Request for Internal Advice on Transactions Involving Victor Woolen Products

HQ W544658 March 26, 1991 VAL CO:R:C:V W544658 VLB CATEGORY: Valuation Peter J. Battaglioli Deputy Assistant Regional Commissioner Regulatory Audit, Northeast Region Boston, Massachusetts 02222-1056 RE: Request for Internal Advice on Transactions Involving Victor Woolen Products Dear Mr. Battaglioli: This is in response to your memorandum (ENT-3-0 :RA JPG) dated February 20, 1991, requesting internal advice on transactions involving Victor Woolen Products, Ltd., (hereinafter referred to as “VWPL”) of St. Victor, Quebec, and its wholly owned subsidiary, Victor Woolen Products of America, Inc. (hereinafter referred to as “VWPA”). FACTS: You state VWPA was incorporated in Delaware on October 24, 1986. VWPA has a registered agent in Delaware who represents VWPA for service of process and as its legal address in Delaware. VWPA also has a sales agent in New York, Concept III Textile Sales, Ltd., and a bank account in Jackman, Maine. In November 1989, VWPA became the exclusive distributor and the importer of record for imports of melton fabrics that were produced by VWPL. The fabric was shipped directly from VWPL’s plant in St. Victor, Quebec, to third party U.S. customers. Prior to November 1989, VWPL had been the importer of record for their fabric sales to U.S. customers. Prior to November 1989, when VWPL was the importer of record for the U.S. sales, the sales prices of the fabric were between $6.50 and $6.95 per yard. After duties, merchandise processing fees and broker fees were taken out of the price, the entered values ranged for $4.60 to $4.90 per yard. In these transactions, VWPL paid Concept III a 5 percent commission, which was passed on in the sales price to the U.S. customer. Subsequently, when VWPA became the importer of record, the parties established an average transfer price of $3.50 per yard, which is the value that is declared to Customs. In addition, VWPA began paying the 5 percent commission to Concept III. This 5 percent commission was not included in the transfer price of the fabric. However, the sales prices to the U. S. customers remained at approximately $6.50 to $6.95 per yard. You further explain that all of VWPA’s books and records are maintained at VWPL in St. Victor de Beauce, Quebec, Canada. Counsel for the importer emphasizes that the books and records are maintained in a segregated area at VWPL. In addition, VWPL employees provide administrative services to VWPA. The labor expenses of these employees are allocated and charged back to VWPA via a monthly journal entry. Other allocated expenses include telephone, rent, EDP, insurance and paper. You state that all monthly allocations are periodically adjusted to reflect the percentage of VWPL’s sales to VWPA to their total sales. You have provided an example of how the transactions at issue are structured. In the example, on October 5, 1989, VWPA issued a Bulk (blanket) Purchase Order to VWPL for 2,500 rolls of fabric at $3.50 per yard. A roll contains approximately 70 yards. The purchase order was issued in anticipation of VWPA’s fabric purchases for the year ended October 31, 1990. Counsel for VPWA states that VWPA assumes the full risk of payment for bulk purchase order placed with VWPL even if the third party customer payments for the merchandise represented by the bulk order are not made. On March 6, 1990, and March 19, 1990, a U. S. purchaser issued two purchase orders to Concept III/VWPA for 1,600 yards and 3,700 yards of fabric at $6.95 per yard. Concept III/ VWPA subsequently issued salesman memo orders indicating the U.S. purchaser’s P.O. numbers. On March 7, 1990, and March 20, 1990, VWPA issued Shipping Request Memos for the orders again referencing the U.S. purchaser’s P.O. numbers. Two set s of invoices were then prepared. VWPL personnel prepared sales invoices containing the price to VWPA of $3.50 per yard. This invoice indicates that VWPA is the buyer, and the U.S. purchaser is listed under the ship to address. These are the invoices that were presented to Customs at the time of entry. The terms of this transact ion are F.O.B. plant. You indicate that VWPA pays VWPL on an invoice-by-invoice basis through a check drawn against VWPA’s U.S. bank account. This check is deposited into VWPL’s Canadian bank account. The second set of invoices was prepared by VWPL personnel on behalf of VWPA. These were invoices from VWPA to the U.S. customer. The terms of the transaction between VWPA and the U.S. purchaser were F.O.B. plant. However, counsel for VWPA states that on occasion, VWPA will ship to U.S. customers on a “prepaid” basis. In these situations, VWPA pays the freight for the merchandise and then receives reimbursement from the U.S. customer. On the invoices, the U.S. customer was instructed to make payment to VWPA in Jackman, Maine. ISSUES: Whether there a bona fide sale between VWPL to