VAL-CO:R:C:V 544973 GG
Mr. John Heinrich
District Director
U.S. Customs Service
300 S. Ferry St.
Terminal Island
San Pedro, California 90731
RE: Transaction value; sale for exportation; delay in importing
merchandise; defective merchandise allowance; IA 92-12
Dear Mr. Heinrich:
This is in response to your internal advice request, dated
January 30, 1992, concerning prospective importations of footwear
by xxxxxxx, Inc. We regret the delay in responding.
FACTS:
In June 1990, xxxxxxx, Inc., of California, contracted with
the xx xxxxxxxxx factory in Indonesia to manufacture Style 90100
Womens Classics Shoes. xxxxxxx established an office in
Indonesia to monitor the production. That office provided the
specifications to the factory.
After completion of the first production run of 27,002
pairs, xxxxxxx' quality control inspection team discovered that
improper lasts and molds had been used on the outsole, resulting
in lower value, grade "B" shoes.
In October 1990, xxxxxxx paid for the shoes at the full
grade "A" price of $9.17 per pair. The price was not lowered to
reflect the quality, because the footwear was made to xxxxxxx
specifications.
The facts are in dispute over whether xxxxxxx originally
intended to import the shoes into the United States. In a letter
dated November 15, 1991, counsel for xxxxxxx stated that "xxxxxxx
purchased these shoes from the factory vendor in Indonesia, xx
xxxxxxxxx, for sale and consumption in Indonesia". However, a
xxxxxxx representative, Mr. xx xxxxx, has indicated to the import
specialist that "the shoes were contracted for shipment to the
United States", and has shown him the invoice that had been
prepared to cover the shipment. A copy of the invoice apparently
was not provided to Customs, or if it was, was not attached to
the internal advice request.
xxxxxxx did not want to sell the grade "B" shoes within the
U.S. domestic market (see October 2, 1991 xxxxxxx letter to
Customs, and facsimile from xxxxxxx Taiwan to xxxxxxx, dated
October 5, 1990), therefore kept them in Indonesia while
attempting to locate an overseas buyer. It has been unsuccessful
in this endeavor.
The shoes' D-rings rusted during storage in Indonesia,
rendering the shoes in a less than grade "B" condition. xxxxxxx
decided that its only option was to import the shoes into the
United States, where they will be sold in limited distribution
channels at a price considerably lower than a Grade A or B shoe
could fetch. Before shipping the shoes here, xxxxxxx planned to
move them from Indonesia to Singapore for further storage in a
bonded facility. At the time of the internal advice request, the
shoes had not yet been imported. xxxxxxx wants confirmation that
the shoes will be appraised under deductive value upon their
importation into the United States.
ISSUE:
1) Whether the shoes were sold for exportation to the
United States, making appraisement under transaction value
possible?;
2) If so, whether a delay in exportation will negate the
use of transaction value as a method of appraising merchandise?
3) Whether an allowance shall be made for defective
merchandise?
LAW AND ANALYSIS:
The primary method of appraising imported merchandise is
transaction value. 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 additions for
packing costs, selling commissions incurred by the buyer,
assists, royalties or license fees, and proceeds of any
subsequent resale that accrue to the seller. 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)). The term "price actually paid or
payable" is defined in section 402(b)(4)(A) of the TAA as the
"total payment . . . made, or to be made, for imported
merchandise by the buyer to, or for the benefit of, the seller."
It is uncontested that xxxxxxx paid the Indonesian factory,
a grade A price for the shoes, or $9.17 per pair. The first
issue to be considered, then, is whether the payment of that
price was made pursuant to a sale for exportation. A bona fide
sale occurs when there is a transfer of ownership (i.e., title
and risk of loss) from the seller to the buyer for a
consideration. See Headquarters Ruling Letter (HRL) 543708,
dated April 21, 1988. Your internal advice request does not
provide specific details of title and risk of loss transfer;
however, this does not appear to be an area of dispute therefore
for purposes of this letter we will assume that the necessary
transfer between xx xxxxxxxxx and xxxxxxx occurred. Although
there was a sale, it must still be determined if the sale was a
sale for exportation to the United States.
