VAL:RR:IT:VA 548494 jsj
Port Director
U.S. Customs and Border Protection
P.O. Box 55580
Portland, Oregon
97238-5580
Attn: CBP Import Specialist Gail Thielen
Re: Application for Further Review of Protest No.: 290403100116;
Dear Port Director :
The purpose of this correspondence is to address the Application for Further Review (AFR) of Protest Number: 290403100116, dated October 6, 2003. The Importer of Record and Protesting party is XXXXXXXXXXXXXXXXXX. The Protestant is represented by counsel.
The parties to the Customs transactions that is the subject of this AFR are: XXXXXXXX XXXXXXXXXXX, the Importer; XXXXXXXX, hereinafter Middleman One; XXXXXXXXXX., hereinafter Middleman Two, and the foreign manufacturers / sellers. Customs and Border Protection (CBP) has been advised that the Importer, Middleman One and Middleman Two are “related” as defined in the CBP regulations. The submission of the Protestant further advises CBP that the foreign manufacturers are not related to any of the parties. The Importer is located in the United States. Middleman One and Middleman Two are located in the United Kingdom. The foreign manufacturers are located in countries other than the United Kingdom.
This protest decision is being issued subsequent to the following: (1) A review of the submission dated October 3, 2003; (2) A review of the attachments that accompanied the submission; and (3) A telephone conversation conducted on November 29, 2004 between counsel for the importer and a representative of this office. The attachments to the submission included: (A) A copy of HQ 547382 (Feb. 14, 2002); (B) A copy of HQ 547859 (Nov. 29, 2001); (C) Copies of the Entry Summaries (CF 7501) for entries numbered: XXXXXX105-6, date of entry: October 15, 2002, and XXXXXXX455-5, date of entry: undated, a two page Commercial Export Invoice from Middleman One, as the seller, to the importer as consignee; (D) A document entitled: “US Early Opportunities for SS03 Preliminary Order” dated May 22, 2002, stated to be a copy of the Importer’s electronic order to Middleman One, and five pages of a printout of information with “Acknowledge” handwritten at the top of the first page stated to be acknowledgements of the electronic order from the Importer to Middleman One; (E) A document entitled: “Manufacturing Order X77199” stated to be Middleman One’s order to hereinafter Middleman Two; (F) A Middleman Two document indicating an order placed by Middleman Two with a foreign manufacturer for the merchandise that is the subject of the instant AFR; (G) Documents of the foreign manufacturer and electronic correspondence indicating an order for merchandise submitted by Middleman Two; (H) A copy of an Airway Bill identify the foreign manufacturer as the shipper and the Importer as the consignee; (I) A copy of an Invoice and payment documents addressing the payment by the Importer to Middleman One; (J) A copy of an invoice from Middleman Two to Middleman One and accounting documents representing payment to Middleman One; (K) A document confirming payment to the foreign manufacturers / sellers by Middleman Two.
XXXXXXXXXXXXXXXXXX, the Importer, requested confidential treatment pursuant to 19 C.F. R. 177.2 (b)(7) for its identity, the identity of related parties, references to its corporate structure, the identity of its foreign manufacturers and the locations of its manufacturers. Customs and Border Protection (CBP) has concluded that the information for which confidential treatment has been sought was clearly identified and is commercial or financial information the disclosure of which would cause substantial harm to the competitive position of the ruling requester or another interested party. Confidential treatment will, therefore, be extended in accordance with the request of the Importer. Confidential information will be underscored in this protest decision and will be redacted in the public version.
FACTS
The facts of the instant Application for Further Review are substantially the same as set forth in HQ 547382 (Feb. 14, 2002), with specific differences that will be noted. Headquarters Ruling Letter 547382, involving essentially the same entities, concerned a three-tiered arrangement, the Importer, Middleman and the Manufacturer. The AFR before this office involves a four-tiered arrangement in which the Importer remains the same, the Middleman is now Middleman One, the Manufacturer is now Middleman Two and new parties to the transactions, foreign manufacturers that are unrelated to any of the other parties.
