OT:RR:CTF:VS H009727 GG
Ms. Carol Beaul
Intelli Trade Inc.
5405 Eglinton Avenue West, Suite 100
Etobicoke, Ontario M9C 5K6
Canada
RE: Transaction value; sale for exportation to the United States; warehoused in Canada; modification of HQ 563551
Dear Ms. Beaul:
This letter is in reference to Headquarters Ruling Letter ("HQ") 563551, dated October 12, 2006, that was issued to you on behalf of Creative Education of Canada, Inc. ("CEC"), on the subject of the valuation of children's dress-up products imported from Canada. We have reconsidered HQ 563551 and have determined that it requires modification. Accordingly, this ruling sets forth the corrected appraisement determination. We regret any inconvenience this may have caused.
Pursuant to section 625(c), Tariff Act of 1930 (19 U.S.C. § 1625(c)), as amended by section 623 of Title VI (Customs Modernization) of the North American Free Trade Agreement Implementation Act, Pub. L. 103-182, 107 Stat. 2057, 2186 (1993), notice of the proposed modification was published on December 19, 2007, in the Customs Bulletin, Volume 41, No. 23. No comments were received in response to this notice.
FACTS:
CEC sells children's dress-up products to toy stores and toy distributors throughout the United States and Canada. In addition, CEC sells merchandise directly to U.S. and Canadian customers through on-line Internet sales. Approximately 86% of the sales are to the United States.
In addition to manufacturing products in Canada, CEC purchases merchandise from an unrelated manufacturer in Sri Lanka, DSL Toys (PVT) Ltd. ("DSL"), for resale in Canada and the United States. The market in which CEC sells its merchandise requires short turnaround to fulfill orders. CEC sells to small specialty stores that typically place orders just before their busiest times between the Halloween and Christmas seasons. In addition, because most of CEC's customers are small businesses, they place frequent orders in small quantities. Consequently, CEC's customers are unable to purchase merchandise directly from many manufacturers that only sell large quantity orders and require several months lead time.
At the time of the ruling request (September, 2006), CEC's procedures with respect to merchandise ordered from DSL were as follows: Upon placing an order with DSL, CEC indicated the quantity of each item that was destined for Canada and the quantity (the majority) that was destined for the United States. All of the ordered product was shipped to Canada, where on arrival the Canadian destined goods were cleared through Canada Customs. The U.S. bound goods were not entered in Canada but proceeded in-bond to the United States where they cleared U.S. Customs. They were then stored in a warehouse in Michigan.
Upon receipt of orders from U.S. customers, CEC picked and packed the Canadian produced product in Canada, then shipped it to the United States where it was entered. The goods were then taken to the Michigan warehouse where the order was supplemented with items produced by DSL. The combined product would then be forwarded to the U.S. customers.
Under this old system, CEC was declaring the price it paid to DSL for those goods that were shipped in-bond to the United States upon arrival in Canada. The Canadian produced items were declared on the basis of the sale between CEC and the U.S. purchasers.
To reduce costs, CEC decided to reorganize its logistics operations by consolidating its warehousing operations at a single facility. Instead of transferring the U.S. bound DSL merchandise to the Michigan warehouse, CEC will now store all of its merchandise at its warehouse in Toronto. CEC planned to designate a portion of its Canadian warehouse as a bonded facility.
Under this new system, CEC will issue separate purchase orders to DSL for the U.S. destined products. These purchase orders are based on past and projected sales to U.S. customers, not on actual orders already placed. This is done to ensure that there will be sufficient stock to handle the orders when they come in, usually during the Halloween through Christmas seasons. This results in the importation into Canada of the products before any orders are received from U.S. customers.
All products destined for both the U.S. and Canada would now be shipped to the Toronto warehouse, where the Canadian bound product would be put into the Canadian inventory and the U.S. destined products placed in the bonded facility. There, defective U.S. bound products will be fixed within the bonded facility. Any defective product that cannot be fixed will be destroyed under CBSA (Canada Border Services Agency) supervision or shipped back to the vendor. Surplus or obsolete U.S. destined product will be sold at toy fairs or trade shows in the United States.
