OT:RR:CTF:VS H275640 EE
Port Director
Port of Anchorage
U.S. Customs and Border Protection
605 W. 4th Avenue Suite 230
Anchorage, AK 99501
RE: Request for Internal Advice; First Sale; 19 U.S.C. § 1401a; Related Parties
Dear Port Director:
This is in response to your request, dated May 10, 2016, seeking internal advice on the appraisement of importations by Norman International Inc.
We have taken into consideration the information and materials presented to us in the memorandum requesting internal advice including the Audit Report Number 612-14-OFO-AU-23685 on Norman International, Inc. (“Norman”), dated January 22, 2016, prepared by the Office of Regulatory Audit; the importer’s unilateral Advance Pricing Agreement (“APA”) with the IRS for the taxable years ending December 31, 2010 to December 31, 2016; 2009 income statements of the manufacturers and the middlemen involved in the transactions; 2010 income statements of one of the manufacturers and one of the middlemen; a copy of the presentation, dated July 20, 2010, prepared by counsel for the importer for the meeting with the port to support the use of first sale appraisement; a presentation by the importer titled “Transaction Model of New Legend HK and Nien Made Dong Guan – Excerpts from 2010 Transfer Pricing Report for Nien Made Dong Guan”; and email exchanges between counsel for the importer and the Port of Anchorage.
FACTS:
Norman is an importer and distributor of window covering products. Norman states that it purchases the merchandise from a first tier middleman, its parent company, Nien Made Enterprise Co., located in Taiwan. The first tier middleman, in turn, purchases the merchandise from one of three second tier middlemen (New Legend Enterprises Limited, Linca Enterprises Limited, or Billion Coins Development Ltd.) located in Hong Kong, which in turn, purchases the merchandise from one of four manufacturers (Zhaofeng Dongguan Windows Fashions Co., Nien Made (DongGuan) Window Fashions Co., Ltd., Dongguan Fanchang Curtain Products Co., Ltd., or I Yang (Dongguan) Textile Co.) located in China. The parties are all related within the meaning of 19 U.S.C. § 1401a(g). The merchandise is shipped directly to the importer from the manufacturers in China, as evidenced by the waybills submitted to us.
The importer claims that the merchandise should be appraised based upon the sale between the manufacturer and one of the four second tier middlemen instead of the price to the importer which was declared upon entry. To substantiate its claim, the importer provided copies of purchase orders, invoices, packing lists, bank statements, and waybills from four sample transactions. The port takes issue with the transactions because the port does not believe that the middlemen act as independent buyers in such transactions, and therefore, bona fide sales do not exist. Rather, the port believes that the middlemen are acting as an agents in these transactions.
The documents provided for transaction #1 include: three purchase orders from Norman Shutters Distribution (USA) to Norman Shutters Distribution (USA); three purchase orders from Nien Made Enterprise Co. (Taiwan) to New Legend Enterprises Limited (Hong Kong); three purchase orders from New Legend Enterprises Limited (Hong Kong) to Nien Made (DongGuan) Window Fashions Co., Ltd. (China); three invoices from Nien Made (DongGuan) Window Fashions Co., Ltd. (China) to New Legend Enterprises Limited (Hong Kong); three invoices from New Legend Enterprises Limited (Hong Kong) to Nien Made Enterprise Co. (Taiwan); three invoices from Nien Made Enterprise Co. (Taiwan) to Norman Shutters Distribution; a packing list from Nien Made Enterprise Co. (Taiwan) to Norman International/Norman Shutters Distribution/Norman Window Fashions/Lemont Window Furnishings for the merchandise at issue; confirmation sheets from Norman Window Fashions for the merchandise; a Citibank wire request form for payment from the importer to Nien Made Enterprise Co. (Taiwan) which includes an amount which corresponds to the third invoice from Nien Made Enterprise Co. (Taiwan) to Norman Shutters Distribution for 245 pieces of merchandise; a Chinatrust Commercial Bank receipt for payment from Nien Made Enterprise Co. (Taiwan) to New Legend Enterprises Limited which includes an amount that corresponds to the third invoice from New Legend Enterprises Limited to Nien Made Enterprise Co. for 245 pieces of merchandise; a notification of receipt from Bank of China for payment to Nien Made (DongGuan) Window Fashions Co., Ltd. (China) from New Legend Enterprises Limited which includes an amount that corresponds to the third invoice from Nien Made (DongGuan) Window Fashions Co., Ltd. to New Legend Enterprises Limited for 245 pieces of merchandise; a sea waybill where the port of loading is Yantian, China and place of delivery is Los Angeles, CA and where Nien Made Enterprise Co. (Taiwan) is identified as the shipper and the importer is identified as the consignee. We note that payment information has not been provided for two of the invoices between the manufacturer, middlemen and the importer.
