HQ 546629 - Application For Further Review of Protest 4909-95-100077; wearing apparel; transaction value; bona fide sale; Dorf International, Inc. v. U.S.; J.L. Wood v. U.S.; HRLs 544775, 543633, 545105 and 543708; terms of sale; Incoterms - United States International Trade Commision Rulings

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HQ 546629

April 2, 1998

RR:IT:VA 546629 KCC

CATEGORY: VALUATION

Port Director
U.S. Customs Service
#1 La Puntilla
San Juan, Puerto Rico 00901

RE: Application For Further Review of Protest 4909-95-100077; wearing apparel; transaction value; bona fide sale; Dorf International, Inc. v. U.S.; J.L. Wood v. U.S.; HRLs 544775, 543633, 545105 and 543708; terms of sale; Incoterms

Dear Port Director:

This is in regard to the Application For Further Review of Protest 4909-95-100077 dated June 26, 1995, filed by Rulin Fashions, Inc., which we received on January 17, 1997. The issue concerns the appraisement of the imported merchandise under transaction value, ?402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. ?1401a(b); "TAA"). Audit Report No. 412-93-FRO-004 dated January 13, 1995; Customs Report of Investigation dated May 4, 1995; additional submission dated June 25, 1996, and December 26, 1997, and information obtained at a meeting on September 18, 1997, were taken into consideration in reaching this decision. We regret the delay in responding.

FACTS:

Rulin Fashions Inc. ("Rulin") was incorporated in May 1988 in response to Customs position that payments made to Mr. Angel Suarez, Sr., as selling agent for Dayan Hermanoes ("Dayan"), were included in the transaction value of the imported wearing apparel. Mr. Suarez, Sr., who was doing business as A & G Imports, entered into an agent and principal relationship with Dayan pursuant to a 1978 contract. Importations made pursuant to this relationship ended in August 1987.

Rulin began importing wearing apparel into Puerto Rico from Dayan, a Panamanian manufacturer, in May 1989. The wearing apparel is shipped directly from Dayan to retail stores in Puerto Rico ("Puerto Rico customers"). Rulin states that none of the parties, i.e., Rulin, Dayan or the Puerto Rico customers, are related to one another pursuant to ?402(g)(1) of the TAA. After its initial incorporation, Rulin established an office in Panama to handle quality and customer problems. Rulin initially was granted space at Dayan's facilities. However, as of 1992, Rulin opened its own office in Panama. A copy of the lease of office space was submitted. Rulin's invoices for its Puerto Rico customers are prepared in Panama. Customs Report of Investigation found that payment by the Puerto Rico customers is made to Rulin in Puerto Rico.

Additionally, Counsel states that Rulin retained its own professional support staff in Puerto Rico, i.e., legal and accounting, to perform the usual related tasks. Counsel notes that the operator of Rulin's Panama office, Mr. Wilberto Batista, has a close working relationship with Dayan. Mr. Batista has known the Dayan family since he was 20 years old and is currently the Administrative Manager and Controller to Dayan. However, Counsel states that Mr. Batista is a businessman in his own right and operates various businesses from facilities located nearby to Dayan. Counsel contends that this close working relationship between Rulin and Dayan does not create a situation where Customs can disregard the existence of one of the companies in connection with a transaction that involves both companies. Rulin's Panama office is responsible for invoicing, billing, order, and dispatch of merchandise. Although all bank deposits are completed by Rulin's manager in Puerto Rico, disbursements are completed in Panama.

Counsel for Rulin states that Mr. Suarez, Sr. worked as an employee of Rulin since Rulin's incorporation. Mr. Suarez, Sr. was hired as a manager by Rulin due to his knowledge of the market and customer base in Puerto Rico. Mr. Suarez, Sr. was paid a fixed monthly salary as an employee of Rulin and received a commission on sales from Rulin. There is no written employment contract. However, Counsel submitted copies of checks reflecting a monthly salary and separate commission payments. After Mr. Suarez, Sr's death, Mr. Angel Suarez Jr. assumed the position of manager.

Rulin notes that when it was first formed Dayan required that it have signing authority over the checking account opened by Rulin to ensure that Dayan's invoices would be paid from the money being paid to Rulin from the Puerto Rico customers. The "Payment Guarantee" dated April 11, 1989, was submitted. Rulin claims that this was a prudent act by a non-related party to assure that its bills would be paid. Rulin states that Dayan's authority over Rulin's checking account ended less than one year later. Rulin submitted a copy of the bank authorization reflecting Dayan's check signing authority dated May 9, 1989, and the change in that authority back to Rulin dated November 27, 1989.

