HQ 548526 - Application for Further Review of Protest No.:5501-03-100130; Transaction Value; Sale for Exportation to the United States; Bona Fide Sale; Arm’s Length Transaction; “Clearly Destined” for the United States; Statutory Additions; Nissho Iwai Am. Corp. v. United States; Treasury Decision 96-87. - United States International Trade Commision Rulings

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HQ 548526

January 5, 2005

VAL:RR:IT:VA 548526 jsj

CATEGORY: VALUATION

Port Director
U.S. Customs and Border Protection
P.O. Box 619050
Dallas, Texas 75261

Attn: Monty Snow, Holly R. Bennett and David S. McGurk

RE: Application for Further Review of Protest No.:5501-03-100130; Transaction Value; Sale for Exportation to the United States; Bona Fide Sale; Arm’s Length Transaction; “Clearly Destined” for the United States; Statutory Additions; Nissho Iwai Am. Corp. v. United States; Treasury Decision 96-87.

Dear Port Director:

The purpose of this correspondence is to address the Application for Further Review (AFR) of Protest Number: 5501-03-100130, dated July 24, 2003. The Importer of Record and Protesting party is xxxxxxxxxxxxxxxxxxxxxxxxxx (hereinafter the importer or Protestant). The Protestant is represented by counsel.

This protest decision is being issued subsequent to the following: (1) A review of the submission dated April 30, 2004; (2) A review of documents that accompanied the submission of April 30, 2004; and (3) A review of correspondence dated December 6, 2004.

The importer requested confidential treatment pursuant to 19 C.F. R. 177.2 (b)(7) for “all supporting documents” that accompanied its protest, as well as for “the identity of the parties” and “pricing information.” Customs and Border Protection has concluded that the information for which confidential treatment has been sought is commercial or financial information the disclosure of which would cause substantial harm to the competitive position of the Protestant or another interested party. Confidential treatment will, therefore, be extended in accordance with the request of the importer. Confidential information will be underscored in this protest decision and will be redacted in the public version.

FACTS

The facts relevant to the protest of xxxxxxxxxxxxxxxxxxxxxxx, the importer, concerning its argument that the entered values should be the transaction value between middleman and the foreign manufacturer are as follows:

Entry Number: xxxxxxxxxxxxxxxxxxx

The importer purchased the merchandise that is the subject of this AFR from xxxxxxxxxxx (hereinafter the middleman). The middleman purchases and resells merchandise. The middleman purchased the merchandise from xxxxxxxxxxxxxxxxxxxx (hereinafter the manufacturer), a foreign manufacturer. The merchandise purchased by the importer from the middleman is manufactured in accordance with designs and specifications provided by the importer. The merchandise is stated to be marked in accordance with Customs and Border Protection regulations and labeled in accordance with Federal Trade Commission requirements. The merchandise also bears labels with the importer’s trademark.

The importer’s purchase of merchandise from the middleman is documented with written purchase orders. The importer’s purchase orders are dated January 24, 2002 and include the garment style number, fabric type, fiber content delivery date and purchase price. The importer’s purchase order to the middleman states that the merchandise is to be shipped to Fort Worth, Texas. The importer’s purchase order typically does not specify the country of production. The country of production decision is made by the middleman.

On March 4, 2002, the middleman issued a “pro forma invoice,” number xxxxxxxxx, to the importer confirming the terms of various orders, including importer purchase orders xxxxx and xxxxxxxx. The pro forma invoice provides that the merchandise will be shipped from Hong Kong/China but does not identify the actual manufacturer.

On March 4, 2002, the middleman also issued purchase order number xxxxxxxxxx

The middleman’s purchase order number xxxxxxxxxx also covers merchandise the importer ordered for sale in the Canadian market. The merchandise at issue, ordered for export to the United States, is identified for shipment to the United States on the middleman’s purchase order. to the manufacturer, which included the merchandise the importer ordered under its purchase orders numbered xxxxx and xxxxxx. The middleman’s purchase order to the manufacturer provides that the merchandise will be shipped directly from Hong Kong/China to the importer in Fort Worth, Texas. The middleman’s purchase order also references the importer’s purchase orders.

