Internal Advice Request; Transaction Value; Multi-Tiered Transaction

HQ H316892 July 20, 2022 OT:RR:CTF:VS H316892 AP CATEGORY: Valuation Center Director Center of Excellence and Expertise for Machinery U.S. Customs and Border Protection 109 Shiloh Dr., Suite 300 Laredo, TX 78045 Attn: Wilbert Jones, Supervisory Import Specialist RE: Internal Advice Request; Transaction Value; Multi-Tiered Transaction Dear Center Director: This is in response to your e-mail referral of February 16, 2021, forwarding an internal advice request regarding the valuation of metal, woodworking, and industrial tools imported by JPW Industries (“U.S. importer”). This internal advice request specifically concerns the acceptability of the first sale between JPW Industries’ related company, JPW Tool Group Hong Kong Ltd (“middleman” or “JPW HK”) and unrelated manufacturers in China and Taiwan. A virtual meeting with the importer’s customs consultant PricewaterhouseCoopers LLP (“PwC”) was held on April 18, 2022. The importer has asked that certain information submitted in connection with this internal advice be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the importer’s request for confidentiality is approved. The information contained within brackets in italics in the internal advice decision and all attachments to the internal advice request, forwarded to our office, will not be released to the public, and will be withheld from published versions of this decision. FACTS: The U.S. importer serves as a distributor of metal, woodworking, and industrial tools. It is part of a U.S.-based multinational group engaged in the manufacture and distribution of metal, woodworking, and industrial tools in the U.S. and worldwide. The importer purchases the products it imports into the United States through its related middleman operating through branch offices in Taiwan and China. The middleman is responsible for product sourcing from the Asia Pacific region. Specifically, the middleman identifies and maintains relationships with suppliers, negotiates prices, and communicates with distributors in the individual markets. The middleman does not hold physical inventory and does not maintain an inventory account in its books and records. The middleman records purchases to its costs of sales account. The submitted U.S. Transfer Pricing Documentation Study for the Fiscal Year Ended December 31, 2014, prepared for the importer, describes the U.S. importer as having “a strong presence in the U.S. market for manual metalworking and woodworking machinery and industrial workholding.” The study also states that the middleman operates “through its branch office in Taiwan, and its representative office in China” and assists with product development, engineering, and direct sourcing of the company’s products through China and Taiwan, and sales to third party customers in and outside of the region. The Transfer Pricing Analysis and Report for the Fiscal Year Ended December 31, 2018, prepared for the importer, explains that the U.S. importer is responsible for negotiating and selling to customers in North America. Its customers are mainly wholesale distributors, retail chain stores, and specialty stores. Most products sold are handled and processed by the importer through a warehousing facility in Tennessee. Products are also drop-shipped directly from Asia to customers. Pursuant to the Master Supply Agreement between the U.S. importer and the middleman, the U.S. importer designs, markets, and sells products, while the middleman sources, procures, and supplies products. The importer purchases the products from the middleman. The products consist of metalworking machinery, woodworking machinery, hand tools and toolsets, shop equipment, and other related products supplied to the importer by the middleman, which are manufactured by third parties with whom the middleman coordinates, manages, and oversees. The products are manufactured according to the importer’s standards and the quantities specified in the importer’s purchase orders. Unless otherwise agreed by the parties, title to and risk of loss pass from the middleman to the importer at the international date line. All products are considered delivered to the importer at the international dateline. The middlemen’s services are “non-exclusive,” and the importer may purchase products from other sources. All purchase orders submitted by the importer need to specify the product type and quantity, and the requested delivery date. In the event of any inconsistency between the agreement and the purchase order, the terms and conditions of the agreement prevail. The purchase price is an amount agreed upon by the middleman and the importer. The full amount of the purchase price is due and payable no later than 30 calendar days after the invoice date unless otherwise agreed by the parties. Payment of any amount by either party is by direct bank transfer to the payee’s