OT:RR:CTF:VS H327067 AP
Center Director
Center of Excellence and Expertise for Machinery
U.S. Customs and Border Protection
109 Shiloh Dr., Suite 300
Laredo, TX 78045
Attn: Wilbert Jones, Supervisory Import Specialist
RE: Modification of HQ H316892; Internal Advice Request; Transaction Value; Multi-Tiered Transaction
Dear Center Director:
This is in reference to an e-mail, dated August 22, 2022, on behalf of JPW Industries (“U.S. importer”), requesting reconsideration of Headquarters Ruling Letter (“HQ”) H316892, dated July 20, 2022, which concluded that the imported merchandise could not be appraised based on the first sale between JPW Industries’ related company, JPW Tool Group Hong Kong Ltd (“middleman” or “JPW HK”) and unrelated manufacturers in China and Taiwan. Upon review, we are amending HQ H316892 with respect to the effect of HQ 546316, dated May 29, 1996, on HQ 546192, dated Feb. 23, 1996, and the transfer of title from the manufacturers to the U.S. importer without changing our conclusion. Therefore, for the reasons set forth below, we hereby modify HQ H316892.
The importer has asked that certain information submitted in connection with this internal advice be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the importer’s request for confidentiality is approved. The information contained within brackets in italics in the internal advice decision and all attachments to the internal advice request, forwarded to our office, will not be released to the public, and will be withheld from published versions of this decision.
FACTS:
The U.S. importer serves as a distributor of metal, woodworking, and industrial tools. It is part of a U.S.-based multinational group engaged in the manufacture and distribution of metal, woodworking, and industrial tools in the U.S. and worldwide. The importer purchases the products it imports into the United States through its related middleman operating through branch offices in Taiwan and China. The middleman is responsible for product sourcing from the Asia Pacific region. Specifically, the middleman identifies and maintains relationships with suppliers, negotiates prices, and communicates with distributors in the individual markets. The middleman does not hold physical inventory and does not maintain an inventory account in its books and records. The middleman records purchases to its costs of sales account.
The submitted U.S. Transfer Pricing Documentation Study for the Fiscal Year Ended December 31, 2014, prepared for the importer, describes the U.S. importer as having “a strong presence in the U.S. market for manual metalworking and woodworking machinery and industrial workholding.” The study also states that the middleman operates “through its branch office in Taiwan, and its representative office in China” and assists with product development, engineering, and direct sourcing of the company’s products through China and Taiwan, and sales to third party customers in and outside of the region.
The Transfer Pricing Analysis and Report for the Fiscal Year Ended December 31, 2018, prepared for the importer, explains that the U.S. importer is responsible for negotiating and selling to customers in North America. Its customers are mainly wholesale distributors, retail chain stores, and specialty stores. Most products sold are handled and processed by the importer through a warehousing facility in Tennessee. Products are also drop-shipped directly from Asia to customers.
Pursuant to the Master Supply Agreement between the U.S. importer and the middleman, the U.S. importer designs, markets, and sells products, while the middleman sources, procures, and supplies products. The importer purchases the products from the middleman. The products consist of metalworking machinery, woodworking machinery, hand tools and toolsets, shop equipment, and other related products supplied to the importer by the middleman, which are manufactured by third parties with whom the middleman coordinates, manages, and oversees. The products are manufactured according to the importer’s standards and the quantities specified in the importer’s purchase orders. Unless otherwise agreed by the parties, title to and risk of loss pass from the middleman to the importer at the international date line. All products are considered delivered to the importer at the international dateline. The middlemen’s services are “non-exclusive,” and the importer may purchase products from other sources. All purchase orders submitted by the importer need to specify the product type and quantity, and the requested delivery date. In the event of any inconsistency between the agreement and the purchase order, the terms and conditions of the agreement prevail. The purchase price is an amount agreed upon by the middleman and the importer. The full amount of the purchase price is due and payable no later than 30 calendar days after the invoice date unless otherwise agreed by the parties. Payment of any amount by either party is by direct bank transfer to the payee’s bank account or by debit or credit to the relevant party’s intercompany account.
