Application for Further Review of Protest No. 1703-06-100113; Sale for Exportation; Clearly Destined; Arm’s Length

HQ W563542 July 24, 2009 OT:RR:CTF:VS 563542 CRS CATEGORY: Valuation Mr. John Porter Area Port Director U.S. Customs and Border Protection 1 East Bay Street Savannah, GA 31401 RE: Application for Further Review of Protest No. 1703-06-100113; Sale for Exportation; Clearly Destined; Arm’s Length Dear Sir: This is in response to an application for further review of Protest No. 1703-06-100113, dated May 31, 2006, filed by KPMG LLP on behalf of the importer of record, [******************] (hereinafter, the “protestant”), concerning the appraisement of certain [********************] imported under entry number [*************************************]. The protested entry serves as the lead protest in this matter. A meeting to discuss this matter was held at CBP Headquarters on December 21, 2006. The protestant has advised that the disclosure of certain information relative to this matter could potentially cause substantial harm to the competitive position of the parties involved. Based on our review of the matter we have concluded that the information in question is eligible for confidential treatment under 19 C.F.R. § 103.12; accordingly, we have granted the request for confidentiality. Appropriate steps will therefore be taken to ensure that the information remains confidential and, to this end, the bracketed portions of this decision will be redacted from any published versions of this decision. A public version of this decision is enclosed for your files. However, the protestant should note that U.S. Customs and Border Protection will be guided in this regard by the laws relating to confidentiality and disclosure, to include the Freedom of Information Act (FOIA), as amended (5 U.S.C. § 552), the Trade Secrets Act (FOIA) (18 U.S.C. § 1905) and/or the Privacy Act of 1974, as amended (5 U.S.C. § 552a). The provisions of the FOIA, the TSA and the Privacy Act will prevail in any conflict concerning the confidentiality and disclosure of information. Accordingly, any information submitted in connection with this matter will be disclosed, if requested, where, e.g., it is administratively determined that the information is not protected by the TSA, the Privacy Act or an exemption of the FOIA. FACTS: The protest involves the importation of merchandise pursuant to a three-tiered transaction between related companies. The parties concerned are the protestant, [*******************] (hereinafter, the “middleman”), and [******* *********************] (hereinafter, the “manufacturer”). The middleman is located in [*********]; the manufacturer, in [*************]. Both the protestant and the middleman are subsidiaries of [********************************] (hereinafter, the “parent” or “parent company”), a [************] corporation. The manufacturer is a joint venture between the parent corporation and [**********************************] (hereinafter, “SAM”), a [************] corporation. The parent and SAM each own fifty percent of the manufacturer. In establishing the manufacturer, the parent company and SAM entered into a supply agreement for the purchase of the imported merchandise. Under the terms of the agreement the parent corporation agreed to purchase a minimum quantity each year at a price of [******] per unit for all product produced by the manufacturer. Purchases in excess of the minimum quantity would also be at [*******] per unit. Except during an initial transition period, SAM agreed to sell product exclusively to the foreign parent. Further, it was agreed that title to and risk of loss in the merchandise would transfer according to the invoice terms at the port of export. Both SAM and the parent corporation assigned their rights and obligations under the agreement. SAM assigned its rights and obligations to the manufacturer in accordance with § 9.1 of the supply agreement. Under the terms of a separate assignment agreement, but in accordance with the provisions of § 9.3 of the supply agreement, the parent assigned its rights and obligations to the middleman. The parent and SAM are publicly-traded multinational corporations. In addition to a copy of the supply agreement, the protestant provided representative documentation in respect of the three-tiered transaction between the parties. The documents included the CBP Forms 3461 and 7501 submitted with the protested entry and the following: - A purchase order from the protestant to the middleman, dated December 1, 2004, for [***********] units of merchandise. The purchase order is labeled “Revision 2,” identifies the middleman as the vendor, describes the merchandise, and recites the shipping and delivery dates and destination in the United States. The terms of sale are listed as FOB Savannah; - A purchase order from the middleman to manufacturer, dated December 3, 2004 for [********] units of merchandise.  Each invoice identifies the manufacturer as the seller, and provides a description of the merchandise consistent with the description in Importer’s purchase order. It indicates that the merchandise is to be delivered to the protestant in the United States.  The terms of sale are stated as FOB port of export;   - An invoice from the manufacturer to the middleman, dated December 7, 2004, which references the protestant’s purchase order to the middleman and specifies the quantity, unit price and total price of the merchandise. It provides an estimated time of arrival at the port of Savannah. The unit prices correspond to those agreed to in the Supply Agreement. The terms of sale are listed as FOB port of export;   - Invoices from the middleman to the protestant, dated December 20, 2004. The invoices describe the merchandise and reference the protestant’s purchase order to the middleman. The invoices list the merchandise sales unit price and total price in U.S. dollars, and a delivery address in Savannah. The terms of sale are stated as being CIF duty paid; - A payment advice, dated July 2, 2005, from the middleman’s bank advising that the middleman’s account was credited. The amount deposited covers the balance due for the merchandise listed in the protestant’s purchase order and includes international freight charges;   - Proof of payment by the middleman to the manufacturer via wire transfer notification issued by the middleman’s bank on July 2, 2005, advising the middleman