OT:RR:CTF:VS H255442 CMR
Jan de Beer, Esq.
Frost Brown Todd, LLC
250 West Main Street
Suite 2800
Lexington, Kentucky 40507-1749
RE: Prospective ruling request; Use of First Sale transaction value for appraisement
Dear Mr. de Beer:
This is in response to your request, on behalf of your client, Portwest LLC, for a ruling on the use of a “first sale” transaction value for purposes of appraisement of certain textile products imported by your client. You also request that Customs and Border Protection (CBP) approve the proposed method for apportioning design and testing assists.
FACTS:
Your client, Portwest LLC, will act as a distributor of certain textile products for its related party, Portwest Limited. Portwest Limited will have the merchandise produced in China which is shipped by the manufacturer. Portwest LLC wishes to use the sale between Portwest Limited and the Chinese manufacturer as the sale for exportation to the United States for purposes of appraisement at the time of entry. You submitted sample documentation for purposes of the ruling request to illustrate the proposed transactions. The documentation consists of:
A purchase order from Portwest LCC to Portwest Limited for certain textile merchandise. The delivery terms on the purchase order are DAP (LA Port).
A purchase order from Portwest Limited to the Chinese manufacturer. The delivery terms are FOB Qingdao Port.
A sales confirmation from the Chinese manufacturer to Portwest Limited confirming the order and indicating the destination for the goods to be Kentucky, USA and the terms to be FOB Qingdao. In addition, the sales confirmation identifies Portwest Limited as the buyer and the Chinese manufacturer as the seller.
A sales confirmation from Portwest Limited to Portwest LLC for the ordered merchandise indicating the delivery terms to be DAP (LA Port).
A packing list summary from the Chinese manufacturer indicating the merchandise is destined for Portwest LLC at its address in Kentucky.
An invoice from the Chinese manufacturer to Portwest Limited indicating the merchandise is to be shipped from Qingdao, China to Kentucky, USA by sea. It also indicates shipping terms of FOB Qingdao.
A bill of lading showing the Chinese manufacturer as the shipper, Portwest LLC as the consignee and Portwest Limited as the “Notify Party/Intermediate Consignee.” Port of Discharge is shown to be Long Beach, CA with Place of Delivery to be Shepherdsville, KY.
An invoice from Portwest Limited to Portwest LLC for the merchandise showing delivery terms as DAP (LA Port).
Proof of payment by Portwest Limited to the Chinese manufacturer.
Proof of payment by Portwest LLC to Portwest Limited.
A CBP Form 3461 Entry/Immediate Delivery form showing Portwest LLC as the ultimate consignee.
A CBP Form 7501 showing Portwest LLC as the importer of record.
An invoice from the freight forwarder showing Portwest LLC as the client billed for certain fees incurred at importation and inland freight from Long Beach, CA to Louisville, KY.
An invoice from the freight forwarder showing Portwest Limited as the client billed for the ocean freight to Long Beach.
The purchase orders from Portwest LLC to Portwest Limited and from Portwest Limited to the Chinese manufacture, the sales confirmations from the manufacturer to Portwest Limited and from Portwest Limited to Portwest LLC, and the invoices from the manufacturer to Portwest Limited and from Portwest Limited to Portwest LLC, all contain similar language indicating that the goods to which the document applies are made to Portwest U.S. specifications and must comply, will comply, or do comply “with the U.S. Federal Trade Commission regulations concerning manufacturer registration, fiber content labelling, and care labelling; U.S. standards on size labelling and country of origin; and U.S. health and safety laws and regulations, including but not limited to The Flammable Fabrics Act and the Consumer Product Safety Improvement Act.”
In addition to the sample documents to support the use of the “first sale” price for duty appraisement purposes, you submitted information relevant to assists provided by Portwest Limited to the Chinese manufacturer. You indicate that Portwest Limited will provide the manufacturer with “logos and designs” (hereinafter, designs) to be used in manufacturing the ordered merchandise. In addition, Portwest Limited will provide on-site testing services of manufactured merchandise. Portwest LLC will add the value of the designs and testing services assists to the price paid by Portwest Limited to the manufacturer to arrive at the “first sale” transaction value of the merchandise.
