RR:IT:VA 546225 RSD
Port Director
United States Customs Service
John F. Kennedy Airport
Building 178
Jamaica, New York 11430
RE: Application for Further Review (AFR) of Protest Number 1001-95-101891; appraisement of merchandise involved in an alleged
two tiered sales transaction; Nissho Iwai American Corp. v
United States
Dear Director:
This is in response to your memorandum dated December 18,
1995, forwarding the AFR of protest 1001-95-101891 filed by
Alfred Dunhill of London, Inc., concerning the appraisement of
items such as mens' and boys' wool shirts, silk handkerchiefs,
sweaters, belts, bandoliers, and leather attaches. Alfred
Dunhill of London's trade advisor from Coopers & Lybrand made
additional submissions containing documents from various
transactions. One submission made on May 30, 1996, contained
documents from three entries covered by the protest. The trade
advisor claims that the three entries are representative of the
other entries being protested. On November 20, 1996, we met with
protestant's representatives at our office to discuss this
matter. At this meeting, protestant submitted copies of air
waybills for the three entries being reviewed. On January 15,
1997, protestant's representative faxed copies of labels which
were supposedly attached to the imported garments.
FACTS:
The importer and protestant, Alfred Dunhill of London Inc.
(hereinafter Inc.), is a United States corporation. According
to Inc., it is required to purchase all of its imported
merchandise from a related party, Alfred Dunhill Ltd., London,
England (hereinafter Ltd.). Both companies are subsidiaries of
Vendome PLC, a company incorporated in the United Kingdom. Ltd.
procures various types of merchandise from unrelated
manufacturers throughout Europe, including manufacturers in
England. It subsequently resells the merchandise to Inc., after
ensuring that it is made according to specifications. Before
Inc. orders merchandise from Ltd., it sends representatives to
inspect samples obtained from various manufacturers at Ltd.'s
premises. According to Inc., under a company policy, Inc. is
precluded from purchasing merchandise directly from any overseas
manufacturers.
Inc. indicates that Ltd. also sells identical merchandise to
unrelated parties in the United States at the same price that it
sells to Inc. Ltd. consolidates the orders from both related and
unrelated purchasers, and then places these orders with its
European vendors. Prior to shipment of the merchandise, the
manufacturers bill Ltd. and secure payment through a letter of
credit. The items for each Inc's individual store in the United
States are consolidated and shipped to the U.S. on a single bill
of lading in care of a U.S. freight forwarder, who handles the
domestic transportation after importation. In some cases
merchandise purchased by Ltd. is shipped to London for
consolidation before it is shipped to the ultimate consignees.
According to Inc., the only entries being protested are those in
which the imported merchandise was shipped directly from the
European manufacturers to the United States.
Included in the transaction documents from three of the
protested entries that Inc. presented, are copies of the Ltd.'s
invoices issued to Inc., and copies of the manufacturers'
invoices issued to Ltd. The manufacturers' invoices show Ltd. as
the purchaser of the merchandise. They also provide a
description of the merchandise, a style number, the quantity of
the various items purchased, the unit price for each item, and
the amount owed for the products purchased. The manufacturers'
invoices also reference Ltd.'s purchase order number and show
that the terms of sale between Ltd. and Inc. were CIF New York.
In addition, rather than submitting the actual purchase orders,
the Inc. furnished copies of what it calls "revised prints of
Dunhill Ltd. purchase orders". Inc. claims that the original
purchase orders could not be located, but points out that
information from actual purchase orders: such as original
purchase order number, vendor, country of destination, the final
destination, and the shipping terms are displayed on the revised
prints of the purchase orders. According to Inc., several boxes
contained on the revised prints of the purchase orders are blank
because the system used to process orders only shows information
in these boxes if the goods have not been received. Once a full
shipment has been received, information will not be shown in the
boxes. For two of the three transactions, copies of Inc.'s
purchase orders to Ltd were also provided. Inc. also provided
copies of remittance advices summarizing several manufacturer's
invoices which indicate that Ltd. paid the manufacturers for the
merchandise.
In order to verify its claim that information regarding the
imported merchandise is deleted from the purchase order after
the order is completed, Inc. has also presented copies of two
current purchase orders which Ltd. allegedly sent to
manufacturers to order merchandise. These two current purchase
orders have the same format as the "revised prints of the Ltd.
purchase orders". However, these purchase orders contain
additional information such as product description information,
product codes, size and fit specifications, quantity and unit
costs that are
not present on the revised prints of the purchase orders. Inc.
contends that this information is contained in every purchase
order, but is deleted from the system once the ordered
merchandise is received. The terms of sale shown on the
documents between Ltd. and the manufacturers were FOB Barcelona,
FOB Geneva, and Ex works.
