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HQ 547100





August 24, 2001

RR:IT:VA 547100 MMC

CATEGORY: VALUATION

Mr. Peter Klestadt
Grunfeld, Desiderio, Lebowitz & Silverman, LLP 245 Park Avenue
New York, NY 10167

RE: Multi-Tiered Transaction

Dear Mr. Klestadt:

This is in response to your letter dated June 1, 1998, in which you request a ruling regarding the appraisement of women’s wearing apparel imported into the U.S. pursuant to a multi-tiered transaction. We met on September 10, 1999. We regret the delay in responding.

In your initial submission, you requested confidentiality for certain information. In a June 10, 1998, letter we requested specificity concerning your confidentiality claim. On June 17, 1998, you sent a submission containing a copy of the June 1, 1998 initial submission identifying the proposed confidential information in brackets. We grant your amended confidentiality request. Any confidential information is bracketed in this ruling and will not be disclosed in copies made available to the public.

Although importations have already been made by your client, you request that this ruling apply only to prospective transactions. You have supplied documentation involving past transactions. For the purposes of this ruling, we will utilize these documents to assist in determining the proper means of appraisement for the subject merchandise for prospective transactions. However, please note that the determination of this issue is factually specific.

Finally, we note that Headquarters Ruling Letter (HRL) 546535 dated December 19, 1997, was a protest decision concerning the subject multi-tiered transaction. In HRL 546535 counsel asserted that pursuant to Nissho Iwai, the port’s appraisement of the merchandise should have been on a “first cost” basis, meaning it should have been appraised based on the sale between the middleman and the factory. We held that the evidence submitted in support of that assertion did not establish that the merchandise was clearly destined for the U.S. Consequently, the importer/ U.S. retailer [ ] had not met his
burden of establishing that the merchandise should be appraised on a transaction other than that between the middleman [ ] and the importer.

You claim that since the issuance of HRL 546535 your client has implemented new procedures to fully comply with the Nissho Iwai criteria. As such, you seek a ruling confirming that belief. To that end, you have provided what you believe to be the requisite documentation evidencing that the criteria have been fulfilled.

FACTS:

The middleman [ ] located in [ ] is divided into two separate divisions. At your request, this ruling only covers the woman’s division [ ] transactions. According to counsel, the middleman [ ] receives purchase orders for women’s apparel from distributors throughout the world, including a related U.S. distributor, [ ]. To fill these purchase orders, the middleman, apparently through its divisions, contracts with unrelated factories on a “cut and make” basis. It is this transaction, between the factory and the middleman/division, which you seek as the sale for export for determining transaction value. After the cut and make operation is completed at the factory, the apparel is sent to the middleman’s warehouse in [ ] where it is sorted and consolidated for worldwide distribution

Counsel states that the terms of sale between the middleman and the U.S. purchaser are C&F duty paid, New York. According to counsel, this means that the middleman transfers title and risk of loss for the goods to the U.S. purchaser upon delivery to the carrier in [ ], but retains responsibility for the cost of freight and all costs relating to completion of U.S. Customs clearance. Therefore, according to counsel, unlike the facts in HRL 546535, the middleman is acting as a non-resident importer of record.

Counsel has supplied documentation detailing a past transaction in which the middleman is the importer of record. For the purposes of this ruling, we will utilize these documents to assist in determining whether the merchandise can be appraised based on the transactions between the middleman/non-resident importer and the factories. Those documents include:
master purchase order from the middleman to unrelated factory “sub-purchase order” indicating U.S. portion of the master order factory’s invoice to the middleman copy of tracking label
A copy of a bank transfer paid by the middleman to the unrelated factory composed of a bank debit and middleman disbursement notification to the bank requesting the bank pay various companies, including the subject factory. “cost sheet” prepared by the middleman detailing the components which compose the “first cost” sale, including [ ]. A copy of a pro forma invoice the middleman proposes to submit at entry identifying the “first cost” value of the garments based upon the above described cost sheet A copy of an agreement between the men’s apparel division of the middleman and an unrelated factory (agreement)

All of the documents, except for the pro forma invoice and agreement, are in [ ]. Translations for the purchase orders, invoice, transfers and cost sheet were not provided. Copies of a purchase order and invoice between the middleman and the U.S. purchaser were not provided. No shipping documents, e.g.: bill of lading, were provided. Neither the factory invoice, nor the purchase order include the terms of sale. Both European and American sizes are indicated on all purchase orders.

Counsel states that prices are negotiated with each factory prior to each season and that the terms of sale between the middleman and the factory are “ex-factory.” While a copy of an agreement with price lists between the men’s division of the middleman and an unrelated factory was provided, no such similar agreement for the women’s division was presented.