You indicate that the majority of the testing costs relate to payments made by Portwest Limited to independent third party testing houses. Portwest Limited uses independent third party testing houses to certify that the products it is purchasing meet certain safety certification standards. You state:
The testing houses perform laboratory tests on development samples for fabric
strength, flame retardant resistance, protection against falling objects, and fabric visibility prior to production. If samples fail testing, they must be reengineered or remade by the Manufacturer to meet the appropriate standards.
You provided additionally information regarding the testing. You have indicated that the Chinese manufacturer will make sample garments for testing. You state:
For new products, fabric and materials samples are obtained from potential suppliers and are used to create a sample product. That sample product is sent to an independent, third party testing house. The testing house tests the sample product to insure that the proposed fabric and materials meet certain safety certification standards such as fabric strength, flame retardant resistance, protection against falling objects, and fabric visibility. If the fabric and materials meet the safety standards, they may be purchased by the Manufacturer for use in making Portwest products.
The testing occurs on samples (after production of the fabric and materials), but prior to full production runs of the garments.
The garment Manufacturer may only purchase fabric and materials for use in Portwest products once such fabrics have passed the independent testing certification standards.
Portwest Limited also tests garments post-production to ensure that the manufacturer is continuing to use approved fabrics and materials and producing the products in accordance with the applicable safety standards. The post-production testing is performed by either an independent, third-party testing house or by Portwest Limited employees in Ireland. You indicate that “in no case are any Manufacturer employees used or paid for testing services.” You further state:
This testing occurs on a small percentage of final, fully assembled products once the production process is complete. The majority of products are shipped without post-production testing. Less that 5% of products tested fail, at which point they must be reengineered or remade by the Manufacturer to meet the appropriate standards.
Portwest Limited proposes to apportion the assists based upon a method set forth in Headquarters Ruling Letter (HQ) W548547, dated March 7, 2006, with some slight differences. In HQ W548547, the design fee, i.e., per garment design charge, was determined based on a 3-year calendar year average of: any and all actual out of pocket costs and expenses incurred directly on account of the design process, including but not limited to such costs and expenses incurred in: the purchase of sample garments, payments to independent art studios for designs or design services, aggregate consultation fees paid to independent contractor designers, and aggregate salaries of dedicated design staff; divided by the total number of garments manufactured using the relevant designs in that year (including garments manufactured for export to the U.S. and other countries and including all garments produced using the designs regardless of who was the manufacturer) to arrive at a per garment design charge. The per garment design charge was added to the transaction value for each garment.
As an example, Portwest Limited proposes to total its design and testing costs including thread, salaries of design and testing workers, procurement fees, from 2011, 2012 and 2013. Portwest Limited will then calculate the total value of the merchandise it purchased in each of those years from manufacturers to whom it provided the design and testing services. It will then divide the total design and testing costs by the total purchases to arrive at a percentage of the value of that purchased merchandise attributable to the design and testing services, i.e., the “assist percentage.” Portwest LLC will apply the assist percentage to the price paid by Portwest Limited to the manufacturer for each imported entry and add the resulting number to the transaction value for that entry. The three year average assist percentage will be updated each year based on the design and testing costs of the previous financial year and the resulting updated assist percentage will be effective from July 1.
ISSUE:
Whether the sale between Portwest Limited and the Chinese manufacturer is a sale for exportation to the United States upon which the goods may be appraised at entry.
Whether the apportionment method for assists proposed by Portwest LLC is acceptable.
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 (TAA; 19 U.S.C. § 1401a). The preferred method of appraisement is transaction value, which is defined as the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus certain statutory additions. 19 U.S.C. § 1401a(b)(1).
