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HQ 548278

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May 12, 2003

RR:IT:VA 548278 EK

CATEGORY: VALUATION

Mr. John A. Bessich
Follick & Bessich
33 Walt Whitman Road
New York, NY 11746

RE: American Utex International; Sale for Exportation to the United States

Dear Mr. Bessich:

This is in response to your letter of February 4, 2003, requesting a prospective ruling on behalf of your clients, American Utex International (Utex USA) and Utex Corporation (Utex Canada).

FACTS:

You indicate that UTEX USA is an importer and wholesaler of garments that are made in and exported from various countries. For many years, UTEX USA has imported garments directly from foreign vendors and imported them into the United States. You indicate that the foreign vendors in question are not related to UTEX USA within the meaning of section 402(g) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA). The merchandise imported by UTEX USA has been appraised pursuant to its transaction value, section 402(b) of the TAA, plus the value of any assists that are applicable.

UTEX Canada is a manufacturer, importer, exporter and wholesaler of wearing apparel. UTEX USA is a wholly-owned subsidiary of UTEX Canada. The companies are therefore related parties, within the meaning of section 402(g). UTEX Canada is a larger company with significantly greater financial assets than UTEX USA, and the two companies have determined that UTEX USA would benefit from UTEX Canada’s superior financial position when purchasing garments that are to be imported into the United States. You state that UTEX USA will benefit from access to UTEX Canada’s computerized production and ordering systems in purchasing these garments. Consequently, UTEX USA and UTEX Canada have entered into an agreement whereby UTEX USA will order garments from UTEX Canada which, in turn, will then issue production or purchase orders for the same garments from foreign vendors for direct shipment to UTEX USA. You have submitted a copy of an agreement between UTEX Canada and UTEX USA that documents this arrangement.

The agreement indicates that UTEX USA will issue purchase orders to UTEX Canada, and that UTEX Canada will issue orders for the same garments from various foreign vendors. UTEX Canada is not related to the foreign vendors. Included in these vendors are those that UTEX USA presently orders such goods. The foreign vendors will manufacture the goods and then ship them directly to UTEX USA, issuing invoices for payment to UTEX Canada. UTEX Canada will pay the vendors and then issue its own invoices to UTEX USA for the goods. You indicate that UTEX Canada’s prices to UTEX USA will reflect the prices paid by UTEX Canada, plus the costs of materials, components, etc., provided free of charge to the foreign vendors for use in the production of the goods. UTEX Canada will actually replace UTEX USA as the purchaser of the garments for shipment to the United States. In a phone conversation with you on Thursday, May 8, 2003, you indicated that there is no “profit” built into the price that UTEX Canada charges UTEX USA for the merchandise.

You state that the orders issued by UTEX Canada to foreign vendors for garments that are ordered by UTEX USA will include U.S. specifications. UTEX USA will continue to specify the garment styles and quantities that they wish to purchase and import. The garments intended for the U.S. market will require sewn-in labels that meet U.S. laws and regulations, including the country of origin, fiber content, RN identifier (FTC requirements), and wash and care instructions, all in English. You indicate that the foreign vendors will be instructed to prepare shipping documents that reflect the direct shipment of the garments to UTEX USA in the United States. All transportation documents will indicate that the United States is the ultimate destination, and no shipments will enter the commerce of any other country.

The invoices prepared by the foreign vendors will indicate that UTEX Canada is the purchaser, and that shipment of the goods is to UTEX USA in the United States. The terms of sale from the foreign vendors will vary, depending upon the vendor. The terms will vary from ex-works, FOB port of export, or CFR port of destination. The terms of sale from UTEX Canada to UTEX USA will be the same in each case. UTEX Canada will make payment to foreign vendors by means of letters of credit opened prior to shipment by UTEX Canada in favor of the foreign vendors. You have submitted a sample letter of credit from UTEX Canada to a foreign vendor. Payment of invoices that UTEX Canada issues to UTEX USA will be on open account after delivery, with UTEX Canada retaining a security interest in the merchandise until UTEX USA makes payment to UTEX Canada. You indicate that since the foreign vendors manufacture and ship the goods directly to UTEX USA, and because the goods are made to UTEX USA’s specifications, UTEX Canada will not warrant the goods or be responsible to UTEX USA for any defects in or damage to the goods. Once delivered, UTEX USA must look to the foreign vendor for any adjustments or corrections.

UTEX USA will continue to act as importer of record and will enter the merchandise at the prices paid by UTEX Canada to the foreign vendors, plus the costs of any assists. At the time of entry, UTEX USA will include as part of its entry papers, the foreign vendor’s commercial invoice to UTEX Canada, UTEX Canada’s invoice to UTEX USA and a bill of material describing the nature of any assists. A copy of the bill of lading or airway bill indicating that the U.S. is the ultimate destination at the time of shipment from the foreign country will be included as well.

ISSUE:

What is the proper method of appraising the merchandise imported by UTEX USA from the foreign vendors, through its parent company, UTEX Canada.

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; 19 U.S.C. 1401a). The primary method of appraisement is transaction value, which is defined as the "price actually paid or payable for merchandise when sold for exportation to the United States, " plus certain enumerated additions.

In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992) ("Nissho Iwai") and Synergy Sport International, Ltd. v United States, 17 C.I.T. 18, (1993), 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 U.S. purchaser. In both cases, the middleman was the importer of record. Both courts held that the manufacturer’s price, rather than the middleman’s price, was valid as long as the transaction between the manufacturer and the middleman fell within the statutory provisions for valuation. The courts explained 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 export to the United States.”

You have described the importations in your ruling request as a three-tiered distribution arrangement between UTEX USA, UTEX Canada, and the foreign vendors. It does not appear to be such an arrangement. Although we do not have the invoices and purchase orders for the transactions between UTEX USA and UTEX Canada, you have indicated that these transactions constitute sales between the related parties. However, these alleged “sales” may not be used to form the basis of a transaction value. The transfer price between UTEX USA and UTEX Canada is effected by the relationship between the parties. The lack of profit in the “price” between UTEX USA and UTEX Canada, a well as the fact that UTEX Canada is not responsible to UTEX USA for any defects in or damage to the goods indicates that the transaction between the related parties is not a “bona fide” sale for purposes of determining transaction value for Customs valuation.

Rather, the relationship between the parties is more akin to an agency relationship, i.e., with UTEX Canada acting on behalf of UTEX USA in the ordering of the merchandise. There is only one sale upon which to appraise the merchandise, and that is between the foreign vendors and UTEX USA, as is currently in effect. In your ruling request of February 4, 2003, you indicate that UTEX USA is currently importing directly from the foreign vendors and declaring the FOB port of export prices shown on commercial invoices issued by the vendors to UTEX USA for the garments. Garments imported by UTEX USA have been appraised at the invoiced prices paid by UTEX USA to its foreign vendors, plus the value of any applicable assists provided to the foreign vendors. Essentially, the method of appraisement will be the same with this new arrangement. The addition of UTEX Canada does not alter the fact that UTEX USA is the importer of record, and that it purchases the merchandise from the foreign vendors. The difference that you propose merely adds UTEX Canada as a “middle-man” with respect to the importations such that UTEX USA will continue to import merchandise from the foreign vendors, merely utilizing UTEX Canada as a facilitator.

HOLDING:

The merchandise should be appraised pursuant to the price actually paid or payable, plus any applicable assists, from UTEX USA to the foreign vendors, through UTEX Canada. This assumes that all required documentation is submitted and the concerned import specialist at the port of entry is satisfied that the documents accurately reflect the transactions in question.

Sincerely,

Virginia L. Brown, Chief
Value Branch

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