• HQ H065028
• Jan 08, 2014

• Type : Valuation/Entry • HTSUS :
•  Related:   547197; 546602; 546206; 545705; 547019; 545659; 547144; 546037; 544791; H003868; H100056; W563462   

OT:RR:CTF:VS H065028 YAG/ARU

Service Port Director
Attn: Trade Operations Branch I
U.S. Customs and Border Protection
1100 Raymond Boulevard, Suite 403
Newark, NJ 07102

RE: Request for Internal Advice; Right to Make Entry; First Sale; Early Payment Discount   Dear Port Director: This is in response to a Request for Internal Advice, dated February 19, 2009, submitted by [***] concerning the importation of fashion apparel, footwear, accessories, and cosmetics from various unrelated foreign suppliers. We apologize for the delay in responding to this Internal Advice request.

[***] has asked that certain information submitted in connection with this internal advice be treated as confidential. Inasmuch as this request conforms to the requirements of 19 CFR §177.2(b)(7), [***] request for confidentiality is approved. The information contained within brackets and all attachments to the internal advice request forwarded to our office will not be released to the public and will be withheld from published versions of this ruling.

This decision is being issued subsequent to the following: (1) A review of the submission dated February 19, 2009; (2) Multiple e-mail correspondence from Ernst and Young; (3) Multiple telephone conversations with representatives from [***] and Ernst and Young; (4) A review of the submission dated November 4, 2010; and, (5) A January 18, 2011 meeting with Bob Schadt of Ernst and Young. FACTS: [***] is a wholly owned subsidiary of [***], which is based in [***]. The [***] group of companies offers a wide range of fashion apparel for women, men, teenagers and children, as well as footwear, accessories and cosmetics. At the end of 2007, [***] operated over 1,500 retail stores in 28 different countries and 132 stores in the United States. [***] does not own any factories. Instead, it purchases the merchandise sold in its stores from approximately 700 unrelated suppliers, located mainly in Asia and Europe.

[***] restructured its global purchasing operations in 2007. Under the previous structure, [***] sales companies in each country, known as Country Sales Organizations (“CSOs”), including [***] in the United States, purchased all merchandise directly from the unrelated foreign suppliers. [***] maintained a global purchasing function that provided support to each of the CSOs to make such purchases.

For the new structure, [***] has established a wholly-owned company, [***] Global Buying Company (“GBC”), located in [***]. [***] transferred all of its purchasing functions and personnel to the new subsidiary company. GBC is responsible for the design, purchasing, production, marketing, supply and sale of all products sold in [***] stores. GBC maintains master sales and distribution agreements with [***] and other CSOs. GBC only sells to the CSOs, including [***] in the United States. Each of the CSOs, including the United States, is responsible for selling such merchandise in their respective country retail stores.

The terms of sale between GBC and the unrelated suppliers is Free Carrier or Free on Board. GBC issues a purchase order to the unrelated supplier. The purchase order specifies the terms of delivery and transport. The purchase order individually sets out a description of the merchandise, specific quantity, and number of sizes to be purchased for the United States and each destination country. Thus, when it issues the purchase order, GBC has determined the specific quantity of the merchandise that will be shipped to and sold in the United States and each country listed.

[***] provided three documentation packages with its request. Each documentation package includes the purchase order, packing instructions, wash and care information, supplier invoice, shipping documents, entry documentation, and payment information. The entry dates for the sample documentation packages are September 17, 2007; October 26, 2007; and, October 26, 2007. The sample documents provided overlap the restructuring of the global purchasing operations. [***] issued new vendor instructions in August 2007, the relevant portions of these instructions were provided with the November 2010 submission.

The purchase order states the time of delivery for each destination for which GBC is purchasing merchandise from the supplier. Thus, each country has its own specific delivery date. All of the above information is provided on the lead page of the purchase order. Each order has supporting detail pages that specify the quantity, size and color for each country (the document submitted include numerous countries). The order provides construction, packing and wash and care information for specific countries, including the United States. The supplier manufactures the specified number of merchandise ordered by GBC exclusively for sale to GBC in the United States. GBC pays the supplier based on these separate country invoices. The unrelated manufacturer offers GBC a certain percentage discount if payment is made within 20 days from the date of shipment. This discount is indicated on both the foreign manufacturer’s invoice and on GBC’s purchase order issued to the manufacturer.