The facts as set forth in HQ 547382 are, in pertinent part, as follows:
The Importer is based in Portland, Oregon, and primarily imports through that port, although a small number of shipments are imported through the ports of New York, Charleston, Chicago, and San Francisco. While the Middleman [now, Middleman One] imports a variety of merchandise, you have requested that we only address certain footwear imports from the Manufacturer [now, Middleman Two].
The subject transaction involves three parties: the Importer, the Middleman and the Manufacturer. The imported footwear is manufactured in the United Kingdom by the Manufacturer. The vendor for the imported merchandise is the Middleman, a wholly
owned subsidiary of the Manufacturer’s group of companies, which also owns the Manufacturer. The Importer is a subsidiary of the Middleman. Previously the Importer used the transaction value of
the sale between it and the Middleman as the basis for its Customs valuation.
You describe the transaction as follows. The Importer submits purchase orders electronically to Middleman, a distributor for the Manufacturer. The Middleman submits the purchase order to the Manufacturer for processing. The Middleman is responsible for marketing, operations, product distribution, sales and some product design and development with the Manufacturer’s group network. All U.S. customer purchase orders that are submitted to the Middleman are designated with an order number that is linked to various documents throughout the manufacturing cycle, shipment to the Middleman, and subsequent shipment to the Importer. We note that no sample purchase orders from the U.S. Importer were submitted for our review.
According to the sample Order Acknowledgement, the terms of sale between the Middleman, and the Importer are Ex Works Warehouse with the Middleman maintaining title until all payments are made in full. You state that the shoes are stamped with a customer number assigned by the Middleman, and that the retail boxes and cartons in which the shoes are packed also contain the customer number. You state also, that the outer cartons contain the ultimate customer’s delivery address. In addition, you have submitted a sample packing list issued by the Middleman that states the same quantity for a certain style listed on the order acknowledgement and manufacturing order.
The Middleman submits a manufacturing order to the Manufacturer using the same number as the Order Acknowledgement. The Order Acknowledgement and the manufacturing order both contain the name of the U.S. Importer with a delivery address in the United States. In addition, the Middleman provides the Manufacturer with product development and design work necessary for the production of the imported merchandise. You state that you believe the cost of this work is a dutiable assist and will need to be added to the transaction value of the merchandise sold by the Manufacturer to the Middleman. The Manufacturer’s Group, the parent company, pays a licensing fee based on [.5] percent of the net sales price on footwear products for the right to use the “[XXXXXX]” trademark. However, in your letter dated December 21, 1999, you state that the fee is included on the books of the Manufacturer as a separate line item in the cost of goods sold account, and is thus already included in the price of the merchandise purchased by the Middleman. Thus, you conclude that the licensing
fee does not need to be added to the price actually paid or payable. For purposes of this ruling we assume that the fee is in the price. Therefore, we have not reviewed the royalty agreement in connection with this ruling request.
Once the footwear is manufactured, the Manufacturer inspects the shoes for quality control and packages the footwear in the retail boxes. The retail boxes are then placed in larger shipment cartons on pallets that are shrink-wrapped for shipment. The Manufacturer invoices the Middleman and ships the merchandise to the Middleman’s warehouse. The Middleman adds the merchandise to its inventory and pays the Manufacturer the price agreed. The invoices reference the dispatch numbers that are linked to the order acknowledgement and manufacturing order. The Middleman’s warehouse is designated for all non-domestic shipments, of which you state that [X]% is comprised of shipments bound for the United States. Upon receipt in the warehouse, the shrink-wrap is removed and the cartons are assigned to a certain location until enough cartons are received to fill a standard container. Once the container is filled it is trucked to the seaport for exportation.
You state that the price negotiated between the Middleman and the Manufacturer is negotiated at arms-length. You submit costing sheets generated by the Manufacturer, which itemize manufacturing costs in detail for each style of footwear produced. The costing sheets break down the costs according to the various operations performed such as clicking and closing, the production for the upper portion of the footwear including material, labor, and overhead. The costing sheets are used to determine the base price for the merchandise plus profit allocation.
