VAL CO:R:C:V 544852 er
Peter J. Battaglioli
Deputy Assistant Regional Commissioner
Regulatory Audit, Northeast Region
Boston, Massachusetts 02222-1056
RE: Request for Internal Advice on Transactions Involving Northern Telecom Merchandise; bona fide sale; sale for exportation; transfer of title; risk of loss.
Dear Mr. Battaglioli:
This is in response to your memorandum (ENT-3-O:RA RGM) dated November 8, 1991, requesting internal advice on certain transactions involving Northern Telecom Canada Limited ("NTC"), a Canadian corporation, and a related company, Northern Telecom Inc. ("NTI"), of Nashville, Tennessee. We regret the delay in responding.
FACTS:
This request was initiated upon facts obtained while the Northeast and South Central Regulatory Audit Divisions were conducting a national audit of Northern Telecom Limited ("NTL") at its NTC subsidiary in St. Laurent, Canada.
NTI, the importer of record, is a Delaware corporation and is a wholly-owned subsidiary of NTL. NTC is also wholly-owned by NTL. Both NTI and NTC are engaged in the business of manufacturing, selling, installing and maintaining a wide range of telecommunications products.
The request for internal advice is to determine the value for duty purposes of prospective transactions involving NTC, NTI and U.S. customers. You have, accordingly, provided us with information about how NTC and NTI's operations are structured and how certain sales to U.S. customers are handled.
NTI, the U.S. corporation in Delaware, has overall management responsibility for the Transmission Network Group (headquartered in Atlanta, Georgia). Transmission Network Group is made up of divisions of NTC and NTI including NTI's Transmission Division, NTI's Network Access Division, NTC's Transmission Networks Division, and NTC's Network Access Division. A common computer
system serves all of the organizations in the Transmission Network Group. An order received by NTI's sales department in the U.S. is automatically received by NTC's Transmission Networks Division's manufacturing and distribution operation in St. Laurent, Canada.
NTC's Transmission Networks Division in Canada is the only manufacturing facility and primary distribution facility for Transmission Network Group transport products. All of NTI's Transmission Division transport product sales in the U.S. (except those items used to repair transmission networks for the U.S. customer, direct shipments of off-the-shelf merchandise from U.S. suppliers and certain installation materials) were imported from NTC's Transmission Networks Division in Canada and were, in most cases, shipped directly to the U.S. customers. NTC's Transmission Networks Division in Canada provides off-the-shelf items called "merchandise sales" and products which have to be specifically configured in the manufacturing process called "contract ledger sales".
In your audit sample of the radio product line, you found that all merchandise and contract ledger sales from NTC's Transmission Networks Division in 1989 were drop-shipped to the U.S. customer. NTC estimates that overall this scenario takes place for 95 percent of the transactions. Only one of these customers, MCI Telecommunications Inc. ("MCI"), had specifically arranged for its own transportation for these purchases and by the terms of its Supply Contract with NTI thereby incurred risk of loss as of the time the goods were put on the carrier at NTC's Transmission Networks Division manufacturing plant in Canada. This response is limited to the transactions between NTC and NTI which involve MCI.
The relevant exhibits submitted with this request are as follows:
1. Supply Contracts between NTI and MCI;
2. Customer purchase orders from MCI;
3. Invoices sent by NTI to MCI regarding purchase orders;
4. A standard blank customer invoice used by NTI;
5. A standard blank intercompany transfer invoice used by NTC as a Customs invoice; and
6. NTC Customs invoices to MCI regarding the goods referenced in the purchase orders.
Section 8.1 of the MCI Supply Contract provides that title to the products will not vest with MCI until payment is made for the goods. Section 8.1 also provides that if MCI elects to be responsible for transportation of the goods, it incurs risk of loss at the time of delivery of the goods to the carrier at the manufacturing plant. Per Section 9.1 of the MCI Supply Contract, payment is not due until 30 days after MCI's receipt of the invoice and invoices may not be issued earlier than the date on which the products were shipped to MCI. Per Section 9.5 of the MCI Supply Contract, NTI retains a security interest in the merchandise until payment is made by MCI. Section 26.2 of the MCI Supply Contract provides that if any provisions in the contract are invalid, the remainder of the contract is not invalid and should be construed as if not containing the particular invalid provisions.
