us-cbp-cross-rulings-hq-543708•HQ 543708: Application for Further Review of Protest No. 2704-4-002249, Contesting the Appraisement of Certain Electronic Communications Equipment from Japan
HQ 543708: Application for Further Review of Protest No. 2704-4-002249, Contesting the Appraisement of Certain Electronic Communications Equipment from Japan
us-cbp-cross-rulings-hq-543708HQ 543708: Application for Further Review of Protest No. 2704-4-002249, Contesting the Appraisement of Certain Electronic Communications Equipment from JapanGuidance
Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.
HQ 543708
April 21, 1988
CLA-2 CO:R:C:V 543708 CW
CATEGORY: Valuation
District Director of Customs
Los Angeles, California 90731
RE: Application for Further Review of Protest No.
2704-4-002249, Contesting the Appraisement of Certain Electronic
Communications Equipment from Japan
Dear Sir:
The above-referenced protest dated June 14, 1984, contests
the appraisement by your office of certain merchandise
imported during the period October 20, 1983, through December 29,
1983, by ("importer"), a wholly-owned
subsidiary of the manufacturer of the merchandise in Japan,
("parent").
We understand that, pursuant to an agreement between the
Area Director, JFK Airport Area, and the importer, the
appraisement issues involved in this case are being presented to
Headquarters for resolution via this Application for Further
Review. A number of protests identical to this one have been
filed by the importer in connection with identical or similar
merchandise entered through other ports of entry. The entries
subject to this protest are generally representative of the
entries encompassed by all the protests.
FACTS:
An audit of the importer's accounting and import records was
conducted by the Regulatory Audit Division, New York Region, to
determine the reliability of the information submitted to Customs
in connection with consumption entries filed by the importer
during the period April 1, 1979, through March 31, 1982. The
audit report dated December 3, 1982, concludes that the importer
acted as the Japanese parent company's selling agent rather than
as the buyer for importations made by the importer's
("R & T") and ("B/E") Divisions.
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In view of this conclusion, the audit report states that the
entered values for the subject importations should be increased
by the amount of the undeclared selling commissions paid to the
importer. In almost all instances, the entered values for the
merchandise equaled the transfer prices between the parent and
its related importer. The audit report indicates that, in these
instances, the selling commission equaled the difference between
the related party transfer price and the importer's invoice price
to the ultimate purchaser. Therefore, the addition of the
selling commissions to these entered values results in appraised
values equal to the invoice prices to the ultimate purchasers.
The audit revealed in regard to entries filed by the
importer's R & T and B/E Divisions that the structure of these
importations fell into four general categories. The first
category involved importations in which formal sales contracts
existed only between the parent company and the ultimate
purchasers in the U.S. In regard to these transactions, all
orders from the ultimate purchasers were forwarded to one of the
two referenced divisions of the importer, who, in turn, forwarded
the orders to the parent. With a few exceptions, the merchandise
was then invoiced from the parent to the importer, who entered
the merchandise in its name at the related-party invoice price
which equaled the parent's contract price to the U.S. customer,
less the importer's selling commission. With respect to a few of
the contracts in this category, sales commission agreements
existed between the parent and the importer.
The second category includes transactions governed by
"three-party contracts" involving the parent, importer, and
ultimate purchaser. The third category encompasses importations
made pursuant to sales contracts between the importer and the
U.S. customers, while the final category relates to transactions
in regard to which no formal contracts were in effect. The audit
report notes that the importer essentially performed the same
functions in regard to all categories of importations and that,
additionally, the overall methods of doing business were the same
for all categories. As a result, the report indicates that since
the importer clearly acted as a selling agent for importations
involving contracts between the parent and the ultimate
purchasers, the importer also acted as a selling agent with
respect to the other categories of transactions.
Also cited by the auditors as evidence that the importer
served as the parent's selling agent for merchandise imported by
the R & T and B/E Divisions are certain telexes between the
related parties which, according to the audit report, show that
the parent exerted substantial control over all aspects of the
transactions, including determining the transfer prices, the
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importer's "resale" prices, and the amount of the commissions.
The report further points out that an agreement described by
representatives of the importer as a "commission and fees
agreement" existed between the parent and importer. This
agreement, which apparently applied to all categories of
transactions, provides that the importer shall perform a variety
of services for the parent in consideration for the payment by
the parent of a fixed amount to be adjusted annually.
The national import specialist concurs in the audit report's
conclusion regarding this issue.
