H301778

HQ H301778 June 4, 2024 OT:RR:CTF:VS H301778 CATEGORY: Valuation Gail T. Cumins, Esq. Sharretts, Paley, Carter & Blauvelt, PC 75 Broad Street New York, NY 10004 RE: Restrictions on Disposition or Use; Price Actually Paid or Payable; Dutiability of Service Fees; Related Party Transactions Dear Ms. Cumins: This is in response to your letter of June 20, 2018, requesting a ruling on the valuation of goods that [ ] (“the Importer”) purchases from a related party, [ ] (“the Seller”). Specifically, you ask for confirmation: (1) that the imported goods are not subject to any restrictions on disposition or use that preclude the use of the transaction value method; (2) that certain service fees associated with retail operations in the United States are not part of the price actually paid or payable for the imported goods; and (3) that the related-party price is acceptable as transaction value for the imported goods. You have requested confidential treatment for certain information contained in your submission and in the file. 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 in your request will not be released to the public and will be withheld from published versions of this ruling. FACTS: The Seller is a parent company located in Europe. The Seller globally promotes and sells brand-name merchandise for which it owns all the intellectual property, brand names, and trade names. The merchandise includes luxury goods such as large and small leather goods, shoes, apparel, watches, jewelry, fashion accessories, and books. The Seller designs and develops the merchandise, oversees its production by both related and unrelated manufacturers located abroad and in the United States, and purchases the finished products from the manufacturers. The Importer is a subsidiary of the Seller based in the United States. The Importer acts as a corporate wholesaler that sells all its inventory to [ ] and [ ] two U.S. “Retail Groups” that are also wholly owned by the Seller. In addition to the imported goods at issue in this case, the Importer also purchases U.S.-made goods that it sells to the Retail Groups. Over the period of 2018 to 2021, U.S.-made goods accounted for between [ ]%-[ ]% of the Importer’s total purchases by value. Once the Retail Groups acquire the merchandise, whether imported or produced in the United States, they offer it to customers through their website and a network of retail stores that they own or operate in the United States. Restriction on Disposition or Use In this case, you note that the Seller provides “retrieval dates” for its products, which you characterize as “recommendations” about when certain products should be removed from the shelves in retail stores. In support of your contention that the retrieval dates are suggestions, rather than an enforceable requirement that could constitute a “restriction on disposition or use” of the goods under 19 U.S.C. § 1401a(b)(2)(A)(i), you provided a non-exhaustive table of 186 products that continued to be sold in the United States after the retrieval date specified by the seller in 2017. In your view, the fact that the Retail Groups continued to sell these products after the retrieval date demonstrates that the Seller cannot exercise control over the final disposition or use of the goods. Additionally, regarding the ultimate disposition of the goods in the United States, you acknowledge that Seller and its subsidiaries do not engage in any outlet store or discounted retail activities. Unsold merchandise from the Retail Groups is returned to the Importer, with a small percentage sold to employees via staff sales. Obsolete products are destroyed locally by the Importer, and where applicable, duty drawback is claimed. Small quantities of active sellable products are returned to the Seller’s overseas headquarters. In your view, no restriction on disposition or use should be inferred either from this business practice or from the Seller’s “recommendations” as to when certain products should be removed from the shelves in the Retail Groups’ U.S. stores. Service Fees In addition to merchandise, the Seller bills the Importer fees that relate to retail services provided to the two U.S. Retail Groups. The retail service fees cover the following eight categories: Merchandising and commercial assistance services, which include architecture, visual merchandising, and sales training; Advertising and communication services, which include advertising campaigns, media strategy, catalogues, brochures, leaflets, and tools for working with clients; Sales and marketing services, which include product launches and sales aid documents; Supply chain and logistics services, which include supply chain & products assortments and logistics, all of which relate solely to the distribution of products in the United States by the retail stores; Information systems (IS) services; Human resources (HR) services, which include HR tools and internal communication; Financial assistance services; and Administration and risk management services. You claim that the retail service fees are 100% pass-through, meaning that the Importer passes them along to the two U.S. Retail Groups in their entirety. Additionally, the Importer adds local administrative and logistics service fees for retail services provided by the Importer to the Retail Groups. The Retail Groups pay the Importer the full amount of the service fees billed by the Seller and the Importer, and the Importer passes along to the Seller the payment for the services fees paid by the Retail Groups. The Seller calculates the fees according to the following principles: Analysis of the cost centers of each department in the statutory accounting of the Seller, in order to identify: The cost centers which relate to one of the services rendered to the retail affiliates, and which thus give rise to full or partial re- invoicing; The cost centers which do not relate to the services and are not re-invoiced; Categorization of these costs per type of service (Merchandising & commercial assistance, Advertising & communication, etc.); Determination of complete costs for each category of services, through the inclusion of a portion of the Seller’s indirect costs; Application of a retail allocation percentage to this complete cost basis, in order to reflect management’s best estimate of time spent and/or costs allocated by each department to provide services to the retail business; Application of a mark-up to each category of services, reflecting the value-added component of this service, from 5% to 15%; Allocation of the full retail services charge between the retail affiliates, based on their respective contribution to the worldwide net sales; and Conversion in local currency. While there is no retail services agreement between the Seller and the Importer, you have provided a Services Agreement, dated January 1, 2012, which was executed between the Seller and one of the U.S. Retail Groups. Under the Services Agreement, the fees are invoiced as follows: During a given calendar year, the Importer is charged by the Seller with a monthly amount equal to 1/12 of the past year total charge (Advanced payments); and The service fee calculation described above is done only after the annual closure of accounts (generally in February), and the gap between the Advanced payments invoiced over the 12 months and the actual calculation gives rise to regular invoicing. You argue that the service fees should not be dutiable as part of the price actually paid or payable because the fees constitute retail-related services carried out in the United States that are “a separate flow, completely unrelated” to the sale or importation of the merchandise. Regarding the connection between the retail fees and the goods ultimately sold in the retail stores, you emphasize again that a substantial portion of the good

Merchandise imported into the United States is appraised for customs purposes in accordance with U.S. value law under section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (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. 19 U.S.C. § 1401a(b)(1). Restriction affecting value; 19 U.S.C. 1401a(b)(2)(A)(i) 19 U.S.C. § 1401a(b)(2) states, in relevant part:The transaction value of imported merchandise determined under paragraph (1) shall be the appraised value of that merchandise for the purposes of this chapter only if – there are no restrictions on the disposition or use of the imported merchandise by the buyer other than restrictions that –are imposed or required by law.limit the geographical area in which the merchandise may be resold, or do not substantially affect the value of the merchandise;(ii) the sale of, or the price actually paid or payable for, the imported merchandise is not subject to any condition or consideration for which a value cannot be determined with respect to the imported merchandise;(iii) no part of the proceeds of any subsequent resale, disposal, or use of the imported merchandise by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment therefor can be made under paragraph (1)(E); and(iv) the buyer and seller are not related, or the buyer and seller are related but the transaction value is acceptable, for purposes of this subsection, under subparagraph (B).Emphasis added.In your submission, you acknowledge precedent in which CBP held that transaction value was inapplicable because the foreign seller retained a right to withdraw and stop the sale of certain merchandise. See Headquarters Ruling (“HQ”) H038381, dated November 17, 2014. In that case, a distribution agree