VAL RR:IT:VA 546318 LR
Port Director
U.S. Customs Service
San Francisco, California
RE: Request for Internal Advice; xxxxxx; loss of revenue; sale
for exportation.
Dear Ms. Rigdon:
This is in response to your memorandum dated February 29,
1996, forwarding Regulatory Audit Report 751-94-IMO-004 and xxx's
submission requesting a review of loss of revenue under section
162.79b, Customs Regulations. You indicate that this is being
treated as an Internal Advice request by Commodity Team 765,
Import Specialist Enforcement Team (ISET), Office of
Investigations and Regulatory Audit. Following a meeting at
Customs Headquarters with xxx's counsel on July 22, 1996, xxx
made two additional submissions dated August 28, 1996 and
September 12, 1996 which have been considered in rendering this
decision. We regret the delay in responding.
FACTS:
xxx made a claimed prior disclosure on August 1, 1994
pursuant to section 162.74, Customs Regulations. Among other
things, xxx stated that it made purchases from one foreign source
on a landed-duty paid (LDP) basis and that appraisement of these
entries could present some valuation issues. xxx later
identified 227 such entries made between August 16, 1989 and
August 15, 1994. These entries involve the importation of
wearing apparel manufactured in China and obtained through a Hong
Kong middleman (either xxxxxxxxx or xxxxxx xxxxxxx). On the
identified entries, xxx is the importer of record. The
commercial invoices presented to Customs upon entry were from the
Hong Kong middleman to xxx and the entered values were based on
the prices in these invoices. In order to determine the amount
of any withheld duties on the identified entries, the Office of
Regulatory Audit, San Francisco, conducted an audit of xxx. The
audit revealed that the entered values did not reflect the amount
xxx actually paid for the imported merchandise. It was
determined that in 203 of the 227 entries, the entered value was
understated. By letter dated September 27, 1995, Customs
notified counsel for xxx that Customs' review determined that
these entries were undervalued and that as a result, xxx owed
additional duties of $688,024.77.
xxx admits that the entered values were incorrect. The
entered values were based on the prices in the commercial
invoices submitted to Customs upon entry which xxx admits were
false and did not represent the amount actually paid by xxx. xxx
admits that these invoices were fictitious and were prepared by
the middleman to avoid paying duties on the middleman's profit.
In a letter dated July 28, 1995, xxx provided Customs with
the following explanation. xxx indicates that Mr. xxxx xxxxx
(owner of xxx xxxxxxx xxxxxx and xxxx xxxxx) proposed selling
merchandise to xxx on a landed-duty paid (LDP) basis with xxx
acting as importer of record on these purchases. xxx agreed with
the proposal based on the understanding that xxx would charge
back to xxx xxxxxxxxxxxxxx ocean freight and international
insurance, the brokerage charges and the duties. In order to
avoid paying duties on the reseller's profit, the parties agreed
that a second invoice would be provided to xxx that would
represent the LDP price from which had been removed estimated
ocean freight and insurance, brokerage charges, duties and his
profit. This invoice would be presented to Customs. The prices
would represent the manufacturer's FOB cost of the goods. On
this basis, according to Mr. xxxxx, xxx could act as importer of
record on the LDP transactions and not be required to pay duty on
the reseller's profit.
xxx indicates that the transactions as discussed above were
entered into by xxx and Mr.xxxxxx. The invoices for the so-called LDP transactions which were used for Customs purposes were
invoices on the letterhead of xxxx xxxxx,xxxx xxxxxx xxxxxx, or
xxxxxxx xxxxxxx.(Mr. xxxxx has an ownership interest in each of
these companies). The prices set forth on all these invoices,
which were filed with the Customs entries, were the calculated
prices which, according to Mr. xxxxx, represented the
manufacturer's approximate FOB cost of the goods.
Counsel has advised that xxx later discovered that the
prices on the invoices submitted to Customs did not approximate
the manufacturer's FOB cost of the merchandise and that it is
uncertain how the invoice prices were determined. Counsel
indicates that xxx came to believe that the invoice prices
provided by the middleman for Customs purposes represented "an
extremely rough estimate based upon some formula used by the
middleman." In any case, xxx concedes that the price declared at
entry was not the price xxx paid for the imported merchandise.