Merchandise must be destined for export to the United States
at the time of the sale for it to be considered to be sold for
exportation. See HRL 542310, dated May 22, 1981 (drill bits
manufactured in Italy and stored in France for an indefinite
period, are not sold for exportation to the United States because
when sold they could end up either with a U.S. or European
customer). As noted earlier, counsel for xxxxxxx states that its
client purchased the shoes from xx xxxxxxxxx for ultimate sale
and consumption in Indonesia. However, a xxxxxxx representative
contradicted this by indicating to the import specialist that the
agreement between the factory and xxxxxxx contemplated that the
finished shoes would be shipped to the United States. The
representative showed the import specialist an invoice that had
been prepared to cover the shipment. It was only after the
defects were discovered that a decision was made to keep the "B"
grade shoes overseas. Assuming this last information is correct,
it would thus appear that the shoes were destined for export to
the United States at the time of sale.
Even though the merchandise was destined for export to the
United States at the time of sale, the issue of whether its
retention overseas now rules out its appraisement under
transaction value needs to be addressed. The length of time
between purchase and exportation - six years - was a factor used
in HRL 542791, dated June 10, 1982, to determine that there was
no sale for exportation to the United States. However, in that
particular case there was no evidence that a U.S. destination was
contemplated when the merchandise - jewelry - was originally
purchased. Here, we have already determined that the shoes were
destined for export to the United States at the time of sale,
therefore the two cases are distinguishable. It is also possible
to distinguish the situation in HRL 542962, dated December 29,
1982, where there was no sale for exportation when a motorcycle
was purchased in Japan for the purpose of being used for an
extended period overseas before being imported. That was clearly
a foreign sale. A xxxxxxx representative, on the other hand, has
indicated to Customs that the shoes were to be shipped to the
United States at the time of sale, which by implication rules out
planned use overseas. In our view, a delay in exportation will
not cancel a sale for exportation where the merchandise was
destined for export at the time of sale and there was no planned
or actual use overseas.
Imported merchandise must be appraised pursuant to
transaction value if that value can be determined in accordance
with the TAA. There is no option under the TAA to use the
deductive value method of appraisement in situations where
transaction value is applicable. See HRL 542972, dated January
6, 1983. The shoes were sold for exportation to the United
States therefore they should, unless barred by other factors not
mentioned in your internal advice request, be appraised under
transaction value.
The remaining issue of whether an allowance shall be made
for defects in the shoes must now be addressed.
The Statement of Administrative Action provides that
"[w]here it is discovered subsequent to importation that the
merchandise being appraised is defective, allowances shall be
made. (Regulation)." Section 158.12 of the Customs Regulations
(19 CFR 158.12) provides that "[m]erchandise which is subject to
ad valorem or compound duties and found by the district director
to be partially damaged at the time of importation shall be
appraised in its condition as imported, with an allowance made in
the value to the extent of the damage." Arguably, the shoes at
issue were not defective immediately after their production, even
though they were of grade "B" rather than the desired grade "A"
quality, because they were made to xxxxxxx specifications.
However, the shoes might have been rendered defective after
incurring rust damage in storage. The import specialist may want
to check for this possibility and make the necessary allowances
at the time of importation.
HOLDING:
1) The shoes were sold for exportation to the United
States, therefore, absent any other limitations or restrictions,
can be appraised under transaction value.
2) A delay in exporation will not negate the use of
transaction value where the merchandise was destined for export
at the time of sale and there was no planned or actual use
overseas.
3) An allowance can be made in the value of the imported
shoes to the extent of the damage if the import specialist
determines at the time of importation that the shoes were
defective.
We hope that this is of assistance to you. Please let me
know if you have further questions.
Sincerely,
John Durant
Director, Commercial
Rulings Division