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HQ 546658

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January 30, 1998

VAL R:C:V 546658 LR

CATEGORY: VALUATION

Ronald W. Gerdes, Esq.
Sandler, Travis & Rosenberg
1341 G Street, N.W.
Washington, D.C. 20005-3105

RE: Request for Reconsideration of HRL 545985; sale for exportation

Dear Mr. Gerdes:

This is in reply to your letter dated February 12, 1997, submitted on behalf of your client, [xxxxxxxxxxxxxxxxxxxxxxxxx], operating through its [xxxxxxxxxxxxxxxxxxxxxxxx], (the importer) seeking reconsideration of a ruling issued by our office on December 19, 1996, Headquarters Ruling Letter (HRL) 545985. Additional information was provided with your letters dated May 30, 1997 and January 23, 1998. You disagree with our finding in HRL 545985 that the evidence presented was insufficient to establish that the microwave ovens in question were clearly destined to the United States and argue that we applied the wrong legal standard in reaching this conclusion.

With your request for reconsideration you have presented additional information and evidence in support of your claim that the merchandise was clearly destined to the United States. For this reason, your request is being treated as a request for a new ruling based on the additional facts presented and modification or revocation of that decision pursuant to section 625, Tariff Act of 1930 (19 U.S.C. 1625), as amended by section 623 of Title VI (Customs Modernization) of the North American Free Trade Agreement Implementation Act, Pub. L. 103-182, 107 Stat. 2057, 2186 (1993) , is not warranted. Pursuant to your request for confidentiality, the names of the parties will be bracketed and will not be disclosed in copies of this ruling made available to the public.

FACTS:

HRL 545985 concerned the importation of microwave ovens pursuant to a multi-tiered distribution arrangement involving the U.S. importer, a related Asian middleman, and unrelated Asian manufacturers. The importer's initial ruling request described in general terms how these transactions were structured and copies of various contracts and supporting documentation were submitted. That information is set forth in detail in HRL 545985 and will not be repeated here. Based on the evidence presented, we determined that there was a bona fide sale between the manufacturer and the middleman. However, we found that this sale could not be used as the basis for transaction value because the evidence did not establish that the goods were clearly destined to the United States in accordance with the decision in Nissho Iwai American Corporation v. United States. Relevant excerpts from the decision follow:

In this case, there is no documentation to establish that the middleman's inventory is sold only to the United States. In fact, it is clear that some of the microwaves will go to countries other than the United States. We also note that the middleman is engaged in the business of selling various consumer products throughout Asia. You also concede that in some circumstances the middleman will also sell some of the microwaves (CMOs) to independent third parties outside of the United States. Accordingly, for both the CMOs and OTRs imported into the United States, the evidence must establish that they were clearly destined to the United States. In making this determination, it is necessary to review the sales contracts between the importer and the middleman, the middleman and the manufacturer, and how the parties will order merchandise.
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In other words, based on the documentation that has been presented, it is not clear when the manufacturer is informed which microwaves are going to the United States and which may be going to some other country. You also have not provided any information which shows that the microwaves sent to the United States will be different than the microwaves that may be sent to other countries. Accordingly, it appears that when the middleman orders the merchandise from the manufacturer or even when the merchandise is being manufactured, there is no clear indication that it is clearly destined to the United States.
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. . . . . Prior to when the microwave boxes are addressed and delivered to a carrier, we have no indication that the microwaves were specifically ordered and made only for the United States. Because the contracts between the parties indicate that the merchandise could be going to countries other than the United States, we find that the importer has not established that merchandise is clearly destined to the United States, and therefore the requirements under Nissho Iwai for having merchandise be appraised based on the middleman's price have not been met.

In your request for reconsideration you have provided a clarification of the facts and have presented additional evidence to support your claim that the merchandise was clearly destined for the United States. You indicate that under its contract, the importer issues to the middleman a blanket purchaser order for goods it desires to purchase for export into the United States. Pursuant to that blanket purchase order, the importer issues to the middleman a material release request indicating the exact quantity by model that it desires to purchase over the next several months. You advise that the importer only purchases goods made to U.S. specification which it intends to sell to the United States. This information is then sent to the manufacturer which produces the goods to U.S. specification, labels the merchandise for shipment to the U.S., and then places the goods with the carrier under the cover of a through bill of lading for shipment to the U.S.

Contrary to references in the original decision about the middleman's inventory, you state that the middleman does not purchase goods for inventory. Rather, each order which it places with the manufacturer is based upon a purchase order or material release request that the middleman has received from one of its customers. Prior to placing a specific order with the manufacturer the middleman knows to whom it intends to resell that merchandise and where it will be shipped.

