• HQ H255028
• Nov 21, 2014

• Type : VALUATION • HTSUS :
•  Related:   547382; 545474; 548494; H246429; H005222; H097035   

OT:RR:CTF:VS H255028 RSD

Elon A. Pollack, Esq.
Stein Shostak Shostak Pollack & O’Hara, LLP
865 South Figueroa Street
Suite 1388
Los Angeles, California 90017

RE: Request for Ruling Concerning Nissho Iwai; First Sale; Bona Fide Sale; Sale for Exportation to the United States; Multi-tier Transaction

Dear Mr. Pollack:

This is in response to your letter of July 1, 2014, submitted on behalf of Source Trading Limited (Source Trading) of Kowloon, Hong Kong, requesting a ruling pertaining to the valuation of merchandise imported into the United States via a multi-tiered transaction with a manufacturer located in China.

FACTS:

In the proposed transaction, the requester, Source Trading, will act as a middle-man in a multi-tiered transaction of wearing apparel imported into the United States. The transaction will begin when a party in the U.S., in this case, Urban Apparel, located in Los Angeles, California will issue a purchase order to Source Trading. You indicate that Source Trading will only make a purchase of goods when it has a firm order from one of its customers. You further state when it has a firm order, Source Trading will find a manufacturer to produce the goods, and will enter into a sales contract with that manufacturer. In this instance, the manufacturer of the imported garments is a Chinese company, Anhui Jie Sheng Co. Ltd. The contract with the factory identifies the Urban Apparel purchase order and that the goods are to be exported to Los Angeles, California area of the United States. The sales contract between the Chinese manufacturer and Source Trading incorporates the same terms found in the Urban Apparel purchase order, including the style numbers, quantities, and destination. When the order is completed, the manufacturer will issue an invoice at the delivery of the goods to Source Trading at the port of export. The terms of sale shown on the sales contract and the invoice between Source Trading and the Chinese manufacturer is “FOB Port”, with no specific port of export being designated on either of these documents.

Source Trading will import the goods and resell them to Urban Apparel. The sale terms for the transaction shown on the sample invoice between Source Trading and Urban Apparel is Delivery Duty Paid (DDP), City of Industry, California. All payments will be accomplished through wire transfers. A sample outgoing Remittance Application dated June 12, 2014, was submitted drawn on the EastWest Bank, Hong Kong Branch showing that Source Trading paid the manufacturer, Anhui Jie Sheng Co. Ltd., the same amount of money that was shown on the submitted manufacturer’s invoice. The sample shipping documents indicate Source Trading Limited as the shipper, and New Saga Distribution, a third party warehousing service provider, is identified as the consignee. You indicated that none of the parties to the transaction are related to each other, and Source Trading will not provide any materials, trims or other assists to the factories involved in making the garments other than product labels. You indicate when product labels are applied to the garments, the value of such labels will be added to the entered value of the garments.

Source Trading also will require that the garment manufacturer (shipper) comply with all U.S. Federal Trade Commission requirements concerning the registration of manufacturers by obtaining an RN number, fiber content labeling, and care instruction labels. Accordingly, all labels in the imported garments, evidencing compliance with the FTC’s requirements, will be affixed by the manufacturer in the country of origin as part of the manufacturing process. In addition, Source Trading will require that each manufacturer comply with the requirements of the Consumer Product Safety Improvement Act and the Flammable Fabric Act. Because the garments will ordinarily display the U.S. customer’s labels and the applicable trademarks, each garment will only be authorized for sale in the United States by the brand owner or its authorized licensee.

ISSUE:

Whether the appraisement of the imported merchandise under transaction value may be based on the “first sale” transaction between the Source Trading and the Chinese manufacturer? 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 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 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, 17 CIT 18 (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, proof of payment, contracts, and any additional documents (e.g. correspondence) 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. T.D. 96-87 states as follows:

In order for an importer to rebut the presumption “[that the price paid by the importer is the basis of transaction value]”, certain information and documentation must be provided. Specifically, the requestor must describe in detail the roles of all the various parties and furnish relevant documents pertaining to each transaction that was involved in the exportation of the merchandise to the United States. If there is more than one possible sale for exportation, information and documentation about each of them should be provided. Relevant documents include, purchase orders, invoices, proof of payment, contracts and any additional documents (e.g. correspondence), which demonstrate how the parties dealt with one another and which support the claim that the merchandise was clearly destined to the United States. If any of these documents do not exist, or exist but are not available, the ruling request should so provide. What we are looking for is a complete paper trail of the imported merchandise showing the structure of the entire transaction

