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HQ 546464

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April 3, 1997

RR:IT:VA 546464 er
CATEGORY: VALUATION

Donald S. Stein, Esq.
Manatt, Phelps & Phillips, LLP
1501 M Street, NW
Suite 700
Washington, DC 20005-1702

RE: Request for Ruling; Sale; Sale for Exportation.

Dear Mr. Stein:

This is in response to your submissions dated August 9 and December 27, 1996 and February 3, 1997, submitted on behalf of your client, Tarrant Apparel Group, d/b/a Fashion Resource, in which you request a ruling regarding the means of appraisement for certain merchandise imported pursuant to a three-tiered transaction. We regret the delay in responding.

FACTS:

Fashion Resource, the importer, is contemplating restructuring the way it sources merchandise from its Hong Kong affiliate. No information was provided regarding how Fashion Resource currently transacts; however, under the proposed restructuring, Fashion Resource seeks confirmation that the sale for exportation to the United States would be that from the foreign manufacturer to Tarrant Company, Ltd. (“TCL”), of Hong Kong, the “middleman” in the arrangement. TCL is a wholly-owned subsidiary of Tarrant Apparel Group.

Fashion Resource proposes to source the merchandise abroad in the following manner, as described in counsel’s submission:

1. Fashion Resource will provide specifications and details of goods to TCL in Hong Kong and request to be provided with a price quotation. 2. TCL will locate a factory to produce the goods and negotiate a price between itself and the factory. 3. TCL will provide a price quotation to Fashion Resource for the finished goods, which will include a 10 percent markup over the price paid by TCL to the foreign manufacturer and will include the cost of any quota. 4. If the terms proposed by TCL are acceptable to Fashion Resource, Fashion Resource will issue a purchase order to TCL for the goods, indicating the terms of sale. 5. TCL will then contract with the factory for the manufacture of the goods.

6. The factory will invoice TCL on an FOB port of shipment basis when the goods are shipped. Counsel states that the shipping documents from the factory will clearly state that the goods are destined for sale in the United States. 7. Title for the goods will pass simultaneously from the factory to TCL and from TCL to Fashion Resource at the port of shipment. 8. Generally, TCL will arrange for shipment of the goods to the United States. 9. TCL will issue an invoice to Fashion Resource at the agreed-upon price when the goods are shipped. 10. Fashion Resource will remit payment to TCL by monthly intercompany accounting entries. Such “payment” is final with respect to all goods which meet quality specifications and are shipped on time. 11. TCL will remit payment to the factory in accordance with the agreed-upon terms, which usually will be a Letter of Credit at sight, or thirty (30) days after shipment by check. Such payment is final with respect to goods produced by the factory which meet all quality specifications and are shipped on time. 12. In those instances where goods do not meet quality specifications and/or are not shipped on time, TCL will require the factory to sign a Letter of Guarantee, or will not ship the goods to Fashion Resource. Under the terms of the Letter of Guarantee, the Factory acknowledges that the covered goods did not meet quality specifications and/or were shipped late, and the Factory further agrees to honor claims for refunds by TCL with respect to such shipments, regardless of whether it has already received payment for the shipment from TCL. 13. Only in those instances where goods produced by the factory do not meet quality specifications and/or are shipped late will payment by Fashion Resource to TCL not be final until the goods are deemed acceptable by Fashion Resource (i.e., the risk of loss remains with TCL until the “off-spec” and/or late-shipped goods are accepted by Fashion Resource). 14. TCL will negotiate and agree on a claim amount by Fashion Resource for goods which do not meet quality specifications and/or are not shipped on a timely basis which are shipped under a Letter of Guarantee from the Factory, if the goods are not deemed acceptable by Fashion Resources, and the inter-company accounting entry (i.e., “payment”) from Fashion Resource to TCL will be reversed to reflect this claim.

Fashion Resource also plans to enter into a Sourcing Agreement with TCL, which would establish the particulars of the relationship between Fashion Resource and TCL. This Agreement will provide for the 10 percent mark-up over factory price to be charged by TCL. Additionally, this Agreement will provide TCL with the authority to select whichever factory it deems appropriate to produce the garments ordered, select appropriate material to be used in the production of the garments, negotiate terms of sale with the factory, and purchase any necessary quota without the consent or approval of Fashion Resource so long as the goods produced and delivered conform to specification. The Agreement will further provide that TCL will bear the risk of loss should the garments produced be nonconforming or rejected by Fashion Resource for other valid reasons. As the Agreement has not yet been drafted, a copy was not provided to us.

ISSUE:

Based on the description of the prospective transactions, whether a sale for exportation to the United States will occur between the factory and the middleman, TCL, which may serve as the basis for appraisement of the imported merchandise.

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the United States is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a). Section 402(b)(1) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States”, plus amounts for the enumerated statutory additions (emphasis added). Accordingly, a bona fide sale must exist between the foreign manufacturer and the middleman, TCL, for appraisement of the imported merchandise to be based on the transaction value represented by that price.

Customs recognizes the term “sale,” as set forth in the case of J.L. Wood v. U.S., 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974), to be defined as the transfer of property from one party to another for consideration. 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. United States, 61 Cust. Ct. 604, A.R.D. 245 (1968).

However, 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 considers whether the potential buyer has assumed risk of loss and acquired title to the imported merchandise. In addition, 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.

In determining whether the relationship of the parties to the transaction in question is that of a buyer-seller, where the parties maintain an independence in their dealings, as opposed to that of a principal-agent, where the former controls the actions of the latter, Customs will consider whether the potential buyer:
a. Provided (or could provide) instructions to the seller; b. Was free to sell the items at any price he or she desired; c. Selected (or could select) his or her own customers without consulting the seller; and d. Could order the imported merchandise and have it delivered for his or her own inventory.

