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HQ 547697




December 27, 2001

RR:IT:VA 547697 DCC

CATEGORY: VALUATION

Port Director
Port of New York
U.S. Customs Service c/o Chief, Residual Liquidation and Protest Branch 1 Penn Plaza, 10th Floor
New York, NY 10119

RE: Application for Further Review of Protest No. 1001-99-105401; Transaction Value; Nissho Iwai; Bona fide Sale for Export

Dear Sir:

This is in response to an Application for Further Review of the above referenced protest, which was timely filed by counsel Grunfeld, Desiderio, Lebowitz & Silverman on behalf of Wicked Fashions Limited, against your appraisement and liquidation of 24 entries of imported merchandise. Counsel has designated the immediate Protest as the lead Protest and has submitted documentation regarding three of the twenty-four entries of merchandise to support its position that the Protestant correctly entered the merchandise using the price paid by the middleman to the manufacturers. Those entries are Nos. 739-6012331-0 (“Entry No. 331-0”); 739-6011848-4 (“Entry No. 848-4”); and 73906012160-3 (“Entry No. 160-3”). We notified Counsel in early August 2001 that we did not consider the documentation presented to be sufficient to support a Nissho claim. We spoke with Counsel again on September 21 and October 5 when we set October 12 as the deadline for submitting additional documentation. No additional documents were received.

FACTS:

The Protestant imported apparel from Hong Kong pursuant to a multi-tiered sales transaction. For Entry Nos. 331-0 and 848-4, the Importer purchased the merchandise from the Middleman, who purchased the merchandise from the License Holder. The License Holder, in turn, purchased the pants from Manufacturer A. The Importer claims the merchandise should be appraised on the basis of the sale from the license holder to the middleman.

On July 30, 1999, Customs liquidated Entry No. 331-0 based on the transaction value between the Importer and Middleman. It is your position that the provisions of the export license imposed conditions on the sale by the License Holder and that the merchandise could not be sold to the Importer unless those conditions were met. You also advise that the evidence fails to prove the existence of a bona fide sale between the Manufacturers and the License Holder, but rather a related-party transaction between the License Holder and Manufacturer. Finally, you state that the Middleman was the principal in obtaining the fabric assist, making the transaction between the Manufacturers and the License Holder one for labor costs, and suggest that the payment to the Manufacturers failed to include the costs of the fabric assists.

The Importer claims that the sales from the manufacturers are made to fill pre-existing orders from the Importer. For each entry, the Importer provided copies of entry summaries, purchase orders, invoices, receipts, official receipts, certificates of origin, packing lists, single country declarations, export licenses, and bills of lading. In addition, for Entry Nos. 848-4 and 160-3, the Importer provided copies of certificates of Hong Kong origin. These documents depict the structure of the relevant transactions.

To illustrate the subject transactions we describe below the importation of merchandise for Entry No. 331-0 based on documents provided by the Importer. Although the transactions underlying all three entries were similar in structure, for Entry No. 160-3, the Middleman purchased the merchandise directly from Manufacturer B, rather than from the License Holder as occurred in Entry Nos. 331-0 and 848-4. In addition, the export license for Entry No. 160-3 designates the Middleman—rather than the License Holder—as the exporter.

The date of entry for Entry 3310 is July 26, 1998, and the date of liquidation is July 30, 1999. The entry summary for Entry No. 3310 states that the Importer entered 3,720 pairs of cotton trousers, with a declared value of [   ] and HK [                 ], on July 28, 1998. At line number 001 of the entry summary, the Importer reported the classification of the trousers as 6203.42.4015 with a duty rate of 17.3%. The entry summary also states that the parties are not related.

Protestant also submitted copies of the Importer’s revised purchase order (P.O. No. 8F0221-0) to the Middleman, dated April 10, 1998, and the Middleman’s invoice (Invoice No. NFE-3001/98), dated July 6, 1998. According to these documents, the Importer paid [               ] FOB Hong Kong for the merchandise.

The Middleman ordered the same quantity and style of trousers from the License Holder. The Middleman’s purchase order (P.O. No. TNP 762/98), dated May 5, 1998, to the License Holder, and the receipt of payment from the Middleman to the License Holder state that the Middleman paid the License Holder HK [                 ]. The terms of sale of the Middleman/License Holder transaction were also FOB Hong Kong.

According to the protest, the License Holder subcontracted production of the merchandise to Manufacturer A. Although the Importer provided a copy of Manufacturer A’s invoice (No. 386/98), dated July 4, 1998, to the License Holder, the Importer provided no evidence of a purchase order or payment from the License Holder to Manufacturer A. According to Manufacturer A’s invoice, the License Holder ordered the merchandise from Manufacturer A for HK [                  ]. This invoice does not state the terms of sale for the transaction between Manufacturer A and the License Holder.

