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HQ 545902

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June 18, 1997

RR:IT:VA 545902 RSD

CATEGORY: VALUATION

District Director
U.S. Customs Service
6747 Engle Road
Middleburg Heights, Ohio 44130

RE: Application for Further Review of Protest No. 4203-94-100612; sale for exportation in a three tiered transaction; Nissho Iwai; Synergy

Dear Sir:

This is in response to an Application for Further Review (AFR) of the above referenced protest dated August 24, 1994, filed by counsel, on behalf of Transcorp Apparel Ltd. ("Transcorp;" the "Protestant") concerning the appraisement of ladies silk woven long sleeve blouses. A meeting was held with counsel and the concerned import specialist at our offices on April 12, 1996. Counsel made several additional submissions. The most recent submission is dated May 9, 1996. We regret the delay in responding. Because there were many entries being protested, it is our understanding that your office agreed to let counsel designate a lead protest as being representative of the transactions so he could obtain the necessary documents.

FACTS:

Transcorp is the importer of record with respect to the protested entry. It is incorporated in the British Virgin Islands, but it is authorized under Customs Regulations Section 141.18 (19 CFR 141.18) to be an importer of record. Counsel states that Transcorp has no offices in the United States. According to counsel, in filling purchase orders from U.S. retailers, Transcorp selected vendors in a number of different countries and arranged to have the goods manufactured.

When Transcorp arranged to have garments produced in China, it did not usually deal directly with the factory, but used either a related or unrelated middleman to obtain the merchandise. For the particular entries involved in this protest, Transcorp used a related middleman, located in Hong Kong, Ten Lions Investment Limited, (Ten Lions) to acquire the goods from the manufacturer. Ten Lions claims not to be related to any of the factories that manufactured the imported garments. Ten Lions supplied the trim to the factory making the garments.

Counsel claims that a U.S. retailer, Limited Express, Inc., located in Columbus, Ohio, initiated the transaction that is the subject of the lead protest when it ordered merchandise from Transcorp using purchase order number 432805. According to counsel, Transcorp's buying agent, Hillsdale Company Ltd., (Hillsdale) located in the British Virgin Islands, relayed the order to Ten Lions. To fill the order, Ten Lions allegedly contracted with a Chinese manufacturer, Shenzhen Xinghe Garment Co. Ltd., to manufacture the garments. To support his position with regard to the lead protest, counsel provided documents with his letter of August 24, 1995, from the various transactions involved in this matter. The highlights of the information contained in these documents are outlined below:

Transaction between Limited Express, Inc. and Transcorp

Purchase order number 432805
Dated November 26, 1993
Style number 8696
18,824, 18,824, 14,112, 18,824 pieces of ordered in colors ivory, Egyptian blue, hedge, and tile

Transaction between Ten Lions and Transcorp's Agent, Hillsdale

Contract HCL-1278-93
Dated November 23, 1993
FOB per piece $6.60 in U.S. dollars
Silk woven long sleeve blouses in style no. 8696 Reference to purchase order number 432805 Latest shipment on Dec 15, 1993 Ex H.K. to U.S.A. by Air
Payment terms "By cheque 15 days after shipment effected."
Three samples were to be supplied prior to production

Invoice TLI/0705/12/93
Dated January 4, 1994
FOB China per piece unit price of $6.60 in U.S. Dollars
Total price $33,613.80
Reference to purchase order number 432805 Reference to contract number (HCL-1278)
Style number 8696
Quantity 5093 pieces in tile
Transaction between Ten Lions and Shenzhen Xinghe Garment Co. Ltd.

