OT:RR:CTF:VS H241090 SEK
Port Director
U.S. Customs and Border Protection
301 E. Ocean Blvd. Suite 1400 Long Beach, CA 90802
RE: Application for Further Review of Protest Number 2704-11-101972 regarding Valuation of Merchandise Based on a First Sale Between Related Parties
Dear Port Director:
The following is our decision regarding the Application for Further Review (“AFR”) of Protest No. 2704-11-101972 (the “Protest”) filed by counsel on behalf of Pacific Sunwear of California, Inc. (“PacSun”) regarding the valuation of certain merchandise imported by PacSun.
FACTS:
This protest concerns the valuation of three entries of certain imported wearing apparel and accessories entered through the Port of Los Angeles. For the transactions under consideration, the importer of record was PacSun. There are two other parties involved in the protested transactions. The first party is the vendor/middleman, Ningbo Sedunotex Co., Ltd. (“Sedunotex”) and its related manufacturer Rockmaui Wear Co., Ltd. (“Rockmaui”).
On September 14, 2011, PacSun’s representative filed a protest on its behalf requesting that the merchandise in three entries should be “appraised under ‘transaction value’ based on the price paid by the middleman to the manufacturer.” On October 18, 2011, PacSun’s representative provided reconstructed entries for the three entries at issue. The entries at issue had respective entry dates of May 8, 2010, May 19, 2010, and September 27, 2010. Each reconstructed entry contained the entry summary, commercial invoices issued by Rockmaui to Sedunotex, detail packing lists issued by Rockmaui, commercial invoices issued by Sedunotex to PacSun, detail packing lists issued by Sedunotex to PacSun, and the bills of lading. We note that for entry [xx-xxxxxxx], the entry package contained additional invoices issued by a company called Encode Clothing Limited, as well as invoices and packing lists issued by Rockmaui that were dated September 14, 2011 and October 13, 2011, respectively. Both documents were dated long after the May 19, 2010 entry date.
In a prior submission dated May 25, 2011, PacSun “notif[ied] [CBP] of [PacSun’s] intention to enter certain merchandise at the Port of Los Angeles (seaport) using a first sale basis of appraisement.” In that submission, PacSun “set forth the factual circumstances which support transaction value appraisement based upon the price paid by [Sedunotex] … to [Rockmaui], a related Chinese factory.” This submission stated that PacSun’s future transactions would follow the same procedure. First, PacSun stated that it will issue a purchase order to Sedunotex with the order details and purchase order number. Upon receipt of the order from PacSun, Sedunotex will subcontract the production of the merchandise to its related factory, Rockmaui. Sedunotex will place factory orders that specify PacSun as the ultimate consignee, and include the PacSun style number, order number, and ordered quantity.
PacSun states that “in the usual course,” Sedunotex will arrange for production of the merchandise whereby the factory will purchase all materials and invoice Sedunotex at a price which covers all costs for these materials plus labor. The factory invoice will reference the original PacSun purchase order number and style numbers. The terms of sale between Sedunotex and Rockmai will be FAS. The factory invoice will also identify PacSun as the ultimate consignee and state that the goods are only sold for export to the United States. Sedunotex will then issue an FOB invoice to PacSun covering this merchandise which is destined for the United States. This value represents the first sale for customs purposes and PacSun’s customs broker will use this value to make entry. The factory invoice as well as the Sedunotex invoice will be submitted at the time of entry. The finished merchandise will feature the PacSun brand trademarks as well as labels for the U.S. market, and will be shipped directly to PacSun in the United States.
The May 25, 2011 submission contained the following sample documents to represent a typical PacSun transaction: a purchase order from PacSun to Sedunotex dated October 21, 2010, a purchase order issued by Sedunotex dated October 22, 2010, a Rockmaui invoice issued to Sedunotex dated December 22, 2010, and a Sedunotex invoice issued to PacSun and dated December 21, 2010. The record does not contain any evidence of payment from PacSun to Sedunotex or Sedunotex to PacSun for the finished goods.
ISSUE:
Whether the transaction between Rockmaui, the foreign manufacturer, and Sedunotex, the middleman, may be used to determine the transaction value of the merchandise described above.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”), codified at 19 U.S.C. 1401a. Transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for five enumerated statutory additions. 19 U.S.C. 1401a(b). In order for imported merchandise to be appraised under the transaction value method, it must be the subject of a bona fide sale between a buyer and seller, and it must be a sale for exportation to the United States. We will assume for the purposes of this ruling that transaction value is the appropriate basis of appraisement.
In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992) and Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993), the Court of Appeals for the Federal Circuit and the Court of International Trade, respectively, reviewed the standard for determining transaction value when there is more than one sale which may be considered as being a sale for exportation to the United States. Both cases involved a foreign manufacturer, a middleman, and a United States purchaser. In each case, the court held that the price paid by the middleman/importer to the manufacturer was the proper basis for transaction value. Each court further stated that in order for a transaction to be viable under the valuation statute, it must be a sale conducted at arm’s length, free from any non-market influences, and involving merchandise clearly destined for export to the United States at the time of the first sale.
In accordance with the Nissho Iwai and Synergy decisions, we presume that transaction value is based on the price paid by the importer. In further keeping with the courts’ holdings, we note that an importer may request appraisement based on the price paid by the middleman to the foreign manufacturer in situations where the middleman is not the importer. However, it will be the importer’s responsibility to show that the “first sale” price is acceptable under the standard set forth in Nissho Iwai and Synergy. That is, the importer must present sufficient evidence that the alleged sale was a bona fide “arm’s length sale,” and that it was “a sale for export to the United States,” within the meaning of 19 U.S.C. 1401a.
