HQ 545368 - Application for Further Review of Protest Number 280993-100693; concerning a sale for exportation of merchandise pursuant to three tiered sale; related parties; Nissho Iwai American Corp. v. United States - United States International Trade Commision Rulings

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HQ 545368

July 6, 1995

VAL R:C:V 545368 RSD

CATEGORY: VALUATION

District Director
United States Customs Service
555 Battery Street
San Francisco, California 94111

RE: Application for Further Review of Protest Number 280993-100693; concerning a sale for exportation of merchandise pursuant to three tiered sale; related parties; Nissho Iwai American Corp. v. United States

Dear Sir:

This is in response to your memorandum dated June 21, 1993, forwarding an application for further review of protest 280993-100693 and other related protests, filed on behalf of Helen of Troy Corporation by its attorneys, Baker & McKenzie, on April 8, 1993. The protest concerns the appraisement of hair dryers and other personal care appliances made in China and imported from Hong Kong. Baker & McKenzie made an additional submission dated March 10, 1994, to your office and made additional submissions to the Office of Regulations and Rulings, the most recent on May 16, 1995. We regret the delay in responding.

FACTS:

The protestant, Helen of Troy Corporation (HOT), which is based in El Paso, Texas, imported electric hair dryers and other personal care appliances and products. The products were manufactured in China, but were imported from Hong Kong. HOT sells a variety of hairdressing equipment marketed under the "Vidal Sassoon" trade name. HOT determined the types and the quantities of the products which it needed, and conveyed this information and specifications to one of its wholly owned subsidiaries, International Appliances Cayman Ltd. (IACL) or International Appliances Ltd. (IAL). IACL is located in the Cayman Islands and IAL is located in Hong Kong. IAL/IACL ordered and purchased the products from various Chinese manufacturers. IAL/IACL entered into contracts with manufacturers to make the products in

China. HOT claims that it and IAL/IACL are unrelated to the foreign manufacturers and that the price at which the Chinese manufacturers sold the products was the result of arm's length negotiations.

According to protestant, IAL purchased finished goods from the factories for a unit price, and it was obligated either to take the finished goods for such price or to compensate the factories for any costs incurred as a result of the order. On the other hand, protestant indicates that IACL consigned certain components to the factories and employed these factories as its agents for the purchase of other components and paid the factories a total price which consisted of two separate amounts, one for the components and raw material purchased on IACL's behalf, and another for manufacturing services. IACL entered into a series of manufacturing contracts with various companies in China to produce personal care appliances. The contracts provided that the parties will enter into production agreements. In the production agreements, the manufacturers agreed to produce and ship products in accordance with the agreement. These agreements further indicated that the raw materials and/or components required in the manufacture of the products may be furnished either by IACL or the manufacturers, that IACL was to reimburse the manufacturers for any raw materials or components that they purchased for making the products, manufacturers were to receive what is referred to as a "manufacturer's fee", and that the factory will be responsible for the cost of handling and transportation of the products from the factory to the point from which they were shipped. IACL followed up the production agreements by issuing purchase orders.

After HOT ordered the products from IAL/IACL, these companies transmitted their own purchase orders for these articles with the Hong Kong office of the relevant foreign manufacturer. Along with the purchase order, the foreign manufacturer was also provided with the specifications for the goods, which included instructions to label the goods with the "Vidal Sassoon" trade name. IAL/IACL issued packing lists describing the articles to be shipped to HOT. Upon loading the goods in Hong Kong, the carrier issued a bill of lading showing IAL/IACL as the shipper, and HOT as the consignee.

The manufacturers submitted their invoices to IAL/IACL for payment. IAL and IACL issued invoices for the articles to HOT at prices which included a profit. HOT paid these invoices amount through wire transfers to IAL or IACL. The manufacturers' invoices did not designate any specific terms of sale. The invoices from IAL/IACL to HOT show that the transactions were F.O.B. Hong Kong.

Customs appraised the goods under transaction value based on the price HOT paid IAL/IACL. On February 24, 1993, HOT disclosed to Customs that an upward price adjustment had been made on products sold by IAL to HOT. Based on this adjustment, HOT tendered additional duties to the District Director in San Francisco. However, on March 15, 1993, HOT notified the Customs Service that it would seek to have entries reappraised in accordance with the Nissho Iwai decision. Protestant claims that transaction value should be based on the prices IAL/IACL paid the foreign manufacturers. For the transactions involving IAL, the protestant submitted the following documents which were supposed to illustrate a representative transaction: 1) Purchase Orders from IAL to the Chinese manufactures; 2) Confirming Purchase Order from HOT to IAL; 3) International Bills of Lading; 4) Packing List prepared by IAL, describing the model and quantity of the goods; 5) Invoices from the Chinese manufacturers to IAL, showing the price of the product and packing cost; 6) Invoice from IAL to HOT showing the description of the imported product and unit the price charged; 7) The Entry Summary; 8) Funds Transfer Advice from NationsBank indicating a transfer of funds.