All suppliers pack the merchandise separately for each [***] destination country. The merchandise is packed ready for sale in the retail stores in the specific destination country, and the supplier affixes all labeling and ticketing required for sale in each such country. GBC then has the merchandise shipped directly from the foreign supplier to warehouses in each country for which it purchased the merchandise. For the United States, the merchandise is entered primarily through the Ports of Newark and Long Beach/Los Angeles. Once imported into the United States, the merchandise will be shipped to GBC distribution centers in several states and remain in GBC’s inventory until GBC ships the merchandise to CSO’s [***] retail stores in the United States, at which time title transfers to the CSO, [***]. The supplier issues a corresponding invoice to GBC for each specific country shipment and sale. A separate invoice is produced solely for the U.S. merchandise ordered by GBC.

GBC retains both title and risk of loss until the merchandise is shipped from GBC’s distribution centers and the merchandise arrives at the [***] stores in the United States. There is no specific correlation between the quantities and styles imported into the United States in a particular shipment and sales to [***] for shipment to its retail stores in the United States, which will occur on an as needed basis depending upon inventory levels on the store shelves. Thus, GBC is responsible for paying all costs until that point, including all U.S. Customs duties and fees. However, as the ultimate consignee and eventual purchaser of the goods in the United States, CSO [***], not GBC, acts as the importer of record. According to an e-mail, dated May 26, 2010, [***] pays U.S. Customs duties and fees and is later reimbursed by GBC for these charges.

[***] and the other CSOs do not issue purchase orders to GBC that correspond with each individual GBC purchase order. GBC invoices [***] on a monthly basis, and the invoice is based on the amount of inventory transferred from the distribution centers to [***] stores in the United States during the previous month. It is intended that all goods sold to GBC for the United States will be resold to [***] and shipped to the [***] retail stores in the United States.

At the time of shipment, commercial documents, including an invoice, packing list, and a sketch or picture of the item are sent to [***] U.S. Customs Broker with copies to [***] Import Department, located in [***]. The broker reviews the documents for accuracy, matches the order number with the container manifest or AWB and submits the entry to U.S. Customs and Border Protection (“CBP”). Once CBP clearance is completed, the delivery order is issued and the shipment is delivered to GBC’s designated warehouse location.

Upon arrival at the warehouse, the merchandise is subject to receiving procedures. As the shipment is unloaded, the orders are identified on the loading list which was provided to the dock supervisor. Any overages or shortages are noted. The final receiving paperwork is then submitted to the [***] Import Department for release and transfer to warehouse storage.

The sales between GBC and [***] are governed by a Distribution Agreement, a sample of which was included with [***] February 2009 request. Under the general terms of the Distribution Service Agreement, GBC is responsible for the design, buying, production, marketing, and sales of fashion garments and related merchandise. Moreover, GBC exclusively owns and retains all rights, title, interest and ownership of all intellectual property rights in the merchandise. For the duration of the Distribution Service Agreement, GBC will, at its own discretion, supply merchandise to [***]. In turn, [***] is appointed as a non-exclusive distributor for the sale of merchandise in the United States. Specifically, [***] agrees to buy merchandise as an independent contractor and sell the merchandise in its own name, for its own account, and at its own risk to end-customers through its retail stores in the United States. Finally, in an Addendum to the Distribution Service Agreement, dated July 28, 2011, it is clarified that [***] is required to purchase, and GBC is required to sell, all merchandise imported into the United States for which [***] is the importer of record. Only merchandise for which GBC acts as importer of record may be sold to other parties.