On December 20, 2019, the importer, through its customs consultant, explained that “while JPW HK is responsible for arranging transportation with approved carriers, JPW Industries bears the cost of international freight.”
The marine cargo insurance policy valid from November 12, 2017 to November 12, 2018, was issued “[f]or the account of JPW Industries, Inc. (known as the Assured)[,] its affiliates, subsidiaries and for the related companies for which this Policy is at risk.” The insurance policy covers “all lawful goods and/or merchandise of every description in packing suitable for the intended voyage but consisting principally of: wood working, metal working tools, and similar merchandise.” The policy covers “all shipments, lost or not lost, from ports and/or places in the World, to ports and/or places in the World directly or via ports and/or places in any order, including the risk of transshipment by land, air, or water.” The goods are insured “[a]gainst all risks of physical loss or damage from any external cause.” The U.S. importer paid for the policy.
The U.S. importer first places a purchase order to the related middleman for specific qualities of certain goods with different shipping dates, who issues a purchase order for the same merchandise to one of the unrelated manufacturers, who then produces the merchandise according to the requested specifications. The manufacturers ship the ordered merchandise in accordance with the requested shipping dates directly to the importer in the U.S. The merchandise does not ship to or enter the physical inventory of the middleman. The U.S. importer renders payment to the middleman, who in turn pays the manufacturers. Title and risk of loss to the goods are supposed to pass from the manufacturers to the middleman in accordance with free on board (“FOB”) Port of Export Incoterms when the product is loaded onto the shipping vessel at the port of export. Under the Master Supply Agreement memorializing the parties’ practices since January 2018 title and risk of loss to the goods are supposed to pass from the middleman to the U.S. importer when the shipping vessel crosses the international date line.
The importer has submitted the following supporting entry documentation:
Purchase from [X] in China (“manufacturer A”)
Purchase order (“PO”) number (“No.”) [X], dated March 28, 2018, from the importer to the middleman. It requests that the merchandise be shipped directly to the importer in La Vergne, TN. The shipping terms are “FOB-ocean freight.” Manufacturer A located in China is listed as the requested manufacturer. The merchandise consists of tools such as reversible vises made to certain specifications. The required ship date is September 20, 2018. Part no. 14800 described as “4800 reversible vise 8 in jaw ship except” with a quantity of 240 pieces priced at $[X] per unit had a total price of $[X]. All the merchandise (18,200 pieces) listed on the invoice was priced at $[X].
Pursuant to the Importer’s Purchase Order Terms and Conditions, no changes in the design and specifications can be made without prior written consent of the importer. The importer must be notified at least 90 days in advance of any changes in price. Upon production of the merchandise, the manufacturers issue an invoice to the middleman, who subsequently issues an invoice to the U.S. importer.
PO no. [X], dated March 29, 2018, from the middleman to manufacturer A indicates that the vises will be shipped directly by Manufacturer A to the U.S. importer in La Vergne, TN. The shipping terms are “FOB-ocean freight.” The requested delivery date is September 20, 2021. The total merchandise (18,200 pieces) is made according to the importer’s specifications and is priced at $[X]. Part no. 14800 includes 240 pieces of bench vises priced at $[X] per unit for a total of $[X].
Commercial invoice no. [X], dated September 21, 2018, from manufacturer A to the middleman states that the port of loading is Quingdao, China and the place of delivery is in La Vergne, TN. The 240 pieces of part no. 14800 are priced at $[X] per unit for a total of $[X]. The bill of lading no. is [X]. The total merchandise (7,237 pieces) is priced at $[X].
Commercial invoice no. [X], dated September 27, 2018, from the middleman to the importer states that the merchandise (7,237 pieces) ships from China to the United States on September 21, 2021. Payment is due 30 days from the bill of lading. The invoice amount for part 14800 is $[X] per unit and the total price for 240 pieces is $[X]. The total merchandise (7,237 pieces of vises, clamps, and other similar articles) is priced at $[X].
