VAL:RR:IT:VA 548504 jsj
Mr. Damon V. Pike
Deloitte & Touche
Customs and International Trade Services
191 Peachtree Street, NE
Atlanta, Georgia 30303-1924
Re: Transaction Value; Sale for Exportation to the United States; Bona Fide Sale; Arm’s Length Transaction; “Clearly Destined” for the United States; Statutory Additions; Nissho Iwai Am. Corp. v. United States; Treasury Decision 96-87.
Dear Mr. Pike:
The purpose of this correspondence is to respond to your correspondence dated March 2, 2004. The correspondence in issue and subsequent communications requested a binding valuation ruling on the behalf of your client, ThreeSixty Sourcing Hong Kong Ltd. (ThreeSixty).
ThreeSixty requests the use of transaction value to appraise imported merchandise in which the parties to the transaction are foreign manufacturers or suppliers, ThreeSixty, in the role of the middleman, and the importers. ThreeSixty seeks a decision from Customs and Border Protection (CBP) concerning the acceptability of using the sale between the manufacturers or suppliers and itself as the middleman as the sale for exportation to the United States pursuant to 19 U.S.C. 1401a (b)(1).
This ruling is being issued subsequent to a review of the following: (1) A submission of Deloitte & Touche on the behalf of ThreeSixty dated March 2, 2004; (2) A facsimile dated May 25, 2004, along with the accompanying documents; (3) Electronic mail correspondence dated May 27, 2004, along with the accompanying documents; (4) Electronic mail correspondence dated May 28, 2004; and (5) Electronic mail correspondence dated June 1, 2004, along with the accompanying documents.
ThreeSixty requested confidential treatment pursuant to 19 C.F. R. 177.2 (b)(7) for information denoted in brackets in its ruling request. Customs and Border Protection 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 ThreeSixty. Confidential information will be underscored in this ruling letter and will be redacted in the public version.
FACTS
ThreeSixty Sourcing Hong Kong Ltd. is a wholly-owned subsidiary of ThreeSixty Sourcing BVI Ltd. ThreeSixty operates as a sourcing entity for companies in the United States that wish to contract with Asian companies to manufacturer merchandise. ThreeSixty, acting as the middleman, purchases merchandise through a three-tiered transaction. ThreeSixty purchases the merchandise from unrelated Asian manufacturers and then re-sells it to unrelated customers in the United States. The merchandise is shipped from the Asian manufacturers directly to ThreeSixty’s customers in the United States.
The purchases made by ThreeSixty are based on orders received from ThreeSixty’s customers. ThreeSixty holds title to the goods which it re-sells to its customers. ThreeSixty is responsible for providing the staff and internal systems sufficient to satisfy its obligations as the middleman, assisting in negotiation of the pricing terms, acting as a liaison between the customer’s design and marketing personnel and the manufacturers, providing showrooms, meeting facilities and test facilities in Hong Kong, and supervising persons engaged by ThreeSixty to satisfy its obligations under the agreements with its U.S. customers.
The transactions of ThreeSixty, as described below, are stated to be the same for all of its U.S. customers. The sample documentation of xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx, one of ThreeSixty’s U.S. customers, similarly, is stated to be representative of the transactions conducted with all of ThreeSixty’s U.S. customers. The manufacturer, in the sample transaction, is xxxxxxxxxxxxxxxxxxxxxxxxx (“xxxxxxxxxxxxxxxxxxxxxxxx”) of Hong Kong. The sample documentation is stated to represent one complete transaction between xxxxxxx the U.S. customer, ThreeSixty, the middleman, and xxxxxxxxxxxxxxxxxxx the manufacturer. Customs and Border Protection is advised that this documentation encompasses a complete paper trail from the initiation of the customer order through payment and delivery of the goods to the customer.