The importer opened a transferable letter of credit, number xxxxxxxxxxxx in favor of the middleman for a total of $xxxxxxxxxxxxxxxxx. This letter of credit covers payment for a number of the importer’s orders, including importer purchase orders xxxxxxx and xxxxxxxxxxxx.

On March 26, 2002, the middleman transferred a portion of the letter of credit to the foreign manufacturer. The letter of credit transfer covered a number of open importer orders, including those numbered xxxxxxxxx and xxxx.

On June 7, 2002, the manufacturer issued commercial invoices numbered xxxxx and xxxxx to the middleman. These invoices, which note that merchandise is being sold for the “account and risk” of the middleman, address the sale of the merchandise from the manufacturer to the middleman. The invoices further note that the merchandise is to be shipped directly from Hong Kong to Dallas, Texas and reference the importer’s style numbers and purchase orders. The invoice also references letter of credit number xxxxxxxxxx and the transferring document number xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.

Upon receipt of the manufacturer’s invoice, the middleman issued its own commercial invoice to the importer on the same day, June 7, 2002. In accordance with the terms of the letter of credit, payment was made to the middleman for the full amount of the commercial invoice, as confirmed by the payment advice The total amount confirmed paid includes payment against another one of the middleman’s invoices not at issue in the instant protest, invoice number: xxxxx, in addition to payment against the middleman’s invoices numbered: xxxxx and xxxxx. Counsel for the Protestant made a copy of middleman invoice number: xxxxx available to CBP upon request.. The middleman, in turn, transferred a portion of the funds to the manufacturer, as reflected on the payment advice The transferred amount also included the amount the middleman transferred to the manufacturer in payment for the merchandise the middleman sold to the importer under invoice number: xxxxx, which is not at issue in this protest. .

Entry Number: xxxxxxxxxxxxxxxxxxxx

The merchandise imported pursuant to Entry Number: xxxxxxxxxxxx, according to counsel for the importer, was purchased and imported pursuant to the same three-tiered arrangement and involved the same parties as those at issue in Entry Number: xxxxxxxxxxxxxxxx addressed above. Documents submitted with the importer’s AFR evidence a transaction similar to that addressed for Entry Number: xxxxxxxxxxxxxxx. The only significant difference in the business transactions between the two entries is that in the second entry the middleman provided an assist to the manufacturer. The assist took the form of fabric.

The importer advises CBP that the middleman purchased fabric from xxxxxxxxxxxxxxxx xxxxxxxxxxxxxxx, (hereinafter the fabric manufacturer), as evidenced by the commercial invoices issued to the middleman. The fabric manufacturer issued three invoices to the middleman, invoice number xxxxxxxxxxx00, dated March 18, 2002; invoice number xxxxxxxx07, dated April 17, 2002; and invoice number xxxxxxxxxxxxxx03, dated April 2, 2002.

The middleman requested on March 25, 2002 that a wire transfer be made to the fabric manufacturer in payment against invoice number xxxxxxxxx00. The payment breakdown on the wire transfer request demonstrates that payment was being made against invoice number xxxxxxxxxxxxxx00. On April 25, 2002, the middleman requested that another wire transfer be made to the fabric manufacturer for payment against invoice numbers xxxxxxxxxxxxxx03 The payment breakdown on the wire transfer request references invoice number: xxxxxxxxxxx, not xxxxxxxxxxxxxx. CBP was advised by counsel that this was a typographical error. Counsel noted that the dollar amount and fabric description referenced on the wire transfer request match that of invoice number: xxxxx. and xxxxxxxxxxxxxx07. This wire transfer request also contains a payment breakdown demonstrating payment against both fabric invoices.

