HQ 547591 - Application for Further Review of Protest 4102-96-100101; transaction value; related parties; consignment; sale for export; transaction value of identical or similar merchandise - United States International Trade Commision Rulings

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HQ 547591

April 21, 2000

RR:IT:VA 547591 KCC

CATEGORY: VALUATION

Port Director
U.S. Customs Service
6747 Engle Road
Middleburg Heights, OH 44130

RE: Application for Further Review of Protest 4102-96-100101; transaction value; related parties; consignment; sale for export; transaction value of identical or similar merchandise

Dear Port Director:

This is in regard to the Application for Further Review of Protest 4102-96-100101, dated October 23, 1996, filed by Grunfled, Desiderio, Lebowitz & Silverman LLP, on behalf of T.J. Manalo, Inc. (“Manalo”) concerning the appraisement of certain wearing apparel pursuant to transaction value in §402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”), codified at 19 U.S.C. §1401a(b). It is our understanding that this is the lead protest and that there are several other protests involving the same parties and same issues. Information presented by Counsel at a meeting and in an additional submission dated February 16, 2000, was taken into consideration in reaching this decision. We regret the delay in responding.

FACTS:

The protestant, T.J. Manalo, Inc. (“Manalo”), a U.S. corporation with offices in Ohio and New York, was initially owned by Jay Dunkelman and Tony Lo. Tony Lo is the owner of Tony Trading Company (“Tony Trading”), the alleged buying agent for Manalo. Tony Trading is located in Hong Kong. Tony Lo eventually sold his ownership in Manalo to Hayward Knitters Ltd. (“Hayward”), which is owned by Tony Lo, S.P. Lo (Tony Lo’s father), and Chan Sook Har (Tony Lo’s mother). Hayward is also located in Hong Kong.

It is our understanding that Manalo primarily imports men’s sweaters under trade names such as “Concrete”, “Agenda”, and “I.C. Etchings”. Manalo’s major customers include J.C. Penney, Lazarus and Bloomingdale’s. We understand that the majority of Manalo’s orders for imported goods are fulfilled by Hayward.

Based upon the submitted evidence, it is our understanding that when Manalo was first organized in 1983, Hayward agreed to extend credit to Manalo by providing merchandise to Manalo on an “open account”. Manalo would forward its U.S. customer’s orders to Tony Trading, its buying agent, who would forward the orders to Hayward for manufacture.

Manalo entered into a Factoring Agreement with Manufacturers Hanover Commercial Corporation of New York (“MHCC”) in April of 1984, which allowed MHCC to act as Manalo’s agent in collecting accounts receivable for Manalo. Pursuant to the Factoring Agreement, Manalo agreed to sell to MHCC all of Manalo’s accounts receivable. Under the Factoring Agreement, Manalo would send credit requests to MHCC relating to Manalo’s customers. If the customer concerned had the requisite creditworthiness, the account receivable was considered eligible for factoring and MHCC issued a “credit guarantee”, whereby MHCC purchased the account receivable and assumed the entire credit risk. Assumption of the credit risk meant that MHCC was obligated to pay Manalo the amount of the account receivable even if Manalo’s customer defaulted. The Factoring Agreement was based upon a “collected funds” basis, meaning that no funds were advanced to Manalo until the customer paid MHCC. If an account was rejected by MHCC, then Manalo could still decide whether to bear the entire credit risk of the transaction. Any of the funds collected solely by Manalo were kept by Manalo for its own purposes. For its service, MHCC was paid a 1% commission on the gross amount of all accounts receivable factored with MHCC during each month, less trade and cash discounts.