The merchandise order process, according to the ruling requester, originates with a Purchase Requisition (PR), Manufacturing Request Form (“MRF”) or Request for Quotation (“RFQ”), through which the ThreeSixty customer requests a price quote on a specific product. ThreeSixty responds to the customer’s Purchase Request, Manufacturing Request Form or Request for Quotation by contacting the appropriate factories or vendors and determining the price at which it can procure the merchandise for the customer. This price obtained by ThreeSixtgy is communicated to the customer by means of a formal Quote Sheet or other official confirmation that specifies the FOB price per unit for the merchandise and ThreeSixty’s per unit fee set in the Master Purchase Agreement between ThreeSixty and its customers. ThreeSixty, in the documentation provided, has confirmed a total price of $xxxxxxxxx per unit to xxxxxxx. This figure includes the manufacturer’s price to ThreeSixty of $xxxxxxx per unit and ThreeSixty’s mark-up.
ThreeSixty’s customer, subsequent to receipt of ThreeSixty’s Quote Sheet or other confirmation of the FOB price, issues a purchase order. The customer’s purchase order includes: a description of the merchandise, the quantity ordered, the total price per unit and the terms of sale. The customer’s purchase order corresponds to the Quote Sheet and includes ThreeSixty’s gross margin. Xxxxxxx purchase order number xxxxx specifies the goods requested, “xxxxxxxxxx, xxxxxx” xxxxxxxxxxxxxxxxxxxx. The sample xxxxxxx purchase order requests a total of seven shipments with a quantity of xxxxxxx per shipment. The prices included in the xxxxxxx purchase order corresponds to the earlier price confirmation from ThreeSixty.
ThreeSixty, on receipt of the customer’s purchase order, issues its own purchase order to the manufacturer or vendor. The ThreeSixty purchase order includes: a description of the merchandise, the quantity ordered, the price per unit and the total price. The purchase order also references the customer’s purchase order number. A Purchase Order Release is subsequently generated for each shipment. The Purchase Order Release includes: the item description, the quantity to be shipped, references the customer’s purchase order number and designates ThreeSixty’s customer as the consignee. The ThreeSixty Purchase Order and Purchase Order Release do not contain ThreeSixty’s gross margin.
The ThreeSixty Purchase Order and Purchase Order Release also specify the terms of sale from the factory to ThreeSixty as “FOB port of shipment” in accordance with “Incoterms 2000.” The price that ThreeSixty pays to its vendors, therefore, include the cost of the merchandise, as well as, foreign inland freight from the factory to the port of shipment and any terminal and vessel loading charges. The sample ThreeSixty Purchase Order, number (xxx)xxxx, references the original xxxxxxx Purchase Order number xxxxx. The xxx in the ThreeSixty Purchase Order number references xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. The ThreeSixty Purchase Order utilizes the same item number and description as the xxxxxxx Purchase Order, as well as the same quantity and delivery dates. The ThreeSixty Purchase Order also specifies that ThreeSixty will purchase the goods from xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. The Purchase Order Release replicates all of this information, but is specific to the first shipment in the amount of xxxxxx units, as requested by xxxxxxxx.
The goods are shipped directly from the manufacturer or vendor to ThreeSixty’s U.S. customer when the order is filled. The shipping documents, including a bill of lading and packing list, will note a description of the merchandise and the quantity shipped. These documents will, additionally, list the U.S. customer as the consignee and reference both the customer’s Purchase Order number and the ThreeSixty Purchase Order number.
ThreeSixty’s U.S. customer is listed the as the importer of record on the Entry Summary (CBP form 7501). The sample CBP 7501 lists xxxxxxx as the importer of record. The shipping documents list xxxxxxx as the consignee and note xxxxxxx’s address as the “ship to” location. The shipping documents also reference both the xxxxxxx and ThreeSixty Purchase Order numbers, as well as the item number and description. The commercial invoice includes all of the above described information and further states the unit price as specified in the original price confirmation. The commercial invoice also includes the margin to be received by ThreeSixty, which amount is consistent with the original price confirmation. The declared value to CBP is the amount charged by ThreeSixty to xxxxxxx.
