VAL: RR:IT:VA 546409 RSD
Port Director
United States Customs Service
300 South Ferry Street
Room 2095
Terminal Island, California 90731
RE: Application for Further Review of Protest No. 2704-95-102611 concerning the dutiability of quota charges
Dear Director:
This is in response to your memorandum dated June 7, 1996,
forwarding the application for further review (AFR) of protest
number 2704-95-102611 submitted by counsel on behalf of Gloria
Vanderbilt Apparel Corp. (hereinafter, "Gloria Vanderbilt")
regarding the dutiability of quota charges. Counsel made a
supplemental submission dated November 18, 1996.
FACTS:
Gloria Vanderbilt imported 250 dozen units of cotton/spandex
woven stretch ladies pants made in Hong Kong. In procuring the
merchandise, Gloria Vanderbilt used an overseas agent, Orit
Trading Limited (hereinafter, "Orit"). The manufacturer of the
garments was Everwin Garment Factory (hereinafter "Everwin").
Gloria Vanderbilt also purchased quota through a quota broker, in
Hong Kong, Parkhero Development Ltd., (hereinafter "Parkhero") at
a price per dozen. Parkhero nominated Hwa Fuh Mfg. Co.
(hereinafter "Hwa Fuh") to act as a "Third Party Shipper" for
quota purposes. Orit issued two purchase order contracts to Hwa
Fuh for 1,800 and 1,200 pieces with a quota category 348 for a
price per dozen in US dollars. In turn, Hwa Fuh prepared two
purchase order contracts dated December 1, 1994, to Everwin, for
the same merchandise at the same price.
The file contains two invoices. One invoice is from Everwin
to Hwa Fuh, and the other invoice is from Orit to Gloria
Vanderbilt. Both invoices show the identical price per dozen for
the pants. There is no invoice for a middle transaction between
Hwa Fuh and Orit. Everwin certified that it received payment
from Hwa Fuh for the f.o.b. ex quota price and that it did not
receive any payment in connection with the quota. All payments
for the quota were made by Orit either to Parkhero or Hwa Fuh and
were not included in the invoice price of the merchandise. (Two
quota charge statements from Orit were submitted. One indicates
that Orit paid Hwa Fuh and the other indicates Orit paid
Parkhero. Both statements refer to the same invoice number and
date.) No documentation regarding any transaction between
Parkhero and Hwa Fuh was provided.
Counsel claims that Gloria Vanderbilt engaged in separate
quota and merchandise purchase transactions. Counsel further
contends that Gloria Vanderbilt's agent, Orit, through Parkhero
contracted with Hwa Fuh to act as a third party shipper to supply
the quota on a non-transferable basis. According to counsel,
because Hwa Fuh's role in this transaction was strictly to supply
quota and the quota was not to be transferred, the documentation
had to be structured to satisfy the quota supply conditions set
by the Hong Kong Trade Department. In other words, the
transaction was structured in a manner so that Hwa Fuh would
satisfy the Hong Kong third party shipper requirements.
Accordingly, in order to comply with the regulations, it was
necessary for Orbit to issue the purchase order directly to Hwa
Fuh. Thereafter, Hwa Fuh contracted with Everwin for the
manufacture of the garments.
Counsel supplied a copy of the quota supply conditions set
by the Hong Kong Trade Department. In order to supply Hong Kong
quota, the quota holder must perform at least four of the six
listed following functions:
(a) receive order from the overseas buyer;
(b) receive payment for the overseas buyer for the goods;
(c) purchase or supply the raw materials for the
manufacturer of the goods;
(d) contract with the manufacturer for the manufacture of
the goods;
(e) make payment to the manufacturer for the goods; and
(f) arrange the export of the goods
or (ii): perform the principal processes in the manufacture
of the consignment in question.
ISSUE:
Under the circumstances presented, whether quota charges
are part of the transaction value of the imported merchandise?
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 (19 U.S.C. 1401a; TAA). The
preferred method of appraisement is transaction value, which is
defined as "the price actually paid or payable for merchandise
when sold for exportation to the United States," plus certain
enumerated additions. 19 U.S.C. 1401a(b)(1)(A)-(E). The price
actually paid or payable is defined as "the total payment
(whether direct or indirect...) made, or to be made, for imported
merchandise by the buyer to, or for the benefit of, the seller."
19 U.S.C. 1401a(b)(4)(A).
For the purposes of this decision, we have assumed that
transaction value is the appropriate basis of appraisement.
Customs has held that quota payments made by the buyer to a
third party unrelated to the seller are not part of the price
actually paid or payable. E.g., Headquarters Ruling Letter (HRL)
542169 dated September 18, 1980 (TAA No. 6). Quota charges paid
by the buyer to an agent are not part of the price actually paid
or payable so long as the payments are not remitted, directly or
indirectly, to the seller. HRL 543655 dated December 13, 1985.