The Protestant also provided copies of an unsigned letter of credit (L.C. No. L145213), dated July 22, 1998; export license (License No. 8HK337747), issued June 29, 1998; bill of lading (B/L No. WLGIHKG07980451NYCA), issued July 6, 1998; and a single country declaration, dated July 6, 1998. According to the letter of credit, the draft amount was [               ]—the same amount in the Importer’s purchase order. The letter of credit, however, does not state the name of the beneficiary.

The export license indicates that Manufacturer A produced the merchandise, states that the value of the merchandise is HK [                 ] FOB Hong Kong, designates the License Holder as the exporter, and designates the Importer as the consignee. The Importer did not explain the discrepancy between the value of the merchandise reported on the export license (HK [                 ]) and the value declared on the entry summary and commercial documents (HK [             ]). The bill of lading indicates that the merchandise was shipped by the License Holder from Hong Kong on July 6, 1998 to New York, and designates the Importer as the intermediate consignee. The single country declaration indicates that the Middleman provided a fabric assist to Manufacturer A from [                                                       ].

For each of the three entries, the Importer claims that it issued numbered purchase orders to the Middleman requesting specific styles, colors and quantities of merchandise. The Middleman, in turn, issued purchase orders to the License Holder or Manufacturer B, requesting the same style, color, and quantity of merchandise ordered by the Importer. For Entry Nos. 331-0 and 848-4, the License Holder subcontracted production of the garments to the Manufacturers. The Manufacturers submitted their factory invoices to the License Holder, which invoiced the Middleman in Hong Kong dollars. Finally, the Middleman invoiced the Importer for the merchandise in U.S. dollars.

Counsel states that the purchase orders from the Importer and the Middleman require that the shipping cartons be labeled with the Importer’s name (the “South Pole” mark), the purchase order number, the style number, and designate Hong Kong as the country of origin. According to counsel, the commercial documents indicate that the merchandise was at all times clearly destined for export to the United States.

ISSUE:

Whether the transactions between the Middleman and the License Holder and the transactions between the Middleman and the Manufacturers constitute bona fide sales conducted at arm’s length, wherein the merchandise was clearly destined for the United States, allowing transaction value to be the based on the License Holder’s sales price.

LAW & ANALYSIS:

Merchandise entered 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). Under 19 U.S.C. § 1401a(b)(1), the preferred basis of appraisement, which is defined as, “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus certain enumerated statutory additions, which are not relevant to this analysis.

The U.S. Court of Appeals for the Federal Circuit has established that for merchandise imported pursuant to a multi-tiered transaction to be appraised on the basis of the sale between the manufacturer and the middleman, 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. The court held 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. The court stated that in a multi-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 Int’l v. United States, 17 CIT 18 (1993).

We note that as a general matter, Customs assumes that the importer’s sales 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 Sale for Export Conducted at Arm’s Length

For Customs purposes, the term “sale,” as articulated by the court in J.L. Wood v. United States, 505 F.2d 1400, 1406 (C.C.P.A. 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.

In this case, we examine whether a sale for exportation to the United States occurred between the Manufacturer and License Holder, the Manufacturers and Middleman, and the License Holder and Middleman. For Customs purposes, the term "sale" generally is defined as a transfer of ownership in property from one party to another for a consideration. See J.L. Wood, 505 F.2d at 1406. Although J.L. Wood was decided under the prior appraisement statute, Customs adheres to this definition under the TAA. The primary factors to consider in determining whether there has been a transfer of property or ownership are whether the alleged buyer has assumed the risk of loss, and whether the buyer has acquired title to the imported merchandise. See HRL 544775, dated April 3, 1992. Also relevant is whether, in general, the roles of the parties and circumstance of the transaction indicate that the parties are functioning as buyer and seller. See HRL 545474.

Based on the facts, we determine that there was no bona fide sale conducted at arm’s length between the Manufacturer, License Holder, and Middleman for Entry Nos. 331-0 and 848-4. For example, in the transaction underlying Entry No. 331-0, according to the entry summary, the declared value of the merchandise was HK [                 ]. This amount is the same as the amount the Middleman paid the License Holder, and the License Holder paid the Manufacturer. The fact that the intermediaries (i.e., the Middleman and the License Holder) paid same amount for the merchandise indicates that there was no bona fide sale between these parties because they received no profit.

Furthermore, the terms of sale for the relevant transactions indicate that there may have been no bona fide sale between the parties. The terms of sale for the transactions between the Importer and the Middleman and the sales between the Middleman and License Holder, were FOB Hong Kong. In addition, for Entry No. 160-3—when the License Holder was not a party to the transaction—the sale between Manufacturer B and Middleman was also FOB Hong Kong. Therefore, for sales at each level of this multi-tiered transaction, the terms of sale were FOB Hong Kong. Consequently, for Entry Nos. 331-0 and 848-4, title and risk of loss transferred from the License Holder to the Middleman to the Importer at the same moment. For Entry No. 160-3, title and risk transferred simultaneously from the Manufacturer to the Middleman to the Importer.