The NTC Customs invoices reveal that the shipping terms are "FOB Ex works". The invoices also indicate that the goods are "sold" to NTI but are to be shipped to MCI, the consignee. The invoices identifying MCI as the consignee additionally indicate that the goods are for the "account" of MCI.
ISSUE:
Whether there is a bona fide sale for exportation to the U.S. between NTC and NTI and/or between NTC and MCI, the U.S. customer?
LAW AND ANALYSIS:
We will assume that transaction value will be the applicable means of appraisement for shipments of the subject merchandise in the future. Transaction value is defined in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA) (19 U.S.C. 1401a(b)) as "the price actually paid or payable for the merchandise when sold for exportation to the United States..." Thus, there must be a bona fide sale of the imported merchandise for it to be appraised under transaction value.
In J.L. Wood v. U.S., 62 CCPA 25, 33, C.A.D. 1139 (1974), the court defined the term "sale" as the "transfer of property from one party to another for consideration." Similarly, section 2-106(1) of the Uniform Commercial Code ("UCC") defines a "sale" as "the passing of title from the seller to the buyer for a price". Although the J.L. Wood case was decided under the appraisement statute prior to the TAA, Customs has applied this basic concept of what constitutes a sale under the TAA. See, HRL 544658 (March 26, 1991).
Based on past transactions between NTC, NTI and MCI, your position is that there were no bona fide sales between NTC and NTI involving imports from NTC which were shipped directly to MCI, because you believe that there was no passage of title from NTC to NTI. Instead, you maintain that title to the goods passed directly to MCI at the point NTC released the merchandise to MCI's carrier when MCI elected under its Supply Agreement with NTI to be responsible for the transportation of the goods from NTC in Canada, to MCI's U.S. receiving point. This conclusion, you state, is further evidenced by the fact that under the terms of the Supply Agreement between NTI and MCI, when MCI elects to be responsible for such transportation, it incurs risk of loss at the time of delivery of the goods to the carrier at NTC's factory in Canada.
Counsel contend that two separate sales occur: an initial sale from NTC to NTI and a subsequent sale from NTI to the U.S. customer. Counsel point out that on the NTC Customs invoices the goods are "sold" to NTI on "FOB Ex Works" shipping terms and that NTI has an obligation to pay NTC for these goods which is separate from the U.S. customer's obligation to pay NTI. Thus, pursuant to section 2-319(1)(a) and 2-401(2)(a) of the Uniform Commercial Code ("UCC"), counsel submit that title to the products sold by NTC to NTI passed to NTI at the time the products were delivered to the carrier at NTC's plant.
Counsel believe that there is a subsequent separate sale between NTI and MCI as evidenced by the Supply Contracts between NTI and MCI as well as by the fact that MCI is obliged to remit payment to NTI, and not to NTC. Counsel argue that title to the goods may not pass from NTC to the U.S. customer at the same time that it passes from NTC to NTI (upon delivery to the carrier at the manufacturing plant) because provisions in the Supply Contracts expressly forestall vesting of title in the customer until payment for the goods is satisfied. Payment is due 30 days after MCI receives the invoice.