Since the fabric was provided to the garment manufacturer free of charge, the importer acknowledges that it constitutes an assist for CBP valuation purposes. The commercial invoices issued by the manufacturer to the middleman only reflect the cutting, sewing and quota costs of the merchandise. The cost of the fabric used by the manufacturer to produce the imported merchandise must, according to the importer, be added to the price actually paid or payable by the middleman to the manufacturer, as the manufacturer’s commercial invoice does not include this amount.

The importer advises CBP that since the fabric invoices also cover the middleman’s purchase of fabric used to produce merchandise imported under other entries not subject to the instant AFR, counsel has provided a spreadsheet offering an itemization of the fabric invoices and a cost analysis of the merchandise at issue. The items listed are stated by counsel to represent the fabric purchased by the middleman for the subject garments and used in their production. Each batch of fabric in the itemization is identified by the style number of the article it was used to produce. The figure identified as the “Total Fabric Cost” represents the amount of the assist to be added to the price actually paid or payable to the fabric manufacturer. The amount identified as “profit” is stated by counsel to represent the middleman’s profit. The middleman’s commercial invoice amount, as counsel advises, includes the manufacturer’s invoice, plus the price the middleman paid the fabric manufacturer.

A comparison of the middleman’s profit in this entry to the previously discussed entry reveals that the middleman’s mark-up, expressed as a percentage, varies depending on the transaction, a factor which counsel suggests is reflective of the middleman’s role as an independent buyer and seller and not as that of an agent. An agent, the importer suggests, would typically receive its compensation in the form of a fixed percentage of the price of the merchandise.

Counsel specifically states that ‘[i]n all other respects the circumstances surrounding the purchase and importation of the merchandise imported under the subject entry mirror those discussed above.” Submission of Counsel, April 30, 2004, at 5. Counsel for the importer further states that “[w]e incorporate by reference our discussion regarding entry number xxxxxxxxxxxxx to likewise support appraisement of the subject merchandise based upon the price paid by the middleman to the foreign manufacturer, with the appropriate additions being made for the fabric assists provided by the middleman.” Id.

ISSUE

Did Customs and Border Protection properly liquidate the entries subject to this protest appraising the imported merchandise using the transaction value between xxxxxxxxxxxxxxxxx xxx, the importer, and xxxxxxxxxxxx, the middleman, or should the entries have been appraised and liquidated based on the transaction value between the middleman and xxxxxxxxxxxxxxxx, the foreign manufacturer ?

LAW AND ANALYSIS

The federal agency responsible for interpreting and applying the United States Code and the regulations of U.S. Customs and Border Protection, as they relate to the final appraisement of merchandise, is Customs and Border Protection. See 19 U.S.C. 1500 (West 1999) (providing that Customs and Border Protection (CBP) is responsible for fixing the final appraisement, classification and amount of duty to be paid); See also Joint Explanatory Statement of the Committee of Conference, H.R. Conf. Rep. No. 100-576, at 549 (1988) reprinted in 1988 U.S. Code Cong. and Adm. News 1547, 1582. Customs and Border Protection, in accordance with its legislative mandate, fixes the final appraisement of imported merchandise in accordance with Section 402 (b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979. See 19 U.S.C. 1401a (West 1999); See generally, What Every Member of The Trade Community Should Know About: Customs Value, an Informed Compliance Publication of Customs and Border Protection available on the World Wide Web site of CBP at: www.cbp.gov. The preferred method of appraisement is transaction value. The transaction value of imported merchandise is the “price actually paid or payable for merchandise when sold for exportation to the United States,” plus amounts for any statutory additions. See 19 U.S.C. 1401a (b)(1).

