OT:RR:CTF:VS H307028 AP
Center Director
Apparel, Footwear and Textiles CEE
200 East Bay Street Charleston, South Carolina 29401
Attn.: Robert O’Brien, Import Specialist
RE: Application for Further Review of Protest Number 2704-18-101531; “First Sale” Appraisement; Multi-Tiered Transaction
Dear Center Director:
The following is our decision regarding the Application for Further Review (“AFR”) of Protest Number 2704-18-101531, timely filed on September 19, 2018, on behalf of [ ] (“U.S. importer and protestant”). The importer contests U.S. Customs and Border Protection’s (“CBP”) denial of its “first sale” valuation of the imported apparel. A conference with the importer’s counsel was held on June 10, 2020, and additional documentation was received on June 11, 2020, and on July 30, 2020.
The importer, through its counsel, has asked that certain information submitted in connection with this AFR be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this AFR and additional documentation, forwarded to our office, will not be released to the public and will be withheld from published version of this decision.
FACTS:
In the instant multi-tiered transaction, the U.S. importer purchased apparel from its related middleman vendor [ ] located in Singapore, which in turn, purchased the goods from the unrelated foreign seller/factory [ ] in China. [ ] in Singapore served as a buying agent for the middleman [ ]. The terms of the sale between the importer and the middleman were Free on Board (“FOB”) Ningbo, China. The terms of the sale between the foreign supplier and the middleman were also FOB Ningbo, China. The importer informs that no assists or statutory additions were provided.
The importer ordered the merchandise from the middleman, specifying the factory in China [ ] as the foreign supplier. Protestant served both as the importer of record and the ultimate consignee, declaring the price between the foreign seller and the middleman under the transaction value method of appraisement. At liquidation, CBP advanced the value of the subject entry based on the sale from the middleman to the importer. The merchandise covered by this entry was a partial shipment of the goods ordered. The entry was filed on January 2, 2016, and was liquidated on March 23, 2018.
The importer provided the following documentation to support its claim that the merchandise should be appraised based on the sale between the middleman and the foreign supplier:
May 21, 2015 PO No. 4500209619 ($252,659.22); May 27, 2015 PO
No. 4500210040 ($50,049.70); and June 15, 2015 PO No. 4500212266 ($128,614.50) issued by the importer to the middleman for various styles of apparel. The terms of sale are FOB Port of Ningbo, China. The factory [ ] is listed as the foreign vendor and goods supplier.
May 21, 2015 PO No. 15-C[ ]I-1072-1 ($240,627.84); May 27, 2015 PO No. 15-C[ ]I-1125-1 ($47,666.40); and June 15, 2015 PO No. 15-G[ ]I-1149-1 ($122,490.00) issued by the middleman to the foreign supplier for various styles of apparel. The importer is listed as the buyer on these POs and [ ] is listed as buying agent for the middleman. The POs reference PO Nos. 4500209619, 4500210040 and 4500212266 issued by the importer. Per PO No. 15-G[ ]I-1149-1, “Premium of product liability insurance on FOB price will be covered by Li & Fung Group at vendor’s expense.” The total listed product liability insurance amount is $306.23.
The Terms and Conditions of the Sale (exhibit 3) provide that, “Risk of loss of or any damage to any of the Goods and title thereto shall pass to the Buyer according to the Contract. At no time does the Buying Agent take any title to the Goods.” The importer is listed as the buyer. The Contract is defined as including the Terms and Conditions and the relevant Placement Memorandum and purchase orders, which define both the terms of the sale between the buyer and the middleman and the middleman and the foreign supplier as FOB Port of Ningbo, China.
May 21, 2015 Placement Memorandum No. 15-C[ ]I-1072-1 ($240,627.84);
May 27, 2015 Placement Memorandum No. 15-C[ ]I-1125-1 ($47,666.40); and June 15, 2015 Placement Memorandum No. 15-G[ ]I-1149-1 ($122,490.00) from the middleman. The middleman is listed as the buyer. The listed terms of sale are “FOB CNNGB-Sea-Ning Bo.”
