OT:RR:CTF:VS H316932 RMC
Apparel, Footwear and Textiles Center
U.S. Customs and Border Protection
237 West Service Rd.
Champlain, NY 12919
Attn: Jason Lemieux
RE: Application for Further Review of Protest No. 2704-21-150962; Sale for Export; Apparel
Dear Center Director:
This is in response to the Application for Further Review (“AFR”) of Protest No. 2704-21-150962, timely filed by [ ] (“Protestant”), on January 26, 2021, contesting the appraised value of apparel imported from China.
You have asked that certain information submitted in connection with this ruling request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this decision.
The Protestant is a trading company registered in Hong Kong and a non-resident importer in the United States. According to the information provided, the Protestant works with commissioned agents in the United States to solicit orders for various apparel products. The Protestant then contracts with a suitable vendor in China to procure the goods.
On June 29, 2020, the Protestant entered the merchandise subject to this protest, which consists of various girls’ garments. It based the declared value of the merchandise on the price actually paid or payable to [ ] (“Vendor”), its Chinese vendor.
On July 20, 2020, the Apparel, Footwear and Textiles Center issued a U.S. Customs and Border Protection (“CBP”) Form 28 (Request for Information) seeking documents relevant to the valuation of the merchandise (such as the purchase order, commercial invoice, and proof of payment) as well as the classification of the merchandise (such as digital photos of the merchandise, sketches, or samples). On August 17, 2020, the Protestant provided a short narrative response to the Center’s inquiries but did not provide any further underlying documentation. CBP Form 29 (Notice of Action – Taken), dated August 27, 2020, the Center determined that the sale for export between the Protestant and its U.S. customer, and not between the Vendor and the Protestant. Accordingly, the Center advanced the value of the merchandise to reflect the price paid by the Protestant’s U.S. customer.
In this AFR, the Protestant contends that the Center has incorrectly based the value of the imported merchandise on a purely domestic sale between the Protestant and its U.S. customer. According to the Protestant, the underlying documentation demonstrates that it was a bona fide buyer that bore title and risk of loss from the time that the goods were entered in the United States until delivery to the U.S. customer. The Protestant therefore points to the sale between the Vendor and itself as the relevant “sale for export” and argues that the entered value was correct.
In support of its position, the Protestant provided a complete paper trail for the transaction under consideration. The purchase orders/master cut tickets between the U.S. customer and the Protestant indicate that on January 8, 2020, the U.S. customer submitted a series of orders for various apparel goods (indicated by purchase order numbers 55211, 55212, 55126, 55127, 55128, 55129, 55158). The purchase orders list the Protestant as the “Vendor” and the shipping terms as LDP. The purchase orders stipulate that the merchandise is required to comply with both state and federal laws per the Consumer Product Safety Improvement Act and California Proposition 65 requirements for hazardous chemicals.
On January 10, 2020, the Protestant submitted a purchase order to the Vendor for the same merchandise under the same purchase order numbers on FOB (Shanghai) terms. On June 10, 2020, a Bank of China (Hong Kong) “customer advice of outward remittance” referencing the purchase orders listed above shows a payment from the Protestant to the Vendor in the amount indicated in the purchase orders between the Protestant and the Vendor, which matches the declared value listed on the entry summary. According to the Protestant, no sales contracts exist for the transactions at issue and the full contractual terms are set forth in the various purchase orders.
A bill of lading dated June 17, 2020, lists the Vendor as the shipper, the Protestant as the consignee, and the U.S. customer as the notify party. The port of loading is Shanghai, and the port of discharge is Los Angeles. The Protestant states that once CBP released the goods, they were delivered to the U.S. customer’s warehouse in California.
In addition to the issue of identifying which transaction constitutes the sale for export to the United States, this case also raises questions about whether additional charges that the Protestant incurred in connection with the imported merchandise should be included in the price actually paid or payable or added as an addition. Specifically, the Protestant paid commissions to its U.S. sales agents and additional sums to third parties for quality control inspections, fabric testing, and social compliance testing.
Regarding the commissions, the Protestant provided copies of the commission agreement, invoice for the commissions for the orders covered by this AFR, and proof of payment. The commission agreement provides that the Protestant contracts with [ ] (“Agent”) to be its “business representative in the USA market from the date of Jan 1st 2020 to December 31st 2020.” Among the Agent’s responsibilities and services are to “provide expansion and service for the current clients”—namely, the U.S. buyer in this case. As compensation, the Agent earns a sales commission that “will not exceed $1.00 per unit” for sales to the U.S. buyer. The Agent’s invoice dated June 20, 2020, identifies the purchase orders listed above, a commission of $0.80 per unit, and a total commission amount for the covered orders. A “customer advice of outward remittance” from Bank of China (Hong Kong) shows a matching payment from the Protestant to the Agent’s Los Angeles bank account.