In Generra Sportswear Company v. United States, 905 F.2d 377
(Fed. Cir. 1990), the court held in regard to quota payments
that:
[a]s long as the...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. The focus of transaction
value is the actual transaction between the buyer and
seller....
905 F.2d at 380. Moreover, the court stated the foreign sellers
must obtain quota before they can export their merchandise. Id.
380. Under Generra, it is Customs' position that all payments to
a seller are presumed to be part of the price paid or payable for
imported merchandise. E.g., HRL 544640 dated April 26, 1991.
When quota payments are made to third parties unrelated to
the seller of the imported merchandise, however, Customs has held
that the payments are not included in transaction value as part
of the price actually paid or payable. However, there must be
sufficient evidence to indicate that the payments do not inure to
the benefit of the seller. HRL 544016, dated June 22, 1988,
aff'd by HRL 544245 dated July 31, 1989.
Accordingly, the issue that must be resolved in this case is
who was the seller of the imported merchandise and did it receive
any of the quota payments. In determining who was the seller of
the imported merchandise, Customs must consider the information
contained on the transaction documents. We note that Gloria
Vanderbilt's agent, Orit, issued a purchase order directly to Hwa
Fuh and Hwa Fuh issued a purchase order to Everwin for the
manufacture of the garments. The file contains two contracts
between Orit and Hwa Fuh for the imported goods. Both contracts
are referred to as "Purchase Order contract" (contract No.
07245/94 & OT24894/94) and refer to Hwa Fuh as the vendor. The
file also contains two "purchase order contracts" between Hwa Fuh
and Everwin for the same garments. The manufacturer's invoices
show that the merchandise was for account and risk of Hwa Fuh.
In addition there is a statement from the manufacturer which
indicates that it received payment of the contractual price from
Hwa Fuh. Similarly, the visa invoice from the Hong Kong
government shows Hwa Fuh as the exporter, Gloria Vanderbilt as
the consignee and Everwin as the manufacturer. Based on the
transaction documents, it would appear that Hwa Fuh was the
seller of the imported merchandise.
Counsel contends that Hwa Fuh was not the seller of the
merchandise, but functioned only as a third party shipper, who
supplied quota. Counsel argues that the only reason why the
documents were prepared to make Hwa Fuh appear as the seller was
to satisfy the Hong Kong third party shippers regulations.
According to counsel, this is demonstrated by the fact that the
purchase order from Orit to Hwa Fuh and the purchase order from
Hwa Fuh to the factory show the same unit price for the garments.
In other words, Hwa Fuh did not mark up the price of the
merchandise. Counsel maintains that if Hwa Fuh had been a real
seller, it would have marked up the price of the merchandise.
Counsel claims that HRL 544016, dated June 22, 1988,
involved a similar transaction to one involved in this case. In
HRL 544016, Customs held that the payments made for quota were
properly excluded from the transaction value of the imported
merchandise. The facts of HRL 544016 indicate that the FOB price
of the merchandise was transferred to the shipper of record. The
shipper of record remitted an amount equal to the price of the
merchandise to the seller. According to the decision, the
shipper of record provided quota and never took title to the
merchandise, nor did it ever bear any risk of loss relating to
the merchandise. Customs concluded that the payments for quota
do not inure to the benefit of the manufacturer of the imported
merchandise. The decision states that "A quota summary sheet has
been submitted indicating that payment for quota was made to a
party other than the seller. (emphasis added). Statements from
the manufacturer confirming receipt of the price of the
merchandise exclusive of quota were submitted as well as
statements from the actual quota broker establishing its role in
the transaction were received."
In this instance, as already noted, however, the evidence
available indicates that the party that received the quota
payments, Hwa Fuh, was the seller of the importer merchandise.
We do not agree with counsel's contention that Hwa Fuh could not
be a seller because it did not mark up the price of the
merchandise. For Customs purposes, a "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). Counsel has not cited any authority to show
that there is a requirement that a seller must mark up the price
of the merchandise that it buys and resells. Two documents, the
manufacturer's invoice and Hwa Fuh's purchase order indicate that
Hwa Fuh took title to the merchandise. No evidence has been
presented to refute the information on these documents that Hwa
Fuh took title to the merchandise and paid for the merchandise.
Moreover, as noted Orit and Hwa Fuh entered into two contracts
for the purchase of the imported merchandise and both contracts
refer to the Hwa Fuh as the vendor. In HRL 544016, it appears
that the contracts covering the imported merchandise were
contracts between the importer's agent, on behalf of the
importer, and the manufacturer and not the third party shipper.