The documents provided for transaction #2 include: two purchase orders from Custom Craft Co. to Nien Made Enterprise Co. (Taiwan); two purchase orders from Nien Made Enterprise Co. (Taiwan) to Linca Enterprises Limited (Hong Kong); two purchase orders from Linca Enterprises Limited (Hong Kong) to I Yang (Dongguan) Textile Co. (China); one invoice from I Yang (Dongguan) Textile Co. (China) to Linca Enterprises Limited for one of the purchase orders from Linca Enterprises Limited (Hong Kong) to I Yang (Dongguan) Textile Co. (China); two commercial invoices from Linca Enterprises limited (British Virgin Islands) to Nien Made Enterprise Co.; a commercial invoice from Nien Made Enterprise Co. (Taiwan) to Custom Craft Company for the two purchase orders from Custom Craft Co. to Nien Made Enterprise Co. (Taiwan); a packing list from Nien Made Enterprise Co. (Taiwan) to Custom Craft Company for the merchandise at issue; a Chinatrust Commercial Bank statement for payment from the importer to Nien Made Enterprise Co. (Taiwan) which includes an amount that corresponds to the invoice from Nien Made Enterprise Co. (Taiwan) to Custom Craft Company; an HSBC statement for payment from Nien Made Enterprise Co. (Taiwan) to Linca Enterprises Limited which includes an amount that corresponds to the two invoices from Linca Enterprises limited to Nien Made Enterprise Co.; an HSBC statement for payment from Linca Enterprises Limited to I Yang (Dongguan) Textile Co. which includes an amount that corresponds to the invoice from I Yang (Dongguan) Textile Co. (China) to Linca Enterprises Limited and the purchase order from Linca Enterprises Limited to I Yang (Dongguan) Textile Co. (China); a waybill where the port of loading is Hong Kong and place of delivery is Long Beach, CA, and where Nien Made Enterprise Co. (Taiwan) is identified as the shipper and Custom Craft Company is identified as the consignee.
The documents provided for transaction #3 include: a purchase order from Norman Shutters Distribution (USA) to Johnson City, TN; a purchase order from Nien Made Enterprise Co. (Taiwan) to Billion Coins Development Ltd. (Hong Kong); a purchase order from Billion Coins Development Ltd. (Hong Kong) to Dongguan Fanchang Curtain Products Co., Ltd. (China); an invoice from Dongguan Fanchang Curtain Products Co., Ltd. (China) to Billion Coins Development Ltd. (Hong Kong); an invoice from Billion Coins Development Ltd. (Hong Kong) to Nien Made Enterprise Co. (Taiwan); an invoice from Nien Made Enterprise Co. (Taiwan) to Norman Shutters Distribution (USA); a packing list from Nien Made Enterprise Co. (Taiwan) to Norman Shutters Distribution (USA); confirmation sheets from Norman Window Fashions for the merchandise; a Chinatrust Commercial Bank statement for payment from the importer to Nien Made Enterprise Co. which includes an amount that corresponds to the invoice from Nien Made Enterprise Co. (Taiwan) to Norman Shutters Distribution (USA); a Chinatrust Commercial Bank statement for payment from Nien Made Enterprise Co. to Billion Coins Development Ltd. which includes an amount that corresponds to the invoice from Billion Coins Development Ltd. (Hong Kong) to Nien Made Enterprise Co. (Taiwan); a First Commercial Bank statement for payment from Billion Coins Development Ltd. (Hong Kong) to Dongguan Fanchang Curtain Products Co., Ltd., which includes an amount that corresponds to the invoice from Dongguan Fanchang Curtain Products Co., Ltd. (China) to Billion Coins Development Ltd. (Hong Kong); a sea waybill where the port of loading is Yantian, China and place of delivery is Johnson City, TN, and where Nien Made Enterprise Co. (Taiwan) is identified as the shipper and the importer is identified as the consignee.