Counsel for the protestant (importer) has incorporated as
part of his written statement in support of the protest the
importer's lengthy response of September 2, 1983, to the audit
findings. Protestant's basic position is that the audit period
findings are erroneous and that no evidence exists which supports
a Customs determination that either the R & T or B/D Divisions
has acted as a selling agent since the end of the audit period.
In fact, counsel asserts that it is "inappropriate and illegal
for the Customs Service to extend the audit period conclusions to
a period for which there is no evidence."
The following is a summary of the information and legal
arguments provided by counsel for the importer in support of the
application for further review:
The importer is a substantial and independent
U.S. corporation which maintains its own financial and
accounting records. Each of the importer's divisions
manages its own employees, develops and implements
marketing plans, negotiates with the parent company
and with U.S. customers, retains authority to accept or
reject customer orders, and decides trade terms with
customers. There is a transfer of title and risk from
the parent to the importer on virtually all transactions
with the exception of a limited number of sales in which
the importer has specifically acted for the parent as an
agent by express agreement. The importer pays its
parent as a normal supplier with no remittances beyond
negotiated transfer prices.
Specifically in regard to the R & T Division, the
only contracts which existed between the parent and
ultimate purchasers related to several transactions
involving a single U.S. customer. Although it is
conceded that the merchandise covered by these
contracts should properly have been entered at the
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contract prices to the U.S. customer, R & T did not
act as a sales agent in regard to these transactions.
The last of these contracts was entered into in 1979,
and none exist as of the date of this submission
(July, 1985). Moreover, none of the entries subject
to this protest relate to merchandise purchased by this
U.S. customer. While the audit report notes the
existence of certain other contracts between the parent
and another U.S. customer, the merchandise covered by
these contracts was properly entered at the prices to
the U.S. customer.
In regard to R & T importations involving contracts
between the importer and U.S. customers and those for
which no formal contract exists, R & T conducts signifi-
cant price negotiations both with the parent and U.S.
customers. Because the R & T contracts with U.S.
customers frequently are governed by bid procedures,
there is a need to discuss bid prices to the U.S.
customers with the parent.
With respect to the B/D Division, its business
is largely conducted on an inventory basis. However,
during the audit period there were in existence two
large contracts with U.S. customers that did not involve
inventory sales. One of these contracts was executed as
a three-party contract between the parent, importer, and
U.S. customer. This structure was adopted because of
the U.S. customer's long-standing relationship with the
parent and because the parent was viewed as an essential
party due to the extensive engineering required to
develop the product in question. The fact that this was
a three-party contract does not negate B/D's independent
status or preclude the existence of separate sales for
profit between the parent and importer and between the
importer and U.S. customer. This agreement was termin-
ated in 1983 for reasons unrelated to the selling
commission issue.
The second contract involving B/D, although des-
cribed in the audit report as a three-party contract,
was actually only a two-party contract between the
importer and the U.S. customer. The confusion on
this point apparently arose from the fact that this
contract was preceded by a letter agreement between
the parent, importer, and U.S. customer. The parent
was included in this agreement because the parent
was to provide the development engineering for this
project. The contract between the importer and U.S.
customer was terminated in 1983.
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The auditors' conclusion that B/D acted as a
selling agent with respect to most of its importations
apparently was based solely on these two unusual
contracts. No evidence was cited in the audit report
to support the auditors' conclusions of agency in
regard to the numerous transactions not covered by
these contracts. None of B/D's importations have been
or are governed by exclusive contracts between the
parent and U.S. customers. Moreover, B/D has never
entered into a selling agency agreement with the parent.
The major portion of non-contract B/D importations
consists of merchandise imported for inventory. The
auditors found that B/D was not acting as a selling
agent in regard to these products. The remaining non-
contract B/D importations consist of "drop shipments"
in which product orders are shipped directly from the
parent's manufacturing facility to the ultimate
purchaser. The audit report's conclusion that B/D
acted as a selling agent in regard to these trans-
actions apparently was based solely on the fact that
B/D's customers were listed as consignees on the
parent's invoices. "Drop shipping" is a common
international and U.S. domestic practice which
carries no implication that an agency relationship
exists between the manufacturer and importer.
The telexes cited in the audit report represent
a small number of isolated instances which primarily
date from the early part of the audit period. All
are from R & T and all represent communications sent
after prices have been set through negotiations. The
auditors' determination that a so-called "commission
and fees" agreement existed between the related parties
is in error and apparently was based upon a rough oral
translation of the agreement. The agreement clearly is
a service agreement containing no discussion of
marketing or commissions. Moreover, the agreement
specifically prohibits the importer from carrying out
the most typical and fundamental role of an agent:
entering into agreements and commitments in the name of
the parent.