The Protestant also hired an employee to inspect cut panel, screen, embroidery, and sample garments before samples were sent to the U.S. customer for its approval. The Protestant provided an employment contract indicating that this individual was hired on a full-time basis to conduct these quality-control inspections in mainland China for all orders destined for the U.S. customer. The employee’s compensation takes the form of a monthly salary, which was substantiated with bank records indicating a payment to the inspector in the amount listed in the employment contract.
Additionally, the Protestant hired Bureau Veritas to carry out a final inspection on the merchandise before shipment to the United States. An invoice dated May 27, 2020, from Bureau Veritas Hong Kong Limited to the Protestant lists the service request as “final random inspection” for the purchase orders listed above to take place on June 5, 2020. Bank records indicate that a payment matching the invoice amount was made to Bureau Veritas on June 3, 2020.
Lastly, the Protestant also hired Bureau Veritas to carry out “social compliance testing,” which it describes as ensuring that the fabric used to produce the merchandise complies with the Consumer Product Safety Improvement Act in the United States. To substantiate these costs, the Protestant provided an invoice from Bureau Veritas Consumer Products Services (Shanghai) to the Protestant listing each style of garment and the corresponding inspection fee, as well as bank records showing a payment to Bureau Veritas on May 27, 2020, for the total amount invoiced for social compliance testing.
Whether transaction value should be based on the alleged sale between the foreign vendor and the importer, rather than on the transaction between the importer and its U.S. customer.
Whether the payments for commissions and inspection services should be included in the price actually paid or payable for the merchandise or added as a statutory addition.
LAW AND ANALYSIS:
Sale for Export to the United States
Merchandise imported into the United States is appraised for customs purposes 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 primary 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 amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. § 1401a(b)(1). When transaction value cannot be applied, the appraised value is determined based on the other valuation methods in the order specified in 19 U.S.C. § 1401a(a).
Here, the Protestant contends that the price it paid to the Vendor constitutes an acceptable transaction value for the entries at issue. Conversely, the Center believes that the transaction value should be based on the price actually paid or payable by the Protestant’s U.S. customers. Under 19 U.S.C. § 1401a, we must first determine whether the Vendor “sold” the merchandise to the Protestant and, if so, whether that sale was “for exportation to the United States.” If that is the case, and all other statutory requirements are met, the Protestant may base transaction value on the price actually paid or payable to the Vendor.
In order for transaction value to be used as a method of appraisement, there must be a bona fide sale between the buyer and seller. 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)).
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 Headquarters Ruling (“HQ”) 545474, dated August 25, 1995; and HQ 545709, dated May 12, 1995.
Finally, as explained in CBP’s Informed Compliance Publication entitled “Bona Fide Sales and Sales for Exportation,” CBP will consider whether the buyer provided or could provide instructions to the seller, was free to sell the transferred item at any price he or she desired, selected 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.
Here, no sales contracts exist that set forth the conditions under which title and risk of loss pass between the buyer and the seller. However, the Protestant points to the shipping terms set forth in the purchase orders as evidence of passage of title and risk of loss. The documentation provided states that the applicable shipping terms are FOB (Shanghai) for the transaction between the Vendor and the Protestant, and LDP (Los Angeles) in the transaction between the Protestant and its U.S. customers.
According to the INCOTERMS 2010 rules, FOB means that “the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment . . . [and] the risk of loss or damage to the goods passes when the goods are on board the vessel . . . .” See Incoterms 2010, International Chamber of Commerce, http://iccwbo.org/resources-for-business/incoterms-rules/incoterms-rules-2010/ (last visited July 8, 2021). Although LDP is not an official INCOTERM, counsel states that it is “a term of sale that is common in the apparel industry and equates with the INCOTERM DDP.” Under a DDP sale,
the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.
Taken together, the shipping terms in the two transactions therefore establish that risk of loss passed from the Vendor to the Protestant when the merchandise was loaded onto the vessel in Shanghai, and subsequently from the Protestant to the U.S. customer when cleared through Customs and brought to the U.S. customer’s warehouse in Los Angeles. As a result, the Protestant retained risk of loss during the shipment from Shanghai to the destination in Los Angeles.