Contract TLG-562/93
Dated November 26, 1993
Unit price of FOB per piece $5.80 in U.S. dollars Shenzhen-Garment maker
Style number 8696
Total price of $109,173.40
Reference to purchase order number 432805 Shipment/delivery on or before December 5, 1993 Ex China
Terms of payment by cheque by 25 days after shipment effected
Approval of three samples before production

Contract TLG 563/93
Dated January 5, 1994
Unit price of FOB per piece $5.80 in U.S. dollars Shenzhen-Garment maker
Style number 8696
Total price of $81,849
Reference to purchase order number 432805 Shipment/delivery on or before December 5, 1993 Ex China
Terms of payment by cheque by 25 days after shipment effected
Approval of three samples before production

Shenzhen Xinghe Invoice number 0000405 to Ten Lions Dated December 18, 1993
Unit price of $5.80 in U.S. Dollars
From Shenzhen to Hong Kong
Style number 8696
Reference to purchase order number 432805 Quantity 13,973 pieces in Egyptian blue and 3,155 pieces in tile
No terms of sale indicated

Application for Payment Order from Citibank Dated January 26, 1997
Ten Lions as the sender of the funds
Shenzhen Xinghe, manufacturer, as the beneficiary of the funds.

Counsel claims that 13,973 pieces of the Egyptian blue were imported under contract TLG-562/93, but the balance of the order, 4,850 pieces, were not manufactured due to a shortage of fabric. For contract TLG-563/93 covering 14,112 pieces in the "tile" color, 3,155 were shipped in one of the entries covered by the protest. The remainder of the order was imported under another entry or was rejected because of quality control problems and was not shipped.
Your office appraised the merchandise based on the price that Transcorp, the importer paid.

ISSUE:

Whether the transaction value of the imported merchandise should be based on the alleged sale between the manufacturer in China and the alleged middleman, Ten Lions?

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 Agreement Act of 1979 (TAA; 19 U.S.C. ?1401a). The preferred method of appraisement under the TAA is transaction value defined as the "price actually paid or payable for the merchandise when sold for exportation to the United States" plus certain enumerated additions. Section 402(b)(1) of the TAA. The "price actually paid or payable" is defined in section 402(b)(4)(A) of the TAA as "the total payment (whether direct or indirect . . . ) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller." For the purposes of this decision, we have assumed that transaction value is the appropriate basis of appraisement.

Under the above cited definitions, transaction value is based on the price actually paid or payable when the goods are sold for exportation. In the instant case, counsel argues that the sale between the manufacturer and the middleman, Ten Lions, is a sale for exportation to the United States. 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. 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 transaction value. 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." Further, 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.

Thus, the transaction between Ten Lions and the manufacturer can be the basis of transaction value only if it constitutes a bona fide sale and meets the court's standards in the Nissho. See Headquarters Ruling Letter (HRL) 545714, November 9, 1994. Customs recognizes the term "sale," as articulated in the case of J.L. Wood v. United States, 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974), as the transfer of ownership in property from one party to another for consideration. 61 Cust. Ct. 604, A.R.D. 245 (1968). In determining whether a bona fide sale has taken place between a potential buyer and seller of imported merchandise, no single factor is determinative and the relationship is to be ascertained by an overall view of the entire situation. Several factors may indicate whether a bona fide sale exists between a potential buyer and seller. In determining whether property or ownership has been transferred, Customs considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. See HRL 545105, November 9, 1993; HRL 544775, April 3, 1992. In addition, Customs may examine whether the potential buyer paid for the goods, 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 545571, April 28, 1995.

In this case, based on the information submitted, we are satisfied that there is a sale between the Ten Lions and the manufacturer. We note that there are contracts for the purchase of the goods between Ten Lions and the manufacturer. The manufacturer also issued an invoice to Ten Lions for the purchase of the merchandise. Counsel has also furnished a document labeled as "Application for Payment Order" from Citibank, which shows Ten Lions as the sender of funds and the manufacturer as the beneficiary of those funds. This document and other similar ones demonstrate that Ten Lions paid the manufacturer for the merchandise. Based on this evidence, we find that the information submitted with the protest is sufficient to establish that there was a sale between Ten Lions and manufacturer.