In addition to the above, the Distribution Service Agreement also stipulates delivery and payment terms between the parties. The terms of delivery stipulated in the Distribution Service Agreement is delivered duty paid (“DDP”), where GBC bears all risk, pays freight costs, and retains ownership of the merchandise until the point of delivery. Delivery, under the Agreement, occurs when the merchandise arrives at [***] retail stores. If the merchandise is defective at the time of delivery, GBC will compensate [***] for any direct loss suffered as a result of the defects. At the end of each month, GBC invoices [***] for all merchandise delivered to the retail stores during the previous month. Finally, the Distribution Service Agreement does not establish a partnership, joint venture, agency relationship or employment or any other joint or common undertaking between [***] and GBC.

Aside from the Distribution Service Agreement, [***] and GBC have also entered into a Services Agreement. Under the Services Agreement, [***] operates distribution warehouses and handles logistics management, materials management and the physical distribution of the imported merchandise, including receipt, storage and shipment of the goods to the end customer from the warehouses. Moreover, [***] inspects and conducts quality assurance activities and provides sales/order management under the parties’ Services Agreement. Finally, the Service Agreement requires [***] to give GBC input on negotiating freight agreements for transporting the imported merchandise to and from the distribution warehouses. In return, GBC is obligated to reimburse [***] for all service costs plus a percentage fee for the services provided. Finally, the merchandise is sold by GBC to [***] on an as needed basis. Once a store has a need for a particular item, the item is shipped to the retail store and the sale takes place. GBC invoices [***] monthly for the amount of inventory transferred from the distribution centers to the U.S. stores during the previous month. This is known as the periodic monthly invoice (“PMI”). The PMI consists of a one page document that states the total amount owed for the previous month. The supporting detail for the invoice sets out all shipments that occurred during the time period broken out by purchase order. ISSUES: Whether [***] has the right to make entry as the importer of record when GBC retains ownership and risk of loss of the goods until they have been released from CBP’s custody.

Whether the sales price from the unrelated foreign suppliers to GBC, can be used to appraise the merchandise on the basis of transaction value.

Whether the discounted prices, agreed to prior to importation, provided conditionally by the foreign supplier to GBC, constitute the price actually paid or payable for the imported merchandise when all conditions are met. LAW AND ANALYSIS:

Whether [***] has the right to make entry as the importer of record when GBC retains ownership and risk of loss of the goods until they have been released from CBP’s custody.

Generally, a party qualifying as an importer of record may make entry and file entry documents, either in person or through an agent with written authorization. See 19 U.S.C. §1484(a)(1). Parties qualified to be an importer of record are owners or purchasers of merchandise, or when appropriately designated by the owner, purchaser, or consignee of the merchandise, a licensed customs broker. See 19 U.S.C. §1484(a)(2)(B). The terms “owner” and “purchaser” are defined in Customs Directive 3530-002A, titled “Right to Make Entry” and dated June 27, 2001. According to the directive:

The terms “owner” and “purchaser” include any party with a financial interest in a transaction, including, but not limited to, the actual owner of the goods, the actual purchaser of the goods, a buying or selling agent, a person or firm who imports on consignment, a person or firm who imports under loan or lease, a person or firm who imports for exhibition at a trade fair, a person or firm who imports goods for repair or alteration or further fabrication, etc. Any such owner or purchaser may make entry on his own behalf or may designate a licensed Customs broker to make entry on his behalf or may be shown as the importer of record on the CF 7501. The terms “owner” or “purchaser” would not include a “nominal consignee” who effectively possesses no other right, title, or interest in the goods except as he possessed under a bill of lading, air waybill, or other shipping document.

Section 5.3.1 of Customs Directive 3530-002A. To summarize, a party that qualifies as an importer of record on its own behalf must be the owner or purchaser of the imported merchandise. To constitute an owner or purchaser, a party must in turn demonstrate a sufficient financial interest in the transaction.

