Application for Further Review of Protest # 1001-99-100012; Nissho Iwai, bona fide sale, related parties, transaction value

HQ W547332 January 2, 2002 Port Director JFK International Airport, Building 77 C/o Chief, Residual Liquidation and Protest Branch Jamaica, NY 10034 RE: Application for Further Review of Protest # 1001-99-100012; Nissho Iwai, bona fide sale, related parties, transaction value Dear Port Director: This is in response to the Application for Further Review of Protest # 1001-99-100012 filed by Minolta Corporation (MC) concerning the importation of electrostatic plain paper copiers (PPCs) from Hong Kong. MC claims the PPCs are properly appraised using transaction value based on the price between the middleman and the manufacturer. We regret the delay in responding. FACTS: MC imported PPCs from Hong Kong in December 1997. The appraised value at the time of entry was based on the invoice price from Minolta Co., Ltd. (MO) located in Osaka, Japan to MC. Entry was made on December 23, 1997. Customs for the Port of New York, JFK Airport, liquidated the entry as entered on November 6, 1998. The protest was timely filed on January 4, 1998. It is our understanding that similar entries have been filed with the Port of Los Angeles. The imported copiers were manufactured by sub contractors of Minolta Industries Hong Kong (MIK) in China. MIK owns the materials and parts used in manufacture. In addition, MIK controls the costs, production scheduling, enforcement of quality control, and procurement of raw material. MIK sources materials from a range of suppliers, including MO. MIK and MC are subsidiaries of MO. MO provides technical assistance and product development to the subcontractors in China. MO develops the material flow techniques and decides the type and specification of equipment used. MO makes all of the decisions relating to layout of the plant, plant design, and plant capacity. MO develops and provides all product specifications and quality control policies and methodologies. MO bears all of the financial risks, including inventory obsolescence of product and parts used in production of products. MO holds legal title and economic ownership of all intangibles associated with the manufacturing process, which includes product research and development, patents and know-how. The subject protests involve alleged multi-tiered transactions, whereby the importer states that MO purchases the copiers from MIK for export to MC in the United States. The importer explains that MC decides a sales plan annually, which MIK uses as a production guideline. On a monthly basis, MC places a tentative order to MO, two months in advance of shipment. The order is confirmed one month before shipment. After confirmation, MO will place an order with MIK, which subsequently places the order with the Chinese subcontractor. After manufacture, the goods are packaged and MIK arranges for the goods to be trucked to Hong Kong where they are then shipped to MC directly. The Chinese subcontractor invoices MIK for labor and factory overheads on a monthly basis. Parts and components are provided by MIK free of charge. Upon shipment of the goods from Hong Kong, MIK issues an invoice to MO for its costs (the labor and material costs) plus a margin to cover general expenses and profit. MO adds a margin to the MIK invoice total to cover its costs plus a profit, then invoices MC. In support of its claim, the importer submits a copy of entry no. XXX, invoice to MC from MO, invoice from MIK to MO, packing list from MIK, packing list from MO, bill of lading from MIK, and other sample documents including: invoices, packing lists, order sheets, sales notes, price lists, waybills, Memoranda from an accountant, application for export bill, and banking transfer documents (claim notes, debit notes, telegraphic transfer memos). The importer claims that the transaction value is properly based on the sales price between MIK and MO. ISSUE: Whether the sale between MIK and MO may serve as the basis for transaction value. LAW AND ANALYSIS: As you are aware, 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. §I401a). 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 enumerated additions. In Nissho Iwai American Corp. v. United States, 16 CIT 86; 786 F.Supp. 1002 (1992), reversed in part, 982 F.2d 505 (1992), and Synergy Sport International. Ltd. v. United States, 17 CIT 18 (1993), the U.S. Court of Appeals for the Federal Circuit and the Court of International Trade, addressed the proper dutiable value of merchandise imported pursuant to a three-tiered transaction. In each case, the courts held that the price paid by the middleman could serve as the transaction value for the shipments in question. However, pursuant to §402(b)(2)(A)(iv), the courts also found that for the transaction to be viable in accordance with the statute, the sale must be negotiated at arm's length, free from non-market influences, and involving goods clearly destined for the United States. In accordance with the courts' decisions in the cases cited above, Customs presumes that the transaction value reported on Customs' Form (CF) 7501, by the importer, is based on the price paid by the importer. See Customs informed compliance publication titled: "What Every Member of the Trade Community Should Know About: Bona Fides Sales And Sales for Exportation," first Issued in November 1996, and revised January 2000. Therefore, where the importer requests that appraisement be based upon the price paid by the middleman to the foreign manufacturer, and the importer is not the middleman, the importer bears the burden of showing that the price is acceptable. The importer must present sufficient evidence that the alleged sale is a bona fide arm's length transaction