RR:IT:VA 546206 KCC

Port Director
U.S. Customs Service
JFK Airport
Building #77
Jamaica, New York 11430

RE: Internal Advice 42/95; transaction value of wearing apparel; Nissho Iwai American Corp; Synergy Sport International, Ltd; HRLs 545144, HRL 545271, HRL 545360, and HRL 545648; J.L. Wood; importer of record; bona fide arm's length sale; sale for export to the United States; 19 U.S.C. 1401a(b); HRL 544775, HRL 543633, and HRL 545474

Dear Port Director:

This is in regard to your memorandum of August 14, 1995, under cover of which you forwarded a request for internal advice (IA 42/95), dated May 30, 1995, submitted by Siegel, Mandell & Davidson, P.C. on behalf of Great Projects Limited ("GPL"). The issue raised is whether the appraised value of the imported wearing apparel should be based on the manufacturer's sale price to the middleman/importer or the sale price between the middleman/importer and the U.S. distributor. Audit Report No. 227-92-CEO-013 dated June 6, 1985, and a memorandum from Chief, Wearing Apparel Branch, National Commodity Specialist Division, New York Seaport, dated November 30, 1995, were taken into consideration in rendering this decision.

FACTS:

Great Projects Limited ("GPL") is a Hong Kong firm that has been in business since 1981. Beginning in 1991, GPL began operating as a supplier and non-resident importer in accordance with 141.18, Customs Regulations (19 CFR 141.18). GPL imported womens wearing apparel into the United States which it acquired from Shanghai Silk Import and Export Corporation ("Shanghai Silk"), an unrelated Chinese manufacturer. GPL supplied the wearing apparel to Nouvelle Sportive Inc. ("Nouvelle"), its related U.S. distributor. Nouvelle owns 50% of GPL. The imported wearing apparel is sold by Nouvelle to clothing stores throughout the United States. Since October 1993, GPL has ceased importing and doing business.

GPL and Nouvelle entered into an exclusive Distributorship Agreement on June 1, 1991, wherein GPL is the manufacturer "engaged in the manufacture and sale of women's apparel" and Nouvelle is the distributor "engaged in the purchase, distribution and resale of women's apparel in the United States, and desire to purchase the Manufacturer's Products for distribution in connection with its business." 8 of the Distributorship Agreement states that "[a]n order placed by the distributor constitutes an offer which Manufacturer may accept or reject. Upon acceptance by Manufacturer, a contract shall be formed which is binding upon the parties. 3 of the Distributorship Agreement states that "[d]elivery shall take place when the Merchandise receives United States Customs clearance at which time risk shall pass to the Distributor." Moreover, the Distributorship Agreement directs the "Distributor to pay any and all applicable customs duties, broker fees and freight, as a credit against the price specified in Paragraph 14" and to keep the customs records required under 162.1(b), Customs Regulations (19 CFR 162.1(b)). See, 11 and 12 of the Distributorship Agreement. 14 states that the price for the wearing apparel will include transportation and insurance to the agreed upon port of entry, export and import licenses, applicable duties and taxes (excluding value added tax), and brokerage fees.

Audit Report No. 227-92-CEO-013 found that, until the middle of 1991, Nouvelle was the importer of record. Invoices submitted by Nouvelle, as importer, indicated either GPL as the buyer, the "Exclusive Sales Agent for Shanghai Silk Corporation", or the seller. At the same time Nouvelle ceased being an importer of record, GPL became the importer of record. The audit found that GPL does not maintain a physical presence in the United States. GPL utilizes a post office box in New York where Nouvelle retrieves GPL's mail. Additionally, Nouvelle makes payments for Customs duties, broker related services, and international freight on behalf of GPL. The audit report determined that GPL and Nouvelle are functioning in the same manner subsequent to GPL becoming the importer of record as when Nouvelle was the importer of record. The audit report further noted that the commercial invoices from GPL to Nouvelle and from Nouvelle to its customers had the same invoice numbers, invoice dates and quantities. Additionally, the report indicated that risk of loss or damage passed to Nouvelle when the wearing apparel was cleared from U.S. Customs. The audit report determined that GPL merely acts as a supplier that subcontracts to Shanghai Silk. Based on findings in the audit report, it is your position that only one bona fide sale for export to the United States exists, the sale between GPL, the middleman/importer, and Nouvelle, the distributor. Therefore, you state that the invoices from GPL to Nouvelle represent the price actually paid or payable for the wearing apparel when sold for export to the United States plus enumerated deductions when determining transaction value. Additionally, you state that the sale between GPL and the Shanghai Silk is not a sale for exportation, but rather a domestic sale, entered into in order to allow GPL to fulfill its contract for export to the United States with Nouvelle.

