RR:IT:VA 547349 EK
Ms. Stefannie L. Leakeas
Arthur Andersen LLP
33 West Monroe Street
Chicago, IL 60603-5385
RE: Request for Ruling; Prospective Importations; Sale for Exportation; Transaction Value; Price Actually Paid or Payable
Dear Ms. Leakeas:
This is in response to your submissions dated March 31 and November 29, 1999, made on behalf of your client, [ )], in which you request a ruling concerning the appraisement of certain merchandise to be imported into the United States. In accordance with your request for confidential treatment of certain information, we have bracketed the confidential portions of this decision and will omit it from any published version. We regret the delay in responding.
FACTS:
[ ], located in London, England, designs women’s apparel. [ ] purchases the apparel in the United Kingdom from five unrelated factories. The transaction structure for each factory is almost identical and thus you use the term "the factories" generically in your request to describe all of the factories. The five factories are: [ ]. Your ruling request encompasses the range of [ ] garments including, but not limited to, cardigans, shirts, tanks, vests, dresses, skirts and pants.
[ ] plans to become a non-resident importer for all of its apparel imported into the United States and shipped to department stores. [ ] intends to ship all its merchandise to its United States customers, FOB destination, duty paid (a.k.a., Delivered Duty Paid, "DDP"). [ ] will be importing its apparel through a variety of ports in the United States.
This ruling request concerns the prospective shipments of the products. The importation transactions will involve three parties: the United States customer, [ ] and the factories in the United Kingdom. The United States customers (department stores) will order women’s apparel from [ ]. Then [ ] will contract with the factories to have the apparel manufactured. You state that the factories are unrelated to [ ] within the meaning of 19 U.S.C. 1401a(g).
Merchandise will be ordered from the factories based on customer purchase orders from the United States customers to [ ]. For administrative ease, [ ] will consolidate the orders from both United States and non-United States customers and issue one purchase order (also known as a "docket") to the factories. The docket will detail the quantity, sizes, styles, colors and prices of the merchandise ordered for exportation to the United States and will state that the garments must be marked and labeled pursuant to United States country of origin and labeling laws and regulations. Also included on the docket will be the quantity, sizes, styles, colors and prices of merchandise ordered from non-United States customers and exported to other countries.
[ ] will consign dyed fabric and garment patterns to the factories at no cost. The factories will cut the fabric, sew the cut parts into the finished garments, supply and fasten the garments’ trim and perform finishing operations. Some of the factories have the capability to press the finished clothing and others do not. As a result, the factories with pressing capabilities [ ] will press the garments and return the pressed garments to [ ]. The factories without pressing capabilities [ ] will send the unpressed garments to third parties for pressing before sending the garments to [ ].
The finished garments will be shipped to [ ], FOB destination. We assume that [ ] obtains title and risk of loss when it receives the finished garments. [ ] will consolidate customers’ orders from the five factories, fill the specific United States customers’ orders, pack the garments and send the packed garments to customers in the United States. [ ] will ship to United States customers, FOB destination and will retain title and risk of loss until the United States customer receives the garments. [ ] will import and pay duties and fees on all shipments to leading United States department stores.
Each of the factories will issue an invoice to [ ]. To reduce the administrative burden on the factories, the factories will issue a consolidated invoice based on [ ] dockets. The invoice will detail the quantity, sizes, colors, styles, and prices of the merchandise ordered for exportation to the United States and will indicate that the garments meet all United States labeling and country of origin requirements. Also included on the invoices will be the quantity, sizes, colors, styles, and prices of merchandise ordered from non-United States customers and intended for exportation to other countries. This delineation will assist [ ] to fill customer orders.
In addition, the factories fasten labels to the garments that contain United States labeling, sizing and country of origin requirements as well as hang tags indicating the garments’ United States destination on those garments intended for the United States market. The factories deliver the finished garments to [ ] on hangers and in plastic bags.
In order to facilitate shipment schedules and consolidation, [ ] will temporarily warehouse merchandise intended for the United States or other countries in its home country for one to five days. The garments are consolidated into specific customer orders and it is possible that a customer order is made up from garments made by two or more different factories. For this reason, the garments can remain in the warehouse for a few days until the customer’s order can be completely filled. Once the customer’s order is available, [ ] allocates and picks the garments that are then consolidated into one shipment and exported. You state that [ ] does not maintain inventory for the U.S. market.
