H309760

HQ H309760 January 6, 2021 OT:RR:CTF:VS H309760 EGJ CATEGORY: Valuation Center Director Consumer Products and Mass Merchandise U.S. Customs and Border Protection 157 Tradeport Drive Atlanta, GA 30354 RE: Related Parties; Fallback Method of Appraisement Dear Center Director: This is in response to your Request for Internal Advice, dated March 6, 2020, concerning the proper basis of appraisement for imported exercise equipment and parts thereof. Your request arises from a Prior Disclosure filed by the importer on January 29, 2019. The Prior Disclosure was filed in response to a Focused Assessment (“FA”) Pre-Assessment Survey (“PAS”) report, dated September 27, 2018, which was prepared by the Regulatory Audit Division of U.S. Customs and Border Protection (“CBP”). The PAS report examined entries made in calendar year 2014, and concluded that the imported exercise equipment and parts could not be appraised on the basis of transaction value. The importer has requested confidential treatment for certain information contained in its submission and in the file. Pursuant to 19 C.F.R. § 177.2(b)(7), the identified information has been bracketed and will be redacted in the public version of this ruling. All attachments to the ruling request will also be considered confidential. FACTS: The importer buys exercise equipment and parts of exercise equipment from its parent company located in Asia. The importer is also the U.S. distributor of the finished exercise equipment and sells the equipment via both commercial and private sales. As the two parties are related, the importer utilizes a transfer price to declare the equipment’s value to CBP. For calendar year 2014, the PAS report noted that the parent company’s gross profit margin percentage for its global sales was greater than the gross profit margin percentage for its sales to the U.S. importer. As such, the report stated that the transfer price did not meet the circumstances of the sale test for transaction value, and that transaction value was not the appropriate basis of appraisement for calendar year 2014. The report recommended that the importer develop and implement a Compliance Improvement Plan (“CIP”), as well as perform self-testing to address transaction value. In its Prior Disclosure, the importer agreed to develop a CIP and to perform self-testing for calendar year 2014 and for subsequent calendar years. In ensuing discussions with CBP, the importer reported that it had obtained the gross profit information on the parent company’s overall sales and its sales to the importer for the years 2015-2018, and that the parent company’s gross profit margin percentage on overall sales exceeded the gross profit margin on its sales to the importer in those years as well. The gross profit margins on exercise equipment for the parent company’s global sales and its sales to the importer are set forth below. Sales 2014 2015 2016 2017 2018  Parent Company’s Global Sales [XXXX]% [XXXX]% [XXXX]% [XXXX]% [XXXX]%  Parent Company’s Sales to Importer [XXXX]% [XXXX]% [XXXX]% [XXXX]% [XXXX]%  Profit Variance [XXXX]% [XXXX]% [XXXX]% [XXXX]% [XXXX]%   Therefore, the transfer price did not meet the “all costs plus a profit” circumstances of the sale test for the years 2014-2018. Both the importer and Regulatory Audit agree that transaction value is not an acceptable basis of appraisement for the relevant timeframe. The importer states that it is the sole U.S. purchaser of the parent company’s exercise equipment. Therefore, there are no sales of identical or similar merchandise by the parent company available for the purposes of comparison. Additionally, the importer notes that it does not have access to the wholesale pricing information of other exercise equipment importers. Therefore, the importer cannot compare its transfer price with the pricing practices of the exercise equipment industry. However, the importer does know the sales price of the finished equipment to its customers located in the United States. The importer notes that the relevant entries include both finished equipment and parts of equipment. The parts will be assembled together before their sales to U.S. customers. Therefore, the importer would find it difficult to calculate the value of the parts using the U.S. customer sales of assembled equipment as a starting point. Furthermore, after an analysis of the sales data, the importer concluded that all of the U.S. sales took place more than six months after the importation of the parts and the equipment. With regard to manufacturing costs, the importer notes that it is unable to obtain them from the parent company. Moreover, even if the importer could obtain them, the costs of the different components would be priced using different foreign currencies – making the manufacturing costs difficult to calculate. In the absence of other applicable methods of valuation, the importer proposes to utilize a modified transaction value under the fallback method of valuation. The importer proposes to adjust the transfer price to reflect the gross profit margin of the parent company on overall sales of its exercise equipment. Then, the importer states that the modified transfer price will meet the “all costs plus a profit” circumstances of the sale test for transaction value. The importer provided a spreadsheet which sets forth an example of how the unit price of exercise equipment would be increased to reflect the profit margin of the parent company. The importer proposes that the same fallback methodology be used for both the imported parts and the completed exercise equipment. The importer notes that the parent company’s profit margins do not distinguish between parts and machines. Therefore, the importer states that there is no reason to distinguish between them for purposes of applying the proposed modified transaction value. To support this fallback calculation, the importer notes that it is a participant in the Fitness Industry Suppliers Association (“FISA”), in which fitness suppliers agree to share their sales figures by product category and regions. After completing this data collection, FISA issues an annual market trend report that companies can use to benchmark against industry data. The importer prepared a summary of these reports for the calendar years from 2014 – 2019. In its report, the importer compares its U.S. commercial sales figures with other unrelated companies’ sales figures in the U.S. and Canada across eight categories of merchandise: upright stationary bikes, recumbent stationary bikes, group exercise bikes, stair climbers, treadmills, elliptical/cross trainers, alternative motion cardio, and other cardio equipment. The importer has summarized the total sales dollars and the average price per unit sold for each equipment category referenced above. The importer’s report also includes the percent variance between the other companies’ sales per unit and the importer’s sales per unit. These calculations in the treadmill product category for calendar years 2014 – 2018 are set forth below. Average Unit Sales for Treadmills 2014 2015 2016 2017 2018  FISA Companies’ Sales in the U.S. and Canada $[XXXX] $[XXXX] $[XXXX] $[XXXX] $[XXXX]  Importer’s Commercial Sales in the U.S. $[XXXX] $[XXXX] $[XXXX] $[XXXX] $[XXXX]  Percent Variance [XXXX]% [XXXX]% [XXXX]% [XXXX]% [XXXX]%   The importer calculated the average profit variance between FISA’s unit sales and the importer’s unit sales across all eight categories of merchandise for each year at issue. Then the importer compared these variances with the profit variance per year between the parent company’s global sales and the importer’s domestic sales. We have set forth that comparison below for reference. Sales 2014 2015 2016 2017 2018  Parent Company’s Global Sales [XXXX]% [XXXX]% [XXXX]% [XXXX]% [XXXX]%  Parent Company’s Sales to Importer [XXXX]% [XXXX]% [XXXX]% [XXXX]% [XXXX]%  

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). 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 the two tests: (1) circumstances of the sale; or (2) test values. See 19 U.S.C. § 1401a(b)(2)(B); 19 C.F.R. § 152.103(l). Under the “circumstances of the sale” test, we look for evidence showing that the parties’ relationship did not affect the price paid or payable. All relevant aspects of the transaction are analyzed including the way the buyer and seller organize their commercial relations and the way that the price was determined. The three examples that demonstrate that a relationship did not influence the price under 19 C.F.R. § 152.103(l) are as follows: (i) the price was settled in a manner consistent with the normal pricing practices of the industry in question; (ii) the price was settled in a manner consistent with the way the seller settles prices for sales to buyers who are not related to it; or (iii) the price is adequate to ensure recovery of all costs plus a profit that is equivalent to the firm’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind. To explain the “all costs plus a profit” test, Interpretative Note 3, at 19 CFR § 152.103(l)(iii) states as follows:If it is shown that the price is adequate to ensure recovery of all co