Counsel also argue that there is no sale between NTC and MCI because there is no contractual relationship between NTC and MCI and that all title and interest in the imported goods acquired by MCI flow from the arms length contractual relationships with NTI and not with NTC. Counsel argue that appraisement on the basis of NTI's selling prices to MCI would be inconsistent with the statutory definition of transaction value as ". . . the price actually paid or payable for the merchandise when sold for exportation to the United States . . . ." (emphasis added). 19 U.S.C. 1401a(b)(1). According to counsel, the transactions between NTC and MCI do not involve sales for exportation to the U.S.; rather, NTI's transactions with MCI involve sales consummated within the commerce of the U.S. by two parties who are located
within the United States. Citing to J.L. Wood v. United States, 62 CCPA 25, C.A.D. 1139 (1974); Orbisphere Corporation v. United States, 726 F.Supp. 1344 (CIT 1989); United States v. Massce & Co., et. al., 21 CCPA 54, T.D. 46379 (1933) counsel maintain that such sales are not for exportation to the U.S. and may not be used in determining transaction value.
In previous decisions issued by Customs involving the question of whether a bona fide sale existed between a foreign seller and a related party in the U.S., Customs has examined whether there was a transfer of property or ownership. The primary factors considered are whether the U.S. related party has assumed the risk of loss, and whether title has passed from the seller to its U.S. related party. See HRL 544775 dated April 3, 1992; HRL 543708 dated April 21, 1988; HRL 543633 dated July 7, 1987; HRL 545544 dated November 26, 1985; HRL 543511 dated May 29, 1985; HRL 543441 dated March 15, 1985 and HRL 542673 dated June 19, 1982 (C.S.D. 82-137).
In a series of transactions described in HRL 543708 (April 21, 1988), the invoices from the parent to the subsidiary (the importer) contained terms of sale of "FOB Japan" or "CIF Los Angeles". Further documentation consisting of the purchase orders and invoices revealed that the sale terms to the U.S. customer were "FOB Japan". Customs examined several provisions of the U.C.C. (2-319, 2-320, 2-401, 2-504 and 2-509) and the Official Comments to those sections, to determine whether title and risk of loss had passed between the Japanese parent and its subsidiary. The examination revealed that the determination of when title and risk of loss pass between a buyer and seller depends on whether the applicable contract is a "shipment" or "destination" contract. Observing the following, Customs concluded that "FOB Japan" terms of sale were "shipment" contracts and therefore, title and risk of loss passed from the parent at the time the merchandise was delivered to the carrier in Japan:
According to these [UCC] provisions, FOB point of shipment contracts and all CIF and C&F contracts are "shipment" contracts, while FOB place of destination contracts are "destination" contracts. These provisions indicate that, unless otherwise agreed by the parties, title and risk of loss pass from the seller to the buyer in "shipment" contracts when the merchandise is delivered to the carrier for shipment, and in "destination" contracts when the merchandise is delivered to the named destination. (emphasis added)
Counsel argue that the rules in UCC section 2-401(2) apply only in the absence of an express agreement of the parties as to the time of passage of title to goods. NTI's Supply Contract with MCI, counsel maintain, constitutes such an express agreement which forestalls passage of title to MCI until payment for the goods is made, after MCI takes delivery of the goods.
Because NTC's Customs invoice identified NTI as the buyer (even though the goods were shipped directly to MCI) and the terms of shipment were "FOB Ex Works", counsel believe title to the goods passed to NTI at the time the goods were put on the carrier at NTC's manufacturing plant. That the goods were shipped directly from the NTC's plant to the U.S. customers (instead of being first shipped and delivered to NTI then delivered to the U.S. customers), counsel maintain, has no bearing on the question of passage title because of the Supply Contract provisions purporting to delay passage of title. Thus, counsel conclude that title could not pass to MCI at the same time it passed to NTI.
While Article II of the UCC strives to minimize title concept under the law of sales, the drafters recognized that problems would arise which were not covered by Article II provisions, and that in such situations the question of title might be of continued importance. For this reason, section 2-401 was added to the Code. Under section 2-401(2), it is provided that in general title passes from the seller to the buyer "at the time and place at which the seller completes his performance with reference to the physical delivery of the goods despite any reservation of a security interest...." Matter of Bosson, 432 F.Supp. 1013 at 1019 and 1020 (D.C. Conn. 1977).