Although [***] does not acquire ownership rights to the merchandise at the time of entry, the company qualifies as a purchaser for purposes of acting as the importer of record because it has sufficient financial interests in the merchandise. In Headquarters Ruling Letter (“HRL”) 231255, dated March 28, 2006, CBP concluded that a key factor in determining financial interest is whether a party is in some significant way expecting or relying on a financial benefit from the imported merchandise. The focus of the inquiry is whether a reciprocal relationship between the party and the goods exists or whether a nexus between the financial welfare of the would-be importer’s business activities and the imported merchandise can be identified. Id. Moreover, in HRL H003868, dated March 22, 2007, we found that a customer who enters into a valid and enforceable sales agreement qualifies as the purchaser of imported merchandise even if title and ownership rights do not transfer until after importation. Of specific relevance, the sales agreement examined in HRL H003868 dictated that once an order was placed and the goods shipped to the United States, the customer no longer had a unilateral right of refusal at the time of delivery, unless the goods failed to conform to contractual specifications. Consequently, the purchase occurred prior to importation because the customer in HRL H003868 was obligated to make payment, without exception, unless non-conforming goods were delivered.

Like the customer in HRL H003868, [***] is contractually obligated to purchase merchandise owned by GBC at the time of importation. According to the terms of the parties’ Distribution Service Agreement, GBC retains full control over the supply of merchandise to [***]. [***], in turn, must purchase all merchandise supplied and delivered by GBC to its retail stores. Most importantly, the parties’ Addendum to the Distribution Service Agreement requires [***] to purchase, and GBC to sell, all merchandise imported into the United States for which [***] is the importer of record. Thus, [***] does not have a unilateral right of refusal when merchandise is delivered by GBC and is obligated to pay for such merchandise. Nor does GBC have the option of selling merchandise entered by [***] as importer of record to third parties. In light of [***] inability to refuse payment on merchandise delivered by GBC and GBC’s inability to sell merchandise entered by [***] as the importer of record to third parties, we conclude that [***] is the purchaser of all goods delivered to its retail stores by GBC.

We further note that in HRL H003868, CBP concluded that the customer’s status as a purchaser, which resulted from the lack of a unilateral right of refusal at the time of delivery, was not necessarily sufficient to allow the customer to make entry as the importer of record. Rather, the customer’s right to make entry was based on his or her inability to refuse payment on the merchandise in combination with additional financial interests in the transaction, including the payment of transportation costs, import duties and brokerage fees related to the importation of the goods. Id. Additional financial interest in the imported merchandise may be conveyed through services rendered by a company in exchange for a fee. In HRL H100056, dated November 15, 2010, CBP found that services rendered by a company in exchange for a fee, such as importing, handling, storage and inventory management, conferred a possessory right over the merchandise. This right, in addition to a consignment agreement and a variety of services indirectly related to the imported merchandise, was sufficient to allow the company to make entry as the importer of record. Id. Likewise, [***] has additional financial interests in the imported merchandise.

Similar to the importer of record in HRL H100056, [***] provides services related to the imported merchandise in exchange for a fee from GBC. Under the parties’ Services Agreement, [***] operates a distribution warehouse for GBC and handles logistics, materials management and physical distribution of the imported merchandise, including receipt, storage and shipment of the merchandise to retail stores. Additional services include inspection and quality assurance activities, managing inventory control, and sales/order management. Finally, under the Services Agreement, [***] provides input to GBC regarding the negotiation of freight agreements for transporting the imported merchandise to and from the distribution warehouses. In exchange for these services, GBC reimburses [***] for all service costs plus a percentage fee. These services confer a significant possessory interest in the imported merchandise to [***], which provides the company with additional financial interests in the imported merchandise. Consequently, we find that [***] status as the ultimate purchaser, together with the additional financial interest conveyed through the Services Agreement, affords [***] a sufficient financial interest in the goods for purposes of making entry as the importer of record. [***] may make entry as the importer of record for merchandise it is contractually obligated to purchase from GBC.

Whether the sales price from the unrelated foreign suppliers to GBC, can be used to appraise the merchandise on the basis of transaction value.

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; 19 U.S.C. §1401a). The preferred method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. 19 U.S.C. §1401a(b)(1).