The September 21, 2018 packing list issued by manufacturer A to the middleman for invoice [X] states that the destination is La Vergne, TN. The 7,237 pieces have gross weight 127,836 kg and net weight 9,840 kg. The 240 pieces of part no. 14800 have gross weight 10,080 kg and net weight 9,840 kg.
The September 21, 2018 packing list from the middleman to the importer states that the estimated delivery date is September 21, 2018. The 240 pieces of part no. 14800 have gross weight 10,080 kg and net weight 9,840 kg. The 7,237 pieces of merchandise including part
no. 14800 have gross weight 127,836 kg and net weight 9,840 kg.
The September 21, 2018 bill of lading no. [X] lists manufacturer A as the shipper on behalf of the middleman. The importer is listed as the consignee. The port of lading is Quingdao, China; the port of discharge is Port Rupert in Canada; and the port of delivery is La Vergne, TN. The gross weight is 127,836 kg. The merchandise is shipped on September 21, 2018.
Per the status notification for bill of lading [X], dated October 15, 2018, the cargo is discharged in Canada in Prince Rupert, and the first U.S. port of entry is Rainier, MN. The gross weight is 127,836 kg. The importer is the ultimate consignee. The status notification references the in-bond transit (“IT”) numbers and rail bond numbers for the containers.
According to the proof of release dated October 26, 2018, the importer is the importer of record and consignee. The port of entry is Nashville, TN. The shipment was released in Nashville, TN on October 24, 2018. The proof of release references the IT and rail bond numbers.
The middleman’s internal accounting system screenshot and bank statement indicate that on December 7, 2018, the middleman paid manufacturer A $[X] per invoice no. [X]. The importer’s internal accounting system screenshot and the middleman’s bank statement of October 19, 2018, show that from September 28, 2018 to October 19, 2018, the importer paid the middleman $[X] per invoice no. [X].
The entry summary reveals that the merchandise was imported into the United States on October 14, 2018. The exporting country was China and the importer in La Vergne, TN was the U.S. importer of record. The total entered value for 7,237 pieces of vises, clamps and other similar articles was $[X]. The gross weight was 120,807 kg. The merchandise transited from Canada to the United States in-bond via rail to CSX Intermodal Terminal P587 in Nashville, TN as indicated by the rail bond numbers listed on the entry.
Purchase from [X] in Taiwan (“manufacturer B”)
PO no. [X] dated February 6, 2018, from the importer to the middleman indicates that the shipping terms are “FOB-ocean freight” and includes the requested product specifications for an air filtration system. The requested ship dates are August 14, 2018 to October 16, 2018. The merchandise would be shipped to the importer in La Vergne, TN. The price for air filtration system part no. 708620B is $[X] (296 pieces at $[X] each). The total price of the purchase order (1,776 pieces) is $[X].
Pursuant to the Importer’s Purchase Order Terms and Conditions, no changes in the design and specifications can be made without prior written consent of the importer. The importer must be notified at least 90 days in advance of any changes in price.
PO no. [X] dated July 8, 2018, from the middleman to manufacturer B located in Taiwan states that the shipping terms are “FOB-ocean freight,” and the requested shipping dates are August 14 to October 16, 2018. The price for air filtration system stock no. 708620B is $[X] (296 pieces at $[X] each). The total price of the purchase order (1,776 pieces) is $[X].
Invoice no. [X] dated August 8, 2018 from manufacturer B to the middleman states that the sailing date is August 13, 2018. The merchandise is shipped from Taiwan and the destination is La Vergne, TN. The shipping terms are “FOB-Taiwan.” The air filtration is manufactured in Taiwan according to the importer’s specifications. The price for air filtration system part no. 708620B is $[X] (296 pieces at $[X] each). The total invoice price (402 packages/1,691 pieces) is $[X].