Sale for Exportation to the United States

Merchandise must be the subject of a bona fide sale, the sales transaction must be conducted at arm’s length, the sale must be for exportation to the United States and CBP must be advised of all statutory additions to be added to the price actually paid or payable, in order for imported merchandise subject to a multi-tiered transaction to be appraised pursuant to the sale from the manufacturer to the middleman. The Court of Appeals for the Federal Circuit in Nissho Iwai American Corp. v. United States, 786 F. Supp. 1002 (Ct. Int’l Trade 1992) rev’d in part 982 F. 2d 505 (Fed. Cir. 1992), and the Court of International Trade in Synergy Sport Int’l, Ltd. v. United States, 17 C.I.T. 18 (Ct. Int’l Trade 1993) addressed the valuation of merchandise imported pursuant to three-tiered distribution arrangements. The parties in the Nissho Iwai and Synergy Sport transactions were the foreign manufacturer, the middleman and the United States buyer. The courts in Nissho Iwai and Synergy Sport held that the price paid by the middleman to the manufacturer could be acceptable as the “sale for export to the United States” for the purpose of using the transaction value method of appraising imported merchandise. Id. The Court of Appeals in Nissho Iwai held that
where there is a legitimate choice between two statutorily viable transaction values.[t]he 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. Nissho Iwai supra at 509.

The Nissho Iwai court further stated that determinations of this nature may only be made on a “case-by-case” basis. Id.

The Customs Service, CBP’s predecessor, in response to the Nissho Iwai and Synergy Sport decisions and in an effort to further clarify those multi-tiered transactions in which the price paid or payable by a party other than the importer will be acceptable as the sale for exportation to the United States issued Treasury Decision 96-87. See 31 Cust. B. & Dec. No. 1 (Jan. 2, 1997) [hereinafter T.D. 96-87]. T. D. 96-87 advises that CBP presumes that the price paid or payable by the importer is the proper basis of transaction value and that the burden of rebutting this presumption rests with the importer. The T.D. further states the requirements and means by which an importer may overcome the presumption.

The importer, in order to rebut the presumption of T.D. 96-87, must establish by sufficient information “that at the time the middleman purchased, or contracted to purchase, the goods were ‘clearly destined for export to the United States’ and the manufacturer (or other seller) and middleman dealt with each other at ‘arm’s length’.” Id. The importer must provide CBP with a description of the roles of the parties involved and must supply relevant documentation addressing each transaction that was involved in the exportation of the merchandise to the United States. The documents may include, but are not limited to “purchase orders, invoices, proof of payment, contracts and any additional documents (e.g. correspondence)” that establish how the parties deal with one another. Id. The objective is to provide CBP with “a complete paper trail of the imported merchandise showing the structure of the entire transaction.” Id.

T. D. 96-87 further states that the ruling requester must also provide CBP with sufficient information regarding the amounts, if any, of the statutory additions set forth in 19 U.S.C. 1401a (b)(1). The requester must not only inform CBP of any statutory additions, but must also advise CBP of the amount of those additions. If the ruling requester or the importer does not have this information, the sale between the middleman and the manufacturer cannot form the basis of transaction value.

The importer in the instant application for further review is xxxxxxxxxxxxxxxxxxxxxxxx. CBP, therefore, presumes that the price between the importer and xxxxxxxxxxxxx, the middleman, should be the value. In order to rebut this presumption and to base transaction value on the transaction between the middleman and xxxxxxxxxxxxxxxxx, the foreign manufacturer, CBP must be provided with sufficient information to demonstrate: (1) The sales between the middleman and the foreign manufacturer were bona fide sales; (2) The transactions between the middleman and the foreign manufacture were “arm’s length” transactions; (3) The merchandise was “clearly destined” for exportation to the United States when the middleman purchased or contracted to purchase the merchandise from the manufacturer; and (4) The amount, if any, of any statutory additions that must be added to the price actually paid or payable in the sales between the middleman and the foreign manufacturer.

Bona Fide Sale

The sale between the manufacturer and the middleman must be a bona fide sale in order for that sale to be accepted as the transaction value. The term “sale” is not defined, however, in either the value statute or CBP regulations. Customs and Border Protection must, therefore, look to jurisprudence for assistance in providing meaning to this term.

