OT:RR:CTF:VS 016966 GG
Ms. Pam Berry
871 Ridgeway Loop, Ste 203
Memphis, TN 38120
RE: Transaction value; sale for exportation; bona fide sale; selling commissions.
Dear Ms. Berry:
This is in response to your ruling request, dated September 10, 2007, made on behalf of Daewoo International Corporation, of Pusan, Korea.
Daewoo International Corporation sells upholstery fabrics to various customers in the United States. Most of the sales are on DDP terms, with freight, insurance, brokerage and customs duties included in the price. Daewoo International Corporation is the importer of record.
Recently, Daewoo International Corporation and its related American company, Daewoo International (America) Corporation, entered into a Supply Agreement (“the Agreement”), a copy of which was enclosed with the ruling request. Under this agreement, Daewoo International (America) Corporation will now purchase the fabric from Daewoo International Corporation and resell it to U.S. customers. The Agreement contains the following provisions, which are of particular relevance for purposes of this ruling:
Article 1.1 Seller [Daewoo International Corporation] shall sell to Buyer [Daewoo International (America) Corporation] and Buyer shall purchase from Seller the Goods and resell the Goods to Customers, subject to the terms and conditions herein provided.
Article 3.1 The parties hereto agree that the selling price of the Goods to Customers shall be [xxx%] of the purchase price of the Goods from Seller, unless otherwise agreed in writing by the parties hereto.
Article 4.2 In case Buyer fails to receive the payment for the Goods from Customers on the due date, Buyer shall not be liable to Seller for paying for the Goods purchased from Seller.
Article 4.3 In case Buyer has any inventory of the Goods supplied by Seller under this Agreement, such disposal of the inventory shall be undertaken by Seller and disposed of under the responsibility of Seller, without any cost and expense to Buyer.
Article 7.1 In case of FOB, CFR or CPT, Buyer shall obtain and pay for all marine insurance for its own account, provided that all marine insurance obtained by Buyer shall include, for the protection of Seller, standard warehouse to warehouse coverage.
Article 7.2 Risk of loss and damage of the Goods shall pass to Buyer according to the INCOTERMS 2000.
Article 7.3 Unless otherwise agreed to between Buyer and its Customers, title to the Goods shall pass from Seller to Buyer: (i) in a shipment contract, when Seller properly completes physical delivery to the carrier or, (ii) in a destination contract, when the Goods are physically delivered to the location required.
Article 10.2 Increases in freight, insurance premiums, and/or surcharges, due to war, threat of war, warlike conditions, port congestion or other emergency or contingency unforeseen or not existent at the time of concluding the Agreement, shall be for Seller’s account.
Notwithstanding this new agreement, the U.S. customers may still purchase directly from the Korean company.
Copies of representative documentation have been provided. These include a purchase order issued by a U.S. customer to Daewoo International (America) Corporation, a commercial invoice issued pre-agreement by Daewoo International Corporation to that same U.S. customer, and post-agreement invoices from Daewoo International Corporation to Daewoo International (America) Corporation and from Daewoo International (America) Corporation to the same U.S. customer. The terms of sale listed on all of the invoices are “DDP Tupelo,” which is the Mississippi location of the U.S. customer.
Whether under the new Agreement the transactions between Daewoo International Corporation and Daewoo International (America) Corporation are bona fide sales for purposes of determining the transaction value of the imported upholstery fabric.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the United States is transaction value. Transaction value is defined in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA) (19 U.S.C. 1401a(b)), as "the price actually paid or payable for the merchandise when sold for exportation to the United States...” plus certain statutory additions, including selling commissions incurred by the buyer. In order for imported merchandise to be appraised under the transaction value method it must be the subject of a bona fide sale between a buyer and seller, and it must be a sale for exportation to the United States.
Customs recognizes the term "sale," as described in J.L. Wood v. U.S., 62 CCPA 25, 33 C.A.D. 1139, 505 F.2d 1400, 1406 (1974), to be a transfer of property from one party to another for consideration. In ascertaining whether a bona fide sale has taken place between a purported buyer and seller of the imported merchandise, no single factor is determinative. Rather, the relationship is to be ascertained by an overall view of the entire situation, with the result in each governed by the facts and circumstances of the case itself. Dorf International, Inc. v. United States, 61 Cust. Ct. 604, A.R.D. 245 (1968). See also, Headquarters Ruling Letter (“HRL”) 545709, dated May 12, 1995. 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 HRL 545474, dated August 25, 1995, and HRL 545709, supra.
