OT:RR:CTF:VS H095240 CMR
Port Director
Customs and Border Protection
JFK International Airport
Building 77
Jamaica, New York 11430
Attention: Chief, Trade Operations Branch D
RE: Application for Further Review Protest 4701-08-100654; First Sale Valuation;
Discounts
Dear Port Director:
This is in response to your memorandum, dated February 3, 2010, forwarding the Application for Further Review (AFR) of Protest 4701-08-100654 to this office for our review. The protest was filed on September 17, 2008, by Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP, on behalf of their client, against your liquidation of an entry of merchandise. The protest challenges the appraised value used for purposes of liquidation and assessment of duties and fees. The protest was timely filed and the AFR was properly approved. This protest has been designated as a lead protest and at least 12 other protests are pending under this protest. However, this decision is limited in application to only those suspended protests where the merchandise is shipped directly from Asia to the United States and the price between the parent and supplier is claimed as the basis of appraisement. The decision herein is not to be used as a basis for deciding to allow or deny suspended protests where first sale is claimed on shipments from Europe after consolidation of the merchandise, or the transfer price between the parent and the U.S. subsidiary is claimed as the basis of appraisement, as we are not addressing either of those issues herein.
FACTS:
A non-resident importer, the parent company, sells brand merchandise to its related U.S. subsidiary who sells to unrelated retail stores for sale to customers. The parent designs the merchandise and contracts with unrelated parties for the manufacture of the merchandise. The parent provides assists to the manufacturers in the form of design work, fabric, trim, accessories, packaging, labels and hangtags. The merchandise is sold to the U.S. subsidiary under trademarked labels owned by the parent. The parent does not charge the subsidiary for use of the trademark name.
According to counsel, the U.S. subsidiary receives orders for merchandise and then places orders with its foreign parent, i.e., the non-resident importer. The parent then places orders with manufacturers to produce the merchandise. In the case of merchandise ordered by the parent from a producer in Asia specifically for the U.S. subsidiary, the merchandise is almost always shipped directly from the manufacturer to the U.S. subsidiary. If merchandise specifically ordered for the U.S. subsidiary is produced in Europe, it is consolidated in the parent’s European warehouse for shipment to its U.S. subsidiary. However, while the parent does not place U.S. special order merchandise produced by European or Asian manufacturers in its general inventory warehouse, the U.S. subsidiary may place orders which are filled from the general inventory.
The non-resident importer/parent asserts a first sale basis of appraisement for all merchandise entered, except merchandise filled from its general inventory warehouse. For the latter merchandise, the parent asserts transaction value based upon the related parties’ transfer price which is based upon the parent’s list price less a 35% discount for the related party U.S. subsidiary. This is described by counsel as the “resale price minus” pricing formula methodology. Counsel asserts this methodology “is consistent with IRS transfer pricing rules and results in an arm’s length price for customs valuation purposes. The methodology is commonly used in the apparel industry.”
As the entry at issue in Protest 4701-08-100654 consists of 9 line items (36 cartons) stated to all be manufactured by the same unrelated manufacturer in China and the goods were shipped directly from China to John Fitzgerald Kennedy (JFK) Airport, the non-resident importer/parent asserts that “first sale” transaction value is the proper basis of appraisement. For this entry, the U.S. subsidiary states it issued an electronic order to its parent on August 23, 2006 for the merchandise at issue, along with other goods. The non-resident importer/parent purchased the merchandise from a Hong Kong company which had the merchandise manufactured by a subcontractor manufacturer in China.
The non-resident importer/parent is claiming the sale between itself and the Hong Kong company as the “first sale” for appraisement purposes. If Customs and Border Protection (CBP) rejects the non-resident importer/parent’s first sale claim, in the alternative it is claimed that the transfer price between the parent and the U.S. subsidiary based on the resale minus method should be accepted for appraisement of the goods under transaction value.
Among the documents submitted to CBP to substantiate the first sale claim are:
A DHL Air Waybill showing 36 cartons shipped by air freight from the Hong Kong supplier to New York. The Air Waybill number matches the number on the entry summary for the protested entry.
The Hong Kong supplier’s invoice to the parent covering all 36 cartons of merchandise. The invoice indicates that the merchandise is for account and risk of the parent with the consignee designated as the U.S. subsidiary. It further indicates “FCA HONG KONG SHIPMENT BY AIR” and “PAYMENT TERM: T/T AFTER SHIPMENT 40 DAYS.”
A portion of the parent’s order to the Hong Kong supplier for one style of garment that was part of the subject entry. The purchase order identifies U.S. destined merchandise by use of the number 1095 under the variant column.