VWPA. If yes, whether this sale is a sale for exportation to the U.S. LAW AND ANALYSIS: The merchandise at issue was appraised under transaction value. Transaction value is defined in section 402(b), Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(b); TAA), as the “price actually paid or payable for the merchandise when sold for exportation to the United States” (emphasis added). Thus, there must be a bona fide sale of the imported merchandise to be appraised under transaction value. In J.L. Wood v. U. S., 62 CCPA 25, 33, C.A.D. 1139 (1974), the U. S. Court of Customs and Patent Appeals defined the term “sale” as the “transfer of property from one party to another for consideration. “Similarly, section 2-106(1) of the Uniform Commercial Code (“the U.C.C.”) defines a “sale” as “the passing of title from the seller to the buyer for a price”. Although the J.L. Wood case was decided under the appraisement statute prior to the TAA, Customs has applied this basic concept of what constitutes a sale under the TAA. In previous Headquarters Ruling Letters (HRL’s), involving the question of whether a bona fide sale existed between a foreign seller and its related U.S. subsidiary, Customs has examined several factors. To determine whether there was a transfer of property or ownership, Customs has ascertained whether title and risk of loss to the merchandise passed to the subsidiary. In HRL 543708, dated April 21, 1988, Customs addressed a related party scenario that is nearly identical to the situation presented in this case. HRL 543708 involved transactions between a Japanese parent company (“the parent”), its U.S. subsidiary (“the subsidiary”) and an ultimate U.S. purchaser. In one series of transactions, the invoices from the parent to the subsidiary, the importer, contained terms of sale of F.O.B. Japan or C.I.F. Los Angeles. Further documentation consisting of the purchase orders and invoices revealed that the sale terms to the U.S. customer were F.O.B. Japan. To determine whether title and risk of loss passed between the Japanese parent and its subsidiary, Customs examined several provisions of the U.C.C. (2- 319, 2-320, 2-401, 2-504, and -509) and the Official Comments to those sections. The examination revealed that a the determination of when title and risk of loss pass between a buyer and a seller depends on whether the applicable contract is a “shipment” or “destination” contract. In making this determination, Customs stated the following: According to these [U.C.C.] provisions, FOB point of shipment contracts and all CIF and C & F contracts are “shipment” contracts, while FOB place of destination contracts are “destination” contracts. These provision indicate that, unless otherwise agreed by the parties, title and risk of loss pass from the seller to the buyer in “shipment” contracts when the merchandise is delivered to the carrier for shipment, and in “destination” contracts when the merchandise is delivered to the named destination. Based on this analysis of the terms of sale under the U.C.C., Customs held that the F.O.B. Japan “sales” between the parent and the subsidiary, and the F.O.B. Japan “sales” between subsidiary and the U.S. customer were “shipment” contracts. Therefore, title and risk of loss passed from the parent at the time the merchandise was delivered to the carrier in Japan. Further, Customs held that [i]t is also clear that the U.S. customer received title and assumed the risk of loss upon delivery of the goods to the carrier. Thus, we conclude that, with respect to this merchandise, title and risk of loss passed directly from the parent to the U.S. customer without an intervening sale between the parent and importer. In the present case, the documentation in the transaction between VWPL and VWPA indicates that the “sale” is F.O.B. plant. Similarly, the documentation between VWPA and the· U.S. customer reveals that the transaction was on an F.O.B. plant basis. Thus, under the U.C.C. as discussed in HRL 543708, both these contacts would be “shipment contracts” with title passing when the merchandise was delivered to the carrier for shipment. Therefore, the evidence in this case, as in HRL 543708, reveals that title passed directly from VWPL to the U.S. customer. The result is that there was not an intervening sale between VWPL and VWPA due to the fact that the requisite transfer of property or title is lacking in the transactions between VWPL and VWPA. Thus, consistent with HRL 543708, transaction value for the imported fabric should be based on the price actually paid or payable by the U. S. customer. HOLDING: Under the facts presented, no bona fide sale occurred between VWPL and VWPA. Rather, title passed directly from VWPL to the U.S. customer. The price that the U.S. customer paid is the price actually paid or payable for the merchandise under transaction value. Sincerely, John Durant, Director Commercial Rulings Division