bank account or by debit or credit to the relevant party’s intercompany account. On December 20, 2019, the importer, through its customs consultant PwC, explained that “while JPW HK is responsible for arranging transportation with approved carriers, JPW Industries bears the cost of international freight.” The marine cargo insurance policy valid from November 12, 2017 to November 12, 2018, was issued “[f]or the account of JPW Industries, Inc. (known as the Assured)[,] its affiliates, subsidiaries and for the related companies for which this Policy is at risk.” The insurance policy covers “all lawful goods and/or merchandise of every description in packing suitable for the intended voyage but consisting principally of: wood working, metal working tools, and similar merchandise.” The policy covers “all shipments, lost or not lost, from ports and/or places in the World, to ports and/or places in the World directly or via ports and/or places in any order, including the risk of transshipment by land, air, or water.” The goods are insured “[a]gainst all risks of physical loss or damage from any external cause.” The U.S. importer paid for the policy. The U.S. importer first places a purchase order to the related middleman for specific qualities of certain goods with different shipping dates, who issues a purchase order for the same merchandise to one of the unrelated manufacturers, who then produces the merchandise according to the requested specifications. The manufacturers ship the ordered merchandise in accordance with the requested shipping dates directly to the importer in the U.S. The merchandise does not ship to or enter the physical inventory of the middleman. The U.S. importer renders payment to the middleman, who in turn pays the manufacturers. Title and risk of loss to the goods are supposed to pass from the manufacturers to the middleman in accordance with free on board (“FOB”) Port of Export Incoterms when the product is loaded onto the shipping vessel at the port of export. Under the Master Supply Agreement memorializing the parties’ practices since January 2018 title and risk of loss to the goods are supposed to pass from the middleman to the U.S. importer when the shipping vessel crosses the international date line. The importer has submitted the following supporting entry documentation: Purchase from [X] in China (“manufacturer A”) Purchase order (“PO”) number (“No.”) [X], dated March 28, 2018, from the importer to the middleman. It requests that the merchandise be shipped directly to the importer in La Vergne, TN. The shipping terms are “FOB-ocean freight.” Manufacturer A located in China is listed as the requested manufacturer. The merchandise consists of tools such as reversible vises made to certain specifications. The required ship date is September 20, 2018. Part no. 14800 described as “4800 reversible vise 8 in jaw ship except” with a quantity of 240 pieces priced at $[X] per unit had a total price of $[X]. All the merchandise (18,200 pieces) listed on the invoice was priced at $[X]. Pursuant to the Importer’s Purchase Order Terms and Conditions, no changes in the design and specifications can be made without prior written consent of the importer. The importer must be notified at least 90 days in advance of any changes in price. Upon production of the merchandise, the manufacturers issue an invoice to the middleman, who subsequently issues an invoice to the U.S. importer. PO no.[X], dated March 29, 2018, from the middleman to manufacturer A indicates that the vises will be shipped directly by Manufacturer A to the U.S. importer in La Vergne, TN. The shipping terms are “FOB-ocean freight.” The requested delivery date is September 20, 2021. The total merchandise (18,200 pieces) is made according to the importer’s specifications and is priced at $[X]. Part no. 14800 includes 240 pieces of bench vises priced at $[X] per unit for a total of $[X]. Commercial invoice no. [X], dated September 21, 2018, from manufacturer A to the middleman states that the port of loading is Quingdao, China and the place of delivery is in La Vergne, TN. The 240 pieces of part no. 14800 are priced at $[X] per unit for a total of $[X]. The bill of lading no. is [X]. The total merchandise (7,237 pieces) is priced at $[X]. Commercial invoice no. [X], dated September 27, 2018, from the middleman to the importer states that the merchandise (7,237 pieces) ships from China to the United States on September 21, 2021. Payment is due 30 days from the bill of lading. The invoice amount for part 14800 is $[X] per unit and the total price for 240 pieces is $[X]. The total merchandise (7,237 pieces of vises, clamps, and other similar articles) is priced at $[X]. The September 21, 2018 packing list issued by manufacturer A to the middleman for invoice [X] states that the destination is La Vergne, TN. The 7,237 pieces have gross weight 127,836 kg and net weight 9,840 kg. The 240 