Although section 2-401(2) begins with the phrase "[unless] otherwise explicitly agreed," the prior subsection places limits on the parties' contractual freedom. Specifically, section 2-401(1) negates any attempt to forestall passage of title beyond the moment of final delivery; contract language purporting to do so merely results in a security interest being retained. O'Donnell v. American Employers Insurance Co., 622 NW2d 570 (D. Ind. 1993) and cases cited therein. Similarly, section 2-401(1) prohibits the passage of title prior to the identification of the goods in question to the contract. In between these extremes, however, the parties may by contract specify the point at which title passes. Matter of Bosson, at 1020 n24; also see, In re Gull Air, Inc., 73 Bankr. 820 (D. Mass. 1987).
It is thus evident that MCI and NTI may not by contract attempt to forestall passage of title until a time after delivery, and the section in the Supply Contract purporting to do so is invalid. Section 26.2 of the MCI Supply Contract provides that if any provision of the contract is invalid, the contract should be construed as if not containing the particular invalid provision. Therefore, Customs will interpret the Supply Contract as though it did not contain the provision which attempts to forestall passage of title.
Following the analysis as set forth above, Customs looks at the terms of shipment between the parties to resolve the issue of when and to whom title and risk of loss pass. In the instant case,
the shipment terms on the NTC invoice indicate that the terms between NTC, NTI and MCI are "FOB Ex Works". The terms "Ex works" means that:
[T]he seller's only responsibility is to make the goods available at his premises (i.e. works or factory). In particular he is not responsible for loading the goods on the vehicle provided by the buyer, unless otherwise agreed. The buyer must bear the full cost and risk involved in bringing the goods from there to the desired destination. This term represents the minimum obligation for the seller.
International Chamber of Commerce, Incoterms: International Rules for the Interpretation of Trade Terms, Publication No. 350, at 16 (1980) quoted in HRL 545105 (November 9, 1993).
The "FOB Ex Works" shipment terms on NTC's Customs invoice reveal that the transaction was structured as a "shipment" contract, with title and risk of loss passing at NTC's plant. The invoice indicates that the goods are sold to NTI but are shipped and consigned to MCI, with the "FOB Ex Works" shipment terms governing the complete transaction. Such was the situation in HRL 545015 where Customs found that the only sale occurred between the seller and the ultimate consignee, not between the seller and the buyer designated on the invoice. There Customs observed that:
[ ] held title only momentarily, if ever.... In essence, therefore, [ ] never held title nor did it bear the risk of loss... It is therefore the position of this office that since [ ] never had title there was never a valid sale between the seller and [ ]. The only sale in the instant transaction occurred between the seller and ultimate consignee, and consequently, there is only one statutorily viable transaction value.
Similarly in the instant case title and risk of loss passed from NTC to MCI with the result being that there is no intervening sale between NTC and NTI due to the fact that the requisite transfer of ownership of property and risk of loss is lacking in the transaction between NTC and NTI.
In essence, NTI never held title nor did NTI bear the risk of loss for the merchandise. In HRL 544513 (September 6, 1990), we stated that in such a situation the intermediary was acting for the seller. As a result, Customs held that the intermediary was operating as a selling agent for the seller, and that amounts retained by the intermediary were selling commissions. See also, HRL 545105. Likewise in this case it is also our position that NTI
is acting as a selling agent for NTC. Accordingly, importations of merchandise under these circumstances should be appraised under transaction value based on the price actually paid or payable by the ultimate consignee. The difference between NTC's price and that of NTI represents a selling commission retained by the latter. However, so long as this amount is already included in the price paid by the ultimate consignee, no addition to the price actually paid or payable is warranted under 19 U.S.C. section 1401a(b)(1)(B).
HOLDING:
Under the facts presented, there is no bona fide sale between NTC and NTI. Rather, a transfer of ownership of property, including title and risk of loss, was made directly between NTC and MCI. Thus, the price actually paid or payable by MCI constitutes a valid transaction value for the purposes of appraisement under 19 U.S.C. 1401a(b).
Sincerely,
John Durant, Director
Commercial Rulings Division