VAL-2 OT:RR:CTF:VS H218258 HkP
Port Director
Port of New York/Newark
U.S. Customs and Border Protection
1100 Raymond Boulevard
Newark, NJ 07102
RE: Application for Further Review of Protest 4601-11-100814; Method of Appraisement; Sale for Exportation
Dear Port Director:
This is in response to your memorandum, dated April 20, 2012, forwarding an Application for Further Review of Protest 4601-11-100814, submitted on behalf of Prego Enterprise Co. (“Prego”) on May 4, 2011. In reaching our decision, we have taken into consideration information submitted to the port between January and June 2010. We apologize for our delay in responding to you.
FACTS:
The importer/protestant, Prego, is a non-resident importer based in Hong Kong that purchased women’s apparel from a Chinese manufacturer, Shanghai East Best. Prego sold the imported goods to Studio 1, a U.S. company. According to counsel, none of the parties are related under the Customs laws.
Six entries of merchandise are at issue. Three of the entries replace entries that were initially attempted by a company called Mosaic Style (“Mosaic”). The circumstances surrounding the Mosaic entries were explained to U.S. Customs and Border Protection (“CBP”) in a letter dated January 4, 2010, from counsel for the instant protestant, Prego. According to counsel’s letter, Mosaic was the buying agent of non-resident importer Prego, and, therefore, had the right to enter the merchandise. In explaining the transaction underlying Mosaic’s attempted entries, Counsel stated that all orders were initiated by Studio 1, the ultimate U.S. consignee, through placement of orders with Prego. Studio 1 purchased branded goods for resale to end users such as department stores on a Landed Duty Paid (“LDP”) basis from Prego. Prego, in turn, placed orders with the Chinese manufacturer, which manufactured the trademarked goods ordered by Studio 1 and shipped the goods directly to the U.S. to Prego’s agent, Mosaic. Mosaic did not take physical possession of the goods but arranged for U.S. Customs clearance and domestic delivery to Studio 1. Prego paid all importation fees and duties as well as Mosaic’s commission directly to the Chinese manufacturer or to the Chinese freight forwarder, which then forwarded the commission payments to Mosaic. Counsel explains that the payments were routed this way because some payments, such as inland transportation in China, have to be made in Chinese Yuan and the manufacturer was in a better position than the importer to convert U.S. Dollars to Yuan. No documents substantiating Prego’s payment of U.S. import duties and fees, or the agent’s commission to the Chinese manufacturer were submitted. The onward payment of the commission by the Chinese manufacturer to the agent was also not substantiated.
CBP rejected the three entries attempted by Mosaic because the port found that Mosaic was a nominal consignee without the right to make entry. CBP ultimately determined that Prego, the importer and protestant in this case, had the right to enter the goods and allowed Prego to replace Mosaic as the importer of record. Accordingly, the transaction described in the preceding paragraph is pertinent to the instant protest. We note that CBP was subsequently informed by counsel that Prego severed ties with Mosaic after the attempted entry was questioned by CBP, and that the company was no longer in business.
The replacement entries made by Prego were made on January 12, 2010. Also on that date, Prego made three additional entries of women’s apparel as the original importer of record. The declared value for all six entries was based on the transaction between Prego and the Chinese manufacturer, described in the importer’s January 4, 2010, letter.
In response to a Request for Information, issued on May 17, 2010, concerning the six entries made in January 2010, counsel for the importer explained in a letter dated June 14, 2010, that according to the FOB Shanghai terms of sale, title and risk of loss for the imported goods passed to Prego from the Chinese manufacturer in China. As evidence that the terms of sale were FOB, he submitted an insurance certificate, dated March 18, 2010, issued to Prego for a voyage from Shanghai to New York commencing on March 19, 2010, which is after the date of entry. According to counsel, similar insurance coverage is obtained by Prego for all its shipments. However, in an email dated June 23, 2010, counsel informed the Port that title to the merchandise passed from the Chinese manufacturer to the importer ex factory, and from the importer to the U.S. buyer at the importer’s New Jersey warehouse. In his June 14th letter, counsel also explained that the importer provided the materials to the Chinese manufacturer to make the goods, which charged the importer a CMT (cut, make, trim) price. According to counsel, the cost of materials was fixed but the CMT charge was negotiated, between the importer and the Chinese manufacturer, over the telephone and was based on the size of the order.