involving "goods clearly destined for export to the United States." In this case, MC, must show that a bona fide arm's length sale occurred between MIK and MO involving "goods clearly destined for export to the United States. Here, it is evident that the goods were clearly destined for export to the United States. Here, it is evident that the goods were clearly destined for export to the United States. The documentation shows that the goods were manufactured based on the importer's purchase order and shipped directly to the importer, although the goods were sold to the middleman. "Sale" means a transfe, of ownership from one to another for consideration. J.L. Wood v. U.S., 505 F.2d 1400, 1406 (1974). Several factors may indicate whether a bona fide sale exists between a buyer and seller. In making its determination, Customs considers whether the buyer has assumed the risk of loss and acquired title to the imported merchandise. Further, Customs may examine whether the buyer paid for the goods and the payments are linked to specific importations of merchandise, the terms of sale, and whether the roles of the parties indicate that they are functioning as buyer and seller. See Headquarters Ruling Letter (HRL) 546225 dated April 14, 1997. The terms of sale between MIK and MO are f.o.b. Hong Kong, the same terms as in the transaction between MO and MC. The implication is that title and risk of loss passed from the manufacturer to the middleman, then immediately from the middleman to the importer. There is a presumption in circumstances where title simultaneously transfers to the middleman and ultimate customer that a bona fide sale is not apparent. However, in HRL 546316, dated May 29, 1996, Customs reviewed the question whether there was a sale for exportation of imported alcohol beverages in a three tiered transaction involving a middleman where the terms of sale shown on the transaction documents indicated that there was a simultaneous transfer of title. Based on the submitted documentation, including an invoice from the foreign seller, the purchase order confirmation payment document which bore the same invoice number and a copy of the settlement register showing payment by the middleman to the foreign seller, Customs found that there was a sale between the middleman and the foreign seller. The ruling states that the additional documentation supported the importer's claim that a bona fide sale took place between the middleman and the foreign seller and that the amount of the payment remitted to the foreign seller was consistent with the amount on the invoice from the foreign seller to the U.S. supplier. The decision states that while the information submitted did not address the other aspects of the sale transaction, i.e. whether the potential buyer, provides (or could provide instructions to the seller, was free to sell the items at any price he or she desired; selected (or could select) his or her own customers without consulting the seller; and, could order the imported merchandise and have it delivered for his or her inventory, we assumed that the importer would be able to provide information which supports the existence of a bona fide sale between the foreign seller and the U.S. supplier. In this case, we have reviewed the documents and find some evidence that a bona fide sale occurred. The invoices show that the manufacturer sold the photocopiers to the middleman, and that the middleman in turn resold them to the importer. Accordingly, these sets of invoices are consistent with a finding that two sales occurred, one between the manufacturer and middleman and the other between the middleman and the importer. In addition the importer has provided evidence of payments from MO consistent with the amounts invoiced by MIK. The indication is that a bona fide sale has occurred between the manufacturer and middleman. Our analysis turns to whether that sale was conducted at arm's length. Section 402(b)(2)(B) of the TAA sets forth two conditions under which a transaction value between related parties might be deemed acceptable. One examines whether the circumstances of the sale indicate that the relationship between the parties did not influence the price actually paid or payable. The other examines whether the transaction value closely approximates certain "test" values. 19 USC § 140la(b)(2)(B). No evidence was submitted in support of the latter test, test values, therefore, our analysis of the transactions subject of these protests is limited to whether the circumstances of the sale indicate that the price was not influenced by the relationship. The circumstances of the sale test envisions that the transaction value between related parties will be considered acceptable if the parties buy and sell from one another as if they were unrelated. Customs examines the manner in which the buyer and seller organize their commercial relations and the way they derive a price, to determine whether the relationship influenced the price. If the parties can show that the price is settled in a manner consistent with 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. 