In a December 3, 1998 letter, counsel states that the garments are not subject to a quality control inspection at the middleman’s warehouse. Any defects will be discovered only after importation into the U.S. Section 2 of the submitted agreement between the factory and men’s division of the middleman addresses “defects and deformations.” Specifically, section 2.2 states, in pertinent part, that:

If we find some deformations and/or defects among the articles you (factory) will send us after you have examined them and which will also be checked by us, we may:

-refuse to accept the articles and return them to you to eliminate the defects -accept the delivery and hold you liable for any loss incurred as a result of such defect; or -eliminate, correct or have others correct the defects we found, and charge you with the relative expenses and any loss we suffer; or -debit you with 100% of the price scheduled for the 1998 spring/summer season....

At the factory a label is attached to the plastic bag that is put over the garment. According to counsel, both the label and bag remain on the garment “throughout transit”. The specific label submitted as part of the example is in [ ]. No translation has been provided.

ISSUE:

Whether the price paid for the merchandise by the middleman/importer to an unrelated factory may form the basis for transaction value.

LAW AND ANALYSIS:

In your submission you characterize the middleman [ ], as a non-resident importer. In order to make entry, parties asserting non-resident importer status must comply with § 141.18 of the Customs Regulations [19 C.F.R. 141.18] pertaining to entry by non-resident corporations. For the purposes of this ruling, we assume that the middleman meets these requirements.

Merchandise imported into the U.S. 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 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.

In Nissho Iwai American Corp. v. United States, 16 CIT 86, 786 F. Supp. 1002 (1992), rev'd in part, 982 F.2d 505 (Fed. Cir. 1992) (Nissho Iwia) and Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993), (Synergy), the U.S. Court of Appeals for the Federal Circuit and the Court of International Trade, respectively, addressed which sale may be used as the basis of transaction value for merchandise imported into the U.S. 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. In each case the court held that the price paid by the middleman/importer was the proper basis for transaction value. Each court further stated 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 non-market influence and involving goods clearly destined for the U.S.

In situations where an importer requests appraisement on the basis of a sale from the foreign manufacturer to the middleman the importer must submit sufficient evidence to show that the price is acceptable under the standard set forth in Nissho Iwai and Synergy. That is, the importer must establish that it was an “arm’s length sale,” and that the goods were “clearly destined for the U.S.” at the time they were sold or contracted to be sold. For purposes of this discussion, it is assumed that the transaction between the unrelated factories and middleman were conducted at arm’s length.

As stated above, the transactional relationships involving the subject parties were dealt with in HRL 546535, dated December 19, 1997. In that ruling, a protest for further review was denied based on the finding that the evidence then provided did not establish that the merchandise was clearly destined for the U.S. You claim that, since the issuance of HRL 546535, your client has implemented new procedures to fully comply with the Nissho Iwai criteria. You further state that you have provided the requisite documentation as evidence that the criteria have been fulfilled. We disagree.

As directed by Treasury Decision 96-87, Cust. Bull 52/1, January 2, 1997, Determining Transaction Value in Multi-Tiered Transactions, 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. In this case, the relevant documents (purchase orders, invoices, proof of payment, contracts, etc.) relating to the transaction between the middleman/importer and the U.S. purchaser were not included. Moreover, in this case, as in the previously decided protest involving the same parties (HRL 546535), the invoices and documents submitted were in [Italian] without a requisite accurate English translation provided. Furthermore, the submitted purchase orders do not reflect a price and both European and American sizes are indicated. Terms of sale do not appear on any of the purchase orders or invoices.

The failure to provide an accurate English translation for the submitted documentation together with the lack of a complete paper trail make it impossible to determine whether the transaction between the middleman/importer and the factory constitutes a sale for exportation upon which transaction value may be based.

However, even if the necessary documents together with the fact that the middleman and factories are unrelated parties did evidence that a bona fide, arm’s length sale exists, there still remains the question of whether the garments are clearly destined for the United States. The “clearly destined” requirement was previously addressed in a protest decision published by this office as HRL 546535, involving the same parties to the instant transaction. There, Customs ruled that the evidence submitted did not establish that the merchandise was clearly destined for the United States. One of the few discernable factual differences in this ruling request and HRL 546535 is that the middleman is now also claiming to be the non-resident importer of record. In multi-tiered transactions such as those in Nissho Iwai where the middleman is the importer, Customs generally presumes that the price paid by the importer is the basis of transaction value. In this case however, the middleman is the non-resident importer of record. Under these circumstances, Customs still holds the importer to the Nissho Iwai standard of establishing that the sale is at arm’s length and the goods are clearly destined for the United States. Thus, even assuming in the instant matter that the sale is at arm’s length, the evidence submitted must also establish that the goods are clearly destined for the U.S. at the time they are sold by the factory to the middleman/non-resident importer.

Such were the circumstances in HRL 547349 dated May 5, 2000, a wearing apparel case factually similar to the instant matter. In HRL 547349, the middleman was also a non-resident importer of record. The other parties involved in the transaction were a U.S. retailer and factories not related to either the U.S. retailer or the middleman/non-resident importer. The transaction was structured such that the U.S. retailer ordered the apparel from the designer/importer who then consolidated that order with other orders from both U.S. and non-U.S. companies onto a master purchase order or “docket”. This docket was sent to the factory as a purchase order for the manufacture of apparel. Among other things, the docket stated that the garments must be marked and labeled pursuant to U.S. country of origin and labeling laws & regulations.

The factories delivered the finished garments on hangers covered with plastic bags. They fastened labels containing sizing and country of origin requirements to the garment and hang tags indicating the garment’s U.S. destination to the plastic bags. The factory issued to the importer a consolidated invoice which indicated that the garments met all U.S. labeling and country of origin requirements. To facilitate shipment schedules and consolidation, the importer temporarily warehoused the apparel intended for the U.S. or other countries for 3-5 days. Once the customer’s order was available, the importer allocated and picked the garments that were then consolidated into one shipment for export to the U.S. retailers delivery duty paid.

Prior to warehousing, the garments were subjected to a quality control inspection by the importer in addition to the quality control procedure performed by the factories. At this point any failures were rejected and may have caused retailers to receive short shipments. The importer experienced approximately a 10% failure in quality control standards. The failures were either destroyed or used as samples. Finally, the garments were not sized separately with U.S., European or British sizes and all labels, regardless of destination, were all printed in English.

Based on this information we concluded that there existed a possibility of diversion and that the apparel was not clearly destined to the U.S. at the time the importer purchased the garments from the factories. See HRL 546069 dated August 1,1996. As such, transaction value could not be based on the sale between the importer and factories.

In this case, as in HRL 547349, the garments are not shipped from the factory directly to the U.S. Rather, they are shipped from the factory to the middleman’s warehouse in [ ]. In [ ] the apparel is sorted and consolidated for worldwide distribution. Furthermore, we note that the statement of counsel and the submitted agreement conflict concerning whether quality control inspection occurs at the warehouse. While we recognize that the submitted agreement is for men’s garments and not the subject women’s garments, for purposes of this ruling the submission of the men’s agreement suggests that any agreement for the subject women’s garments also contains the same provisions, including section 2.2, the provision for quality control. As was the case in HRL 547349, the warehouse sorting and consolidation for worldwide distribution, together with the possibility of a warehouse quality control inspection creates the possibility of diversion at the time the importer purchased the subject garments from the factories such that the goods may not be shipped to the U.S. As such, the subject apparel was not clearly destined to the U.S.

You assert that any contingency for diversion is eliminated by the use of a “tracking system” (labels and tagging) and cite HRL 546233 dated November 25,1996, in support of your claim. We find that your reliance on HRL 546233 is misplaced. HRL 546233 is too factually dissimilar to the instant matter to provide support for your arguments. In HRL 546233, it appears that the manufacturer did not include quality control operations and while allowing for the possibility of warehousing it was not clear whether such an operation was actually performed.

Furthermore, in HRL 546233, we held that the middleman’s extensive tracking system for merchandise was only one of the factors indicating that the articles were clearly destined to the United States. During the production, the articles of HRL 546233 were marked with tracking codes to ensure they arrived at the intended destination and were not diverted to alternative purchasers and locations. The code also appeared on all control system generated documents. Customs accepted the tracking system as evidence that the articles were clearly destined to the United States because the manufacturers were required to abide by the system. No such requirement was indicated for the present merchandise. Furthermore, in this matter the untranslated label cannot demonstrate the accuracy of the system. As such, it cannot be relied upon as evidence of an attempt to prevent diversion.

In addition to the “tracking system factor”, in HRL 546233 we indicated that another factor that would support a “clearly destined” finding, was that a factory produces garments to fulfill a pre-existing purchase order issued by a U.S. retailer. The purchase order in the transaction between the middleman/importer and factory is not a pre-existing purchase order issued by a U.S. retailer, but rather a consolidated “master” purchase order. Likewise, while the “sub-purchase order” indicates what portion of the master purchase order is intended for the U.S., the sub-purchase order is not issued by a U.S. retailer. Furthermore, to fulfill the “clearly destined” requirement, the merchandise in HRL 546233 had to be sized and labeled to meet United States standards. Again without fully translated documents it is not possible to discern whether this merchandise is sized only for the American market and it is unclear if or at what point marking labels are placed into the garments.

Based on the lack and condition (untranslated) of the documents before us, and a possibility of diversion existing such that the merchandise is not clearly destined for the U.S. at the time the middleman/importer purchases it from the factories, we conclude that transaction value cannot be based on the sale between the unrelated factories and middleman/importer.

HOLDING:

Based on the lack of evidence and condition of the documents before us, and the fact that a possibility of diversion exists, we conclude that transaction value cannot be based on the sale between the unrelated factories and middleman/importer.

Sincerely,

Virginia Brown
Chief, Value Branch

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