Inc. has also presented copies of air waybills from the
three transactions being reviewed. The air waybills indicate
Ltd. as the shipper of the merchandise, the city from where the
merchandise was shipped, and the merchandise's destination. For
one transaction, the air waybill shows that the merchandise
departed from Barcelona, Spain and arrived in New York. In the
second transaction, the air waybill shows that the merchandise
departed from Zurich via Swissair destined for New York. The
air waybill for the third entry shows that the merchandise was
shipped from Stuttgart for "J F Kennedy Airport". The air
waybills do not indicate that the merchandise was first shipped
to England for consolidation.
The protestant has also presented copies of the labels which
were supposedly attached to the garments. The labels contain
information regarding the fabric content, care instructions and
country of origin. Some of the labels are in English and in
French, but they are supposedly attached to the garments to meet
the U.S. Customs and other U.S. government requirements for
labeling of imported garments. Inc.'s representative, however,
has stated that for convenience these labels are attached to the
garments even if their destination is a country other than the
United States.
You appraised the imported merchandise based on the price
Inc. paid to Ltd. because you believe that there was only one
sale for exportation to the United States between Ltd and Inc,
and the transaction between Ltd and the manufacturers were not
sales for exportation to the United States. Inc. claims that the
merchandise should be appraised based on the sale between the
manufacturers and Ltd. Inc has presented a schedule showing the
entered value, the duty paid for each entry, the value if the
first sale was used, and the duty that would be owed on the
merchandise if the first sale was used to appraise the
merchandise.
ISSUE:
Whether the imported merchandise should be appraised based
upon an alleged first sale in a three tiered sales transaction
between Ltd. and the manufacturers?
LAW AND ANALYSIS:
As you know 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 preferred method of appraisement is
transaction value, which is defined as the "price actually paid
or payable for merchandise when sold for exportation for the
United
States," plus certain enumerated additions. Although we have
assumed for purposes of this
decision that transaction value is the appropriate basis of
appraisement, we note that the parties are related, and no
evidence has been provided to justify its use.
In Nissho Iwai American Corp. v. United States, 982 F.2d 505
(Fed. Cir. 1992), the Court reaffirmed the principle of E.C.
McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that
a manufacturer's price, for establishing transaction value, is
valid so long as the transaction between the manufacturer and the
middleman falls within the statutory provision for valuation. In
reaffirming the McAfee standard 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 influence that affect the
legitimacy of the sale price...[T]hat determination can only be made on a case-by-case basis.
Id. at 509. See also, Synergy Sport International, Ltd. v. United
States, 17 C.I.T.___, Slip Op. 93-5 (CT. Int'l Trade January 12,
1993).
As a general matter in situations of this type, Customs
presumes that the price paid by the importer is the basis of
transaction value. However, in order to rebut this presumption,
the importer must in accordance with the court's standard in
Nissho, provide evidence that establishes that at the time the
middleman purchased, or contracted to purchase, the imported
merchandise the goods were "clearly destined for export to the
United States" and that the manufacturer and middleman dealt with
each other at "arm's length."
In the instant case, Inc. is claiming that in accordance
with Nissho, the transaction value for the imported merchandise
should be based on the sale between Ltd. and the manufacturers.
In determining if this claim is valid, the first question to be
considered is whether there was in fact a bona fide sale between
Ltd. and the manufacturers.
For Customs purposes, a "sale" generally is defined as a
transfer of ownership in property from one party to another for a
consideration. J.L. Wood v. United States, 62 CCPA 25, 33;
C.A.D. 1139 (1974). Although J.L. Wood was decided under the
prior appraisement statute, Customs recognizes this definition
under the TAA. Several factors may indicate whether a bona fide
sale exists between potential seller and buyer. In determining
whether property or ownership has been transferred, Customs
considers whether the alleged buyer has assumed the risk of loss
and acquired title to the imported merchandise. In addition,
Customs may examine whether the alleged buyer paid for the goods,
whether such payments are linked to specific importations of
merchandise, 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 545705, January 27,
1995.
