HQ 0545105 - Internal advice request; bona fide sale; J.L. Wood; sale for exportation; transfer of title; risk of loss; HRL 544613 and HRL 544471 cited. - United States International Trade Commision Rulings

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HQ 545105

November 9, 1993

VAL CO:C:R:V 545105 CRS

CATEGORY: VALUATION

Regional Director
U.S. Customs Service
Regulatory Audit Division
Suite 1501
55 East Monroe Street
Chicago, IL 60603-7590

RE: Internal advice request; bona fide sale; J.L. Wood; sale for exportation; transfer of title; risk of loss; HRL 544613 and HRL 544471 cited.

Dear Sir:

This is in reply to your memorandum of September 16, 1992, in which you requested internal advice with regard to the price actually paid or payable for certain merchandise in connection with audits of an liquor importers and distributors in the North Central Region. We regret the delay in replying.

FACTS:

An audit of liquor importers and distributors in the North Central Region suggests that the ultimate consignees of imported merchandise, who are also the importers of record, pay more for the goods than the value declared to Customs.

You state that the audit findings apply generally to a number of companies. However, the documentation attached to the instant request relates to a specific transaction. Accordingly, our response is based on the documentation underlying this transaction. There are three principal actors involved in the transaction: the U.S. purchaser, ********* Co., who is the ultimate consignee and importer of record (hereinafter the "ultimate consignee"); the U.S. supplier, ********* Ltd., (hereinafter the "supplier"); and the foreign seller, ******** (hereinafter the "seller"). You have advised that in transactions of this type the supplier is either the subsidiary, or the selling agent or exclusive distributor, of the seller. However, in the instant case the precise nature of the relationship is not stated.

The documentation consists of six exhibits. The first is a purchase order from the ultimate consignee to the supplier. The purchase order reflects unit prices for one liter, 375 milliliter (ml) and 50 ml bottles of a certain liqueur.

The second exhibit is the invoice from the seller of the liqueur. The invoice identifies supplier as the buyer, and the U.S. purchaser/ultimate consignee, as the consignee. The terms of sale are "ex works." Lower unit prices are quoted than those shown on the purchase order submitted as Exhibit 1. The invoice identified as Exhibit 2 was not submitted with Customs Form (CF) 7501 but was obtained from the ultimate consignee's customs files.

Exhibit 3 is the CF 7501 which reflects the invoice values from Exhibit 2. Exhibit 4 consists of six items, marked (a)- (f), and includes copies of a bill of lading, a waybill, notices from a shippers association, a broker's invoice, and a check from the ultimate consignee's broker to the shipper for shipping costs.

Exhibit 5 is an invoice from the supplier to the ultimate consignee. The terms of sale are given as "F.O.B. ex cellars," and the unit prices are the same as those on the purchase order (exhibit 1). A check from the ultimate consignee to the supplier in the amount specified on the invoice is enclosed as Exhibit 6.

You have inquired as to whether the higher of the two invoice prices should be the basis for appraisement. You state that the supplier acted without the knowledge of the ultimate consignee.

In a telephone conversation between a member of your office and a member of my staff it was confirmed that insurance claims filed by the ultimate consignee in regard to imported merchandise are paid directly by the insurance company to the ultimate consignee. This was determined by a examination of the ultimate consignee's ledger records.

ISSUE:

The issue presented is whether the transaction between the seller and the supplier, and/or that between the supplier and the ultimate consignee, are bona fide sales such that the price actually paid or payable constitutes a valid transaction value.

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 method of appraisement is transaction value, defined as the price actually paid or payable for the merchandise when sold for exportation to the United States, plus amounts for certain enumerated additions, including any selling commissions incurred by the buyer. 19 U.S.C. 1401a(b)(1).