Counsel for GPL contends that the sale between GPL and Shanghai Silk is the bona fide sale for export that should be used in determining transaction value. Counsel states that Shanghai Silk and GPL deal with each other at arm's length and that the goods are clearly destined for export to the United States. Counsel states that the wearing apparel imported by GPL was purchased for export to the United States from Shanghai Silk, an unrelated manufacturer. All of the wearing apparel was designed, ordered, produced, and labeled explicitly for the U.S. market. The wearing apparel is labeled in accord with relevant U.S. Federal Trade Commission requirements pertaining to content and care instructions, as well as with both U.S. size designations and the private labels of the U.S. retailers. Additionally, Counsel notes that the apparel was accompanied by properly visaed textile export licenses issued by the appropriate authorities in the People's Republic of China.

Counsel states that although the Distributorship Agreement referred to GPL as a "manufacturer", it is clear that GPL owned no manufacturing or production facilities, a fact which Counsel contends has been verified by Customs auditor's review of GPL's books and records. Counsel states that GPL is what is referred to in the trade as a "contract manufacturer", a party that arranges for the production of wearing apparel in China upon receipt of an order from Nouvelle. Counsel states that GPL functioned as a middleman purchaser and importer, who purchased finished wearing apparel directly from Shanghai Silk for export to the U.S. and then resold to its own customer in the U.S., Nouvelle. Although some of the stationery used by GPL characterized it as the "exclusive sales agent for Shanghai Silk", Counsel states that this was simply inaccurate. No agency relationship existed between GPL and Shanghai Silk. Counsel states that this is fully supported by the books and records reviewed by Customs, all of which unequivocally confirmed the sale and transfer of title to the wearing apparel from Shanghai Silk to GPL and that there was no receipt of any commissions by GPL from Shanghai Silk. Moreover, Counsel states that GPL's lack of physical presence in the U.S. is of no concern. GPL was operating within the prescribed regulatory framework as a non-resident importer of record. Counsel states that the fact that Nouvelle performed mail collection, duty payment services, and other ministerial and/or clerical services in the U.S. does not invalidate GPL's status as a purchaser and importer of goods into the U.S.

We have reviewed various documents which illustrate the type of transactions that occurred between GPL, Nouvelle and Shanghai Silk. The following documents demonstrate a typical transaction between the parties:

1. Cutting tickets issued by GPL to Shanghai Silk for 7,200 pieces of style CC952A and 4,842 pieces of style CC952B dated November 12, 1991. Further details on the cutting tickets indicate that the wearing apparel is for Casual Corner, it is to be delayed until December, 15, 1992, with shipment "EX-SHAI by SEA", and requests reserving quota for U. S. category 641.

2. Sales Confirmation No. 91RGS1253 from Shanghai Silk to GPL dated November 19, 1991, for 7,200 pieces of style CC952A and 4,842 pieces of style CC952B, both for the FOB amount of $x.xx per piece. The sales confirmation is signed by individuals from both GPL and Shanghai Silk and indicates the terms of sale are FOB Shanghai, December 1992 with shipment from Shanghai to New York by air.

3. Shanghai Silk Invoice No. E113987 for Sale No. 91RGS1253 dated December 13, 1991 to GPL for 7,200 pieces of style CC952A and 3,624 pieces of style CC952B, both for the amount of $x.xx per piece. The terms of sale are indicated as FOB Shanghai with shipment via truck and sea to Hong Kong/New York. Additionally, the invoice indicates that the marks and numbers are "GPL NEW YORK E113987/«T7."

