HQ 563420 - Sale for Exportation to the United States; Nissho Iwai; Multi-tiered Transactions; “Clearly Destined” for the United States. - United States International Trade Commision Rulings

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HQ 563420

April 14, 2006

CLA-02 RR:CTF:VS 563420 EAC

CATEGORY: VALUATION

Mr. R. Kevin Williams
Rodriguez O’Donnell Ross Fuerst
Gonzalez Williams & England, P.C.
8430 West Bryn Mawr Ave.
Suite 525
Chicago, IL

RE: Sale for Exportation to the United States; Nissho Iwai; Multi-tiered Transactions; “Clearly Destined” for the United States.

Dear Mr. Williams:

This is in response to your letter of December 20, 2005, submitted on behalf of Mr. Dan Nahmiach, Consulting Services, Omnitrans, Inc. (hereinafter “Omnitrans”), requesting a ruling pertaining to the valuation of merchandise imported into the United States. We have additionally considered the information provided in your supplemental submission of February 3, 2006, and electronic message of April 12, 2006.

FACTS:

ABC Canada will import sweaters and t-shirts into Canada from an unrelated foreign manufacturer for storage prior to shipping the sweaters and t-shirts to retail customers in the United States. You state that the retail customers in the United States are also unrelated to ABC Canada. The sweaters and t-shirts will be shipped to the United States in the same condition as imported into Canada and no value will be otherwise added to the merchandise in Canada. It is claimed that the sweaters and t-shirts will be labeled in accordance with U.S. labeling laws for textiles and that such labels will not satisfy similar Canadian labeling laws. The sweaters and t-shirts will be imported into the United States through the ports of Buffalo and Champlain in New York.

In describing the multi-tiered transactions under consideration in this case, you state that the various U.S. retailers will initially provide ABC Canada with confirmed purchase orders as well as with “forecast” orders for additional amounts of merchandise that may be required. Based upon these confirmed and forecast orders, ABC Canada will issue a “tentative” purchase request to the foreign manufacturer. Prior to actual shipment of the merchandise by the foreign manufacturer, ABC Canada will: (1) obtain confirmed purchase orders from the U.S. retailers for all required merchandise and (2) will subsequently confirm its own purchase order with the foreign manufacturer. It is stated that the purchase order confirmation will constitute the contract of sale between ABC Canada and the foreign manufacturer.

Six sample purchase orders were included with your submission. The sample purchase order between the foreign manufacturer and ABC Canada is for 2400 articles of apparel (consisting of sweaters and t-shirts) and provides, in pertinent part, that:

The merchandise shall be labeled in accordance with all applicable U.S. laws and regulations, including the Textile Fiber Products Identification Act, the Care Labeling Rules, and country of origin marking requirements. The merchandise shall be intended for sale only in the Customs territory of the United States.

This sample purchase order also indicates that the merchandise will ultimately be delivered to the United States. The five sample purchase orders between ABC Canada and the U.S. retailers account for the distribution of the 2400 pieces of apparel and state, in pertinent part, that:

This merchandise is in accordance with the details and specifications of the purchase order number(s) listed above, including any addendums, and all merchandise covered by this invoice meets all labeling instructions and rules as specified in the FTC labeling rules. All goods have been marked in accordance with U.S. laws, rules and regulations, including U.S. customs origin marking laws. These goods are irrevocably destined to the U.S. Diversions outside of the U.S.A. or its territories are not permitted.

The purchase orders between ABC Canada and the U.S. retailers further indicate that the merchandise will be shipped to five different locations within the United States. In addition to the above-referenced purchase orders, you have provided a bill of lading, packing list, pro forma invoices, shipping and distribution manifests, and separate invoices reflecting the various shipments and transactions between the parties.

After shipment by the foreign manufacturer, ABC Canada will enter the goods into Canada under a “duty relief license” or into a “bonded warehouse.” You advise that ABC Canada’s application for a duty relief license in Canada is granted by the Canadian customs authorities on the assumption that the apparel is intended only for direct export sale from Canada and that failure to comply with the terms of the program can result in the assessment of penalties under Canadian law. You further state that ABC Canada’s application to operate a bonded warehouse in Canada indicates that the imported merchandise will be withdrawn only for exportation and that ABC Canada’s failure to comply with this condition can also result in penalties assessed under Canadian law.

