VAL R:C:V 546658 LR
Ronald W. Gerdes, Esq.
Sandler, Travis & Rosenberg
1341 G Street, N.W.
Washington, D.C. 20005-3105
RE: Request for Reconsideration of HRL 545985; sale for exportation
Dear Mr. Gerdes:
This is in reply to your letter dated February 12, 1997,
submitted on behalf of your client, [xxxxxxxxxxxxxxxxxxxxxxxxx],
operating through its [xxxxxxxxxxxxxxxxxxxxxxxx], (the importer)
seeking reconsideration of a ruling issued by our office on
December 19, 1996, Headquarters Ruling Letter (HRL) 545985.
Additional information was provided with your letters dated May 30,
1997 and January 23, 1998. You disagree with our finding in HRL
545985 that the evidence presented was insufficient to establish
that the microwave ovens in question were clearly destined to the
United States and argue that we applied the wrong legal standard in
reaching this conclusion.
With your request for reconsideration you have presented
additional information and evidence in support of your claim that
the merchandise was clearly destined to the United States. For
this reason, your request is being treated as a request for a new
ruling based on the additional facts presented and modification or
revocation of that decision pursuant to section 625, Tariff Act of
1930 (19 U.S.C. 1625), as amended by section 623 of Title VI
(Customs Modernization) of the North American Free Trade Agreement
Implementation Act, Pub. L. 103-182, 107 Stat. 2057, 2186 (1993) ,
is not warranted. Pursuant to your request for confidentiality,
the names of the parties will be bracketed and will not be
disclosed in copies of this ruling made available to the public.
FACTS:
HRL 545985 concerned the importation of microwave ovens
pursuant to a multi-tiered distribution arrangement involving the
U.S. importer, a related Asian middleman, and unrelated Asian
manufacturers. The importer's initial ruling request described in
general terms how these transactions were structured and copies of
various contracts and supporting documentation were submitted.
That information is set forth in detail in HRL 545985 and will not
be repeated here. Based on the evidence presented, we determined
that there was a bona fide sale between the manufacturer and the
middleman. However, we found that this sale could not be used as
the basis for transaction value because the evidence did not
establish that the goods were clearly destined to the United States
in accordance with the decision in Nissho Iwai American Corporation
v. United States. Relevant excerpts from the decision follow:
In this case, there is no documentation to establish that
the middleman's inventory is sold only to the United States.
In fact, it is clear that some of the microwaves will go to
countries other than the United States. We also note that the
middleman is engaged in the business of selling various
consumer products throughout Asia. You also concede that in
some circumstances the middleman will also sell some of the
microwaves (CMOs) to independent third parties outside of the
United States. Accordingly, for both the CMOs and OTRs
imported into the United States, the evidence must establish
that they were clearly destined to the United States. In
making this determination, it is necessary to review the sales
contracts between the importer and the middleman, the
middleman and the manufacturer, and how the parties will order
merchandise.
. . . . . . . .
. . . .
In other words, based on the documentation that has been
presented, it is not clear when the manufacturer is informed
which microwaves are going to the United States and which may
be going to some other country. You also have not provided
any information which shows that the microwaves sent to the
United States will be different than the microwaves that may
be sent to other countries. Accordingly, it appears that when
the middleman orders the merchandise from the manufacturer or
even when the merchandise is being manufactured, there is no
clear indication that it is clearly destined to the United
States.
. . . . . . . . .
. . .
. . . . . Prior to when the microwave boxes are addressed and
delivered to a carrier, we have no indication that the
microwaves were specifically ordered and made only for the
United States. Because the contracts between the parties
indicate that the merchandise could be going to countries
other than the United States, we find that the importer has
not established that merchandise is clearly destined to the
United States, and therefore the requirements under Nissho
Iwai for having merchandise be appraised based on the
middleman's price have not been met.
In your request for reconsideration you have provided a
clarification of the facts and have presented additional evidence
to support your claim that the merchandise was clearly destined for
the United States. You indicate that under its contract, the
importer issues to the middleman a blanket purchaser order for
goods it desires to purchase for export into the United States.
Pursuant to that blanket purchase order, the importer issues to the
middleman a material release request indicating the exact quantity
by model that it desires to purchase over the next several months.
You advise that the importer only purchases goods made to U.S.
specification which it intends to sell to the United States. This
information is then sent to the manufacturer which produces the
goods to U.S. specification, labels the merchandise for shipment to
the U.S., and then places the goods with the carrier under the
cover of a through bill of lading for shipment to the U.S.
Contrary to references in the original decision about the
middleman's inventory, you state that the middleman does not
purchase goods for inventory. Rather, each order which it places
with the manufacturer is based upon a purchase order or material
release request that the middleman has received from one of its
customers. Prior to placing a specific order with the manufacturer
the middleman knows to whom it intends to resell that merchandise
and where it will be shipped.