pieces of part no. 14800 have gross weight 10,080 kg and net weight 9,840 kg. The September 21, 2018 packing list from the middleman to the importer states that the estimated delivery date is September 21, 2018. The 240 pieces of part no. 14800 have gross weight 10,080 kg and net weight 9,840 kg. The 7,237 pieces of merchandise including part no. 14800 have gross weight 127,836 kg and net weight 9,840 kg. The September 21, 2018 bill of lading no. [X] lists manufacturer A as the shipper on behalf of the middleman. The importer is listed as the consignee. The port of lading is Quingdao, China; the port of discharge is Port Rupert in Canada; and the port of delivery is La Vergne, TN. The gross weight is 127,836 kg. The merchandise is shipped on September 21, 2018. Per the status notification for bill of lading [X], dated October 15, 2018, the cargo is discharged in Canada in Prince Rupert, and the first U.S. port of entry is Rainier, MN. The gross weight is 127,836 kg. The importer is the ultimate consignee. The status notification references the in-bond transit (“IT”) numbers and rail bond numbers for the containers. According to the proof of release dated October 26, 2018, the importer is the importer of record and consignee. The port of entry is Nashville, TN. The shipment was released in Nashville, TN on October 24, 2018. The proof of release references the IT and rail bond numbers. The middleman’s internal accounting system screenshot and bank statement indicate that on December 7, 2018, the middleman paid manufacturer A $[X] per invoice no. [X]. The importer’s internal accounting system screenshot and the middleman’s bank statement of October 19, 2018, show that from September 28, 2018 to October 19, 2018, the importer paid the middleman $[X] per invoice no. [X]. The entry summary reveals that the merchandise was imported into the United States on October 14, 2018. The exporting country was China and the importer in La Vergne, TN was the U.S. importer of record. The total entered value for 7,237 pieces of vises, clamps and other similar articles was $[X]. The gross weight was 120,807 kg. The merchandise transited from Canada to the United States in-bond via rail to CSX Intermodal Terminal P587 in Nashville, TN as indicated by the rail bond numbers listed on the entry. Purchase from [X] in Taiwan (“manufacturer B”) PO no. [X] dated February 6, 2018, from the importer to the middleman indicates that the shipping terms are “FOB-ocean freight” and includes the requested product specifications for an air filtration system. The requested ship dates are August 14, 2018 to October 16, 2018. The merchandise would be shipped to the importer in La Vergne, TN. The price for air filtration system part no. 708620B is $[X] (296 pieces at $[X] each). The total price of the purchase order (1,776 pieces) is $[X]. Pursuant to the Importer’s Purchase Order Terms and Conditions, no changes in the design and specifications can be made without prior written consent of the importer. The importer must be notified at least 90 days in advance of any changes in price. PO no. [X] dated July 8, 2018, from the middleman to manufacturer B located in Taiwan states that the shipping terms are “FOB-ocean freight,” and the requested shipping dates are August 14 to October 16, 2018. The price for air filtration system stock no. 708620B is $[X] (296 pieces at $[X] each). The total price of the purchase order (1,776 pieces) is $[X]. Invoice no. [X] dated August 8, 2018 from manufacturer B to the middleman states that the sailing date is August 13, 2018. The merchandise is shipped from Taiwan and the destination is La Vergne, TN. The shipping terms are “FOB-Taiwan.” The air filtration is manufactured in Taiwan according to the importer’s specifications. The price for air filtration system part no. 708620B is $[X] (296 pieces at $[X] each). The total invoice price (402 packages/1,691 pieces) is $[X]. Commercial invoice no. [X] dated August 13, 2018, from the middleman to the importer confirms that the sailing date is August 13, 2018, the merchandise ships from Taiwan, and the final destination is La Vergne, TN. A total of 296 pieces of part no. 708620B were ordered at $[X] per unit for a total of $[X]. The total invoiced price (1,691 pieces) is $[X]. The importer explains that a rounding difference of $1.18 between the total amounts for part no. 708620B resulted in a discrepancy between the price here ($[X]) and in PO no. [X] ($[X]). Payment is due 30 days from the bill of lading. Packing list no. [X] dated August 13, 2018, from the middleman confirms that the 296 pieces of part no. 708620B with net weight 7,252 kg and gross weight 8,199.20 kg shipped from Taiwan to La Vergne, TN. All the merchandise that shipped to La Vergne, TN consisted of 1,691 pieces with net weight 15,752 kg and gross weight 18,753 kg. Bill of lading no. [X] dated August 13, 2018 lists manufacturer B as the shipper and