VAL CO:R:C:V 545474 er
Robert L. Eisen, Esq.
Paul J. Crowley, Esq.
114 Avenue of the Americas
New York, New York 10036-7794
RE: Request for Ruling Concerning the Appraisement of Footwear; Sale for Exportation.
Dear Messrs. Eisen and Crowley:
This is in response to your submission dated November 4, 1993, and supplemental submissions dated September 12, 1994 and August 11, 1995, on behalf of your client, Fila U.S.A., Inc. ("Fila"), in which you request a ruling concerning the proper basis of appraisement for footwear imported into the U.S. pursuant to a three-tiered purchasing arrangement between Fila, a related middleman and the foreign manufacturers. We regret the delay in responding.
The following facts are based on counsel's submission. Fila, the importer of record, is a Delaware corporation engaged in the importation and distribution of leisure and sports-related footwear and apparel. Fila is jointly owned by Fila Netherlands B.V. and Fila Holding S.p.A. A diagram was submitted with this request describing the relationship between Fila and its parent corporations.
Fila exercises exclusive control over product development, design, and marketing of Fila brand footwear in the U.S. U.S. customers include national retailers, general distributors, and small retail outlets. High volume customers typically place orders directly with Fila after viewing Fila samples at footwear trade shows and similar promotional events. Smaller customers may place orders indirectly through authorized Fila sales representatives.
Fila operates a distribution center in the U.S., where imported footwear is received and consolidated pending shipment to U.S. customers. In some cases, the distribution center is bypassed by Fila customers who request direct shipment from overseas manufacturers.
Fila Sport Hong Kong Ltd. ("Fila HK") is a Hong Kong corporation jointly owned by Fila Netherlands B.V. and Fila S.p.A. Holding. Fila HK operates as an independent profit center for the Fila international group, of which Fila is a member. Fila HK is fully funded and staffed, books inventory and pays taxes on its own resale profit. Fila HK's duties include locating manufacturers capable of producing footwear that meets the specifications of Fila. Fila HK continually monitors local market conditions in order to identify reliable sources of supply at the lowest possible cost.
Prior to placing purchase orders with Fila HK, Fila supplies Fila HK with detailed product specifications for all models of footwear contained in the product line. The specifications are prepared by Fila design and production teams in the U.S. and include component material and color requirements, design schematics for each model, manufacturing guidelines, and quality control standards. The shoes must be manufactured in American sizes and be individually labelled in English to indicate country of origin. Labels relating to constituent materials must comply with the particular labelling guidelines of the Federal Trade Commission. See 16 C.F.R. 231.1, et seq.
Upon receipt of Fila product specifications, Fila HK enters into negotiations with manufacturers. The manufacturers are unrelated to Fila, Fila HK, or to any member of the Fila corporate group. The manufacturers review Fila specifications and provide Fila HK with estimated unit prices for the specified styles. Qualifying manufacturers must be able to meet Fila product standards and be willing to commit production to the appropriate Fila style or styles over a fixed period of time, which typically averages six months in duration.
The final stage of price negotiation occurs after Fila places purchase orders with Fila HK. Firm prices are agreed upon with the manufacturers, which may be more or less than the estimated prices discussed in the preliminary stages of the transaction, depending upon intervening changes in market conditions.
For merchandise originating in Korea or Indonesia, Fila HK is assisted by its subsidiary, Fila Korea, in identifying manufacturers, monitoring local market conditions, and supervising quality control and production. Fila Korea also assists in the negotiation of price with factories and receives a 2 percent commission from Fila HK for its services; final approval of any purchases, however, rests with Fila HK. Fila HK's branch office in Taiwan performs similar services with respect to merchandise which will be manufactured in Taiwan.
In order to negotiate the letter of credit from Fila HK and thereby receive payment, manufacturers are required to complete a special footwear invoice. The invoice is intended to satisfy U.S. Customs invoicing requirements for certain classes of footwear.
The following documents were submitted as exhibits to the submissions: copies of purchase orders from Fila to Fila HK which identify quantities, styles and delivery date requirements; statements which confirm receipt from Fila HK of the purchase orders from Fila and which also designate shipping dates and prices; purchase orders from Fila Korea to the unrelated manufacturers which identify the number of the original Fila purchase order, identify the seller and specify that the goods are to be shipped to Fila in the U.S.; invoices from Fila HK to Fila in the U.S. which reference the original Fila purchase order; commercial invoices from the manufacturer which reference the original Fila purchase order and indicate that the goods are sold to Fila HK and are shipped to Fila in the U.S.; and an Interim Footwear Invoice of the International Footwear - Association Footwear Retailers of America.