In HRL 543708, dated April 21, 1988, we stated in regard to the transfer of title and the assumption of the risk of loss:
[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 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 as to whether the instant transactions are shipment contracts or destination contracts accordingly depends on the trade terms specified in the documentation.
Article 7.3 of the Agreement specifies that, unless otherwise agreed between Daewoo International (America) Corporation and its U.S. customers, title shall pass from Daewoo International Corporation to Daewoo International (America) Corporation “(i) in a shipment contract, when Seller properly completes physical delivery to the carrier or, (ii) in a destination contract, when the Goods are physically delivered to the location required.” In reviewing the sample commercial invoices provided under the new agreement, we note that the terms of sale used in both transactions are “DDP Tupelo.” A “delivered duty paid” transaction is a destination contract, whereupon risk of loss transfers from the seller to the buyer at the named place of destination, which in this case is the location of the U.S. customer. Whenever there is a purported series of sales, and the same terms of sale are used in both transactions, there is a concern that the middleman obtains risk of loss and title only momentarily or never at all, and thus has nothing to sell to the ultimate purchaser. In such situations the middleman may be a buying or selling agent rather than an independent buyer/seller, and the sale will be said to occur between the party identified as the first seller and the ultimate U.S. purchaser. This issue has been discussed in various rulings. See, e.g., HRL 546192, dated February 23, 1996, and HRL 548520, July 20, 2004. Here, the use of identical terms of sale suggests that there is only one sale, namely that between Daewoo International Corporation and the ultimate U.S. customer.
Other factors indicate that Daewoo International Corporation and Daewoo International (America) Corporation are not interacting as authentic sellers and buyers. The provision in Article 4.2 excusing Daewoo International (America) Corporation from paying for the goods in the event of non-payment by the U.S. customers is inconsistent with the premise that the transactions between Daewoo International Corporation and Daewoo International (America) Corporation are bona fide sales. Commercial reality is such that a seller of goods would expect to receive payment from its customer regardless of the customer’s ability to resell the goods.
Article 4.3 also gives rise to a similar concern. It provides that in case Daewoo International (America) Corporation has any inventory of the goods supplied by Daewoo International Corporation under the Agreement, the latter will arrange and pay for disposal of the goods. This unusual arrangement whereby the seller bears responsibility for disposition of the buyer’s goods after the purported sale between them has occurred calls into question the issue of whether title ever transfers from one to the other.
It is also notable that the Agreement requires Daewoo International (America) Corporation to obtain marine insurance in FOB, CFR or CPT transactions (Article 7.1) but then holds Daewoo International Corporation responsible for increases in insurance premiums for any unforeseen contingencies (Article 10.2). The same favorable treatment also extends to increases in freight costs, which are to be borne by Daewoo International Corporation, even in those instances when presumably the terms of sale call for Daewoo International (America) Corporation to assume responsibility for the expense of transportation.
When all of the factors discussed above are considered together, it is evident that the transactions between Daewoo International Corporation and Daewoo International (America) Corporation are not bona fide sales. The documentation supports a finding that, notwithstanding being identified as a “buyer,” Daewoo International (America) Corporation is in fact serving in the capacity of selling agent for Daewoo International Corporation. Accordingly, the imported merchandise shall be appraised under transaction value based on the price actually paid or payable between Daewoo International Corporation and the ultimate U.S. customers. Although the markup built into the resale price pursuant to Article 3.1 most likely represents Daewoo International (America) Corporation’s selling commission, to the extent the ultimate customers incur any additional selling commissions such commissions shall be added to the price actually paid or payable pursuant to 19 U.S.C. § 1401a(b)(1)(B).
The transactions between Daewoo International Corporation and Daewoo International (America) Corporation under the Agreement are not bona fide sales for transaction value purposes. The merchandise shall be appraised under transaction value based upon the sales between Daewoo International Corporation and the ultimate U.S. customers.
A copy of this ruling letter should be attached to the entry documents filed 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 Customs official handling the transaction.
Monika R. Brenner
Valuation and Special Programs Branch