In Treasury Decision (“T.D.”) 96-87, 30 Cust. Bull. 52/1 (January 2, 1997), CBP set forth the documentation and information needed to support a ruling request that transaction value should be based on a sale involving a middleman and the manufacturer or other seller rather than on the sale in which the importer was a party. CBP advised that the importer must provide 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.” If such information is unavailable the ruling should so provide. We note that PacSun did not provide any proof of payments, or any contracts between any of the parties. T.D. 96-87 further provides that the importer must also inform CBP of any statutory additions and their amounts. If unable to do so, the sale between the middleman and the manufacturer cannot form the basis of transaction value.
According to Nissho Iwai, in order for a transaction to be viable for transaction value purposes, it must be a sale negotiated at arm’s length, free from any non-market influences. There is a presumption that a transaction will meet this standard if the buyer and seller are unrelated. See T.D. 96-87, supra. If the parties are related, then “it is necessary to provide Customs with information which demonstrates that transaction value may be based on the related party sale as provided in 19 U.S.C. § 1401a(b)(2)(B) (stating that the circumstances of the sale indicate that the relationship did not influence the price or that the transaction value closely approximates certain test values). See T.D. 96-87, supra. “Test values” refer to values previously determined pursuant to actual appraisements of imported merchandise. Furthermore, transaction value between a related buyer and seller may be acceptable if an examination of the circumstances of the sale indicates that although related, their relationship did not influence the price actually paid or payable. The CBP Regulations specified in 19 CFR Part 152 set forth illustrative examples of how to determine if the relationship between the buyer and the seller influences the price. See also HRL 029658, dated December 8, 2009; H037375, dated December 11, 2009; and, HRL H032883, dated March 31, 2010. In this respect, CBP will examine the manner in which the buyer and seller organize their commercial relations and the way in which the price in question was derived in order to determine whether the relationship influenced the price. If it can be shown that the price was settled in a manner consistent with the normal pricing practices of the industry in question, or with the way in which the seller settles prices with unrelated buyers, this will demonstrate that the price has not been influenced by the relationship. See 19 CFR § 152.103(l)(1)(i)-(ii). In addition, CBP will consider the price not to have been influenced if the price was adequate to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit realized over a representative period of time. 19 CFR § 152.103(l)(1)(iii). These are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well.
In this case, PacSun acknowledges that Sedunotex and Rockmaui are related parties for purposes of section 402(g) of the TAA. In its May 25, 2011 submission, PacSun states the following:
In the instant case, the price that Sedunotex pays the vendor for merchandise is agreed upon through arms length [sic] negotiation and competitive market forces. As with negotiations between uncontrolled parties in the marketplace, negotiations between Sedunotex and the vendor are based on cost considerations and the requirement that the vendor realizes a reasonable profit, as well as Sedunotex’s ability to obtain the goods at a price that will permit their profitable resale. This process results in a price that is adequate to ensure that the factory recovers all costs plus a profit that is equivalent to Sedunotex’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind.
PacSun contends that the price paid by Sedunotex to the manufacturer meets the “all costs plus a profit” methodology. As indicated above, if it can be shown that the related party price is adequate to ensure recovery of all costs plus a profit equal to the firm’s overall profit realized over a representative period of time, in sales of merchandise of the same class or kind then the circumstances of the sale test is met when the analysis reveals that the relationship between the buyer and seller did not influence the prices paid. However, apart from the above assertion, PacSun did not supply any documentation or evidence to substantiate its claim that the sale between Sedunotex and Rockmaui meets the requirements of 19 CFR 152.103(l)(1)(iii). In evaluating the all costs plus profit test in the past, CBP has examined companies’ income statements, transfer pricing studies, and other financial information relating to companies’ profits and losses. See, e.g., H215658, dated June 11, 2012, for a discussion of the financial information submitted in CBP’s prior rulings on the all costs plus profit test.
In support of the Application for Further Review, PacSun submitted copies of purchase orders, commercial invoices, packing lists, and the bills of lading. The information submitted supports a finding that the merchandise was clearly destined for export to the United States. However, the information submitted is insufficient to support a finding that the sale between the manufacturer and the middleman was an arm’s length sale in accordance with the standard articulated by the court in Nissho. 982 F.2d at 509-510. No evidence or documentation regarding the circumstances of sale was submitted, nor was any information on test values provided. See 19 U.S.C. 1401a(b)(2)(B); 19 CFR 152.103(j)(2). The only information submitted by the protestant in regard to the related party issue consists of the above statement, which is insufficient to satisfy the circumstances of the sale test for determining the acceptability of a related party price without any supporting documentation. Therefore, due to the lack of evidence to show that the price between Sedunotex and Rockmaui was not influenced by the relationship of the parties, we find that PacSun cannot use the sale between Sedunotex and Rockmaui as the sale for export.
Accordingly, the goods may not be appraised under transaction value on the basis of the “first sale,” the price paid by the middleman to the manufacturer because the protestant has failed to demonstrate that the price actually paid or payable was not affected by the relationship between the parties.
HOLDING:
The protest should be denied. Based on the evidence presented, we find that the imported goods may not be appraised under transaction value on the basis of the “first sale,” the price paid by the middleman to the foreign manufacturer.
In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, 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 or entries in accordance with the decision should be accomplished prior to mailing of this decision. Sixty days from the date of this decision, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial & Trade Facilitation Division