Internal Advice; Dutiability of Post-Importation Fees Paid; Proceeds; Section 402(b)(1)(E)

HQ H301145 January 10, 2025 OT:RR:CTF:VS H301145 RSD CATEGORY: Valuation Assistant Director Enforcement Industrial and Manufacturing Materials Center for Excellence and Expertise U.S. Customs & Border Protection 2813 Business Park Drive Suite “I” Memphis, Tennessee 38118 RE: Internal Advice; Dutiability of Post-Importation Fees Paid; Proceeds; Section 402(b)(1)(E) Dear Assistant Director: This is in response to your memorandum dated October 2, 2018, concerning a Request for Internal Advice regarding the dutiability of post-importation fee payments that Stahl USA, Inc. (Stahl USA) paid to a related company for services and assets provided in connection with the resale of imported chemicals to U.S. automotive companies to treat leather products. A teleconference was held with counsel and members of my staff on October 20, 2021, to discuss the issues involved with the internal advice request. Counsel has also made several additional submissions on this matter. Counsel has requested confidential treatment for certain information contained in its submission and in the file. 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 in italics in this ruling or in the attachments to the ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling. FACTS: Stahl USA is a subsidiary of Stahl USA Holding Inc., which, in turn, is a subsidiary of Stahl Holdings B.V. (Stahl B.V.), a private limited liability company incorporated under the laws of the Netherlands. According to the submissions from counsel, the Stahl group of companies is a global leader in the production and sale of various chemical products and technology used for the processing, tanning, dyeing, and finishing of leather, and finishes and coatings for all kinds of flexible and rigid substrates. These coatings are used in various applications like leather replacement, car interiors, functional and decorative films and papers, technical and functional textiles, and resins for producing paints for rigid substrates. The trade names of these products include Permuthane, Permutex, Permaqure, Picassiam and Relca. One of Stahl’s business groups, Performance Coatings & Polymers (PC), is responsible for all of Stahl USA’s sales to its U.S. automotive customers as well as sales to non-automotive customers. This internal advice request and related prior disclosure only concerns sales made to automotive customers of products sold by the PC division of Stahl USA for 2016 and the first half of 2017. Stahl USA imports various chemicals into the United States that it purchases from other members of the Stahl group. Stahl USA resells these chemicals to various customer groups in the United States. One of these customer groups is the automotive group. Pursuant to a December 2016, Automotive Customers Agreement (the “Agreement”) between Stahl USA and its ultimate parent, Stahl B.V., Stahl B.V. agreed to provide support to Stahl USA in sales to automotive customers for certain activities such as sales and marketing which Stahl B.V. undertakes. To compensate Stahl B.V. for the services provided, Stahl USA made payments to Stahl B.V. The parties agreed to an arrangement how these payments were determined. All the imported products may be sold by multiple Stahl USA business groups, including the PC group. At the time of importation, the ultimate customer category for a given import is not known, and it is only after importation, when the sale is made by Stahl USA, that the customer category is known. In most instances, Stahl USA pays the amount shown on an invoice for the imported merchandise and there are no additional payments. However, because Stahl USA relies heavily on Stahl B.V. for marketing and sales support in selling products to the automotive sector, Stahl USA agreed to split some its profits with Stahl B.V. on its sales in the automotive sector in the United States under a tax transfer pricing residual profit split method. This means that the profits obtained in sales to automotive customers are split based on the functions, risks, and assets of each company related to those sales. Thus, profits on sales by the Stahl USA PC division to automotive customers are tracked and aggregated with a portion of the profits paid to Stahl B.V. for automotive customers, pursuant to the Agreement. As reflected in the Agreement, a contribution analysis was used to bring the transfer pricing policy between Stahl Headquarters and Stahl USA in line with the actual functions performed, risks assumed, and assets used within the PC-Automotive group. This contribution analysis applied a weight to each function, risk and asset utilized in the operation of the automotive business, and allocated each function, risk and asset between Stahl USA and Stahl B.V. Based on this contribution analysis, part of the earnings before interest and taxes (“EBIT”) of Stahl USA attributable to sales to automotive customers are paid to Stahl B.V. for its sales and marketing support in the automotive sector. This additional payment is paid exclusively from the profits generated on sales of products sold to Stahl USA’s automotive customers. The profits that Stahl USA made on sales of the same products which are sold to non-automotive customers are not subject to this arrangement. While Stahl USA disclosed these payments, Stahl USA claims that most of these payments should not be considered part of the customs value of the imported merchandise. The parties have specified 24 items to consider in determining the appropriate profit split between Stahl USA and Stahl B.V. These items are assigned a weight based on their importance and on whether Stahl USA or Stahl B.V., or both, performed the activity and, if so, to what extent. As a result of the analysis performed, Stahl B.V. received [xx] percent of the profits from Stahl USA’s sales made to U.S. automotive customers in 2016. The same amount was used for the first half of 2017. It is indicated that the amount is reviewed and, if necessary, adjusted in subsequent years. The parties have determined that there are 11 functions related to the general global sales and