The documents provided for transaction #4 include: a purchase order from Norman International San Jose LLC (USA) to Nien Made Enterprise Co. (Taiwan); a purchase order from Nien Made Enterprise Co. (Taiwan) to New Legend Enterprise Limited (Hong Kong); an invoice from Zhao Feng (DongGuan) Window Fashions Co. (China) to New Legend Enterprise Limited (Hong Kong); an invoice from New Legend Enterprise Limited (Hong Kong) to Nien Made Enterprise Co. (Taiwan); an invoice from Nien Made Enterprise Co. (Taiwan) to Norman International San Jose LLC (USA); a packing list from Nien Made Enterprise Co. (Taiwan) to Norman International San Jose LLC/Norman Shutters Distribution/Norman Window Fashions/Lemont Window Furnishings/Norman International Virginia LLC; a Citibank wire request for funds to be sent from the importer to Nien Made Enterprise Co. (Taiwan) which includes an amount that corresponds to the invoice from Nien Made Enterprise Co. (Taiwan) to Norman International San Jose LLC (USA); a Chinatrust Commercial Bank receipt for payment from Nien Made Enterprise Co. (Taiwan) to New Legend Enterprise Limited which includes an amount that corresponds to the invoice from New Legend Enterprise Limited (Hong Kong) to Nien Made Enterprise Co. (Taiwan); a sea waybill where the port of loading is Yantian, China and place of delivery is Los Angeles, CA, and where Nien Made Enterprise Co. (Taiwan) is identified as the shipper and the importer is identified as the consignee. We note that a purchase order from New Legend Enterprise Limited (Hong Kong) to Zhao Feng (DongGuan) Window Fashions Co. (China) was not provided. We also note that bank statement for payment from New Legend Enterprise Limited to Zhao Feng (DongGuan) Window Fashions Co. was not provided.
The information regarding the merchandise on the purchase orders, invoices, and packing lists on all four transactions correspond to one another. The purchase orders in transactions #1, 2, and 4 and the invoices in transactions #1 and 4 specify terms of sale FOB Hong Kong. The purchase orders and invoices in transaction #3 specify terms of sale FOB Yantian, China.
We note there is no issue as to whether the importations from the manufacturers are clearly destined to the United States at the time of shipment. The issues, as presented to this office, are whether the second tier middlemen acted as independent buyers of the merchandise produced by related party manufacturers, so as to constitute bona fide sales between the manufacturers and the middlemen and whether the transactions between the related parties are conducted at arm's length.
ISSUE:
Whether the sales between the related manufacturers and the second tier middlemen are bona fide sales for export to the United States which may be used for appraisement purposes under transaction value.
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 (TAA; 19 U.S.C. § 1401a). The primary method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. § 1401a(b)(1).
The importer believes the merchandise supplied by the related factory may be appraised under the “first sale” transaction value method of appraisement between the manufacturers and the second tier middlemen based on Nissho Iwai American Corp. v United States, 16 C.I.T. 86, 786 F. Supp. 1002, reversed in part, 982 F. 2d 505 (Fed. Cir. 1992). In that case, the Court of Appeals for the Federal Circuit reviewed the standard for determining transaction value when there is more than one sale which may be considered as being a sale for exportation to the United States. The court held that the price paid by the middleman to the manufacturer was the proper basis for transaction value. The court further stated that in order for a transaction to be viable under the valuation statute, it must be a sale negotiated at arm’s length, free from any non-market influences, and involving goods clearly destined for the United States. See also, Synergy Sport International, Ltd. v. United States, 17 C.I.T. 18 (1993).
