HQ 545898 - Sale for exportation of merchandise imported pursuant to a three-tiered sales arrangement; Nissho Iwai - United States International Trade Commision Rulings

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HQ 545898

June 12, 1995

VAL R:C:V 545898 RSD

CATEGORY: VALUATION

Elon A. Pollack, Esq.
Politis & Pollack
3255 Wilshire Blvd., Suite 1688
Los Angeles, California 90010

RE: Sale for exportation of merchandise imported pursuant to a three-tiered sales arrangement; Nissho Iwai

Dear Mr. Pollack:

This is in further response to your letter dated June 14, 1994, requesting a ruling, on behalf of your client, B.B. Dakota Inc. (hereinafter referred to as "Dakota") concerning the valuation of merchandise that is imported pursuant to a three tiered sales arrangement. On November 4, 1994, we issued an information letter concerning Dakota's import transactions. In that letter, we stated that because we did not have adequate information regarding the transactions described, we could not issue a ruling. In response to our letter, you have submitted additional documents such as purchase orders, invoices, letters of credit, and draft orders, called cut slips, for a specific transaction with your letter dated March 2, 1995.

You have also transmitted a letter by fax dated May 12, 1995. In that letter, you request that the name of Dakota's U.S. customer be kept confidential. For the reasons stated in your letter, your request for confidentiality is granted.

FACTS:

You state that Dakota is a U.S. trading company which normally acts as a middleman in the purchase of goods from the foreign exporter or manufacturer. According to your submissions, it is not related to any foreign vendor or manufacturer of goods, and it receives no compensation from a vendor/manufacturer. It has a Hong Kong agent, which is also not related to any vendor or manufacturer and receives no compensation from a manufacturer/ vendor. Typically, Dakota places purchases orders directly with Hong Kong vendors who have ownership interests in production facilities located in China. In making the orders, Dakota specifies the construction and styling of the garments and furnishes instructions to the vendor concerning the trademark labeling, hang tags, and other requirements of its customers. The identity of the U.S. customer and the customer purchase order number are specified in Dakota's order given to the foreign seller. The documents submitted with your March 2, 1995, letter pertain to a transaction involving Dakota, its U.S. customer, and Dakota's supplier, Genmark Fur and Leather of Hong Kong (hereinafter referred to as "Genmark") concerning ladies leather jackets, which occurred in September and October of 1994. A complete paper trail pertaining to the transaction consisting of purchase orders, commercial invoices, letters of credit and cut slips was submitted. In your May 12, 1995, letter, you state that in most instances Dakota's U.S. customer was the actual importer of the merchandise. For the purposes of this ruling, we will assume Dakota's U.S. customer is the importer of the merchandise.

The documentation submitted indicates that the U.S. customer sent a series of purchases orders to Dakota for several different styles of ladies leather jackets. A letter of credit was opened on behalf of Dakota which was transferrable to Genmark provided that the conditions in the letter of credit were met. The purchase orders indicated that the merchandise was to be shipped to the U.S. customer's facilities in New Jersey, Chicago, and Dallas. The documents further show that Dakota placed the orders for merchandise with Genmark in Hong Kong by preparing what they call cut slips. These cut slips indicated the destination and the name of the U.S. customer. Genmark prepared order confirmations for the merchandise. A statement that Dakota had no financial interest in any foreign vendor, that a foreign vendor did not have any financial interest in Dakota, and that Dakota did not act as a selling agent for any foreign vendor is printed on the bottom of the submitted cut slips. Genmark prepared invoices for the merchandise which were sent to Dakota. The invoices show an ex-factory price with an additional dollar added to the price for the cost of freight to transport the merchandise from China to Hong Kong. The invoices also indicate that the merchandise was to be shipped from Hong Kong to New York. Dakota paid Genmark through a letter of credit which was drawn on the Standard Chartered Bank of Los Angeles, California. The letter of credit states that the merchandise was to be transported from Hong Kong to New York. Dakota issued invoices to its U.S. customer for the merchandise which showed an FOB price for the merchandise with an additional amount added for Dakota's profit. The U.S. customer used a letter of credit to pay Dakota which provided that partial shipments were acceptable as long as each style was shipped complete.

This ruling is limited to prospective import transactions involving these same parties which are conducted in the same manner as those described above.

ISSUE:

Whether in the circumstances described, transaction value should be based on the sale between Dakota and the U.S. purchaser or on the sale between Dakota and its supplier?

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, which is defined as the "price actually paid or payable for merchandise when sold for exportation to 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).

Until recently it has been the policy of the Custom Service to appraise imported merchandise under transaction value based on the sale which most directly caused merchandise to be exported to United States, Brosterhous, Coleman & Co. v. United States, 737 F.Supp. 1197 (Ct. Int'l Trade 1990).

However, in Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir 1992), the Court of Appeals for the Federal Circuit reviewed the standard for determining transaction value when there is more than one sale, which may be considered as being for exportation to the United States. In so doing, the court stated that Customs policy of basing transaction value on the sale which most directly caused the merchandise to be exported to the U.S. proceeded from an invalid premise. Nissho Iwai, 982 F.2d 505, 511.