You indicate further than the Lebanon transaction referred to
HRL 545985 was very early in the implementation of this program,
and that it occurred prior to the actual formal signing of the
contracts. You advise that additional software has now been put in
place and that the documentation has become somewhat more formal.
You have presented two sets of documents with your request for
reconsideration. The first is a sample of another early
transaction in this program of a shipment for a third country, and
the second is a set of the revised documentation. In both sets of
documents the customer is located outside the United States.
The first set is marked Exhibit 1. The first document is a
purchase order received from a customer in China, dated November
17, 1995, for 628 microwave ovens to be delivered within 90 days.
The second document is the E-mail message sent by the middleman to
the manufacturer on December 7, 1995, and designated as release SS-044. (You indicate that the E-mail message advises the
manufacturer prior to production of these units of their intended
destination and is representative of how the transactions work
under the contracts). The material release form designates the
customer and the shipping marks. The third documents is an E-mail
message from the manufacturer dated February 6, 1996, reflecting
that the goods are scheduled for production on February 21, 1996.
The third and fourth documents are the packing list and bill of
lading indicating that the goods were packed on February 21, 1996
and directly shipped by the manufacturer to the ultimate customer
on March 6, 1996. You indicate that these documents reflect that
the manufacturer was specifically aware, prior to production, of
the ultimate destination of the product.
You advise that as this program has matured, the middleman has
developed and implemented a new software package to provide
somewhat more formal documentation for these transactions. Exhibit
2 is a set of this revised documentation. The first document is an
order acknowledgment form. This document, dated September 12,
1996, reflects an order from another customer in China for 628
microwave ovens. The second document is a Material Release Form,
No. B000565, likewise dated September 12, 1996, which the middleman
sent to the manufacturer to request production of these specific
articles and instructing that they be directly delivered to the
ultimate customer. The third document is the commercial invoice
from the manufacturer to the middleman dated November 20, 1966 and
the fourth document is the packing list prepared by the
manufacturer. Finally, there is a copy of the middleman's invoice
to the ultimate customer.
You advise that this documentation is representative of
similar shipments and reflects that throughout the process both the
middleman and the manufacturer are aware of the ultimate
destination of the product and that the product is sold for export
to the country of ultimate destination and directly shipped by the
manufacturer.
In response to our request for more recent documentation
regarding sales to the United States, with your May 30, 1997
submission, you provided copies of the relevant documentation for
a shipment of microwave ovens (Model JVM 1341WW) to the United
States in January 1997. Exhibit 1 is a copy of the November 1,
1996 production schedule issued by the importer to the middleman
(via computer), which schedules 500 units of model JVM 1341WW for
January 1997. This computer request is then transmitted by the
middleman to the manufacturer. As noted in the contracts, these
documents represent firm commitments for the middleman to purchase
the products from the manufacturer and the lead times necessary for
the manufacturer to secure the appropriate materials to actually
produce the items requested. Exhibit 2 is a copy of a purchase
order for 100 units of model JVM 1341WW issued by the importer to
the middleman and Exhibit 3 is a copy of a purchase order for the
100 units issued by the middleman to the manufacturer. Exhibit 4
is the invoice from the manufacturer to the middleman dated January
17, 1997, (referencing the above purchase order number from the
middleman) covering 40 units of the model number JVM 1341WW).
Exhibit 5 is the bill of lading covering the shipment of the 40
units from Busan, Korea to Los Angeles, issued January 22, 1997.
Finally, Exhibit 6 is the commercial invoice issued by the
middleman to the importer covering 40 units of JVM 1341WW, and
referencing the importer's original P.O. number.
You advised that the remaining 460 units of Model JVM 1341WW
covered by the November 1, 1996 production schedule were ultimately
shipped to the United States. In response to our request, you
provided evidence of this with your January 23, 1998 letter.
Specifically, you provided bills of lading and commercial invoices
for five additional shipments covering 467 units of model JVM
1341WW microwave ovens imported into the United States during early
1997. Thus, you indicate that taken together, the documents show
that all 500 units were shipped to the United States.
You contend that the submitted documents are proof that the
manufacturer was aware of the ultimate destination of the
merchandise prior to manufacture. In this regard, you point out
that it is critical to both the middleman and the manufacturer that
they know the ultimate destination of the product prior to
manufacture because of the differing electrical current
requirements around the world. You have provided a color coded map
reflecting the electrical current requirements around the world and
note that an appliance made to U.S. specifications would not work
in the vast majority of the world, and as a consequence it must be
manufactured to a different set of specifications.
You also indicate that the model numbers differ depending on
the ultimate destination of the product. For example, the models
shipped to third countries contain an I designator not found for
U.S. models. This designator is used to differentiate models to be
made and directly shipped to third countries as opposed to those
made for the U.S. market. You state that goods for the Canadian
market have a separate C designator.
