H336783

 HQ H336783 November 6, 2024 OT:RR:CTF:VS H336783 RRB CATEGORY: Valuation Assistant Center Director Apparel, Footwear, and Textiles Center of Excellence and Expertise (CEE) U.S. Customs and Border Protection 1100 Raymond Blvd. Newark, NJ 07102 RE: Internal Advice Request; Method of Appraisement for “Obsolete Merchandise”; Related Parties; Fallback Method; 19 U.S.C. § 1401a(f) Dear Assistant Center Director: This is in response to the request for internal advice (“IA”), initiated by counsel for Giorgio Armani Corporation, (“GAC”), on September 20, 2023, concerning the appropriate appraisement of merchandise transferred between related parties under 19 U.S.C. § 1401a. FACTS: GAC is a distributor and retailer of high-end fashion apparel, footwear, handbags, and accessories. Giorgio Armani Japan Co. Ltd. (“GAJ”) is a party related to GAC. At issue are two entries that were shipped by GAJ and imported by GAC. The merchandise was sourced by GAJ from various vendors worldwide between 2017 and 2021. It was offered for sale both at retail stores and outlets in Japan. GAC explains that even with deep discounts at the outlets in Japan, the merchandise, which GAC refers to as “obsolete merchandise,” could not be sold in Japan. Consequently, the merchandise was transferred to GAC to be sold in the United States at GAC factory outlets to retail customers at deep discounts. For purposes of the intercompany transaction, each piece of merchandise was assigned an intercompany price of $1.00. The “obsolete merchandise” at issue is comprised of 35,727 pieces and 6,280 different styles. GAC explains that the merchandise is “obsolete” because it consists of old and outdated inventory, some of which is six years old and some of which shows signs of use or damage. GAC further states that the notion of obsolete inventory is well known within the fashion industry. The entered values of the two entries, dated March 22, 2023, and March 23, 2023, were appraised at the retail prices of the goods, less a 35% markdown. GAC asserts that because of this appraisement, the entered value has resulted in the shipments being grossly overvalued and duties grossly overpaid. GAC subsequently filed Post Summary Correction (“PSCs”) for the two entries, dated March 22, 2023, and March 23, 2023,, appraising the merchandise under the “fallback method” described in 19 U.S.C. § 1401a(f) based on a modified deductive value. GAC asserts that the intercompany transfer price of $1.00 per unit would not be an acceptable transaction value. GAC also states that transaction value of identical or similar merchandise is not an appropriate method of appraisement because it does not believe there is any merchandise that is identical or similar to the obsolete inventory. GAC further asserts that deductive value as a basis of appraisement is inappropriate because most of the obsolete inventory will not be sold at GAC’s factory outlets in the United States within 90 days after the date of importation as required by 19 U.S.C. § 1401a(d)(2)(A)(ii). Moreover, GAC states that it is unable to use computed value as a basis of appraisement because it does not have information available on which to base a computed value for the obsolete inventory (e.g., cost of materials and processing costs, an amount for profits and general expenses equal to that usually reflected in sales of merchandise of the same class or kind, the value of any assists, and packing costs). Because the obsolete merchandise cannot be appraised under any of the methods set forth in 19 U.S.C. § 1401a(a)-(e), GAC asserts that the value of the obsolete merchandise must be determined based on a fallback method set forth in 19 U.S.C. § 1401a(f). Accordingly, GAC has proposed a fallback method of appraisement using a modified deductive value. In support of this proposed method, GAC has provided information suggesting the average sales discounts to customers in the U.S. factory outlets as a starting point for modified deductive value, with deductions for GAC’s general expenses and profit, international freight charges, and duties in accordance with 19 C.F.R. § 152.105. ISSUE: Whether the correct method of appraisement of the “obsolete merchandise” is the modified deductive value under 19 U.S.C. § 1401a(f). LAW AND ANALYSIS: 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, then the appraised value is determined based on the other valuation methods in the order specified in 19 U.S.C. § 1401a(a). To use transaction value, there must be a bona fide sale for exportation to the United States. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit found that the term “sold” for purposes of 19 U.S.C. § 1401a(b)(1) means a transfer of title from one party to another for consideration (citing J.L. Wood v. United States, 62 CCPA, 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). Without a sale for exportation to the United States, transaction value must be eliminated as a means of appraisement. Here, GAC states that the goods are not actually sold, but instead are transferred from GAJ to GAC via an intercompany transaction of $1.00 per unit. GAC also notes that at the time of the PSC submissions, the merchandise has not been sold through GAC’s outlets in the United States. An intercompany transaction price of $1.00 per unit is clearly not indicative of the “price actually paid or payable” for purposes of a bona fide sale for exportation. Therefore, transaction value cannot be used as the basis of appraisement. When imported merchandise cannot be appraised on the basis of transaction value, it is appraised in accordance with the remaining methods of valuation, applied in sequential order. The alternative bases of appraisement, in order of precedence, are: transaction value of identical merchandise (19 U.S.C. § 1401a(c)); transaction value of similar merchandise (19 U.S.C. § 1401a(c)); deductive value (19 U.S.C. § 1401a(d)); computed value (19 U.S.C. § 1401a(e)); and the fallback method (19 U.S.C. § 1401a(f)). Transaction value of identical or similar merchandise refers to a previously accepted transaction value of identical or similar merchandise that was exported at or about the same time as the merchandise being valued. Under 19 U.S.C. § 1401a(c), transaction value of identical or similar merchandise should be based on sales of merchandise at the same commercial level and in substantially the same quantity as the sales of merchandise being appraised. If no such sale is found, sales of merchandise at either a different commercial level or in different quantities, or both, should be used, but adjusted to take account of any such difference. In this matter, GAC does not believe that there is any merchandise that is identical or similar to the obsolete inventory at issue. If transaction value of identical or similar merchandise cannot be determined, then the Customs value will be based upon deductive value, unless the importer has elected computed value at the time of entry. 19 U.S.C. § 1401a(a)(2). Nothing in the submitted request indicates that GAC has elected the application of computed value before deductive value. Deductive value under 19 U.S.C. § 1401a(d) is based upon the price at which the merchandise is sold in the United States in its condition as imported and in the greatest aggregate quantity either at or about the time of importation, or before the close 

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, then the appraised value is determined based on the other valuation methods in the order specified in 19 U.S.C. § 1401a(a).To use transaction value, there must be a bona fide sale for exportation to the United States. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit found that the term “sold” for purposes of 19 U.S.C. § 1401a(b)(1) means a transfer of title from one party to another for consideration (citing J.L. Wood v. United States, 62 CCPA, 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). Without a sale for exportation to the United States, transaction value must be eliminated as a means of appraisement. Here, GAC states that the goods are not actually sold, but instead are transferred from GAJ to GAC via an intercompany transaction of $1.00 per unit. GAC also notes that at the time of the PSC submissions, the merchandise has not been sold through GAC’s outlets in the United States. An intercompany transaction price of $1.00 per unit is clearly not indicative of the “price actually paid or payable” for purposes of a bona fide sale for exportation. Therefore, transaction value cannot be used as the basis of appraisement. When imported merchandise cannot be appraised on the basis of transaction value, it is appraised in accordance with the remaining methods of valuation, applied in sequential order. The alt