H287710

HQ H287710 August 12, 2020 OT:RR:CTF:VS H287710 RMC CATEGORY: Valuation Center Director Machinery Center of Excellence and Expertise U.S. Customs & Border Protection 109 Shiloh Dr., Suite 300 Laredo, TX 78045 Re: Internal Advice Request; Transaction Value; Related-Party Transactions Dear Center Director: This is in response to your correspondence dated May 4, 2017, requesting internal advice on whether [ ] (“the Buyer”) may use transaction value as the method of appraisement for merchandise purchased from a related entity, [ ] (“the Seller”). A meeting was held in our offices on November 8, 2018, during which counsel provided additional information about the transactions and the entities involved. Several follow-up submissions were also provided. The Buyer has asked that certain information submitted in connection with this internal advice request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this decision. FACTS: The Seller, a French entity, and the Buyer, a U.S. entity, are subsidiaries of the same parent company. The Seller manufactures bottle molding and filling equipment for use in the beverage bottling industry. The Buyer acts as a distributor of finished goods and as a technical service center for the North American market. As part of this role, the Buyer purchases spare parts and rebuild components from the Seller. The Buyer resells spare parts to U.S. and other North American customers. The Buyer uses rebuild components to rebuild worn pieces of equipment for its customers. The Buyer uses the transaction value method to appraise spare parts and rebuild components that it purchases from the Seller, claiming the sales price between the related parties as the customs value. The information provided states that prices in the related-party transactions between the Buyer and the Seller are established depending on the intended use of the goods as either spare parts or rebuild components. Spare parts, which are intended for resale to U.S. customers in their condition as imported, are priced according to a pricing procedure called TPP Finished Goods. Under this pricing procedure, prices are established based on a recommended selling price (“RSP”) in the country of importation and a discount rate. The RSP is established on a yearly basis by the product management team considering local competition, inflation, input costs, and risk analysis. The TPP Finished Goods pricing procedures state that the discount rate is periodically adjusted to allow the Buyer to “cover operating expenses and earn an appropriate operating profit in light of functions and risks assumed.” Rebuild components, which are not sold in their condition as imported but are used to rebuild components or pieces of equipment for U.S. customers, are priced using a procedure called TPP Components. Under this methodology, prices are established according to a “cost basis,” described as the “sum of direct, indirect and allocated structure costs” multiplied by [ ], which reflects the Seller’s mark-up of [ ]%. The TPP Components pricing procedures states that this methodology aims to “remunerate the parties appropriate for functions performed, assets employed and risks assessed.” Spreadsheets generated by the Seller’s SAP enterprise resource planning software demonstrate that the goods at issue in the entry were priced in accordance with these transfer pricing policies. The Buyer claims that its relationship with the Seller did not affect the prices it paid for spare parts or rebuild components. In support of these claims, it relies on the totality of the circumstances as described in a transfer pricing study (“TPS”), financial statements of the Buyer and the Seller, and evidence of arm’s-length price negotiations between the Buyer and the Seller. Transfer Pricing Study The Buyer first argues that a TPS conducted for tax purposes for the fiscal year ended December 31, 2015, demonstrates that the prices it paid to the Seller were at arm’s-length. The TPS was conducted in compliance with Section 482 of the Internal Revenue Code (26 U.S.C. § 482), which requires that the arm’s-length result of a controlled transaction be determined under the method that, given the facts and circumstances, provides the most reliable measure of an arm’s length result. The application of the best method establishes an arm’s-length range of prices or financial returns with which to test controlled transactions. The TPS concludes that a transaction-based analysis of the related-party transactions (i.e., comparable uncontrolled price method, cost plus method, or resale price method) would be less accurate and reliable than a profit-based method that focuses on the overall profitability of the Buyer. Accordingly, the TPS applies the comparable profit method (“CPM”), which examines whether the amount charged in a controlled transaction is an arm’s-length price by comparing the profitability of the tested party to that of comparable companies. The TPS identifies the profit level indicator as the operating margin, defined as “operating profit divided by net sales.” The TPS notes that “[a]ccording to U.S. transfer pricing regulations, if the Buyer’s profitability is similar to that of comparable companies, then it can be inferred that transfer pricing policies applied to its various controlled transactions were not used to shift the Buyer’s income to other jurisdictions.” According to the TPS, a search was conducted for companies that perform “similar distribution functions” to the Buyer. The search identified 17 companies, of which 14 were deemed “comparable” to the Buyer “in terms of its distribution functions.” However, the TPS recognizes that “[u]nder the CPM, comparability of the functions and risk between a tested party and uncontrolled companies is more important than exact product comparability.” Therefore, although the uncontrolled companies are deemed comparable in terms of distribution functions, they do not necessarily sell similar products. The 2015 TPS does not describe the products sold by the comparable companies, but an internet search indicated that the companies sell a variety of products including health products, pharmaceutical ingredients, electronics, industrial equipment, hardwood flooring, capacitors, semiconductors, and others. The Buyer states that the products offered by these distributors are “goods of the same class or kind” as the products in the entry at issue. The Buyer points out that many of the imported goods in the entry at issue are “commodity” goods such as rings, bearings, seals, springs, pulleys, shafts, resistors, sleeves, spacers, rollers, and other common machinery parts that “can reasonably be expected to have been imported or sold by most or all of the comparable companies” in the 2015 TPS. At the same time, the Buyer recognizes that the selected comparable companies are “engaged in the distribution and sale of goods that were not substantially the same as the spare parts and rebuilt pieces of equipment (incorporating rebuilt components) sold by the Buyer.” According to the Buyer, the nature of the business is more probative than the class or kind of goods in determining the arm’s length nature of the sales. In support, the Buyer cites the small interquartile ranges produced under the CPM method. During the three-year period for which data was available at the time of the study (2013-2015), the TPS calculated the range of operating margins for comparable companies as -[ ]% to [ ]%, with an interquartile range of [ ]% to [ ]%. The TPS states that under the CPM, the interquartile range identified by the comparable companies can be used as a benchmark to determine whether the Buye

Merchandise imported into the United States is appraised for customs purposes 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 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 amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. § 1401a(b)(1). When transaction value cannot be applied, the appraised value is determined based on the other valuation methods in the order specified in 19 U.S.C. § 1401a(a). Special rules apply when the buyer and seller are related parties, as defined in 19 U.S.C. § 1401a(g). Specifically, transaction value between a related buyer and seller is acceptable only if the transaction satisfies one of two tests: (1) test values or (2) circumstances of the sale. See 19 U.S.C. § 1401a(b)(2)(B). “Test values” refer to values previously determined pursuant to actual appraisements of imported merchandise. The Buyer did not submit evidence that would support the use of transaction value under the “test values” method. However, information regarding the circumstances of the sale was provided. Under the circumstances of the sale approach, the transaction value between a related buyer and seller is acceptable if an examination of the circumstances of the sale indicates that although related, the relationship between the buyer and the seller did not influence the price actually paid or payable. Illustrative examples are set forth in 19 C.F.R. Part 152 showing how to determine whether the relationship between the buyer and the seller influenced the price. In this respect, CBP will examine the manner in which the buyer and seller organize their commercial relations and the way in which the price in question was derived in order to determine whether the