In summary, the public should be aware that CBP presumes that transaction value is based on the price paid by the importer and in order to rebut this presumption and prove that transaction value should be based on some other price, complete details of all the relevant transactions and documentation (including purchase orders, invoices, evidence of payment, contracts and other relevant documents) must be provided, including the relationship of the parties and sufficient information regarding the statutory additions.

Bona Fide Sale

First, we must determine if indeed a “sale” will occur. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit found that the term “sold” for purposes of 19 U.S.C. § 1401a(b)(1) means a transfer of title from one party to another for consideration, (citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). No single factor is decisive in determining whether a bona fide sale has occurred. See Headquarters Ruling Letter (“HQ”) 548239, dated June 5, 2003. CBP will consider such factors as to whether the purported buyer assumed the risk of loss for, and acquired title to, the imported merchandise. Evidence to establish that consideration has passed includes payment by check, bank transfer, or payment by any other commercially acceptable means. Payment must be made for the imported merchandise at issue; a general transfer of money from one corporate entity to another, which cannot be linked to a specific import transaction, does not demonstrate passage of consideration. See HQ H246429, dated November 7, 1995.

In addition, CBP may examine whether the purported buyer paid for the goods, and whether, in general, the roles of the parties and the circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HQ H005222, dated June 13, 2007.

Finally, pursuant to the CBP’s Informed Compliance Publication, entitled “Bona Fide Sales and Sales for Exportation,” CBP will consider whether the buyer provides or could provide instructions to the seller, is free to sell the transferred item at any price he or she desires, selects or could select its own downstream customers without consulting with the seller, and could order the imported merchandise and have it delivered for its own inventory. 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 proposed transactions involved in the ruling request are shipment contracts or destination contracts depends on the shipment terms specified in the documentation.

In this case, under an FOB sale, the risk of loss transfers when the goods pass the ship’s rail. See HQ H097035 dated November 15, 2011. In this regard, the sample submitted documentation, including the sales contract and the commercial invoice and the purchase order, between the Source Trading and the garment manufacturer shows the terms of sale as “FOB Port”. However, the name of the particular port is not specified, nor does it indicate whether the port will be the port of export or the port of import. An FOB port of export term of sale means that risk of loss transfers from the seller to the buyer upon lading onto the outgoing carrier. In the absence of a written instruction to the contrary, it is commonly accepted that title passes simultaneously with assumption of risk of loss. As such, Source Trading would assume title and risk of loss from the point that the garments are loaded on board the vessel.

While the documentation submitted generally seems to support the existence of a bona fide sale of the imported merchandise between Source Trading and the Chinese manufacturer, but since the sample invoice submitted indicates that the terms of sale are FOB Port without a specific port being designated, there is some confusion. Counsel indicates when the invoice was prepared, the parties were unsure from what port the merchandise would be exported.  For the actual transactions, the parties always intend to specify the port of export once it is known and clearly from these sample documents, the garments are destined for shipment to the Los Angeles area. We believe that for the purposes of clarity, the sale terms should indicate which specific port the merchandise will be shipped from or if they do not know the specific port of export at the time the invoice is prepared, at a minimum the shipping terms should indicate the country of export in which the parties intend to have title to the merchandise pass. For example, the shipping terms could be designated as “FOB PORT OF EXPORT CHINA”, which would indicate that the parties intend to have title to the merchandise pass from the seller to the buyer when the merchandise is delivered to the ship at the port of export in China. Assuming the parties follow through and clarify the shipping terms on the actual invoices as the counsel claims they will, we would find there is sufficient evidence to support a bona fide sale between Source Trading and the Chinese garment manufacturer.

We also note that there will be payment for the goods between the buyer and seller as shown by the sample outgoing Remittance Application dated June 12, 2014 drawn on the EastWest Bank, Hong Kong Branch. This document shows that Source Trading will pay the manufacturer, Anhui Jie Sheng Co. Ltd., the same amount of money for the goods that are shown on the submitted manufacturer’s invoice. Therefore, we find that the documentation establishes that there is enough evidence of a bona fide sale between the Chinese manufacturer seller and the middleman, Source Trading.

