VAL: RR:IT:VA 546409 RSD

Port Director
United States Customs Service
300 South Ferry Street
Room 2095
Terminal Island, California 90731

RE: Application for Further Review of Protest No. 2704-95-102611 concerning the dutiability of quota charges

Dear Director:

This is in response to your memorandum dated June 7, 1996, forwarding the application for further review (AFR) of protest number 2704-95-102611 submitted by counsel on behalf of Gloria Vanderbilt Apparel Corp. (hereinafter, "Gloria Vanderbilt") regarding the dutiability of quota charges. Counsel made a supplemental submission dated November 18, 1996.

FACTS: Gloria Vanderbilt imported 250 dozen units of cotton/spandex woven stretch ladies pants made in Hong Kong. In procuring the merchandise, Gloria Vanderbilt used an overseas agent, Orit Trading Limited (hereinafter, "Orit"). The manufacturer of the garments was Everwin Garment Factory (hereinafter "Everwin"). Gloria Vanderbilt also purchased quota through a quota broker, in Hong Kong, Parkhero Development Ltd., (hereinafter "Parkhero") at a price per dozen. Parkhero nominated Hwa Fuh Mfg. Co. (hereinafter "Hwa Fuh") to act as a "Third Party Shipper" for quota purposes. Orit issued two purchase order contracts to Hwa Fuh for 1,800 and 1,200 pieces with a quota category 348 for a price per dozen in US dollars. In turn, Hwa Fuh prepared two purchase order contracts dated December 1, 1994, to Everwin, for the same merchandise at the same price.

The file contains two invoices. One invoice is from Everwin to Hwa Fuh, and the other invoice is from Orit to Gloria Vanderbilt. Both invoices show the identical price per dozen for the pants. There is no invoice for a middle transaction between Hwa Fuh and Orit. Everwin certified that it received payment from Hwa Fuh for the f.o.b. ex quota price and that it did not receive any payment in connection with the quota. All payments for the quota were made by Orit either to Parkhero or Hwa Fuh and were not included in the invoice price of the merchandise. (Two quota charge statements from Orit were submitted. One indicates that Orit paid Hwa Fuh and the other indicates Orit paid Parkhero. Both statements refer to the same invoice number and date.) No documentation regarding any transaction between Parkhero and Hwa Fuh was provided.

Counsel claims that Gloria Vanderbilt engaged in separate quota and merchandise purchase transactions. Counsel further contends that Gloria Vanderbilt's agent, Orit, through Parkhero contracted with Hwa Fuh to act as a third party shipper to supply the quota on a non-transferable basis. According to counsel, because Hwa Fuh's role in this transaction was strictly to supply quota and the quota was not to be transferred, the documentation had to be structured to satisfy the quota supply conditions set by the Hong Kong Trade Department. In other words, the transaction was structured in a manner so that Hwa Fuh would satisfy the Hong Kong third party shipper requirements. Accordingly, in order to comply with the regulations, it was necessary for Orbit to issue the purchase order directly to Hwa Fuh. Thereafter, Hwa Fuh contracted with Everwin for the manufacture of the garments.

Counsel supplied a copy of the quota supply conditions set by the Hong Kong Trade Department. In order to supply Hong Kong quota, the quota holder must perform at least four of the six listed following functions:

(a) receive order from the overseas buyer;

(b) receive payment for the overseas buyer for the goods;

(c) purchase or supply the raw materials for the manufacturer of the goods;

(d) contract with the manufacturer for the manufacture of the goods;

(e) make payment to the manufacturer for the goods; and

(f) arrange the export of the goods

or (ii): perform the principal processes in the manufacture of the consignment in question.

ISSUE:

Under the circumstances presented, whether quota charges are part of the transaction value of the imported merchandise?

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 (19 U.S.C. 1401a; TAA). The preferred method of appraisement is transaction value, which is defined as "the price actually paid or payable for merchandise when sold for exportation to the United States," plus certain enumerated additions. 19 U.S.C. 1401a(b)(1)(A)-(E). The price actually paid or payable is defined 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)(A).

For the purposes of this decision, we have assumed that transaction value is the appropriate basis of appraisement.

Customs has held that quota payments made by the buyer to a third party unrelated to the seller are not part of the price actually paid or payable. E.g., Headquarters Ruling Letter (HRL) 542169 dated September 18, 1980 (TAA No. 6). Quota charges paid by the buyer to an agent are not part of the price actually paid or payable so long as the payments are not remitted, directly or indirectly, to the seller. HRL 543655 dated December 13, 1985. In Generra Sportswear Company v. United States, 905 F.2d 377 (Fed. Cir. 1990), the court held in regard to quota payments that:

[a]s long as the...payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value even if the payment represents something other than the per se value of the goods. The focus of transaction value is the actual transaction between the buyer and seller....

