No Transaction Value if Exporter Can Remove Out-of-Season Product From Importer's Inventory, Says CBP

An importer of branded merchandise cannot use transaction value as a method of appraisement because a distribution agreement allows the related foreign seller to direct the importer to remove out-of-season merchandise from its inventory, said CBP in a valuation ruling dated Nov. 17. Although the unnamed importer claimed that, in practice, the seller never forces it to remove old merchandise, the agreement clearly gives the seller that ability, said the agency in ruling HQ 038381 (here). Additionally, imprecisely-allocated brand protection fees paid by the importer to the seller mean CBP is unable to determine the fees’ dutiable value, also precluding use of transaction value, it said.

CBP issued the ruling in response to a request for internal advice from the Port of New York, it said. The importer, which was granted confidential treatment, imports merchandise that it distributes under the related-party seller’s brand name. The seller designs and develops the merchandise, and oversees the manufacturing of the products by related and unrelated manufacturers from whom the seller purchases the products, said CBP. The importer is the North American distributor for the brand. The seller owns all intellectual property related to the merchandise. As part of the deal, the importer pays the related-party seller quarterly fees based on North American sales to cover worldwide brand protection, advertising, public relations, legal and financial services.

The importer appraised the merchandise under transaction value, and did not add the fees paid to its seller to the price paid or payable. The Port of New York held transaction value was the correct appraisement method, but found the fees dutiable. However, it determined that the importer did not provide enough detail on how the fees are calculated to determine the price paid or payable.

CBP headquarters disagreed, finding transaction value could not be used to value the importer’s merchandise. Under the statute on valuation, 19 USC 1401a, transaction value cannot be used by related parties unless certain conditions are met, said CBP. One of those conditions is that the seller cannot impose restrictions on the importer’s distribution of the merchandise that affect the goods’ value, it said. A distribution agreement between the unnamed importer and its seller gives the seller “the right to withdraw from distribution certain Products and require that they not be sold,” Standard operating procedures and company handbooks, as well as an interview with the seller's CEO, indicate that the reasoning behind the withdrawal provision was to remove outdated merchandise from the importer’s inventory in order to increase the brand’s (and the goods’) value, said CBP.

The importer is also precluded from using transaction value because the fees paid to its seller cannot be allocated precisely enough to calculate their dutiable value, said CBP. Although some of the fees are not dutiable, such as those for financial and legal services, CBP has held brand protection and advertising fees to be additions to transaction value, said the agency. In this case, the fees are calculated based on all brand protection activities undertaken by the seller, and are not allocated based on brand protection services performed in each region. As a result, the value of the fees assessed in connection with the importer’s imports cannot be calculated, said CBP.

With transaction value unavailable, the agency moved down the list of other forms of valuation provided for under 19 USC 1401. With no previously accepted transaction values for identical or similar merchandise available, that method of appraisement could not be used. Nor could computed value, because computed value is calculated based on the producer’s profits and expenses, and the seller was not the producer, instead contracting out production. That left deductive value, which is based on the importer’s profit and expenses. However, use of deductive value has restrictions, including that the goods be sold within 90 days after importation. If those conditions are not met, then the importer is to use a “fallback method” based on deductive value. “A modified transaction value would not be an option for the same reasons transaction value is not applicable,” said CBP.