% of the first sale price plus $[x]/piece for freight. Counsel for the protestant explains that JS Canada places all purchase orders to overseas vendors on behalf of JS Canada and JS US under the Incoterms free on board (“FOB”) or ex-works (“EXW”). The merchandise is entered into Canada by JS Canada. JS Canada sells to JS US under the Incoterm delivered duty unpaid (“DDU”). It is claimed that title transfers with risk of loss based upon the Incoterms used. Counsel states that for sales to JS US, JS Canada pays the costs for transportation, insurance and bears the risk of loss until the goods enter the United States, then JS US assumes the risk of loss. Per counsel, “[t]he terms of sale between JS US and its customers are either FOB Champlain or delivered to the customer’s door (Prepaid), depending on the agreement between the parties. JS US factors its accounts receivable to a financing company [XXXXXXXXXX]. The invoices to JS US’s customers indicate that they are to pay the factor. JS US is incorporated in Delaware with its headquarters in New York City. Counsel states, “With regard to the type of operations performed in the U.S., please note that JS US continues to function as a showroom and design center.” Per counsel, all design functions of the two related companies are grouped under JS US, “while JS Canada provides all support services including general finance, administrative and information technology functions.” In addition, each company retains its own sales force. See Counsel’s letter, dated November 16, 2015. In support of the protest, counsel submitted six exhibits. Some of these exhibits consist of documentation regarding much earlier entries of merchandise. Exhibit 1 consists of an August 6, 2004 email from counsel to “Groupe JS” sending an attachment of an analysis of middleman transactions. Exhibit 2 is a copy of a letter from CBP, dated September 13, 2004, notifying JS Canada of CBP’s intent to conduct a North American Free Trade Agreement (“NAFTA”) verification visit. Exhibit 3 is CBP Form 28, Request for Information, dated November 1, 2005, and counsel’s response, dated November 17, 2005, on behalf of JS US. In the November 2005 letter, counsel stated that “the inter-company pricing has been arrived at by making use of a computed value analysis and all statutory elements of value, including profit, are included in the price.” Exhibit 4 consists of a CBP form 28, Request for Information, dated May 19, 2011, and counsel’s response, dated July 11, 2011, on behalf of JS US. In the July 2011 letter, counsel stated that “[a]s a general premise, the inter-company price between JS Canada and JS USA is based upon a formula of [XXX]% of the U.S. net resale price at which JS USA sells to its customers in the U.S.” Exhibit 5 consists of the response from counsel, on behalf of JS US, to a CBP Form 28, Request for Information, dated July 17, 2015, requesting information with regard to a 2015 entry of merchandise. In Exhibit 5, counsel supplies information with regard to that 2015 entry, which is one of the entries at issue in this protest. Counsel submitted copies of purchase orders consisting primarily of emails which lack any terms of sale, some of which merely forward purchase orders from U.S. customers also lacking any terms of sale (Appendix A); a list of employees for JS US with their job descriptions (Appendix B); and a copy of a sales invoice between JS Canada and JS US which lack any terms of sale (Appendix C). Counsel also provides documents asserted to be evidence of proof of payment for this transaction (Appendix D). These documents show payment by JS US’s customers to the finance company with whom JS US factors its accounts receivable. The documents in this exhibit include invoices from JS US to its U.S. customers and show terms of sale of FOB Point Montreal, Quebec. The invoices also identify the salesman, some include charges for freight, and all include the following statement: All of our rights & interests in and to the A/R arising from this invoice have been assigned, made over & sold to [XXXXXXXXXXXXXXXX] All payments should be made to: [XXXXXXXXXXXXXXXXXXXX XXXXXXX] Montreal QC [XXXXXX] Finally, counsel has provided a copy of documents submitted to CBP in response to a Request for Information, dated May 19, 2011, regarding an entry by JS US (Appendix E). The response, submitted by counsel, is dated July 11, 2011, and involved an entry of merchandise by JS US during March 2011. The entry was valued based upon the transfer price between JS US and JS Canada (registered as 3632571 Canada Inc.). The transfer price was based upon a formula of [XXX]% of the U.S. net resale price at which JS US sold merchandise to its customers in the United States. Exhibit 6 is a copy of the first page of JS US’s 2014 tax return (identified as “Group J.S. International Ltd. & Sub” on the form). Counsel submitted this to show CBP that JS US lists an amount on the tax form for cost of goods sold and an amount for bad debt. Counsel submits that this supports their claim that a bona fide sale occurred between JS Canada and JS US claiming “[i]f Groupe JS USA were nothing more than a selling agent, they would have no purchases (Cost of Goods Sold) and would have no bad debt.” Counsel states “the bad debt consists entirely of customers failing to pay Groupe JS USA.” March 14, 2018; May 17, 2018; and June 7, 2018 supplemental submissions to this office