December 18, 2015 Invoice No. YF15-GBG-S1204 from the foreign supplier to the middleman for 16,776 apparel sets for a partial shipment of the goods ordered in the amount of $55,149.84. The invoice references the importer’s PO Nos. 4500209619, 4500210040 and 4500212266, and identifies the importer as the U.S. consignee. Los Angeles is listed as the final destination and Ningdo in China is listed as the port of loading. The terms of sale are FOB Ningbo, China. [ ] is listed as the buying agent for the middleman.
December 18, 2015 Invoice No. CU1C/151026 from the middleman to the importer for a partial shipment of the goods ordered in the amount of $57,907.33. The invoice references Placement Memorandum 15-C[ ]I-1072-1, 15-C[ ]I-1125-1, and 15-G[ ]I-1149-1 as well as PO Nos. 4500209619, 4500210040 and 4500212266 from the importer. The terms of sale are FOB Ningbo, China.
December 18, 2015 Waybill No. NB[ ]010327 for the shipment of 698 cartons to the U.S. PO Nos. 4500209619, 4500210040, and 4500212266 are referenced. The port of loading is Ningbo, China and the port of discharge is Los Angeles, CA. The Packing List generated on December 18, 2015, is also included. The Packing List states that the factory/foreign supplier [ ] is the shipper and the importer serves as the consignee.
Proof of June 28, 2016 payment between the importer and the middleman in the amount of $57,907.33 in satisfaction of Invoice No. CU1C/151026 from the middleman dated December 19, 2015. The middleman’s buying agent is listed as the beneficiary.
Proof of May 7, 2016 payment between the middleman and the factory/foreign supplier [ ] in the amount of $546,980.16 in satisfaction of, among others, December 19, 2015 Invoice No. YF15-GBG-S1204 from the factory/foreign supplier to the middleman for $55,149.84. Payment executed by the middleman’s buying agent.
December 29, 2015 Entry Summary (CBP Form 7501) for the entry reflects the value from Invoice No. YF15-GBGS1204 from the factory/foreign supplier to the middleman for a total of $55,149.84. The protestant is listed as the importer of record. China is listed as the exporting country.
December 29, 2015 duty deduction summary from the importer detailing the $480.16 of non-dutiable charges associated with the international transportation of the imported merchandise.
After our June 10, 2020 conference, the importer, through its counsel, submitted the following additional documentation:
Buying agency agreement effective as of June 29, 2014, between the importer and its buying agent. Per the agreement, [ ] is a “non-exclusive buying agent” for the purchase of products “from manufacturers and all other sources of supply” in selected territories to include China, Singapore, and Hong Kong. The middleman acts as a principal and may source from third parties if it sources [ ] from its buying agent. The buying agent assists the middleman in the selection of vendors and in the negotiation of the most favorable prices. According to the agency agreement, the buying agent is “a corporation duly organized, validly existing and in good standing under the laws of the Republic of Singapore.” The agreement was signed for and on behalf of the middleman and the agent without a date next to each signature and did not include the name and title of the individual who signed on behalf of the buying agent.
Annual Report from the middleman for the financial period from January 1, 2015 to March 31, 2016 (“2016 PwC Report), prepared by PriceWaterhouseCoopers in Singapore in accordance with Singapore law. The report states that the middleman is incorporated and domiciled in Singapore, and its principal activity is “export trading.” The middleman has paid more than $[ ] in employee wages and bonuses from January 1, 2015 to March 31, 2016. The middleman is subject to a concessionary tax rate of [ ]% under the Singapore Global Traders Program. The company has several subsidiaries, [ ]. The middleman’s immediate holding corporation is [ ] and its ultimate holding corporation is [ ].
Invoices from the middleman to other buyers that are not part of the instant transactions. The invoices indicate that “a dutiable commission has been included in the price.”
Certificate of Insurance issued by [ ] to the middleman and the buying agent, and their parent company for the time period January 1, 2015 through December 31, 2015. The insurance covered commercial general liability and products liability worldwide. The foreign supplier was added as an additional insured. The policy is occurance based. The importer also submitted an itemized breakdown of the $55,149.84 payment by the middleman’s buying agent to the foreign supplier made on December 19, 2015, which deducted the premium in the amount of $137.87 for the insurance, which was included in the entered value for the goods.
The importer asserts that the merchandise should be appraised based on the transaction between the middleman and the foreign supplier.