Although xxx concedes that the entered values were not
correct, it disagrees with Customs method of determining the loss
of revenue. Customs determined the loss of revenue by comparing
the entered values with the amounts paid by xxx to the middleman
(less non-dutiable charges). Deductions for Customs duties were
based on the amount of duties paid upon entry and not on the
amount of duties which would have been due had the entered values
been properly stated.
xxx first contends that each of these transactions involved
a middleman and that in accordance with Nissho Iwai American
Corp. v. United States, 786 F. Supp. 1002 (CIT 1992) rev'd. 982
F.2d 505 (Fed. Cir. 1992), transaction value should be based on
the generally lower price the middleman paid to the foreign
seller, and not the price xxx paid to the middleman. Second, xxx
contends that even if we were to find that transaction value is
properly based on the price paid or payable by xxx, Customs
methodology in determining the loss of revenue was incorrect.
Specifically, xxx contends that 1) an incorrect duty amount has
been deducted from the true invoice price; and 2) that offsets
should have been allowed where duties were overpaid at the time
of entry.
It is the position of the Commodity Team, ISET and the
Office of Regulatory Audit that appraisement in accordance with
Nissho-Iwai is not warranted based primarily on the fact that the
submitted documentation is unreliable. It is position of
Regulatory Audit that the method of determining the loss of
revenue was correct.
ISSUE:
Whether Customs' methodology in determining the actual loss
of revenue was correct.
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 preferred basis of appraisement under the TAA is transaction
value defined as the "price actually paid or payable for the
merchandise when sold for exportation to the United States," plus
certain enumerated additions. As the statute makes clear, there
must be a sale upon which to base transaction value.
Pursuant to section 402(b)(2)(A) of the TAA, transaction
value is acceptable only in certain circumstances, e.g., where
the buyer and seller are not related, or where related, the
relationship does not influence the price actually paid or
payable.
1. Transaction Value/Sale for Exportation
In determining the loss of revenue, Customs compared the
entered values with the amount the importer paid for the imported
merchandise. xxx claims that the entered values should have been
compared with the generally lower amounts the middleman paid the
manufacturer based on the Nissho-Iwai case.
In Nissho Iwai American Corp. v. United States, 786 F. Supp.
1002 (CIT 1992) rev'd. 982 F.2d 505 (Fed. Cir. 1992) and Synergy
Sport International, Ltd., v. United States, Slip. Op. 93-5 (CIT,
decided January 12, 1993), the U.S. Court of Appeals for the
Federal Circuit and the Court of International Trade,
respectively, addressed the proper dutiable value of merchandise
imported pursuant to a three-tiered distribution arrangement
involving a foreign manufacturer, a middleman, and a U.S.
purchaser. In both cases the middleman was the importer of
record. Both courts held that the manufacturer's price, rather
than the middleman's price, was valid as long as the transaction
between the manufacturer and the middleman fell within the
statutory provision for valuation. The courts explained 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
export to the United States."
In the context of filing an entry, Customs Form (CF) 7501,
an importer is required to make a value declaration. As
indicated by the language of CF 7501 and the language of the
valuation statute, there is a presumption that such transaction
value is based on the price paid by the importer. In this
regard, field instructions dated March 8, 1993 from the Director
of Trade Operations, provide that 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 is 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 sale was at "arm's length,"
and that the goods sold were "clearly destined for the United
States," within the meaning of 19 U.S.C. 1401a(b).
Before reaching the question of whether the goods were
"clearly destined for the United States" and whether the alleged
sale was at "arm's length", we must first consider whether the
evidence establishes that transaction between the manufacturer
and the middleman is a sale. Customs recognizes the term "sale,"
as articulated in the case of J.L. Wood v. U.S., 62 CCPA 25, 33,
C.A.D. 1139, 505 F.2d 1400, 1406 (1974), as the transfer of
property from one party to another for consideration. In
determining whether a sale has taken place between a potential
buyer and seller of 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
case 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).
In determining whether property or ownership has been
transferred, Customs considers whether the potential buyer has
assumed the risk of loss and acquired title to the imported
merchandise. In addition, Customs may examine whether the
potential 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.
In a buyer-seller relationship, the parties maintain an
independence in their dealings whereas in a principal-agent
relationship, the former controls the actions of the latter.
Some of the relevant considerations in determining the nature of
the relationship are whether the potential buyer: provided (or
could provide) instructions to the seller; was free to sell the
items at any price he or she desired; selected (or could select)
his or her own customers without consulting the seller; and,
could order the imported merchandise and have it delivered for
his or her own inventory. See Headquarters Ruling Letter (HRL)
545709, May 12, 1995; HRL 545506, November 30, 1995.