marketing of products to automotive customers. They have decided that these functions represent [xx] percent of the profits from the sales made to automotive customers. The functions for which Stahl B.V. received additional payments are: Sales Strategy (pricing/terms & condition product portfolio etc.) Sales/Technical Support Product Portfolio Development Central Marketing (OEM interaction) After-sales/problem solving Key Management (setting directions and making Key decisions Order Fulfillment (order management/CSD interaction/logistics) Centre of Excellence (training application testing) Brand Management Input for Production Planning, and Invoicing & collection Regarding risks, the parties determined that these risks represent [xx] percent of the profits: Product Liability/ Warranty risk Plant Capacity Risk Product Development Risk Market Risk Inventory Risk Foreign Exchange Risk, and Debtor Risk Regarding assets, the parties determined that these categories represent [xx] percent of the profits: Market know-how Customer relations IP Application (recipe, compacts) IP License Production site, and Customer Lists Counsel points out that the fees paid by Stahl USA to Stahl B.V. were for services performed after the merchandise had already been imported into the United States. Thus, counsel claims that the services, risks, and assets involved did not relate to the sale of the imported merchandise to the United States. ISSUE: Whether the service fees paid by the importer to a related party seller for the various services, risks assumed, and assets provided in connection with the resale of the imported merchandise in the United States would be an addition to the price actually paid or payable, as proceeds of a subsequent resale. LAW AND ANALYSIS: Merchandise imported into the United States is appraised for customs purposes in accordance with U.S. value law under section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. § 1401a). The primary method of appraisement is called 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. 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. As CBP is not questioning whether there were bona fide sales for export to the United States between the Seller and the Importer, we will not examine that question. Imported merchandise will be appraised under transaction value only if the buyer and seller are not related, or if related, either (1) the circumstances of sale indicate that the relationship did not influence the price actually paid or payable, or (2) the transaction value approximates certain test values. See 19 U.S.C. § 1401a(b)(2)(A)-(B). There is no dispute that the transactions at issue involve related parties, as defined in 19 U.S.C. 1401a(g). Counsel claims that a transfer pricing study was conducted to determine the price that Stahl USA should pay to the related selling companies in the Stahl Group for the imported merchandise. Based on the transfer pricing study, counsel further claims that the price paid for the merchandise was at arms-length basis. In this decision, your office has not requested us to examine whether the relationship between Stahl USA and Stahl B.V. influenced the price of the imported merchandise. However, beyond the stated price of the imported goods, the buyer, Stahl USA made additional payments to Stahl B.V., a party related to the seller for the functions, risks, and assets connected to the sales of Stahl’s products to automotive customers in the United States. It is recognized that there is a rebuttable presumption that all payments made by a buyer to a seller, or party related to a seller, are part of the price actually paid of payable. See Headquarter Rulings Letter (HQ) 545663, dated July 14, 1995. (Emphasis added). This position is based on the meaning of the term “price actually paid or payable” as addressed in Generra Sportswear Co. v. United States, 8 CAFC 132, 905 F.2d 377 (1990). In Generra, the Court of Appeals held that the term “total payment” is all-inclusive and that "as long as the quota payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods." The court also stated: Congress did not intend for the Customs Service to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, are for the merchandise or for something else. As we said in Moss Mfg. Co. v. United States, 896 F.2d 535, 539 (Fed. Cir.1990), the “straightforward approach [of section 1401a(b)] is no doubt intended to enhance the efficiency of Customs’ appraisal procedure; it would be frustrated were we to parse the statutory language in the manner, and require Customs to engage in the formidable fact-finding task, envisioned by [appellant]. Generra, 905 F.2d at 380 (brackets in original). The presumption that all payments made by the buyer to the seller are part of the price actually paid or payable may be rebutted. In Chrysler Corporation v. United States, 17 CIT 1049 (1993), the Court of International Trade applied the standard in Generra and determined that certain shortfall and Special Application fees that the buyer paid to the seller were not a component of the price actually paid or payable for the imported merchandise. The Court found that the evidence established that these fees were independent and unrelated costs assessed because the buyer failed to purchase other products from the seller, and not a component of the price of the imported merchandise. Accordingly, the services fees at issue will not be considered part of the price actually paid or payable if the evidence clearly establishes that, like those in Chrysler, they are totally unrelated to the imported merchandise. The burden of establishing that the payments are totally unrelated to the imported merchandise rests with the importer. Generra, 905 F.2d at 380. Here, the payments were made for services that were provided after the merchandise had been imported into the United States and resold to other parties. Therefore, the service fee payments would not be a part of the price actually paid or payable for the imported merchandise. Nevertheless, since the importer made payments to a party related to the seller based on the resale of the imported merchandise in the United States, we must