ISSUE:
Whether the entry at issue may be appraised based on the “first sale” transaction value between the unrelated factory/foreign supplier and the middleman.
LAW AND ANALYSIS:
Initially, we note that the matter protested is protestable under 19 U.S.C. § 1514(a)(1) as a decision on the value of merchandise. The protest was timely filed, within 180 days of liquidation for entry made on March 23, 2018. See Miscellaneous Trade and Technical Corrections Act of 2004, Pub. L. 108-429, § 2103(2)(B)(ii)-(iii) (codified as amended at 19 U.S.C. § 1514(c)(3) (2006)). Further Review of this protest is properly accorded to the importer pursuant to 19 C.F.R. § 174.24(b) because the issues protested involve questions of law or fact, which have not been ruled upon.
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, codified at 19 U.S.C. § 1401a. The primary method of appraisement is transaction value. For purposes of this ruling, we accept that transaction value is the proper method of appraisement for the imported merchandise. Transaction value is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus certain statutorily enumerated additions under 19 U.S.C. § 1401a(b)(1)(A)-(E). Unless there is a bona fide sale of merchandise for exportation to the United States, the transaction value method cannot be used.
In Nissho Iwai Am. Corp. v United States, 982 F.2d 505 (Fed. Cir. 1992), the court reviewed the standard for determining transaction value in a multi-tiered transaction. The court case involved a foreign manufacturer, a middleman, and a U.S. purchaser. The court held that the price paid by the middleman to the foreign manufacturer was the proper basis for transaction value. The court stated that in order for the foreign manufacturer’s price to be a valid transaction value, the transaction between the foreign manufacturer and the middleman needed to be a sale negotiated at “arm’s length” that was free from any non-market influences, and involved goods clearly destined for exportation to the U.S.
In accordance with the Nissho Iwai court decision and our own precedent, we presume that transaction value is based on the price paid by the importer. 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. It is the importer’s responsibility to show that the “first sale” price is acceptable under the standard set forth in Nissho Iwai. The U.S. 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 CBP) advised that the importer must describe in detail 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 (e.g., the alleged sale between the importer and middleman, and the alleged sale between the middleman and the manufacturer). Relevant documents include, but are not limited to purchase orders, invoices, proof of payments, contracts, and any additional documents (i.e. correspondence) that establishes how the parties deal with one another. CBP is looking for “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.
First, we must determine if a bona fide “sale” occurred between the foreign manufacturer and the middleman. “Sale” means a transfer of property from one party to another for consideration. See VWP of Am., Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, 505 F.2d 1400, 1406 (1974). CBP considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. No single factor is decisive in determining whether a bona fide sale has occurred. See HQ 548239, dated June 5, 2003. CBP will consider whether the purported buyer assumed the risk of loss for, and acquired title to, the imported merchandise. Evidence to establish that consideration has passed includes payment by check, bank transfer, or payment by any other commercially acceptable means. Payment must be made for the imported merchandise at issue; a general transfer of money from one corporate entity to another, which cannot be linked to a specific import transaction, does not demonstrate passage of consideration. See HQ 545705, dated
Jan. 27, 1995.
In addition, CBP may examine whether the purported buyer paid for the goods, and whether, in general, the roles of the parties and the circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HQ H005222, dated June 13, 2007. Finally, pursuant to the CBP’s Informed Compliance Publication, entitled “Bona Fide Sales and Sales for Exportation,” CBP will consider whether the buyer provides or could provide instructions to the seller, is free to sell the transferred item at any price he or she desires, selects or could select its own downstream customers without consulting with the seller, and could order the imported merchandise and have it delivered for its own inventory.
According to the Terms and Conditions of the instant sale (see exhibit 3), the buying agent [ ] at no time takes title to the goods and risk of loss of or damage to the goods passes to the middleman when the goods are delivered to it. While there is no mention in the documentation regarding the passage of title, as title must pass for there to be a sale, title will pass with the risk of loss based on the Incoterms. See HQ H268741, dated Feb. 27, 2018. The commercial documents indicate that the terms of sale for the transactions between the foreign seller and the middleman, and between the middleman and the importer were both FOB Port of Ningbo, China. FOB point of shipment contracts are “shipment” contracts and unless otherwise agreed by the parties, title and risk of loss pass from the seller to the buyer when the merchandise is delivered to the carrier for shipment. Thus, a simultaneous or “flash” transfer of title occurred from the foreign seller to the middleman to the importer when the goods were laden on the outgoing carrier.
