RR:IT:VA 547436 MMC
Mr. James L. Sawyer
Katten Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, IL 60661
RE: Multi-Tiered Transaction; Sale for Export
Dear Mr. Sawyer:
This is in response to your July 14, 1999, letter requesting a prospective ruling on behalf of your client, [ ] the importer, concerning the applicability of the “first sale” rule of valuation. The issue raised is whether the appraised value of the imported merchandise should be based on the transaction between the foreign supplier and [ ] middleman, or the middleman and the importer. Information provided in additional submissions dated January 13, 2000, March 6, 2000, and in a February 15, 2000, meeting has been taken into consideration in reaching this decision.
Your request that, pursuant to §177.2(b)(7), Customs Regulations (19 C.F.R. §177.2(b)(7)), certain information provided in connection with this decision be treated as confidential is granted. Accordingly, the portions of this decision that appear in brackets will be deleted from any copies that are made available to the public.
FACTS:
According to your submission, the importer is in the promotion and premium incentive business and sells a variety of products to ultimate U.S. purchasers. The middleman markets and distributes various types of products used as premium, promotional, or advertising specialty products. The importer orders merchandise from the middleman and then the middleman obtains the merchandise from several different foreign suppliers in various countries. Counsel states that the foreign supplier and middleman are not related to each other as that term is defined in 19 C.F.R. section 102(g). Attached to the submission is a copy of a Purchase and Distributorship Agreement (Agreement) between the importer and middleman. Additionally, examples of two sample transactions were submitted for our review.
The products subject to the Agreement include the middleman’s entire product line purchased from non-U.S. suppliers except for certain products subject to arms’-length license agreements. The Agreement indicates that the importer operates as the exclusive worldwide distributor of various merchandise for the middleman except for direct in-person, face-to-face sales already conducted by the middleman and its affiliates. Furthermore, the Agreement states that the importer and middleman are independent buyers and sellers not employer/employee, principal/agent, or any other relationship other than that of buyer and seller. Under the Agreement, the importer can terminate the relationship at anytime by giving the middleman thirty days notice. The middleman can terminate if the importer doesn’t meet certain minimum purchasing requirements.
Concerning the products subject to the license agreements, the Agreement requires the middleman to use its best efforts to negotiate, in future license agreements, the right for the importer to distribute the products. For such negotiation efforts, the importer agrees to bear additional costs incurred by the middleman. Concerning price, the Agreement indicates that the middleman purchases products from non-U.S. suppliers and resells the products to the importer at actual product cost plus a certain percentage plus, in certain cases, the middleman’s direct overhead. Finally, if certain requirements are met, the importer agrees to pay the middleman a bonus.
The Agreement states that the importer is under the obligation to make arrangements with the foreign supplier for the products to be shipped directly to its US retailers “U.S. destination freight collect”. The U.S. retailer will pay the freight costs directly to the subject freight forwarder. Risk of loss for the merchandise will remain with the middleman until the merchandise reaches the U.S. port of entry. The middleman has no obligation to accept returns and the responsibility and risk of loss for the unwanted merchandise remains with the ultimate U.S. purchaser. The middleman will however, if the importer requests, use its best efforts to assist the importer in returning merchandise for refund, credit or finding another buyer.
Counsel provided the following documents for the two sample transactions:
the relevant portion of the importer’s master purchase orders
purchase orders to the various suppliers
the supplier’s invoices and packing lists to the middleman
the middleman’s invoices to the importer
the freight forwarder’s bills of lading
proof of payment between the supplier & middleman
proof of payment between the middleman & importer
Review of the purchase orders indicates that the middleman uses a related party located in Hong Kong to order merchandise from the supplier. For the purposes of this ruling we assume that this related party is the middleman’s agent.
The supplier’s invoices and packing list to the middleman indicate that the merchandise is shipped from Hong Kong to port(s) in California. Finally, the bills of lading indicate that the supplier is the “shipper” and the importer or ultimate U.S. purchaser is the party to be notified. Consistent with the Agreement, the importer’s purchase orders and the middleman’s invoices to the importer indicate that the merchandise is shipped “FOB destination freight collect” to either the importer or its ultimate U.S. purchaser. The merchandise is, in essence, drop shipped from the supplier to the importer or its U.S. purchaser. Additionally, the importer’s purchase orders indicate that the purchase order number must appear on all invoices, shipping papers, packages, and correspondence.
ISSUE:
Whether the imported merchandise may be appraised based on the transaction between the foreign supplier and the middleman.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the United States is transaction value pursuant to §402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 ("TAA"), codified at 19 U.S.C. §1401a. §402(b)(1) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus numerated additions. The terms “price actually paid or payable” is defined in §402(b)(4)(A) of the TAA as:
...the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise...) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller.
