H303474

 HQ H303474 January 4, 2022 OT:RR:CTF:VS H303474 AP CATEGORY: Valuation Mitchel Landau, Assistant Director Apparel, Footwear and Textile CEE U.S. Customs and Border Protection Validation and Compliance Division 1100 Raymond Blvd. Newark, NJ 07102 RE: Request for Internal Advice; Appraisement; Men’s Suits; Related Parties Dear Mr. Landau: This is in response to your request for internal advice received on April 10, 2019, which was initiated by counsel for the U.S. importer of record, [X], as to whether the transaction between its related foreign factory, [X], and parent company, [X], is an acceptable basis for appraisement of men’s suits using transaction value. A virtual meeting with the importer’s counsel was held on March 18, 2021. The importer has asked that certain information submitted in connection with this internal advice 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 in italics as well as the attachments to the internal advice request and the additional documentation submitted by the importer’s counsel will not be released to the public and will be withheld from published versions of this decision. FACTS: The transaction at issue is a multi-tier transaction involving the following related parties: the U.S. importer of record located in New York, the parent company in Italy, and the foreign factory in Italy. The parent company fully owns the importer and the factory. The parent company is a producer and distributor of clothes, sportswear, and accessories for men, and has established itself as a lifestyle luxury brand. The parent company provides the materials to the foreign factory as an assist. The factory is a “cut and make” manufacturer of men’s luxury suits, sport jackets, pants, woven shirts, and overcoats. The parent company pays the factory for the production and packaging of the clothes, shirts, and related products and accessories. The offices of the parent company’s personnel are located at the same street number as the factory’s production facility. The parent company is described as an agent and sales representative on the entry documents. The parent company sells the products either to the importer, which markets and distributes the goods to wholesalers and retailers in the U.S., or directly to the final U.S. customer. The importer has a store in New York City. When the sale is between the parent company and the factory, the sale is “ex-factory” When the sale is between the parent company and the importer, the sale is delivered duty unpaid (“DDU”). When the sale is between the parent company and the final U.S. customer, the sale is DDU or cost and freight (“CFR”). Under the terms of the “purchaser contract” dated January 1, 2014, the foreign factory manufactures men’s apparel exclusively for its parent company. The parent company purchases and provides all raw materials necessary for the production of the merchandise. The raw materials remain the property of the parent company, which assumes the risk of loss unless any damage is caused by negligence of employees of the factory. The “cut and make” prices between the factory and the parent company are negotiated on an annual basis. The parent company typically applies a discount to the related importer when it is purchasing from the parent. The payment of the individual production orders must be made “within 30 days from delivery, upon receipt of an invoice.” Interest is due when a payment to the factory is delayed. According to the “lease contract for commercial use” dated January 2, 2014, the foreign factory leases the commercial property on which it operates from the parent company and pays rent to the parent company. The factory is on the ground and first floors of the parent company’s larger property. The lease was from January 2, 2014 through January 2, 2020, and is renewable. The factory is exempt from payment of a security deposit. The January 10, 2017 “commercial lease contract” was for more commercial space on the same street. The parent company can inspect the premises at any time. The premises can only be used for commercial manufacturing and packaging of clothing. The lease is for six years effective January 1, 2017, and is paid in monthly installments. According to the February 4, 2014 “contract of mandate” (also referred to as a cash pooling contract) between the parent company and the foreign factory, the factory produces the clothes while the parent company markets them. The parent company holds and controls the factory’s capital. The parent company provides administrative, accounting, financial, management, and training services. The factory authorizes the parent company to make and collect payments on its behalf. The “centralized treasury service” in place allows the parent company to make and collect payments on behalf of the factory. The importer explains that the “contract of mandate” allows the balances on various accounts to be treated collectively optimizing the amount of interest the companies pay and receive as the bank considers the pooled balance when calculating interest. According to the importer’s counsel, “[t]he [X] group uses a monthly netting process to settle the invoices issued from one company in the [X] group to another company in the [X] group. Money moves directly to and from the centralized treasury in-house bank system operated by the parent company [(X)] and is credited or debited to the factory’s [X]’s account in the in-house-bank system.” Pursuant to a “services supply contract” dated January 2, 2017, the foreign factory pays the parent company for performance of administrative and accounting services, centralized treasury, human resources services (payroll management, training, legal services), procurement services, quality control services, and information technology services. The parent company receives a fixed fee for the services it provides to the factory equal to [X]% of the annual turnover of the foreign factory within [X] Euros and [X]% of the annual turnover above [X] Euros. The percentage is subject to change every year. The service fee is due to the parent company annually when the parent company submits an invoice. PricewaterhouseCoopers (“PWC”) performed a study for the parent company entitled “[X] Manufacture of Wearing Apparel in Italy: Arm’s Length Price and Benchmarking Analysis” dated May 2018 (“2018 benchmarking study”). The study used returns on investment (“ROI”) as the transfer pricing benchmarks of the results. The ROI was calculated as operating profit expressed as percentage of turnover. The study selected 26 companies engaged in the manufacture of wearing apparel in Italy. PWC did not examine the published financial statements of the comparable companies. The median profit for these 26 manufacturers during the time period 2014-2016 was [X]%; the lower quartile was [X]% and the upper quartile was [X]%. The benchmark study further narrowed that list to the ten most similar companies in terms of their manufacturing operations and the products which those companies sell. These companies were sellers of private label clothing, dress trousers and clothing, tailor-made clothing, and of men’s and women’s clothing. The median profitability of these ten companies was [X]% and the average profitability was [X]%. Subsequently, the importer’s counsel performed its own on-line search for Italian suit, dress, trouser and jacket manufacturers and identified six factories. The median profitability of these six sellers was [X]% and the average profitability was [X]%. These selected companies manufactured men’s fashion brand suits, jackets, coats, shirts and trousers; coats and jackets for men, women and children; men’s trousers; bridegroom clothing; and everyday clothing for men and women. Their Nomenclature of Economic Activities (“NACE”) codes were 1413 (manufacture of oth

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; 19 U.S.C. § 1401a). The preferred 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 certain statutory additions. 19 U.S.C. § 1401a(b)(1). When transaction value cannot be applied, then the appraised value is determined based on the other valuation methods in the order specified in 19 U.S.C. § 1401a(a). In Nissho Iwai Am. Corp. v. United States, 16 CIT 86, 786 F. Supp. 1002 (1992), rev’d in part, 982 F.2d 505 (Fed. Cir. 1992) (“Nissho”), the court addressed the methodology for determining the transaction value of merchandise imported pursuant to a three-tiered transaction. The court held that the price paid by the middleman could serve as the basis for transaction value for the shipments in question. However, for the transaction to be viable, the sale must be negotiated at arm’s length, free from non-market influences, and involve goods clearly destined for the U.S. In accordance with Nissho, CBP presumes that the transaction value reported by the importer on CBP Form 7501 is based on the price paid by the importer. Where the importer requests that appraisement be based upon the “first sale” price paid by the middleman to the foreign factory, and the importer is not the middleman, the importer bears the burden of showing that the price is acceptable based upon the Nissho standard. The importer must present sufficient evidence that the “first sale” is a bona fide arm’s length sale involving “goods clearly destined for export to the United States.” In the present case, the parent company is the middleman, and thus, the U.S. importer must present sufficient evidence that the sale between the factory and the parent is a bona fide arm’s length sale of “goods clearly destined for export