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. First, there must be a bona fide sale between the buyer and seller in order for merchandise to be appraised using transaction value. 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)). “Sale” means a transfer of ownership from one to another for consideration. J.L. Wood v. United States, 505 F.2d 1400, 1406 (1974). 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, whether such payments are linked to specific importations of merchandise, the terms of sale, and whether the roles of the parties indicate that they are functioning as buyer and seller. See HRL 547197, dated August 22, 2000; HRL 546602, dated January 29, 1997; HRL 546206, dated April 11, 1996; and, HRL 545705, dated January 27, 1995.

In the instant case, we find that the submitted evidence establishes a bona fide sale between the foreign suppliers and GBC. GBC issues purchase orders to the foreign suppliers for the merchandise. The unrelated foreign suppliers issue invoices to GBC and GBC remits payment to the suppliers based on these invoices. In addition, title passes to GBC from the suppliers at the time the goods are placed with the carrier. The risk of loss transfers at that time as well.

[***] provided sample documentation. The import documentation and bills of lading also establish that there is a sale between the parties and that the parties are clearly acting as buyer and seller. We raised concerns about discrepancies in some of the sample documentation, including certain invoices and payment records. [***] acknowledged some errors in the documentation during the transition from the old CSO structure to the new GBC structure, and provided additional supporting documentation to clarify the structure of the transactions. Given the complexity of the new GBC global purchasing structure, we emphasize the importance of clear and correct documentation to enable CBP to link the entries from the initial purchase order all the way through to the payments from [***] to GBC. Only transactions properly and sufficiently documented can be appraised using the proposed method of transaction value.

Next, we must consider whether the sales from unrelated foreign suppliers to GBC are sales for exportation to the United States. Here, the purchase order issued to the unrelated foreign supplier sets out a specific quantity to be manufactured for, shipped to, and sold in the United States. Merchandise ordered for the U.S. market is always shipped to one of the [***]/GBC distribution centers in the United States. Goods destined for the United States are marked as such, and price tickets on the items are printed in U.S. dollars. The cartons in which the merchandise is shipped are marked to indicate the merchandise is destined for the United States. As a result, we find that the goods were clearly destined for the United States at the time of sale.

The evidence available indicates that the sales between unrelated foreign suppliers and GBC are bona fide sales for export to the United States. Therefore, the price between the unrelated foreign suppliers and GBC constitutes the price actually paid of payable for purposes of determining transaction value of the imported fashion apparel, footwear, accessories, and cosmetics.

Whether the discounted prices, agreed to prior to importation, provided conditionally by the foreign supplier to GBC, constitute the price actually paid or payable for the imported merchandise when all conditions are met.

As mentioned above, merchandise imported into the United States is appraised in accordance with section 402 of the TAA, 19 U.S.C. §1401a. The preferred method of appraisement is transaction value, which is defined as the “price actually paid or payable for the merchandise when sold for exportation to the United States,” plus certain enumerated additions.

Section 402(b)(4)(A) of the TAA defines the term “price actually paid or payable” as:

The total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C. §1401a(b)(4)(A).

The CBP Regulations further provide that the price actually paid or payable “will be considered without regard to its method of derivation. It may be the result of discounts, or negotiations, or may be arrived at by the application of a formula ….” 19 CFR §152.103(a)(1). Thus, where a seller discounts its price for certain merchandise to a buyer, and the discount is agreed to and effected prior to importation of the merchandise, the discounted price constitutes the “price actually paid or payable” for the merchandise. See HRL 547019, dated March 31, 2000; and HRL 545659, dated October 25, 1995.

