Intercompany Customs Valuation Issue – India

Dear Friends,

Happy New Year!  It is hard to believe it is 2018 already . . . .

We wanted to bring to your attention a recent report out of India involving a customs valuation investigation that could have meaningful consequences for other multinationals who do business there. 

The article published in The Indian Express earlier this week details a customs investigation by the Directorate of Revenue Intelligence (“DRI”) (as you may know, DRI is a group within the Central Board of Excise and Customs responsible for investigating and pursuing violations of India’s Customs Act) into the intercompany pricing of a multinational enterprise.  DRI alleged that the Indian subsidiary of this multinational undervalued goods purchased/imported from related parties over a 6-year period and, as a result, failed to pay approximately $96 million (Rs. 612.72 crore) in customs duties.

There are several interesting/important take-away’s from this article. 

The first is the substantive customs valuation issue involved, as it may be a common one among multinationals.  From the article, it appears that the intercompany distribution agreement required the Indian distributor to spend a certain amount in the Indian market advertising and promoting the product (which is not unusual).  DRI took the position that that the amounts the distributor spent on advertising and promotion in the local market were for the benefit of the seller and, therefore, were part of the “price actually paid or payable” (i.e., part of the customs value) for the imported goods.  What is interesting is DRI’s characterization of normal distributor expenses as being for the benefit of the seller, rather than being for the benefit of the distributor (i.e., the amount the distributor spends advertising promoting the product helps justify the margin the distributor earns on resale of that product).  This characterization has a major impact on how the expenses are treated for customs purposes.

The second take-away is to remember that DRI is quite aggressive, particularly when it comes to multinationals, and even more particularly when it comes to intercompany customs valuation issues.  We are currently assisting several clients with customs-related disputes with DRI and can attest to this personally.

While the article does not say whether DRI’s conclusions are being further challenged in court (one would expect/hope so), all multinationals that do business in India should take this as a warning and review their intercompany agreements/practices to identify any additional customs risk.  If you would like any assistance doing so, please let us know.

We hope this is helpful.

Best regards,
Ted

 

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Footwear Importer Indicted for Customs Fraud

Dear Friends,

I thought you might be interested in a customs fraud case involving a footwear importer recently unsealed in the U.S. District Court for the Eastern District of California.

The indictment unsealed late last week alleges that Thomas Romeo, the owner of a footwear importer (Romeo and Juliette, Inc.), engaged in a scheme to defraud the U.S. government of customs duties.  The alleged scheme involved intentionally understating the value of footwear the company imported into the United States from 1994 through March 2010 (at Mr. Romeo’s direction).  The undervaluation resulted in the company not paying at least $5.6 million in duties and fees that were legally owed.  The indictment also alleges that Mr. Romeo provided a “false and fictitious document purportedly from a customs broker” to ICE during the investigation (the document advises Romeo and Juliette to pay duty on the understated value).  The document was alleged to have been created by employees of Romeo and Juliette, at Mr. Romeo’s direction.  Mr. Romeo is also alleged to have instructed employees to make false statements to ICE, if questioned during the investigation.

This case is interesting on a number of levels.  First, it demonstrate that CBP/ICE are actively pursuing trade fraud cases.  What appears to have started as a routine trade compliance inquiry turned into more based on the evidence CBP/ICE uncovered.  Second, it will be interesting to see if any of Romeo and Juliette’s customers are drawn into the case.  Romeo and Juliette’s products are sold by a number of major retailers (under the BEARPAW brand) and, while none are likely to have been involved in the scheme (and the indictment does not allege that any were involved), it would be interesting to know if the prices Romeo and Juliette offered these customers were “too good to be true” or not.  If Romeo and Juliette did pass at least some of the (substantial) cost savings on to its customers in the form of lower prices, a question could be raised as to whether the customers should have known that something was amiss (or at least asked why the prices on the imported footwear were so low).

We expect that a plea agreement will ultimately be reached in this matter and a trial will be avoided.

If you have any questions about this matter, or customs issues more generally, please let us know.

Best regards,

Ted

Recent “Made in USA” Enforcement Case

Dear Friends:

We are writing to let you know about a recent (and interesting) “Made in USA” enforcement case.

