OT:RR:CTF:VS H240423 CMR
U.S. Customs and Border Protection
New York/Newark Service Port
Protest & Control
1100 Raymond Boulevard
Newark, NJ 07102
RE: Protest and Application for Further Review for Protest 4601-10-101639
Dear Port Director:
Protest 4601-10-101639 was forwarded to this office after we set aside the denial of the Application for Further Review (“AFR”) by letter March 25, 2011. Counsel timely filed the request to set aside the denial of AFR and we found that the request for AFR submitted to the port met the regulatory requirement of 19 CFR § 174.24(c). The protest was timely filed.
This protest is related to other protests before this office involving the same middlemen and manufacturer. On May 16, 2013, a conference call was held with counsel to discuss this protest and related protests.
FACTS:
The protest involves merchandise imported claiming appraisement under the “first sale” transaction value. The protestant, Ecko Direct LLC (hereinafter, Ecko), is the importer of record and importer/U.S. ultimate consignee. Ecko asserts that appraisement should be based upon the price between the manufacturer and the middleman and not between itself and the middleman seller. Initially, the middleman, Fame Sky Industrial Limited (hereinafter, “Fame Sky”`) was the importer of record for the protest, but the importer of record was changed, at the request of the port, to the U.S. ultimate consignee. The port questioned Fame Sky’s right to make entry.
There are five parties involved in the transactions at issue. The manufacturer is located in China. Ecko claims that the manufacturer sold merchandise to Fame Sky who then sold it to Ecko. The additional parties are involved in the payment process. Li & Fung, a buying agent acting on behalf of Ecko, paid Fame Sky. Fame Sky, through its sister company, United Way International Limited, paid Guangdong Guanghong Import and Export Company Limited who then transferred funds to the manufacturer.
The entry under protest was liquidated based upon the CIF (cost, insurance, freight) price paid by Ecko, less charges for international shipping and charges incidental thereto. Ecko, through counsel, filed a timely protest against the liquidation. The protest submission contained various exhibits to support the “first sale” claim, including “Placement Memorandums” from Li & Fung (a buying agent) to Fame Sky on behalf of Ecko, purchase orders from Fame Sky to the manufacturer, invoices from the manufacturer to Fame Sky, invoices from Fame Sky to Ecko, proof of payment from Li & Fung (on behalf of Ecko) to Fame Sky consisting of copies of bill payment advices, proof of payment from Fame Sky/United Way to Guangdong Guanghong Import and Export Company which consists of a copy of a telegraphic transfer record from HSBC Bank, and proof of payment from Guangdong Guanghong Import and Export Company to the manufacturer consisting of a copy of a payment receipt. We note that the telegraphic transfer record from HSBC Bank does not mention Fame Sky anywhere on the document. The document references United Way in the section under “e-Advice”, not Fame Sky. However, the account number from which money is withdrawn is the same account number to which money was deposited as reflected in the bill payment advices which referenced payment to Fame Sky. In addition, we received a bill of lading showing Fame Sky as the exporter and Ecko as the consignee.
Additional information was submitted by counsel on May 15, 2013 consisting of a copy of the filing receipt from the New York State, Division of Corporations and State Records, showing that an individual filed the document of incorporation in New York for Fame Sky Industrial, Inc., on February 27, 2008; a copy of a Document of Trust related to the same individual; a copy of the corporate annual filing of United Way International Limited indicating that this same individual is its sole director; a copy of the corporate annual filing of Fame Sky Industrial Limited indicating that this same individual is its sole director; and, a copy of the business license of the manufacturer identifying a certain individual as the “Legal Person.” Counsel previously advised CBP that he understands that the manufacturer’s “Legal Person” is the owner and director of manufacturer. Counsel has also advised that the manufacturer’s owner is known by another name.
In reviewing the documents for this protest, this office has also considered documentation presented in two other protests before us for consideration involving the same manufacturer, middlemen and issue. Our review of the documentation reveals that Fame Sky is located at the same address as the manufacturer in China. In addition, the companies have the same telephone number in Guangzhou, China. Furthermore, the principal, or sole director of the manufacturer signed documents submitted in support of the protests. On some documents, he signed as the representative of the manufacturer; on others, his name is typed in as the representative of Fame Sky. For example, the “Non-Quota Charges Statement,” on paper with Fame Sky letterhead, submitted to the port for this protest, states:
“I, [the owner of the manufacturer], THE EXPORTER OF THE GOODS . . . .”
Additionally, the “Single Country Declaration” submitted to the port, states:
“I, [the owner of the manufacturer] (name), declare . . . .”
While not signed, the document identifies the owner of the manufacturer’s position title as “Production Manager” and the company as “Fame Sky Industrial, Limited.” Furthermore, Fame Sky is identified as the shipper/exporter on the Customs Invoice. The Customs Invoice for the protest at issue (identical in format to the Commercial Invoice in a related protest), also identifies Fame Sky as the shipper/exporter. These documents further state:
We hereby identify that [the owner of the manufacturer] is a responsible individual and who has knowledge of or can readily obtain knowledge of the facts of the transaction and is an employee of our company.