In the instant AFR, simply as a reminder, the Importer has remained the same, the initial Middleman is now Middleman One, the initial Manufacturer is now Middleman Two and the new foreign manufacturers are new entities to the business arrangement. Counsel advises CBP that since HQ 547382 was issued the original manufacturer, now Middleman Two, has ceased manufacturing operations and sources merchandise for Middleman One, the original Middleman. The Importer, Middleman One and Middleman Two, as previously stated, are related. The new entities to the transactions, the foreign manufacturers, are not related to any of the other parties.
In the transaction applicable to the entries in issue, the Importer placed an order with Middleman One, that in turn placed an order with Middleman Two, that in turn placed an order with the foreign manufacturer. The foreign manufacturers shipped the merchandise directly to the Importer in the United States. According to the submission of counsel for the Importer, “[t]he process of purchasing, manufacturing and shipment, and the papertrail thereto, is identical to those reviewed in HQ 547382, except that there are additional purchase orders and invoices between [Middleman Two] and the [foreign] manufacturers.”
In the Customs transactions subject to this AFR, the Importer submits an electronic order to Middleman One. The electronic orders are assigned a specific order number and refer to specific style numbers of merchandise that has been ordered. Middleman One generates an order acknowledgement referencing the specific order numbers. Middleman One subsequently issues a purchase order to Middleman Two in which the Importer’s purchase order numbers are set forth as well as an identifying code, an “identifier,” indicating that the order is for the Importer. Middleman One’s purchase order also includes an internal manufacturing number or customer number identifying the Importer. The purchase order or manufacturing order from Middleman One to Middleman Two also states that the goods are to be shipped to the Importer in the United States. The air waybill submitted with the AFR documentation confirms that the goods were shipped directly from the foreign manufacturer to the Importer in the United States.
Middleman Two’s order to the foreign manufacturers is placed with the manufacturers after Middleman Two receives Middleman One’s order. The manufacturer subsequently issued an invoice to Middleman Two, which invoice reflects shipment of the merchandise to the Importer in the United States. The manufacturer’s invoice notes that the terms of sale with Middleman Two are “Ex Works.”
Payment documentation between the Importer and Middleman One reflects Middleman One’s invoice number, the Importer’s electronic order numbers for the specific merchandise and Middleman Two’s order number to the manufacturer. A list of wire transfers made by the Importer in payment to Middleman One was also provided. Documentation submitted by the Importer further establishes the invoicing of Middleman One by Middleman Two and the payment of Middleman Two by Middleman One. The final documents submitted by the Importer confirm payment of the manufacturer by Middleman Two.
ISSUE
Did Customs and Border Protection properly liquidate the relevant entries appraising the merchandise pursuant to the transaction value between Middleman One and Middleman Two or should CBP have appraised the entries using the transaction value between the unrelated foreign manufacturer and Middleman Two ?
LAW AND ANALYSIS
The federal agency responsible for interpreting and applying the United States Code and the regulations of U.S. Customs and Border Protection, as they relate to the final appraisement of merchandise, is Customs and Border Protection. Customs and Border Protection, in accordance with its legislative mandate, fixes the final appraisement of imported merchandise in accordance with Section 402 (b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979. The preferred method of appraisement is transaction value. The transaction value of imported merchandise is the “price actually paid or payable for merchandise when sold for exportation to the United States,” plus amounts for any statutory additions.
Sale for Exportation to the United States
Merchandise must be the subject of a bona fide sale, the sales transaction must be conducted at arm’s length, the sale must be for exportation to the United States and CBP must be advised of all statutory additions to be added to the price actually paid or payable, in order for imported merchandise subject to a multi-tiered transaction to be appraised pursuant to the transaction value method of appraisement. The Court of Appeals for the Federal Circuit in Nissho Iwai American Corp. v. United States, 786 F. Supp. 1002 (Ct. Int’l Trade 1992) rev’d in part 982 F. 2d 505 (Fed. Cir. 1992), and the Court of International Trade in Synergy Sport Int’l, Ltd. v. United States, 17 C.I.T. 18 (Ct. Int’l Trade 1993) addressed the valuation of merchandise imported pursuant to three-tiered distribution arrangements. The parties in the Nissho Iwai and Synergy Sport transactions were the foreign manufacturer, the middleman and the United States importer. The courts in Nissho Iwai and Synergy Sport held that the price paid by the middleman to the manufacturer could be acceptable as the “sale for export to the United States” for the purpose of using the transaction value method of appraising imported merchandise. The Court of Appeals in Nissho Iwai held that
where there is a legitimate choice between two statutorily viable transaction values.…[t]he 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 influences that affect the legitimacy of the sales price.