The Court of Appeals for the Federal Circuit in J.L. Wood v. United States, 505 F.2d 1400, 1406 (Fed. Cir. 1974) defined “sale” as the transfer of property from one party to another for consideration. No single factor is deemed to be conclusive in determining whether a sale exists. The relationship between the parties, as to whether they are functioning as buyer and seller, can only be ascertained by a review of the entire situation. See Dorf Int’l, Inc. v. United States, 61 Cust. Ct. 604, A.R.D. 245 (1968); see also HQ 547672 (May 21, 2002). One of the factors in determining whether a transfer of property or ownership has occurred is “whether the alleged buyer has assumed the risk of loss, and whether the buyer has acquired title to the imported merchandise.” HQ 547436 (Aug. 10, 2000); See HQ 544775 (April 3, 1992), HQ 543663 (July 7, 1987). Customs and Border Protection will also examine the “roles of the parties and the circumstances of the transaction” to determine if the parties are interacting as buyer and seller. See HQ 545474 (Aug. 25, 1995). See generally, What Every Member of The Trade Community Should Know About: Bona Fide Sales and Sales for Exportation, an Informed Compliance Publication of Customs and Border Protection.

It is the conclusion of this office, based on the information provided by the Protestant, that the sales between the middleman and the foreign manufacturer were bona fide sales. The commercial documents that were generated, particularly the purchase orders, pro forma invoices, invoices and payment documents indicate bona fide sales. This conclusion is further supported by the fact that the terms of sale between the middleman and the foreign manufacturer were such that the middleman took title and assume the risk of loss from the manufacturer at the port of lading when the merchandise crosses the ship’s rail. The manufacturer’s invoice notes the terms of sale to be F.O.B. Hong Kong.

CBP is aware that the middleman’s invoice to the importer also notes terms of sale “FOB Hong Kong.” Although simultaneous transfer of title or “flash title” caused CBP to more closely scrutinize the transactions to confirm that there were, in fact, two viable transactions, the simultaneous transfer of title does not by itself preclude a finding of more than one viable sale. See HQ 546316 (May 29, 1995).

In this instance, CBP concludes that there were two viable transactions on which transaction value could be determined overcoming the possibility that the simultaneous transfer of title from the seller to the middleman and then to the buyer-importer could indicate the existence of an agency relationship and only one viable sale. The payment documents presented to CBP by the importer indicate two sales and two transfers of ownership in exchange for consideration. The circumstances of these sales, as counsel suggests, further indicate that the middleman’s profit varies by transaction rather than the middleman receiving the same, consistent return on each transaction that would be suggestive of the type of return an agent might receive.

The importer also advises CBP that that the middleman is responsible to the importer for merchandise that might be defective, rather than the importer seeking resolution of such a situation directly from the manufacturer. CBP has not sought documentary evidence of such claims, but is informed by counsel that examples of claims by the importer against the middleman are available.

Customs and Border Protection additionally took note of the fact that the manufacturer’s invoices state that the merchandise was sold for the “account and risk of” the middleman and that the manufacturer sought payment from the middleman, not the importer. These factors, in conjunction with the others addressed, lead CBP to conclude that the manufacturer and the middleman assumed the roles of a buyer and a seller, and that two viable, bona fide sales occurred.

Although the merchandise was shipped directly to the importer by the manufacturer, this fact alone does not preclude the conclusion that bona fide sales occurred. See HQ 547436 (Aug. 10, 2000). In the protested transaction, sufficient documentation, assumptions of risk and transfers for title, and proof of legitimate payment lead CBP to conclude that two viable sales occurred, in particular, a sale between the middleman and the manufacturer, and a subsequent sale between the middleman and the importer.

Arm’s Length Transaction

The Nissho Iwai decision and T.D. 96-87 state that the manufacturer and the middleman must “deal with each other at arm’s length” and that there may be no “non-market influences that affect the legitimacy of the sales price.” Nissho Iwai supra at 509. Customs and Border Protection regulations define “related parties” in 19 U.S.C. 1401a (g)(1) and provide, in part, that imported merchandise may be appraised pursuant to the transaction value method when the “[t]he buyer and seller are not related.” 19 U.S.C. 1401a (b)(2)(A)(iv).

