Chemical Distribution Company Unable to Prove Related Party Sales Don't Affect Price, Says CBP

A lack of information regarding the profitability of a U.S. crop protection chemicals distributor versus its competitors means the use of transaction value is unavailable for appraisement of sales between the company and related suppliers, CBP said in a Nov. 25 ruling (here). The internal advice ruling is in response to pushback from the company, Makhteshim Agan of North America (MANA), related to a 2013 Focused Assessment that MANA disagreed with. The company was unable to prove through the use of "test values," that transaction value would be the correct appraisement method, said CBP.

During the focused assessment in 2013, "CBP reviewed MANA’s internal controls for calculating value and concluded that MANA represented an unacceptable risk," the agency said. MANA, the U.S.-based subsidiary of Israeli company Makhteshim Agan Industries, buys the majority of its products from related suppliers outside the U.S., said CBP. "As part of the FA, CBP also determined that MANA’s documentation supporting its position that related party transactions were conducted at arm’s length was insufficient," said CBP. "Consequently, CBP concluded that MANA failed to provide sufficient information to allow CBP to determine the correct basis of appraisement, or the correct value and related duties and fees." After the company disputed the findings and submitted additional materials, the Port of Savannah sought input from CBP headquarters.

The company offered a "deductive value example" to help prove its case. But, while a company can demonstrate a transaction value through the use of "test values," including the deductive value for identical merchandise, MANA's submission wasn't enough, the agency said. "We are not persuaded by MANA’s arguments with respect to the applicability of the test value approach and reiterate that it continues to be CBP’s position that in determining whether a test value closely approximates an instant transaction value, the test value has to reflect a value previously accepted as a customs value," said CBP. The agency said its longstanding position is that "test values refer to values previously determined pursuant to actual appraisements of imported merchandise."

As evidence that the circumstances of the sale show the sales between related parties didn't affect price, MANA said that its "transfer pricing methodology is designed to provide a guaranteed profit margin" in the U.S. and is supported by the North American Economic Analysis. "The fact that MANA earns a guaranteed profit margin is not indicative of the fact that the declared prices are at arm’s length for customs valuation purposes," CBP said to MANA. According to the company, MANA's suppliers don't sell merchandise to unrelated parties in the U.S., which means "it cannot be shown that the price was settled in a manner consistent with the way in which the seller settles prices with unrelated buyers," said CBP.

Considering there's no "available quantitative data of other companies in the crop protection industry that would further support the profitability figures presented to CBP in MANA’s transfer pricing studies and updates," transaction value appraisement "is not applicable in this instance," said CBP. Instead, "the deductive value method of appraisement, using the amount of profit and general expenses originally reported to CBP, should be used to value the imported merchandise," CBP said.

The company also submitted a prior disclosure in 2014 "claiming refunds on the basis of cumulative adjustments taken in 2009-2012," said CBP. But those adjustments are mistakenly based on the transaction value documentation prepared for tax purposes "in which the profit range is not calculated on the basis of comparable companies that produce merchandise within a group or range of merchandise produced by a particular industry or industry sector such as the crop protection industry," said CBP. "Therefore, in this case, MANA has failed to establish that its profit and expenses, as initially reported to CBP, are inconsistent with those usually reflected in sales of merchandise of the same class or kind as the imported merchandise. Thus, MANA has not demonstrated that value adjustments are warranted."