The current valuation statute, 19 U.S.C. 1401a,
provides that selling commissions may be added to the
price actually paid or payable by the buyer to the
seller only if they are "incurred by the buyer" in the
sale for exportation. The statute neither contemplates
nor authorizes the addition of selling commissions
incurred by a subsequent purchaser in a domestic sale
made after the sale for exportation. Therefore, the
essential question presented in this case is whether
there were sales between the parent and importer
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with respect to the merchandise subject to this
protest. If it is determined that there were sales,
then the matter is at an end simply because the
importer did not incur selling commissions. Rather,
it charged markups to the ultimate purchasers.
In regard to nearly all of the transactions
between the parent and importer, the terms of delivery
were either CIF P.O.E. (port of entry), CIF Los
Angeles (or other named port), or FOB Japan. The
trade terms for the transactions between the importer
and its U.S. customers ranged from CIF P.O.E. to FOB
customer premises. The parent manufactured the goods
and delivered them to the carrier at the port of
shipment for shipment to the importer or directly to
the importer's customer in the U.S. In all cases,
the parent's invoices name the importer as the buyer.
The Uniform Commercial Code (U.C.C.) provides that,
unless otherwise agreed, title and risk of loss pass
from the seller to the buyer in CIF destination and
FOB point of shipment contracts (referred to as
"shipment contracts") when the goods are delivered
to the carrier for shipment. This is true even
though in regard to CIF purchases, the price to the
buyer includes the freight and insurance costs to
bring the goods to the named destination. Therefore,
in almost every transaction between the parent and
importer in this case, title and risk of loss passed
to the importer at the port of shipment in Japan.
This requires a finding that these related-party
transactions constitute sales. Moreover, the fact
that the trade terms between the importer and its U.S.
customers frequently were CIF P.O.E. when the terms
for the related-party transactions were CIF P.O.E. or
CIF Los Angeles has no affect on whether there were
sales between the parent and importer.
ISSUE:
Whether the Japanese manufacturer's U.S. subsidiary acted as
a bona fide buyer of the imported merchandise or as a selling
agent for the parent in connection with sales to customers in the
U.S.
LAW AND ANALYSIS:
There appears to be no dispute in this case that the proper
basis of appraisement for the affected merchandise is transaction
value, section 402(b) of the Tariff Act of 1930, as amended by
the Trade Agreements Act of 1979 (TAA). Transaction value is
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defined as "the price actually paid or payable for the
merchandise when sold for exportation to the United States, plus
amounts" for certain items to the extent that they are not
already included in that price. One of the items to be added to
the price actually paid or payable is "any selling commission
incurred by the buyer with respect to the imported merchandise."
We agree with counsel for the importer that the basic issue
to be addressed in this case is whether the subject transactions
between the importer and parent constitute bona fide sales. If
it is determined that there were sales, then transaction value
would properly be represented by the price actually paid or
payable for the merchandise by the importer to the parent,
assuming that this related-party transaction price is
"acceptable" within the meaning of section 402(b)(2)(B) of the
TAA. No selling commission could be added to this price since no
selling commission was "incurred by the buyer with respect to the
imported merchandise." A determination that there were no sales
necessarily results in a finding that transaction value should be
represented by the price actually paid or payable for the
merchandise by the U.S. customer to the parent (through the
importer, acting as the parent's agent).
In J. L. Wood v. United States, 62 CCPA 25, C.A.D. 1139
(1974), it was stated that for appraisement purposes the word
"sales" should be given "its ordinary meaning, namely: transfers
of property from one party to another for a consideration." The
court concluded in that case that "ownership of the imported
merchandise was transferred from (the parent) to (the U.S.
subsidiary) for a valuable consideration." The court also noted
that the existence of a parent-subsidiary relationship will not,
of itself, preclude the existence of a bona fide sale. Section
2-106(1) of the U.C.C. similarly defines "sale" as "the passing
of title from the seller to the buyer for a price."
In previous Headquarters rulings involving the question of
whether bona fide sales existed between a foreign seller and its
related U.S. importer, the primary factor considered was whether
there was a transfer of ownership (i.e., title and risk of loss)
from the seller to the purported buyer. Other factors discussed
included whether the amounts remitted to the seller by the
importer equaled the related-party transfer prices, and whether
these payments could be linked to specific import transactions.
See, for example, rulings dated April 2, 1986 (543446), May 29,
1986 (543511), March 15, 1985 (543441), and June 10, 1982
(542673; C.S.D. 82-137).