that its account was debited and funds transferred to the manufacturer’s account. The funds transferred cover the balance due stated on the manufacturer’s invoice; - Sample journal entries on the middleman’s books corresponding to the middleman’s purchase of the subject merchandise as listed on the manufacturer’s Invoice;   - A packing list dated December 7, 2004, prepared by the manufacturer and issued to the middleman. The packing list describes the size, quantity and gross weight of the merchandise and references the protestant’s purchase order and the invoices issued by the middleman to the protestant. It provides the estimated sailing date of the vessel and estimated arrival date in Savannah; - A bill of lading dated December 7, 2004, listing the manufacturer as the shipper/exporter and the protestant as the consignee of the merchandise. The bill references the shipping containers listed on the middleman’s invoices and the merchandise ordered by the protestant. It lists the port and date of lading and identifies Savannah as the destination; and - A fumigation certificate listing the manufacturer as the exporter and protestant as the importer of the [*******] units of merchandise. The certificate also lists the three shipping containers referenced in the packing list and the invoices issued by the Middleman to Importer. It certifies that the merchandise and packing materials were fumigated on December 4, 2004. In addition to the foregoing, the protestant submitted FY 2005 financial statements for the parent and its related subsidiaries containing merchandise sales, costs and profit margins for the manufacturer, middleman and Importer. The protestant contends that the merchandise covered by the protested entry is properly appraised under the transaction value method based on the sale between the manufacturer and the middleman. However, as liquidated, the imported merchandise was appraised based on the sale between the middleman and the importer. On the Form 6445A, the appraising officer raised concerns in respect of the sufficiency of information. In addition, it was noted the supply agreement is a contract between the foreign parent and SAM and that, consequently, the “first sale” price was imposed on the manufacturer and middleman, rather than having been negotiated between the parties. ISSUE: The issue presented is whether the sale between the manufacturer and the middleman constitutes a sale for exportation for purposes of determining the appraised value of the imported merchandise. LAW AND ANALYSIS: As a preliminary matter, we note that the protest and application for further review was timely filed under the statutory and regulatory provisions for protests (19 U.S.C. § 1514; 19 C.F.R. pt. 174). We also note that the issues raised are protestable (19 U.S.C. § 1514) and that the protestant qualifies as the importer of record for purposes of 19 U.S.C. § 1484. 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; codified at 19 U.S.C. § 1401a). The primary method of appraisement under the TAA is transaction, defined as the price actually paid or payable for the merchandise when sold for exportation to the United States, plus amounts in respect of certain statutorily enumerated additions. The term “price actually paid or payable” is defined in pertinent part as “the total payment (whether direct or indirect . . . ) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C. § 1401a(b)(4). See Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990). Transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, an examination of the circumstances of sale indicates that the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain "test values." 19 U.S.C. § 1401a(b)(2)(B). Sale for Exportation In Nissho Iwai American Corp. v. United States, 786 F. Supp. 1002 (Ct. Int’l Trade 1992), rev’d in part, aff’d in part, 982 F.2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit reviewed the standard for determining transaction value when there is more than one sale that may be considered as being a sale for exportation to the United States. In so doing, the court reaffirmed the principle of E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that the manufacturer's price, rather than the middleman's price, is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. Nissho Iwai, 982 F.2d 505, 511. In reaffirming the McAfee standard the court stated that in a three-tiered distribution system: The manufacturer's price constitutes a viable transaction value when the goods are clearly destined for export to the United States and when the manufacturer and the middleman deal with each other at arm's length, in the absence of any non-market influences that affect the legitimacy of the sales price . . . . [T]hat determination can only be made on a case-by-case basis. Id. at 509. See also, United States v. Getz Bros. & Co., 55 C.C.P.A. 11 (1967), Synergy Sport International, Ltd. v. United States, 17 C.I.T. 18 (1993). As a general matter, CBP presumes that transaction value is based on the price paid by the importer. In order to rebut this presumption and base transaction value on a sale involving another party, such as a middleman, the importer must provide evidence that establishes that the manufacturer’s price constitutes a statutorily viable transaction value in accordance with Nissho. To this end, the importer must provide detailed information that the goods were clearly destined for export to the United States, and that the manufacturer and the middleman dealt with each other at arm’s length, absent any non-market influences affecting the legitimacy of the sales price. See Transfer Pricing; Related Party Transactions, 58 Fed. Reg. 5445 (Jan. 21, 1993), published as T.D. 96-87, 31 Cust. B. & Dec. 1, 30 Cust. B. & Dec. 52 (Jan. 2, 1993); see also Customs and Border Protection, Dep’t Homeland Security, Informed Compliance Publication, Bona Fide Sales and Sales for Exportation (Aug. 2005), available at http://www.cbp.gov/linkhandler/cgov/trade/legal/informed_compliance_pubs/icp010r2.ctt/icp010r2.pdf (Mar. 5, 2009). In this case there are two sales that may be considered a sale for exportation to the United States within the meaning of section 402 of the TAA. The protestant has provided detailed information and documentation concerning the roles of the various parties in the three-tiered transaction, including purchase orders, invoices, contracts, shipping documents and financial statements. 