RR:IT:VA 547071 DCC
Area Director of Customs
Building #77
Jamaica, NY 11430
RE: Application for Further Review of Protest No. 1001-97-104246; Multi-tiered Transaction
Dear Area Director:
This is in response to the Application for Further Review (“AFR”) of Protest No. 1001-97-104246, dated June 12, 1997, concerning the appraisement of certain wearing apparel, filed by counsel on behalf of Fila Sports, Inc. (“Fila USA” or the “Importer”).
We received copies of Counsel’s responses to two requests for information dated January 16, 1997, and October 16, 1997. In addition, we received Counsel’s letter, dated December 17, 1999, responding to questions raised at meeting between the importer and Customs on November 3, 1999. Lastly, we note that Fila USA previously filed Protest 2809-97-100960 for identical merchandise entered at San Francisco. In response to an application for further review, we issued Headquarters Ruling Letter (“HRL”) 546875, dated April 2, 1999, in which we determined that transaction value was properly based on the sale between the manufacturer and the middleman. We apologize for our delay in responding.
FACTS:
Protest 1001-97-104246 concerns the appraised value of three entries of women’s and men’s wearing apparel manufactured in the People’s Republic of China. Because the transactions underlying each of the three entries are similar, for the purposes of this ruling we analyze Entry No. 526 0055050-4. The subject merchandise was purchased and imported by Fila USA, from Fila Sport (Hong Kong) Ltd. (“Fila HK” or the “Middleman”) (collectively “Fila”). Fila HK in turn purchased the merchandise from Luen Ford Sportswear Fty., Ltd. (“Luen Ford” or the “Supplier”), a vendor in Hong Kong. Luen Ford subsequently contracted with its related factory in China, Cheng Mao Garments Co., Ltd. of Shanghai (“Cheng Mao” or the “Manufacturer”), for the manufacture of the goods on a cut, make, and trim (“CMT”) basis. Luen Ford also contracted with five suppliers for fabric which was provided to the Manufacturer and with an export quota holder for the cost of securing quotas. The Importer asserts that Fila USA and Fila HK are not related to any of the other parties to the transaction.
The subject apparel was appraised by your office using transaction value based on the sale between Fila USA and Fila HK. Fila USA contends that the imported merchandise should be appraised based on the Supplier’s price to the Middleman. In support of this contention, Counsel submitted copies of Fila USA’s purchase orders to Fila HK; Fila HK’s invoices to Fila USA; Luen Ford’s invoices to Fila HK; textile export licenses designating Fila USA as consignee; Fila HK’s packing lists; airway bills listing Luen Ford as the shipper and Fila USA as the consignee; letters of credit advice showing payment from Fila USA to Fila HK; a voucher showing receipt of payment from Fila USA to Fila HK; a payment receipt from Fila HK to Luen Ford; a receipt from the Manufacturer to Luen Ford; an untranslated document from the Manufacturer which counsel claims is a schedule of charges from Luen Ford to the Manufacturer; and receipts of payment from two quota holders to Luen Ford for the cost of securing quotas. In addition, the Importer provided several untranslated foreign commercial documents.
Your office expressed concern that the information submitted by the protestant is insufficient to establish that the Supplier-Middleman sale is the appropriate basis of appraisement, particularly as it relates to the question of whether the merchandise was clearly destined for exportation to the United States. In this regard, you note that it appears that related parties serve on the board of directors for a particular supplier and the Middleman. You also note the inability of the Fila USA to obtain payment records between one of the Chinese manufacturers and the Supplier.
Counsel describes the transaction underlying Entry 050-4 as follows. Fila HK operates as an independent profit center, negotiating with and buying from unrelated overseas manufacturers or vendors, operating primarily in Asia, and selling to Fila USA. Before placing actual purchase orders with Fila HK, Fila USA supplies Fila HK with product specifications such as fabric and component material requirements, design schematics for each style, manufacturing guidelines, and quality control requirements. Fila HK subsequently conducts advance negotiations with foreign manufacturers or vendors capable of producing products to Fila USA’s specification, and obtains from the manufacturers estimated prices for the merchandise. With these preliminary factory prices, Fila HK negotiates the estimated prices with Fila USA. Fila USA then places actual purchase orders with Fila HK, and Fila HK and Fila USA finalize the sales prices. Fila HK places purchase orders with the manufacturers or vendors, and production begins. In this case, Fila HK purchased the goods from Luen Ford, who in turn subcontracted production to Cheng Mao, the Manufacturer. Finally, Luen Ford obtains export quotas through quota brokers. Counsel states that, although Fila USA and Fila HK are related, Fila USA and Fila HK are not related to any of the vendors or suppliers.