Section 484(a)(1)(B), Tariff Act of 1930, as amended (19
U.S.C.1484(a)(1)(B)), requires that importers file documentation
with Customs, which among other things allows Customs to assess
properly the duties on the merchandise, [and] collect accurate
statistics with respect to the merchandise. See T.D. 86-56.
Accordingly, in appraising merchandise, Customs must rely on the
accuracy of the information contained on the documents, such as
invoices and contracts, that the importer submits. Customs
cannot find that the documentation did not accurately depict the
transaction, based solely on counsel's assertion that they
represent a sham arrangement among the parties to make Hwa Fuh
look like the seller, in order to circumvent the Hong Kong's
quota requirements. Based on the transaction documents, we
conclude that Hwa Fuh bought the merchandise from the
manufacturer and then resold it to Gloria Vanderbilt for
exportation to the United States. Consequently, Hwa Fuh was
engaged in a sale for exportation of the imported merchandise,
and for appraisement purposes, it was the seller of the importer
merchandise. Because Hwa Fuh was the seller of the imported
merchandise and it received the quota payments, the quota
payments were part of the transaction action value of the
merchandise.
Counsel has also raised an alternative argument that if
Customs finds that the quota holder, Hwa Fuh, is a seller of the
imported merchandise, then the Federal Circuit's decision in
Nissho Iwai American Corp. V. United States, 982 F.2d 505 (Fed
Cir. 1992) would be applicable and appraisement should be based
on the sale between Hwa Fuh and the manufacturer. We recognize
that under the preceding analysis there were two sales; one
between the manufacturer and Hwa Fuh, and a second sale between
the Hwa Fuh and the importer. Accordingly, it is necessary to
determine on which of these two sales should the transaction
value be based. In Nissho Iwai American Corp. v. United States,
Supra., the Court reaffirmed the principle of E.C. McAfee Co. v.
United States, 842 F.2d 314 (Fed. Cir. 1988), that a
manufacturer's price, for establishing transaction value, is
valid so long as the transaction between the manufacturer and the
middleman falls within the statutory provision for valuation. In
reaffirming the McAfee standard the court stated that in a three-tiered distribution system:
The manufacturer's price constitutes a viable
transaction value when the goods are clearly destined
for export to the United States and when the
manufacturer and the middleman deal with each other at
arm's length, in the absence of any non-market
influence that affect the legitimacy of the sale
price...[T]hat determination can only be made on a
case-by-case basis.
Id. at 509. See also, Synergy Sport International, Ltd. v. United
States, 17 C.I.T.___, Slip Op. 93-5 (CT. Int'l Trade January 12,
1993).
As a general matter in situations of this type Customs
presumes that the price paid by the importer is the basis of
transaction value. However, in order to rebut this presumption,
the importer must in accordance with the court's standard in
Nissho, provide evidence that establishes that at the time the
middleman purchased, or contracted to purchase, the imported
merchandise the goods were "clearly destined for export to the
United States" and that the manufacturer and middleman dealt with
each other at "arm's length."
In applying whether the Nissho decision is applicable to
this case, we must determine whether there was a sale for
exportation to the United States between Everwin and Hwa Fuh. We
note that the merchandise could not legally be exported without
using a quota allocation from the Hong Kong government. In this
instance, in the transaction between the Everwin and Hwa Fuh,
Everwin did not use a quota allocation from the Hong Kong
government. Accordingly, the Everwin could not legally export
the merchandise to the United States. Instead, when the
merchandise was exported from Hong Kong to the United States, Hwa
Fuh supplied the quota. Consequently, the sale between the
manufacturer and Hwa Fuh was not a sale for exportation to the
United States, which could serve as the basis of transaction
value of the imported merchandise. The sale between Hwa Fuh and
Gloria Vanderbilt, which used quota from Hong Kong government,
was the only sale for exportation to the United States available
on which to base the appraisement of the imported merchandise.
Therefore, the Nissho decision is not applicable to this case.
Transaction value was properly based on the sale between Gloria
Vanderbilt and Hwa Fuh.
HOLDING:
The protest should be denied in full. Based on the evidence
presented, Hwa Fuh was the seller of the importer merchandise and
the quota payments at issue were part of the price actually paid
or payable for the imported merchandise and are therefore
included in the transaction value.
In accordance with section 3A(11)(b), Customs Directive 099
3550-065, dated August 4, 1993, this decision should be mailed by
your office to the protestant no later than sixty days from the
date of this letter. Any reliquidation of the entry in
accordance with this decision must be accomplished prior to the
mailing of the decision. Sixty days from the date of the
decision 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