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HQ H006576

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December 19, 2007

OT:RR:CTF:VS H006576 JPP

CATEGORY: VALUATION

Fred R. Lowenberg
Assistant Field Director
Regulatory Audit Division
U.S. Customs and Border Protection
726 Exchanges St., Suite 400
Buffalo, N.Y. 14210

RE: Internal Advice;Transaction Value; Related Parties; Dutiability of Service Fees Dear Field Director:

The following is in response to a ruling request submitted by Cowan, Leibowitz & Latman, P.C., in a letter dated February 1, 2007, on behalf of a U.S. client (hereinafter “Importer”). The request concerns the dutiability of certain service fees paid to the client’s related foreign seller and exporter in Canada, (the “Seller”). This inquiry emanates from an audit conducted by the Buffalo Office of the Regulatory Audit Division (“RAD”), concerning various aspects of the Importer’s operations, including the accurate valuation of the merchandise. RAD contacted us to discuss the Importer’s ruling request and provided us with background documentation related to Importer’s case. Your request raises issues that are still being reviewed by RAD. Therefore, Internal Advice per 19 C.F.R. 177.11, is appropriate. We regret the delay in responding. FACTS:
The Importer is a U.S. company that purportedly purchases merchandise from its related foreign Seller for sale to U.S. customers. The Importer is the sole distributor of Seller’s products in the United States. The Importer states that it has offices and a warehouse in the United States. The Seller is a Canadian company with
warehouse, distribution, manufacturing and office facilities in Canada. The Seller and Importer are related by common shareholders, officers and share certain financial books (e.g., payroll ledgers and a “U.S.-inter-co. rec./payable account”), which are maintained by the Seller.

The Importer outsources certain services from Seller’s personnel in Canada. These services are provided on behalf of the Importer and relate to: customer service, management information systems, new accounts, order processing, sales liaison, trade show coordination, mail services, reception and communications, payroll, accounts payable, administration, cash management, billing, order control, customer accounts, collections, and shipping. The Seller maintains and supports the telecommunications infrastructure (e.g., computer network, voice mail, e-mail, hardware and software applications) used in connection with the Importer’s selling and marketing operations. The Importer pays a fee for the services rendered by Seller’s personnel. The fee is based on the Seller’s corporate transfer pricing policy.

Seller’s transfer pricing policy is described in a report titled “Transfer Pricing Review for the Year Ended December 31, 2003,” prepared by an economic consulting group. This document analyses the alleged arm’s length nature of Seller’s inter-company transactions based on Canada’s Income Tax Act or equivalent provincial legislation. Under this policy, Seller pools its administrative, labor, and operating expenses associated with performing these services and, based on the percentage of U.S. sales to total corporate sales, charges Importer for its share of these costs. Seller does not include these costs in the price of the merchandise. The Seller invoices the Importer for these services at cost and sets its inter-company prices to allow Importer to earn a return on its selling and marketing activities. The Importer, however, has not provided U.S. Customs and Border Protection (CBP) with any written agreement establishing the terms of the services or fee arrangement between the Seller and Importer. As per interview information obtained by RAD, the ordering process is initiated by the Importer’s sales representatives who solicit and take orders from U.S. customers (namely stores). Sales representatives enter the orders in an electronic hand-held device and subsequently transmit them electronically to Seller’s customer service personnel. The Seller maintains a large inventory of finished merchandise at its warehouse, and is responsible for processing and shipping orders placed by U.S. customers. Seller’s warehouse personnel place the merchandise in shipping boxes. Seller’s order department prepares two types of invoices: (1) a summary sheet or pro-forma invoice (Form B13), detailing contents of the shipment for export and import purposes; and a (2) customer invoice, detailing the shipment contents for the customer. Both invoices are placed in the shipping boxes. The boxes are labeled with the U.S. customer address and a U.S. return address, which is the Importer’s warehouse address. This address is also used to handle U.S. merchandise returns and as the location where U.S. customers mail their payment.