Counsel submitted:
Six Purchase Orders issued by the importer, Prego, to the Chinese manufacturer (four (PG-072409A/B/C/D) all dated July 24, 2009 and revised August 20, 2009, and two (PG-081209A/B) both dated August 12, 2009 and revised September 24, 2009);
Purchase Orders from Studio 1 to Prego;
Product specification sheets on Prego letterhead provided by Prego to the Chinese manufacturer and product specification sheets on Studio 1 letterhead. The Prego product specification sheets contain the same information as the Studio 1 specification sheets, except that the Prego sheets also list the information in Chinese.
The CMT unit prices for the various styles of imported goods listed on the individual POs fell within the following ranges (only one price per style was listed on the POs): blouses, $2.50 to $2.58; skirts, $2.00 to $2.10; dresses, $2.20 to $2.25; pants, $2.00; and, sleeveless tops, $1.50. However, in shipping documents, the Chinese manufacturer listed the total unit cost for some of the styles of blouses, skirts, and dresses included in these six orders as between $3.91 and $4.40 (unit “sailing costs” between $4.50 and $4.85). The manufacturer’s total unit costs included amounts for fabric and other materials, as well as for customs and inland transportation. No documents were provided to substantiate these costs. We note that the U.S. Customs entry numbers were included in the documents provided by the manufacturer. Unit prices for the Studio 1 orders placed with Prego ranged between $9.05 and $12.75.
Prego’s orders to the Chinese manufacturer correspond to the styles and quantities of merchandise listed in Studio 1’s orders to Prego. In all cases but one, Studio 1’s orders to Prego were issued on or before the dates on which Prego’s orders to the Chinese manufacturer were either originally placed or revised. In one case, Studio 1’s order for one style of dress and blouse listed on PO PG-072409D, was made after the date on which Prego’s order to the Chinese manufacturer was revised.
Five of the six POs stated that Mosaic Style had the right to cancel the order if the vendor did not follow the terms of the agreement; the sixth (PG-072409B) stated that an entity named Fashion Connections had that right. However, in counsel’s June 14, 2010, letter to the port, counsel stated that “Fashion Connections has no involvement in the instant transactions. The companies share space in Taiwan.” In all cases: Mosaic Style was listed as the consignee party for the bill of lading; the terms of sale were FOB Chinese Port; a 30% percent down payment was required and the balance was required to be paid 30-45 days after shipment; and, the freight charges were to be pre-paid by the Chinese manufacturer and reimbursed by Prego.
The invoice from the Chinese manufacturer for the down payments on the first four POs (PG-072409A/B/C/D) was dated July 20, 2009, and the invoice for the balances owed and related freight charges was dated December 2, 2009. Bank records indicate that payments in approximately the same amounts as invoiced for merchandise and freight were made by the importer, Prego, to the Chinese manufacturer on August 11, 2009, and December 23, 2009. The invoice from the Chinese manufacturer for the down payments on POs PG-081209A/B was dated August 13, 2009, and the invoice for the balances and freight charges was dated January 4, 2010. Payments in approximately the same amounts as invoiced for merchandise and freight were made by Prego to the Chinese manufacturer on August 14, 2009, and March 9, 2010. In all cases, the Chinese manufacturer’s invoices for merchandise correspond to the CMT unit prices listed in Prego’s orders to the Chinese manufacturer, but not to the total unit costs or the sailing prices listed by the manufacturer in the shipping documents, which were higher than the CMT unit prices.
On July 6, 2010, the port requested that counsel provide Prego’s trial balance for the period in which the entries were made, as well as the negotiable bills of lading for the entries. There is no indication that this information was ever received.
On September 21, 2010, Prego was advised that CBP had reappraised all the entries based on the sale between Studio 1, the U.S. buyer, and the importer, Prego, because the port concluded that there was no sale between the importer and the Chinese manufacturer. All entries were liquidated on November 12, 2010. On May 4, 2011, counsel timely filed the instant protest and AFR.
ISSUE:
Whether the imported merchandise may be appraised on the basis of the transaction between the importer and the Chinese manufacturer.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in 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. The transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for five enumerated statutory additions. 19 U.S.C. § 1401a(b). The term “price actually paid or payable” is defined in 19 U.S.C. § 1401a(b)(4)(A) as:
[T]he total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller.