If the importer is able to establish by adequate evidence
that a bona fide sale has occurred between the middleman and the
manufacturer, the Nissho Iwai decision is relevant in determining
whether transaction value is appropriately based on a
manufacturer's price, rather than a middleman's price.
Although little evidence was initially presented showing a
sale between the manufacturer and the middleman, counsel provided
additional documentary evidence with its August 28 and September
12, 1996 submissions. To support the claim that a sale occurred
between the Chinese manufacturer and the Hong Kong middleman,
counsel has submitted copies of manufacturers' invoices for most
of the entries as well as invoices from the middleman to xxx.
Counsel has also provided evidence of payment from the middleman
to the manufacturers for many of the entries. Counsel also
states that the goods were shipped directly from the factories in
China to the United States, by way of Hong Kong, and that during
the time the goods were in transit the middleman bore the risk of
loss for the goods. In order to protect themselves against the
risk of loss, the middleman purchased insurance from two
companies for movement of the goods from China to Hong Kong and
for the onward movement of these goods from Hong Kong to the
United States. A statement to this effect by xxx xxxxxx xxxxx
was submitted. Thus, it is counsel's contention that the sale
from the manufacturer to the middleman and the sale from the
middleman to xxx are not back-to-back sales" that would serve to
constitute the middleman as agent of the manufacturers.
While the evidence presented by xxx in its submissions
appears to be consistent with xxx's contention that there was a
sale between the manufacturer and the middleman, the following
considerations regarding the reliability of the documents must
also be taken into account. First, the record reflects that
during the audit, Customs asked xxx to produce the manufacturers'
invoices and xxx advised Customs at that time that these
documents no longer existed for transactions preceding October
1992. Notwithstanding this statement, xxx submitted
manufacturers' invoices from 1989 in its request for internal
advice and furnished no explanation regarding its previous
statement. Second, the documents themselves raise some
questions. Many of the submitted invoices do not contain the
name or address of the buyer and seven of the invoices from the
manufacturer to xxx xxxxxx xxxxxxxx have corresponding invoices
issued to xxx on xxxxi xxxxxxx letterhead, rather than xxx
xxxxxxxx xxxxxxxx's letterhead.
Third, although the claim is made that xxx purchased the
imported merchandise from the middleman on an LDP basis, this is
not what the documents reflect. Counsel's submission indicates
that of the 225 invoices that were available for review, 39%
stated the terms of sale to be FOB, 47% stated the terms to be
C&F, 10% stated the terms to be LDP, and 4% stated the terms to
be X-Dock, duty paid. Although no explanation was furnished,
counsel speculates that it resulted from some confusion on the
part of the middleman as to how they should properly invoice the
goods.
In addition, despite the claim that xxx purchased the
imported merchandise from the middleman, many of the invoices
filed with Customs included a statement substantially to the
following effect: "Please note that the importer has paid a 5%
buying commission on the FOB unit price to xxx xxxxxxx xxxxxxx
xxx." Counsel indicates that approximately one-half of the
entries filed with Customs may have contained a statement
indicating the payment of a 5% commission to the middleman. xxx
indicates that the notation was mistakenly provided by the
broker.
Finally, in determining the reliability of the documents
provided now, consideration must be given to the fact that the
invoices submitted to Customs upon entry were admittedly
fictitious.
As indicated above, the relationship of the parties is to be
ascertained by an overall view of the entire situation, with the
result in each case governed by the facts and circumstances of
the case itself. Here, no corroborating evidence was presented
to establish that in general, the roles of the parties and
circumstances of the transaction indicate that the parties
functioned as buyer and seller. For example, no purchase orders,
correspondence between the parties, evidence concerning how
prices were set, etc. was submitted. Nor was evidence provided
as to whether the potential buyer provided (or could provide)
instructions to the seller; was free to sell the items at any
price he or she desired; selected (or could select) his or her
own customers without consulting the seller; and, could order
the imported merchandise and have it delivered for his or her own
inventory.
Although the documents presented, if reliable, would be
consistent with xxx's allegations, in view of the discrepancies
noted above, the fact that fictitious invoices were submitted
upon entry, and the lack of other evidence that the parties
transacted business as buyers and sellers, we find that the
submitted documentation is insufficient to establish a bona fide
sale between the manufacturer and the middleman upon which
transaction value may be based. We agree with the Commodity Team
that there is nothing about the prices or terms in any of the
middleman's or manufacturer's invoices which can be considered
reliable enough for Customs to be able to contemplate a Nissho-Iwai appraisement.