You indicate further than the Lebanon transaction referred to HRL 545985 was very early in the implementation of this program, and that it occurred prior to the actual formal signing of the contracts. You advise that additional software has now been put in place and that the documentation has become somewhat more formal. You have presented two sets of documents with your request for reconsideration. The first is a sample of another early transaction in this program of a shipment for a third country, and the second is a set of the revised documentation. In both sets of documents the customer is located outside the United States.

The first set is marked Exhibit 1. The first document is a purchase order received from a customer in China, dated November 17, 1995, for 628 microwave ovens to be delivered within 90 days. The second document is the E-mail message sent by the middleman to the manufacturer on December 7, 1995, and designated as release SS-044. (You indicate that the E-mail message advises the manufacturer prior to production of these units of their intended destination and is representative of how the transactions work under the contracts). The material release form designates the customer and the shipping marks. The third documents is an E-mail message from the manufacturer dated February 6, 1996, reflecting that the goods are scheduled for production on February 21, 1996. The third and fourth documents are the packing list and bill of lading indicating that the goods were packed on February 21, 1996 and directly shipped by the manufacturer to the ultimate customer on March 6, 1996. You indicate that these documents reflect that the manufacturer was specifically aware, prior to production, of the ultimate destination of the product.

You advise that as this program has matured, the middleman has developed and implemented a new software package to provide somewhat more formal documentation for these transactions. Exhibit 2 is a set of this revised documentation. The first document is an order acknowledgment form. This document, dated September 12, 1996, reflects an order from another customer in China for 628 microwave ovens. The second document is a Material Release Form, No. B000565, likewise dated September 12, 1996, which the middleman sent to the manufacturer to request production of these specific articles and instructing that they be directly delivered to the ultimate customer. The third document is the commercial invoice from the manufacturer to the middleman dated November 20, 1966 and the fourth document is the packing list prepared by the manufacturer. Finally, there is a copy of the middleman's invoice to the ultimate customer.

You advise that this documentation is representative of similar shipments and reflects that throughout the process both the middleman and the manufacturer are aware of the ultimate destination of the product and that the product is sold for export to the country of ultimate destination and directly shipped by the manufacturer.

In response to our request for more recent documentation regarding sales to the United States, with your May 30, 1997 submission, you provided copies of the relevant documentation for a shipment of microwave ovens (Model JVM 1341WW) to the United States in January 1997. Exhibit 1 is a copy of the November 1, 1996 production schedule issued by the importer to the middleman (via computer), which schedules 500 units of model JVM 1341WW for January 1997. This computer request is then transmitted by the middleman to the manufacturer. As noted in the contracts, these documents represent firm commitments for the middleman to purchase the products from the manufacturer and the lead times necessary for the manufacturer to secure the appropriate materials to actually produce the items requested. Exhibit 2 is a copy of a purchase order for 100 units of model JVM 1341WW issued by the importer to the middleman and Exhibit 3 is a copy of a purchase order for the 100 units issued by the middleman to the manufacturer. Exhibit 4 is the invoice from the manufacturer to the middleman dated January 17, 1997, (referencing the above purchase order number from the middleman) covering 40 units of the model number JVM 1341WW). Exhibit 5 is the bill of lading covering the shipment of the 40 units from Busan, Korea to Los Angeles, issued January 22, 1997. Finally, Exhibit 6 is the commercial invoice issued by the middleman to the importer covering 40 units of JVM 1341WW, and referencing the importer's original P.O. number.

You advised that the remaining 460 units of Model JVM 1341WW covered by the November 1, 1996 production schedule were ultimately shipped to the United States. In response to our request, you provided evidence of this with your January 23, 1998 letter. Specifically, you provided bills of lading and commercial invoices for five additional shipments covering 467 units of model JVM 1341WW microwave ovens imported into the United States during early 1997. Thus, you indicate that taken together, the documents show that all 500 units were shipped to the United States.

You contend that the submitted documents are proof that the manufacturer was aware of the ultimate destination of the merchandise prior to manufacture. In this regard, you point out that it is critical to both the middleman and the manufacturer that they know the ultimate destination of the product prior to manufacture because of the differing electrical current requirements around the world. You have provided a color coded map reflecting the electrical current requirements around the world and note that an appliance made to U.S. specifications would not work in the vast majority of the world, and as a consequence it must be manufactured to a different set of specifications.