58 Fed. Reg. 5445. In the particular circumstances of this case we find that the information submitted constitutes sufficient evidence for purposes of T.D. 96-87. In regard to the first prong of the Nissho test, the evidence unambiguously establishes that the merchandise was clearly destined for export to the United States. Purchase orders from the protestant to the middleman match purchase orders from the middleman to the manufacturer. These in turn are consistent with commercial invoices from the manufacturer to the middleman and from the middleman to the protestant. For example, the invoices reference the purchase order pursuant to which the merchandise was manufactured and part numbers specific to the protestant. Part numbers also appear on the packing list. Similarly, the shipping documents indicate that the merchandise was to be delivered to the protestant. Moreover, the terms of the supply agreement require the manufacturer to sell the merchandise exclusively to the middleman. See Getz, 55 C.C.P.A. at 24-26. The second prong of the Nissho test requires that in order for the “first sale price” to fall within the statutory definition of transaction value, the parties deal with each other at arm’s length, absent any non-market influences that might affect the validity of the sales price. Nissho, 982 F.2d at 509. In this instance, the manufacturer and the middleman are related pursuant to section 402(g)(1)(G) of the TAA, in that they are “directly or indirectly . . . controlled by, or under common control with” the parent corporation. In addition, the parent company and SAM are related within the meaning of section 402(g)(1)(G) to the extent that they directly or indirectly control the manufacturer by virtue of their ownership interest in the company. See Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 56; see also Transfer Pricing: Related Party Transactions, 58 Fed. Reg. 5445 (Noting that for purposes of the control provision, one person is deemed to control another when the former is legally or operationally in a position to exercise restraint or direction over the latter). However, notwithstanding the relationship created by the joint venture, the record reflects that in the particular circumstances of this case the price of the imported merchandise was negotiated between otherwise unrelated parties, viz., the parent and SAM, who then assigned their rights to buy and sell the merchandise at the price specified in the supply agreement to, respectively, the middleman and the manufacturer. Although the manufacturer and the middleman are considered to be related persons for purposes of section 402(g) of the TAA, the price at which they buy from and sell to each other was negotiated between the parent and SAM, who apart from the joint venture, are unrelated parties. Thus, the price at which the parent agreed to buy from SAM and at which SAM agreed to sell to the parent is an arm’s length price. In the particular circumstances of this case, the fact that they chose to delegate their rights to buy and sell at this price to the middleman and the manufacturer does not undermine the legitimacy of the price. Moreover, we note as a general matter that transaction value is not to be disregarded solely because the buyer and seller are related, e.g., where the circumstances of the sale indicate that the relationship did not influence the price actually paid or payable. In this regard, CBP Regulations provide in pertinent part: (i) Interpretative Note 1. . . . [T]he Customs Service will examine relevant aspects of the transaction, including the way in which the buyer and seller organize their commercial relations and the way in which the price in question was arrived at, in order to determine whether the relationship influenced the price. (ii) Interpretative Note 2. If it is shown that the buyer and seller, although related, buy from and sell to each other as if they were not related, this will demonstrate that the price has not been influenced by the relationship and the transaction value will be accepted. . . . 19 C.F.R. § 152.103(l)(1)(i)-(ii). In the circumstances presented, the evidence in the record supports a finding that the middleman and the manufacturer, as the assignees of the parent company’s and SAM’s rights under the supply agreement, buy from and sell to each other based on a price that was negotiated at arm’s length. Nothing in the record suggests the existence of any non-market influences that “undermined the legitimacy of the price . . . or that the sales price did not accurately reflect the price that would exist in a true arm’s length transaction.” Nissho, 982 F.2d at 510. Indeed, to the contrary, the protestant has supplied a wealth of documentation related to the transaction, including purchase orders, commercial invoices, entry documentation and financial statements that all support the existence of bona fide sale for exportation to the U.S. between the middleman and the manufacturer. In that regard, while the circumstances of the sale support basing transaction value on the manufacturer-middleman sale, the financial information submitted by the protestant buttresses our finding in this regard inasmuch as it demonstrates that the price was adequate to ensure recovery of all costs plus a profit that was equivalent to the parent company’s overall profit for the period in question in sales of same class or kind merchandise. Accordingly, the manufacturer’s price falls within the statutory definition of transaction value. Nissho, 982 F.2d at 509. HOLDING: In conformity with the foregoing, the protest is granted. The imported merchandise may be appraised under transaction value based on the sale between the manufacturer and the middleman. In accordance with Protest/Petition Processing Handbook (HB 3500-08A, Dec. 2007), you are to mail this decision, together with CBP Form 19, to the protestant no later than sixty days from the date of this letter. Any reliquidation of the entry in accordance with this decision must be accomplished prior to the mailing of the decision. Sixty days from the date of this letter, the decision will be made available to CBP personnel and to the public via the CBP Home Page at www.cbp.gov, by means of the Freedom of Information Act, and by other methods of public distribution. Sincerely, Myles B. Harmon, Director Commercial and Trade Facilitation Division