consider whether such service fee payments made to Stahl B.V. should be considered as one of the additions to the price actually paid or payable provided for by section 402(b)(1) of the TAA. One of the five additions to the price actually paid or payable specified in 19 U.S.C. § 1401a(b)(1)(E) are the proceeds of any subsequent resale, disposal or use of the imported merchandise that accrue, directly or indirectly to the seller. Under transaction value, when a fixed percentage of the buyer’s profit from the resale of the merchandise inures to the seller, such payments are proceeds which will be added to the price paid or payable within the meaning of section 402(b)(1)(E) of the TAA. In applying this definition in the context of section 402(b)(1)(E), the income produced from the subsequent resale, disposal, or use of the imported merchandise that accrues directly, or indirectly, to the seller is added to the price actually paid or payable for the imported goods. Under the corresponding regulation, proceeds are described as follows: Additions to the price actually paid or payable will be made for the value of any part of the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrues directly or indirectly to the seller. Dividends or other payments from the buyer to the seller which do not relate directly to the imported merchandise will not be added to the price actually paid or payable. Whether any addition would be made will depend on the facts of the particular case. 19 C.F.R. § 152.103(g). Regarding proceeds, the Statement of Administrative Action (“SAA”) further provides that: Additions for the value of any part of the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrues directly or indirectly to the seller, do not extend to the flow of dividends or other payments from the buyer to the seller that do not directly relate to the imported merchandise. Whether an addition will be made must be determined on a case-by-case basis depending on the facts of each individual transaction. Statement of Administrative Action, H.R. Doc. No. 153, Pt. II, 96th Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 at 49 (1981). As stated in the General Notice on Dutiability of "Royalty" Payments, published in the Customs Bulletin on February 10, 1993, commonly referred to as Hasbro II, at page 13, CBP referred to the definition of proceeds in analyzing whether certain payments were proceeds within the meaning of §402(b)(1)(E). The notice states: Proceeds are defined as "issues; income; yield; receipts; produce; money or articles of other thing of value arising or obtained by the sale of property; the sum, amount, or value of property sold or converted into money or into other property. Notice, p. 13 citing Black's Law Dictionary, 6th ed., 1990 at p. 1204. Another definition of proceeds is "what is produced by or derived from something (as a sale investment, levy, business) by way of total revenue: the total amount brought in ***" Webster's Third New International Dictionary 1986. CBP has previously ruled that for proceeds of a subsequent resale to be dutiable under this section, they must pertain to the resale of the imported merchandise, and they must accrue directly or indirectly to the benefit of the seller. See HQ 545035, dated August 23, 1995. Therefore, in determining whether a payment that a buyer made would be dutiable, as proceeds, CBP will generally apply a three-prong test. The three prongs of this test are: 1) the proceeds must arise from a subsequent resale, disposal, or use of the imported merchandise, 2) the proceeds must accrue, directly or indirectly, to the seller, and 3) the proceeds must relate directly to the imported merchandise. Turning to the first prong, we note that Stahl USA paid the applicable service fees to Stahl B.V. from a split of the profits it earned on the resale of the imported leather chemical treatment products made to Stahl’s automotive customers in the United States. In other words, the payments are based on a percentage of profits that Stahl USA makes from its resale of the imported merchandise to its automotive customers. Accordingly, the profits, and hence the payments made to Stahl B.V., are directly dependent on the subsequent resale of the imported goods in the United States. As such, the profits obtained will only arise from the subsequent resale of the imported merchandise after importation of the products. If there are no resales of the imported products in the U.S. after importation, then there are no profits, and Stahl USA will not be responsible to pay any service fees to Stahl B.V. In turn, the more profits Stahl USA makes from its resale of the imported merchandise to its automotive customers, the more service fees Stahl USA pays to Stahl B.V. The requirements for proceeds set forth in 19 C.F.R. §152.103(g)
state that proceeds arise from any subsequent resale, disposal, or use of the imported merchandise. Here it is clear that the service fee payments arise from the resale of the imported products in the United States. Therefore, we conclude that the first prong of the test, whether the service fee payments made to a seller should be considered as proceeds, is satisfied. The second prong requires that the proceeds must accrue directly or indirectly to the seller. Here, Stahl USA, the buyer and the importer of the applicable products, pays the service fees to its ultimate parent, Stahl B.V., for providing support with certain activities such as sales and marketing undertaken by Stahl B.V., as well as for risks assumed and certain assets furnished involved in the selling of the imported products to the U.S. automotive customers. While Stahl B.V. is not technically the seller of the imported merchandise, it is the parent company of the sellers of the imported merchandise. Thus, because Stahl B.V. is a party related to the various sellers of the imported merchandise, we find that the service fee revenue accrues indirectly to the seller of the merchandise. Accordingly, the second prong of the test for determining whether the payments should be considered as proceeds, is also met. Turning to the third prong, we note that for the payments to be considered dutiable