Fila HK’s price to Fila USA generally includes a “mark up” over and above the vendor’s or Manufacturer’s price to Fila HK, and consists of Fila HK’s purchase price from the Manufacturer, letter of credit financing expenses, handling costs, international insurance and freight charges, financing charges for extending credit to Fila USA pursuant to open account terms of payment, and profit.
According to the Supplier’s invoice, the terms of sale for the Supplier-Middleman sale were FOB Shanghai, and the terms of sale for the Middleman-Importer transaction were CIF New York. In addition, the Supplier’s invoice notes that the buyer is responsible for insurance during shipment. The terms of delivery for both of these transactions were “By Air from Shanghai to New York on or about December 14, 1996.”
ISSUE:
Whether the transactions between the Luen Ford and Fila HK consist of bona fide sales conducted at arm’s length, wherein the merchandise was clearly destined for the United States, allowing transaction value to be based on the Supplier’s price to the Middleman.
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”; codified at 19 U.S.C. § 1401a). The preferred method of appraisement is transaction value, which is defined as the "price actually paid or payable for merchandise when sold for exportation to the United States," plus certain enumerated additions. 19 U.S.C. § 1401a(b)(1).
We note that as a general matter, Customs assumes that the importer’s sales price is the basis of transaction value. As Customs explained in a General Notice entitled, “Determining Transaction Value in Multi-tiered Transactions,” T.D. 96-87, 30/31 Cust. Bull. 52/1, January 2, 1997:
Customs presumes that the price paid by the importer is the basis of transaction value and the burden is on the importer to rebut this presumption. In order to rebut this presumption, in accordance with the Nissho Iwai standard, the importer must prove that at the time the middleman purchased, or contracted to purchase, the goods were “clearly destined for the United States” and the manufacturer (or the seller) and middleman dealt with each other at “arm’s length.”
Clearly Destined for the United States
The U.S. Court of Appeals for the Federal Circuit has established that for merchandise imported pursuant to a three-tiered transaction to be appraised on the basis of the first sale, the merchandise must be clearly destined for export to the United States. In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the Federal Circuit reviewed the basis 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. In so doing, the court reaffirmed the rationale established in M.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that the manufacturer’s price rather than the middleman’s price, is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. In reaffirming the McAfee rationale the court stated that in a three-tiered distribution system, “the manufacturer’s price constitutes a viable transaction value when the goods are clearly destined for export to the United States and when the manufacturer and the middleman deal with each other at arm’s length, in the absence of any non-market influences that affect the legitimacy of the sales price.” Nissho Iwai, at 509. See also, Synergy Sport Int’l v. United States, 17 CIT 18 (1993).
To support its claim that the merchandise was clearly destined for export to the United States, Fila provided purchase orders, invoices, packing lists, payment records, airway bills, and textile visas for the transaction underlying the protest. The Importer states that the merchandise was manufactured pursuant to Fila USA’s product specifications. Counsel also notes that the quantity, size, style, and color of the apparel ordered by Fila USA, as stated in its purchase orders, corresponds to the information contained in the Supplier’s and Middleman’s invoices to Fila USA.
We determine that the subject merchandise was clearly destined for export to the United States. The commercial documents provided by Counsel establish a clear paper trail that shows at all times the merchandise was clearly intended for export to the United States. As noted by Counsel, the information contained in the purchase orders, invoices, packing lists, and textile visas consistently state the quantity, price, and product specifications of the merchandise ordered by the Importer. In addition, the Supplier’s and Middleman’s invoices, airway bills, and textile visas all indicate that the merchandise was to be shipped directly to the Importer in the United States. Based on these documents, we find that the United States was the apparent destination of the merchandise.
Bona Fide Sales Conducted at Arm’s Length
The second prong of the Nissho standard is whether the merchandise was exported pursuant to a bona fide sale conducted at arm’s length. For Customs purposes, the term “sale,” as articulated by the court in J.L. Wood v. United States, 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974), is defined as the transfer of property from one party to another for consideration. No single factor is decisive in determining whether a bona fide sale has occurred. Customs makes each determination on a case-by-case basis and will consider such factors as whether the purported buyer assumed the risk of loss and acquired title to the imported merchandise. In addition, Customs 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, e.g., HRL 545709, dated May 12, 1995, and HRL 545474, dated August 25, 1995. Generally, Customs will presume that a transaction between parties that are not related, within the meaning of 19 U.S.C. 1401a(g), is conducted at “arm’s length.” See HRL 545878, dated July 31, 1996.