On the issue of transfer of title, however, CBP has previously explained that INCOTERMS and other shipping terms do not, by themselves, establish when title transfers. See H008101, dated October 9, 2012, quoting St. Paul Guardian Ins. Co. v. Neoromed Med. Sys. & Support, 2002 WL U.S. Dist. LEXIS 5096 at *12 (“INCOTERMS, however, only address passage of risk, not transfer of title.”) (citations omitted). The parties may incorporate INCOTERMS into a sales contract that specifies that title passes at the same time as risk of loss. But here, as in H008101, no sales contracts are available.
Without a sales contract between the parties, the Uniform Commercial Code (“UCC”) aids in determining when title to the goods was transferred. In HQ 543446, dated April 2, 1986, we relied on UCC § 2-401(2) which provided, in pertinent part:
Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even though a document of title is to be delivered at a different time or place . . . .
Applying UCC § 2-401(2), we concluded “unless the parties otherwise agree, title passes from the seller to the buyer on delivery of the property, irrespective of whether the agreed-upon purchase price has actually been paid.” In this case, the seller (namely, the Vendor) delivered when the goods were placed on board the vessel in Shanghai. Therefore, under UCC § 2-401(2), title transferred from the Vendor to the Protestant at that time.
Additionally, the other evidence in this case also supports a finding that the transaction between the Vendor and the Protestant constituted a bona fide sale for purposes of 19 U.S.C. § 1401a. The documentation provided shows that the Protestant issued a purchase order to the Vendor, the Vendor issued an invoice to the Protestant, and the Protestant made payment against that invoice. Moreover, the roles of the Vendor and the Protestant and the circumstances of the transaction are consistent with a sales transaction. In sum, we are satisfied that the Protestant purchases the imported merchandise from the Vendor and subsequently sells it to customers in the United States.
Having established that the transaction between the Vendor and the Protestant constitutes a bona fide sale, the second issue under 19 U.S.C. § 1401a is whether the merchandise was sold “for exportation to the United States.” Here, the Protestant issued purchase orders to the Vendor to fulfill existing orders that it had received from U.S. customers. Under the U.S. customer orders, the merchandise was required to comply with both state and federal laws per the Consumer Product Safety Improvement Act and California Proposition 65 requirements for hazardous chemicals. The Vendor’s invoice to the Protestant clearly indicates that the merchandise was destined for Los Angeles. Additionally, the bill of lading demonstrates that the merchandise was shipped directly from Shanghai, China to Los Angeles. Accordingly, we find that the sale was “for exportation to the United States” and that transaction value should be based on the price actually paid or payable to the Vendor.
This finding is consistent with CBP decisions considering similar transactions. In HQ W548670, dated November 19, 2007, as in this case, a U.S. sales agent collected apparel orders on behalf of the importer. The importer then completed a single consolidated purchase order with the Chinese manufacturer. The transaction between the importer and the manufacturer was on an FOB (Shanghai) basis, while the transaction between the importer and its U.S. customers listed the freight terms as LDP. In finding that the transaction between the manufacturer and the importer constituted a sale, CBP emphasized that, as is the case here, the importer issued a purchase order to the manufacturer, the manufacturer issued an invoice, the importer paid the invoice, and the title and risk of loss passed from the manufacturer to the importer when the goods passed the ship’s rail in Shanghai. Moreover, the fact that U.S. customers had pre-ordered the merchandise supported a finding of a sale “for export” to the United States. As a result, CBP held that the transactions could be appraised based on the price actually paid or payable by the U.S. importer.
Payments for Commission and Inspection Services
As a result of our finding that transaction value should be based on the price actually paid or payable to the Vendor, we must also consider whether the payments that the Protestant made for commission and inspection services should be included in the price actually paid or payable or added as statutory additions. The term “price actually paid or payable” is defined in pertinent part as “the total payment (whether direct or indirect…) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C. § 1401a(b)(4). The price actually paid or payable shall be increased by the amounts attributable to the five statutory additions enumerated in 19 U.S.C. § 1401a(b)(1)(A) through (E) only to the extent that each such amount is not otherwise included within the price actually paid or payable. 19 U.S.C. § 1401a(b)(1).