905 F.2d at 380. Moreover, the court stated the foreign sellers must obtain quota before they can export their merchandise. Id. 380. Under Generra, it is Customs' position that all payments to a seller are presumed to be part of the price paid or payable for imported merchandise. E.g., HRL 544640 dated April 26, 1991.

When quota payments are made to third parties unrelated to the seller of the imported merchandise, however, Customs has held that the payments are not included in transaction value as part of the price actually paid or payable. However, there must be sufficient evidence to indicate that the payments do not inure to the benefit of the seller. HRL 544016, dated June 22, 1988, aff'd by HRL 544245 dated July 31, 1989.

Accordingly, the issue that must be resolved in this case is who was the seller of the imported merchandise and did it receive any of the quota payments. In determining who was the seller of the imported merchandise, Customs must consider the information contained on the transaction documents. We note that Gloria Vanderbilt's agent, Orit, issued a purchase order directly to Hwa Fuh and Hwa Fuh issued a purchase order to Everwin for the manufacture of the garments. The file contains two contracts between Orit and Hwa Fuh for the imported goods. Both contracts are referred to as "Purchase Order contract" (contract No. 07245/94 & OT24894/94) and refer to Hwa Fuh as the vendor. The file also contains two "purchase order contracts" between Hwa Fuh and Everwin for the same garments. The manufacturer's invoices show that the merchandise was for account and risk of Hwa Fuh. In addition there is a statement from the manufacturer which indicates that it received payment of the contractual price from Hwa Fuh. Similarly, the visa invoice from the Hong Kong government shows Hwa Fuh as the exporter, Gloria Vanderbilt as the consignee and Everwin as the manufacturer. Based on the transaction documents, it would appear that Hwa Fuh was the seller of the imported merchandise.

Counsel contends that Hwa Fuh was not the seller of the merchandise, but functioned only as a third party shipper, who supplied quota. Counsel argues that the only reason why the documents were prepared to make Hwa Fuh appear as the seller was to satisfy the Hong Kong third party shippers regulations. According to counsel, this is demonstrated by the fact that the purchase order from Orit to Hwa Fuh and the purchase order from Hwa Fuh to the factory show the same unit price for the garments. In other words, Hwa Fuh did not mark up the price of the merchandise. Counsel maintains that if Hwa Fuh had been a real seller, it would have marked up the price of the merchandise.

Counsel claims that HRL 544016, dated June 22, 1988, involved a similar transaction to one involved in this case. In HRL 544016, Customs held that the payments made for quota were properly excluded from the transaction value of the imported merchandise. The facts of HRL 544016 indicate that the FOB price of the merchandise was transferred to the shipper of record. The shipper of record remitted an amount equal to the price of the merchandise to the seller. According to the decision, the shipper of record provided quota and never took title to the merchandise, nor did it ever bear any risk of loss relating to the merchandise. Customs concluded that the payments for quota do not inure to the benefit of the manufacturer of the imported merchandise. The decision states that "A quota summary sheet has been submitted indicating that payment for quota was made to a party other than the seller. (emphasis added). Statements from the manufacturer confirming receipt of the price of the merchandise exclusive of quota were submitted as well as statements from the actual quota broker establishing its role in the transaction were received."

In this instance, as already noted, however, the evidence available indicates that the party that received the quota payments, Hwa Fuh, was the seller of the importer merchandise. We do not agree with counsel's contention that Hwa Fuh could not be a seller because it did not mark up the price of the merchandise. For Customs purposes, a "sale" generally is defined as a transfer of ownership in property from one party to another for a consideration. J.L. Wood v. United States, 62 CCPA 25, 33; C.A.D. 1139 (1974). Counsel has not cited any authority to show that there is a requirement that a seller must mark up the price of the merchandise that it buys and resells. Two documents, the manufacturer's invoice and Hwa Fuh's purchase order indicate that Hwa Fuh took title to the merchandise. No evidence has been presented to refute the information on these documents that Hwa Fuh took title to the merchandise and paid for the merchandise. Moreover, as noted Orit and Hwa Fuh entered into two contracts for the purchase of the imported merchandise and both contracts refer to the Hwa Fuh as the vendor. In HRL 544016, it appears that the contracts covering the imported merchandise were contracts between the importer's agent, on behalf of the importer, and the manufacturer and not the third party shipper.