Whether there is a bona fide sale for exportation to the United States between the manufacturer and Fila HK and/or between Fila HK and Fila?
LAW AND ANALYSIS:
We will assume that transaction value, the preferred method of appraisement, applies. Transaction value is defined in section 402(b) of the Tariff Act of 1930, as amended by the Trade agreements Act of 1979 (TAA) (19 U.S.C. 1401a(b)) as "the price actually paid or payable for the merchandise when sold for exportation to the United States..." In order for the merchandise to be appraised based on the transaction between the manufacturer and Fila HK, a bona fide sale for exportation must occur between these parties.
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.
Customs recognizes the term "sale," as described in J.L. Wood
v. U.S., 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974),
to be a transfer of property from one party to another for
consideration. In ascertaining whether a bona fide sale has taken
place between a purported buyer and seller of the 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). Also see, HRL
545709, dated May 12, 1995.
Several factors may indicate whether a bona fide sale exists
between the purported buyer and seller. In determining whether
property or ownership has been transferred, Customs considers
whether the potential buyer has assumed the risk of loss and
acquired title to the imported merchandise. In addition, Customs
may examine whether the purported 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. See, HRL 545709, supra.
In ascertaining whether the relationship of the parties to the
transaction is that of a buyerseller in which the parties maintain
an independence in their dealings, as opposed to that of a
principalagent in which 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
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.
See, HRL 545709 supra.
Fila HK provides the manufacturers with instructions as to design and manufacturing requirements, quality and materials controls, production schedules, labelling and size requirements, direct shipment routing to Fila or its U.S. customers and so forth. If a factory is unable to meet Fila HK's demands or follow instructions, Fila HK eliminates them from consideration as possible manufacturers.
Subject to the market forces that shape the negotiated purchase price from the manufacturers, Fila HK is free to re-sell the merchandise at any price it can command. The re-sale price consists of the following cost components: Fila HK's FOB purchase price; letter of credit financing expenses incurred by Fila HK, plus an additional service charge; handling costs, international insurance, and international freight charges incurred by Fila HK in shipping the merchandise from the FOB port of exportation to the U.S., plus an additional service charge for arranging freight consolidation and international transportation of the merchandise; the buying commission paid to Fila Korea or Fila Taiwan; compensation for taking title to and assuming risk of loss for the goods purchased from the manufacturers; financing charge for extending Fila 60 days credit pursuant to open account terms of payment; and profit.
Fila HK does not consult with or require the permission of the factories to sell the merchandise to Fila. Although Fila HK sells the merchandise only to Fila, it is not forced or influenced by the factories in its decision to do so. The manufacturers have no interest in, liability or responsibility for, or control over, Fila HK's choice of Fila as a customer.
Fila HK places its own purchase orders for the merchandise with the manufacturers, and records that merchandise as inventory on its corporate books. Although Fila HK instructs the manufacturers to ship the goods directly to Fila or its domestic customers in the U.S., Fila HK has the authority to give the manufacturers alternative routing instructions, and have the goods physically inventoried overseas, prior to exporting them to the U.S.
It is our understanding that Fila does not negotiate prices with the manufacturers and does not control or influence the negotiations between Fila HK and the manufacturers. This is substantiated by the detailed explanation of how the factory price is negotiated and marked up by Fila HK, discussed above, as well as by the submitted purchase orders and invoices in which the manufacturers are characterized as the sellers and Fila HK is characterized as the buyer.
We note that the term used in the factory sale is FOB and that the contract between Fila HK and Fila is based upon CIF terms. Normally in both FOB and CIF sales title passes at the same time, namely at the time the merchandise is loaded on-board at the port of exportation. However, in the instant case, counsel explains that as between Fila HK and the manufacturers it is explicitly understood that risk of loss and title to the shoes will pass to Fila HK as soon as the merchandise is manufactured, and before the goods are delivered by the factory to a carrier at the port of exportation. The FOB term used in the factory sale is understood by the parties to be only a price term, which requires manufacturers to pay for carriage of the merchandise from the factory to the port of exportation. The substance of the transactions and the corresponding rights, remedies, obligations and economic risks of the parties, as described by counsel, tend to support the claim that risk of loss and title to the merchandise pass to Fila HK the time the merchandise is manufactured.
