VAL CO:R:C:V 545254 LR

District Director of Customs
909 First Avenue
Seattle, WA 98174

RE: Request for Reconsideration of IA 3/91 (HRL 544714); sale for exportation; clearly destined for the United States

Dear Sir:

This is in response to your memorandum dated February 12, 1993, forwarding a request for reconsideration of Internal Advice 3/91 (HRL 544714), dated March 3, 1992. The request was submitted by counsel on behalf of Travelway Group International, Inc. ("Travelway"). We regret the delay in responding.

FACTS:

On October 3, 1990, Travelway, a Canadian corporation, filed an entry for 7,862 duffle bags at Blaine, Washington. The entered value was $41,983.08, the price Travelway paid the foreign seller. In HRL 544714, Customs determined that based on the information presented, the sale between Travelway and the foreign seller was not a sale for exportation to the United States and ruled that the transaction value of the merchandise should be based on the transaction between Travelway and Oakley Inc. ("Oakley"), the ultimate consignee in the U.S. The underlying facts will not be repeated here. Relevant excerpts from the March 3, 1992 decision follow:

In the present case there are two sales that we must examine to determine whether there was a sale for exportation to the U.S. From the documentation presented at the time of entry, it appears that the first sale was between China National Light Industrial Products ("China National") and Travelway, although as previously discussed Gem Fastival Limited appears to have played some type of role in this transaction. The only "commercial invoice" available for the China National/Travelway sale is the Textile Export License/Commercial Invoice. This document, dated September 10, 1990, indicates that the merchandise was shipped "From Guandong China to Inglewood, California via Hong Kong by Sea in Sep., 1990".

All of the other documents in the file indicate that the merchandise was shipped from Hong Kong on or about July 24, 1990. Moreover, based on the information contained in the shipping documents and the information the NIS obtained though ACS and AMS, we must conclude that the merchandise went from Hong Kong to Canada in July of 1990, not to the U.S. Therefore, the sale between China National and/or Gem Fastival Ltd. and Travelway was not a sale for exportation to the U.S.

The second sale of the merchandise occurred between Travelway and Oakley. It appears from the documents in the file that Travelway exported the goods from Canada to Oakley in California on or about October 3, 1990....

... [it] appears that the goods were sold by Travelway to Oakley for exportation to the U.S. Therefore, this sale can serve as the basis of transaction value.

Your office has orally advised that the above decision has not yet been implemented and that the entry in question has not been liquidated. In addition, we are advised that no action is being taken with respect to a pre-penalty notice issued to Travelway in connection with the entry of the duffle bags in question pending our decision on the reconsideration.

In its request for reconsideration, counsel has presented additional information clarifying the circumstances surrounding the importation in question. We are advised that after Oakley placed its order with Travelway for 7,862 nylon duffle bags bearing the Oakley logo, Travelway placed an order with Gem Fastival ("Gem"), a Hong Kong company, who arranged for their manufacture in China. Counsel indicates that Travelway is not related to Gem and that the price was negotiated at arm's length. The file contains Gem's Invoice No. 90/132/133, to Travelway, dated July 21, 1990, for 7,862 duffle bags, with mark "OAK" USA, at a price of $41,983.08. Counsel indicates that rights to the Oakley logo are exclusively held by Oakley.

Counsel does not dispute the finding in the original decision that the duffle bags went from Hong Kong to Canada before entering the United States. Nonetheless, it argues that there was a sale for exportation to the United States because the shipment was never entered for consumption in Canada, and no contingency of diversion existed with regard to an alternative disposition of the goods. In this regard, counsel points to the fact that the Oakley bags were bonded goods for which Travelway had no license or intent to re-sell, and were in-bond at all times from the time the ship docked in Vancouver until the merchandise was entered at Blaine Washington. It notes that Travelway entered a contract with the seller, Gem, based solely on the Oakley order to Travelway and that there was no other buyer to whom Travelway would have, or could have, sold the shipment.

According to counsel, due to the forwarder's logistical setup, which concentrated Pacific Ocean operations in Vancouver, rather than a West Coast U.S. port, the bags were shipped in-bond to Vancouver, Canada before arriving in Blaine, Washington. According to counsel, the Oakley bags were in-bond from the time the ship docked in Vancouver until the merchandise was entered at Blaine, Washington. Counsel states that in Canada, the only manipulation of the goods was stripping out the merchandise which was rejected by Oakley and returning it to Hong Kong. (Oakley allegedly rejected one item in the shipment based on a pre- production sample after the container ship was en route.) Counsel has submitted copies of shipping and in-bond documents in support of its claim that the involved merchandise was clearly destined for Oakley in the U.S. throughout the transportation cycle that ended with the subject entry. Included are the in- bond documents filed by Schenker of Canada (freight forwarder), including the Canada Export Declaration used to close out the Canada in-bond requirements. Counsel indicates that while in Canada, the merchandise was retained in Schenker's bonded warehouse in Burnaby, British Columbia.

Counsel claims that based on the decisions in Nissho Iwai American Corp. v. United States, No. 92-1239, Slip Op. (Fed Cir. Dec. 28, 1992) and E.C. McAfee Co. v. United States, 842 F.2d 314; 6 Fed.Cir.(T) 92 (Fed. Cir. 1988), the proper basis of valuation of the involved entry is under transaction value, represented by the amount paid or payable by Travelway to the manufacturer ($41,983.08), since this is the actual sale for exportation to the United States. Your office indicates that reconsideration may be warranted based on recent court decisions.