The foreign manufacturer will invoice ABC Canada when the merchandise is actually shipped to Canada. The U.S. retailers will be issued an invoice after the merchandise is imported into the United States and will thereafter make payment to ABC Canada. The merchandise will be shipped to the United States retailers on an as needed basis or according to an agreed upon schedule. ABC Canada will act as a non-resident importer when the merchandise is imported into the United States. In the event that a U.S. retailer cancels an order, the merchandise will be stored in the Canadian duty-deferral warehouse until another U.S. buyer is identified and new sale completed. As noted, it is claimed that the merchandise will not enter the commerce of Canada and that no Canadian duty will be paid on the goods. Based upon the foregoing, you contend that the imported merchandise should be appraised on the basis of the transaction between ABC Canada (the “middleman”) and unrelated manufacturer.

ISSUE:

Whether the imported merchandise may be appraised on the basis of the transaction between the middleman and manufacturer.

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”), codified at 19 U.S.C. §1401a. Section 402(b)(l) 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. In order for imported merchandise to be appraised under the transaction value method it must be the subject of a bona fide sale between a buyer and seller, and it must be a sale for exportation to the United States.

The courts have had the opportunity to address the issue of the use of the transaction value method in multi-tiered transactions (involving foreign middlemen and foreign manufactures). In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit addressed the method for determining the use of transaction value in a three-tiered distribution system involving a foreign middleman. The court indicated that a manufacturer's price for establishing transaction value is valid so long as the transaction between the foreign manufacturer and the foreign middleman falls within the statutory provision for valuation. In this regard, the court stated that in a three-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 sale price.

Id. at 509. See also, Synergy Sport International, Ltd. v. United States, 17 C.I.T. 18 (1993).

In response to the decision in Nissho Iwai American Corp. v. United States, U.S. Customs and Border Protection (“CBP”) issued its official position on the application of that decision in the form of a Treasury Decision (“T.D.”). In T.D. 96-87, Determining Transaction Value in Multi-Tiered Transactions, Vol. 30/31, Customs Bulletin No. 52/1, (January 2, 1997), CBP clarified some of the issues that arise in multi-tiered transactions in determining which sale is the sale for exportation to the United States for the purposes of determining transaction value. T.D. 96-87 states, in part, that:

[I]n fixing the appraisement of imported merchandise, 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 export to the United States" and the manufacturer (or other seller) and middleman dealt with each other at "arm's length." In reaching a decision, Customs must ascertain whether the transaction in question falls within the statutory provision for valuation, i.e., that it is a sale, that it is a sale for exportation to the United States in accordance with the standard set forth above, and that the parties dealt with each other at "arm's length." As stated in Nissho Iwai, these questions are determined case-by-case on the evidence presented.

T.D. 96-87 also identifies the documentation and information required to support a determination that transaction value should be based on a sale involving a middleman and the manufacturer or other seller rather than on the sale to which the importer is a party. First, a complete paper trail of the imported merchandise showing the structure of the entire transaction must be provided. Second, if the parties to the requested transaction are related, the importer must provide CBP with information that demonstrates that transaction value may be based on the related party sale as provided in 19 U.S.C. §1401a(b)(2)(B) (i.e., that the circumstances of sale indicate that the relationship did not influence the price or that the transaction value closely approximates certain test values). Finally, sufficient information must be provided with regard to the statutory additions set forth in 19 U.S.C. §1401a(b)(1) (i.e., packing costs, selling commissions, assists, royalty or license fees, and proceeds of any subsequent sale), for the alleged sale between the manufacturer and the middleman.

With respect to the documentation required for the importer to rebut the presumption that the price paid by the importer is the basis of transaction value, T.D. 96-87 states that:

In order for an importer to rebut the presumption[that the price paid by the importer is the basis of transaction value], certain information and documentation must be provided. Specifically, 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. correspondence) which demonstrate how the parties dealt with one another and which support the claim that the merchandise was clearly destined to the United States. If any of these documents do not exist, or exist but are not available, the ruling request should so provide. What we are looking for is a complete paper trail of the imported merchandise showing the structure of the entire transaction.