The Protestant also submitted several sets of documents for different products which are presented as being representative of transactions between HOT and IACL. Included in these sets of documents were 1) Production Agreements between HOT Cayman (IACL) and the Chinese Manufacturers; 2) Purchase Orders from Hot Cayman (IACL) to the Chinese manufacturers; 3) HOT specifications for the goods delivered to the manufacturers; 4) Confirming Purchase Orders from HOT to HOT Cayman (IACL); 5) International Bills of Lading with attaching lists of the model descriptions and quantities of the goods; 6) Packing Lists prepared by HOT Cayman (IACL); 7) Invoices from the Chinese manufacturers to HOT Cayman (IACL); 8) Invoices from HOT Cayman (IACL) to HOT; 9) Entry Summaries; 10) NationsBank Fund Transfer Advice from HOT to HOT Cayman (IACL).

ISSUE:

Whether the transaction value should be based on the sale between the foreign manufacturers and IAL/IACL or the sale between IAL/IACL and HOT?

LAW AND ANALYSIS:

As you know 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, which is defined as the "price actually paid or payable for merchandise when sold for exportation for the United States," plus certain enumerated additions. For purposes of determining transaction value in appraising imported merchandise, a sale for exportation to the United States must take place at some unspecified time prior to the exportation of the goods. (HRL 545434, dated May 31, 1994).

In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir 1992), the Court reaffirmed the principle of E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that a manufacturer's price, for establishing transaction value, is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. In reaffirming the McAfee standard the court stated that in a three-tiered distribution system:

The manufacturer's price constitutes a viable transaction value when the goods are clearly destined for export to the United States and when the manufacturer and the middleman deal with each other at arm's length, in the absence of any non-market influence that affect the legitimacy of the sale price...[T]hat determination can be made on a case-by-case basis.

Id. at 509. See also, Synergy Sport International, Ltd. v. United States, 17 C.I.T.___, Slip Op. 93-5 (CT. Int'l Trade January 12, 1993).

As a general matter in situations of this type, Customs presumes that the price paid by the importer is the basis of transaction value. However, in order to rebut this presumption, the importer must in accordance with the court's standard in Nissho, provide evidence that establishes that at the time the middleman purchased, or contracted to purchase, the imported merchandise the goods were "clearly destined for export to the United States" and that the manufacturer and middleman dealt with each other at "arm's length."

In the instant case, HOT is claiming that based on Nissho, the transaction value for the imported merchandise should be based on the sales between IAL/IACL and the manufacturers in China. In determining if this claim is valid, the first question to be addressed is whether there were bona fide sales between IAL/IACL and the manufacturers.

For Customs purposes, a "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). Although J.L. Wood was decided under the prior appraisement statute, Customs recognizes this definition under the TAA. Several factors may indicate whether a bona fide sale exists between potential seller and buyer. In determining whether property or ownership has been transferred, Customs considers whether the alleged buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, Customs may examine whether the alleged buyer paid for the goods, whether such payments are linked to specific importations of merchandise, and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HRL 545705, January 27, 1995.

In assessing whether there was a sale between the manufacturers and IAL, we note that the transaction documents between the manufacturers and IAL do not specify the terms of sale. However, the other evidence indicates that there was a sale between the IAL and the manufacturers. IAL prepared separate purchases orders describing the merchandise for the manufacturers. The purchase orders also indicate that the goods had to be inspected by IAL and an inspection certificate had to accompany each shipment, showing that IAL had an interest that the goods were in compliance with specifications. IAL also prepared a packing list. The manufacturers also issue specific invoices for the products shown on the purchase orders, which show that the transaction is "By order and for account of International Appliance Ltd.". We also assume that IAL paid the manufacturers the amount shown on invoices for the merchandise. In
turn, IAL issued invoices to HOT for the imported merchandise. The invoices show a specific model number and an amount that was to be paid. Based on the totality of the evidence submitted, we conclude that there was a bona fide sale between IAL and the manufacturers.

The transactions involving IACL were different than those involving IAL because rather than buying the merchandise straight out from the manufacturers, IACL supplied certain components to the manufacturers and paid them a manufacturer's fee for the assembly of the merchandise. Nonetheless, as explained below, the assembly transaction may form the basis of transaction value.