Finally, you advise that the importer's sales in the U.S. are
a separate and distinct operation from its sales in third
countries. All of the units ordered for shipment to the United
States are goods made to U.S. specifications, with a U.S. model
number, for direct shipment to the United States. Any units
ordered for direct shipments to a third country would be handled by
separate operational units, would reflect a different model number,
and would be manufactured to the appropriate specifications and
directly shipped to that country by the manufacturer.
ISSUE:
Whether the additional information and evidence establishes
that the imported microwaves were clearly destined to the United
States so that the sale between the manufacturer and the middleman
may be used as the basis for transaction value.
LAW AND ANALYSIS:
Customs recognizes the term "sale," as articulated in the case
of J.L. Wood v. U.S., 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400,
1406 (1974), to be defined as: the transfer of property from one
party to another for consideration. In determining whether a bona
fide sale has taken place between a potential buyer and seller of
imported merchandise, no single factor is determinative. Rather,
the relationship is to be ascertained by an overall view of the
entire situation, with the result in each case governed by the
facts and circumstances of the case itself. Dorf International,
Inc. v. United States, 61 Cust. Ct. 604, A.R.D. 245 (1968). We
determined in HRL 545985 that the transaction between the Asian
manufacturers and the middleman constituted bona fide sales.
In Nissho Iwai American Corp. v. United States, 982 F.2d 505
(Fed. Cir 1992) and Synergy Sport International, Ltd. v. United
States, 17 C.I.T. 18, (1993) the U.S. Court of Appeals for the
Federal Circuit and the Court of International Trade, respectively,
addressed the proper dutiable value of merchandise imported
pursuant to a three-tiered distribution arrangement involving a
foreign manufacturer, a middleman, and a U.S. purchaser. In both
cases the middleman was the importer of record. Both courts held
that the manufacturer's price, rather than the middleman's price,
was valid as long as the transaction between the manufacturer and
the middleman fell within the statutory provision for valuation.
The courts explained 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 nonmarket influences and involving goods
"clearly destined for export to the United States."
A recent notice, entitled Determining Transaction Value in
Multi-Tiered Transactions", T.D. 96-87, 30/31 Cust. Bull 52/1,
January 2, 1997 clarifies some of the issues that arise in multi-tiered transactions in determining which is the sale for
exportation to the United States for the purpose of determining
transaction value. Although there is a presumption that
transaction value is based on the price paid by the importer, the
notice sets 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 is a party. It states
that:
In order for an importer to rebut the presumption discussed
above, certain information and documentation must be provided.
Specifically, the requestor must describe in detail the roles
of all the various parties and furnish relevant documents
pertaining to each transaction that was involved in the
exportation of the merchandise to the United States. If there
is more than one possible sale for exportation, information
and documentation about each of them should be provided.
Relevant documents include, purchase orders, invoices, proof
of payment, contracts and any additional documents (e.g.
correspondence) which demonstrate how the parties dealt with
one another and which support the claim that the merchandise
was clearly destined to the United States. If any of these
documents do not exist, or exist but are not available, the
ruing request should so provide. What we are looking for is a
complete paper trail of the imported merchandise showing the
structure of the entire transaction. If the request covers
many importations, it is acceptable to submit documents
pertaining to some of the importations provided complete sets
of documents are furnished, the underlying circumstances are
the same, and the documents are representative of the
documents used in all the transactions. Any differences
should be explained.
In HRL 546658 we indicated that it must be evident throughout
the transaction that the merchandise is clearly destined for the
United States and that it is not sufficient to establish after the
merchandise was ordered and manufactured, at the time of shipment,
near the end of the transaction, that it will be going to the
United States. We determined that evidence that the boxes of the
imported articles were addressed to the United States when
delivered to the carrier was insufficient by itself to establish
that the articles were clearly destined to the United States.
You contend that Customs applied the wrong legal standard in
determining whether the imported microwave ovens were clearly
destined to the United States. Your position is that the sale
between the middleman and the manufacturer occurred when the goods
were presented in boxes to the carrier for shipment to the U.S. and
that this is the relevant point in time for Customs for determine
whether the goods were clearly destined to the U.S. You state that
at that time it was clear that this was the case based on how the
goods were packed and the shipping documents.
As discussed below, we have determined that the additional
information and evidence you have presented is sufficient to
establish that the imported microwave ovens are clearly destined to
the United States. However, we disagree with your position
regarding the proper standard to be applied in reaching this
determination. Under your interpretation, the only relevant point
in time is when title passes to the middleman. Thus, in situations
where title passes to the middleman when the goods are delivered to
the carrier, the fact that the shipping cartons are addressed to a
U.S. customer would be sufficient evidence that the goods are
clearly destined to the United States. This is not the analysis
adopted by the either the Court of International Trade or the Court
of Appeals for the Federal Circuit. In each case, the court
considered whether throughout the entire transaction (including the
time of production) the goods were destined only for the U.S.