Once it has been established that there was a bona fide sale between Ten Lions and the manufacturer, in order to have the imported merchandise appraised based on that sale, the two part test that the court set forth in the Nissho Iwai case must be met: 1) the sale must be at arm's length, and 2) the goods must clearly be destined to the United States at time they are purchased. First, turning to the question of whether the sale was at arm's length, counsel has submitted a copy of a letter written on Ten Lions letterhead dated July 5, 1995. The letter states that Ten Lions is not related to the manufacturer, and that the shareholders/directors or owners are not members of the same family. The letter also explains that the companies have no common officers, directors, partners, employees, employers, shareholders, and the two companies are not under the common control of any one person. Because we have no evidence to contradict this
letter, we find that Ten Lions and the manufacturer are not related. Therefore, the sale between these parties would be considered to be at arm's length, and we conclude that the first condition set forth in the Nissho Iwai case regarding an arm's length transaction has been satisfied.

With regard to the second requirement in the Nissho Iwai case, that the goods be "clearly destined for the U.S.", we stated in HRL 545420, dated May 31, 1995, that the following information would support a finding that the requirement has been met: (1) the factory produces the garments to fulfill a pre-existing purchase order issued by the U.S. retailer; (2) the factory places labels in the garments which identify or represent the trademarks of U.S. retailers; (3) the factory packs the garments in shipping cartons which identify the U.S. retailer, by marks and numbers, as the ultimate destination; and (4) the export licenses controlling the volume of garments shipped to the U.S. cover specific garments. Customs will also require a copy of the factory invoice.

In support of its position that the merchandise was clearly destined to United States at the time of sale, counsel states that Transcorp sells only to the U.S. and only to the divisions of "The Limited". The only very minor exception is if "The Limited" cancels the order because of a late shipment or defective goods. In such a case, Transcorp will sell the goods to a discounter, also in the United States. Counsel also states that according to Transcorp, when "Limited" goods are shipped to the U.S., the cartons are identified by marks and numbers as indicated on the paperwork and it is the factory which packs the cartons. Counsel, however, has provided no collaboration for these statements. The statements are also only in regards to Transcorp's role in the transaction, not how the alleged middleman, Ten Lions, resells the goods it purchased from the manufacturer. We also have no way of verifying how the garments were labeled and packaged. In addition, it is our understanding that no export licenses were required for the merchandise involved in this case.

Counsel also points out that the contracts, TLG-562/93 and TLG563/93 used in the sale between Ten Lions and the manufacturer, reference the original purchase order no. 432805 from Limited Express, Inc. to Transcorp. This same purchase order no. also appears on the manufacturer's invoice. According to counsel, this demonstrates that the factory sale was intended to fulfill a pre-existing purchase order requiring shipment to the United States, and the garments were contracted for, produced, and sold for export to the United States.

The import specialist in reviewing the transaction documents noticed several irregularities and questionable items. The most significant of these problems is that the original purchase order from the U.S. retailer, Limited Express, purchase order number 432805 that allegedly began the transaction, is dated November 26, 1993, while the purchase contract from Transcorp's agent, Hillsdale, to the middleman, Ten Lions, is dated November 23, 1993. In addition, the import specialist points out that the two purchase order contracts from Ten Lions to the manufacturer, TLG 562/93 and TLG 563/93, are dated November 26, 1993 and January 5, 1994, while the manufacturer's invoice covering the purchase order is dated December 18, 1993. The import
specialist states that according to the marks and numbers portion of the entry invoice, Limited Express was identified on the cartons. However, the merchandise was actually shipped to Transcorp Apparel.

Moreover, the import specialist points out that the transaction does not correlate to the terms of the contracts. First, in contracts TLG 562/93 and TLG 563/93 between Ten Lions and the manufacturer, the payment terms were "By cheque 25 days after shipment effected", but payment for both contracts was not made until March 16, 1994, almost 80 days after the merchandise was exported. Another instance, where the transaction did not follow the contract terms, is with contact HCL 1278/93 between Ten Lions and Hillsdale, which shows that the latest ship date as "Dec 15, 1993 ex H.K. to U.S.A. by AIR." Yet, the items were actually shipped on December 23, 1993 and December 26, 1993 by sea, and payment was actually transferred on May 2, 1995, more than 150 days after shipping, not the 15 days specified in the purchase order. Additionally, contract HCL 1278/93 specified that the payment be made by cheque, but actual payment was made by telegraphic transfer.