19 CFR 152.103(a)(3) states that:

In some cases, the price actually paid or payable may represent an amount for assembly of merchandise in which the seller has no interest in the merchandise other than as the assembler. In such cases the price actually paid or payable, adjusted by the addition of the value of the components and required adjustments, will form the basis for transaction value.

Customs has applied this provision both where the price paid by the importer is for assembly of the imported merchandise and where it is paid for processing the goods. This position was articulated in HRL 543737, July 21, 1986, modifying HRL 543593, March 28, 1986. In that case, a U.S. importer purchased oil well tubing from an unrelated manufacturer in Japan. The tubing was then shipped to Canada where a plastic protective coating was applied to the inside of the tubing by another unrelated party. Separate payments were made by the importer to the Japanese manufacturer and to the company in Canada which performed the further processing. Customs initially determined that transaction value could not be determined because the imported tubing was not sold for exportation to the United States from Canada. However, in HRL 543737, July 21, 1986, Customs found that this decision was incorrect and that the merchandise should have been appraised on the basis of transaction value. Customs concluded that the transaction between the importer and the Canadian processor represents a sale "for exportation to the United States," as those words are used in section 402(b) of the TAA, and may, therefore, be the basis for a proper transaction value. The ruling states that this is true even though the price actually paid or payable to the Canadian processor relates solely to the processing of the imported merchandise in Canada, noting section 152.103(a)(3), Customs Regulations. Customs found that transaction value is represented by the price paid to the Japanese manufacturer and the transportation and related costs incurred in shipping the merchandise from Japan to the site of the further processing Canada.

Customs applied a similar analysis in HRL 543971, July 22, 1987. In that case, the importer purchased copper concentrate from Zaire. The concentrate was then transported to a smelter/refinery in Zambia where it was converted into copper cathode. From Zambia, the final product was transported to South Africa where it was shipped to the United States. Even though the price actually paid or payable to the Zambian processor related solely to the processing of the imported merchandise, Customs ruled that the transaction between the importer and the foreign smelter/refinery represents a sale for exportation to the Untied States, as those words are used in section 402(b) of the TAA, and may therefore, be the basis for a proper transaction value. The price actually paid or payable was determined to be the price the importer paid to the Zambian smelter/refinery plus the value, as an assist, of the copper concentrate furnished to the smelter/refinery free of charge by the importer.

Based on the above rulings and section 152.103(a)(3), we find that the transactions between IACL and the manufacturers are sales for exportation to the United States and may be the basis for a proper transaction value. The price actually paid or payable is the fee IACL pays the manufacturer for the assembly of the merchandise plus the value as an assist, of the components furnished to the assembler. The hair driers may be appraised on the manufacturer's price if the requirements of Nissho-Iwai are satisfied.

Turning to the first part of this two part test, the protestant has presented a number of factors which indicate that the hair dryers were clearly destined to the United States at the time they were sold to the IAL or IACL. First, there is the exclusive use of the English language on the packaging and the use care manual. Second, the electrical products bear the Underwriters Laboratory (UL) Trademark, indicating that the products meet the safety standards of one of the major organizations that tests products used in the U.S. market. Third, the electrical products are made to operate on 110 volt electrical current, which is not used outside of North America. All the hair dryers have a circuit interruption device which prevents electrical shock if the appliance is dropped into water. This is required in the United States, but not in other countries, and it is generally not used in other countries because of its expense. Fourth, the products bear a U.S. trademark, "Vidal Sassoon", licensed to HOT. Finally, the shipping documents indicate that the merchandise was to be delivered to the HOT in the United States. Accordingly, the evidence establishes that the merchandise was clearly destined for export to the United States at time it was sold to the middlemen.

Regarding the second part of the test, the Chinese manufacturer and the middlemen, IAL or IACL, are unrelated and it is presumed that they negotiated with each other at arm's length. Therefore, absent evidence to show that the sale between manufacturer and IAL/IACL, was not at arm's length, it is our position that the transaction value should have been based on the manufacturer's price that IAL or IACL paid. However, we note that IACL supplied the manufacturer with component parts for the hair dryers, which would be assists and must be added to the price actually paid or payable to determine the transaction value for imported merchandise.

HOLDING:

Because the imported merchandise was clearly destined to the United States when sold to the middlemen, and the manufacturers and the middlemen are unrelated and they apparently have
dealt with each other at arm's length, the transaction value of the imported merchandise should be based upon the price actually paid or payable for the imported merchandise by the middlemen, IAL/ IACL, to the manufacturers.

You are directed to grant the protest. A copy of this decision with the Form 19 should be sent to the protestant. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision, the office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS, and to the public via the Diskette Subscription Service, the Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director
Commercial Rulings, Division

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