CBP presumes that unrelated parties transact business with one another at “arm’s length.” See HQ 548504 (June 3, 2004). In addition, CBP notes a statement submitted by the president of the middleman for the relevant period of these entries suggesting that the middleman was not related to the foreign manufacturer nor to the importer. Thus, for purposes of this ruling, CBP assumes that the middleman and the manufacturer were not related and that the price actually paid or payable by the middleman is one that was negotiated at arm’s length and was not subject to any non-market influences.

“Clearly Destined” for the United States

Section 1401a (b)(1) defines transaction value as the price actually paid or payable for the imported merchandise “when sold for exportation to the United States,” plus the amounts of the statutory additions. See generally, What Every Member of The Trade Community Should Know About: Bona Fide Sales and Sales for Exportation, an Informed Compliance Publication of Customs and Border Protection. The phrase “when sold for exportation to the United States” has been interpreted by the Nissho Iwai court and subsequently in T.D. 96-87 to mean that, in multi-tiered transactions, at the time the manufacturer and middleman conclude their agreement the goods that are the subject of the sale must be “clearly destined for export to the United States.”

The transaction set forth by the importer conforms to section 1401a (b) and establishes that at the time of the sale between the middleman and the manufacturer the merchandise was “clearly destined for export to the United States.” The “paper trail” linking purchase orders, pro forma invoices, invoices and payment documents confirms that the merchandise imported by the importer was “clearly destined” for the United States when it was ordered by the middleman from the manufacturer.

Customs and Border Protection notes that the merchandise was shipped directly to the importer by the manufacturer. The invoice from the manufacturer to the middleman confirms direct shipment to the United States from the country of manufacture. This fact, in conjunction with the fact that the manufacturer’s invoices note the importer’s purchase order numbers, garment style numbers and the middleman’s pro forma invoice numbers, indicate that the merchandise was “clearly destined for export to the United States” when it is ordered by the middleman from the manufacturer.

Statutory Additions

The final element that must be established in order to rebut the presumption that the price paid to the middleman by the importer should be the value involves the statutory additions to the price actually paid or payable that are set forth in 19 U.S.C. 1401a (b)(1). Section 1401a (b)(1) provides that amounts equal to the following must be added to the price actually paid or payable:

(A) the packing costs incurred by the buyer with respect to the imported merchandise; (B) any selling commissions incurred by the buyer with respect to the imported merchandise; the value, apportioned as appropriate, of any assist; any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States; and (E) the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.

Customs and Border Protection must be provided sufficient information to confirm, as between the middleman and the manufacturer, that there are no statutory additions or the nature and amount of the statutory additions that must be made to the price actually paid or payable.

The importer, though its counsel, advised CBP that as relates to entry number: xxxx xxxxxxxxxx, the middleman purchased fabric from the fabric manufacturer and provided the fabric free of charge to the garment manufacturer. The fabric purchased by the middleman and used in the production of the imported garments is an assist as defined in 19 C.F.R. 152.102 (a)(1)(i). The fabric was material that was incorporated into the imported merchandise and was supplied free of charge by the buyer, in this instance the middleman, to the manufacturer. The fabric that was supplied by the middleman to the manufacturer that became waste product subsequent to the manufacturing process, in essence scrap material, is an assist in that it is considered by CBP to be “[m]erchandise that was consumed in the production of the imported merchandise.” 19 C.F.R. 152.102(a)(1)(iii). See HQ 545909 (Nov. 30, 1995).

HOLDING

The protest of xxxxxxxxxxxxxxxxxxxxxxxxx, the Protestant and importer, is GRANTED.

In accordance with the decision of the court in Nissho Iwai American Corp. v. United States, the appraised value may be based on the sale from the manufacturer to the middleman.

In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2002, pp. 18 and 21), you are to mail this decision, together with the Customs Form 19, 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 of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Virginia L. Brown, Chief

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