Commercial invoice no. [X] dated August 13, 2018, from the middleman to the importer confirms that the sailing date is August 13, 2018, the merchandise ships from Taiwan, and the final destination is La Vergne, TN. A total of 296 pieces of part no. 708620B were ordered at $[X] per unit for a total of $[X]. The total invoiced price (1,691 pieces) is $[X]. The importer explains that a rounding difference of $1.18 between the total amounts for part no. 708620B resulted in a discrepancy between the price here ($[X]) and in PO no. [X] ($[X]). Payment is due 30 days from the bill of lading.
Packing list no. [X] dated August 13, 2018, from the middleman confirms that the 296 pieces of part no. 708620B with net weight 7,252 kg and gross weight 8,199.20 kg shipped from Taiwan to La Vergne, TN. All the merchandise that shipped to La Vergne, TN consisted of 1,691 pieces with net weight 15,752 kg and gross weight 18,753 kg.
Bill of lading no. [X] dated August 13, 2018 lists manufacturer B as the shipper and the importer as the consignee. The port of loading is Taichung, Taiwan; the port of discharge is Prince Rupert; Canada, and the place of delivery is La Vergne, TN. The merchandise is described as 402 packages of “woodworking machine and parts” with gross weight 18,753 kg included the 296 packages with total gross weight 8,199 kg.
The status notification dated August 21, 2018 confirms that two containers containing 402 packages with gross weight 18,753 kg including the 296 pieces with gross weight 8,199 kg exported on behalf of the middleman were loaded in Taichung, Taiwan; were discharged at Prince Rupert, Canada; and were delivered in La Vergne, TN. The merchandise cleared through customs in Nashville, TN. The notification references the IT number and the rail bond number. After being discharged from the ocean vessel in Prince Rupert, Canada, the merchandise is loaded onto a rail line while remaining in-bond to the final place of delivery in La Vergne, TN via rail. The same container numbers are listed as on the packing list and bill of lading.
The proof of release dated July 22, 2019, confirms that on October 4, 2018, the merchandise (402 cartons) was released from the Port of Nashville, TN. The proof of release references the IT number and rail bill number indicated in the status notification.
The middleman’s internal system screenshot and bank statement show that the middleman paid manufacturer B $[X] per invoice no. [X] on September 26, 2018, which included $[X] for part no. 708620B.
The importer’s internal system screenshot shows that the importer paid the middleman $[X] per invoice no. [X]. The payment vouchers are dated October 31 and November 22, 2018, and the advance payments were made by the importer from August 31 to November 22, 2018. The October 19, 2018 statement from the middleman’s bank confirms that the payments amounting to $[X], which includes $[X] for part no. 708620B, were transferred from the importer’s bank account from August 31, 2018 to November 22, 2018.
The entry summary shows that the merchandise was imported into the United States on September 18, 2018; the importer was the importer of record; and International Falls, MN was the U.S. port of entry. The total entered value for 402 cartons was $[X]. The total gross weight was 18,754 kg. The merchandise transited from Canada to the United States in-bond via rail to CSX Intermodal Terminal P587 in Nashville, TN.
Purchase from [X] in Taiwan (“manufacturer C”)
PO no. [X] dated August 3, 2018, from the importer to the middleman includes the requested product specifications for the merchandise (band saw and parts, 582 pieces) with a total value of $[X]. The requested ship dates are September 11, 2018 to January 15, 2019. The PO includes part number 413452, with description “HVBS-710SG 7x10.5 GearHead Miter Bandsaw,” and a quantity of 29 pieces ordered at $[X] per unit, with a total value of $[X]. The merchandise would be shipped to the importer in La Vergne, TN.
Pursuant to the Importer’s Purchase Order Terms and Conditions, no changes in the design and specifications can be made without prior written consent of the importer. The importer must be notified at least 90 days in advance of any changes in price.