The contact person is identified as an email address at United Way.
In addition, a “Certificate of Compliance” document, in box 8, states:
As the vendor, I certify that based upon testing the style listed below comply with the Standard for Flammability of Clothing Textiles (16 CFR 1610) administered by the Consumer Product Safety Commission.
In box 8, the name given of the individual certifying is the owner of the manufacturer, with the position of production manager, and the company identified is Fame Sky. Similarly a “Denim Certificate” on Fame Sky letterhead has the owner of the manufacturer’s name typed in under the signature block as the production manager for Fame Sky.
Furthermore, on purchase orders which identify the manufacturer and either Fame Sky or United Way as the buyer, the owner of the manufacturer signed as the manufacturer’s or vendor’s authorized signature.
In addition, CBP found on the internet information indicating that one of the principals at Fame Sky and United Way had updated a company profile on April 19, 2012. The web page, appearing on Manta.com, indicates that the principal is the sales manager for the company. In regard to the company, it states:
Our company-United Way is entirely owned 4 companies-U.S.A. Fame Sky Industrial Inc.; HongKong United Way International Limited; [the manufacturer]; [another named company], and we manufacture all kinds of knit & woven & denim, we have our own designer team which could sample up the most fashionable and fancy styles for you. . . .
Counsel submitted further information on May 31, 2013, regarding the ownership of the manufacturer and the middleman companies involved in the transaction at issue, that even if the manufacturer and middlemen were related parties, which they do not concede, the prices paid by the middlemen to the manufacturer were arm’s length based upon an all costs plus a profit analysis. In furtherance of this argument, counsel submitted profit and loss statements for each company for the fiscal period ending December 31, 2009, the relevant time period for the 2009 entry. Based on these statements, CBP compared the operating margins of the companies.
ISSUE:
Does the submitted documentation support the claim that the “first sale” transaction value should be the basis of appraisement for the merchandise at issue?
LAW AND ANALYSIS:
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 the merchandise when sold for exportation to the United States" plus certain statutory additions. 19 U.S.C. § 1401a(b)(1).
In Nissho Iwai American Corp. v. United States, 16 C.I.T. 86, 786 F. Supp. 1002, reversed in part, 982 F. 2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit reviewed the standard for determining transaction value when there is more than one sale which may be considered as being a sale for exportation to the United States. The case involved a foreign manufacturer, a middleman, and a United States purchaser. The court held that the price paid by the middleman/importer to the manufacturer was the proper basis for transaction value. The court further stated 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 non-market influences, and involving goods clearly destined for the United States. See also, Synergy Sport International, Ltd. v. United States (Ct. of Int’l Trade, 1993).
In accordance with the Nissho Iwai decision and our own precedent, we presume that transaction value is based on the price paid by the importer. In further keeping with the court’s holding, we note that an importer may request appraisement based on the price paid by the middleman to the foreign manufacturer in situations where the middleman is not the importer. However, it is the importer’s responsibility to show that the "first sale" price is acceptable under the standard set forth in Nissho Iwai. That is, the importer must present sufficient evidence that the alleged sale was a bona fide "arm’s length sale," and that it was "a sale for export to the United States" within the meaning of 19 U.S.C. § 1401a.
In Treasury Decision (T.D.) 96-87, dated January 2, 1997, the Customs Service (now Customs and Border Protection (CBP)) advised that the importer must provide a description of the roles of the parties involved and must supply relevant documentation addressing each transaction that was involved in the exportation of the merchandise to the United States. The documents may include, but are not limited to purchase orders, invoices, proofs of payment, contracts, and any additional documents (e.g. correspon- dence) that establishes how the parties deal with one another. The objective is to provide CBP with "a complete paper trail of the imported merchandise showing the structure of the entire transaction." T.D. 96-87 further provides that the importer must also inform CBP of any statutory additions and their amounts. If unable to do so, the sale between the middleman and the manufacturer cannot form the basis of transaction value.
In this case, we have been provided with purchase orders, invoices and proofs of payment. However, no contracts have been provided between any of the parties involved. As to Fame Sky and United Way, we have been informed that these two companies are related sister companies. Counsel has advised this office that “United Way handles all back office work for Fame Sky including bookkeeping, banking and production/quality control.” Thus, the explanation is offered that “while payments were made by wire transfer to Fame Sky from the various Ecko companies, it was United Way who paid [the manufacturer].”
In T.D. 96-87, we stated that “[i]n general, Customs will consider a sale between unrelated parties to have been conducted at ‘arm’s length.’” It is claimed that the middleman, Fame Sky, and the manufacturer are unrelated and therefore, the sale between the parties is presumed to be an arm’s length sale. However, the arm’s length presumption is not absolute. “Presumption” is defined in Black’s Law Dictionary, Ninth Edition, (2009), at 1304, as:
A legal inference or assumption that a fact exists, based on the known or proven existence of some other fact or group of facts. ? Most presumptions are rules of evidence calling for a certain result in a given case unless the adversely affected party overcomes it with other evidence. A presumption shifts the burden of production or persuasion to the opposing party, who can then attempt to overcome the presumption. . . .