Merchandise packaged in shipping boxes is loaded onto trailers at Seller’s loading dock in Canada and transported to the U.S. port of entry. As stated in section 4.1 of Seller’s “Transfer Pricing Review for the Year Ended December 31, 2003”, Ibid., 4.2 Transfer Pricing Policy. the Importer takes title at Seller’s loading dock, and title then immediately passes to the U.S. customer. The Importer does not carry any merchandise inventory. After the shipment clears U.S. Customs, the boxes are “dropped shipped” directly to the U.S. customer by a third party carrier that is contracted by the Seller.

Concerning payment procedures, the Importer will send payment directly to Seller’s Canadian bank account in an amount equal to the total balance due stated on a Statement of Account prepared by the Seller, listing Importer’s invoices. The Importer remits payment to the Seller with a check, which is drawn on a Canadian bank with a branch and address in the United States. U.S. customers will remit payment to the Importer by mail to Importer’s warehouse address, which, as indicated above, is also used to handle U.S. merchandise returns. Importer collects the sums and deposits them into a Seller’s bank account in Canada. RAD provided us with documentation relevant to a sample entry. This documentation includes the following: Entry Summary (CBP Form 7501), dated December 13, 2005, listing the Importer as the importer of record. The entry summary reflects that the merchandise was exported from Canada.

Summary Sheet or Pro-forma Invoice (Form B13), undated and prepared by Seller. This document itemizes the merchandise by origin, item number, description, tariff classification, quantity, unit price, vendor name and value extension. Seller uses the information in this document to prepare the commercial invoice to the Importer; and the customs broker uses it to prepare CBP Form 7501.

Commercial Invoice to Importer, dated November 25, 2005, which was prepared by Seller, identifies the U.S. customer by customer number, order number, and invoice amount. The invoice states under Item Description: “Product Charge to Importer.”

Broker Pro-forma Invoice (Form 12a), dated November 25, 2005, prepared for customs clearance by the customs broker, which identifies the Seller as the “Exporter” and the Importer as the “Buyer.” The pro-forma invoice indicates that the purported Seller and Buyer are related parties, and provides the order number that appears on Seller’s commercial invoice to the Importer. It also lists the number and kind of packages to be shipped, their weight and currency of value used. The pro-forma invoice also refers to the Summary Sheet (Form B13) for a description of the goods. Packing Slip (labeled Shipping Memo), dated Nov. 25, 2005, prepared by Seller, which provides a description of the goods, their origin and quantity. This document also provides the U.S. customer’s name, address, order number and the number of cartons per order. The company transporting the goods into the U.S. carries a copy of the packing slips.

Commercial Invoices to U.S. Customers. These sample invoices contain the customer purchase order number, name and the address where the merchandise is to be shipped. The invoices also contain a description of the merchandise, quantity, unit price and extended price. All invoices list a Seller’s telephone number in Canada.

Proof of Payment between U.S. Customer & Seller in the form of sample checks payable to Importer.

Proof of Payment between Importer & Seller in the form of a sample check payable to Seller and drawn on a Canadian bank with a U.S. address. ISSUE:
I. Whether transaction value between the two related parties may form the basis of appraisement of the imported merchandise.

II. If transaction value between the related parties is acceptable, whether the service fees paid by Importer to Seller are includable in the price actually paid or payable for the imported merchandise.