Normally, all payments made by a buyer to a seller, or a party related to a seller, are part of the price actually paid or payable. See Headquarters Ruling Letter ("HQ") 545663, dated July 14, 1995; HQ H088115, dated April 19, 2010. This position is based on the meaning of the term "price actually paid or payable" as addressed in Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990). In Generra, the court considered whether quota charges paid to the seller on behalf of the buyer were part of the price actually paid or payable for the imported goods. In reversing the decision of the lower court, the appellate court held that the term "total payment" is all-inclusive and that "as long as the quota 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." Id. at 379. The court also explained that Congress did not intend for Customs to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, were for the merchandise or something else. Id.
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 a seller, and it must be a sale for exportation to the United States. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the CAFC 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)).
Counsel argues that the merchandise is properly appraised at the value of the transaction between the importer, Prego, and the Chinese manufacturer because the price was negotiated at arm’s-length and includes profit. According to counsel, there are no additional costs or expenses beyond the purchase price attributable to the goods purchased from the Chinese manufacturer, and there are no commissions, royalties or proceeds that accrue to the benefit of the seller, the Chinese manufacturer. The goods were purchased pre-packed and shipped to the U.S. in the same condition. Counsel states that title to the goods passed from the Chinese manufacturer to the U.S. importer at the port in China, as evidenced by the course of dealing between the parties, including the adoption of FOB Incoterms, and the fact that the importer bore the risk of loss for all shipments. Further, title only transferred from the importer to the U.S. buyer upon domestic delivery or physical possession. According to counsel, any claims for loss or damage were the sole responsibility of the importer, and all returns by and refunds to the U.S. buyer were the sole responsibility of the importer. Counsel also contends that the accounting records of the importer reflect its purchase of the merchandise from the Chinese manufacturer; however, we note that these records were never provided to CBP.
The Port is of the opinion that a sale between the Chinese manufacturer and the importer has not been sufficiently proven because the structure of the transactions and the roles of the parties have not been fully explained. In this regard, the Port notes that the importer has not clarified the role of Fashion Connections in the transactions, as stated in the facts above. The Port also questions whether title ever passed from the Chinese manufacturer to the importer or whether the importer is merely an agent of the true buyer or seller, and believes that only one sale occurred, between the Chinese manufacturer and the U.S. buyer.
In determining whether a bona fide sale has occurred between a potential buyer and seller, no single factor is determinative. CBP reviews all the facts and circumstances of the transaction and makes its determination on a case-by-case basis. Dorf International, Inc. v. United States, 61 Cust. Ct. 604, A.R.D. 245 (1968). In making its determination as to whether property or ownership has been transferred, CBP initially considers whether the alleged 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 parties are functioning as buyer and seller. See Headquarters Ruling Letters (“HQ”) HQ H006576, dated December 19, 2007; HQ 547071, dated November 1, 2001; HQ 545709, dated May 12, 1995; and HQ 545474, dated August 25, 1995.
In this case, there is no evidence that the importer, Prego, was the agent for the U.S. buyer. Specifically, there is no mention of the U.S. buyer, Studio 1, in the orders and specifications submitted to the manufacturer that would indicate that the importer was conducting business with the Chinese manufacturer on behalf of Studio 1. In fact, the product specifications supplied by Studio 1 to the importer were transferred to the importer’s letterhead before they were submitted to the manufacturer, although the importer’s orders to the Chinese manufacturer corresponded to the styles and quantities of merchandise listed in Studio 1’s orders to Prego. Also, the goods were shipped directly to the U.S. to Prego/Mosaic, and not to Studio 1. Likewise, there is nothing in the record to suggest that the importer was conducting business on behalf of the Chinese seller.
We note, however, that FOB Shanghai terms of sale are alleged but there are records of payments by the importer, Prego, to the Chinese manufacturer for CMT services and freight costs for the imported merchandise. Moreover, the CMT unit prices do not correspond to the total unit costs or sailing prices listed by the manufacturer, which were both higher than the CMT prices. In addition, the importer made payments to the manufacturer for “buying commissions,” and according to counsel paid all U.S. customs duties and fees to the manufacturer.