PO no. [X] dated August 3, 2018, from the middleman to manufacturer C located in Taiwan states that the shipping terms are “FOB-ocean freight.” The requested shipping date for the 29 pieces of part number 413452 is October 23, 2018. Each unit is valued at $[X] and the total price for part number 413452 is $[X]. The merchandise (91 pieces) listed, that includes part number 413452, is priced at $[X].
Invoice no. [X] dated October 24, 2018 from manufacturer C to the middleman states that the sailing date is October 27, 2018. The merchandise (band saw and parts) is shipped from Taichung, Taiwan, and the destination is La Vergne, TN. The shipping terms are “FOB-Taichung, Taiwan.” The merchandise is manufactured in Taiwan according to the importer’s specifications. The total invoiced price for the 29 pieces of part number 413452 is $[X] per unit or a total of $[X]. The listed price for 806 units of band saw and parts is $[X].
Commercial invoice no. [X] dated October 29, 2018, from the middleman to the importer confirms that the sailing date is October 27, 2018; the merchandise is shipped from Taichung, Taiwan; and the final destination is La Vergne, TN. The total quantity of 29 units ordered at $[X] per unit, totals $[X]. The importer notes that there is a rounding difference of $0.04 between this invoice and PO no. [X] from the importer to the middleman ($[X]). The price for the 806 units is $[X]. The payment terms are “T/T 30 days bill of lading.”
Packing list no. [X] dated October 24, 2018, from manufacturer C confirms that 806 units with net weight 37,171.55 kg and gross weight 40,996 kg shipped from Taiwan to La Vergne, TN.
Packing list no. [X] dated October 27, 2018, from the middleman confirms that 806 units with net weight 37,171.55 kg and gross weight 40,996 kg, which includes the 29 units of part number 413452 with net weight 5,278 kg and gross weight 5,858, shipped from Taiwan to La Vergne, TN.
Bill of lading no. [X] dated October 25, 2018, lists manufacturer C as the shipper and the U.S. importer as the consignee. The foreign place of receipt is Taichung, Taiwan; the port of loading is Kaohsiung, Taiwan; the port of discharge is Vancouver, Canada; and the place of delivery is La Vergne, TN. The merchandise is described as 226 packages of “band saw and parts” with gross weight 40,996 kg and includes the 29 units of part no. 413452 with gross weight 5,858 kg.
The status notification dated November 13, 2018, confirms that four containers containing 226 packages with gross weight 40,996 kg (including the 29 units of part no. 413452 with gross weight 5,858 kg) exported on behalf of the middleman were loaded in Kaohsiung, Taiwan; were discharged in Vancouver, Canada; and were delivered in La Vergne, TN. The merchandise was cleared through customs in Nashville, TN. The containers moved in-bond through a rail bond from Canada to the United States. The first U.S. port of entry was Ranier, MN. The status notification references the IT number and rail bond number, and the same containers indicated on the packing list and the bill of lading.
The proof of release dated July 22, 2019, confirms that on December 7, 2018, the merchandise was released from the Port of Memphis, TN. The importer of record and the consignee were the same. The proof of release references the IT number and the rail bond number.
The middleman’s internal system screenshot and bank report statement show that on January 8, 2019, the middleman paid manufacturer C $[X], the amount listed on the first sale invoice no. [X].
The importer’s internal system screenshot shows that from October 19, 2018 to December 27, 2018, the importer paid the middleman $[X], the total amount listed on second sale invoice no. [X].
Per the entry summary, the merchandise was imported into the U.S. on November 30, 2018; the importer is the importer of record; and International Falls, MN is the U.S. port of unlading. The total entered value is $[X] (rounded up from $[X]). The total gross weight is 40,995 kg. The rail bond number is included on the entry showing that the merchandise (including the 29 units of part no. 413452) transited from Canada to the United States in-bond via rail.
Purchase from [X] in Taiwan (“manufacturer D”)
PO no. [X] dated March 30, 2018, from the importer to the middleman includes the requested product specifications for the merchandise (woodworking machine and parts). The PO includes part number 1791317, with description “PM54HH: PW 6” LONG DLX JOINTER HELICAL HEAD,” 104 pieces at $[X] per unit for a total price of $[X]. The requested ship dates are May 22, 2018 to June 19, 2018. The merchandise would be shipped to the importer in La Vergne, TN. The total merchandise (1,557 pieces) is $[X].
