HQ 0544973 - Transaction value; sale for exportation; delay in importing merchandise; defective merchandise allowance; IA 92-12 - United States International Trade Commision Rulings

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HQ 544973

January 11, 1993

VAL-CO:R:C:V 544973 GG

CATEGORY: VALUATION

Mr. John Heinrich
District Director
U.S. Customs Service
300 S. Ferry St.
Terminal Island
San Pedro, California 90731

RE: Transaction value; sale for exportation; delay in importing merchandise; defective merchandise allowance; IA 92-12

Dear Mr. Heinrich:

This is in response to your internal advice request, dated January 30, 1992, concerning prospective importations of footwear by xxxxxxx, Inc. We regret the delay in responding.

FACTS:

In June 1990, xxxxxxx, Inc., of California, contracted with the xx xxxxxxxxx factory in Indonesia to manufacture Style 90100 Womens Classics Shoes. xxxxxxx established an office in Indonesia to monitor the production. That office provided the specifications to the factory.

After completion of the first production run of 27,002 pairs, xxxxxxx' quality control inspection team discovered that improper lasts and molds had been used on the outsole, resulting in lower value, grade "B" shoes.

In October 1990, xxxxxxx paid for the shoes at the full grade "A" price of $9.17 per pair. The price was not lowered to reflect the quality, because the footwear was made to xxxxxxx specifications.

The facts are in dispute over whether xxxxxxx originally intended to import the shoes into the United States. In a letter dated November 15, 1991, counsel for xxxxxxx stated that "xxxxxxx purchased these shoes from the factory vendor in Indonesia, xx xxxxxxxxx, for sale and consumption in Indonesia". However, a xxxxxxx representative, Mr. xx xxxxx, has indicated to the import specialist that "the shoes were contracted for shipment to the United States", and has shown him the invoice that had been prepared to cover the shipment. A copy of the invoice apparently was not provided to Customs, or if it was, was not attached to the internal advice request.
xxxxxxx did not want to sell the grade "B" shoes within the U.S. domestic market (see October 2, 1991 xxxxxxx letter to Customs, and facsimile from xxxxxxx Taiwan to xxxxxxx, dated October 5, 1990), therefore kept them in Indonesia while attempting to locate an overseas buyer. It has been unsuccessful in this endeavor.

The shoes' D-rings rusted during storage in Indonesia, rendering the shoes in a less than grade "B" condition. xxxxxxx decided that its only option was to import the shoes into the United States, where they will be sold in limited distribution channels at a price considerably lower than a Grade A or B shoe could fetch. Before shipping the shoes here, xxxxxxx planned to move them from Indonesia to Singapore for further storage in a bonded facility. At the time of the internal advice request, the shoes had not yet been imported. xxxxxxx wants confirmation that the shoes will be appraised under deductive value upon their importation into the United States.

ISSUE:

1) Whether the shoes were sold for exportation to the United States, making appraisement under transaction value possible?;

2) If so, whether a delay in exportation will negate the use of transaction value as a method of appraising merchandise?

3) Whether an allowance shall be made for defective merchandise?

LAW AND ANALYSIS:

The primary method of appraising imported merchandise is transaction value. The transaction value of imported merchandise is the price actually paid or payable for the merchandise when sold for exportation to the United States, plus additions for packing costs, selling commissions incurred by the buyer, assists, royalties or license fees, and proceeds of any subsequent resale that accrue to the seller. Section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(b)). The term "price actually paid or payable" is defined in section 402(b)(4)(A) of the TAA as the "total payment . . . made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller."

It is uncontested that xxxxxxx paid the Indonesian factory, a grade A price for the shoes, or $9.17 per pair. The first issue to be considered, then, is whether the payment of that price was made pursuant to a sale for exportation. A bona fide sale occurs when there is a transfer of ownership (i.e., title and risk of loss) from the seller to the buyer for a consideration. See Headquarters Ruling Letter (HRL) 543708, dated April 21, 1988. Your internal advice request does not provide specific details of title and risk of loss transfer; however, this does not appear to be an area of dispute therefore for purposes of this letter we will assume that the necessary transfer between xx xxxxxxxxx and xxxxxxx occurred. Although there was a sale, it must still be determined if the sale was a sale for exportation to the United States.