CBP has consistently enumerated three criteria in determining whether a discount or price adjustment should be considered part of the transaction value of imported merchandise. See HRL W563462, dated October 11, 2006. First, the discount or price adjustment must be agreed on prior to the importation of the merchandise. See Allied International v. United States, 16 C.I.T. 545, 795 F. Supp. 449 (1992) (importer required to affirmatively show that there was a pre-importation agreement for the claimed discount). The second criterion is that the importer must be able to furnish CBP with sufficient documentary evidence to support the existence of the discount and establish that it was agreed to before the time of entry. See HRL 547144, dated November 20, 1998 (appraised value may reflect discount when supplier’s invoice indicated total price, 5% reduction, and the discounted price); HRL 545659, dated October 25, 1995 (unconditional discount factored into the value declared at the time of entry and reflected on the invoice presented to CBP may be taken into account in determining transaction value); and, HRL 546037, dated January 31, 1996 (discount disallowed when importer failed to submit evidence that it took advantage of 2% discount for payment within 45 days of invoice date).

The third criterion requires that the discount or price adjustment be unconditional, or if conditional, all the conditions must be met prior to importation. This criterion was discussed in HRL 545659, supra, in which CBP determined that a discount was unconditional when there were no specified purchasing obligations placed on the customer. In that case, CBP held that unconditional discounts, which were reflected on the invoices presented to CBP, could be factored into the declared value of the merchandise. CBP also concluded that, if a conditional discount is agreed to before entry at the time of order placement, and the discount is reflected on the entry documentation presented to CBP, the conditional discount may be used to determine transaction value.

As applied, we must initially consider whether the discount at issue is agreed upon prior to the importation of the merchandise. While there is no written agreement between the unrelated foreign supplier and GBC regarding the certain percentage early payment discount, [***] claims that the discount amount is part of the negotiating process with new suppliers. The unrelated foreign supplier offers GBC a certain percentage discount if payment is made within 20 days from the date of shipment. In addition, the discount is indicated on both the foreign supplier’s invoice and on GBC’s purchase order issued to the supplier.

We must next consider whether the documentary evidence provided to CBP is sufficient to support the existence of the discounts and to establish that they were agreed upon before the time of entry. Since [***] is not currently claiming the certain percentage discount at entry, there are no corresponding documents to examine. However, in HRL 545659, supra, CBP found that in the absence of a written agreement establishing an unconditional discount, entry documentation and invoices reflecting the discount were sufficient documentary evidence. Consequently, it is our opinion that evidence of the discount on the foreign supplier’s invoice and on GBC’s purchase order would support the existence of the discount and establish that the discount was agreed to before entry.

The third criterion requires that the discount or price adjustment be unconditional, or if conditional, all the conditions must be met prior to importation. See HRL 544791, dated March 11, 1992. [***] concedes that the discount is conditional on prompt receipt of payment, namely within 20 days from the date of shipment. Therefore, in order to use the discount to determine the price actually paid or payable for the imported merchandise, this condition must be met prior to importation. [***] states that it will only claim the discount if payment is made within the 20 days agreed upon and if it occurs prior to import.

Based on the information submitted, we find that the three criteria used to determine whether a discount or price adjustment should be considered part of the transaction value of imported merchandise have been satisfied in this case. Therefore, provided that the condition upon which the discount is based is met prior to importation, we find that the certain percentage early payment discount meets CBP’s established criteria for price adjustments and may be used to determine the price actually paid or payable for the imported merchandise.

HOLDING: Based on the evidence presented, we find that [***] may make entry as the importer of record for merchandise it is contractually obligated to purchase from GBC. Further, the sales between unrelated foreign suppliers and GBC constitute bona fide sales for exportation to the United States. As such, the sales price from the unrelated foreign suppliers to GBC can be used to appraise the merchandise using transaction value. We again emphasize the importance of clear and correct documentation linking the entries from the initial purchase order all the way through the payments from [***] to GBC. Only transactions properly and sufficiently documented can be appraised using the proposed method of transaction value.

In addition, the certain percentage early payment discount meets the established criteria for price adjustments and may be used to determine the price actually paid or payable for the imported fashion apparel, footwear, accessories, and cosmetics.

Please mail this decision to the internal advice applicant no later than sixty (60) days from the date of this letter. Sixty days from the date of this letter, the Office of International Trade: Regulations and Rulings will take steps to make the public version of 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,


Myles B. Harmon, Director
Commercial and Trade Facilitation Division