the importer as the consignee. The port of loading is Taichung, Taiwan; the port of discharge is Prince Rupert; Canada, and the place of delivery is La Vergne, TN. The merchandise is described as 402 packages of “woodworking machine and parts” with gross weight 18,753 kg included the 296 packages with total gross weight 8,199 kg. The status notification dated August 21, 2018 confirms that two containers containing 402 packages with gross weight 18,753 kg including the 296 pieces with gross weight 8,199 kg exported on behalf of the middleman were loaded in Taichung, Taiwan; were discharged at Prince Rupert, Canada; and were delivered in La Vergne, TN. The merchandise cleared through customs in Nashville, TN. The notification references the IT number and the rail bond number. After being discharged from the ocean vessel in Prince Rupert, Canada, the merchandise is loaded onto a rail line while remaining in-bond to the final place of delivery in La Vergne, TN via rail. The same container numbers are listed as on the packing list and bill of lading. The proof of release dated July 22, 2019, confirms that on October 4, 2018, the merchandise (402 cartons) was released from the Port of Nashville, TN. The proof of release references the IT number and rail bill number indicated in the status notification. The middleman’s internal system screenshot and bank statement show that the middleman paid manufacturer B $[X] per invoice no. [X] on September 26, 2018, which included $[X] for part no. 708620B. The importer’s internal system screenshot shows that the importer paid the middleman $[X] per invoice no. [X]. The payment vouchers are dated October 31 and November 22, 2018, and the advance payments were made by the importer from August 31 to November 22, 2018. The October 19, 2018 statement from the middleman’s bank confirms that the payments amounting to $[X], which includes $[X] for part no. 708620B, were transferred from the importer’s bank account from August 31, 2018 to November 22, 2018. The entry summary shows that the merchandise was imported into the United States on September 18, 2018; the importer was the importer of record; and International Falls, MN was the U.S. port of entry. The total entered value for 402 cartons was $[X]. The total gross weight was 18,754 kg. The merchandise transited from Canada to the United States in-bond via rail to CSX Intermodal Terminal P587 in Nashville, TN. Purchase from [X] in Taiwan (“manufacturer C”) PO no. [X] dated August 3, 2018, from the importer to the middleman includes the requested product specifications for the merchandise (band saw and parts, 582 pieces) with a total value of $[X]. The requested ship dates are September 11, 2018 to January 15, 2019. The PO includes part number 413452, with description “HVBS-710SG 7x10.5 GearHead Miter Bandsaw,” and a quantity of 29 pieces ordered at $[X] per unit, with a total value of $[X]. The merchandise would be shipped to the importer in La Vergne, TN. Pursuant to the Importer’s Purchase Order Terms and Conditions, no changes in the design and specifications can be made without prior written consent of the importer. The importer must be notified at least 90 days in advance of any changes in price. PO no. [X] dated August 3, 2018, from the middleman to manufacturer C located in Taiwan states that the shipping terms are “FOB-ocean freight.” The requested shipping date for the 29 pieces of part number 413452 is October 23, 2018. Each unit is valued at $[X] and the total price for part number 413452 is $[X]. The merchandise (91 pieces) listed, that includes part number 413452, is priced at $[X]. Invoice no. [X] dated October 24, 2018 from manufacturer C to the middleman states that the sailing date is October 27, 2018. The merchandise (band saw and parts) is shipped from Taichung, Taiwan, and the destination is La Vergne, TN. The shipping terms are “FOB-Taichung, Taiwan.” The merchandise is manufactured in Taiwan according to the importer’s specifications. The total invoiced price for the 29 pieces of part number 413452 is $[X] per unit or a total of $[X]. The listed price for 806 units of band saw and parts is $[X]. Commercial invoice no. [X] dated October 29, 2018, from the middleman to the importer confirms that the sailing date is October 27, 2018; the merchandise is shipped from Taichung, Taiwan; and the final destination is La Vergne, TN. The total quantity of 29 units ordered at $[X] per unit, totals $[X]. The importer notes that there is a rounding difference of $0.04 between this invoice and PO no. [X] from the importer to the middleman ($[X]). The price for the 806 units is $[X]. The payment terms are “T/T 30 days bill of lading.” Packing list no. [X] dated October 24, 2018, from manufacturer C confirms that 806 units with net weight 37,171.55 kg and gross weight 40,996 kg shipped from Taiwan to La Vergne, TN. Packing list no. [X] dated October 27, 2018, from the midd