The Nissho Iwai court further stated that determinations of this nature may only be made on a “case-by-case” basis.
The Customs Service, CBP’s predecessor, in response to the Nissho Iwai and Synergy Sport decisions and in an effort to further clarify those multi-tiered transactions in which the price paid or payable by a party other than the importer will be acceptable as the sale for exportation to the United States issued Treasury Decision 96-87. Treasury Decision 96-87 advises that CBP presumes that the price paid or payable by the importer is the proper basis of transaction value and that the burden of rebutting this presumption rests with the importer. The T.D. further states the requirements and means by which an importer may overcome the presumption.
The importer, in order to rebut the presumption of T.D. 96-87, must establish by sufficient information “that at the time the middleman purchased, or contracted to purchase, the goods were ‘clearly destined for export to the United States’ and the manufacturer (or other seller) and middleman dealt with each other at ‘arm’s length’.” The importer must provide CBP with a description of the roles of the parties involved and must supply relevant documentation addressing each transaction that was involved in the exportation of the merchandise to the United States. The documents may include, but are not limited to “purchase orders, invoices, proof of payment, contracts and any additional documents (e.g. correspondence)” that establishes how the parties deal with one another. The objective is to provide CBP with “a complete paper trail of the imported merchandise showing the structure of the entire transaction.”
Treasury Decision 96-87 further states that the ruling requester must also provide CBP with sufficient information regarding the amounts, if any, of the statutory additions set forth in 19 U.S.C. 1401a (b)(1). The requester must not only inform CBP of any statutory additions, but must also advise CBP of the amount of those additions. If the ruling requester or the importer does not have this information, the sale between the middleman and the manufacturer cannot form the basis of transaction value.
The Protestant in the instant AFR is the Importer. CBP presumes that the transaction value between the Importer and Middleman One should be the entered value. In order to rebut this presumption and to base the transaction value on the sale between the foreign manufacturer and Middleman Two, CBP must be provided with sufficient information to demonstrate: (1) The sale between Middleman Two and the foreign manufacturer was a bona fide sale; (2) The transaction between Middleman Two and the foreign manufacturer was an “arm’s length” transaction; (3) The merchandise was “clearly destined” for exportation to the United States when the Middleman Two purchased or contracted to purchase the merchandise from the foreign manufacturer; and (4) The amount, if any, of any statutory additions that must be added to the price actually paid or payable in the sale between Middleman Two and the manufacturer.
Bona Fide Sale
The sale between the manufacturer and Middleman Two must be a bona fide sale in order for that sale to be accepted as the transaction value. The term “sale” is not defined, however, in either the value statute or CBP regulations. Customs and Border Protection must, therefore, look to jurisprudence for assistance in providing meaning to this term.
The Court of Appeals for the Federal Circuit in J.L. Wood v. United States, 505 F.2d 1400, 1406 (Fed. Cir. 1974) defined “sale” as the transfer of property from one party to another for consideration. No single factor is deemed to be conclusive in determining whether a sale exists. The relationship between the parties, as to whether they are functioning as buyer and seller, can only be ascertained by a review of the entire situation. One of the factors in determining whether a transfer of property or ownership has occurred is “whether the alleged buyer has assumed the risk of loss, and whether the buyer has acquired title to the imported merchandise.” Customs and Border Protection will also examine the “roles of the parties and the circumstances of the transaction” to determine if the parties are interacting as buyer and seller.