Terms of Sale
According to arguments made by counsel in the instant protest and in his June 14, 2010, letter the goods were sold by the Chinese manufacturer to the importer, Prego, on FOB Shanghai terms of sale, which he states is also evidence of transfer of title to Prego in China. As evidence of FOB terms of sale, by which the risk of loss passes when the goods are loaded onto the ship at the port of exportation, he points to an insurance certificate covering goods shipped from China to the U.S. issued to Prego after the date of entry of the goods at issue. Counsel previously asserted in his June 23, 2010, letter that the terms of sale were ex factory, by which risk of loss passes at the factory door. Counsel also informed the port in a letter dated January 4, 2010, that Prego pays all U.S. importation fees and duties to the Chinese manufacturer, and in the instant protest he provided evidence that Prego also pays the Chinese manufacturer for international freight costs. The obligation of Prego to pay for international freight, customs duties and fees indicates to us that the terms of sale between the Chinese manufacturer and Prego were neither FOB Shanghai nor ex factory, but Delivered Duty Paid (“DDP”). Under DDP terms of sale, the seller bears all the costs and risks involved in bringing the goods to the named destination, which is normally reflected in the price charged to the buyer, in this case the importer, Prego. Accordingly, we find that the terms of sale between the Chinese manufacturer and Prego were DDP, and that risk of loss and title passed when the goods were delivered to Prego/Mosaic in the United States.
Commission Payments Made to the Chinese Seller
Selling commissions incurred by the buyer with respect to the imported merchandise are statutory additions to transaction value. See 19 U.S.C. § 1401a(b)(1)(B). Bona fide buying commissions, however, are not identified as additions to the price actually paid or payable, and the courts have construed that they are not an element to be included in transaction value. 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). The importer has the burden of proving that a bona fide agency relationship exists and that payments to the agent constitute bona fide buying commissions. Pier 1 Imports, Inc., 13 Ct. Int’l Trade at 164; Rosenthal-Netter, Inc., 12 Ct. Int’l Trade at 78; and New Trends, Inc. v. United States, 10 Ct. Int’l Trade 637, 640, 645 F. Supp. 957, 960 (1986).
The existence of a bona fide buying commission depends upon the relevant factors of the individual case. J.C. Penney Purchasing Corp. v. United States, 80 Cust. Ct. 84, 95, C.D. 4741, 451 F. Supp. 973, 983 (1978). Although no single factor is determinative, the primary consideration is the right of the principal to control the agent’s conduct with respect to those matters entrusted to the agent. Id.; Pier 1 Imports, Inc., 13 Ct. Int’l Trade at 164; Rosenthal-Netter, Inc., 12 Ct. Int’l Trade at 79; and Jay-Arr Slimwear, 12 Ct. Int’l Trade at 138. The alleged agent performs duties on behalf of its principal, the buyer. It may not act as an independent seller, or as a representative of the manufacturer. United States v. Manhattan Novelty Corp., 63 Cust. Ct. 699, A.R.D. 263 (1969). In addition, the courts have examined such factors as the existence of a buying agency agreement; whether the importer could have purchased directly from the manufacturers without employing an agent; whether the agent was financially detached from the manufacturer of the merchandise; and the transaction documents. See J.C. Penney Purchasing Corp., 80 Cust. Ct. at 95-98. The courts have also examined whether the purported agent's actions were primarily for the benefit of the principal; whether the agent bore the risk of loss for damaged, lost or defective merchandise; whether the agent was responsible for the shipping and handling and the costs thereof; and whether the intermediary was operating an independent business, primarily for its own benefit. See New Trends, Inc.,10 Ct. Int’l Trade 640-643. See also HQ H135835 (May 18, 2011).
Although Mosaic was replaced as importer of record for the initial three entries by Prego, Mosaic’s role as the alleged buying agent must be examined in order to determine how to account for the additional payments made by the importer to the Chinese seller, purportedly for the benefit of Mosaic. Mosaic arranged for U.S. Customs clearance and domestic delivery of the imported merchandise to the U.S. buyer for three entries, and was listed as consignee on all the bills of lading per the importer’s purchase orders. In return, the importer paid Mosaic’s “commission” to the Chinese manufacturer who, it is claimed, forwarded the payment to Mosaic. However, many of the services typically performed by a buying agent, such as locating the manufacturer and acting as an intermediary between the buyer and the manufacturer, were not performed by Mosaic, the alleged buying agent, but by the buyer itself, Prego. For example, Prego, not Mosaic, contracted directly with the Chinese manufacturer and provided it with the merchandise specifications. In addition, we question why a buyer would pay its agent’s commission through the seller/manufacturer, unless the seller and the agent were somehow associated with each other. Counsel’s explanation that the manufacturer was in a better position than the importer to convert Dollars to Yuan is not credible. Further, there is no evidence to substantiate the importer’s claim that the commission payments were sent by the Chinese manufacturer to Mosaic and did not in fact remain with the manufacturer. Consequently, we find no evidence to support the allegation that Mosaic was a buying agent and that, therefore, the payments were not dutiable. The Port found that Mosaic was a nominal consignee with no financial interest in the goods.