For Customs purposes, the word "sale" generally is defined as a transfer of ownership in property from one party to another for a consideration. J.L. Wood v. United States, 62 CCPA 25, 33; C.A.D. 1139 (1974). While J.L. Wood was decided under the prior appraisement statute, Customs adheres to this definition under the TAA. The primary factors to consider in determining whether there has been a transfer of property or ownership are whether the alleged buyer has assumed the risk of loss, and whether the buyer has acquired title to the imported merchandise. E.g., HRL 544775 dated April 3, 1992; HRL 543633 dated July 7, 1987.

In HRL 543708 dated April 21, 1988, we stated in regard to the transfer of title and the assumption of the risk of loss:

[A] determination of when title and risk of loss pass from the seller to the buyer in a particular transaction depends on whether the applicable contract is a "shipment" or "destination" contract.... FOB point of shipment contracts are "shipment" contracts, while FOB place of destination contracts are "destination" contracts.... Unless otherwise agreed by the parties, title and risk of loss pass from the seller to the buyer in "shipment" contracts when the merchandise is delivered to the carrier for shipment, and in "destination" contracts when the merchandise is delivered to the named destination.

The question of whether the instant transactions are shipment contracts or destination contracts accordingly depends on the shipment terms specified in the documentation.

The shipment terms between the seller and the supplier were "ex works," while those between the supplier and the ultimate consignee were "F.O.B. ex cellars". It is the understanding of this office that the term "ex cellars" is a merely a variant of "ex works," and that the meaning of the terms is synonymous. The term "ex works" means that:

[T]he seller's only responsibility is to make the goods available at his premises (i.e. works or factory). In particular he is not responsible for loading the goods on the vehicle provided by the buyer, unless otherwise agreed. The buyer must bear the full cost and risk involved in bringing the goods from there to the desired destination. This term represents the minimum obligation for the seller.

International Chamber of Commerce, Incoterms: International Rules for the Interpretation of Trade Terms, Publication No. 350, at 16 (1980).

The shipment terms stated on the invoice from the seller to the supplier ("ex works") indicate that this transaction was structured as a shipment contract, with title and risk of loss passing to the supplier at the seller's plant. However, based on the invoice from the supplier to the ultimate consignee, the terms of shipment ("F.O.B. ex cellars") prevailing in that transaction indicate that title and risk of loss also passed to the ultimate consignee at the seller's plant. Furthermore, the documentation also establishes that the merchandise was shipped directly from the seller to the ultimate consignee.

Thus under the circumstances of the transaction at issue title and risk of loss passed from the seller to the supplier, then immediately thereafter from the supplier to the ultimate consignee. The supplier held title only momentarily, if ever. In HRL 544513 dated September 6, 1990, we stated that in a situation where there is a simultaneous passage of title between parties, while an intermediary might take title to merchandise for a split second, this would not negate the fact that in reality it was acting for the seller. As a result, we held that the intermediary was operating as a selling agent for the seller, and that amounts retained by the intermediary were selling commissions. See also, HRL 544513 dated September 6, 1990.

Similarly, in this case it is also our position that the supplier acted as a selling agent for the seller. The supplier took possession of the merchandise at the seller's plant for but an instant, before title and risk of loss passed to the ultimate consignee. In essence, therefore, the supplier never held title nor did it bear the risk of loss. The ultimate consignee was the importer of record, had title to, and bore the risk of loss for, the merchandise when it entered the U.S. It is therefore the position of this office that since the supplier never had title there was never a valid sale between the seller and the supplier. The only sale in the instant transaction occurred between the seller and ultimate consignee, and consequently, there is only one statutorily viable transaction value.

Accordingly, the imported merchandise should be appraised under transaction value based on the price actually paid or payable by the ultimate consignee. The difference between the seller's price and that of the supplier represents a selling commission retained by the latter. However, since this amount is already included in the price paid by the ultimate consignee, no addition to the price actually paid or payable is warranted under 19 U.S.C. 1401a(b)(1)(B).

HOLDING:

Based on the documentation submitted, the price actually paid or payable by the ultimate consignee constitutes a valid transaction value for the purposes of appraisement under 19 U.S.C. 1401a(b).

Sincerely,

John Durant, Director

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