In accordance with the Nissho Iwai decision and our own precedent, we presume that transaction value is based on the price paid for the merchandise in the last sale for export to the United States. In further keeping with the court’s holding, we note that an importer may request appraisement based on the price paid by a middleman to a foreign manufacturer in situations where the middleman is not the importer. However, 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 Treasury Decision (T.D.) 96-87, dated January 2, 1997, the Customs Service (now Customs and Border Protection (“CBP”)) advised that the importer must provide a description of the roles of the parties involved and must supply relevant documentation addressing each transaction that was involved in the exportation of the merchandise to the United States. The documents may include, but are not limited to purchase orders, invoices, proof of payments, contracts, and any additional documents (e.g. correspondence) that establishes how the parties deal with one another. The objective is to provide CBP with “a complete paper trail of the imported merchandise showing the structure of the entire transaction.” T.D. 96-87 further provides that the importer must also inform CBP of any statutory additions and their amounts. If unable to do so, the sale between the middleman and the manufacturer cannot form the basis of transaction value.
In this case, the port does not believe that there are bona fide sales between the second tier middlemen and the related manufacturers. Thus, the port believes that the merchandise should be appraised based upon the price paid by the importer. The importer claims that the merchandise should be appraised based upon the sale between the manufacturers and the second tier middlemen.
In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit found that the term “sold” for purposes of 19 U.S.C. § 1401a(b)(1) means a transfer of title from one party to another for consideration, (citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). No single factor is decisive in determining whether a bona fide sale has occurred. See HQ 548239, dated June 5, 2003. CBP will consider such factors as to whether the purported buyer assumed the risk of loss for, and acquired title to, the imported merchandise. Evidence to establish that consideration has passed includes payment by check, bank transfer, or payment by any other commercially acceptable means. Payment must be made for the imported merchandise at issue; a general transfer of money from one corporate entity to another, which cannot be linked to a specific import transaction, does not demonstrate passage of consideration. See HQ 545705, dated January 27, 1995. In addition, CBP may examine whether the purported buyer paid for the goods, and whether, in general, the roles of the parties and the circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HQ 547197, dated August 22, 2000; and HQ 546602, dated January 29, 1997.
Finally, pursuant to the CBP’s Informed Compliance Publication, entitled “Bona Fide Sales and Sales for Exportation,” CBP will consider whether the buyer provided or could provide instructions to the seller, was free to sell the transferred item at any price he or she desired, selected or could select its own downstream customers without consulting with the seller, and could order the imported merchandise and have it delivered for its own inventory.
In response to Regulatory Audit’s questions about the various parties to the transactions in an email dated September 25, 2015, the importer indicated on September 30, 2015 that the factories focus on manufacturing functions while the second tier middlemen in Hong Kong are responsible for sales support and logistics of the shipments. This is an indication that the middlemen act more like agents rather than independent buyers and sellers. Concerning CBP’s question whether the buyer provided or could provide instructions to the seller, the importer stated that the second tier middlemen receive instructions and specifications given by the customers through the first tier middleman and provide them to the manufacturers in China, including information about product size, color, material, packaging instructions, etc. that are being provided by the customers. Based on this response, it appears that the second tier middlemen could not change the orders or issue different instructions. Rather, they simply communicate the instructions provided by the first tier middleman to the manufacturers. In response to CBP’s question whether the buyer was free to sell the merchandise at any price he or she desired, the importer stated that price negotiations between the manufacturers and middlemen are conducted in the same manner as they would be with unrelated parties during the planning meetings which are held by the manufacturers. However, the importer also stated that in price negotiations, the second tier middlemen also take into account various factors, such as their required profit and the price they can ultimately charge to the first tier middleman. As such, it appears that the second tier middlemen may be somewhat limited in the price negotiations. In response to CBP’s question whether the buyer could order the imported merchandise and have it delivered for its own inventory, the importer indicated that the second tier middlemen could order products for their own inventory; however, logistically it is more cost effective to have the factories drop ship to the customers directly. The importer stated that “for all the transactions destined for the U.S. market, the factories deliver the goods directly to the United States, either to Norman International’s facility in the United States or an ultimate U.S. consignee.” Further, in response to CBP’s email inquiry dated January 20, 2016, the importer indicated that given the second tier middlemen’s close proximity to China, they work closely with the manufacturers in China on raw materials procurement. These two subsidiaries serve as the buying agents for raw materials and components sourced from third-party vendors outside of China, supply finished goods to the first tier middleman and arrange shipment of components and finished goods via air or ocean freight. The importer stated that from a functional perspective, the two second tier middlemen play an important role on procurement and logistics arrangement and the China factories serve as contract manufacturers for the second tier middlemen. Similarly, in the presentation titled “Transaction Model of New Legend HK and Nien Made Dong Guan – Excerpts from 2010 Transfer Pricing Report for Nien Made Dong Guan”, the importer stated that New Legend HK (a second tier middleman) provides central procurement, logistics, and distribution support to the Nien Made Group. Based on these responses to CBP’s questions, it appears that the middlemen do not act as independent buyers and sellers but rather they act more like agents.