Assists
19 U.S.C. 1401a(h)(1)(A) provides, in relevant part, as follows:
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 the 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.
…
Based on the invoices and bank statements submitted, the importer, Prego, paid the Chinese manufacturer for the imported merchandise according to the prices listed on the importer’s purchase orders and for the freight costs that the parties agreed would be paid by the manufacturer and reimbursed by the importer. However, the prices listed on the importer’s orders were CMT prices and did not include the cost of materials supplied by the importer. Section 152.103(a)(3) of the Customs Regulations (19 CFR § 152.103(a)(3)) provides:
Assembled merchandise. The price actually paid or payable may represent an amount for the assembly of imported merchandise in which the seller has no interest other than as the assembler. The price actually paid or payable in that case will be calculated by the addition of the value of the components and required adjustments to form the basis for the transaction value.
While the manufacturer listed values for fabric and other materials in shipping documents, there is no information in the record on whether materials were provided to the manufacturer at cost, at a reduced cost or free of charge. Materials used to make the imported goods supplied by the buyer to the seller at a reduced cost or free of charge are dutiable as assists and must be added to the price actually paid or payable. 19 U.S.C. § 1401a(b)(1)(C). In this case, the value of the materials used to make the imported goods, whether or not dutiable as an assist, is not accounted for in the CMT values declared by the importer to CBP.
19 U.S.C. § 1401a(b)(1) provides, in relevant part, “[i]f sufficient information is not available, for any reason, with respect to any amount referred to in the preceding sentence [price actually paid or payable plus amounts for the five statutory additions], the transaction value of the imported merchandise shall be treated, for purposes of this section, as one that cannot be determined.” In turn, 19 U.S.C. § 1401a(h)(5)(A)(i) states, “[t]he term ‘sufficient information’, when required under this section for determining any amount added under subsection (b)(1) to the price actually paid or payable, means information that establishes the accuracy of such amount.”
In sum, the importer paid sums of money to the Chinese manufacturer, purportedly commissions for the importer’s alleged buying agent, and for U.S. Customs duties and fees. The record does not contain any information on any of these payments and we cannot determine whether the “commission” payments are non-dutiable buying commissions, dutiable selling commissions, or additional payments to the seller that should be included in the price paid or payable. In addition, the importer provided the material used to make the imported merchandise to the manufacturer but only CMT charges were declared to CBP. Similarly, the record does not contain any information authenticating the value of the materials or on the nature of the transaction by which the materials were transferred by the importer to the manufacturer. We are, therefore, unable to determine whether the material should be added to the price of the imported merchandise as an assist or otherwise accounted for in the price paid or payable.
Applying 19 U.S.C. § 1401a(b)(1), we find that sufficient information is not available to determine the values of the transactions between the Chinese manufacturer and the importer because the value of assists and “commission” and other payments is unknown. Based on these facts, we agree with the port that the transactions have not been fully explained and that the merchandise cannot be appraised using the transactions between the Chinese manufacturer and the importer, Prego.
We find that the port’s appraisement of the merchandise based on the value of the transactions between the importer, Prego, and the U.S. Buyer, Studio 1, was correct. However, based on the freight invoices provided, it appears that international shipping costs may be deducted from the values.
HOLDING:
The imported merchandise may not be appraised on the basis of the transactions between the Chinese manufacturer and the importer, Prego. The transactions between Prego and the U.S. buyer, Studio 1, are the correct bases of appraisement; however, substantiated amounts for international shipping should be deducted from the values.
The protest should be denied. In accordance with the Protest/Petition Processing Handbook (CIS HB, December 2007), you are to mail this decision together with the Customs Form 19 to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to the mailing of the decision. Sixty days from the date of the decision the Office of International Trade, Regulations and Rulings, will make the decision available to CBP personnel and to
the public at www.cbp.gov by means of the Freedom of Information Act and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division