You also indicate that the model numbers differ depending on the ultimate destination of the product. For example, the models shipped to third countries contain an I designator not found for U.S. models. This designator is used to differentiate models to be made and directly shipped to third countries as opposed to those made for the U.S. market. You state that goods for the Canadian market have a separate C designator.

Finally, you advise that the importer's sales in the U.S. are a separate and distinct operation from its sales in third countries. All of the units ordered for shipment to the United States are goods made to U.S. specifications, with a U.S. model number, for direct shipment to the United States. Any units ordered for direct shipments to a third country would be handled by separate operational units, would reflect a different model number, and would be manufactured to the appropriate specifications and directly shipped to that country by the manufacturer.

ISSUE:

Whether the additional information and evidence establishes that the imported microwaves were clearly destined to the United States so that the sale between the manufacturer and the middleman may be used as the basis for transaction value.

LAW AND ANALYSIS:

Customs recognizes the term "sale," as articulated in the case of J.L. Wood v. U.S., 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974), to be defined as: the transfer of property from one party to another for consideration. In determining whether a bona fide sale has taken 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). We determined in HRL 545985 that the transaction between the Asian manufacturers and the middleman constituted bona fide sales.

In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir 1992) and Synergy Sport International, Ltd. v. United States, 17 C.I.T. 18, (1993) the U.S. Court of Appeals for the Federal Circuit and the Court of International Trade, respectively, addressed the proper dutiable value of merchandise imported pursuant to a three-tiered distribution arrangement involving a foreign manufacturer, a middleman, and a U.S. purchaser. In both cases the middleman was the importer of record. Both courts held that the manufacturer's price, rather than the middleman's price, was valid as long as the transaction between the manufacturer and the middleman fell within the statutory provision for valuation. The courts explained that in order for a transaction to be viable under the valuation statute, it must be a sale negotiated at "arm's length" free from any nonmarket influences and involving goods "clearly destined for export to the United States."

A recent notice, entitled Determining Transaction Value in Multi-Tiered Transactions", T.D. 96-87, 30/31 Cust. Bull 52/1, January 2, 1997 clarifies some of the issues that arise in multi-tiered transactions in determining which is the sale for exportation to the United States for the purpose of determining transaction value. Although there is a presumption that transaction value is based on the price paid by the importer, the notice sets forth the documentation and information needed to support a ruling request that transaction value should be based on a sale involving a middleman and the manufacturer or other seller rather than on the sale in which the importer is a party. It states that:

In order for an importer to rebut the presumption discussed above, certain information and documentation must be provided. Specifically, the requestor must describe in detail the roles of all the various parties and furnish relevant documents pertaining to each transaction that was involved in the exportation of the merchandise to the United States. If there is more than one possible sale for exportation, information and documentation about each of them should be provided. Relevant documents include, purchase orders, invoices, proof of payment, contracts and any additional documents (e.g. correspondence) which demonstrate how the parties dealt with one another and which support the claim that the merchandise was clearly destined to the United States. If any of these documents do not exist, or exist but are not available, the ruing request should so provide. What we are looking for is a complete paper trail of the imported merchandise showing the structure of the entire transaction. If the request covers many importations, it is acceptable to submit documents pertaining to some of the importations provided complete sets of documents are furnished, the underlying circumstances are the same, and the documents are representative of the documents used in all the transactions. Any differences should be explained.

In HRL 546658 we indicated that it must be evident throughout the transaction that the merchandise is clearly destined for the United States and that it is not sufficient to establish after the merchandise was ordered and manufactured, at the time of shipment, near the end of the transaction, that it will be going to the United States. We determined that evidence that the boxes of the imported articles were addressed to the United States when delivered to the carrier was insufficient by itself to establish that the articles were clearly destined to the United States.

You contend that Customs applied the wrong legal standard in determining whether the imported microwave ovens were clearly destined to the United States. Your position is that the sale between the middleman and the manufacturer occurred when the goods were presented in boxes to the carrier for shipment to the U.S. and that this is the relevant point in time for Customs for determine whether the goods were clearly destined to the U.S. You state that at that time it was clear that this was the case based on how the goods were packed and the shipping documents.

As discussed below, we have determined that the additional information and evidence you have presented is sufficient to establish that the imported microwave ovens are clearly destined to the United States. However, we disagree with your position regarding the proper standard to be applied in reaching this determination. Under your interpretation, the only relevant point in time is when title passes to the middleman. Thus, in situations where title passes to the middleman when the goods are delivered to the carrier, the fact that the shipping cartons are addressed to a U.S. customer would be sufficient evidence that the goods are clearly destined to the United States. This is not the analysis adopted by the either the Court of International Trade or the Court of Appeals for the Federal Circuit. In each case, the court considered whether throughout the entire transaction (including the time of production) the goods were destined only for the U.S.

