OT:RR:CTF:VS H012659 HEF
Port Director
U.S. Customs and Border Protection
4341 International Parkway, Suite 600
Atlanta, Georgia 30354
RE: Internal advice request; transaction value; sale for export
Dear Port Director:
This is in reply to a request for internal advice that you forwarded to our office on June 1, 2007, on behalf of ZF Industries, Inc. (“ZFI”), of Gainesville, Georgia, concerning whether transaction value may be used to appraise certain merchandise imported into the United States.
FACTS:
ZFI, through counsel, indicates that it purchases automotive components from its related sister company, ZF do Brazil. The components are used in the manufacture of transmissions, which ZFI ultimately sells to a third party. The transactions at issue are governed by a requirements contract that ZFI and ZF do Brazil entered into on May 20, 2004, wherein ZF do Brazil undertook to provide ZFI with 100 percent of its needs for the products specified in Annex I to the contract. Copies of the agreement, entitled “Corporate General Contract,” and the accompanying annexes were provided with counsel’s submission.
The contract provides that by August of each year, ZFI will inform ZF do Brazil of the total amount of contractual products that it expects to purchase in the forthcoming calendar year. Counsel advises that ZF do Brazil receives material releases containing the current quantities required by ZFI and the delivery deadlines on a weekly basis. If ZF do Brazil does not object to the material releases within two days of receipt, the releases become binding on the parties.
The contract specifies that ZFI and ZF do Brazil agree to operate under “consignment” with regard to the products listed in Annex 1. Prices for the products are listed in U.S. dollars in Annex 1, and the contract designates such prices as “F.O.B. Santos.” The contract specifically provides that ZFI bears the risk of loss for the merchandise from the F.O.B. point of shipment.
The contract requires delivery of the merchandise to the designated logistics service provider of ZFI. The logistics service provider is an independent contractor of ZFI and the operator of a U.S. warehouse where the imported merchandise is stored. Annex 6 of the contract requires ZF do Brazil to issue a pro forma invoice on the date of the merchandise’s departure from its plant in Brazil. ZF do Brazil will subsequently issue a commercial invoice that will be timed and reconciled to the pro forma invoice. The contract provides that ZF do Brazil retains title to the merchandise until it is delivered to ZFI or until the pro forma invoice ages a maximum of 63 days. Annex 6 requires ZFI to issue payment for the merchandise “in the 63rd day of the Proforma Invoice.” Counsel thus explains that regardless of whether the parts have been used in consumption before the end of the 63-day period or whether the parts remain in the warehouse after the 63-day period, ZFI must issue payment for the parts on the 63rd day. Counsel also notes that ZF do Brazil cannot sell the imported merchandise to any other buyers.
Annex 7 to the contract sets forth the inventory control processes for the “consigned” merchandise and again specifies that ZFI must purchase ZF do Brazil inventory held in the warehouse in excess of 63 days from the “consignment invoice” date, assuming that the material release required the parts. Annex 7 also provides that electronic controls will be used to segregate ZF do Brazil’s “consigned inventory” from inventory owned by ZFI.
Your office takes the position that the transactions concern consigned merchandise. Consequently, your office believes that the use of transaction value is precluded. ZFI acknowledges that the contract between itself and ZF do Brazil refers to the merchandise as “consignment inventory” or “consignment stock.” ZFI, however, contends that the transactions at issue are not truly consignments, but rather sales for exportation to the United States with delayed payment terms.
ISSUE:
Whether transaction value is precluded as the proper method of appraisement for the imported merchandise.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the United States is transaction value pursuant to 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. Transaction value is the “price actually paid or payable for merchandise when sold for exportation to the United States,” plus five statutorily enumerated additions. See 19 U.S.C. § 1401a(b).
Transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, the circumstances of sale indicate that the relationship does not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain “test values,” i.e., previously accepted values of identical or similar merchandise. See 19 U.S.C. § 1401a(b)(2)(B). The request for internal advice asks our office to address only whether the transactions at issue constitute consignments such that the use of transaction value is precluded. The request specifies that other issues, including the relationship between the parties and any applicable discounts and volume increases, are being addressed in an ongoing Focused Assessment. Therefore, the scope of our response is limited to whether the transactions at issue are true consignments precluding the use of transaction value as the method of appraisement.