In Nissho Iwai American Corp. v. United States, 16 C.I.T. 86, 786 F. Supp. 1002, reversed in part, 982 F. 2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit 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. The case involved a foreign manufacturer, a middleman, and a United States purchaser. The court held that the price paid by the middleman/importer to the manufacturer was the proper basis for transaction value. The court further stated 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 the United States. See also, Synergy Sport International, Ltd. v. United States, 17 C.I.T. 18 (1993).
In accordance with the Nissho Iwai decision and our own precedent, we presume that transaction value is based on the price paid by the importer. In further keeping with the court’s holding, 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 is the importer’s responsibility to show that the “first sale” price is acceptable under the standard set forth in Nissho Iwai. 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, dated January 2, 1997, the Customs Service (now Customs and Border Protection (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 payments, contracts, and any additional documents (e.g. correspon- dence) 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.” 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.
In this case, there are no supplier contracts between Portwest Limited and the manufacturer. Counsel states that the Distribution Agreement between Portwest Limited and Portwest LLC expressly provides that “Risk of loss and title shall pass to the Distributor in accordance with the Incoterms set forth in the Sales Documentation.” As there is no contract between Portwest Limited and the manufacturer with only the sales documentation to reflect the terms, and the Distribution Agreement clearly expresses and intent in that agreement to have risk of loss and title pass in accordance with the Incoterms, counsel asserts the same intent applies in the sale between Portwest Limited and the Chinese manufacturer.
The submitted documentation supports the use of the sale between the Chinese manufacturer and Portwest Limited. As the parties are unrelated, the sale between them is presumed to be at arm’s length. The documentation shows that the merchandise is clearly destined for the United States as it is shipped directly from the manufacturer to the U.S. subsidiary in Kentucky. In addition, the documentation indicates that the merchandise must comply with certain U.S. standards and requirements. Further, documentation regarding proof of payment by Portwest Limited to the Chinese manufacturer was provided to show that Portwest Limited pays for the goods. Further, accepting counsel’s assertion that title and risk of loss pass together based on the applicable Incoterms in the documents, Portwest Limited assumes title and risk of loss when the goods are loaded at Qingdao headed for the United States.
With regard to the design and testing services assists, “assist” is defined in 19 CFR 152.102(a) as:
. . . any of the following if supplied directly or in-directly, and free of charge
or at reduced cost, by the buyer or imported merchandise for use in connection with the production or the sale for export to the United States of the merchandise:
Materials, components, parts, and similar items incorporated in the imported merchandise.
Tools, dies, molds, and similar items used in the production of the imported merchandise.
Merchandise consumed in the production of the imported merchandise.
Engineering, development, art-work, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise.
No service or work to which paragraph (a)(1)(iv) of this section applies will be treated as an assist if the service or work:
Is performed by an individual domiciled within the United States;
Is performed by that individual while acting as an employee or agent of the buyer of the imported merchandise; and is incidental to other engineering, development, artwork, design work, or plans or sketches that are undertaken within the United States.
Portwest Limited provides the Chinese manufacturer of the imported merchandise with “logos and designs” to be used in manufacturing the goods. As Portwest Limited is a not a U.S. company and there is no indication that the exclusion in 19 CFR 152.102(a)(2) applies, the provision of logos and designs to the manufacturer falls within the definition of assist and the value of such must be added to the price actually paid or payable to the manufacturer as a dutiable cost. See 19 U.S.C. § 1401a(b)(1)(C).
With regard to the testing services, we have stated in previous decisions that when testing is performed by independent testers for the benefit of the buyer, not the seller, and is paid for by the buyer, such testing costs are not part of the price actually paid or payable for the merchandise. See HQ H256223, dated August 20, 2014 and citations therein. In HQ 548540, dated July 28, 2004, we stated:
. . . testing may constitute one of the enumerated assists if the testing (1) is supplied directly or indirectly, free of charge or at a reduced cost, by the buyer of the imported merchandise for use in connection with the production or the sale for export to the United States of that merchandise and (2) is essential to the production of that merchandise. See 19 U.S.C. 1401a(h)(1)(A) and see generally HQ 544508 (June 19, 1990); HQ 545170 (October 27, 1994); and HQ 545500 (March 24, 1995).