Pursuant to the Importer’s Purchase Order Terms and Conditions, no changes in the design and specifications can be made without prior written consent of the importer. The importer must be notified at least 90 days in advance of any changes in price.
PO no. [X] dated April 13, 2018, from manufacturer D to the middleman states that the shipping terms are “FOB-ocean freight,” and the required shipping dates are May 22, 2018 to June 19, 2018. The total price for the merchandise (748 pieces) is $[X]. Part number 1791317, 104 pieces are priced at $[X] each for a total of $[X].
Invoice no. [X] dated July 4, 2018, from manufacturer D to the middleman states that the payment terms are “O/A 60 days from B/L date.” The shipping terms are “F.O.B. Taiwan.” The merchandise (woodworking machine and parts) is manufactured according to the importer’s specifications. The merchandise (539 units) valued at $[X] is shipped from Taichung, Taiwan and the destination is La Vergne, TN. The 104 units of part number 1791317 are priced at $[X] each for a total of $[X].
Commercial invoice no. [X] dated July 10, 2018, from the middleman to the importer confirms that the sailing date was on or about July 10, 2018; the merchandise shipped from Taichung, Taiwan; and the final destination is La Vergne, TN. The total quantity is 539 packages, and the invoiced price is $[X]. The payment terms are “T/T 30 days bill of lading.” The 104 units of part number 1791317 are priced at $[X] each for a total of $[X].
Packing list no. [X] dated July 4, 2018, from manufacturer D confirms that 539 units with net weight 65,381.80 kg and gross weight 75,391.24 kg shipped from Taichung, Taiwan, to La Vergne, TN. The 104 units of part number 1791317 had net weight 10,920 kg and gross weight 11,851.84 kg.
Packing list no. [X] dated July 10, 2018, from the middleman confirms that 539 units with net weight 37,171.55 kg and gross weight 40,996 kg shipped from Taichung, Taiwan to La Vergne, TN. The 104 units of part number 1791317 had net weight 10,920 kg and gross weight 11,851.84 kg.
Sea waybill no. [X] dated July 10, 2018, lists manufacturer D as the shipper and the importer as the receiver. The foreign place of receipt is Taichung, Taiwan; the port of loading is Kaohsiung, Taiwan; the port of discharge is Los Angeles, CA; and the place of delivery is La Vergne, TN. The goods are shipped via vessel from Taichung, Taiwan to La Vergne, TN through the port of Los Angeles. The merchandise is described as 539 packages of “woodworking machine & parts” with gross weight 75391 kg.
The middleman’s internal system screenshot and the middleman’s September 10, 2018 bank statement show that the middleman paid manufacturer D $[X] per invoice no. [X] on September 10, 2018.
The importer’s internal system screenshot and July 6, 2018 bank statement show that the importer paid the middleman $[X] per invoice no. [X] from June 7, 2018 to October 15, 2018.
The entry summary shows that the merchandise was imported into the U.S. on July 25, 2018 and entered on August 7, 2018; the U.S. importer was the importer of record; and Los Angeles/Long Beach, CA was the U.S. port of unlading. The shipment moved via in-bond rail to CSX Intermodal Terminal P587 in Nashville, TN. The IT number is listed on the entry. The 539 units had a total entered value of $[X] and gross weight 75,392 kg.
Machinery CEE Denies Importer’s First Sale Request
On October 26, 2020, U.S. Customs and Border Protection (“CBP”), Machinery Center of Excellence and Expertise (“CEE”) denied the importer’s first sale request for the entries made between August 7, 2018 and November 30, 2018 noting: “Since JPW [HK] could not take inventory and did not record the purchase of the merchandise as an asset on their books and records, we do not consider JPW Asia to be a legitimate bona fide buyer/seller. Rather, they appear to be functioning more as an agent for the ultimate consignee, JPW US. Therefore, because the transaction between JPW Asia and the manufacturer is not a bona fide sale, then this does not qualify as a viable transaction value, and therefore cannot be used as a first sale for export value.” The matter was referred to our office for an internal advice decision.
ISSUE:
Whether the “first sale” transaction between each of the foreign manufacturers and the middleman may be used to determine the transaction value of the imported merchandise.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the United States is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”), codified at 19 U.S.C. § 1401a. Transaction value is the “price actually paid or payable for merchandise when sold for exportation to the United States,” plus five statutorily enumerated additions including the value, apportioned as appropriate, of any assist. 19 U.S.C. § 1401a(b). Transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, the circumstances of sale indicate that the relationship does not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain “test values,” i.e., previously accepted values of identical or similar merchandise. See 19 U.S.C. § 1401a(b)(2)(B).
In Nissho Iwai Am. Corp. v. United States, 16 CIT 86, 786 F. Supp. 1002 (1992), rev’d in part, 982 F.2d 505 (Fed. Cir. 1992), the courts addressed the methodology for determining the transaction value of merchandise imported pursuant to a three-tiered transaction. In each case, the courts held that the price paid by the middleman could serve as the basis for transaction value for the shipments if the sale was negotiated at arm’s length free from non-market influences and involved goods clearly destined for the United States.
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. 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. 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 the present case, the middleman and the importer must present sufficient evidence that the sale between the manufacturer and the middleman was a bona fide arm’s length sale of “goods clearly destined for export to the United States.”
First, we note that the foreign manufacturers and the middleman are unrelated, and the sales between them are presumed to be at arm’s length.
Second, the documentation shows that the merchandise was either shipped directly by the foreign manufacturers to the importer to the Port of Los Angeles/Long Beach, CA, or moved in-bond through a rail bond from Canada to the United States as declared on the invoices, and there is no evidence of any actual or planned use of the merchandise in Canada, so it was clearly destined for the U.S. at the time of the sale between the manufacturers and the middleman.
See HQ 545254, dated Nov. 22, 1994 (duffle bags destined for a U.S. purchaser, which were initially shipped to Canada and then moved in-bond from Canada, were clearly destined for the U.S. because there was no indication of their planned or actual use in Canada).
Next, we have to determine if the “first sale” was a bona fide sale. In VWP of Am., Inc. v. United States, 175 F.3d 1327, 1139 (Fed. Cir. 1999), citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, 505 F.2d 1400, 1406 (1974), the court found that the term “sold,” for purposes of 19 U.S.C. § 1401a(b)(1), meant “a transfer of title from one party to another for consideration.” Several factors are relied on to determine whether a bona fide sale exists.
See HQ 546067, dated Oct. 31, 1996. No single factor is decisive in determining whether a bona fide sale has occurred. See HQ 548239, dated June 5, 2003. In determining whether property or ownership has been transferred, CBP will consider whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. CBP may also examine whether the potential buyer paid for the goods and whether the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HQ H005222, dated June 13, 2007.
In HQ 546192, dated Feb. 23, 1996, under the cost, insurance, and freight (“CIF”) terms of sale, the foreign seller was responsible for the costs, insurance, and freight necessary to bring the merchandise to the named port of destination, but the risk of loss or damage to the merchandise would transfer from the seller to the middleman when the merchandise passed the ship’s rail in the port of shipment. However, the U.S. purchaser arranged for the ocean marine cargo insurance, and the risk of loss and title to the goods immediately transferred from the foreign seller to the U.S. importer at the port of shipment. The middleman did not hold title or bear the risk of loss of the goods. The goods were shipped directly from Sweden to the U.S. and the middleman did not take possession of the imported merchandise. CBP concluded that the only sale was between the U.S. importer and the foreign seller, and the middleman was acting as an agent for the U.S. importer.
Based on the documentation presented, the sale terms between the foreign manufacturers and the middleman were FOB port of shipment, which means per the Incoterms that the foreign manufacturers fulfilled their obligation to deliver when the goods passed the ship’s rail at the foreign port of shipment. The sales terms between the middleman and the U.S. importer were FOB international date line, which means that the importer was supposed to assume risk of loss or damage for the goods when they arrived at the international date line. The middleman was responsible for the freight and insurance costs from the port of shipment to the international date line. However, the U.S. importer paid the freight charges and the marine cargo insurance. The freight costs and marine cargo insurance paid by the U.S. importer serve as evidence that in reality risk of loss to the goods transferred from the manufacturers directly to the U.S. importer at the foreign port of shipment and the middleman bore no risk of loss from the port of shipment to the international date line. Once the goods were on the ship at the foreign port of shipment, the risk of loss or damage for the goods transferred directly from the foreign manufacturers to the U.S. importer. The middleman did not assume risk of loss or damage for the goods from the foreign port of shipment to the international date line.
Unless otherwise indicated by the parties, Incoterms do not indicate when title to goods passes from one party to another. See HQ H316932, dated Aug. 5, 2021; HQ H272113, dated Mar. 9, 2016. The importer states that title and risk of loss between the parties pass at the same time. Apart from the Master Supply Agreement memorializing the parties’ practices in 2018, which indicates that risk of loss and title between the middleman and the importer pass at the same time unless otherwise agreed, the remaining documents do not provide information regarding passage of title. The Uniform Commercial Code (“U.C.C.”) provides guidance when title to the goods was transferred to the U.S. domestic buyer, who is the U.S. importer. U.C.C.
§ 2-401(2) states that, “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; ….” Thus, title passed directly from the manufacturers to the U.S. importer when the merchandise was placed on board the vessel at the foreign port of export for delivery to the U.S. importer.
A seller needs to have title to merchandise to be able to sell it. See HQ H268741, dated Feb. 27, 2018. A seller “acts in his own name and receives the title to the property which he thereafter is to transfer.” Rosenthal-Netter, Inc. v. United States, 12 CIT 77, 81, 679 F. Supp. 21, 25 (1988), quoting Restatement (Second) of Agency § 14K, comment a(2) (1958). As the court pointed out in Rosenthal-Netter, 12 CIT at 83, 679 F. Supp. at 26, citing New Trends, Inc. v. United States, 10 CIT 637, 640, 645 F. Supp. 957, 962 (1986), it “is uncharacteristic of an agency relationship to allow the intermediary to bear the risk for damaged, lost, or defective merchandise.” Since title and risk of loss here transferred directly from the foreign manufacturers to the U.S. importer, the middleman acted more as an agent rather than as an independent seller. The middleman did not obtain title to the goods in order to sell them and could not sell what he did not own to the U.S. importer.
Accordingly, in the absence of a passage of title and risk of loss to the middleman, there was no bona fide “first sale” and the merchandise may not be appraised based on the price paid by the middleman. As the only sale that occurred is the sale between the U.S. importer and the unrelated foreign manufacturers, the merchandise may be appraised under transaction value based on the price actually paid or payable by the U.S. importer.
HOLDING:
Based on the evidence presented, the imported goods may be appraised under transaction value based on the price actually paid or payable for the merchandise by the U.S. importer.
You are to mail this decision to the U.S. importer, through the importer’s customs consultant, no later than 60 days from the date of the decision. At that time, the Office of Trade, Regulations and Rulings, will make the decision available to CBP personnel and the public at www.cbp.gov, through the Freedom of Information Act and other methods of public distribution.
EFFECT ON OTHER RULINGS:
HQ H316892, dated July 20, 2022, is hereby MODIFIED.
This modification decision is not subject to the notice and comment provisions of 19 U.S.C. § 1625(c) because HQ H316892 has been in effect for less than 60 days.
Sincerely,
for Gregory S. Connor, Acting Director
Commercial and Trade Facilitation Division