Customs and Border Protection (“CBP”) has maintained the position that the use of transaction value is precluded in instances where goods are shipped on consignment, as these transactions do not constitute bona fide sales. See Headquarters Ruling Letter (“HRL”) 548574, dated March 17, 2005; HRL 546602, dated January 29, 1997; HRL 545755, dated May 18, 1995; HRL 543128, dated June 4, 1984; and HRL 542765, dated April 20, 1982. Although the contract between ZF do Brazil and ZFI uses the term “consignment,” the question that must be answered is whether the imported merchandise is the subject of a bona fide sale for exportation to the United States.
In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit found that the term “sold” for purposes of 19 U.S.C. § 1401a(b)(1) means a transfer of title from one party to another for consideration, (citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). However, several factors may indicate whether a bona fide sale occurs between a potential buyer and seller of imported merchandise. In determining whether property or ownership has been transferred, CBP considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, CBP may examine whether the potential buyer paid for the goods 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 HRL 547197, dated August 22, 2000; and HRL 546602, supra.
The contract indicates that the prices for the imported merchandise are “F.O.B. Santos.” “F.O.B.” or “Free on Board” is a term of sale, which means that the seller fulfills his obligation to deliver when the goods pass the ship’s rail at the named port of shipment. See Incoterms 2000, International Chamber of Commerce, 49 (1999). Consequently, the buyer assumes all risk of loss or damage to the goods from that point. Id. The fact that ZFI assumes the risk of loss for the imported merchandise when the goods pass the ship’s rail in Santos points in favor of finding that bona fide sales for exportation exist. However, we must examine other factors.
In this case, the contract specifies that ZF do Brazil will retain ownership of the merchandise until it is delivered to ZFI or until the pro forma invoice ages a maximum of 63 days. ZFI argues that the fact that title to the merchandise does not transfer until after the goods are imported into the United States does not disqualify the transactions from being sales for exportation. ZFI cites to HRL 542930, dated March 4, 1983 (TAA No. 59). HRL 542930 involved a contract for the supply of components and their assembly into chemical plants and pulp and paper systems in the United States. Although acceptance and final payment for the merchandise was contingent upon testing or assembly in the United States, CBP found that a sale for exportation to the United States occurred. CBP reasoned that there was a transfer of property for consideration at the time of export, which consisted of mutual promises to sell and purchase, plus a partial payment. HRL 542930 has been cited for the proposition that the fact that title to merchandise passes after importation, by itself, does not disqualify a sale from being a sale for exportation, where all other factors lead to the conclusion that there is a sale. See HRL 547168, dated April 12, 1999; and HRL 544314, dated April 15, 1991.
By contrast, in three other cases involving “just-in-time” or “supplier-managed” inventory systems, CBP found that sales for exportation did not exist where title to the imported merchandise passed after importation. See HRL 548574, supra; HRL 548236, dated March 27, 2003; and HRL 548273, dated April 17, 2003. In all three instances, the sellers exported merchandise to the United States, where it was stored in warehouses operated by third parties. The buyers were not obligated to purchase the merchandise unless they withdrew it from the warehouse. In addition, prices for the imported merchandise were not agreed to until the merchandise was withdrawn from the warehouse, and the risk of loss did not transfer to the buyers until this point. As CBP determined that no sales for exportation occurred, the imported merchandise could not be appraised on the basis of transaction value. The facts of the instant case are readily distinguishable from the arrangements described in these three cases.
In the instant case, ZFI is obligated to purchase the merchandise listed in the material releases. ZFI must also issue payment for the merchandise 63 days from the pro forma invoice date, regardless of whether the parts have been used in consumption before the end of the 63-day period or whether the parts remain in the warehouse after the 63-day period. It is also our understanding that ZFI’s payments for the imported merchandise conform to the prices listed on the pro forma invoices and the commercial invoices. As we noted above, ZFI also bears the risk of loss for the merchandise when the goods pass the ship’s rail at the F.O.B. point of shipment. Although title to the imported merchandise does not pass until after importation, the presence of these other factors suggests that the transactions at issue are bona fide sales for exportation to the United States. Consequently, based on the evidence presented, we find that these transactions are not “true consignments” that would prohibit the use of the transaction value method to appraise the imported merchandise.
HOLDING:
The transactions between the buyer and the seller constitute sales for exportation to the United States. As such, the use of the transaction value method to appraise the imported merchandise is not precluded.
Please mail this decision to the internal advice applicant no later than 60 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 Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Monika Brenner, Chief
Valuation and Special Programs Branch