In summary, the public should be aware that CBP presumes that transaction value is based on the price paid by the importer and in order to rebut this presumption and prove that transaction value should be based on some other price, complete details of all the relevant transactions and documentation (including purchase orders, invoices, evidence of payment, contracts and other relevant documents) must be provided, including the relationship of the parties and sufficient information regarding the statutory additions.

It should be noted that CBP’s rulings are normally based on the evidence submitted when the ruling request is received. Although, CBP is not precluded from requesting additional information, this will not be done routinely. If insufficient evidence is provided, the claim will be denied as noted in Headquarters Ruling Letter (“HRL”) 548520 dated July 30, 2004.

Bona Fide Sale

The term "sale," as articulated in the case of J.L. Wood v. United States, 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974), is defined as the transfer of property from one party to another for consideration. In considering whether a bona fide sale has taken place between a potential buyer and seller of imported merchandise, however, 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 particular case itself. See, Dorf International, Inc. v. United States, 61 Cust. Ct. 604, A.R.D. 245, 291 F. Supp. 690 (1968).

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, CBP considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, CBP 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 this case, we note that the transactions described above are prospective in nature and that certain commercial documents normally generated during the course of an actual transaction (such as proof of payment) may not be available. However, the sample commercial documents provided (such as purchase orders and invoices) seem to indicate a bona fide sale will occur. Moreover, we are informed that ABC Canada and the manufacturer are not related and will freely negotiate the price of the goods. Accordingly, it is our opinion based on the information before us that the sale between ABC Canada and the manufacturer would constitute a bona fide sale.

Clearly Destined for Export to the United States

The next issue that must be considered in this case is whether the evidence presented demonstrates that the merchandise is clearly destined for export the United States. As noted in HRL 547382, a multi-tiered transaction case dated February 14, 2002, our prior rulings indicate that CBP hesitates to find a sale for export where merchandise is not shipped directly to the United States. See, for example, HRL 542310 dated May 22, 1981 (drill bits manufactured in Italy and stored in France for an indefinite period are not sold for exportation to the United States because when sold they could end up either with a U.S. or European customer) and HRL 542962 dated December 29, 1982 (no sale for exportation when a motorcycle was purchased in Japan for the purpose of being used for an extended period overseas before being imported into the United States). Thus, as further indicated in HRL 547382, the presumption is that merchandise shipped to a foreign party and location is not sold for export to the United States. In order to rebut this presumption, the importer must present sufficient evidence to show that the merchandise is clearly destined for export to the United States at the time of sale to the middleman. Id.

In HRL 547349 dated May 5, 2000, a U.S. retailer ordered apparel from an unrelated non-resident importer. The non-resident importer consolidated that order with other orders from U.S. and non-U.S. companies to form a master purchase order or "docket" which was then sent to unrelated factories. The docket stated, in part, that the garments were to be marked and labeled pursuant to U.S. country of origin and labeling laws & regulations. Thereafter, the factories produced the apparel and fastened labels containing sizing and country of origin information, as well as hangtags indicating the U.S. destination. The factories delivered the finished garments to the non-resident importer along with a consolidated invoice. The invoice provided that the garments met all U.S. labeling and country of origin marking requirements. As the apparel was sourced from various factories, the non-resident importer temporarily warehoused the apparel intended for the United States (or other country) for 3-5 days until a particular customer’s order was filled. Prior to such warehousing, the garments underwent a quality control inspection performed by the non-resident importer. Garments that did not pass this inspection were either destroyed or used as samples. It was additionally noted in this case that the garments were not sized separately with U.S. or European sizes and that all labels, regardless of destination, were printed in English. In consideration of such facts, CBP held that the merchandise was not clearly destined for export to the United States when sold to the non-resident importer middleman. In support of this determination it was noted that up to 10 percent of the garments did not pass the quality control inspections and were not exported to the United States. Moreover, there was nothing unique about the purported U.S.-destined merchandise that might show that the garments could be used in the United States as opposed to some other country.