19 CFR § 152.103(1)(1)(ii). In addition, Customs may find the price is not influenced by the relationship if it is adequate to ensure recovery of all the seller's costs plus a profit equivalent to the firm's overall profit realized over a representative period of time in sales of merchandise of the same class or kind. 19 CFR § 152.103(1)(1)(iii). In this case, the importer submits that a transfer price study was performed with respect to the sales of PPCs, by an outside accounting firm, and that the study meets Customs criteria for the circumstances of the sale test. Based on the importer's statements, the price between MO and MIK was analyzed using a Comparable Profits Method (CPM) under the Internal Revenue Code (IRC) section 482. Using the comparable profit method, an arm's length price is derived by measuring the profitability of unrelated taxpayers that are engaged in similar businesses with other unrelated parties. It is our understanding that the comparable businesses need only be broadly similar in applying the comparable profits method, and that reliability of this method is dependent on the completeness and accuracy of data, the assumptions made, and the degree of comparability between the related party transactions and unrelated party transactions. A copy of the study was not provided for our review, only the importer's summarization of the findings was submitted. As such, we are unable to objectively examine the accuracy and completeness of the data used, the assumptions made and the degree of comparability between the subject transactions and those chosen for comparison. Without objective evidence, we are unable to discern whether the method used in analyzing the price between MO and MIK is adequate to substantiate that the circumstances of the sale were conducted at arm's length. Further, we caution that documentation in support of the arm's length nature of a transaction should be contemporaneous with the transaction, and that an analysis based on an IRC method is only valid where it was used to set the price. Even if the IRC method had been used in setting the price in this case, we note that its use alone is not adequate evidence to establish that the circumstances of the sale were such that the relationship did not influence the price. In HRL 546979 dated August 30, 2000, we explained that while an IRC method may be acceptable for deriving a transfer price, the mere use of such a method is inadequate to substantiate the Customs related party test. The rationales behind the requisites of the IRC and the Customs regulations are distinct in their focus. Additionally, we note that the transaction between MIK and MO is a foreign transaction that would not necessarily fall within the auspices of the IRC, but rather the foreign taxing authority. Thus, the transactions would not be subject to the same regulatory standards. Accordingly, the mere fact that the importer claims to have analyzed the transactions in question using an IRC method is insufficient to substantiate the circumstances of the sale test. In addition, we do not find conclusory statements by the importer to be evidence of the nature of the transaction. The importers statements, while perhaps useful in explaining any objective evidence presented, are not, in and of themselves, conclusive evidence that the transaction was conducted at arm's length. The importer has not established that the prices paid by the middleman in the related party transactions were at arm's length. The prices were not shown to be consistent with the industry in question; nor was the evidence sufficient to show that the prices contained all costs plus a profit equivalent to the firm's overall profit as a whole for the same class or kind of merchandise. Without this information, we find that the price between the middleman and the related manufacturers is influenced by the relationship. Finding that insufficient evidence is present to show that the transaction between MIK and MO was conducted at arm's length, the price between the middleman and the manufacturer may not serve as a basis for transaction value. Since you have accepted the transaction value between MO and MC, the merchandise was properly appraised based on that price. As stated above, the court in Nissho observed that the rule for using the first sale applies only where there is a legitimate choice between two statutorily viable transaction values. In order for the manufacturer's price to constitute a viable transaction value, all elements must exist: 1) bona fide sale; 2) merchandise must be clearly destined for export to the United States; and 3) the transaction must be at arm's length. We find that only the first two elements existed in these protests based upon the information submitted. We do not find that the third element exists in the related party transactions. As such, the sale between the middleman and the related manufacturers does not provide a viable transaction value. The court in Nissho and again in VWP of America, Inc., v. United States, observed that the rule for using the sale from the manufacturer applies only where there is a legitimate choice between two statutorily viable transaction values. 175 F.3d 1327 (1999). Thus, the court recognized that the sale to the U.S. customer might also represent a statutorily viable transaction value. Accordingly, the sale to the importer was properly used for appraisement. HOLDING: Based upon the information submitted, we find no legitimate choice exists between two statutorily viable transactions. Thus, the sale between the middleman and the U.S. importer was properly used as the basis for determining the transaction value of the imported merchandise. Therefore, this protest is DENIED. This protest should be administered as set forth above. In accordance with §3A(l l)(b), Customs Directive 099 3550-065, dated August 4, 1993, this decision should be mailed by your office to the protestant no later than sixty days from the date of this letter. Any reliquidation of the entries in accordance with this decision must be accomplished prior to the mailing of the decision. Sixty days from the date of the letter the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Ruling Module in ACS, and the public via the Diskette Subscription Service, the Freedom of Information Act and other public access channels. Sincerely, Virginia L. Brown Chief, Value Branch Cc: Port of Los Angeles