RR:IT:VA 548609 RFC
Area Director
U.S. Bureau of Customs and Border Protection
JFK International Airport
Jamaica, New York 11430
RE: Internal Advice Request; Transaction Value; Bona Fide Sales
Dear Sir or Madam:
This letter is in response to a request for internal advice forwarded to this office by your port in a November 8, 2004, memorandum (VAL-1 K:TO:B9 BNH). The request for internal advice concerns the proper method of appraisement of merchandise imported by IFT International, Inc. (“IFT”), which was previously known as “Italian Fashion Trading Inc.” The importer’s counsel made the request for internal advice in a January 7, 2002, letter to the port. We understand that the importer is currently in Chapter 7 bankruptcy proceedings.
FACTS
IFT is a U.S. company that imported apparel products from manufacturers in Italy. At the request of your port, an audit was conducted on the financial operations of IFT. The audit covers the calendar years 1996 to 1999, during which time period IFT entered the merchandise under the transaction value method based on the alleged sales between it and the Italian manufactures. The report resulting from the audit is dated February 1, 2002. It states, in part, that:
IFT was incorporated in the State of New York on November 20, 1985. IFT is an importer and re-seller of men’s and women’s fashion apparel. The company imports primarily from manufacturers located in Italy. IFT employs approximately 30 employees. It should be noted that IFT’s Financial Statements did not show a sales figure for Calendar Year 1996. Revenue consists of import profit, commissions, and other income totaling $2,971,609. No purchase or cost of goods was recorded.
IFT maintains electronic accounting books and records. IFT has no purchases, cost of goods sold, or inventory. Merchandise from a foreign manufacturer is bought by the ultimate consignees at IFT’s New York showroom. IFT debits its accounts receivable, ultimate consignee, for the landed duty paid (LDP) price. The LDP price is the amount the ultimate consignee pays IFT for imported merchandise. IFT then credits its accounts payable, foreign manufacturer account, for the delivery duty paid (DDP) price. The DDP price is the amount IFT pays its foreign manufacturer for imported merchandise. The difference between the DDP price and the LDP price is margin and is split based on contractual percentages between IFT and Aeffe U.S.A., IFT’s agent.
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The importer [IFT] used transaction value, which was the appropriate basis of appraisement. (Emphasis added.)
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IFT enters its merchandise at its delivery duty paid (DDP) price, however we determined the price actually paid or payable to be the landed duty paid (LDP) price.
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IFT enters its merchandise at its delivery duty paid (DDP) price, which represents the price between IFT and its foreign manufacturer less deductions for non-dutiable charges (NDC), including freight, insurance, and duty. IFT’s import practices, applicable circumstances of sale, and shipping terms, indicate that the price paid or payable should be landed duty paid (LDP) price, which represents the price between IFT’s foreign manufacturer and the ultimate consignee less allowed deductions for NDCs. (Emphasis added.)
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IFT relies on its foreign manufacturer to approve orders, reduce the ordered quantities, sets minimum resale prices to the customer, set the price of merchandise in the retail store and dictate the location of sales. IFT does not provide nor could provide instructions to the seller and could not select its own customers without consulting the seller.
The foreign manufacturer determines the re-sale prices and the buyer agrees to the terms, as part of selling conditions. IFT is not free to sell the items at any price it desires. The goods remain the property of the foreign manufacturer until payment is received. The foreign manufacturers assume all risk of loss for the entire transaction.
IFT does not determine or negotiate discounts. Discounts are determined and negotiated between the customer and the foreign manufacturer. IFT is not aware of any adjustments in the selling price until the customer makes final payment.
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IFT has not taken corrective action regarding its under valuation of imported merchandise since it does not agree with our findings.
In sum, the audit report concluded that transaction value is the appropriate method of appraisement for the imported merchandise but that it should be based on the sales between the foreign manufacturers and the ultimate U.S. consignees rather than on the alleged sales between the foreign manufacturers and IFT. Your memorandum for the request for internal advice supports this conclusion.
In addition to its January 7, 2002, internal advice request, IFT submitted several documents in support of its use of transaction value in a October 24, 2003, letter from its counsel to CBP. The documents are set forth in the following exhibits to the letter: Exhibit A consists of a copy of a 1996 sales or distribution agreement between Italian Fashion Trading Inc. and the manufacturer, Time Italia s.r.l. and a copy of the importation procedures, which is said to be presented by IFT to its vendors at the time of contract. In the importation procedures document it states, in part, as follows:
9. PAYMENT TERMS
I.F.T. will make payments to the manufacturers, once payment from customers is received. These payments will be issued on the 10th, 20th, and 30th of each month.