Merchandise must be destined for export to the United States at the time of the sale for it to be considered to be sold for exportation. See HRL 542310, dated May 22, 1981 (drill bits manufactured in Italy and stored in France for an indefinite period, are not sold for exportation to the United States because when sold they could end up either with a U.S. or European customer). As noted earlier, counsel for xxxxxxx states that its client purchased the shoes from xx xxxxxxxxx for ultimate sale and consumption in Indonesia. However, a xxxxxxx representative contradicted this by indicating to the import specialist that the agreement between the factory and xxxxxxx contemplated that the finished shoes would be shipped to the United States. The representative showed the import specialist an invoice that had been prepared to cover the shipment. It was only after the defects were discovered that a decision was made to keep the "B" grade shoes overseas. Assuming this last information is correct, it would thus appear that the shoes were destined for export to the United States at the time of sale.

Even though the merchandise was destined for export to the United States at the time of sale, the issue of whether its retention overseas now rules out its appraisement under transaction value needs to be addressed. The length of time between purchase and exportation - six years - was a factor used in HRL 542791, dated June 10, 1982, to determine that there was no sale for exportation to the United States. However, in that particular case there was no evidence that a U.S. destination was contemplated when the merchandise - jewelry - was originally purchased. Here, we have already determined that the shoes were destined for export to the United States at the time of sale, therefore the two cases are distinguishable. It is also possible to distinguish the situation in HRL 542962, dated December 29, 1982, where there was no sale for exportation when a motorcycle was purchased in Japan for the purpose of being used for an extended period overseas before being imported. That was clearly a foreign sale. A xxxxxxx representative, on the other hand, has indicated to Customs that the shoes were to be shipped to the United States at the time of sale, which by implication rules out planned use overseas. In our view, a delay in exportation will not cancel a sale for exportation where the merchandise was destined for export at the time of sale and there was no planned or actual use overseas.

Imported merchandise must be appraised pursuant to transaction value if that value can be determined in accordance with the TAA. There is no option under the TAA to use the deductive value method of appraisement in situations where transaction value is applicable. See HRL 542972, dated January 6, 1983. The shoes were sold for exportation to the United States therefore they should, unless barred by other factors not mentioned in your internal advice request, be appraised under transaction value.

The remaining issue of whether an allowance shall be made for defects in the shoes must now be addressed.

The Statement of Administrative Action provides that "[w]here it is discovered subsequent to importation that the merchandise being appraised is defective, allowances shall be made. (Regulation)." Section 158.12 of the Customs Regulations (19 CFR 158.12) provides that "[m]erchandise which is subject to ad valorem or compound duties and found by the district director to be partially damaged at the time of importation shall be appraised in its condition as imported, with an allowance made in the value to the extent of the damage." Arguably, the shoes at issue were not defective immediately after their production, even though they were of grade "B" rather than the desired grade "A" quality, because they were made to xxxxxxx specifications. However, the shoes might have been rendered defective after incurring rust damage in storage. The import specialist may want to check for this possibility and make the necessary allowances at the time of importation.

HOLDING:

1) The shoes were sold for exportation to the United States, therefore, absent any other limitations or restrictions, can be appraised under transaction value.

2) A delay in exporation will not negate the use of transaction value where the merchandise was destined for export at the time of sale and there was no planned or actual use overseas.

3) An allowance can be made in the value of the imported shoes to the extent of the damage if the import specialist determines at the time of importation that the shoes were defective.

We hope that this is of assistance to you. Please let me know if you have further questions.

Sincerely,

John Durant
Director, Commercial

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