You advise that Fila USA failed to provide sufficient evidence to support a determination that the merchandise should be appraised based on the value of the sale between the Supplier and the Middleman. You note that the Importer was unable to provide proof of payment documentation for the sale between the Manufacturer and the Hong Kong Supplier who in turn sells to Fila HK. You also state that it appears that Fila HK may be related to a foreign supplier in Hong Kong and that the Importer failed to indicate at the time of entry that a fabric assist was provided to the Manufacturer. Finally, you express concern regarding the fact that many of the manufacturers are related to the Hong Kong Supplier.
To support its claim that the Supplier’s price constitutes a viable basis for determining the transaction value, Fila USA states that the merchandise was manufactured pursuant to Fila USA’s product specifications. Counsel points out that the quantity, size, style, and color of the apparel ordered by Fila USA, as stated in Fila USA’s purchase orders, corresponds to the information contained in Luen Ford’s and Fila HK’s invoices. Furthermore, Counsel notes, the garments were shipped directly from Shanghai to Fila USA. Finally, Counsel asserts that the facts in the present case are substantially similar to those in HRL 545474, dated August 25, 1995, which involved a multi-tiered transaction involving footwear. Other than the fact that HRL 545474 involved a three-tiered transaction, Counsel claims that the circumstances in both cases are “materially identical.”
We determine that the subject merchandise was sold pursuant to a bona fide sale conducted at arm’s length. You raise concerns regarding the sale between the Manufacturer and the Supplier—including the nature of the relationship between these parties. However, because Fila claims that the merchandise should be appraised based on the sale between the Supplier and the Middleman, the circumstances of the earlier sale between the Manufacturer and the Supplier are immaterial to our bona fide sale analysis. We therefore focus our analysis on the Supplier-Middleman transaction, i.e., the first sale.
According to the Supplier’s invoice to Fila HK, the terms of sale in the Supplier-Middleman transaction were FOB Shanghai. The Supplier’s invoice also notes that Fila HK covered the cost of insurance. Under a free on board contract, title and risk of loss passes from the seller to the buyer at the named destination. In this case, title and risk transferred to Fila HK when the goods were delivered to Shanghai. See Incoterms, International Chamber of Commerce, 38-43 (1990).
For the second sale, the Fila HK’s invoice states that the terms of sale between the Supplier and Importer were CIF New York. Based on the air waybills, however, the merchandise was transported by air to New York. Use of the CIF term in this situation was inappropriate because CIF contracts can only be used for sea and inland waterway transport. See Incoterms at 51. The proper term for this type of contract is “CIP,” which means that the seller pays the freight for the carriage of the goods and cargo insurance to the named destination. As with CIF contracts, risk of loss under a CIP contract is transferred from the seller to the buyer at the point when the goods are delivered to the custody of the carrier. Incoterms, 62-67. For purposes of our analysis, and in accordance with both CIP and CIF contracts, title and risk of loss passed from Fila HK to Fila USA when the merchandise was delivered to the custody of the air carrier in Shanghai.
Therefore, based on the terms of sale in the first transaction, title and risk of loss passed to Fila HK when the merchandise was first delivered to Shanghai. In the second sale, title and risk of loss passed from Fila HK to Fila USA when the merchandise was delivered to the custody of the air carrier in Shanghai. Consequently, Fila HK held title and risk of loss from the time the merchandise entered Shanghai until the time it was turned over to the air carrier. Based on the fact that the Supplier and Middleman each held title and assumed the risk of loss at different times, we determine that the Supplier-Middleman and the Middleman-Importer transactions were bona fide sales.
Finally, you raise concern about the relationship between Fila HK and the other parties. Counsel states that neither Fila USA nor Fila HK are related to any of the overseas vendors or suppliers. There is no evidence in the file to indicate that Fila USA or Fila HK are related to any of the other parties. In the absence of such evidence, we assume that Fila and the other parties are unrelated and therefore conclude that the relevant transactions were conducted at arms’ length. We note that if evidence is discovered that establishes a relationship between Fila and any of the other parties, this ruling will be considered inapplicable to those facts.
Based on the totality of circumstances we determine the sale between the Supplier and the Middleman represents a bona fide sale conducted at arm’s length in which the exported merchandise was clearly destined for the United States. Therefore, the sale from the Supplier to the Middleman is an appropriate basis for determining the transaction value.
HOLDING:
The protest should be granted. Based on the information provided, we determine that subject merchandise was clearly destined for the United States at the time of export pursuant to a bona fide sale conducted at arm’s length. Consequently, transaction value is appropriately based on the sale between the Luen Ford and Fila HK.
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 sixty days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision. Sixty days from the date of the 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 http://www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Virginia L. Brown
Chief, Value Branch