9.1 Disputes
I.F.T. will not accept responsibility on disputed invoices even if partial, therefore, the manufacturer will help I.F.T. solve disputes which relate to the following:
-late or non-delivery
-total or partial delivery
-defective or incorrect merchandise
-any other disputes caused by the activities of the manufacturer
9.2 I.F.T. may be entitled to offset sums which may be owed to the
manufacturer because of any of the above occurrences which impact
I.F.T.’s ability to fulfill its contracted obligation.
Exhibit B consists of a copy of an importation and distribution agreement between IFT International, Inc., and Sarl Creation Mediterranee, which is said to represent a later model contract used by IFT. We note that the importation and distribution agreement submitted as part of exhibit B is dated after the audit period and the manufacturer did not sign it.
Exhibit C consists of copies of three sales agency agreements between IFT and its U.S. sales agents.
Exhibit D consists of a copy of an order report which is said to be the final order that would be sent by IFT to the manufacturer (which in this case is AEFFE S.p.A.). With respect to the order report, it states in the above-mentioned letter from IFT’s counsel that:
You will note that in some instances IFT has not approved orders. These situations are covered in the Distribution Agreements whereby the vendor could, at their own risk, ship goods that had been ordered by not (sic) approved by IFT. The reason for this procedure was simply that it was important for the brand designer that the goods be available from certain retailers who may have high visibility in their markets, but, unfortunately, poor credit histories. IFT was perfectly willing to accommodate this procedure, and was free to do so contractually, but as a bona fide purchaser of merchandise. IFT certainly had no interest in accepting orders placed by customers who are known credit risks. We recognize that where merchandise was shipped to IFT by the manufacturer, pursuant to an order where the manufacturer would not require payment from IFT unless IFT was paid by the customers, that there is an issue relating to the use of transaction value. However, it must be noted that the same styles of merchandise were invariably purchased by IFT for importation during the same timeframe with a contractual obligation of IFT to pay the manufacturer for the goods. Therefore, the transaction value based on the sale of identical merchandise is appropriate.
Five copies of sales agreements between IFT and its various foreign manufacturers were submitted with the internal advice request to this office. Four of the agreements were submitted as part of exhibits H, I, J and K to your November 8, 2004, memorandum and one agreement was submitted as part of exhibit A to counsel’s above-mentioned October 24, 2003, letter to CBP. Each of the agreements is dated and signed by a representative of IFT and a representative of the manufacturer to the particular agreement. Additionally, each of the agreements states, in part, as follows:
The manufacturer will sell…[goods or lines of clothing]…to IFT and IFT agrees to purchase them. The manufacturer appoints IFT as its sole and exclusive importer…in the U.S. and IFT accepts that appointment. The nature, quantity, and price of the goods will be reflected in purchase orders. Purchase orders will contain terms of sale and shall be confirmed in writing within a reasonable time period by manufacturer. The terms of sale shall be Delivered Duty Paid Port USA (“DDP USA”).
IFT shall provide dates and places of delivery to the manufacturer after confirmation of sales. IFT shall pay for the goods…[no later than 210 days from the date of shipment or within 210 the original due date for payment as contained on IFT’s invoices.] All risk of loss is assumed by the manufacturer until the goods are placed at the disposal of IFT after clearing U.S. customs at port of destination.
The manufacturer, when necessary, with the knowledge, participation and consent of IFT, can deal directly with IFT’s sales agents particularly in helping to resolve disputes of any nature and in developing marketing strategies, pricing and future sales.
IFT will be indemnified by the manufacturer for any and all costs and damages from the following: any assessment of IFT by U.S. Customs and/or U.S./EC agencies overseeing international commerce, for increased duties, fines and penalties or assessments of any nature or kind on goods purchased and imported by IFT; reimbursement for all costs, fines and penalties including attorney fees to IFT as a result of manufacturer’s activities and reimbursement for any manufacturer negligence and product liability.
As concerns the discounts granted to the ultimate consignees by the foreign manufacturers, in a August 2, 1999, correspondence from IFT’s accountant (as identified in your memorandum and attached as exhibit M) it states that:
The reason that the transfers to the manufacturers are different (lower) than the amount that would normally be transferred is that the manufacturer has granted pre-authorized discounts (PODs), which in effect are granted to the ultimate customer by the manufacturer bypassing the importer (IFT), and are the sole responsibility of the manufacturer, therefore, IFT as importer becomes whole for the amount by deducting these PODs from the transfer to the manufacturer.
With regard to the above correspondence, you state in your memorandum that the “[t]ransfers in this case refer to the payments made by the ultimate consignees, or U.S. customers.”