Counsel claims that the reason why the contract from Transcorp (through Hillsdale) to Ten Lions is dated before the purchase order from the U.S. retailer is that it was a reorder and an earlier version of the order was issued but cannot be located. Counsel also maintains that this first version of the purchase order would have pre-dated the November 23, 1993, contract between Transcorp and Ten Lions. In addition, Counsel argues that it is common for there to be some discrepancies or irregularities in the documents in these type of transactions, but in this instance, the flow of the paperwork establishes that the merchandise was intended for the U.S., when the middleman, Ten Lions, purchased it from the manufacturer.

In considering the totality of the evidence in this case, we find that Protestant has not met its burden in establishing that the merchandise was clearly destined to the United States. The principal indication that the merchandise was intended for the United States is on the transaction documents, the Ten Lions purchase orders and manufacturer's invoice. Although these documents reference the purchase order number from the U.S. retailer, Limited Express, the dates shown on the purchase orders and invoices, diminish the weight that can be afforded to these documents to establish that the merchandise was destined to the United States. Because the contract between Ten Lions and Transcorp is dated after the purchase order from the U.S. retailer, we cannot conclude that the U.S. retailer's order actually initiated the transaction. Furthermore, one of the purchase order contracts from the middleman to the manufacturer is dated after the manufacturer's invoice.

Despite counsel's claims, there is no evidence to substantiate the claim that the reason for the discrepancies in the dates is that the Express purchase order number 432805 was a reorder, and the original purchase order cannot be found. We note that counsel has not documented the existence of this alleged previous purchase order other than pointing out that the word reorder appears on purchase order number 432805. Even if there was a previous purchase order, there is no indication what merchandise was actually ordered on it, when it was issued, and whether it was for exportation to the United States. Moreover, as noted above, the parties did not follow the shipping/delivery and payment terms set forth in the contracts. In addition, the manufacturer's invoice to Ten Lions simply shows the goods were to go from Shenzhen to Hong Kong, not the to United States. These additional discrepancies and inconsistencies with the contract terms further undermines the importer's ability to overcome the presumption that the price it paid should be the basis for transaction value. Consequently, the transaction documents do not establish that the factory produced the garments to fulfill a pre-existing purchase order of a U.S. retailer and that the parties understood that the merchandise was intended for the United States.

Because samples of merchandise or its cartons are no longer available, there is no evidence that the merchandise was labeled for the United States. Protestant also has not furnished evidence regarding what instructions the manufacturer was given regarding labeling the garments. In addition, there is no evidence concerning whether Ten Lions, who actually purchased the merchandise from the manufacturer, only sells to the United States. Therefore, we conclude that the evidence is insufficient to establish that the merchandise was clearly destined to the United States, at the time Ten Lions purchased it from the manufacturer. Accordingly, the requirements of the Nissho Iwai have not been satisfied and the merchandise should be appraised based on the price that the importer paid for the merchandise.

It should be noted that counsel claims that the Transcorp used the services of its buying agent, Hillsdale, to obtain the imported merchandise. We have very little information on Hillsdale, its relationship with Transcorp, and the amount of commissions it received for performing its services. The protest file contains no information supporting Hillsdale's bona fide buying agency, such as a buying agency agreement or the amount of the commissions paid to Hillsdale.
Accordingly, in this decision, we will not address the question of whether Hillsdale acted as a bona fide buying agent whose commissions would be excluded from the transaction value of the imported merchandise.

HOLDING:

Because the evidence submitted is insufficient to demonstrate that the merchandise was "clearly destined for United States" at the time the middleman purchased it from the manufacturer, the transaction value of the imported merchandise should not have been based on the price the middleman paid the manufacturer, but was properly based on the importer's price.

You are instructed to deny this 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, Lexis, the Freedom of Information Act and other public access channels.

Sincerely,

Acting Director

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