Further, in HQ W563480, dated June 9, 2006, we ruled on the dutiability of testing services paid by an importer to unrelated third parties for testing fabrics prior to production of garments or accessories from it. The tests were done prior to acquisition of the fabrics by the factories producing merchandise for sale to the importer and were done for the purpose of quality assurance. Customs (now, Customs and Border Protection (CBP)) concluded that the testing costs were not part of the price actually paid or payable for the imported merchandise as the importer made the payments for the testing to an independent third-party tester and not to, or for the benefit of, the seller of the imported goods. The ruling also stated that the fabric testing did not appear to amount to production related design or development of the imported merchandise.
In addition, in HQ 542387, dated May 15, 1981, this office ruled on the dutiability of certain costs, including testing, incurred by an importer who supplied material to garment manufacturers. In that decision, the importer bought material from unrelated sellers and tested the material for quality. The importer sold the material at its original purchase price to an unrelated garment manufacturer. The imported did not charge the garment manufacturer the cost for testing the material. Since the importer did not provide the material to the garment manufacturer for free or at a reduced cost, but for the actual purchase price, we concluded the fabric was not an assist. We further stated that “we would not consider the cost of warehousing or testing material to be part of the ‘cost of acquisition’ of the material had it been an assist.”
In this case, the testing of a sample to determine whether the fabric and materials from which it is made meets certain safety certification standards is performed by third-parties who are paid directly by Portwest Limited. The manufacturer of the finished textile products to be purchased by Portwest Limited buys the fabric and materials from the producer of such directly. The testing of a sample garment made by the Chinese manufacturer is for the purpose of determining whether the fabric and materials are suitable for production of garments to be imported, i.e., the testing determines the sourcing of materials for making the imported merchandise. However, the testing does not fall within the definition of an assist in 19 CFR 152.102(a)(1). Nor is the testing considered an indirect payment to the manufacturer. Therefore, the cost of the testing is not dutiable.
As for the design and testing services assists, the CBP regulations at 19 CFR § 152.103(e) provides, with regard to the apportionment of assists:
The apportionment of the value of assists to imported merchandise will
be made in a reasonable manner appropriate to the circumstances and in accordance with generally accepted accounting principles. The method of apportionment actually accepted by Customs will depend upon the documentation submitted by the importer. If the entire anticipated production using the assist is for exportation to the United States, the total value may be apportioned over (i) the first shipment, if the importer wishes to pay duty on the entire value at once, (ii) the number of units produced up to the time of the first shipment, or (iii) the entire anticipated production. In addition to these three methods, the importer may request some other method of apportionment in accordance with generally accepted accounting principles. If the anticipated production is only partially for exportation to the United States, or if the assist is used in several countries, the method of apportionment will depend upon the documentation submitted by the importer.
We have reviewed your proposal for apportioning the assist costs. HQ W548547, which you cite, supports the use of a three-year averaging method. While your proposal differs from HQ W548547 wherein a set amount was determined and added as a per garment charge, and you propose a formula for calculating an assist percentage to be added to each entry, CBP finds your proposed apportionment method acceptable.
HOLDING:
Based on the submitted sample documentation and information provided, the sale between the Chinese manufacturer and Portwest Limited is a sale for exportation to the United States under 19 U.S.C. § 1401a(b) and may be used for appraisement purposes at entry.
The cost of logos and designs provided by Portwest Limited to the Chinese manufacturer is a dutiable assist within the meaning of 19 CFR 152.102(a)(1)(4). The cost of pre-production testing of samples by third-party testers to determine the suitability of materials for production and the cost of post-production testing by third-party testers or Portwest Limited are not assists, nor indirect payments to the manufacturer. Therefore, the testing costs are not dutiable. The proposed apportionment of assist costs is acceptable.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch