HQ 547435 - Transaction Value; Sale for Export; Nissho Iwai; Clearly Destined for United States - United States International Trade Commision Rulings

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HQ 547435

October 30, 2001

RR:IT:VA 547435 DCC

CATEGORY: VALUATION

Mr. Michael Vitale
Ernst & Young LLP
787 Seventh Avenue
New York, New York 10019

RE: Transaction Value; Sale for Export; Nissho Iwai; Clearly Destined for United States

Dear Mr. Vitale:

This is in response to your July 13, 1999 advance ruling request on behalf of your client [ ] or the “Importer,” and its parent corporation [ ] or the “Exporter.” You requested a ruling regarding the appraisement of certain merchandise from two Japanese manufacturers. We also received your submissions dated August 17, 1999, September 24, 1999, July 5, 2000, February 21, 2001, and March 13, 2001. We regret the delay in responding to your request.

In your letter dated February 21, 2001, you requested that Customs withdraw from consideration your request concerning merchandise from [ ] of Kanagawa, Japan. Pursuant to your request and Customs Regulation 177.6 (19 C.F.R. § 177.6), we hereby consider that portion of your ruling request to have been withdrawn. Accordingly, this ruling only addresses merchandise produced by the second manufacturer.

In addition, we have reviewed your request for confidential treatment pursuant to Customs Regulations § 177.2(b)(7), with respect to certain information submitted. Accordingly, that information has been bracketed in this letter and will be redacted from any public versions.

FACTS:

This ruling request concerns the prospective importation of medical tools. The importation at issue involves three parties: [ SFA ], or the “Importer”; [ ], or the “Exporter”; and [ ] of Osaka, Japan, or the “Manufacturer.” The Importer purchases medical tools from its parent corporation, the Exporter, which the Importer then resells in the United States. The Importer and Exporter are not related to the Manufacturer. The terms of sale for sales by the Exporter are FOB Tokyo, with payment due 90 days after delivery.

Because this ruling request covers prospective transactions, you provided sample commercial documents describing the proposed transactions. According to these documents and your narrative submission, the Manufacturer produces and sells medical research tools. On receiving a purchase order for medical tools from the Importer, the Exporter places an order for the merchandise from the Manufacturer. The terms of sale for sales by the Manufacturer are FOB factory.

The Importer’s purchase order designates the Importer as the recipient of the subject merchandise. Before it is shipped to the Importer, however, the merchandise is delivered from the Manufacturer in Osaka, Japan, to a freight forwarder, [ ], in Yokohama, Japan, for consolidation. The Manufacturer’s shipping notice lists the Exporter as the customer and designates the Exporter’s Japan facilities as the shipping address.

ISSUE:

Whether the transactions between the Manufacturer and the Exporter consist of bona fide sales conducted at arm’s length, wherein the merchandise was clearly destined for the United States, allowing transaction value to be based on the Manufacturer’s sales price.

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 Agreements Act of 1979 (TAA; codified at 19 U.S.C. §1401a). The primary basis of appraisement under the TAA is transaction value, which is defined as “the price actually paid or payable for the imported merchandise when sold for exportation to the United States,” plus certain enumerated additions thereto to the extent they are not otherwise included in the price actually paid or payable. 19 U.S.C. §1401a(b)(1).

We note that as a general matter, Customs assumes that the importer’s purchase price is the basis of transaction value. As Customs explained in a General Notice entitled, “Determining Transaction Value in Multi-tiered Transactions,” T.D. 96-87, 30/31 Cust. Bull. 52/1, January 2, 1997:

Customs presumes that the price paid by the importer is the basis of transaction value and the burden is on the importer to rebut this presumption. In order to rebut this presumption, in accordance with the Nissho Iwai standard, the importer must prove that at the time the middleman purchased, or contracted to purchase, the goods were “clearly destined for the United States” and the manufacturer (or the seller) and middleman dealt with each other at “arm’s length.”

Bona Fide Sales Conducted at Arm’s Length

For Customs purposes, the term “sale,” as articulated by the court in J.L. Wood v. United States, 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974), is defined as the transfer of property from one party to another for consideration. No single factor is decisive in determining whether a bona fide sale has occurred. Customs makes each determination on a case-by-case basis and will consider such factors as whether the purported buyer assumed the risk of loss and acquired title to the imported merchandise. In addition, Customs may examine whether the purported buyer paid for the goods, and whether, in general, the roles of the parties and the circumstances of the transaction indicate that the parties are functioning as buyer and seller. See, e.g., Headquarters Ruling Letter (“HRL”) 545709, dated May 12, 1995, and HRL 545474, dated August 25, 1995.