As previously noted, the purchase orders between the importer, first tier middleman, second tier middlemen, and the manufacturers in transactions #1, 2, and 4 and the corresponding invoices from the manufacturers, second tier middlemen, first tier middleman, and the importer in transactions #1 and 4 specify terms of sale FOB Hong Kong. The purchase orders and invoices in transaction #3 specify terms of sale FOB Yantian, China. Based on these documents, risk of loss transfers from the manufacturers to the second tier middlemen, from the second tier middlemen to the first tier middleman, and from first tier middleman to the importer at the port of export, i.e., there is a flash transfer of the risk of loss. Based on the assumption that title transfers at the same time as risk of loss, these documents indicate a “flash title” transfer. While CBP recognizes that bona fide sales may occur in instances of “flash title,” such transactions generally are viewed with greater scrutiny so as to determine whether the middleman truly is an independent buyer/seller of goods or is actually acting as an agent on the part of one of the other parties. See Headquarters Ruling Letter (“HQ”) H097616, dated November 21, 2011; see also HQ W563605, dated November 19, 2009.
Each transaction must be individually assessed and all the information considered in determining whether sufficient information has been provided to support a determination that separate bona fide sales occur when “flash title” transfer occurs. In HQ 547697, dated December 27, 2001, CBP stated in regard to a multi-tiered transaction:
The fact that title and risk of loss transferred simultaneously from the Manufacturer to License Holder to the Middleman to the Importer in each of the four transactions—i.e., Manufacturer/License Holder, License Holder/Middleman, Manufacturer/Middleman, and Middleman/Importer—suggests that there were no bona fide sales between the Manufacturer, License Holder and Middleman. See HRL 545980, dated December 12, 1995 (finding evidence insufficient to support claim of a bona fide sale in two-tiered transaction when first and second sale were FOB foreign port of export), and HRL 546225, dated April 14, 1997 (declaring that a bona fide sale did not appear not to have occurred when there was simultaneous passage of title between the manufacturers and the middleman).
In addition to the roles of the parties described by the importer in its email communications with CBP and the terms of sale on the purchaser orders and invoices, we note that all of the purchase orders are issued on the same date and use the same P.O. number. Several days later, the invoices are issued, all on the same date, all using the same number. Moreover, the middlemen never took physical possession of the goods, which were shipped directly from the manufacturers to the importer. These are all indications that there may not be a valid sale between the manufacturers and the middlemen.
Taking into consideration the totality of the circumstances of the transactions, we conclude that the first tier middlemen and the second tier middleman were not independent buyers/sellers of the goods. While it is asserted there is a flash title transfer between the parties at the port of export, there is no evidence that the middlemen ever held title to the goods, or bore the risk of loss. Accordingly, since the sales between the related manufacturers and the middlemen are not bona fide sales, the transaction value for the transactions at issue is the amount paid by the importer for the merchandise.
HOLDING:
The sales between the related manufacturers and the second tier middlemen are not bona fide sales which may be used for first sale appraisement of the imported merchandise. Similarly, the sales between the second tier and the first tier middlemen are not bona fide sales. The proper value for appraisement purposes is the amount paid by the importer for the goods.
This decision should be mailed to the internal advice applicant no later than sixty days from the date of this letter. On that date, Regulations and Rulings of the Office of International Trade will make the decision available to CBP personnel and to the public via the CBP Home Page on the World Wide Web at www.cbp.gov, through the Freedom of Information Act, and by other methods of public distribution.
Sincerely,
Monika R. Brenner
Chief
Valuation & Special Programs Branch