4. GPL Invoice No. 0000787 to Nouvelle dated January 10, 1992, for 7,200 pieces of CC952 for $yy.yy per piece, and GPL Invoice No. 0000788 to Nouvelle dated January 8, 1992, for 3,624 pieces of CC952 for $yy.yy per piece.

5. Nouvelle Invoice No. 0000787 to Casual Corner dated January 10, 1992, for 7,200 pieces of CC952 for $zz.zz per piece, and Nouvelle Invoice No. 0000788 to Casual Corner dated January 10, 1992, for 3,624 pieces of CC952 for $zz.zz per piece.

6. Quota charge Statement from Shanghai Silk covering Invoice No. E113987 a charge for Quota U.S. Category No. 641 was paid by GPL to China National Silk Imp. & Exp. Corp. and is not included in the invoice price.

7. The Hongkong and Shanghai Banking Corporation Limited statement showing a deduction from GPL account to cover the total amount of Shanghai Silk Invoice No. E113987 to GPL.

ISSUE:

Whether the transaction between Shanghai Silk and GPL or the transaction between GPL and Nouvelle determines the "price actually paid or payable" for wearing apparel when sold for exportation.

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the United States is transaction value pursuant to 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. 402(b)(1) of the TAA provides, in pertinent part, that 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 numerated additions. The terms "price actually paid or payable" is defined in 402(b)(4)(A) of the TAA as:

...the 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...) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller.

Counsel for GPL contends that this transaction involves a three-tiered situation involving a U.S. purchaser/distributor (Nouvelle), importer/middleman (GPL), and primary-level seller (Shanghai Silk). Thus, Counsel reasons that two sales took place, one between Shanghai Silk and GPL and the other between GPL and Nouvelle. Counsel for GPL contends that the sale between GPL and Shanghai Silk is the bona fide sale for export that should be used in determining transaction value. Counsel states that Shanghai Silk and GPL deal with each other at arm's length and that the goods are clearly destined for export to the United States. Counsel states that the wearing apparel imported by GPL was purchased for export to the United States from Shanghai Silk as it was designed, ordered, produced, and labeled explicitly for the U.S. market. Counsel contends that this situation is similar to the factual situations in Nissho Iwai American Corp. v. United States, 16 C.I.T. 86, 786 F. Supp. 1002, reversed in part, 982 F.2d 505 (1992), and Synergy Sport International, Ltd. v. United States, Slip Op. 93-5 (CIT Jan 12, 1993).

In Nissho Iwai and Synergy, the U.S. Court of Appeals for the Federal Circuit and the Court of International Trade, respectively, addressed the proper transaction value of merchandise imported pursuant to a three-tiered distribution arrangement involving a foreign manufacturer, a middleman and a United States purchaser. In both cases, the middleman was the importer of record. In each case, the court held that the price paid by the middleman/importer to the manufacturer was the proper basis for transaction value. Each 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 nonmarket influences, and involving goods clearly destined for the United States.

We note that in the context of filing an entry, Customs Form (CF) 7501, an importer is required to make a value declaration. As indicted by the language of CF 7501 and the language of the valuation statute, there is a presumption that transaction value is based on the price paid by the importer. In accordance with the Nissho Iwai and Synergy decisions and our own precedent, we presume that transaction value is based on the price paid by the importer. See, Headquarters Ruling Letter (HRL) 545144 dated January 19, 1994, HRL 545271 dated March 4, 1994, HRL 545360 dated May 31, 1994, and HRL 545648 (IA 10/94) dated August 31, 1994. In further keeping with the courts' holdings, we note that in those situations where an importer requests appraisement based on the price paid by the middleman to the foreign manufacturer (and the importer is not the middleman), the importer may do so. However, it will be the importer's responsibility to show that such price is acceptable under the standard set forth in Nissho Iwai and Synergy. 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(b).