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With respect to consideration in this case, we note that the
audit findings do not contradict protestant's assertion that no
amounts beyond the transfer prices were remitted by the importer
to the parent for the imported merchandise. Therefore, we are
assuming for purposes of this decision that the parent's invoice
prices to the importer were actually paid and that these payments
can be linked to specific import transactions.
A reading of sections 2-319, 2-320, 2-401, 2-504, and 2-509
of the U.C.C., as well as the Official Comments to those
sections, discloses that a determination of when title and risk
of loss pass from the seller to the buyer in a particular
transaction depends on whether the applicable contract is a
"shipment" or "destination" contract. According to these
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
provisions 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.
As previously mentioned in the summary of the protestant's
position, there was in existence during the audit period a three-
party contract involving the parent, importer (B/E Division), and
a U.S. customer. Of the eleven entries subject to this protest,
five encompass merchandise purchased by this U.S. customer during
1982 and 1983. They are Entry Nos. 84-523010-3, 84-522919-8, 84-
503474-9, 84503617-4, and 84-503724-1. Counsel for the importer
advises that although this three-party contract was terminated
sometime during 1983, certain shipments of spare parts continued
to be made to the U.S. customer after the termination date
pursuant to the delivery terms specified in the contract. It
appears that the delivery terms set forth in the contract govern
the five shipments under consideration here. We note in this
regard that the contract provides that "products shall be
delivered to (the U.S. customer) FOB-Japan." For the most part,
the available documentation concerning these five entries (e.g.,
purchase orders and invoices) confirms that the trade terms to
the U.S. customer were FOB Japan. Moreover, most of the invoices
from the parent to the importer in regard to these entries
reflect that the terms of delivery to the importer also were FOB
Japan, although several specify terms of CIF Los Angeles.
Therefore, in accordance with the previous discussion of
"shipment" contracts under the cited U.C.C. provisions, title and
risk of loss passed from the parent at the time the merchandise
covered by these entries was delivered to the carrier in Japan.
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It 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.
The available documentation supporting three additional
entries (i.e., Entry Nos. 84-241379-0, 84-241573-0, and
84-241125-5) reflect that the terms of delivery for these
transactions between the parent and importer (R & T Division)
were CIF Los Angeles, while, for the most part, the delivery
terms for the transactions between the importer and the U.S.
customer were CIF P.O.E. Here again, both the transactions
between the parent and importer and those between the importer
and U.S. customer are governed by the U.C.C. rules relating to
"shipment" contracts. Therefore, we find that when the
merchandise covered by these entries was delivered to the carrier
in Japan, title and risk of loss passed not to the importer but
directly to the U.S. customer.
The documentation supporting Entry No. 84-503590-0 reflects
that the delivery terms for the transaction between the parent
and importer (B/D) were CIF Sacramento, while the terms for the
transaction between the importer and U.S. customer were FOB
destination in the U.S. Therefore, applying the previously-
discussed U.C.C. provisions to these transactions, title and risk
of loss passed from the parent to the importer when the
merchandise was delivered to the carrier in Japan. Because the
transaction between the importer and U.S. customer is subject to
the U.C.C. rules relating to "destination" contracts, title and
risk of loss for this merchandise passed from the importer to the
U.S. customer when the merchandise was delivered to the U.S.
destination. Thus, we are satisfied that there were actual sales
of the subject merchandise from the parent to the importer.
The documentation relating to the final two entries, Entry
Nos. 84-503420-2 and 84-503561-2, supports protestant's
contention that the merchandise covered by these entries was
imported for inventory and resold to U.S. customers only after it
was placed in inventory in the U.S. Therefore, we believe that
the transactions between the parent and importer (B/D) involving
this merchandise constitute bona fide sales.
HOLDING:
On the basis of the information presented in this case, we
conclude that there were no sales between the parent and importer
with respect to the merchandise covered by Entry Nos. 84-
523010-3, 84-522919-8, 84-503474-9, 84-503617-4, 84-503724-1, 84-
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241379-0, 84-241573-0, and 84-241125-5. Transaction value for
this merchandise should be based upon the price actually paid or
payable by the U.S. customers. Actual sales between the parent
and importer took place in regard to the merchandise covered by
Entry Nos. 84-503590-0, 84-503420-2, and 84-503561-2.
Transaction value for this merchandise should be based upon the
price actually paid or payable by the importer, assuming that the
related-party transaction prices are deemed "acceptable" within
the meaning of section 402(b)(2)(B) of the TAA.
Sincerely,
John Durant
Acting Director, Commercial
Rulings Division
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