When considering whether the payments for commission and inspection services are part of the price actually paid or payable for the merchandise, we must consider whether they are made “to” or “for the benefit” of the seller (in this case, the Vendor). See 19 U.S.C. § 1401a(b)(4). Here, the Protestant does not make the commission payment or the inspection payments to the Vendor; the payments go directly to the relevant third-party service providers. Moreover, the payments are not made “for the benefit” of the Vendor. Instead, the payments are made to provide services that benefit the buyer—namely, soliciting orders on the Protestant’s behalf and ensuring that the merchandise complies with standards that its downstream customers have specified. See, e.g., HQ W563469, dated March 21, 2006 (holding that inspection payments that the buyer made to an unrelated entity in China to ensure that the merchandise met the buyer’s requirements did not inure to the benefit of the sellers and therefore did not form part of the price actually paid or payable). Accordingly, the commission and inspection payments do not form part of the price actually paid or payable for the merchandise.
The enumerated additions to the price actually paid or payable include the value of any selling commissions incurred by the buyer with respect to the imported merchandise. A “selling commission” is any commission paid to the seller’s agent, who is related to or controlled by, or works for or on behalf of, the manufacturer or the seller. 19 C.F.R. § 152.102(b). Bona fide buying commissions, however, are not included in transaction value as part of the price actually paid or payable or as an addition thereto. See Pier 1 Imports, Inc. v. United States, 13 Ct. Int’l Trade 161, 164, 708 F. Supp. 351, 354 (1989); Rosenthal-Netter, Inc. v. United States, 12 Ct. Int’l Trade 77, 78, 679 F. Supp. 21, 23 (1988), aff’d, 861 F.2d 261 (Fed. Cir. 1988); and Jay-Arr Slimwear, Inc. v. United States, 12 Ct. Int’l Trade 133, 136, 681 F. Supp. 875, 878 (1988).
Here, as the sale for exportation to the United States occurs between the Vendor and the Protestant, the Protestant is the buyer and the Vendor is the seller. Therefore, for the commissions that the Protestant pays to the Agent to be selling commissions under 19 U.S.C. § 1401a(b)(1)(B) and 19 C.F.R. § 152.102(b), the Agent must either be controlled by, or work for, the Vendor. Here, the documents provided demonstrate that the Agent works on the Protestant’s behalf and for its benefit as its “business representative in the USA market” and works to “provide expansion and service for current clients.” There is no evidence that the Vendor has any involvement in, or control of, the Agent’s activities. Accordingly, the commissions that the Protestant paid to the Agent are not selling commissions under 19 U.S.C. § 1401a(b)(1)(B) and 19 C.F.R. § 152.102(b) and should not be added to the price actually paid or payable for the merchandise.
The enumerated additions to the price actually paid or payable also include the value of any assist as defined in 19 U.S.C. 1401a(h)(a)(A):
The term “assist” means any of the following if supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the United States of the merchandise:
Materials, components, parts, and similar items incorporated in the imported merchandise.
Tools, dies, molds, and similar items used in the production of the imported merchandise.
Merchandise consumed in the production of the imported merchandise.
Engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise.
Regarding inspection fees, CBP has held that “quality control service does not constitute an assist, unless it involves production-related design and intimate involvement in the nature of the goods sold.” See HQ H253767, dated March 30, 2015. In this case, the inspection services carried out by the Protestant’s employee in China and by Bureau Veritas did not rise to the level of “production-related design” or “intimate involvement in the nature of the goods.” The Protestant’s inspector in China was not involved in the design process of the merchandise; his duties were limited to inspecting cut panel, screen, embroidery, and sample garments for compliance with the U.S. customer’s specifications before forwarding those items to the U.S customer for its final approval. It was the U.S. customer, rather than the Protestant’s inspector, that made all design-related decisions. Bureau Veritas’s final inspection of the finished merchandise likewise did not constitute “production-related design” as it occurred after the manufacturer had completed production and merely selected random garments to ensure compliance with the end U.S. customer’s specifications. Finally, Bureau Veritas’s “social compliance testing,” did not implicate design as it merely ensured that the manufacturer actually used fabrics that comply with U.S. regulations, as specified by the end U.S. customer. Accordingly, the inspection fees were not an assist as defined in 19 U.S.C. 1401a(h)(a)(A) and should not be added to the price actually paid or payable for the merchandise.
The protest should be granted. Because a bona fide sale for export to the United States occurred between the Vendor and the Protestant, transaction value is based on the price actually paid or payable by the Protestant. The commissions and inspection fees do not constitute statutory additions and should not be added to the price actually paid or payable for the imported merchandise.
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, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and to the public on the Customs Rulings Online Search System (CROSS) at https://rulings.cbp.gov/ which can be found on the U.S. Customs and Border Protection website at http://www.cbp.gov and other methods of public distribution.
For Craig T. Clark, Director
Commercial and Trade Facilitation Division