“A presumption may be defined to be an inference as to the existence of one fact from the existence of some other fact founded upon a previous experience of their connection.” William P. Richardson, The Law of Evidence § 53, at 25 (3d ed. 1928).
Further, 19 U.S.C. § 1401a(g) provides, in relevant part:
(1) For purposes of this section, the persons specified in any of the following subparagraphs shall be treated as persons who are related:
* * *
(E) Employer and employee.
In this case, CBP has reason to reject the claim that the transactions between Fame Sky and the manufacturer should be treated as arm’s length transactions. Fame Sky and the manufacturer share the same address and telephone number in Guangzhou, China. In addition, they have the same individual, the owner of the manufacturer, signing documents and being identified as the representative for each of them. The owner of the manufacturer, its sole director, is clearly defined in documents as an employee of Fame Sky. The protestant maintains that the middlemen and the manufacturer are not related, and that the owner of the manufacturer provided additional document services and was authorized by United Way/Fame Sky to sign documents on their behalf in order to assist them. The owner of the manufacturer was not compensated beyond the sale of the merchandise. These additional document services were “part of the package [the manufacturer] sold to United Way/Fame Sky.”
Counsel has submitted additional financial information to argue that the financials support that the manufacturer and the middlemen operated at arm’s length. Based on the financial performance of the manufacturer and middlemen for the period ending December 31, 2009, counsel argues that the all costs plus a profit method for determining that related parties operate at arm’s length, has been met.
The all cost plus profit test that counsel relies upon is set forth in 19 CFR § 152.103(l)(iii), Interpretative note 3, which states:
If it is shown that the price is adequate to ensure recovery of all costs plus a profit which is equivalent to the firm’s [generally, the parent’s] overall profit realized over a representative period of time (e.g., on an annual basis), in sales of merchandise of the same class or kind, this would demonstrate that the price has not been influenced.
As it is argued that the middlemen and manufacturer are not related, there is no identifiable parent in this case for purposes of comparison of profit in sales of merchandise of the same class or kind, i.e., the overall profit of the parent comparison. See 19 CFR 152.103(l)(iii). The submitted financial information shows the manufacturer made a modest profit, one middleman made a much smaller profit, and the other middleman lost money. CBP reviewed the entry in the subject protest and the entries in the related protests to examine the gross margin, mark-up and gross profit of the middleman selling to the U.S. buyer. In the case of a related protest also involving the same manufacturer and United Way/Fame Sky, the file included a cost sheet from the manufacturer for the 3 line items so CBP was able to compare the manufacturer’s gross margin, mark-up and gross profit to that of United Way/Fame Sky. In that protest, the manufacturer’s mark-up was rather modest, especially when compared with the considerably larger mark-up of Fame Sky’s related party, United Way. Three line items clearly do not provide a sufficient basis upon which to compare the profitability of the parties. However, in this protest, the entry contained 50 line items. In another related protest involving the same parties, we examined another entry with 2 line items. Although no manufacturer cost sheets were available in this protest or the protest with 2 line items, by calculating the Free on Board (FOB) value of the imported merchandise and using that information along with the price paid by the middleman for the merchandise, we were able to calculate the gross margin, mark-up and gross profit for the middleman.
It is difficult to understand how the middleman in this case made such a small profit in comparison to the manufacturer as reflected by the financial statements when we consider the mark-ups on the goods in these entries. When considering the submitted financial information and the middlemen’s mark-ups on these goods, we have difficulty reconciling the information discerned from the files with that of the financial statements. The gross margin, per the financial statements, for United Way and Fame Sky were considerably smaller than the average gross margin for these companies as reflected by the line items in these protests. Additionally, the operating margins for United Way and Fame Sky were extremely small. The apparent inconsistencies in these figures lead to questions regarding the selling, general and administrative expenses of the companies involved and whether they are beyond the norm for companies engaged in similar activities. Without further information, we are not convinced that the submitted financial information provides adequate support to conclude that the middlemen and manufacturer operated at arm’s length.
The totality of the circumstances leads CBP to conclude the “sale” between these parties is not an arm’s length sale. In addition, although numerous documents were submitted in support of Ecko’s claim, the documentation fell short of the “complete paper trail” referenced in T.D. 96-87. Therefore, such sale cannot be used under transaction value as the sale for exportation to the United States under “first sale” transaction value.
HOLDING:
The port is to deny the protest. The merchandise was properly appraised based on the price paid by the importer of record, Ecko Direct, LLC.
In accordance with the Protest/Petition Processing Handbook (CIS HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with this decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision, Regulations and Rulings of the Office of International Trade will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at
www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division