Thus, in E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed Cir. 1988), the CIT indicated that where clothing is made-to-measure for individual United States customers and ultimately sent to those customers, the reality of the transaction between the distributors and the tailors is that the goods, at the time of the transaction between the distributors and tailors are for exportation to the United States. The court found that the merchandise was being made for export to the United States. Similarly, in Nissho Iwai, supra, the subway cars in question were ordered and manufactured for a specific purchaser in the United States, the Metropolitan Transit authority of New York City. As indicated in HRL 545985, the court stated that they were unquestionably intended for exportation to the United States and had no alternative destination. Nissho Iwai at 509. Finally, in Synergy, supra, the CIT found that the merchandise involved was clearly destined for export to the United States. In this regard, the decision states that "not only were the goods shipped directly from Chinatex to Oakland, California, but also "the labels required to be placed on the garments . . . reflect the fact the goods are destined for the United States, and always for a particular ultimate customer." Synergy at 20. The court based its determination on the fact that the merchandise was always for a particular ultimate customer and not merely on the fact that the goods were shipped directly from Chinatex to the U.S.

In each of the above cases, in determining that the imported merchandise was clearly destined to the United States the courts focussed on the fact that throughout the entire transaction the imported merchandise was intended for a specific customer in the United States and not that the merchandise was clearly destined to the United States when title transferred to the middleman. In fact, in considering this question, the time of sale was not addressed at all. Therefore, we will continue to look at the entire transaction and not just when title passes from the manufacturer to the middleman in determining whether the goods were clearly destined to the United States.

As stated above, in your request for reconsideration you have provided a clarification of the facts and have presented additional evidence to support your claim that the merchandise was clearly destined for the United States. You indicate that under its contract, the importer issues to the middleman a blanket purchase order for goods it desires to purchase for export into the United States. Pursuant to that blanket purchase order, the importer issues to the middleman a material release request indicating the exact quantity by model that it desires to purchase over the next several months. You indicate further that the importer only purchases goods made to U.S. specification which it intends to sell in the United States. This information is then sent to the manufacturer which produces the goods to U.S. specification, labels the merchandise for shipment to the U.S., and then places the goods with the carrier under the cover of a through bill of lading for shipment to the U.S. You have also clarified that the middleman does not purchase goods for its inventory and that each order which it places with the manufacturer is based on a purchase order or material release request that it has received from one of its customers. This establishes that prior to placing a specific order with the manufacturer, the middleman knows to whom its intends to resell that merchandise and where it will be shipped.

You advise further that the middleman's sales in the U.S. are a separate and distinct operation from its sales in third countries and that all of the units ordered for shipment to the United States are goods made to U.S. specifications, with a U.S. model number, for direct shipment to the United States. Any units ordered for direct shipments to a third country would be handled by separate operational units, would reflect a different model number, and would be manufactured to the appropriate specifications and directly shipped to that country by the manufacturer.

In addition, the documentation presented relating to the sale of microwave ovens (Model JVM 1341WW) to the United States, comprise a complete paper trail relating to their sale and importation showing the structure of the entire transaction in accordance with T.D. 96-87. Although these documents do not identify the ultimate consignee in the United States, they sufficiently demonstrate that all the merchandise designated in the production schedule by the importer are manufactured for the U.S. market and subsequently imported into the United States.

Based on the submitted documents and your representations that the goods are manufactured to conform to U.S. electrical requirements, that the model numbers differ depending on the ultimate destination of the product, that the middleman does not purchase goods for inventory and the fact that the goods sent directly from the manufacturer to the U.S., we are satisfied that throughout the entire transaction, the goods were clearly destined to the United States.

With regard to the requirement that the transaction between the middleman and the seller be at arm's length, in T.D. 97-86 we stated that in general, Customs will consider a sale between unrelated parties to have been conducted at "arm's length." Thus, based on your representation that the middleman will purchase the products in question from unrelated manufacturers located in Asia, we consider this sale to have been conducted at "arms's length."

HOLDING:

Based on the additional information and supporting documentation provided with respect to the sale of the JVM 1341WW microwave ovens, we find that the sale between the middleman and the manufacturer of the microwave ovens covered by the importer's blanket purchase order is a sale for exportation to the United States upon which transaction value may be based. This finding is applicable to other transactions involving the same parties conducted in the same manner and for which similar documentation exists.

Sincerely,

Acting Director

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