Section 484(a)(1)(B), Tariff Act of 1930, as amended (19 U.S.C.1484(a)(1)(B)), requires that importers file documentation with Customs, which among other things allows Customs to assess properly the duties on the merchandise, [and] collect accurate statistics with respect to the merchandise. See T.D. 86-56. Accordingly, in appraising merchandise, Customs must rely on the accuracy of the information contained on the documents, such as invoices and contracts, that the importer submits. Customs cannot find that the documentation did not accurately depict the transaction, based solely on counsel's assertion that they represent a sham arrangement among the parties to make Hwa Fuh look like the seller, in order to circumvent the Hong Kong's quota requirements. Based on the transaction documents, we conclude that Hwa Fuh bought the merchandise from the manufacturer and then resold it to Gloria Vanderbilt for exportation to the United States. Consequently, Hwa Fuh was engaged in a sale for exportation of the imported merchandise, and for appraisement purposes, it was the seller of the importer merchandise. Because Hwa Fuh was the seller of the imported merchandise and it received the quota payments, the quota payments were part of the transaction action value of the merchandise.

Counsel has also raised an alternative argument that if Customs finds that the quota holder, Hwa Fuh, is a seller of the imported merchandise, then the Federal Circuit's decision in Nissho Iwai American Corp. V. United States, 982 F.2d 505 (Fed Cir. 1992) would be applicable and appraisement should be based on the sale between Hwa Fuh and the manufacturer. We recognize that under the preceding analysis there were two sales; one between the manufacturer and Hwa Fuh, and a second sale between the Hwa Fuh and the importer. Accordingly, it is necessary to determine on which of these two sales should the transaction value be based. In Nissho Iwai American Corp. v. United States, Supra., the Court reaffirmed the principle of E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that a manufacturer's price, for establishing transaction value, is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. In reaffirming the McAfee standard the court stated that in a three-tiered distribution system:

The manufacturer's price constitutes a viable transaction value when the goods are clearly destined for export to the United States and when the manufacturer and the middleman deal with each other at arm's length, in the absence of any non-market influence that affect the legitimacy of the sale price...[T]hat determination can only be made on a case-by-case basis.

Id. at 509. See also, Synergy Sport International, Ltd. v. United States, 17 C.I.T.___, Slip Op. 93-5 (CT. Int'l Trade January 12, 1993).

As a general matter in situations of this type Customs presumes that the price paid by the importer is the basis of transaction value. However, in order to rebut this presumption, the importer must in accordance with the court's standard in Nissho, provide evidence that establishes that at the time the middleman purchased, or contracted to purchase, the imported merchandise the goods were "clearly destined for export to the United States" and that the manufacturer and middleman dealt with each other at "arm's length."

In applying whether the Nissho decision is applicable to this case, we must determine whether there was a sale for exportation to the United States between Everwin and Hwa Fuh. We note that the merchandise could not legally be exported without using a quota allocation from the Hong Kong government. In this instance, in the transaction between the Everwin and Hwa Fuh, Everwin did not use a quota allocation from the Hong Kong government. Accordingly, the Everwin could not legally export the merchandise to the United States. Instead, when the merchandise was exported from Hong Kong to the United States, Hwa Fuh supplied the quota. Consequently, the sale between the manufacturer and Hwa Fuh was not a sale for exportation to the United States, which could serve as the basis of transaction value of the imported merchandise. The sale between Hwa Fuh and Gloria Vanderbilt, which used quota from Hong Kong government, was the only sale for exportation to the United States available on which to base the appraisement of the imported merchandise. Therefore, the Nissho decision is not applicable to this case. Transaction value was properly based on the sale between Gloria Vanderbilt and Hwa Fuh.

HOLDING:

The protest should be denied in full. Based on the evidence presented, Hwa Fuh was the seller of the importer merchandise and the quota payments at issue were part of the price actually paid or payable for the imported merchandise and are therefore included in the transaction value.

In accordance with section 3A(11)(b), Customs Directive 099 3550-065, dated August 4, 1993, this decision should be mailed by your office to the protestant no later than sixty days from the date of this letter. Any reliquidation of the entry in accordance with this decision must be accomplished prior to the mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS, and to the public via the Diskette Subscription Service, the Freedom of Information Act and other public access channels.

Sincerely,


Acting Director
International Trade Compliance Division