Clearly Destined for Export to the United States

The next issue that must be considered in this case is whether the evidence presented demonstrates that the merchandise is clearly destined for export to the United States at the time it is sold to the middleman. As noted in HQ 547382, dated February 14, 2002, our prior rulings indicate that CBP hesitates to find a sale for export where merchandise is not shipped directly to the United States without any diversion. In this case, we note that the sales contract indicates that destination for the finished product is for export to Los Angeles U.S.A. only. Similarly, the sample commercial invoice indicates that the merchandise is to be shipped to City of Industry, California. There is further documentation in the form of a Sea Waybill showing that the consignee for the merchandise is New Saga Distribution in City of Industry, California U.S.A. The purchase order shows that Urban Apparel will order the merchandise from Source Trading for shipment to the United States. The sample packing list further confirms that the merchandise will be shipped from China to City of Industry, California. The description of the products, quantities of the products shipped, price, and further details regarding the merchandise contained in the sample documents correspond with each other. You also state that the product labels attached to the imported garments will be in compliance with the Federal Trade Commission requirements and will be affixed to the garments by the manufacturer in the country of origin as part of the manufacturing process. In addition, Source Trading will require that each manufacturer have the garments comply with requirements of U.S. law such as the Consumer Product Safety Improvement Act and the Flammable Fabric Act. Consequently based on the information submitted, we find that the applicable merchandise will be clearly destined to the United States when it is sold by the manufacturer to the middleman.

Arm’s Length Transactions

According to the decision in Nissho Iwai, in order for a transaction to be viable for transaction value purposes, it must be a sale negotiated at arm’s length, free from any non-market influences. You state that Source Trading is not related to the foreign manufacturer and the U.S. affiliate does not participate in any negotiations with the foreign manufacturers. There is a presumption that a transaction will meet this standard if the buyer and seller are unrelated. See T.D. 96-87, supra. Since the buyer in the first sale, is unrelated to the manufacturer/vendors of the imported merchandise, absent evidence to the contrary, it is presumed that the transaction is at “arm’s length”. See HQ 545474 dated August 25, 1995.

Statutory Additions The final element that must be established in order to rebut the presumption that the price actually paid or payable by the importer to the middleman is the transaction value involves the statutory additions to the price that are set forth in 19 U.S.C. §1401a (b)(1). Section 1401a (b)(1) provides that amounts equal to the following must be added to the price actually paid or payable: the packing costs incurred by the buyer with respect to the imported merchandise; any selling commissions incurred by the buyer with respect to the imported merchandise; the value, apportioned as appropriate, of any assist; any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States; and the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller. CBP must be provided with sufficient information to confirm, as between the middleman and the manufacturer, that there are no statutory additions or, alternatively, must be advised of the nature and amount of the statutory additions that must be added to the price actually paid or payable. See, for example, HQ 548494 dated January 26, 2005. In this case, you have advised that Source Trading will not provide any materials, trims or other assists to the factories involved other than labels and will add the value of any such labels to the entered value of the merchandise as they occur. In addition, the information presented indicates that there are no other statutory additions that must be made to the price actually paid or payable between Source Trading and the Chinese manufacturer. Consequently, in accordance with Nissho Iwai, based on the documents presented, we find that the imported merchandise may be appraised using transaction value based on the price that Source Trading pays the Chinese manufacturer. HOLDING: The information presented in this case indicates that the sale between the Chinese manufacturer and the middleman (Source Trading) will constitute a bona fide sale conducted at arm’s length and that the merchandise will be clearly destined for export to the United States at the time Source Trading purchases, or contracts to purchase, the merchandise. Therefore, we find that the price paid between the manufacturer and Source Trading may serve as the basis of appraisement value for the imported merchandise.  Section 177.9(b)(1), U.S. Customs and Border Protection Regulations (19 CFR 177.9(b)(1)), provides that "[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect." The application of a ruling letter by a CBP field office to transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based. 

A copy of this ruling letter should be attached to the entry documents at the time this merchandise is 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.

Sincerely,

Monika R. Brenner, Chief
Valuation and Special Programs Branch