We have reviewed various documents which illustrate the type of transactions that occur between Dayan, Rulin and the Puerto Rico customers. The following documents demonstrate a typical transaction between the parties:

1. Retail stores purchase order to Rulin which Rulin then forwards to Dayan;

2. Dayan's invoice #1743 dated August 30, 1993, to vendor Rulin referencing Clubman for various wearing apparel totaling $56,206.50 FOB Panama;

3. Rulin's checks to Dayan dated October 18, 1993 for $44,028.00 and dated November 2, 1993, for $12,212.00 for a total payment on invoice #1743 of $56,240.00;

4. TAT De Panama, S.A. air waybill #0821 for $2,302.95 to Rulin as consignee dated September 2, 1993;

5. Rulin's check to TAT De Panama, S.A. dated September 27, 1993, for $3,879.20 which includes the $2,302.95 payment for air waybill #0821;

6. Dayan debit note #413 to Rulin dated August 31, 1993, for insurance based on 2% of the invoice price, which references Dayan's invoices # 1722 and #1743.

7. Rulin's check to Dayan dated February 10, 1994, to cover insurance for Dayan invoice #1743;

8. Packing Lists for Dayan invoice #1743;

9. Rulin's invoices to retail stores #2485 to 2493 and #2495 all dated September 3, 1993, to various Clubman stores in Puerto Rico with the terms of sale listed as "TOTAL CIF LANDED PUERTO RICO U.S.$";

10. Clubman store check #035429 dated October 26, 1993, to Rulin covering the above referenced invoices; and

11. Rulin's deposit slip for Clubman check #035429.

Counsel states that all Rulin's sales are reflected in its books and their year end financial statement. Copies of Rulin's financial statements for three years were submitted for our review. Counsel for Rulin notes that the terms of sale on its invoices to the Puerto Rico customers may state FOB Panama. However, Counsel states that is probably a clerical error and occurs in very limited situations. Counsel states that the sale from Dayan to Rulin is always from Panama to Puerto Rico on an FOB basis, with title passing to Rulin upon shipment in Panama. Moreover, Counsel notes that Rulin's invoices to the Puerto Rico customers state "Total CIF Landed Puerto Rico U.S.$." Counsel states that this designation was intended to reflect that the Puerto Rico customers were buying at a delivered price which included the Puerto Rico excise tax and not for any other reason. Counsel states that these taxes were paid by Rulin and their payment is further support of the position that Rulin was the purchaser of the imported merchandise. Affidavits from several customers attesting to their purchase of the wearing apparel from Rulin and the meaning of the CIF terms were submitted for our review.

Counsel notes that some Puerto Rico customers visit the Rulin and/or Dayan offices in Panama to view the Dayan wearing apparel. Counsel states that Rulin has approximately 20 customers and three of those customers travel to Panama. Those customers that visit Panama require special treatment due to the wide variety of styles they purchase and the fact that they tend to individualize the product for their needs. Counsel states that this type of situation is typical of a manufacturer-distributor relationship. Counsel contends that the fact that some customers visit the manufacturer in Panama does not destroy the distributor's identity or the sale to the distributor.

Rulin states that it is an independent distributor who buys from Dayan and resells the imported merchandise to retail stores. Thus, Rulin claims that two sales occur; one between Dayan and Rulin and another between Rulin and the Puerto Rico customers. Rulin claims that the transaction value of the imported merchandise is based on the price actually paid or payable to Dayan.

It is your position that only one sale occurs; a sale between Dayan and the Puerto Rico customers. You state that Rulin is not an independent distributor but is under Dayan's control. You note that the imported merchandise is shipped directly from Dayan to the retail customers. Additionally, you state that Rulin gave up financial control of the company in allowing Dayan authority over Rulin's checking account pursuant to the "Payment Guarantee". Thus, Dayan was responsible for paying Rulin's liabilities. Additionally, you found that Mr. Suarez, Sr., the manager of Rulin, was also under Dayan's control. According to Mr. Suarez, Sr's 1978 agency contract, he received a 5% commission based on the FOB Panama value of the imported merchandise.

ISSUE:

Whether sufficient evidence was offered to prove that Rulin is operating other than as a selling agent and, consequently, that the "price actually paid or payable" for the imported merchandise should be based on the transaction between Dayan and Rulin.

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the United States is transaction value pursuant to ?402(b) of the TAA. ?402(b)(1) of the TAA provides, in pertinent part, that 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 enumerated additions. The term "price actually paid or payable" is defined in ?402(b)(4)(A) of the TAA as:

...the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise...) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller.