In your submission of November 29, 1999, you indicate that subsequent to their arrival at the consolidation warehouse, the garments are quality checked by [ ], although there is also a quality control procedure at the factories. [ ] does not permanently remove or replace the plastic bags during quality inspection. At this point, you indicate that any failures are rejected, which means that customers may receive short shipments. [ ] experiences up to a 10% failure in quality control standards, and these failures are either destroyed or used as samples.
[ ] proposes purchasing the finished garments from the factories at a price that includes the assembly and finishing operation costs, inland transportation costs and insurance. [ ] will pay the factories for the garments upon receipt of goods, delivery note and invoice. The factories will be paid by check or bank transfer, generally on a weekly basis. [ ] will pay each factory for many orders with one payment. However, the payments will be linked to specific importations.
Because the above-described transactions are prospective, no commercial documents exist to document an actual transaction. However, pursuant to our request, you provided us with examples of commercial documents that you maintain will be generated in conjunction with the importation of the subject merchandise. These documents include consolidated purchase orders and invoices between [ ] and the factories as well as documentation of the purchase orders placed by the United States customers with [ ]. You additionally provided samples of the labels and hangtags to be attached at the factory level to the garments intended for the United States market. As described above, the samples of the purchase orders and invoices detail the quantity, sizes, styles, colors and prices of the merchandise ordered for exportation to the United States. The purchase orders and invoices also detail the same sort of information for garments intended for non-United States markets.
ISSUE:
Whether the merchandise may be appraised pursuant to transaction value based upon the alleged sale between the factories and [ ], or that between [ ] and the United States customers.
LAW AND ANALYSIS:
In your submission you state that [ ] intends to become a nonresident importer for all of the imported merchandise. Please note that under these circumstances, in order to make entry, [ ] must comply with the section 141.18 of the Customs Regulations (19 CFR 141.18) pertaining to entry by nonresident corporations.
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 merchandise when sold for exportation to the United States, " plus certain enumerated additions.
In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992) ("Nissho Iwai") and Synergy Sport International, Ltd. v United States, 17 C.I.T. 18, (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 provisions 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 non-market influences and involving goods “clearly destined for export to the United States.”
In this case, based on your description and the sample documentation submitted, it appears that the transactions between the factories and [ ] are bona fide sales. In addition, it appears that these sales between [ ] and the unrelated factories are at “arm’s length”. However, in order for these sales to form the basis of transaction value, they must also be “clearly destined for export the United States”.
In HRL 546069, dated August 1, 1996, notwithstanding the fact that the purchasing sequence, the product descriptions and quantities set forth in the commercial documents provided evidence that the imported cheese was destined for the United States at the time of the first sale, and that the packaging had the name of the U.S. purchaser and that the cheese was labeled in accordance with U.S. requirements, Customs determined that based on the totality of the evidence, the imported cheese was not clearly destined to the United States. In reaching this conclusion, Customs stressed that the cheese was shipped from the factory to Holland for quality testing before being shipped to the U.S., that the terms of the contract provided that the cheese could be rejected if not of sufficient quality, and that none of the commercial documents pertaining to the first sale referenced the ultimate U.S. destination of the cheese.
Similarly, in this case, although the purchasing sequence and paper trail provide some evidence that the garments are clearly destined for the U.S., there are other indications to the contrary. The garments in this case are placed in [ ] warehouse for up to five days for consolidation purposes and for quality control inspections. Based upon these quality control inspections, you indicate that [ ] experiences up to a 10% failure in quality control standards. These failures are either destroyed or used as samples and are not sold to the U.S. customer. Thus, some of the garments initially intended for sale to a U.S. customer may not in fact be sold to that customer. In addition, all the garments, regardless of their destination, are sized the same way and the labels are all printed in English. The tags do not contain any US or UK specific sizes. Other than a tag attached by the factory, or possibly [ ], there is nothing unique about the U.S.-destined merchandise. Thus, any rejected garments can be used or sold in the U.K. or another country.
Based on these facts, we conclude that there exists a possibility of diversion and that the merchandise is not clearly destined to the United States at the time [ ] purchases the garments from the factories. Therefore, transaction value cannot be based on the sale between [ ] and the factories. We conclude that transaction value should be based on the sale between [ ] and its U.S. customers.
HOLDING:
Based on your description of the prospective transactions between the United States customers, [ ] and the factories in the United Kingdom, the imported merchandise should be appraised pursuant to the “price actually paid or payable” between the U.S. customers and [ ].
Sincerely,
Thomas L. Lobred, Chief
Value Branch