It is the conclusion of this office, based on the information provided by the Protestant, that the sale between Middleman Two and the foreign manufacturer was a bona fide sale. The commercial documents that were generated, particularly the purchase orders, order acknowledgment, invoices and payment documents indicate a bona fide sale. This conclusion is further supported by the fact that the terms of sale between Middleman Two and the foreign manufacturer were such that Middleman Two take title and assume the risk of loss from the manufacturer at the manufacturer’s loading dock.
Although the merchandise will be “drop shipped” directly to the Importer by the manufacturer, this fact alone does not preclude the conclusion that a bona fide sale has occurred. See HQ 547436 (Aug. 10, 2000). In the instant Customs transaction, sufficient documentation establishing assumption of risk and transfer of title lead CBP to conclude that a viable sale occurred between Middleman Two and the foreign manufacturer.
Arm’s Length Transaction
The Nissho Iwai decision and T.D. 96-87 state that the manufacturer and the middleman must “deal with each other at arm’s length” and that there may be no “non-market influences that affect the legitimacy of the sales price.” Customs and Border Protection regulations define “related parties” in 19 U.S.C. 1401a (g)(1) and provide, in part, that imported merchandise may be appraised pursuant to the transaction value method when the “[t]he buyer and seller are not related….” CBP has been advised by the Protestant that although it is related to Middleman One and Middleman Two, it is not related to the foreign manufacturer.
CBP presumes that unrelated parties transact business with one another at “arm’s length.” Since Middleman Two and the manufacturer are unrelated, CBP presumes that the price actually paid or payable by Middleman Two is one that was negotiated at arm’s length and was not subject to any non-market influences.
“Clearly Destined” for the United States
Section 1401a (b)(1) defines transaction value as the price actually paid or payable for the imported merchandise “when sold for exportation to the United States,” plus the amounts of the statutory additions. The phrase “when sold for exportation to the United States” has been interpreted by the Nissho Iwai court and subsequently in T.D. 96-87 to mean that, in multi-tiered transactions, at the time the manufacturer and middleman conclude their agreement the goods that are the subject of the sale must be “clearly destined for export to the United States.”
The transaction set forth by the Importer conforms to section 1401a (b) and establishes that at the time of the sale between Middleman Two and the foreign manufacturer the merchandise was “clearly destined for export to the United States.” The “paper trail” linking purchase orders, invoices, shipping documents and payment documents confirms that the merchandise imported by the Importer was “clearly destined” for the United States when it is ordered by Middleman Two from the manufacturer.
Customs and Border Protection notes that the merchandise will be “drop shipped” directly to the importers by the manufacturer. This fact, in conjunction with the fact that the documents that comprise the paper trail between all of the parties, indicates that the merchandise was “clearly destined for export to the United States” when it was ordered by Middleman Two from the manufacturer.
Statutory Additions
The final element that must be established in order to rebut the presumption that the price actually paid or payable by the importer to the middleman is the transaction value involves the statutory additions to the price that are set forth in 19 U.S.C. 1401a (b)(1). Section 1401a (b)(1) provides that amounts equal to the following must be added to the price actually paid or payable:
(A) the packing costs incurred by the buyer with respect to the imported merchandise;
(B) any selling commissions incurred by the buyer with respect to the imported merchandise;
the value, apportioned as appropriate, of any assist;
any royalty or license fee related to the imported
merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States; and
(E) the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.
Customs and Border Protection must be provided sufficient information to confirm, as between Middleman Two and the foreign manufacturer, that there are no statutory additions or must be advised of the nature and amount of the statutory additions that must be added to the price actually paid or payable between Middleman Two and the manufacturer.
The Importer, through its counsel, has advised CBP that there are no statutory additions that must be made to the price actually paid or payable between Middleman Two and the manufacturer. Should any assist have been provided by Middleman Two to the manufacturer free of charge or at a reduced cost, that amount would have to be added to the price actually paid or payable.
HOLDING
The protest of XXXXXXXXXXXXXXXXXX, the Importer, is GRANTED.
XXXXXXXXXXXXXXXXXXXXXX, the Importer, may declare as the entered value the transaction value between XXXXXXXXXXXXX, Middleman Two, and the foreign manufacturer.
In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2002, pp. 18 and 21), you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Virginia L. Brown, Chief
Value Branch