ISSUE:

Whether transaction value for the imported goods should be based on the sale between Travelway and the Hong Kong seller, or on the sale between Travelway and Oakley.

LAW AND ANALYSIS:

The method of appraisement is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreement 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 enumerated additions. (emphasis added)

The "price actually paid or payable" is defined in section 402(b)(4)(A) of the TAA as "the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise...) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller."

Several court decisions have addressed the issue of determining transaction value in a three-tiered distribution arrangement; specifically, whether a sale from a foreign seller to a foreign distributer was a proper transaction value. In E.C. McAfee, supra the goods at issue were made-to-measure clothing for individual United States customers. The customers placed an order with a middleman, a Hong Kong distributor. On receipt of an order, the middleman contracted with tailors in Hong Kong to produce the clothing and ultimately arranged for shipment of the goods to his customers in the United States. The middleman was the importer of record. The court found that the goods sold by the manufacturers to the middleman were for exportation to the United States. In reaching this conclusion the court stated:

Where clothing is made-to-measure for individual United States customers and ultimately sent to those customers, the reality of the transaction between the distributors and the tailors is that the goods, at the time of the transaction between the distributor and tailors, are "for exportation to the United States." Apart from this factor, there is no dispute that the merchandise was being made for export to the United States. 842 F.2d at 319, 6 Fed. Cir. (T) at 98.

The court further ruled that "if the transaction between the manufacturer and the middleman falls within the statutory provision for valuation, the manufacturer's price, rather than the price from the middleman to his customer, is used for appraisal." 842 F.2d at 318; 6 Fed. Cir. (T) at 97.

In Nissho Iwai, supra, and Synergy Sport International, Ltd. v. United States, No. 93-5, Slip Op. (Ct. Int'l Trade Jan. 12, 1993), the U.S. Court of Appeals for the Federal Circuit and the Court of International Trade, respectively, again addressed the proper value of merchandise imported pursuant to a three-tiered distribution arrangement involving a foreign manufacturer, a middleman and a U.S. purchaser. In each case the issue was which sale (the sale from the foreign manufacturer to the middleman or the sale from the middleman to the U.S. purchaser) is the sale for exportation for purposes of establishing transaction value. In both cases, the middleman was the importer of record. Applying the McAfee standard, in each case the court held that transaction value for the imported merchandise should be based on the price that the middleman/importer paid to the foreign manufacturer. Each court further held that in such three-tiered distribution arrangement, if the sale from the foreign manufacturer to the middleman is "at arm's length" and involves goods "clearly destined for the United States," then transaction value is based on that sale.

Based on the above decisions, counsel for Travelway requests reconsideration of HRL 544714 which determined that the price Oakley paid to Travelway was the proper transaction value. It claims that the price Travelway paid Gem should control instead.

In order to accept Gem's price as the basis of transaction value, the importer must meet the standard set forth in Nissho Iwai. Counsel indicates that Travelway is not related to Gem and that the sale is "at arm's length". There is no evidence in the file to suggest otherwise. Therefore, it appears that the first requirement is met. We also conclude that the second requirement is met, i.e., that the duffle bags were clearly destined for the United States, even though they were shipped through Canada. The evidence shows that Travelway is a foreign company who received an order from a U.S. customer (Oakley) for duffle bags, arranged for their production with a Hong Kong company (Gem), and acted as the importer of record. The duffle bags were special ordered by a specific U.S. purchaser, bore its logo and were ultimately sent to that purchaser. Like the custom-made clothing in McAfee, the duffle bags were destined only for the U.S. purchaser. Even though the bags were initially shipped to Canada, the evidence indicates that they were shipped in-bond and there is no indication there was any planned or actual use of the bags in Canada.

The submitted documents support the conclusion that the duffle bags were clearly destined for exportation to the United States. Oakley's Purchase Order Nos. 2730 and 2638, issued to Travelway, dated April 12, 1990 and March 5, 1990, respectively, were for 7,862 small duffle bags with the Oakley logo. Gem Invoice No. 90/132/133, dated July 21, 1990, issued to Travelway was for 7,862 duffle bags with the marks "OAK" USA. Travelway Invoice Nos. 138230/138231, dated October 26, 1990, were issued to Oakley for the 7,862 duffle bags. These documents, coupled with the Canadian in-bond documents, show that at the time of the Gem/Travelway sale, the duffle bags were clearly destined for Oakley in the United States. (Although the file also contains a copy of a Chinese textile export license for the subject duffle bags, the date of issuance was September 10, 1990, after the bags were shipped to Canada and after the Gem/Travelway sale. Therefore, it is not probative evidence that the Gem/Travelway sale was a sale for exportation to the U.S.).

We also take note of the fact that in the present case Travelway was the importer of record and that in three-tiered distribution arrangements, Customs generally presumes that the price paid by the importer is the basis of transaction value. See HRL 545262, March 11, 1994.

Based on a review of the evidence along with the additional clarifying information, we find that the duffle bags were clearly destined for the U.S. at the time of the Gem/Travelway sale, as provided in Nissho Iwai. Therefore, such sale was a sale for exportation to the United States.

HOLDING:

Based on the additional facts presented, we find that the sale for exportation to the U.S. for purposes of transaction value occurred between Gem and Travelway. The "price actually paid or payable" for the goods is the price Travelway paid to Gem.

The Office of Regulations and Rulings will take steps to make this decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels 60 days from the date of this decision.

Sincerely,

John Durant, Director
Commercial Rulings Division