In HRL 543708 dated April 12, 1988, we stated in regard to
the transfer of title and the assumption of the risk of loss:
[A] determination of when title and risk of loss pass from
the seller to the buyer in a particular transaction depends on
whether the applicable contract is a "shipment" or "destination"
contract.... FOB point of shipment contracts and all CIF and C&F
contracts are "shipment" contracts, while FOB place of
destination contracts are "destination" contracts.... Unless
otherwise agreed by the parties, title and risk of loss pass from
the seller to the buyer in "shipment" contracts when the
merchandise is delivered to the carrier for shipment, and in
"destination" contracts when the merchandise is delivered to the
named destination.
The question of whether the transactions involved in the protest
are shipment contracts or destination contracts depends on the
shipment terms specified in the documentation.
The purchase orders between Ltd. and the manufacturers
indicate that the terms of sale for the three transactions were
FOB Barcelona, FOB Geneva, and Ex works. The transactions where
the terms of sale were FOB Barcelona and FOB Geneva, are shipment
contracts, where title and risk of loss passed from the
manufacturer at the time the merchandise was delivered to the
carrier in the designated city. For the transaction where the
"ex works" term was used the seller fulfills his obligation to
deliver when he has made the goods available at his premises to
the buyer. The buyer bears all costs and risks involved in the
taking the goods from the seller's premises to the desired
location. See International Chamber of Commerce, Incoterms 1990,
Publication No. 460 at 18. Thus, it is the seller's
responsibility to make the goods available to the buyer at the
name place of delivery, and to bear all risk of loss until such
time as the goods have been place at the buyer's disposal.
Correspondingly, the buyer assumes all risk of loss or damage
from this point on. Incoterms 1990 at 18-19. It is our position
that title passes to the buyer in an "ex works" contract at the
seller's premises. See HRL 545105 dated November 8, 1993.
Ltd.'s invoices show that the terms of sale between Ltd. and
Inc. were CIF New York. As already noted the CIF term indicates
a shipment contract, title and risk of loss are considered to
have passed from the manufacturer to Ltd. when the merchandise
was delivered to the carrier for shipment. Therefore, in the two
FOB transactions title passes to Ltd., when the goods are
delivered to the carrier for shipment and then immediately
thereafter from Ltd to Inc. Consequently, Ltd. is considered to
hold title only monetarily, if ever, and not to bear the risk of
loss. On the ex-works transaction, it appears that Ltd. held
title and risk loss from the time the goods leave the factory
until the time the goods are delivered to the carrier. Hence,
based solely on the terms of sale, in two instances there were
simultaneous passage of title and bona fide sale would not appear
not to have occurred between the manufacturers and Ltd. However,
in such circumstances, Customs will consider other pertinent
evidence or documentation concerning the bona fides of the sale.
In addition to the whether the potential buyer has assumed
the risk of loss and acquired title to the imported merchandise
as indicated by the terms of sale, 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, Customs 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 HRL 545709 May 12, 1995, Customs outlined some factors
for determining whether the relationship of the parties to the
transaction in question is that of a buyer-seller, where the
parties maintain an independence in their dealings, as opposed to
that of a principal-agent, where 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 she
desired;
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.
In this case, because other relevant evidence has been made
available concerning the roles of the parties and the
transactions in general, such evidence should be examined and
afforded substantial weight in determining whether one or two
sales occurred. For the three transactions being analyzed, the
evidence furnished by Inc. establishes that there were sales
between the manufacturers and Ltd. In this regard, we note that
Ltd. negotiates and agrees to the prices with the manufacturers,
and that Inc. and Ltd conduct separate negotiations regarding the
prices that Ltd. will charge Inc. for the merchandise. We
understand that Inc. does not negotiate their prices with the
foreign manufacturers and does not control or influence, in any
manner, the negotiations between Ltd. and the factories. This is
substantiated by the manufacturer's invoices indicating that the
merchandise was sold to Ltd. The manufacturers' invoices
describe the merchandise, quantity, unit price and total amount
and also show Ltd. as the buyer. The Ltd.-Inc. invoices,
reflecting a markup from the factory prices, provide further
indication of this arrangement. We note also that Ltd. allegedly
sells the same merchandise to parties other than Inc. without
having to consult with Inc, and can have merchandise delivered to
its own warehouses if it so chooses.
In addition, the revised prints of Ltd.'s purchase orders
to the manufacturers for the imported merchandise provide another
indication that a sale occurred between Ltd. and the
manufacturers. The vendor is displayed on these documents. The
purchase order numbers shown on revised print purchase orders
match the numbers shown on the manufacturers' invoices.