The fact that title and risk of loss transferred simultaneously from the Manufacturer to License Holder to the Middleman to the Importer in each of the four transactions—i.e., Manufacturer/License Holder, License Holder/Middleman, Manufacturer/Middleman, and Middleman/Importer—suggests that there were no bona fide sales between the Manufacturer, License Holder and Middleman. See HRL 545980, dated December 12, 1995 (finding evidence insufficient to support claim of a bona fide sale in two-tiered transaction when first and second sale were FOB foreign port of export), and HRL 546225, dated April 14, 1997 (declaring that a bona fide sale did not appear not to have occurred when there was simultaneous passage of title between the manufacturers and the middleman).

In addition to the whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise as indicated by the terms of sale, several factors may indicate whether a bona fide sale exists between a potential buyer and seller. In determining whether property or ownership has been transferred, Customs may examine whether the potential buyer paid for the goods, and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller.

For the transactions between the Manufacturers, License Holder, and Middleman, the fact that Manufacturer A’s price to the License Holder is the same as the License Holder’s price the Middleman suggests that these parties were not acting at arms’ length. Furthermore, the fact that all the relevant transactions were FOB Hong Kong indicate that the merchandise was shipped directly from the Manufacturers to the Importer and, therefore, the License Holder and Middleman never took possession of the goods.

The Importer claims the receipts from Manufacturer B and the License Holder demonstrates the existences of a bona fide sale between the License Holder and the Middleman. We disagree. As noted above, the payment amounts between the Manufacturers, License Holder, and Middleman were the same. The uniformity of price and terms of sale between these allegedly unrelated parties suggests that the transactions between the Manufacturers, License Holder, and Middleman may be collapsed into a single transaction to the Importer. Therefore, based on the information presented, we find that there is insufficient evidence of bona fide sales between the Manufacturers, License Holder, and Middleman.

Finally, as stated above, we note that there is a discrepancy in the reported value of the merchandise covered by Entry No. 331-0. According to the entry summary, the declared value of the merchandise is HK [             ]. As stated in the export license, however, the value of the merchandise is HK [                      ]. The Importer provided no explanation for this discrepancy.

Under Treasury Decision (T.D.) 86-56, 20 Cust. B. & Dec. 175, differences or discrepancies contained in invoices and other entry documentation presented to Customs in connection with imported merchandise raise the presumption that the documents contain false or erroneous information. In addition, T.D. 86-56 provides:

Section 484 of the Tariff Act of 1930, as amended (19 U.S.C. § 1484(a)), requires that importers file with Customs documentation which, among other things, allows Customs “to assess properly the duties on the merchandise, [and] collect accurate statistics with respect to the merchandise . . .” Clearly, an invoice which sets forth a false purchase price does not satisfy this requirement. Equally clearly, such an invoice fails the requirement imposed by 19 U.S.C. § 1481(a)(5), that each invoice of imported merchandise set forth, “[t]he purchase price of each item . . .”

T.D. 85-56 further provides that such documentation will not be accepted and must be returned to the importer for correction. Nevertheless, pursuant to the field instructions implementing T.D. 86-56, dated May 1, 1986, Customs may accept an entry so long as there is an acceptable explanation for any differences in the price or value information contained in the entry documents.

Although Customs released the imported merchandise in this instance, please note that in the future such inconsistencies as exist here represent a sufficient basis under T.D. 86-56 for requiring the submission of corrected documentation. Moreover, as you are aware, an importer’s failure to provide corrected documentation in response to a T.D. 85-56 request allows Customs, in appropriate circumstances to, initiate actions under the civil and criminal penalty statutes, including but not limited to 19 U.S.C. § 542, and 18 U.S.C. § 1001.

In conclusion, we determine that there is insufficient evidence to prove the existence of bona fide sales between the Manufacturers, Export License Holder, and Middleman. Therefore, because the Nissho standard has not been met, we conclude that the Manufacturers’ price cannot be used to determine transaction value. We note that the discrepancy regarding the value of the merchandise as stated on the entry summary, commercial invoices and export license raises the presumption that the documents may contain false or erroneous information in regard to appraisement. In the absence of convincing evidence that there were bona fide sales between the Manufacturers, Export License Holder, and Middleman we do not reach the question of whether the merchandise was clearly destined for the United States.

HOLDING:

Pursuant to the foregoing, the Protest should be denied. The imported merchandise was appraised properly pursuant to the transaction value method, on the basis of the price paid by the Importer to the Middleman.

In accordance with section 3A(11)(b), Customs Directive 099 3550-065, dated August 4, 1993, this decision 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 this decision must be accomplished prior to the mailing of the decision.

Sixty days from the date of the decision, the Office of Regulations and Rulings will make this decision available to Customs personnel, and to the public on the Customs web site at www.customs.treas.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely

Virginia L. Brown
Chief, Value Branch


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