Pursuant to the terms of an Assignment Agreement, Manalo assigned to Manufacturers of Hanover Trust Company, Hong Kong Branch (“MHTC”), a security interest in all of the rights of Manalo to the proceeds due it under the Factoring Agreement with MHCC. The Assignment Agreement provided that at all times when Manalo owed obligations to MHTC, funds actually received by Manalo from MHCC under the Factoring Agreement had to be remitted to MHTC. The funds remitted to Manalo per the Factoring Agreement were deposited in Manalo’s account with MHTC. Counsel states that, according to bank records, S.P. Lo, a director of Manalo, Tony Lo, and Chan Sook Har were authorized to make withdrawals from the Manalo account. The monies in the account were used to pay creditors such as Hayward.

Hayward entered into a Finance Agreement with MHTC, extending to Hayward a line of credit in the amount of $6 million to finance shipments to Manalo. Counsel states that drawdowns under this line had to be supported by shipping documents evidencing a shipment of merchandise from Hayward to Manalo. Under this Finance Agreement, loans were guaranteed by S.P. Lo, Chan Sook Har, and Tony Lo. Also, concurrent with its Assignment Agreement with MHTC, Manalo entered into a Finance Agreement with MHTC, also extending to Manalo a line of credit in the amount of $6 million. As discussed above, the proceeds due under the Factoring Agreement with MHCC were used as security. Borrowings under this Finance Agreement were used to retire outstanding loans under the $6 million credit line extended by MHTC to Hayward pursuant to the MHTC Hayward Finance Agreement. It is our understanding that Manalo has never totally paid off these outstanding loans.

With regard to the transactions which are the subject of this protest, we have been provided with various invoices, including the visaed invoice and CF 7501. The CF 7501 states that the merchandise consists of sweaters, Manalo is the importer of record, the country of exportation is Hong Kong, and the parties are related. A “Y” is printed in box #33 of the CF 7501 which we conclude means that Manalo is stating that it is related to the seller. However, we understand that in other entries which are the subject of other Protests, for example Protest 4102-94-100037 dated May 2, 1994), Manalo did not declare its relationship with Hayward on the CF 7501. Specifically, in box #33 of the CF 7501, Manalo printed “NOT-RELATED.” Additionally, the visaed invoice/export license states that Hayward is the manufacturer and exporter of record, Manalo is the consignee, the country of importation is the U.S., and the terms of sale are F.O.B. Additionally, the commercial invoice states that the merchandise was “SHIPPED TO CINCINNATI FROM HONG KONG”, “FOR ACCOUNT AND RISK OF MESSRS. T.J. MANALO INC.”, “PRICE FOB PER DOZ FROM HK” and “TERMS OF PAYMENT: CONSIGNMENT.”

The information provided establishes that a transaction occurred in the following manner. Manalo forwarded its U.S. customer’s orders to Tony Trading, acting as Manalo’s buying agent. Tony Trading forwarded these orders to Hayward who manufactured the merchandise. Hayward then either shipped the merchandise to Manalo’s warehouse in the U.S. on a consignment basis or directly to the ultimate purchaser, Manalo’s U.S. customers.

We note that the Protest does not contain any documentation with regard to the transaction between Manalo and its U.S. customers. Manalo only received direct payment if one of its U.S. customers was a bad credit risk and had therefore been rejected by MHCC pursuant to the Factoring Agreement, and Manalo had separately taken on the U.S customer’s account. In the majority of cases, Manalo’s U.S. customers did not pay Manalo directly and MHCC collected the amounts owed pursuant to the Factoring Agreement. Once MHCC had taken its 1% commission, the monies were forwarded to Manalo’s account with MHTC. Pursuant to the Assignment Agreement and the Finance Agreements, the monies then were used to pay either third party creditors or Hayward’s obligations. It is our understanding from Counsel that Manalo was constantly in “debtor” status. Counsel states that the funds were used to pay (a) the invoiced price of merchandise sold to Manalo, (b) other, separately itemized indebtedness owed by Manalo, (c) interest on Manalo’s obligations, (d) Tony Trading’s buying agency commissions, and (e) Manalo’s operating expenses.

