HQ 547625 - Application for Further Review of Protest 3901-99-101156; transaction value of imported merchandise; sale for exportation; “export handling fee” - United States International Trade Commision Rulings

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HQ 547625

November 2, 2001

VAL R:IT:V 547625 MMC

CATEGORY: VALUATION

Port Director
U.S. Customs Service
610 South Canal Street
Chicago, IL 60607

RE: Application for Further Review of Protest 3901-99-101156; transaction value of imported merchandise; sale for exportation; “export handling fee”

Dear Port Director:

This is in reference to Application for Further Review of Protest 3901-99-101156 concerning the proper method of determining transaction value for ladies woven jumpers imported by Mast Industries, Inc. (importer of record). The merchandise was appraised pursuant to transaction value, §402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. §1401a(b)).

In addition to the initial submission, counsel also made additional submissions on October 20, 2000, July 3, 2001 and July 5, 2001. A meeting with counsel was held on June 21, 2001. Information provided in the original submission as well as the additional submissions and meeting has been taken into consideration in reaching this decision.

FACTS:

The merchandise at issue is a shipment of ladies woven jumpers. The merchandise was entered on July 21, 1998, and the entry was liquidated on June 4, 1999, based upon the invoice price between the importer of record and Han-Soll Textile, Ltd., a Korean trading company located in Seoul, South Korea (middleman). In a protest timely filed on September 1, 1999, counsel for the importer contends that the appraised value of the merchandise is incorrect. Counsel argues that the merchandise should be appraised on the basis of a transaction between the middleman and Da Som Apparel, located in Busan, Korea (factory).

Counsel asserts several facts about the transactions between the three identified parties. First, counsel states that the importer purchased the merchandise from the middleman who subcontracted the production of the merchandise to an unrelated factory to perform a cut and make (C&M) process to create the jumpers. Further, counsel claims that the middleman supplied the factory with fabric and trim for the jumpers. The merchandise was produced by the factory according to the importer’s specifications and with “full knowledge” that the merchandise would be exported to the U.S. Finally, counsel asserts that the factory produced the goods on a cut and make basis and then “sold” them to the middleman, who in turn, “sold” them to the importer on an F.O.B. basis. According to counsel the merchandise was packed for export by the factory and shipped “directly” to the U.S.

In support for these assertions counsel provided the following documents:

An Importer Production Order to the middleman. While the production order date is April 2, 1998, the document also indicates a revision date of August 15, 1998. No copy of the original production order was provided. The production order references a vender agreement to which the middleman is bound. Among other things, the production order indicates that the port of embarkation is “South Korea” and the port of discharge is Columbus, Ohio. The goods are to be conveyed by boat. Additionally, the order contains a detailed description of the goods covered, price, quantity, delivery date, quality and packing instructions, as well as a purchase order number from the importer’s customer. The packing instructions indicate that the goods are to be packed “solid color, asst. size if tickets arrive. Pack solid color, solid size if tickets do not arrive.”

A July 1, 1998, Vendor Agreement (Agreement) between the importer and middleman. The pertinent provisions of the Agreement include:

That the Agreement together with the specification and sampling guidelines provided by the importer to the middleman are incorporated by reference into each importer production order and such order must be communicated in writing to the middleman.

Purchase orders must state a description of the goods covered as well as the price, quantity, delivery date, quality and means of shipment for the goods.

Written acknowledgement of an order from the middleman to the importer confirming price & quantity, the furnishings of any of the goods specified or the performance of any of the middleman’s obligations creates a binding “contract” between the two parties.

Nothing in the Agreement requires the importer to enter into contracts for the purchase of goods or services from the middleman.

All the goods delivered to the importer from the middleman must be invoiced and packaged in accordance with the terms of the purchase order. All packaging, correspondence, packing slips and invoices must display the importer’s production order number, department number, style number and quantity.

No charges for packing, boxing, crating, freight, express or services charges, cartage or containers whatsoever, and no interest can be charged to the importer unless previously agreed to in writing or authorized by the relevant importer’s order. A packing slip bearing the importer’s production order number must be placed in each container. Subject to the importer’s written instructions, the middleman is responsible for obtaining the lowest transportation cost possible.