As many of you know, the use of U.S.-origin claims in product labeling or advertising is governed by rules promulgated by the Federal Trade Commission.  These rules set an incredibly high standard for unqualified U.S. origin claims, such as “Made in the USA”.  Under this standard, a product must be “all or virtually all” made in the United States.  “All or virtually all” means that all significant parts and processing that go into the product must be of U.S. origin; that is, the product may only contain a negligible amount of foreign content.  This has generally be viewed to mean that the product was last substantially transformed in the United States and contains at least 95% U.S. content.  If a product is last substantially transformed in the United States, but does not contain “all or virtually all” U.S. content, then a qualified U.S. origin claim is more appropriate (e.g., “Made in the U.S. of U.S. and imported parts” or “Assembled in USA”).

Earlier this week, the FTC announced that E.K. Ekcessories, Inc., a U.S.-based outdoor accessories retailer, agreed to settle charges that it falsely advertised, labeled and distributed certain products to consumers throughout the United States as “Made in the USA.”  According to the FTC’s complaint (available here),  the Company made a number of unqualified U.S.-origin on the packaging, on its website and in its product catalogs.  The claims that were made included:

“Truly Made in USA [with an image of an American flag]”

“For 28 years, E.K. Ekcessories has been producing superior quality made accessories in our 60,000 sq. ft. facility in Logan, Utah”

“[O]ur source of pride and satisfaction abounds from a true ‘Made in USA’ product.”

“Made in USA”

The FTC alleged that in fact many of the products, or certain components of these products, were made outside of the United States and, thus, were not eligible to use these unqualified claims.  The FTC also alleged that by distributing promotional materials to third-party retailers, the company provided the means and instrumentalities to those retailers for the commission of deceptive acts.

Under the proposed settlement agreement, which contains a 20-year Consent Order (available here), the company is prohibited from claiming that a product is made in the United States, or providing third-party retailers with promotional materials with which to make that claim, unless the product is “all or virtually all” made in the United States.  More significantly, the company is required to contact all distributors who purchased or otherwise received any products from the company over a certain time period, and provide them with a notice and a copy of the Order.  As you will see from the attached notice, the company is now in the uncomfortable position of having to ask its distributors to immediately stop using some of its marketing materials, and to affix stickers over the packaging of certain products to cover claims that the items are made in the United States.

The proposed agreement will be subject to public comment for 30 days, after which the FTC will decide whether it will make the Order final.

The use of U.S.-origin claims has become increasingly important for many companies in recent years.  This case underscores the need to exercise caution when making such claims, whether on product packaging or on your website.  The standard for making these claims differs from the traditional customs test and the standard for making unqualified U.S. claims is extremely high (and, arguably, counterintuitive).  Companies need to review their packaging and marketing materials to ensure that any such claims are accurate and capable of being substantiated.

We have a great deal of experience advising clients on country of origin marking issues, including the use of “Made in USA” claims.  If you have any questions about the case discussed above, or making U.S.-origin claims more generally, please let us know.

Best regards,

Ted

U.S. Investigation of India’s Trade, Investment and Industrial Policies Lauched

Dear Friends:

We wanted to let you know of a recent development regarding potentially restrictive trade, industrial and investment policies adopted by India.

In recent years, many U.S. multinationals have encountered India’s preferential “buy local” policies, such as those requiring that all electronics acquired by the Indian government be manufactured by local business. India recently considered expanding this local content requirement to private sector purchases, but has been reconsidering the expansion based on an outcry from U.S. businesses and meetings with high-level U.S. officials. As another example, multi-brand retailers hoping to establish operations in India have been met with restrictive mandatory local sourcing and back-end infrastructure investment requirements. Another concern, for the pharmaceutical industry, in particular, has been whether India is meeting its international obligations with regards to the protection of intellectual property rights.

In view of these and other issues, the U.S. International Trade Commission (“USITC”) announced this week that it is launching an investigation into the Indian policies alleged to discriminate against U.S. trade and investment. The investigation was prompted by a bipartisan request from the U.S. Senate Committee on Finance and the House Committee on Ways and Means. The USITC is expected to issue a report on India’s trade and investment policies that it determines are restrictive, determine the U.S. industry sectors most affected by the policies and examine the competitiveness of Indian firms in those sectors. The report will include several case studies of U.S. companies or industries affected by such measures. A public hearing on these issues will be held in February 13, 2014. Written submissions are also welcomed and should be filed on, or before, April 11, 2014. The USITC will deliver its report by November 30, 2014.

If you have/are experiencing difficulties with “buy local” and/or other restrictive policies in India and would like to discuss participating in the USITC investigation, please let us know.

Best regards,

Ted