Originally, you took the position that there was not a sale between Manalo and Hayward. You found that the actual sale took place between Hayward and Manalo’s U.S. customers with Manalo acting as Hayward’s selling agent. Based on the information contained in the CF 29s, the price actually paid or payable was determined to be the price paid by Manalo’s U.S. customers in determining the transaction value of the imported goods. Thus, you appraised the imported wearing apparel based on this position.

Counsel contends that Customs appraisement based on, or derived from, the domestic resale price charged by Manalo to its U.S. customers is improper. Counsel contends that there is a bona fide sale between Manalo and Hayward and that the relationship between the parties does not affect the price of the imported goods. Therefore, Counsel states that transaction value should be based on the price actually paid or payable between Manalo and Hayward. Counsel states that Manalo believes that Hayward sold identical or similar goods to unrelated buyers at prices which were comparable to the prices Hayward charged Manalo. Therefore, Counsel contends that the price between Manalo and Hayward is acceptable pursuant to §402(b)(2)(B) of the TAA. No other evidence was submitted with regard to this position. Alternatively, Counsel states that if the price between Manalo and Hayward is found to be an unacceptable transaction value than appraisement should proceed through the alternative methods of appraisement as set forth in §402 of the TAA. Counsel states that the appropriate method of appraisement should be deductive value pursuant to §402(d) of the TAA

It is now your position that, if there is a sale between Manalo and Hayward, it is not acceptable for purposes of transaction value because the parties relationship affected the price of the imported goods. You state that Hayward sold identical and similar merchandise to unrelated parties at substantially higher prices than the prices it sold the imported merchandise to Manalo. You provided information in support of this position for our examination. You now state that the imported wearing apparel should be appraised based on the transaction value of identical or similar merchandise pursuant to §402(c) of the TAA. However, you note that appraisement pursuant to §402(c) of the TAA would significantly increase duties.

ISSUE:

1. Whether the transaction between Manalo and Hayward is a bona fide sale for export to the U.S. purposes of determining the price actually paid or payable pursuant to transaction value.

2. If there is a bona fide sale for export to the U.S. between Manalo and Hayward, does the parties relationship affect the price such that transaction value is unacceptable as a method of appraisement.

LAW AND ANALYSIS:

Merchandise imported into the U.S. is appraised in accordance with §402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”; 19 U.S.C. §1401a). The preferred basis 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. Thus, for imported merchandise to be appraised under transaction value, it must be the subject of a bona fide sale between the buyer and seller and it must be a sale for exportation to the U.S.

Manalo claims that transaction value is the proper basis of appraisement, and the transaction between itself and Hayward should be used to determine that value. In determining whether the Manalo’s claim is valid, the first question to be considered is whether there was in fact a bona fide sale between Manalo and Hayward. 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. U.S., 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. 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. U.S., 61 Cust. Ct. 604, A.R.D. 245 (1968). 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 HQ 545705, dated January 27, 1995.

Based upon the evidence presented, it is our understanding that Hayward shipped the goods to Manalo on a consignment basis. The commercial invoice from Hayward to Manalo specifically states that the sale from Hayward to Manalo is pursuant to a consignment sale. Customs has consistently stated that transactions involving goods which are shipped on consignment do not constitute bona fide sales. See, Headquarters Ruling Letter (“HRL”) 546602 dated January 29, 1997. In this case, Manalo only paid for the goods after its U.S. customers paid the Manalo to U.S. customer invoice price to MHCC pursuant to the Factoring Agreement. Pursuant to the Factoring and Assignment Agreements, MHCC would take the payment minus its 1% commission and transfer the remaining amount to MHTC. Thereafter, upon the direction of Manalo, via Tony Lo and Chan Sook Har, withdrawals were made from the MHTC account to pay creditors such as Hayward.