The manufacture or vendor issues an invoice to ThreeSixty for the goods, once they have been transported from the factory to the U.S. customer’s vessel of lading at the FOB port. The manufacturer or vendor invoice includes: a description of the merchandise, the quantity sold, the price per unit, the total price from the manufacturer to ThreeSixty, the terms of sale (FOB port of shipment), and references both the Purchase Order number of ThreeSixty’s customer and the ThreeSixty Purchase Order number. The sample invoice, number xxxxxxxxxxxxx, references both the xxxxxxx and the ThreeSixty Purchase Order numbers, the quantity shipped and the unit price as specified in the original price confirmation. It also states the terms of sale as FOB Hong Kong.
ThreeSixty, subsequent to receipt of the manufacturer’s or vendor’s invoice, makes payment. Depending upon agreement with the manufacturer or vendor, ThreeSixty will make payment in the form of a check or wire transfer. When payment is made by check, a Remittance Advice is prepared by ThreeSixty and issued to the manufacturer or vendor, with a subsequent receipt from the manufacturer or vendor. When payment is made by wire transfer, payment is in the form of bank transfer with payment confirmation. The sample Remittance Advice identifies specific invoices in the remittance, including number xxxxxxxxxxxxxx, and the total amount of each invoice. An acknowledgement from xxxxxxxxxxxxxxxxxxxxxx, referred to by ThreeSixty as an “Official Receipt,” indicating that full payment was received is also provided.
ThreeSixty, on receiving an invoice from the manufacturer or vendor, prepares and sends an invoice to its U.S. customer for the item or items shipped. The ThreeSixty invoice includes: the item description, quantity shipped, the total price per unit, the total price in aggregate and the terms of sale. The invoice notes the U.S. customer as the “ship to” entity and references both the original customer Purchase Order number and the ThreeSixty Purchase Order number. The sample invoice provided in the ruling request, number xxxxxxx, references the xxxxxxx and ThreeSixty purchase order numbers, the quantity shipped, and the unit prices as specified in the original price confirmation. The ThreeSixty invoice lists both the prices from xxxxxxxxxxxxxxxxxxx and the ThreeSixty margin, with the total amount to be paid by xxxxxxx. The ThreeSixty invoice is the commercial invoice used when entering the merchandise into the United States.
Payment by the U.S. customer to ThreeSixty is made by wire transfer, with documentation of payment in the form of a ThreeSixty “Applied Receipts Register” that references the specific ThreeSixty invoice number and the amount paid. The sample Applied Receipts Register notes the ThreeSixty invoice number and the amount received from xxxxxxxxxx.
ThreeSixty advises CBP that in the future it will utilize a new “Master Purchase Agreement.” All transactions with ThreeSixty customers in the U.S., pursuant to section 1(h) of the master agreement, will use the term “Documents Against Payment” rather than the Incoterms currently utilized. Legal title to the goods, Incoterms notwithstanding and as specifically noted in the agreement, will be held by ThreeSixty until such time as the customer pays for the goods by way of wire transfer. The new Master Purchase Agreement, according to ThreeSixty’s submission, will override any implied passage of title when risk of loss might be considered as passing according to the FOB Incoterm because the agreement specifically states that title will remain with ThreeSixty until the merchandise has been paid for by its customer. Although the sample invoices from an earlier transaction submitted with this ruling request show the first sale from xxxxxxxxx xxxxxxxxxxxx to ThreeSixty using the Incoterm “FOB Hong Kong” and the second invoice from ThreeSixty to xxxxxxx also using “FOB Hong Kong,” title pursuant to the new Master Purchase Agreement will not transfer until ThreeSixty receives payment. The importer advises CBP that since payment normally takes at least a week, no “flash title” is expected to occur in any of the transactions described in this ruling request.
ISSUE
May the customers of ThreeSixty Sourcing Hong Kong Ltd., the importers, declare the price actually paid or payable between, ThreeSixty, the middleman, and the foreign manufacturers or suppliers as the transaction value ?