In this situation, the importer is the middleman and, thus, transaction value is presumed to be based on the price paid by the importer, GPL. Counsel states that GPL was acting within Customs Regulations as a nonresident importer pursuant to 19 CFR 141.18. Thus, it is of no concern that GPL did not have a physical presence in the U.S., nor does the fact that Nouvelle performed mail collection, payment services, document retention and other ministerial services invalidate GPL as the importer. We agree. If GPL is acting within Customs Regulations and fulfilling its obligation as an importer or record with or without the assistance of another party, it is of no concern that GPL does not have a physical presence in the U.S.

From the evidence presented, it appears that a bona fide sale for export to the United States occurred between Shanghai Silk and GPL. For Customs purposes, the word "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). While J.L. Wood was decided under the prior appraisement statute, Customs adheres to this definition under the TAA. The primary factors to consider in determining whether there has been a transfer of property or ownership are whether the alleged buyer has assumed the risk of loss, and whether the buyer has acquired title to the imported merchandise. See, HRL 544775 dated April 3, 1992; HRL 543633 dated July 7, 1987. Also relevant is whether, in general, the roles of the parties and circumstance of the transaction indicate that the parties are functioning as buyer and seller. See, HRL 545474 dated August 25, 1995.

We find that the submitted evidence establishes a bona fide sale between Shanghai Silk and GPL. Commercial documents relating to the sale, such as, GPL's cutting tickets to Shanghai Silk, Shanghai Silk's sales confirmation to GPL, Shanghai Silk's invoices to GPL, and evidence of payment by GPL were examined by Customs. The evidence available indicates that there was a transfer of property or ownership from Shanghai Silk to GPL and that GPL assumed the risk of loss for the subject merchandise until it reached the U.S. Shanghai Silk's sales confirmations and invoices indicate that the terms of sale were FOB Shanghai. Additionally, as you have noted, 3 of the Distributorship Agreement states that risk of loss was transferred to Nouvelle when the wearing apparel was cleared from U.S. Customs. Thus, GPL takes ownership and risk of loss for the wearing apparel in Shanghai until Nouvelle takes possession of the subject merchandise after it clears U.S. Customs. Furthermore, Counsel states that Shanghai Silk and GPL are not related. We do note that Nouvelle invoices prior to 1991, when Nouvelle acted as importer, indicated that GPL acted as either a seller, or "Exclusive Sales Agent for Shanghai Silk Corporation." However, no other evidence is available to ascertain that an agency relationship existed between Shanghai Silk and GPL, other than prior Nouvelle invoices. As previously discussed, all the documentation indicates that Shanghai Silk and GPL functioned as buyer and seller due to the sale and transfer of ownership in Shanghai between Shanghai Silk and GPL. Thus, we find sufficient evidence to establish a bona fide "arm's length" sale between Shanghai Silk and GPL.

Additionally, we find that the Shanghai Silk/GPL sale was a "sale for export to the U.S." All of the wearing apparel was designed, ordered, produced, and labeled explicitly for the U.S. market. This is first evidenced by the GPL cutting tickets which indicate the eventual U.S. buyer, i.e. Casual Corner, and the request to reserve U.S. quota for a particular category. Counsel states that the wearing apparel is labeled in accord with relevant U.S. Federal Trade Commission requirements pertaining to content and care instructions, as well as with both U.S. size designations and the private labels of the U.S. retailers. Additionally, Counsel notes that the apparel was accompanied by properly visaed textile export licenses issued by the appropriate authorities in the People's Republic of China. Furthermore, Shanghai Silk's sales confirmation and invoices to GPL indicated that the subject merchandise is to be shipped from Shanghai to New York.

The evidence available indicates that the sale between Shanghai Silk and GPL, as importer and middleman, is a bona fide "arm's length sale" for export to the United States. Therefore, the price between Shanghai Silk and GPL constitutes the price actually paid or payable for purposes of determining transaction value of the imported wearing apparel.

HOLDING:

Based on the evidence presented, the price between Shanghai Silk and GPL constitutes the price actually paid or payable for purposes of determining the transaction value of the imported wearing apparel.

This decision should be mailed by your office to the internal advice requester no later than 60 days from the date of this letter. On that date 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 the public via the Diskette Subscription Service, Freedom of Informational Act and other public access channels.

Sincerely,

Acting Director
International Trade Compliance
Division