In HRL 547825 dated July 16, 2001, CBP considered a case where a company operated a chain of retail outlets in the United States. The company forwarded merchandise forecast orders each season to a related company in Canada that, in turn, placed a single consolidated purchase order with a buying agent or directly to foreign suppliers. The shipments from the foreign suppliers, which contained merchandise intended both for the Canadian and U.S. markets, were consigned to a central warehouse in Canada for storage and deconsolidation and were entered into Canada under a duty deferral program. Under the terms of the duty deferral program, duty was imposed only when merchandise was subsequently sold in Canada. In considering whether the merchandise was clearly destined for export to the United States when sold to the middleman, CBP noted that there was nothing in the commercial documents pertaining to the sale from the manufacturer that referenced the U.S. destination of the commingled merchandise. Moreover, there was nothing unique about the purportedly U.S.-destined merchandise that would prevent diversion into the Canadian market. Therefore, CBP held that the goods were not clearly destined for export to the Untied States when sold to the middleman because no evidence was offered to refute the possibility that a contingency of diversion existed.

In this case, you have submitted various commercial documents in order to show how the prospective transactions will be structured. Such documents include a bill of lading, packing list, purchase orders, pro forma invoices, shipping and distribution manifests, and invoices. The sample purchase order between ABC Canada and the manufacturer states that the merchandise is to be sold only in the United States and that the merchandise will be ultimately delivered to U.S. addresses. The shipping documents (i.e., bill of lading and packing list) further indicate that the ultimate delivery addresses are in the United States. We further note that the purchase order between ABC Canada and the manufacturer corresponds with the subsequent purchase orders and invoices between ABC Canada and the U.S. retailers with regard to article (sweater or t-shirt), color (brown, tan, white, or black), fabric (wool or cotton), and quantity ordered. As established above, we are additionally advised that the sweaters and t-shirts, which will be entered into Canada under a duty relief license or into a bonded warehouse, will be labeled in accordance with all U.S. labeling laws for textiles and that such labels will not satisfy applicable Canadian labeling laws.

The specific facts set forth above and paper trail established by the commercial documentation provided, indicate that there will be no contingency of diversion in this case. Therefore, we find that sufficient information has been provide to show that the subject merchandise will be clearly destined for export to the United States at the time ABC Canada purchases, or contracts to purchase, the goods from the manufacturer.

Arm’s Length

Under Nissho, the sale between ABC Canada and the manufacturer must have been conducted at arm’s length in order to serve as the basis for transaction value. CBP presumes that unrelated parties transact business with one another at arm’s length. You assert that ABC Canada and the manufacturer are unrelated parties. Therefore, without evidence to the contrary, we presume that the transaction between the parties satisfies the arm’s length requirement of Nissho.

Statutory Additions

The final element that must be established in order to rebut the presumption that the price actually paid or payable by the importer to the middleman is the transaction value involves the statutory additions to the price 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:
the packing costs incurred by the buyer with respect to the imported merchandise;
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
the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.

CBP must be provided sufficient information to confirm, as between ABC Canada and the manufacturer, that there are no statutory additions or, alternatively, must be advised of the nature and amount of the statutory additions that must be added to the price actually paid or payable. See, for example, HRL 548494 dated January 26, 2005. In this case, you advise that there are no statutory additions that must be made to the price actually paid or payable between the ABC Canada and manufacturer.

HOLDING:

The information presented in this case indicates that the sale between the manufacturer and middleman (ABC Canada) would constitute a bona fide sale conducted at arm’s length and that the merchandise will be clearly destined for export to the United States at the time the middleman (ABC Canada) purchases, or contracts to purchase, the merchandise. Therefore, we find that the price paid between the manufacturer and middleman (ABC Canada) may serve as the basis of appraisement under transaction value for the imported merchandise.

Section 177.9(b)(1), U.S. Customs and Border Protection Regulations (19 CFR 177.9(b)(1)), provides that "[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect." The application of a ruling letter by a CBP field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.

A copy of this ruling letter should be attached to the entry documents at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.

Sincerely,

Monika Brenner, Chief

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