2. Offsets
xxx claims that even if Customs determines that transaction
value is properly based on the price paid by xxx, the method used
to calculate the loss of revenue is not correct. xxx claims that
there are some instances in which the entered values exceeded the
price actually paid by xxx resulting in overpayment of duties.
It contends that it should be given a credit for such overpayment
which should offset some of the loss of revenue on the other
entries. We disagree.
According to the audit report, in order to determine the
loss of revenue, Customs compared the actual transaction value
(based on the amount xxx actually paid for the imported
merchandise less deductions for international freight and
insurance, brokerage charges, U.S. inland freight expenses, duty,
and other appropriate non-dutiable charges) with the entered
value. If this amount was greater than the entered value, a loss
of revenue was reported for the entry. Any entry in which the
actual transaction value was less than the entered value was not
included in the loss of revenue calculation.
Customs has previously considered the issue of offsetting
the loss of revenue in connection with lost duties to be tendered
to Customs in a prior disclosure situation. In HRL 223909, July
28, 1992, Customs considered whether the calculation shall take
into account only the duties the Government was deprived of by
reason of the section 1592(a) violation or whether there shall be
allowed any offsets based on overpayments deriving from other
errors in the same entries not identified as violations. In that
case, the importer had made several prior disclosures to the
district director, admitting therein to filing entries that did
not accurately reflect the value of entered merchandise. These
undervaluations produced underpayment of duty. Subsequently, the
importer notified Customs that there had been some
misclassification involved in the same entries that were subject
to the prior disclosure already filed, as well as to those yet to
be filed. These misclassifications caused duties to be higher
than they should have been in some cases and lower than they
should have been in other cases. These classification errors
were not identified by the importer as violations, nor did
Customs find them to be violations. The importer contended that
the duties lost as a result of the violations should be reduced
by the amount of an overpayment of duty made as a consequence of
an error not related to such violation.
Customs determined that an offset was not proper. The
classification decision had become final since it was not
protested within 90 days of the liquidation as required under 19
U.S.C. 1514. The rationale for the decision was that to allow
the classification error to be corrected at this stage would be
to permit what is in effect an extension of the statutory time
limitation of the protest procedure. Customs can collect duties
owed as a consequence of a section 1592(a) violation, where
liquidation has become final, only because such collection, and
any recalculation involved, is authorized under the statute.
This action is strictly limited, however, to losses deriving
directly from section 1592(a) violations.
Similarly, in this case, we find that this action is
strictly limited to losses deriving directly from the disclosed
violations. The fact that the violations may have resulted in
the overpayment of duties on certain entries is of no
consequence. As in HRL 223909, no protests were filed regarding
these entries and consequently the appraised value determined at
liquidation became final.
Although counsel is aware of Customs position regarding
offsets, it is argued that a different policy should be followed
in prior disclosure cases where the overpayment and underpayment
of duties result from duty recalculations arising from the same
nucleus of facts contained in the prior disclosure. It is
counsel's contention that in this situation the offset should be
allowed so that the government, in collecting additional duties,
is merely made whole, i.e. collects the amount of duty that
should have been collected at the time of entry if the entries
had been properly filed in the first instance.
The prior disclosure regulations do not support such a
position. In order to receive the benefit of a prior disclosure
under section 162.74, Customs Regulations, a person who discloses
the circumstances of the violation shall tender any actual loss
of duties. Actual loss of duties is defined as the duties of
which the Government has been deprived by reason of the violation
in respect of entries on which liquidation had become final. An
actual loss of revenue is calculated on an entry by entry basis.
On any entry in which xxx claims that it overpaid duties as a
result of the violation there is no actual loss of revenue.
Since liquidation of these entries is final, no credit can be
given for any such overpayment. On any entry in which xxx
underpaid duties as a result of the violation there is an actual
loss of revenue, and such amount must be deposited in order to
receive the benefits of prior disclosure. Since the entries were
liquidated based on the entered values and xxx never filed a
protest, no credit is warranted for any entries on which it
overpaid duties.
In fact, Customs position on offsets was upheld in the
recent decision United States v. Snuggles, Inc., D/B/A Royal
Waterbeds, Inc. (Ct. Int'l. Trade, Slip Op. 96-141) decided
August 20, 1996. In that case, the government sought to collect
civil penalties and customs duties which resulted from the
defendant's alleged violations of 19 U.S.C. 1592. One of the
alleged violations was that defendant misstated the prices. The
court noted that on 15 of the entries in question, defendant
understated the price of some merchandise and overstated the
price of other merchandise, resulting in simultaneous
overpayments and underpayment of duties. Customs' revenue loss
calculations did not offset the amount defendant overpaid against
the amount that defendant underpaid on these 15 entries. The
issue addressed by the court was whether defendant's
overstatements and understatements within the same entry may be
"offset" so as to reduce the total amount owed to Customs.