As explained in HQ H016966, dated Dec. 17, 2007, “[w]henever there is a purported series of sales, and the same terms of sale are used in both transactions, there is a concern that the middleman obtains risk of loss and title only momentarily or never at all, and thus has nothing to sell to the ultimate purchaser. In such situations the middleman may be a buying or selling agent rather than an independent buyer/seller and the sale will be said to occur between the party identified as the first seller and the ultimate U.S. purchaser.” By itself, simultaneous transfer of title does not equate to failure to show a bona fide sale. However, it may cause CBP to more closely scrutinize a transaction.
In HQ H266540, dated Sept. 8, 2016, a U.S. company ordered merchandise from a related party. The related party then ordered the merchandise from a foreign seller, which contracted with a Chinese supplier. The related party used a buying agent. Each transaction involved the same shipping terms, FOB Ningbo, China, and the documents were silent as to the passage of title and the risk of loss between the foreign seller and the middleman. The related party and the U.S. importer took title at the same time. Although flash title did not preclude a finding of more than one viable sale, CBP emphasized that the simultaneous transfer of title from the parties indicated a possible existence of an agency relationship and a first-sale appraisement was inappropriate. See HQ H275755, dated Jan. 26, 2018 (reaching the same conclusion in another multi-tiered transaction).
Here, we cannot conclude that there is a bona fide sale for export between the foreign seller and the middleman, and between the middleman and the importer. The documents submitted for our review provide conflicting and inconsistent information as to the passage of title and the risk of loss between the foreign seller and the middleman, and between the middleman and the importer. The invoices and the purchase orders indicate that terms of sale in the transactions between the importer and the middleman, and the middleman and the factory/foreign supplier were both FOB Port of Ningbo, China. Thus, per the Incoterms, as discussed above, the importer obtained title and assumed risk of loss at the time the goods were loaded on board the vessel at the Chinese Port. The Terms and Conditions of the Sale in
exhibit 3, however, indicate that the risk of loss of or damage to the goods passed to the middleman when the goods were delivered to it, which never occurred. The purchase orders from the middleman to the Chinese factory are also confusing because they indicate that the premium of product liability insurance on FOB price will be covered by the parent company of both the middleman and the buying agent at the vendor’s expense. Under the FOB port of shipment Incoterms, the seller is relieved of responsibility once the goods are shipped and insurance is assumed by the buyer, so it does not make sense that the insurance was “at the vendor’s expense.”
Also, there is inadequate evidence to show that the middleman was an independent buyer as the importer has not submitted any documents showing that the middleman initiated transactions on its own behalf. See HQ H097616, dated Nov. 21, 2011. The Importer’s purchase orders identify the vendor and the supplier, which suggests that the middleman might not have been able to choose the source of the goods. No evidence has been provided that the middleman collaborated with the importer in determining the source of the goods to be ordered. In addition, the invoices from the middleman to buyers in other transactions indicate that “a dutiable commission has been included in the price,” which suggests that the middleman might be acting as an agent.
As in HQ H266540, supra, the circumstances of this case indicate an agency relationship between the importer and the middleman. The importer has not demonstrated that the middleman was an independent buyer. Accordingly, we are unable to conclude that the transactions between the parties involved were bona fide sales. Since the importer has not met the Nissho Iwai standard to use the “first sale” price between the middleman [ ] and the factory/foreign supplier [ ], the appraisement of the merchandise should be based upon the price paid by the U.S. importer.
HOLDING:
The protest should be DENIED. Appraisement of the merchandise should be based upon the price paid by the U.S. importer.
In accordance with the Protest/Petition Processing Handbook (CIS HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the importer, through its counsel, no later than 60 days from the date of this letter. Any reliquidation of the entries in accordance with this decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision, Regulations and Rulings, Office of Trade will make the decision available to CBP personnel, and to the public on the CBP Home Page at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
for Craig T. Clark, Director
Commercial and Trade Facilitation Division