provided answers to questions posed by us regarding the transactions at issue. The March 14, 2018 and May 17, 2018 submissions also include a list of JS Canada’s 2015 employees; a copy of the factoring agreement between the factor and JS Canada (as 3632571 Canada Inc.), JS Canada (as 8847313 Canada Inc., also known as Newco), and Group JS International Ltd.; proof of payment; a freight invoice; bills of lading; and freight forwarder receipts to show that JS Canada pays the freight to Champlain, NY; documents to show that JS US pays the customs broker; a U.S. customer’s “Vendor Operations Manual;” a copy of an insurance policy which applies to both JS Canada and JS US; a letter from the Canadian corporate counsel for the JS related party companies involved in the transactions at issue; a letter from the Port of Champlain, dated March 21, 2017, indicating that the port accepted a reasonable care claim with regard to entries finally liquidated, but notifying JS Group’s counsel that any entries not finally liquidated were value advanced and all entries should be entered in accordance with the CBP Form 29, Notice of Action, dated May 9, 2016; amendments to the factoring agreement which became effective on January 15, 2016 (after the timeframe at issue); a copy of Group JS International’s Combined Financial Statements, unaudited, dated November 30, 2015; a transfer pricing study for the taxation year ending November 30, 2014; and, five sets of documents purported to match invoices directly to the factoring company’s statements. Counsel submits that JS Canada’s accounting department maintains these accounting statements for both JS Canada and JS US as part of the administrative services it provides JS US for a fee. The June 7, 2018 submission responded to CBP questions, and clarified that JS Canada factors its accounts receivable from sales to unrelated parties in Canada and the United Kingdom with the factoring company. The submission also includes a copy of a “Client Position Report”, dated December 1, 2015, from the factoring company. The client, i.e., the name that appears at the left side top of each page of the report, is identified as “Group JS (8647313 Canada Inc.),” in other words, JS Canada. Under the section entitled, “Account Details,” “Accounts Receivable,” four accounts are listed, including one which is designated as JS US’s accounts receivable. The factoring agreement, as previously noted, is between the factor and JS Canada (as 3632571 Canada Inc. and as 8847313 Canada Inc., “Newco,” the successor of 3632571 Canada Inc.) and JS US. An email from the factoring company, dated March 7, 2018, indicates the factor “has a single factoring agreement with JS Group in which both JC Canada and JS US are named.” The email summarizes the treatment of JS US and JS Canada customers’ payments against factored accounts receivable. The factor indicates that it “keeps a separate record of all JS US accounts receivable and JS Canada accounts receivable.” On page 2 of the factoring agreement, dated March 21, 2014, in the initial language prior to the sections, it is stated that JS Canada, as Newco, “agrees to be solidarily bound for the payment and fulfillment to [the factor] of all of JS Canada’s and JS USA’s present and future debts and obligations under the Factoring Agreement as amended and restated by the present Amended and Restated Factoring Agreement.” The agreement indicates that the term “you” in the agreement “shall include JS Canada, JS USA, and Newco.” Section 19 of the factoring agreement provides the following: 19.1 You shall be and remain solidarily (and jointly and severally) liable towards us for the payment and fulfillment of all indebtedness and obligations hereunder. 19.2 You shall be considered as one single person for the purposes of calculating all matters hereunder. 19.3 All references to “you” hereunder shall, whenever the context requires, be deemed to constitute references to both of you. 19.4 We shall be entitled, in our discretion from time to time, to keep separate accounts for each of you. Notwithstanding the keeping of such separate accounts, we may deal with each of you and with each of your accounts as if each of you and each of your accounts were one sole account and, without limiting the generality of the foregoing, we shall be and remain fully authorized to apply any debits and/or credits to any or all of such accounts and to transfer debits and credits between such accounts and/or either of you as we may, in our sole discretion, deem appropriate. [Emphasis added.] We note that the same individual signed for each related party, i.e., 3632571 Canada Inc., Group JS International Ltd., and 8647313 Canada Inc., in that individual’s capacity as president of each company. In the submitted transfer pricing study, it is stated, at page 37, that “[t]he executive management team of JS Canada is in charge of maintaining all customer relationships.” It further states that “JS Canada is the owner of all contractual relationships related to the Company’s customers.” “Company” refers to JS Canada and JS US. See Group JS International Ltd Transfer Pricing Study For the Taxation Year Ending November 30, 2014, at 5. In response to a request for clarification of the statement regarding JS Canada’s ownership of all contractual relationships, CBP was informed in the June 7, 2018 submission, in part: In our industry, the purchase order from the customer is in essence the binding document which is destined as the Contract between the buyer and seller. There is no actual contract, but rather a purchase order and a vendor manual (for larger customer accounts). The Port of Champlain liquidated the entries at issue based upon the price paid by U.S. retailers for the imported merchandise. The port does not believe there is bona fide sale between JS Canada and JS US, but rather that JS US is a selling agent for JS Canada. Thus, the port considers the sale for export to the United States to be between JS Canada and the U.S. retailers. Counsel submits that JS US has received treatment, as discussed under 19 CFR § 177.12. Specifically, counsel claims that CBP accorded JS US treatment to substantially identical transactions when it approved JS US’s related party and first sale transactions reviewed by CBP in 2012 and 2013 “and liquidated all subsequent entries accordingly.” However, no documentation was submitted as evidence that CBP inquired about any of JS US’s entries during 2012 or 2013. ISSUE: Whether a bona fide sale of merchandise occurred between JS US and JS Canada or whether JS US was a selling agent for its related party, JS Canada. 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). The statutory additions include any selling commissions incurred by the buyer with respect to the imported merchandise. In this case, the importer, JS US, purports to be the U.S. buyer of the merchandise from its related party in Canada, and not JS Canada’s selling agent. In order to have a sale, there must be a transfer of property for consideration. See VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999); and J.L. Wood v. United States, 62 CCPA 25, 505 F.2d 1400, C.A.D. 1139 (1974). Counsel submits there is a sale between JS Canada and JS US, and submitted documents in Exhibit 5 which are directly related to the transactions at issue to support that claim. Among the documents submitted in Exhibit 5, counsel provided emails to show the U.S. retail customers ordering merchandise from JS US and JS US ordering the merchandise from JS Canada. See Exhibit 5, Appendix A. However, the emails fail to support the claim. The emails in Exhibit 5, Appendix A, are identified as “Copies of orders from JS US to JS CANADA – JS US Orders from JS Canada by forwarding e-mails (sic) containing the purchase orders sent by clients in USA to JS US.” However, a close examination of the emails show that they do not support the claim for which they are submitted. A JS Canada employee [XXXXXXXXX], Senior Account Executive is identified as the salesman on a purchase order to an online U.S. retailer [XXXXXX] and instructed another JS Canada employee [XXXXXXXXX], Reception/Order Entry in an email dated June 30, 2015, to ship out a garment, noting the order was placed by [XXXXX]. JS US’s list of employees does not list anyone named [XXXXX]. Emails show JS US employees acting as if they are selling for JS Canada, not JS US. For instance, in an email, dated June 26, 2015, from a JS US employee, [XXXXXXXX], to a JS Canada employee, [XXXXXXX], the JS US employee asks if the U.S. customer’s credit card is on file. Another email, dated June 26, 2015, shows a JS US employee, [XXXXXXXXXXX], telling a JS Canada employee, [XXXXXXXX], that she has permission to charge a customer’s credit card which is on file and ship the merchandise. An email, dated May 18, 2015, from a JS US employee, [XXXXXXXXXX], to a JS Canada employee, [XXXXXXXX], requests “Please extend 30% off” and further informs the JS Canada employee to: find attached the completed credit card application form! Kindly help in submitting it to [the factoring company]. While we note that JS US pays JS Canada for certain administrative services, some distinction between the sale from JS US to the U.S. customer and sale from JS Canada to JS US should exist. The submitted emails support the position that JS US sold merchandise for JS Canada, but they do not provide support to the proposition that JS US did so as an owner of the merchandise as opposed to a selling agent for JS Canada. We also note that one of the invoices in Exhibit 5, Appendix D lists a JS Canada employee [XXXXXXXXX] as the salesman on the invoice, although the invoices purport to be from JS US to its customers. One invoice identifies an individual as the salesman who is not listed on either JS Canada’s or JS US’s lists of employees for the time period, but whose name appears on an invoice dated, March 15, 2011, and submitted in Exhibit 5, Appendix E. In addition, the sales transactions between JS Canada and JS US are stated to be DDU, yet all of the invoices from JS US to its customers contain terms of sale of “FOB POINT Montreal, Quebec.” In the March 14, 2018, submission by counsel, documents were submitted to show that JS Canada pays the freight to ship the merchandise to the United States. Included as Exhibit 4 to the submission were three complete sets of export documents. We note that the last document in this exhibit was a copy of an invoice from JS US to a U.S. retail customer with a handwritten notation, “Print Mel’s email,” and the “F.O.B. Point Montreal, Quebec” is circled with “FOB Champlain” handwritten above it. In addition, a JS Canada employee, [XXXXXXXXXX], is identified as the salesman on the invoice. Counsel informed us that this invoice was not for the sample transaction selected for review. Coun