The importer or its agents has the right to inspect the production facilities and manufacturing processes of the middleman and to require the middleman to produce all relevant documentation of each stage of manufacture. If after inspection of either the facilities or the relevant documentation, the importer concludes that manufacturing operations are not carried out at declared manufacturing locations or that the middleman doesn’t have sufficient manufacturing capacity, or that the middleman has participated in an unlawful transshipment practice, the importer has the immediate right to cancel all current and outstanding orders.

The middleman is responsible for providing all necessary certificates of origin, export/import licenses, quotas and certificates of similar nature. The importer arranges and pays for insurance for the goods in a manner consistent with the terms of delivery set forth on the face of the order.

The importer relies on the middleman’s representations and warranties with respect to the goods and will not be obligated to unpack and inspect them before delivery to the importer’s customers. However, the importer has the right to inspect and examine the goods at any time and in any place before delivery to its customer, but no such inspection shall constitute or be deemed to constitute an acceptance of the goods or of their conformity with any of the terms of the relevant order.

If the importer believes the middleman has breached the Agreement, he has several options. The importer may cancel the whole or any part of any of the relevant purchase order, reject goods being shipped, refuse to accept delivery of the goods or any part thereof until the middleman has fully complied or impose a charge-back. Rejected goods at the importer’s option may be returned to the middleman, resold for the middleman’s account at the best price which can reasonably be obtained (whether or not the middleman agrees to the sell off price) or placed in storage in all cases at the middleman’s sole risk.

The middleman may not purchase materials, or make material commitments or production arrangements in excess of the amount, or in advance of the time, necessary to meet the importer’s delivery schedule.

The middleman and importer are independent contractors. This agreement does not create a principal-agent or legally binding partnership relationship between them and neither one may legally commit the other in any matter.

July 4, 1998 Invoice to the Importer from the middleman indicating the middleman as the shipper for the account of the importer with the “notifying party” indicated as the importer’s broker. Port of loading is Busan, Korea and “final destination” is indicated as Columbus, Ohio. As dictated by the vending agreement, the importer’s production order number appears on the invoice as does, the importer’s customer’s purchase order and all other requirements from the vendor agreement. The cost breakdown indicates a cost for fabric charges, cut & make, trim and an “export handling fee”. The “export handling fee” is deducted from the total costs to arrive at a “value for customs purposes.” The shipping terms are “FOB Busan, South Korea”.

A packing list prepared by the middleman containing all the vendor agreement required information. No shipping terms appear on the packing list.

A May 5, 1998 invoice for fabric from Dong Il Trading Co., LTD. located in Seo-Ku, Daegu, Korea to the middleman. The document has a quantity, unit price & total amount in US dollars. The importer’s production order number and the importer’s customer’s purchase order number also appear on it. The style numbers for the ordered and invoiced merchandise also match. No signature of receipt or acceptance by the middleman appears on the document. Nor do shipping terms.

A June 7, 1998 invoice for cut and make (C&M) services from Da Som Apparel (factory) to the middleman. It is virtually identical to the invoice described in “5” above. The factory is located in Busan, Korea. The document has a quantity, unit price & total amount in US dollars. The importer’s purchase order number and the importer’s customer’s purchase order number also appear on it. No signature of receipt or acceptance by the middleman appears on the document. Nor do shipping terms.

A translated “Contract for Manufacture for Export” between the middleman and the counsel identified factory (Manufacturing Contract). The Manufacturing Contract contains the following pertinent provisions:

The middleman will provide the factory with necessary raw materials, trims/accessories plus packing materials.

The factory will manufacture according to specifications supplied by the middleman.

The factory will “follow up” on the instructions from the middleman based on inspections and produce apparel “as acceptable by the inspection from the government inspection agencies and the importer.”

The middleman will provide the factory with documents evidencing exports for tax purposes.

A cargo receipt which indicates that cargo is to be shipped from Busan, Korea to Columbus, Ohio freight collect and identifies the cargo as that described in the above documents.

Proof of payment slip between the factory and middleman for C&M services. The translation identifies the document as such but does not appear to have been conducted in the same manner as the translation of the factory/middleman agreement. Translation on the proof of payment is handwritten and only translates two boxes on the form. One is translated as “Payment Receipt” the other as Da Som Apparel, the name of the factory performing the C&M process.

