H314296

 HQ H314296 August 12, 2021 OT:RR:CTF:VS H314296 AP CATEGORY: Valuation Amy Guerriero, Field Director U.S. Customs and Border Protection Regulatory Audit and Agency Advisory Services Office of Trade 10 Causeway Street, Room 895 Boston, MA 02222-1059 RE: Internal Advice; Related Parties; Unrelated final customer; Transaction Value Dear Ms. Guerriero: This is in response to your internal advice request dated October 7, 2020, initiated by counsel for [X] (the “importer” or [X]), concerning the applicability of transaction value as a method of appraisement of laser cutting machines imported into the United States via a multi-tiered transaction with related parties and the dutiability of royalty payments paid by the importer for the use of its parent company’s trademark. These questions arose as a result of a Focused Assessment Audit conducted by U.S. Customs and Border Protection’s (“CBP”) Regulatory Audit and Agency Advisory Services (“RAAAS”). Virtual meetings with the importer’s counsel and controller were held on April 30 and May 20, 2021. The importer 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 importer’s request for confidentiality is approved. The information contained within brackets as well as all attachments to your request for internal advice forwarded to our office and the documentation submitted by the importer’s counsel will not be released to the public and will be withheld from the published version of this decision. FACTS: The importer is headquartered in the United States [X]. It designs, produces, and distributes punching machinery, laser machinery, gas and solid-state laser resonators, and laser diodes. The importer primarily operates in the Machine Tools/Power Tools and Laser Technology/Electronics business divisions of the [X] Group. The importer is a wholly-owned North American subsidiary of [X] ([X] or “parent company”) located in Germany. The parent company owns a 100 percent direct interest quota in [X] in Germany ([X] or the “middleman”), and a 100 percent indirect interest quota in [X] in Switzerland ([X] or the “manufacturer”) and in the importer. The parent company coordinates payments from all its subsidiaries and acts as a central, clearing “bank.” [X] ([X] or “Company R”) in Alabama is the unrelated final customer in the U.S. On June 6, 2017, the importer filed a claimed prior disclosure with respect to royalty payments it paid to its parent company. In its submission, the importer stated, it “believes” that the royalties “paid on imported merchandise sold in the U.S. may be dutiable.” On July 20, 2018, the importer filed another submission to perfect its claimed prior disclosure stating the subject royalties would not be dutiable as royalty payments or proceeds. On July 17, 2020, RAAAS, Boston Field Office completed a focused assessment pre-assessment survey of the importer’s processes. The scope of the RAAAS audit included imports from July 1, 2015 through June 30, 2016. RAAAS selected and reviewed entries where [X] served as the U.S. importer of record to determine whether transaction value was properly declared to CBP. Your office determined that transaction value was not an acceptable basis of appraisement between the importer [X] and its related parties. The importer did not agree with RAAAS’ determinations and initiated this internal advice request. The representative transaction that you used as an example and referred to us in your RAAAS internal advice request is entry number [X]. Transaction between the Manufacturer and the Middleman The manufacturing agreement between the related manufacturer and middleman states that the products should be made by the manufacturer to the middleman’s order and according to the middleman’s specifications. The middleman oversees the ordering and distribution process. “Unless otherwise agreed, risk and title should pass to the principal [the middleman] ex works manufacturer’s factory.” (Emphasis added). The agreement “shall be subject to the laws of the Federal Republic of Germany, excluding the law of conflicts and the UN Convention on Contracts for the International Sale of Goods (CISG).” Purchase Order (“PO”) Number (“No.”) [X] dated July 22, 2015, identifies the manufacturer as the foreign seller of laser machine [X] priced at [X] Euros (“EUR”) and delivered to the middleman on September 4, 2015. Invoice No. [X] from the manufacturer to the middleman, dated September 4, 2015, lists the middleman as the buyer in Germany and indicates delivery is to Company R in Alabama. The terms of delivery are “FCA [X],” Switzerland. The payment terms are 30 days from the time of delivery. The original merchandise price is [X] EUR. The invoice states that the “delivery is subject to retention of title at our conditions.” The revised invoice no. [X] from the manufacturer to the middleman, dated December 11, 2015, corrects the sale price of the machine by adding [X] EUR to the original price of [X] EUR, for a total cost of [X] EUR. The invoice states that the “delivery is subject to retention of title at our conditions.” Delivery Note No. [X], dated September 4, 2015, lists the middleman as the buyer, the terms of delivery of the transaction between the manufacturer and the middleman as “FCA (Free Carrier at) [X],” Switzerland and notes that the “shipping terms correspond to INCOTERMS 2010.” It shows that the manufacturer delivered the laser machinery to Company R in [X], AL. The inventory records show that on September 4, 2015, the merchandise was in the middleman’s inventory. The middleman assumed the delivery costs and risk of loss when the merchandise was loaded on the truck at the manufacturer’s premises in [X], Switzerland. The middleman paid [X], the trucking/transport company that transported the laser machinery from Switzerland to the shipping port in Germany (Invoice No. [X] dated September 9, 2015, related to bill of lading no. [X]), to deliver the machine from the manufacturer in Switzerland to [X], the container company in Hamburg, Germany that loaded the machine onto containers and onto the vessel for ocean shipment. Payment from the Middleman to the Manufacturer The [X] Group uses a multilateral netting process to make payment arrangements for intercompany transactions to eliminate the need for multiple invoicing and payments among its affiliates. The parent company serves as the netting center that offsets accounts payables and accounts receivables to determine the net receivables and net payables between its subsidiaries. All subsidiaries send a single payment to the parent company, which in turn sends payments to the subsidiaries that are due payment. The parent company paid the manufacturer a total of [X] EUR ([X] EUR + [X] EUR) for the laser machine on October 23, 2015 ([X] EUR) and on February 19, 2016 ([X] EUR). The manufacturer received the payments via bank transfers on the same days. Transaction between the Middleman and the U.S. Importer The distribution agreement between the middleman and the importer states that as a distributor, the importer can determine selling prices in North America, and can buy in its own name and for its own account. The middleman owns the licenses of all product trademarks and grants the importer the non-exclusive and non-transferable right to use its product trademarks in advertising and promotional materials for the contractual products in the contractual territory only. Under the delivery terms, “Unless otherwise agreed, delivery of contractual products shall be ex warehouse of principal [the middleman] or its contract manufacturers. The risk of transport shall be borne by the distributor [the importer].” The products delivered to the importer “remain in the legal ownership of principal [the middleman] until distributor [the importer] has fully paid all outstanding invoices

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), the courts addressed the methodology for determining the transaction value of merchandise imported pursuant to a three-tiered transaction. In each case, the courts held that the price paid by the middleman could serve as the basis for transaction value for the shipments if the sale was negotiated at arm’s length, free from non-market influences, and involved goods clearly destined for the United States. In accordance with the Nissho Iwai decision and our own precedent, we presume that transaction value is based on the price paid by the importer. An importer may request appraisement based on the price paid by the middleman to the foreign manufacturer in situations where the middleman is not the importer. It is the importer’s responsibility to show that the “first sale” price is acceptable under the standard set forth in Nissho Iwai. That is, the importer must present sufficient evidence that the alleged sale was a bona fide “arm’s length sale,” and that it was “a sale for export to the United States” within the meaning of 19 U.S.C. § 1401a. In the present case, the middleman and the importer must present sufficient evidence that the sale between the related party manufacturer and middleman is a bona fide arm’s length sale of “goods clearly destined for export