Even if the transactions described above were treated as bona fide sales, none of the parties appear to dispute the fact that Manalo, Tony Trading, and Hayward are all related to one another within the meaning of §402(g) of the TAA. Imported merchandise can be appraised under transaction value only if the buyer and seller are not related, or if related, the transaction value is deemed to be acceptable. §402(b)(2)(B) of the TAA provides that transaction value between related parties is acceptable only if an examination of the circumstances of the sale indicates that the relationship between the parties does not influence the price actually paid or payable or, if the transaction value of imported merchandise closely approximates the transaction value of identical or similar merchandise in sales to unrelated buyers in the U.S. or the deductive or computed value for identical or similar merchandise.

Under the circumstances of sales approach, if the parties buy and sell from one another as if they were unrelated, transaction value will be considered acceptable. Thus, if the price is determined in a manner consistent with normal industry pricing practice, or with the way the seller deals with unrelated buyers, the price actually paid or payable will be deemed not to have been influenced by the relationship. Furthermore, the price will not be influenced if it is shown that the price is adequate to ensure recovery of all costs plus a profit that is equivalent to the firm's overall profit realized over a representative period of time in sales of merchandise of the same class or kind. Statement of Administrative Action, reprinted in Customs Valuation under the Trade Agreements Act of 1979, Department of the Treasury, U.S. Customs Service (October 1981) at 54; 19 CFR §152.103(j)(2)).

After reviewing the information submitted, we have not been provided with any evidence that Manalo has satisfied the statutory requirements set forth in §402(b)(2)(B) of the TAA., notwithstanding Counsel’s statement that “[i]n the present circumstances, prices paid by Manalo to Hayward Knitters are comparable to prices paid by unrelated U.S. purchasers of merchandise directly to Hayward Knitters.” Moreover, you indicate that an analysis of “test values” indicates that Hayward sold identical and similar merchandise to unrelated parties at substantially higher prices than the prices it sold the merchandise to Manalo. Accordingly, we have no evidentiary basis to support the acceptability of those related party transaction values.

Because we find that the price between Manalo and Hayward is not acceptable in determining a transaction value, we must proceed sequentially through the subsequent provisions of §402 of the TAA. The first alternative basis of appraisement is the transaction value of identical or similar merchandise. §402(c) of the TAA provides that the transaction value of identical or similar merchandise is the transaction value, accepted as the appraised value under §402(b) of the TAA, of merchandise identical or similar to the merchandise currently being appraised which was exported to the U.S. at or about the time that the merchandise currently being appraised was exported to the U.S. It is our understanding from your office that you possess evidence which allows appraisement pursuant to the transaction value of identical and similar merchandise in §402(c) of the TAA as it meets the statutory and regulatory requirements of this provision. The evidence you possess involves sales by Hayward to unrelated parties of merchandise “identical and similar” to that which was consigned to Manalo. However, you indicate that if the entries of the imported wearing apparel are reliquidated so that the imported merchandise is appraised pursuant to the transaction value of identical or similar merchandise pursuant to §402(c) of the TAA, duties would significantly increase. As reliquidation in a manner described above would increase the importer’s or surety’s liability, no further action is warranted in the disposition of the protest. See, HRL 220678 dated August 23, 1989.

HOLDING:

Based on the evidence available, transaction value is not the proper basis of appraisement for the subject wearing apparel. Appraisement of the imported wearing apparel should proceed sequentially through the subsequent provisions of §402 of the TAA, with the first alternative basis of appraisement being the transaction value of identical or similar merchandise in §402(c) of the TAA. As appraisement of the imported merchandise pursuant to the transaction value of identical or similar merchandise in §402(c) of the TAA would increase the importer’s or surety’s liability, no further action is warranted in the disposition of the protest.

This Protest should be administered in a manner consistent with the decision as set forth above. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065 dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry or entries 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 make the decision available to Customs personnel, and to the public on customs Home Page on the World Wide Web at www.customs.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,
Thomas L. Lobred
Chief, Value Branch

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