In determining whether a bona fide sale takes place between a potential buyer and seller of imported merchandise, no single factor is determinative. Rather, the relationship is to be ascertained by an overall view of the entire situation, with the result in each case governed by the facts and circumstances of the case itself. Dorf International, Inc. v. United States, 61 Cust. Ct. 604, A.R.D. 245 (1968). 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. See, HRL 544775 dated April 3, 1992; HRL 543633 dated July 7, 1987. 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.

In HRL 543708 dated April 12, 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 and all CIF and C&F 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 transactions involved in the protest are shipment contracts or destination contracts depends on the shipment terms specified in the documentation. Counsel has submitted various samples of invoices from Dayan to Rulin and from Rulin to the Puerto Rico customers. The invoices from Dayan to Rulin show Rulin as the vendor with shipment to the Puerto Rico customers. The terms of sale are FOB Panama in U.S. Dollars. Thus, this is a shipment contract and title and risk of loss pass from the seller to the buyer when the merchandise is delivered to the carrier for shipment in Panama. See also, International Chamber of Commerce, Incoterms, at 38 (1990).

The terms of sale on the Rulin invoice to the Puerto Rico customers state "total CIF landed Puerto Rico" in U.S. Dollars. Counsel states that this designation was intended to reflect that the Puerto Rico customers were buying at a delivered price which included the Puerto Rico excise tax. Affidavits from several customers were submitted attesting to their purchase of the wearing apparel from Rulin and the meaning of the CIF terms. These affidavits state that the Puerto Rico customers purchase the wearing apparel from Rulin and take title to the goods at their business locations. They further state that the terms of sale, "total CIF landed Puerto Rico," were designed to include the cost of the merchandise and all the cost associated with delivery of the merchandise to the business location, including all relevant taxes. Thus, the parties intention is that title and risk of loss pass to the Puerto Rico customers upon delivery at their business location.

In this case, title and risk of loss of the imported merchandise pass from Dayan to Rulin in Panama and then from Rulin to its Puerto Rico customers upon delivery in Puerto Rico. Moreover, Rulin is responsible for payment of the freight and insurance. Rulin submitted an example of a freight bill and a debit note from Dayan for insurance and proof of payment for the freight and insurance.

You indicated that Dayan has control over Rulin's financial independence pursuant to the "Payment Guarantee" agreement dated April 11, 1989. In this agreement, you indicate that Rulin relinquished its check signing authority to Dayan. Thus, Dayan was responsible for paying all of Rulin's liabilities. You further state that this financial control continued when Mr. Davis U. Btesh was authorized to sign checks based on the agreement. Counsel recognizes this important release of financial independence but states that this was a prudent act by a non-related party to assure payment of its bill. Whether we agree that this was actually a prudent act is moot in this case. Dayan's financial control over Rulin ended on November 27, 1989, less than one year after the agreement. Copies of the bank authorization's reflecting Dayan's check signing authority of May 9, 1989 indicating release of authority and the change in that authority back to Rulin dated November 27, 1989 were submitted. Thus, Rulin had financial control over its cash flow before the lead entry of this protest which occurred on April 22, 1991.

The evidence available indicates that the sale between Dayan and Rulin is a bona fide sale for export to the United States. Rulin takes title and assumes risk of loss of the imported merchandise in Panama. All Rulin's transactions are reflected as sales in its accounting books and financial statements. Payment is made by the Puerto Rico customers to Rulin and the customers acknowledge that they are purchasing the wearing apparel from Rulin. Rulin maintains an office in Puerto Rico where the majority of its customers orders are placed and it employs its own independent legal and accounting staff. Rulin acknowledges that it maintains an office in Panama to handle quality and customer problems and that three of its customers directly visit its offices in Panama and Dayan for placing orders. Counsel states that the fact that customers visit Panama does not destroy Rulin's identity as a buyer and reseller. The Panama office is established for the customers who require special treatment due to the wide variety of styles they purchase and the need to individualize their product. Additionally, Rulin's Panama office is responsible for invoicing, billing, ordering and dispatch of the merchandise. Therefore, the transaction between Dayan and Rulin constitutes the price actually paid or payable for purposes of determining transaction value of the imported wearing apparel.

HOLDING:

Based on the evidence presented, the transaction between Dayan and Rulin constitutes the price actually paid or payable for purposes of determining the transaction value of the imported wearing apparel.

The protest should be GRANTED. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065 dated August 4, 1993, Subject: Revised Protest Directive, this decision, together with the Customs Form 19, 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 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 the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels.

Sincerely,

Acting Director
International Trade Compliance

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