A Way Bill from the shipping company to the middleman as consignee, with the middleman’s broker as the party to be notified. Place of receipt as well as place of loading for the shipped merchandise is Busan, South Korea. Point of Discharge is Long Beach, CA. Place of delivery is Columbus, Ohio. The bill indicates that it is “freight collect” payable at Columbus, Ohio, with terminal handling charges and document fees having been prepaid. The middleman is identified as the shipper.

No affidavit concerning the translation of documents from Korean to English was provided. No purchase or C&M order between the middleman and factory was provided. No proof of payment between the middleman and importer was provided. No documents regarding the purchase of the trim was provided. No documentation between the importer and its’ customer(s) was provided.

ISSUE:

Whether sufficient evidence was provided to find that a sale for export to the U.S. occurred between the middleman and factory such that that “sale” can serve as a basis for transaction value.

LAW AND ANALYSIS:

Counsel contends that this transaction involves a three-tiered situation involving an importer, middleman, and factory. Counsel reasons that two sales took place, one between the importer and the middleman and the other between the middleman and factory. As such Counsel maintains that a bona fide sale for exportation to the U.S. took place between the middleman and the factory and that it is this “sale” which should be used for transaction value purposes.

In Nissho Iwai American Corp. v. United States, 16 C.I.T. 86, 786 F. Supp. 1002, reversed in part, 982 F.2d 505 (1992) [Nissho Iwai], and Synergy Sport International, Ltd. v. United States, Slip Op. 93-5 (CIT Jan 12, 1993) [Synergy], 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 United States importer. In both cases, the middleman was the importer of record. In each case, the court held that the price paid by the middleman/importer to the manufacturer 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 influences, and involving goods clearly destined for the United States.

We note that in the context of filing an entry, Customs Form 7501, an importer is required to make a value declaration. In accordance with the Nissho Iwai and Synergy decisions and our own precedent, we presume that transaction value is based on the price paid by the importer. See, Headquarters Ruling Letter (HRL) 545144 dated January 19, 1994, HRL 545271 dated March 4, 1994, HRL 545360 dated May 31, 1994, and HRL 545648 (IA 10/94) dated August 31, 1994. In further keeping with the courts' holdings, we note that in those situations where an importer requests appraisement based on the price paid by the middleman to the foreign manufacturer (and the importer is not the middleman), the importer may do so. However, it will be the importer's responsibility to show that such price is acceptable under the standard set forth in Nissho Iwai and Synergy. That is, the importer must present sufficient evidence that the alleged sale was a bona fide "arm's length sale," and that it was "a sale for export to the United States," within the meaning of 19 U.S.C. §1401a(b).

In T.D. 96-87, General Notice, Determining Transaction Value in Multi-Tiered Transactions, 30/31:52/1 Cust. B. & Dec. (January 2, 1997), we indicated what evidence should be submitted to demonstrate that a bona fide sale for export, negotiated at arms’ length and clearly destined for the United States took place. As outlined in the General Notice, such evidence should describe the structure of the entire transaction. More particularly, 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., agreements, contracts, correspondence) which demonstrate how the parties dealt with one another. What we are looking for is a complete paper trail of the imported merchandise showing the structure and scope of the entire transaction.

The requirements identified in T.D. 96-87 have not been met. No purchase or C&M order between the middleman and factory was provided. No documents regarding the purchase of the trim were provided. Clearly, the trim would be considered an assist to the factory. Thus, documentation establishing the value of the trim is necessary to substantiate the use of the transaction between the middleman and the factory as the basis of transaction value.

Further, no documentation between the importer and its customer(s) was provided. Concerning the submitted “proof of payment” between the middleman and factory, it was not fully translated and the only two provisions translated are done so in handwriting. The lack of identified documents together with a poorly translated proof of payment leads us to determine that there is insufficient evidence to conclude that a sale for export occurred between the C&M factory and middleman. As such, for the entry subject to this protest the transaction between the factory and middleman may not be used as the basis for transaction value. The transaction value should be based on the price paid by the importer.

HOLDING:

The submitted documentation is insufficient to support the claim that a sale for exportation to the U.S. occurred between the factory and middleman. Transaction value for the subject entry should be based on the price paid by the importer.

The protest should be DENIED. 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,

Virginia L. Brown, Chief

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