ANALYSIS:
Merchandise imported into the U.S. 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. 1401a). The primary basis of appraisement under the TAA 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 statutorily enumerated additions thereto to the extent they are not otherwise included in the price actually paid or payable. 19 U.S.C. 1401a(b)(1)(B). A prerequisite to finding a transaction value acceptable is the finding that a bona fide sale for exportation to the United States has occurred. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit found that the term "sold" for purposes of 19 U.S.C. 1401a(b)(1) means a transfer of title from one party to another for consideration (citing J.L. Wood v. United States, 505 F.2d 1400 (CCPA 1974)). In determining whether a bona fide sale has occurred between a potential buyer and seller, no single factor determinative. Customs reviews all the facts and circumstances of the transaction and makes its determination on a case-by-case basis. Dorf International, Inc. v. United States, 61 Cust. Ct. 604, A.R.D. 245 (1968). In making its determination as to whether property or ownership has been transferred, CBP initially considers whether the alleged buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, CBP may examine whether the purported buyer paid for the goods, and whether, in general, the parties are functioning as buyer and seller. See Headquarters Ruling Letter (“HRL”) 545709, dated May 12, 1995, and HRL 545474, dated August 25, 1995. In this case, we need to examine whether a bona fide sale for exportation to the United States occurred between the Seller and Importer. Bona Fide Sale
In the instant case, the Importer is declaring values for the imported merchandise based on the transaction value of alleged sales with its related Seller. In determining whether those are bona fide sales, we need to consider whether the Importer has assumed the risk of loss and acquired title to the imported merchandise. The Importer obtains title of the merchandise at Seller’s loading dock and title then immediately passes to the U.S. customer. Accordingly, title and risk of loss would transfer simultaneously from the Seller to the Importer and U.S. customer. Consequently, Importer would be considered to obtain risk of loss and title only momentarily, if at all, and thus would have nothing to sell to the U.S. customer. See HRL 546225, dated April 14, 1997 (declaring that a bona fide sale did not appear to have occurred when there was simultaneous passage of title between the manufacturers and middleman), and HRL 545980, dated December 12, 1995 (finding evidence insufficient to support a bona fide sale in a two-tiered transaction when the first and second sale were FOB foreign port of export). Here, the apparent simultaneous transfer of title from the Seller to the Importer, and then to the U.S. customer suggests that there is only one sale; namely, that between the Seller and the ultimate U.S. consumer. However, in such circumstances, CBP would consider other pertinent evidence or documentation to determine if there is in fact a bona fide sale. Furthermore, we note that the specific terms of sale agreed to by the parties are not specified in the commercial invoices or elsewhere. Consequently, there is no evidence provided to show when the parties actually agreed that title and risk of loss would pass to the Importer. Also, the fact that the Importer does not purchase merchandise for inventory adds further doubt as to whether the Importer assumed the risk of loss and acquired title to the goods.

It is also notable that the commercial documentation made available to CBP is not fully consistent with that used by traditional buyers and seller. In this case, the Importer, after receiving a purchase order from a U.S. customer, simply forwards it electronically to the Seller. This seems to indicate that the Importer considers its purchase order to the Seller to be a mere extension of the U.S. customer’s order, and calls into question whether the Importer is a “buyer” in its own right.

Moreover, Importer’s lack of independence from the Seller is further evidenced by Seller’s being responsible for all warehousing, purchase order processing, invoicing (including preparation of invoices to U.S. customers), and distribution and shipping of the merchandise to U.S. customers. Additionally, the commercial invoices to U.S. customers list a Seller’s contact telephone number in Canada; the Seller maintains and supports the telecommunications infrastructure used in connection with the Importer’s selling and marketing operations; and the Importer relies on Seller’s foreign personnel to perform virtually all of its administrative services. Also, the Seller and Importer share accounting books and records (including payroll ledgers and a U.S.-inter-co. rec./payable account), which is atypical in a bona fide buyer-seller relationship.

We find, based on the totality of the information presented and the above analysis, that the transaction between the Seller and Importer does not constitute a bona fide sale. Therefore, the transaction between the Importer and the Seller may not form the basis of appraisement of the imported merchandise. The merchandise should be appraised under transaction value based on the price actually paid or payable between the Seller and the ultimate U.S. customer.

Please note that had there been a bona fide sale between the Importer and its related foreign Seller, it would have been appropriate to make an inquiry regarding the dutiability of the service fees paid by the Importer.  Such inquiry, however, is not relevant in the instant case, since the Seller-Importer transaction may not form the basis of appraisement of the imported merchandise and the service fees are not paid by the U.S. customer.

HOLDING:
Pursuant to the foregoing, the Importer has not provided sufficient evidence to demonstrate that the merchandise was properly appraised under transaction value based on the price actually paid or payable by the Importer. We determine that no bona fide sale occurs between the Importer and its related foreign Seller. Accordingly, the transaction between the Importer and the Seller may not form the basis of appraisement of the imported merchandise. The merchandise should be appraised using the transaction value based on the price actually paid or payable by the U.S. customer. Because the service fees are not paid by the U.S. customer, the inquiry regarding the dutiability of the service fees becomes moot.

This decision should be mailed by your office to the internal advice requester not later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.gov by means of the Freedom of information Act, and other methods of public distribution. Sincerely,

Monika R. Brenner, Chief
Valuation and Special Programs Branch

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