Based on the facts, there exist bona fide sales conducted at arm’s length between the Exporter and the unrelated Manufacturer. The evidence demonstrates that the Exporter received title and assumed the risk of loss from the time the merchandise left the Manufacturer’ premises. The evidence also supports a finding that the Exporter paid valuable consideration in exchange for the goods. We therefore determine that bona fide sales exist between the parties in respect to the offshore transactions. In addition, we find that the sales between the Exporter and the Manufacturer were negotiated at arm’s length. In order for sales from the Manufacturer to form the basis for transaction value, however, we must also determine that the merchandise was clearly destined for the United States at the time of sale to the Importer.

Clearly Destined for the United States

The U.S. Court of Appeals for the Federal Circuit has established that for merchandise imported pursuant to a three-tiered transaction to be appraised on the basis of the manufacturer-middleman sale, the merchandise must be clearly destined for export to the United States. In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the Court of Appeals reviewed the standard for determining transaction value when there is more than one sale which may be considered as being a sale for exportation to the United States. In so doing, the court reaffirmed the principle established in E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that the manufacturer’s price, rather than the middleman’s price, is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. Nissho Iwai, 982 F.2d at 511. 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 influences that affect the legitimacy of the sales price.” Id. at 509. See also, Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993).

In support of your contention that the Manufacturer’ sales price is the appropriate basis for determining the transaction value you argue that the subject merchandise was clearly destined for the United States. You state that the merchandise was manufactured for the Exporter pursuant to the Importer’s instructions. You also explain that the subject merchandise was shipped from the Manufacturer to a freight forwarder who then ships the goods to the Importer in the United States. Furthermore, many of the documents you provided designate that the Importer as the consignee or recipient of the merchandise.

Sales from the Manufacturer

We find insufficient evidence to determine that the subject merchandise was clearly destined for the United States. Although the Importer was designated as the recipient or consignee on the Importer’s purchase order, the Exporter’s purchase order, and the bill of lading, the Manufacturer’s shipping notice designates the Exporter as the customer and makes no reference to the Importer.

Furthermore, although you state that the merchandise is manufactured to the Importer’s specifications, there is no documentary evidence to support your claim. There is also no evidence to support an assumption that this merchandise was custom designed or manufactured specifically for the Importer. Furthermore, we find no evidence to suggest that the medical tools are the type of goods that are generally custom made or that these goods could not be redirected to a customer in a different country. Although the fact that these goods may be sold in other markets does not preclude a determination that the subject merchandise was clearly destined for the United States, it is a factor to be considered.

With regard to shipping procedures, you state that the merchandise is dropped shipped directly from Manufacturer A to the Importer and that all parties abide by strict policies to ensure that the merchandise is only exported to the United States. You also state, however, and the commercial documents show, that the merchandise is shipped to a freight forwarder’s warehouse before it is shipped to the Importer, presumably to facilitate shipment schedules and consolidation. The fact that the merchandise is first shipped to a consolidator means that the goods are not dropped shipped directly to the Importer as you allege. In addition, because the merchandise is not shipped directly from Manufacturer A to the Importer there is the possibility of diversion to a third party, especially in light of the fact that there is no evidence to show that the goods are not custom made.

Based on the evidence submitted, we find that there exists a possibility of diversion and that the merchandise from Manufacturer A, therefore, is not clearly destined for the United States at the time of the Importer’s purchases.

As discussed above, the Nissho court found that the rule for using the first sale applies only when there is a legitimate choice between two statutorily viable transaction values. In order for a manufacturer’s price to constitute a viable transaction value, all three elements must exist: 1) bona fide sale; 2) the transaction must be at arm’s length; and 3) the merchandise must be clearly destined for export to the United States. Although we find that you satisfied the first two elements, we determine that there is insufficient evidence to support your claim that the merchandise was clearly destined for the U.S. Importer. Therefore, we find that the sale from the Manufacturer to the Exporter is an inadequate basis for determining the transaction value.

HOLDING:

Based on the information submitted, we find that there exists a possibility of diversion and that the merchandise from the Manufacturer was not clearly destined for the United States at the time of sale. Consequently, transaction value cannot be based on the sale between the Manufacturer and the Exporter. We conclude, therefore, that transaction value should be based on the sales between the Exporter and the Importer.

Sincerely,

Virginia L. Brown
Chief, Value Branch

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