Under both the old and new systems, the terms of sale for the DSL merchandise purchased by CEC will be FOB Columbo, Sri Lanka regardless of whether the merchandise is destined for the U.S. or Canadian market. CEC would like to continue to declare the price it pays to DSL upon eventual entry into the United States.
ISSUE:
Whether, under CEC's new system, transaction value is properly based on the sales between CEC and DSL, or on the sales between CEC and the ultimate U.S. purchasers?
LAW AND ANALYSIS:
Section 402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a) 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. 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.
CEC would like its merchandise to be appraised under transaction value based upon the sales between CEC and DSL. The first issue to be addressed is whether the transactions between CEC and the DSL are bona fide sales. CBP recognizes the term "sale," as described in J.L. Wood v. United States, 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 determined 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).
Several factors may indicate that a bona fide sale exists between the purported 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 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 545474, dated August 25, 1995, and HRL 545709, dated May 12, 1995. CEC has provided copies of purchase orders, invoices, and proof of payment, which indicate that it places orders with, is billed by, and pays DSL for the goods received. CEC explains that the "FOB Columbo" term of sale is used, which signifies that risk of loss, and in the absence of express instruction otherwise, also title, transfer from DSL to CEC when the goods are laden on board the departing vessel in Columbo. (We note that some of the submitted documents show a "C&F Toronto" term of sale, which is also indicative of risk of loss passing in Columbo, and the assumption by DSL of international shipping costs). To further demonstrate that its transactions with DSL are bona fide sales, CEC notes that it provides product and shipping instructions to DSL, sets the prices to its own customers without input from DSL, and issues a catalogue under its own name. We agree that the submitted documentation and the description of the roles of the parties support CEC's contention that it enters into bona fide sales with DSL.
Although there are bona fide sales between CEC and DSL, to qualify as the basis for transaction value upon entry into the United States such sales must also be "for exportation to the United States." CEC claims that the special procedures it has implemented under its new system ensure that the goods in question are destined solely for the United States when purchased from DSL. Specifically, CEC will issue separate purchase orders and use distinct product codes for merchandise destined, respectively, for the United States and Canada. Also, the U.S. destined products will be stored in a bonded warehouse until they are ready for shipment to the U.S. customer. CEC has also taken measures to ensure that defective goods will be either destroyed or returned to DSL, and that surplus or obsolete U.S. bound items will be sold at toy fairs or trade shows in the United States.
Notwithstanding these new procedures, when sold by DSL to CEC the goods will go to Canada, where they will stay in CEC's inventory at the bonded warehouse until one of several contingencies occurs, including being sold to a U.S. customer, being returned to the vendor, being destroyed, or being sent to the United States for sale at a toy fair or trade show. At the time of the sale between DSL and CEC, there are no U.S. customers or arrangements to physically send the goods to the United States, and the ultimate disposition of the merchandise is unknown. Under these circumstances, the sale between DSL and CEC is not a sale for exportation to the United States.
HOLDING:
Under the new system, the sales between DSL and CEC are not a sales for exportation to the United States. When the warehoused items are sold by CEC to U.S. customers and shipped to the United States, such sales are sales for exportation to the United States. Upon importation, the goods shall be appraised under transaction value based upon the sales between CEC and its U.S. customers.
A copy of this ruling letter should be attached to the entry documents filed at the time the goods are 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.
EFFECT ON OTHER RULINGS:
Headquarters Ruling Letter ("HQ") 563551, dated October 12, 2006, is hereby MODIFIED. In accordance with 19 U.S.C. § 1625(c), this ruling will become effective 60 days after publication in the Customs Bulletin.
Sincerely,
Myles B. Harmon
Director
Commerical and Trade Facilitation Division
2