Counsel contends that the instant situation involves a multi-tiered transaction with the merchandise first being sold from a foreign supplier to a middleman, then from the middleman to the importer and finally from the importer to the ultimate U.S. purchaser. Counsel’s position is that two viable sales took place, with the claimed sale for exportation being that between the foreign supplier and the middleman.
In Nissho Iwai American Corp. v. United States, 16 CIT 86, 786 F. Supp. 1002 (1992), rev'd in part, 982 F.2d 505 (1992) (Nissho), and Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993), (Synergy), 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 United States purchaser. In both cases, the middleman was the importer of record. In each case, the court held that the price paid by the middleman/importer was the proper basis for transaction value. Each court further said 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.
We note that in the context of filing an entry, Customs Form (“CF”) 7501, an importer is required to make a value declaration. As indicated by the language of CF 7501, the language of the valuation statute, and in accordance with the Nissho Iwai and Synergy decisions and our own precedent, we presume that transaction value is based on the price paid by the importer. See, Headquarters Ruling Letter (“HRL”) 545114 dated May 31, 1994 and HRL 545648 (IA 10/94) dated August 31, 1994.
In further keeping with the courts’ holdings, we note that in those situations where an importer requests appraisement based on the price paid by the middleman to the foreign supplier, and the importer is not the middleman, the importer may do so. However, it will be the importer’s responsibility to show that such price is acceptable under the standard set forth in Nissho and Synergy. That is, the importer must present sufficient evidence that the transaction was an arm’s length sale and that it involved goods clearly destined for the United States.
With regard to this case, the importer and middleman are different entities. Thus, the importer must present sufficient evidence that the transaction between the foreign supplier and the middleman is an arm’s length sale and that it involves goods clearly destined for the United States.
From the evidence presented, it appears that a bona fide sale for export to the United States occurred between the foreign supplier and middleman. For Customs purposes, the word "sale" generally is defined as a transfer of ownership in property from one party to another for a consideration. J.L. Wood v. United States, 62 CCPA 25, 33; C.A.D. 1139 (1974)[J.L. Wood]. While J.L. Wood was decided under the prior appraisement statute, Customs adheres to this definition under the TAA. The primary factors to consider in determining whether there has been a transfer of property or ownership are whether the alleged buyer has assumed the risk of loss, and whether the buyer has acquired title to the imported merchandise. See, HRL 544775 dated April 3, 1992; HRL 543633 dated July 7, 1987. Also relevant is whether, in general, the roles of the parties and circumstance of the transaction indicate that the parties are functioning as buyer and seller. See, HRL 545474 dated August 25, 1995.
We find that the submitted evidence establishes a bona fide sale between the foreign supplier and middleman. Commercial documents relating to the sale, such as, the foreign supplier’s invoices to the middleman, and evidence of payment by the supplier to the middleman were provided. Furthermore, according to the Agreement, the importer and middleman are independent buyer and sellers and do not have any other kind of relationship, the importer can terminate the relationship at anytime with 30 days notice and that the middleman can terminate if the importer doesn’t meet certain minimum purchasing requirements. These provisions establish the middleman’s role as a buyer. Moreover, the terms of sale specified in the Agreement indicate that title and risk of loss pass from the foreign supplier to the middleman at the Hong Kong port of shipment and from the middleman to the importer at the U.S. port of entry. Additionally, Counsel states that the foreign supplier and middleman are not related. Thus, we find sufficient evidence to establish a bona fide “arm's length” sale between the foreign supplier and middleman.
As for whether the goods were clearly destined for the U.S., we find that at the time the middleman orders the goods from the supplier, they are clearly destined for the U.S. The Agreement indicates that the goods are to be drop shipped from the supplier to the importer and the importer’s purchase orders indicate that the purchase order number must appear on all invoices, shipping papers, packages and correspondence. The example transactions conform to the Agreement. As such, we find that the foreign supplier/middleman sale was a "sale clearly destined for the U.S."
The evidence available indicates that the sale between foreign supplier and middleman, is a bona fide "arm's length sale" for export to the United States. Therefore, the price between the foreign suppler and middleman constitutes the price actually paid or payable for purposes of determining transaction value of the imported merchandise.
HOLDING:
Based on the evidence presented, the price between the foreign supplier and middleman constitutes the price actually paid or payable for purposes of determining the transaction value of the imported merchandise.
Sincerely,
Thomas L. Lobred
Chief, Value Branch