Related parties; circumstances of sale; transaction value inapplicable

HQ W544957 April 7, 1995 VAL CO:R:C:V 544957 CRS CATEGORY: Valuation Sandra Liss Friedman, Esq. Barnes, Richardson & Colburn 475 Park Avenue South New York, New York 10016 RE: Related parties; circumstances of sale; transaction value inapplicable Dear Ms. Friedman: This is in reply to your ruling request, dated March 13, 1992, submitted on behalf of your client, La Perla Fashions, Inc. ("La Perla"). A further submission was made on June 30, 1993, and a meeting was held with members of my staff on October 19, 1994. Additional information concerning this matter was obtained from Commodity Specialist Team 255, JFK International Airport, and the Regulatory Audit Division (RAD), Branch IV, New York. We regret the delay in responding. FACTS: La Perla is a wholly-owned subsidiary of its Italian parent, Gruppo La Perla (GLP), from which it imports wearing apparel. Transactions with GLP are structured either as intercompany sales in which La Perla purchases merchandise on an “ex works” basis, or as “direct sales” in which GLP sells directly to an unrelated U.S. buyer on an FOB basis. In the former, La Perla is responsible for all foreign inland and ocean freight, duty, domestic inland freight, brokerage, and handling charges. However, La Perla never takes delivery of merchandise in these situations but instead, resells it to customers in the U.S. on a delivered, duty paid (DDP) basis. According to the cognizant import specialist, La Perla’s resale prices are set by S.p.A. La Perla is responsible for any returns and cancellations and, in addition, bears the risk of loss of should non-payment by its U.S. customers. Based on information obtained from the cognizant import specialist, JFK Airport, we understand that La Perla receives a commission based on a percentage of the resale price of the imported merchandise. GLP offers La Perla 120 day credit terms in related party transactions. In addition to the related party sales outlined above, GLP sells directly to certain customers in the U.S. and Canada. In these situations, you have advised that La Perla receives a commission equal to twenty percent of the invoice price. Insofar as direct sales are concerned, we understand that the amount of the commission is in fact reflected in the price of the imported merchandise. In contrast with related party sales, thirty day terms of sale prevail in direct sale transactions. Payment terms are also thirty day in transactions between La Perla and is U.S. customers. La Perla has a staff of six persons resident in the U.S., three of whom are company officers. La Perla does not administer its own customer billing accounts. Instead, all customer invoices in respect of La Perla’s U.S. sales are prepared by GLP which charges La Perla quarterly for the cost of customer billings. You have submitted information concerning direct sales and related party sales in respect of style 032353. Per invoice no. 221463, dated August 28, 1992, style 032353 was sold to La Perla for $69.00. According to sales invoice no. 214403, dated April 23, 1992, the price charged to Victoria's Secret Catalogue for the same style was 116,300.00 Italian lira. Based on a six-month, average exchange rate, you calculate the U.S. dollar equivalent of the lira price to be $79.84. After deducting the twenty percent commission included in the price, you state that the total amount remitted to GLP for its direct sale of style 032353 to Victoria's Secret Catalogue is $63.27. ISSUE: The issue presented is whether, for purposes of determining transaction value, there is a bona fide sale between GLP and La Perla, or whether transaction value should be based on the price actually paid or payable by the ultimate U.S. purchaser. LAW AND ANALYSIS: 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 basis of appraisement under the TAA is transaction value, defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus, to the extent not already included in the price actually paid or payable, amounts equal to five enumerated additions, including any selling commissions incurred by the buyer with respect to the imported merchandise. 19 U.S.C. § 1401a(b)(1)(B). However, in order for transaction value to exist, there must be a bona fide sale between the buyer and seller. For Customs purposes, the word "sale" is defined as a transfer of ownership in property from one party to another for a price or other consideration. J.L. Wood v. United States, 62 CCPA 25, C.A.D. 1139 (1974); J.H. Cottman & Co. v. United States, 20 CCPA 344, T.D. 46114 (1932). While J.L. Wood was decided under the prior appraisement statute, Customs continues to adhere to this definition under the TAA. The existence of a bona fide sale may depend on a number of factors. Customs will consider, inter alia, whether the alleged buyer has acquired title to the merchandise and assumed the risk of loss; whether the alleged buyer paid for the merchandise; whether the payments are linked to specific importations; and whether the circumstances of the transaction indicate that the parties are functioning as buyer and seller. Headquarters Ruling Letter (HRL) 545542, dated December 9, 1994; HRL 545570, dated January 27, 1995. In the instant case the evidence submitted indicates that La Perla never takes delivery of the imported merchandise, nor does it maintain an inventory of merchandise for its own account, with the exception of samples used for taking orders. Instead, after the alleged related party sale, the merchandise is shipped directly to La Perla’s customers. GLP also provides La Perla with administrative support, viz., it performs all customer billings on behalf of La Perla. Finally, whereas GLP extends 120 day credit terms to La Perla, La Perla “sells” to its customers on thirty-day terms. Thus, under the prevailing terms of sale, La Perla does not have to pay GLP for the merchandise until it has collected from the ultimate U.S. customer. As a result, under the J.L. Wood standard, there is no transfer of ownership between La Perla and GLP until La Perla collects from the ultimate U.S. purchaser. Accordingly, based on the information submitted, it is our position that La Perla acts as a selling agent for GLP, rather than as a buyer in its own right. For purposes of determining transaction value, the buyer is the ultimate purchaser in the U.S. HOLDING: In conformity with the foregoing, there is no bona fide sale between GLP and La Perla. Transaction value should be based on the price actually paid or payable by the ultimate U.S. purchaser. Selling commissions should be added to the price actually paid or payable to the extent not otherwise included therein. Sincerely, John Durant, Director, Commercial Rulings Division