Instead the court in Nissho 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 vendor and middleman dealt with each other at "arm's length." Of course, the price the middleman pays the vendor can be the basis for transaction value only if there is a bona fide sale between these parties.

In the instant case, Dakota is claiming that it is a middleman in a three tiered sales transaction between its supplier, Genmark and its U.S. customer. Although Dakota is not the importer, it maintains that a sale for exportation occurred between it and Genmark, and that based on Nissho, the transaction value for the imported merchandise should be based on this sale. In determining if this claim is valid, the first question to be addressed is whether there is a bona fide sale between Dakota and Genmark.

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, Custom 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.

Based on the evidence submitted, we conclude that Dakota and Genmark deal with one another as buyer and seller. For example, Genmark issues separate detailed invoices for the merchandise to Dakota. From the invoices, it can be inferred that Dakota is buying the merchandise. The cut slips prepared by Dakota list Genmark as the foreign vendor. In addition, Dakota directly pays Genmark for the merchandise by opening a letter of credit with Genmark as the beneficiary. The letter of credit makes reference to the seller, which is presumably Genmark. Moreover, the letter of credit from the U.S. customer and Dakota also makes reference to a "purchase price" between Genmark and Dakota which must be on the Genmark's invoices.

The terms of sale specified on the documents further support a finding of a sale between Dakota and Genmark. Based on such terms described below, it appears that Dakota assumed the risk of loss and acquired title for a period of time. Genmark's invoices and order confirmation indicate that Dakota purchased the merchandise on an ex-factory basis. An ex-factory price is the cost of the goods at the seller's loading dock. It means that the seller fulfills his obligation to deliver when he has made the goods available at his premises to the buyer and from that point the buyer bears all cost and risk involved in taking the goods from the seller's premises to the desired destination. International Chamber of Commerce, Incoterms, 1990 edition n. 460, at 18. Thus it is the seller's responsibility to make the goods available to the buyer at the named place of delivery, and to bear all risk of loss until such time as the goods have been placed at the buyer's disposal. Correspondingly, the buyer assumes all risk of loss or damage from this point on. Incoterms 1990 at 18-19. Accordingly, in this case title passes to Dakota at the seller's premises, i.e. at Genmark's factory in China. See HRL 54105 November 8, 1993.

The invoices from Dakota to the U.S. customer indicate that the terms of the sale between those parties is FOB Hong Kong. The use of the term "FOB Hong Kong" indicates that the contract was a shipment contract. In a shipment contract, unless otherwise agreed to by the parties, title and risk of loss pass from the seller to the buyer, when the merchandise is delivered to the carrier for shipment. See HRL 543708, April 12, 1988. Accordingly, Dakota held title to the merchandise and bore the risk of loss from the time Genmark made it available at its facilities in China until it was transported to the carrier in Hong Kong. At that point, Dakota's U.S. customer took title to the merchandise and bore the risk of loss. The fact that Dakota held the title to the merchandise and bore the risk of loss for a definite period of time is a further indication that there was a sale between the Genmark and Dakota.

Based on the totality of the circumstances, we conclude that the evidence presented establishes that a bona fide sale occurred between Dakota and Genmark.

The next question that arises is whether it is proper to base the transaction value of the imported merchandise on the sale between Genmark and Dakota. As explained above, the court in Nissho set forth a two part test that must be met for a sale between a middleman and its supplier to be the basis of a viable transaction value: 1) the goods must clearly be destined to the United States at time they are purchased, and 2) the sale must be at arm's length. Turning to the first part of the test, the submitted documents relating to the transaction between Genmark and Dakota, such as the cut slips, order confirmations and the invoices all indicate that the merchandise was to be shipped to New York or to another location in the United States. The letter of credit from Dakota to Genmark states that the merchandise will be transported to New York. This is especially significant because unless the conditions in the letter of credit are met, Genmark would not be paid. In addition, the evidence shows that the imported goods were manufactured for Dakota's U.S. customer. This is shown by the fact that various documents make reference to the U.S. customer. For example, Genmark's invoices and order confirmations make reference to the U.S. customer's purchase order numbers, and the cut slips issued to Genmark display the name of Dakota's U.S. customer. Accordingly, we find that at the time that Dakota purchases the merchandise from Genmark it was clearly destined to the United States.

With respect to the second condition that the court set forth in the Nissho case, that the middleman and the manufacturer deal with each other at arm's length, there is a certified statement from Genmark dated October 24, 1994, that there is no relationship between itself and Dakota. There is also a statement printed on the cut slips prepared by Dakota, which reads that it does not have any financial interest in the foreign vendor and that the foreign vendor does not have any financial interest in it. Based on these statements, we conclude that the sale between Dakota and Genmark was at arm's length.

Accordingly, we find that both conditions set forth by the court in Nissho for assessing whether a sale between a supplier and a middleman would be a viable sale for exportation on which to base the transaction value of imported merchandise are met. Therefore, the transaction value for the imported merchandise is to be based on the sale between Genmark and Dakota.

HOLDING:

With regard to prospective transactions, similar to those described above and involving the same parties, we find that the transaction value of the imported merchandise should be based on the sale between Genmark and Dakota.

Sincerely,

John Durant, Director

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