The government argued that the defendant is not entitled to
such an offset because overstating the price of some merchandise
is irrelevant to the application of 19 U.S.C. 1592(d) to
defendant's undervaluation. The government also argued that to
allow an offset would provide violators of section 1592 a benefit
unavailable even to non-violators who may have inadvertently
overpaid duties. Defendant argued that offsets should be allowed
because the overpayments and underpayment were made within the
same entry. The court determined that the government's
calculation of the loss of revenue was correct. In this regard,
it stated that the "defendant did not file a protest requesting a
correction of its overpayments. Inasmuch as defendant failed to
take the requisite steps to secure a correction, the decision of
Customs officers as to value, classification, rate, and amount
must stand as final and conclusive as far as those importations
are concerned."
If offsetting is not proper in cases involving the
understatement and overstatement of prices in the same entry, it
is certainly not proper where it occurs in different entries, the
situation at hand. Based on the above considerations, we find
that Customs decision not to allow the requested offsets in
determining the loss of revenue was proper.
3. Deduction for Duties Allegedly Included in the Price Paid by
xxx
xxx claims that in determining the loss of revenue, Customs
should have deducted the amount of duties that xxx should have
paid and not the amount of duties actually paid at the time of
importation based on the erroneous invoices. Regulatory Audit
disagrees with xxx's contention because any duties included in
the prices on the invoices submitted to Customs upon entries were
based on the amount of duty actually paid and not additional duty
due as a result of reappraisement. It points to the fact that
the importer stated that the dual invoicing arrangement was
devised to avoid payment duty of the middleman's profit.
Therefore, the amount of duties to be deducted would be the
duties actually paid. We agree.
The 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 the merchandise by the buyer to...seller." The price
actually paid or payable does not include those charges, costs,
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. In order to deduct for non-dutiable charges included in the invoice price, Customs must be
satisfied that such prices include the non-dutiable charges and
the amount of such charges must be ascertainable.
It is xxx's contention that all invoices to xxx were truly
LDP, whether stated or not. xxx states that it agreed to charge
back to xxx xxxxxx xxxxxxxx and xxxx xxxxxx all the freight,
insurance, brokerage fees and duty purportedly included in the
invoice unit values. However, the commodity team indicates most
of the invoices do not indicate LDP terms of sale and that xxx
actually paid their Customs broker for freight, insurance,
brokerage fees and duty (a typical FOB transaction), then they
deducted this total amount from the amount they owed xxx xxxxxxx
xxxxxxx and xxxx xxxxxx on a running account. It appears that the
auditors accepted xxx's claim that the entries were LDP and thus
deducted from the price an amount for duties in determining the
loss of revenue. (The dispute concerns the amount of duties to
be deducted).
Assuming that xxx has established to Customs satisfaction
that the amounts paid by xxx were an LDP price, and that xxx
reimbursed the middleman for any duties it actually paid, we
agree with Regulatory Audit that it would be appropriate to
deduct the amount of duties actually paid at the time of entry.
A deduction for duties which should have been paid at the time of
entry is improper because any reimbursements to the middleman
were based on the reported values at entry. However, as noted
above, based on the submitted documentation, there is some
question concerning whether the prices paid by xxx were LDP
prices. Only a few of the submitted invoices specify LDP terms
of sale. Aside from counsel's statement that all the
transactions were LDP, we cannot tell if this was the case. If,
based on the audit of xxx it is determined that the prices
actually paid by xxx as reflected in the second set of invoices
provided to Customs included duties and other non-dutiable
charges, we agree with your method of applying the deduction.
HOLDING:
Assuming you are satisfied based on the evidence that the
amounts xxx paid for the imported merchandise upon which the loss
of revenue was based were LDP prices and thus included an amount
for duties, the method of determining the loss of revenue was
proper. If you are not satisfied that the amounts paid were LDP,
no deduction for duties paid should be made in determining the
loss of revenue.
This decision should be mailed by your office to the
importer no later than sixty 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 to the public via the Diskette
Subscription Service, the Freedom of Information Act, and other
public access channels.
Sincerely,
Acting Director
International Trade Compliance Division