ISSUE:
Whether there were bona fide sales for exportation to the United States of the imported merchandise (1) between the foreign manufacturers and IFT or (2) between the foreign manufacturers and the ultimate purchasers or consignees for the purpose of determining the price actually paid or payable pursuant to the transaction value method, as provided for under 19 U.S.C. § 1401a(b)(1).
LAW AND ANALYSIS
The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in section 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. Section 402(b)(l) 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 amounts for the enumerated statutory additions. In order for imported merchandise to be appraised under the transaction value method it must be the subject of a bona fide sale between a buyer and seller, and it must be a sale for exportation to the United States. The imported merchandise can be appraised under transaction value only if the buyer and seller are not related, or if related, the transaction value is deemed to be acceptable.
As indicated above, when considering the applicability of the transaction value method, one must determine whether a bona fide sale has taken place. In the instant case, IFT entered the merchandise under the transaction value method based on the alleged sales between it and the foreign manufacturers. In determining whether that appraisement was correct, the first question to be considered is whether there were, in fact, bona fide sales between IFT and the foreign manufactures during the audit period. For Customs purposes, a “sale” generally is defined as a transfer of ownership in property from one party to another for consideration. See J.L. Wood v. U.S., 62 CCPA 25, 33; 505 F.2d 1400, 1406; C.A.D. 1139 (1974); J.H. Cottman & Co. v. United States, 20 CCPA 344, 356 T.D. 46114 (1932), cert. denied, 289 U.S. 750 (1933).
With respect to identifying the buyer and seller to a sale, whether a buyer-seller relationship exists between two parties is to be determined by the substance of the transaction and not by the labels that parties attached to it. 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. See Dorf International, Inc. v. U.S., 61 Cust. Ct. 604, 610; 291 F. Supp. 690, 694; A.R.D. 245 (1968).
Several factors may indicate whether a bona fide sale occurred between a potential or alleged seller and buyer. In determining whether property or ownership has been transferred, CBP considers whether the alleged buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, CBP may examine whether the alleged buyer paid for the goods, whether such payments are linked to specific importations of merchandise, and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HQ 545705 (January 27, 1995).
Upon a review of the record in the instant case, we conclude (1) that IFT and the various manufacturers did not act as buyer and sellers and (2) that no bona fide sales for exportation to the United States of the imported merchandise occurred between them. Furthermore, we conclude from the record (1) that IFT acted as a selling agent for the manufacturers and (2) that bona fide sales occurred between the manufacturers and the ultimate U.S. consignees. See, e.g., HQ 545571 (April 28, 1995) (The totality of the circumstances indicates that a foreign manufacturer and related U.S. importer did not act as buyer and seller. Rather, for purposes of determining a transaction value, the “sale for exportation to the United States” occurred between the foreign manufacturer and the ultimate U.S. purchaser.) See also, e.g., HQ 546858 (June 2, 2000); HQ 545865 (August 25, 1995); HQ 545542 (December 9, 1994); HQ 544659 (July 3, 1991); and HQ 544383 (January 18, 1991).
The audit report identifies numerous activities and documentation that support the above conclusions. The activities include the following ones: No purchase or cost of goods was recorded by IFT; IFT had no inventory; IFT did not provide instructions to the sellers; IFT could not select its own customers without consulting the sellers; the goods remained the property of the sellers/foreign manufacturers until payment was received; the sellers/foreign manufacturers assumed all risk of loss for the entire transaction; and IFT did not determine or negotiate discounts, rather discounts were determined and negotiated between the sellers/foreign manufacturers and the ultimate U.S. consignees (see also, August 2, 1999, IFT’s accountant’s correspondence, supra). Moreover, various provisions in the agreement that IFT had with its foreign manufacturers (e.g., IFT had 210 days to pay the manufacturers) and in the import procedures document (e.g., IFT only required to pay the manufacturers of the merchandise after the ultimate U.S. purchasers paid IFT for the merchandise) further support these conclusions.
In light of the above, the merchandise covered by the above-mentioned audit should be appraised under the transaction value method based on the sales between the foreign manufacturers and the ultimate U.S. consignees.
CONCLUSION
The merchandise covered by the above-mentioned audit should be appraised under the transaction value method based on the sales between the foreign manufacturers and the ultimate U.S. consignees.
This internal advice should be mailed by your office to the requester no later than sixty days from the date of this letter. Sixty days from the date of this letter, the Office of Regulations and Rulings will take steps to make this decision available to CBP personnel and to the public on the CBP’s web site, and by means of the Freedom of Information Act as well as by other means of public distribution.
Sincerely,
Virginia L. Brown, Chief
Value Branch