Moreover, the copies of remittance advice and bank statements
indicate that Ltd. paid the various
manufacturers for the merchandise out of its funds. Accordingly,
we conclude that the evidence presented establishes that bona
fide sales occurred between Ltd. and the manufacturers.
Once it has been established that there were sales between
Ltd. and the manufacturers, whether the merchandise will be
appraised based on the manufacturers' prices depends upon if the
requirements of the Nisho case are satisfied. As explained
above, the court in Nissho set forth a two part test that must be
met for a sale between a middleman and its supplier to be the
basis of a viable transaction value: 1) the goods must clearly be
destined to the United States at time of sale, and 2) the sale
must be at arm's length. Turning to the first part of the two
part test, the evidence must establish that the merchandise was
clearly destined to the United States at the time it was sold to
Ltd. The manufacturers' invoices indicate that the merchandise
was to be shipped in the United States. Ltd.'s purchase orders
display "USA" in the box labeled country of destination.
Accordingly, the manufacturers were advised that the merchandise
being purchased was to be delivered to a carrier for shipment to
the United States. We note that the protestant has submitted
what it refers to as "revised prints of Ltd. purchase orders"
because the actual purchase orders cannot be located. Although
these documents do not contain important information regarding
the transactions such as product descriptions, sizes and
quantity, Inc. has explained that once the transaction has been
completed, the system that Ltd. uses deletes this information.
We have observed that the purchase orders numbers match up with
the purchase order numbers shown on the manufacturers' invoices
and that the format of these documents seems consistent with the
other purchase orders that Ltd. uses to transact business.
Inc. has also submitted copies of labels which indicate the
country of origin marking, fabric content and care instructions.
These labels are attached to the garments before importation, in
order to meet the requirements of the United States government.
Although these labels could potentially be a further indication
that the garments are intended for the United States, Inc.'s
representative has advised that the manufacturers will attach
these label to garments even if the garments are intended to be
sold in countries other than the United States. Consequently,
the labeling of the garments is not evidence that the goods are
clearly destined to the United States.
Your report states that after Ltd. places its orders with
European vendors, the merchandise is shipped to England, where
Ltd consolidates the orders of all purchasers, both related and
unrelated, in its warehouse before being shipped to the United
States. Inc. concedes that in some instances merchandise was
first shipped to England, and consolidated with other merchandise
before being sent to the United States. However, Inc. claims
that this did not happen for the entries being protested and that
such merchandise was shipped directly from the manufacturer to
the United States. Inc. has submitted copies of air waybills for
the transactions being analyzed, which indicate that the
merchandise was shipped directly from a European city (Barcelona,
Zurich, or Stuttgart) to New York. We have no evidence to show
that the merchandise was shipped first to England before it was
shipped to the United States. Accordingly without any evidence
to contradict the airway bills, we conclude that the merchandise
was shipped directly to the United States. Based on the
submitted transaction documents such as purchase orders, the
manufacturers invoices, and the air waybills, we are satisfied
that the merchandise was clearly destined to the United States at
the time that Ltd. purchased it from the manufacturers.
Regarding the second part of the test, because the European
manufacturers are not related to the middleman, Ltd., it will be
presumed that they negotiate with each other at arm's length.
This case is similar to the facts of HRL 545368 dated July 6,
1995, where subsidiaries of a U.S. company were purchasing hair
dryers from unrelated manufacturers in China for export to and
for sale in the United States. We held that absent evidence to
show that the sale between the
manufacturers and the middleman was not at arm's length,
transaction value should be based on the manufacturer's price
that the middleman paid. The fact that the middleman and U.S.
importer were related to each other was not relevant.
HOLDING:
The evidence that has been presented for the three entries
being reviewed, establishes that there were bona fide sales
between Ltd. and the manufacturers and that such sales are sales
for exportation to the United States under the Nissho standard.
Therefore, assuming that the three entries that we have reviewed
are representative of the remaining entries in the protest, the
transaction value of the imported merchandise should be based on
the price Ltd. paid to the manufacturers.
You are directed to grant the protest. A copy of this
decision with the Form 19 should be sent to the protestant. In
accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive,
this decision should be mailed by your office 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 take steps to make the decision available to Customs
personnel via the Customs Rulings Module in ACS, and to the
public via the Diskette Subscription Service, the Freedom of
Information Act and other public access channels.
Sincerely,
Acting Director
International Trade Compliance
Division