That the meaning and significance of the FOB term, with respect to both risk of loss and transfer of title, has been varied by the parties is evidenced by the course of performance of the parties. As explained by counsel, the facts and circumstances surrounding the factory transaction demonstrate that the parties intend the goods to be sold as soon as they are produced. In order to secure production capacity sufficient to meet the demands of Fila, Fila HK competes with other footwear distributors. The factories who possess the production capacity to manufacture the merchandise to specification, thus, exert considerable bargaining power when dealing with propective buyers.
Notably, the factories must agree to commit their production capacity to the specified Fila product for a period of up to 6 months. Factories agreeing to these terms forego the opportunity to contract with other distributors. Under these "seller's market" conditions, counsel informs us that the factories agreeing to produce the merchandise do so only with the certainty that as soon as the shoes are manufactured, they are "sold" to and bound to be paid for by the buyer.
According to counsel, this understanding is further evidenced by the nature of the shoes themselves which are custom-made to Fila specifications. The factories do not sell directly to Fila , and could not legally sell the merchandise to other distributors. Accordingly, the factories that do manufacture Fila merchandise, thereby limiting themselves to one buyer, would do so only if they are assured that the merchandise is sold when produced. Without this assurance, the manufacturers would bear the commercial risk of being left at the end of a Fila production run with unsold shoes which, by virture of their unique and proprietary nature, could not be sold to another buyer.
We find counsel's arguments persuasive regarding the timing of risk of loss and passage of title. Moreover, we find that based on the documentation and information submitted, it appears that Fila HK is: (1) in a position to give instructions to the manufacturer/seller; (2) free to sell the merchandise at its own price; (3) able to select its own customers and negotiate with them without consulting the seller; and (4) able, if desired, to have the merchandise delivered for its inventory, and does, in fact, record the merchandise in its own records as inventory. Accordingly, we are satisfied that a bona fide sale occurs between the manufacturers and Fila HK. Under these circumstances the decisions reached in Nissho Iwai American Corp. v. United States, 786 F. Supp. 1002 (CIT 1992) rev'd 982 F.2d 505 (Fed. Cir. 1992) and Synergy Sport International, Ltd. v. United States, Slip Op. 93-5 (Ct. Int'l Trade, decided January 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 U.S. purchaser. In both instances 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 provision 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 nonmarket influences and involving goods "clearly destined for export to the United States."
The information submitted reveals that the middleman, Fila HK, and the foreign manufacturers are not related; accordingly, we will assume that the sales between the manufacturers and Fila HK are independent, arm's length transactions. With regard to whether the goods are clearly destined for the U.S., the evidence presented demonstrates that at the time the purchase orders are placed with the manufacturers, the goods are destined for the U.S. The purchase orders include instructions to ship the merchandise directly from the factory to the U.S. Additionally, the manufacturers are instructed to mark the merchandise in English with the country of origin and labels relating to constituent materials must comply with the particular labelling guidelines of the Federal Trade Commission. See 16 C.F.R. 231.1, et seq. Further, the manufacturers are required to mark the cartons in which the shoes are packed for international shipment with the name and address of the U.S. importer. Finally, in order to negotiate the letter of credit from Fila HK and thereby receive payment, the manufacturers are required to complete a special footwear invoice. This invoice is intended to satisfy U.S. Customs' invoicing requirements for certain classes of footwear. See 19 CFR 141.89. The invoice is known as the "Interim Footwear Invoice of the International Footwear - Association Footwear Retailers of America". In sum, based on the evidence presented, we conclude that the sale between Fila HK and the foreign manufacturers is a "sale for exportation to the U.S." within the meaning of section 402(b)(1) of the TAA.
Based on the evidence presented, a sale for exportation to the U.S. takes place between the middleman, Fila HK, and the foreign manufacturers. As a result, the transaction value of the
merchandise is based on the price actually paid or payable by Fila HK to the manufacturers.
John Durant, Director
Commercial Rulings Division