Because this ruling request involves prospective transactions, the importer has no importation documentation to submit in conjunction with its request. In a recently issued General Notice, Customs described the documentation and information necessary to support a ruling request that transaction value should be based on a sale involving a middleman and the manufacturer. See, T.D. 96-87, 31 Cust. B. & Dec. No 1 (1997). The effective date of the General Notice is January 2, 1997; therefore, Customs will not issue a ruling in response to a request submitted after January 2, 1997, unless the importer submits the requisite information and documentation. Consequently, this ruling is necessarily limited to whether the described restructuring appears to meet the sale and sale for exportation criteria, such that transaction value may be based on the transaction between the middleman and the factory. If the described restructuring does appear to satisfy the requisite criteria, the importer will, nonetheless, have to submit supporting documentation, as described in T.D. 96-87, after importation, if so requested by Customs.

The shipping terms are inconclusive on the issue of whether there are two sales as the transaction appears to be prospectively structured as back-to-back fob port of shipment sales, with the result being that title will pass simultaneously to TCL and Fashion Resource. However, counsel has further described the roles of the parties which we will examine to determine whether the proposed transaction results in one or two sales.

According to counsel, TCL will negotiate and agree to prices with the manufacturers while Fashion Resource will independently consult with TCL to negotiate and determine the prices between TCL and Fashion Resource. Accordingly, it is our understanding that Fashion Resource will not negotiate their prices with the foreign manufacturers and as such does not control or influence, in any manner, the negotiations between TCL and the factory.

Payment will be structured such that TCL will remit payment to the factory either through a Letter of Credit at sight, or thirty days after shipment by check. Payment is final unless the goods are determined to be non-conforming. TCL bears the risk of loss for non-conforming goods. Fashion Resource remits final payment to TCL by monthly intercompany accounting entries. If goods are rejected by Fashion Resource for failure to conform, the inter-company accounting entry will be reversed until the non-conformity is corrected.

Based on counsel’s description of the transactions, it appears that TCL will be (1) in a position to give instructions to the manufacturer/seller; and (2) free to resell the merchandise from the factory at a desirable price. It is not revealed whether TCL will have any customers other than Fashion Resource or whether it will order any merchandise for its own inventory. For purposes of this ruling, we will assume that TCL could have additional customers and its own inventory, if it so chose.

Counsel additionally states that Fashion Resource and TCL plan to enter into a written Sourcing Agreement which will incorporate the above provisions and will set forth the 10 percent mark-up over the factory price as the price of the imported merchandise. The importer must be able to present Customs with a copy of this agreement as well as copies of invoices, purchase orders and proof of payment, if so requested, which reflect the transactions as described. Providing the transactions are conducted as described and the documentation to be submitted is consistent with the transactions, a bona fide sale between the foreign manufacturer and TCL appears to exist. Under these circumstances, the decisions reached in Nissho Iwai American Corp. v. United States, No. 92-1239, Slip Op. (Fed. Cir. Dec. 28, 1992) and Synergy Sport International, Ltd. v. United States, No. 93-5, slip op. (CIT Jan. 12, 1993), are relevant.

In Nissho Iwai and 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 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 nonmarket 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. As indicated by the language of CF 7501 and the language of the valuation statute, there is a presumption that such transaction value is based on the price paid by the importer. In accordance with the Nissho Iwai and Synergy decisions and our own precedent, we will continue to presume that an importer's declared transaction value is based on the price the importer paid. Also see, HRL 545144 (January 19, 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 sale was an "arm's length sale," and that it involved goods “clearly destined” for the United States.

In this case, counsel for the importer requests that the transaction value be based on the price that the middleman, TCL, pays to the factory, rather than on the price that the importer, Fashion Resource, pays to the middleman. In that regard, we note that counsel has declared that TCL is not "related" to the factories, as that term is defined within 19 U.S.C. 1401a(g). Therefore, we will assume that the sales between the middleman and the manufacturers are at "arm's length" and that the first requirement set forth in Nissho Iwai has been met.

As noted above, because this ruling request is prospective, the importer does not have any documentation to submit in support of its position that the transaction between the middleman, TCL, and the manufacturer involves goods which are clearly destined for the United States. However, counsel states that the merchandise will be “cut to order” for a U.S. company and the shipping documents will clearly state that the goods are destined for sale in the United States. Additionally, counsel states that Fashion Resource will issue purchase orders to TCL and TCL will invoice Fashion Resource for the imported merchandise. As described above, in accordance with T.D. 96-87, copies of purchase orders, invoices and proof of payment between Fashion Resource, TCL and the manufacturer, must be made available to Customs, if requested. Providing these documents support counsel’s claim that the goods were clearly destined for the United States at the time they were sold for exportation, it appears that the imported merchandise may be appraised based on the transaction between TCL and the factory. Assuming the imported merchandise is subject to visa requirements, the visaed invoices would constitute additional evidence that the merchandise is destined for the United States.

We note that our decision in this case is based on the specific facts submitted. If, at any time, the sales between the middleman and any of its suppliers are no longer at arm's length or if the middleman expands its market beyond the United States, our reasoning as set forth above would no longer apply.

HOLDING:

Based on the description of the prospective transactions and providing the importer is able to present Customs with the kind of documentation described in T.D. 96-87, if requested, which is consistent with the described transactions, it appears that a sale for exportation to the United States will occur between TCL and the foreign factory, with TCL fulfilling a role characteristic of a buyer/reseller. Providing these conditions are met, the transaction value of the merchandise may be based on the price actually paid or payable by TCL to the factory.

Sincerely,

Acting Director
International Trade Compliance Divisions

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