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 an 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 importers in the instant ruling request will be the customers of the middleman and ruling requester, ThreeSixty. CBP, therefore, presumes that the price paid or payable by ThreeSixty’s customers to ThreeSixty is the transaction value. In order to rebut this presumption and to base transaction value on the price paid or payable by ThreeSixty to the foreign manufacturers or suppliers of ThreeSixty, CBP must be provided with sufficient information to demonstrate: (1) The sales between ThreeSixty and the foreign manufacturers or suppliers are bona fide sales; (2) The transactions between ThreeSixty and the foreign manufacturers or suppliers are “arm’s length” transactions; (3) The merchandise is “clearly destined” for exportation to the United States when ThreeSixty purchases or contracts to purchase the merchandise from the manufacturers or suppliers; and (4) The amount, if any, of any statutory additions that must be added to the price actually paid or payable in sales between ThreeSixty and the manufacturers or suppliers.
Bona Fide Sale
The sale between the manufacturer and the middleman 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 ruling requester, that the sales between ThreeSixty, the middleman, and the foreign manufacturers or suppliers are bona fide sales. The commercial documents that will be generated, particularly the purchase orders, invoices, packing lists and payment documents indicate bona fide sales. This conclusion is further supported by the fact that the terms of sale between ThreeSixty and the foreign manufacturers or suppliers will be such that ThreeSixty will take title and assume the risk of loss from the manufacturers or suppliers at the port of lading when the merchandise crosses the ship’s rail. The middleman will, according to the “Master Purchase Agreement,” maintain title until payment is received from its customers, the importers.
Although the merchandise will be “drop shipped” directly to ThreeSixty’s customers by the manufacturers or suppliers, this fact alone does not preclude the conclusion that a bona fide sale has occurred. See HQ 547436 (Aug. 10, 2000). In the proposed transaction, sufficient documentation, assumptions of risk and transfers for title lead CBP to conclude that two viable sales will occur, in particular, a sale between the middleman, ThreeSixty, and the manufacturers or suppliers, and a sale between ThreeSixty and the ultimate U.S. customer.
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 ThreeSixty that it is not related to either the importers or the manufacturers or suppliers. This ruling also assumes that ThreeSixty’s customers are not related to the manufacturers or suppliers.
CBP presumes that unrelated parties transact business with one another at “arm’s length.” Since ThreeSixty and the manufacturers or suppliers are unrelated, CBP presumes that the price actually paid or payable by ThreeSixty is one that will be negotiated at arm’s length and will 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 ThreeSixty conforms to section 1401a (b) and establishes that at the time of the sale between the middleman, ThreeSixty, and the manufacturers or suppliers the merchandise will be “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 ThreeSixty’s customers is “clearly destined” for the United States when it is ordered by ThreeSixty from the manufacturers or suppliers.
Customs and Border Protection notes that the merchandise will be “drop shipped” directly to ThreeSixty’s customers, the importers, by the manufacturers or suppliers. This fact, in conjunction with the use of corresponding purchase order numbers between ThreeSixty and its customers, indicates that the merchandise is “clearly destined for export to the United States” when it is ordered by ThreeSixty from the manufacturers or suppliers.
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 the middleman and the manufacturers or suppliers, that there are no statutory additions or the nature and amount of the statutory additions that must be made to the price actually paid or payable between the middleman and the manufacturers.
ThreeSixty, through its representative at Deloitte & Touche, has advised CBP that there are no statutory additions that must be made to the price actually paid or payable between the middleman and the manufacturers. Customs and Border Protection does note Paragraph 9 of Exhibit B of the new Master Purchase Agreement which addresses “Mold[s].” Should any mold, tool, or any other assist be provided by ThreeSixty’s customer 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 importers, the customers of ThreeSixty Sourcing Hong Kong Ltd., may declare the price actually paid or payable between, ThreeSixty, the middleman, and the foreign manufacturers or vendors as the transaction value.
Sincerely,
Virginia L. Brown, Chief
Value Branch