Thus, in E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed
Cir. 1988), the CIT indicated that where clothing is made-to-measure for individual United States customers and ultimately sent
to those customers, the reality of the transaction between the
distributors and the tailors is that the goods, at the time of the
transaction between the distributors and tailors are for
exportation to the United States. The court found that the
merchandise was being made for export to the United States.
Similarly, in Nissho Iwai, supra, the subway cars in question were
ordered and manufactured for a specific purchaser in the United
States, the Metropolitan Transit authority of New York City. As
indicated in HRL 545985, the court stated that they were
unquestionably intended for exportation to the United States and
had no alternative destination. Nissho Iwai at 509. Finally, in
Synergy, supra, the CIT found that the merchandise involved was
clearly destined for export to the United States. In this regard,
the decision states that "not only were the goods shipped directly
from Chinatex to Oakland, California, but also "the labels required
to be placed on the garments . . . reflect the fact the goods are
destined for the United States, and always for a particular
ultimate customer." Synergy at 20. The court based its
determination on the fact that the merchandise was always for a
particular ultimate customer and not merely on the fact that the
goods were shipped directly from Chinatex to the U.S.
In each of the above cases, in determining that the imported
merchandise was clearly destined to the United States the courts
focussed on the fact that throughout the entire transaction the
imported merchandise was intended for a specific customer in the
United States and not that the merchandise was clearly destined to
the United States when title transferred to the middleman. In
fact, in considering this question, the time of sale was not
addressed at all. Therefore, we will continue to look at the
entire transaction and not just when title passes from the
manufacturer to the middleman in determining whether the goods were
clearly destined to the United States.
As stated above, in your request for reconsideration you have
provided a clarification of the facts and have presented additional
evidence to support your claim that the merchandise was clearly
destined for the United States. You indicate that under its
contract, the importer issues to the middleman a blanket purchase
order for goods it desires to purchase for export into the United
States. Pursuant to that blanket purchase order, the importer
issues to the middleman a material release request indicating the
exact quantity by model that it desires to purchase over the next
several months. You indicate further that the importer only
purchases goods made to U.S. specification which it intends to sell
in the United States. This information is then sent to the
manufacturer which produces the goods to U.S. specification, labels
the merchandise for shipment to the U.S., and then places the goods
with the carrier under the cover of a through bill of lading for
shipment to the U.S. You have also clarified that the middleman
does not purchase goods for its inventory and that each order which
it places with the manufacturer is based on a purchase order or
material release request that it has received from one of its
customers. This establishes that prior to placing a specific order
with the manufacturer, the middleman knows to whom its intends to
resell that merchandise and where it will be shipped.
You advise further that the middleman's sales in the U.S. are
a separate and distinct operation from its sales in third countries
and that all of the units ordered for shipment to the United States
are goods made to U.S. specifications, with a U.S. model number,
for direct shipment to the United States. Any units ordered for
direct shipments to a third country would be handled by separate
operational units, would reflect a different model number, and
would be manufactured to the appropriate specifications and
directly shipped to that country by the manufacturer.
In addition, the documentation presented relating to the sale
of microwave ovens (Model JVM 1341WW) to the United States,
comprise a complete paper trail relating to their sale and
importation showing the structure of the entire transaction in
accordance with T.D. 96-87. Although these documents do not
identify the ultimate consignee in the United States, they
sufficiently demonstrate that all the merchandise designated in the
production schedule by the importer are manufactured for the U.S.
market and subsequently imported into the United States.
Based on the submitted documents and your representations that
the goods are manufactured to conform to U.S. electrical
requirements, that the model numbers differ depending on the
ultimate destination of the product, that the middleman does not
purchase goods for inventory and the fact that the goods sent
directly from the manufacturer to the U.S., we are satisfied that
throughout the entire transaction, the goods were clearly destined
to the United States.
With regard to the requirement that the transaction between
the middleman and the seller be at arm's length, in T.D. 97-86 we
stated that in general, Customs will consider a sale between
unrelated parties to have been conducted at "arm's length." Thus,
based on your representation that the middleman will purchase the
products in question from unrelated manufacturers located in Asia,
we consider this sale to have been conducted at "arms's length."
HOLDING:
Based on the additional information and supporting
documentation provided with respect to the sale of the JVM 1341WW
microwave ovens, we find that the sale between the middleman and
the manufacturer of the microwave ovens covered by the importer's
blanket purchase order is a sale for exportation to the United
States upon which transaction value may be based. This finding is
applicable to other transactions involving the same parties
conducted in the same manner and for which similar documentation
exists.
Sincerely,
Acting Director
International Trade Compliance Division