A copy of the agreement between the parent and Hong Kong supplier covering conditions of delivery, payment, packing and invoicing related to the sale of merchandise. The agreement is governed by the laws of Germany.
An allocation of assist costs related to design work and materials and accessories assists.
Proof of payment from the parent to the supplier.
ISSUE:
Whether the entry at issue may be appraised based upon the transaction value between the unrelated Chinese supplier and the non-resident importer/parent company as a sale for export to the U.S.
If “first sale” is not an acceptable method of appraisement, whether the transfer price between the parent and U.S. subsidiary based upon the “resale price minus” methodology is acceptable.
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; 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 statutory additions. 19 U.S.C. § 1401a(b)(1).
In Nissho Iwai American Corp. v. United States, 16 C.I.T. 86, 786 F. Supp. 1002, reversed in part, 982 F. 2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit reviewed the standard 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. The case involved a foreign manufacturer, a middleman, and a United States purchaser. The court held that the price paid by the middleman/importer to the manufacturer was the proper basis for transaction value. The court further stated 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. See also, Synergy Sport International, Ltd. v. United States, 17 C.I.T. 18 (1993).
In accordance with the Nissho Iwai decision and our own precedent, we presume that transaction value is based on the price paid by the importer. In further keeping with the court’s holding, we note that an importer may request appraisement based on the price paid by the middleman to the foreign manufacturer in situations where the middleman is not the importer. However, it is the importer’s responsibility to show that the "first sale" price is acceptable under the standard set forth in Nissho Iwai. That is, the importer must present sufficient evidence that the alleged sale was a bona fide "arm’s length sale," and that it was "a sale for export to the United States" within the meaning of 19 U.S.C. § 1401a.
In Treasury Decision (T.D.) 96-87, dated January 2, 1997, the Customs Service (now Customs and Border Protection (CBP)) advised that the importer must provide a description of the roles of the parties involved and must supply relevant documentation addressing each transaction that was involved in the exportation of the merchandise to the United States. The documents may include, but are not limited to purchase orders, invoices, proof of payments, contracts, and any additional documents (e.g. correspon- dence) that establishes how the parties deal with one another. The objective is to provide CBP with "a complete paper trail of the imported merchandise showing the structure of the entire transaction." T.D. 96-87 further provides that the importer must also inform CBP of any statutory additions and their amounts. If unable to do so, the sale between the middleman and the manufacturer cannot form the basis of transaction value.
In this case, the sale claimed as the sale for export to the U.S. occurs between the parent, who acts as the non-resident importer of record and an unrelated supplier (not the actual manufacturer) in Hong Kong. As the supplier and parent are unrelated, the sale is presumed to be at arm’s length. Further, in regard to the agreement
between the parent and the supplier, the agreement is governed by German law. We note, the agreement does not address the transfer of title to the goods.
In order for the sale between the unrelated Hong Kong supplier and the parent company to qualify as a sale for appraisement purposes, it must be an arm’s length, bona fide sale of goods clearly destined for the United States. Reviewing the documentation submitted to support this sale as the sale for export for appraisement purposes, we find there is sufficient evidence to support the claim of the parent.
Counsel submitted a copy of the agreement between the parent and the supplier which reflects a relationship between the parties as buyer and seller. The agreement addresses, among other things, the issue of invoicing, i.e., directing that invoices be issued to the parent, that the supplier indicate his “payment terms, vat-no., currency and bank details,” and specifying how to invoice merchandise destined for the U.S. (must be issued separately and must have remark “AW 95” or “USA AW 95”). Counsel indicated that the remark “1095” was also used to designate merchandise destined for the U.S. The partial purchase order submitted clearly has the remark “1095” next to a certain style number, whereas the same style number is listed with a different remark indicating a different destination for those ordered goods.
Although the parent’s purchase order to the Hong Kong supplier indicates “ex-Factory 15.12.2006,” the terms of delivery on the supplier’s invoice to the parent are “FCA Hong Kong shipment by air.” The INCOTERM FCA stands for Free Carrier and means that the seller delivers the goods, cleared for export, to the carrier nominated by the buyer at the named place.” See Incoterms 2000, ICC Official Rules for the interpretation of Trade Terms, at page 33. Risk of loss transfers from the seller to the buyer at delivery of the goods. INCOTERMS do not address transfer of title. See St. Paul Guardian Ins. Co. v. Neuromed Med. Sys. & Support, GmbH, No. 00 Civ. 9344, 2002 U.S. Dist. LEXIS 5096, 2002 WL 465312, at *4 (S.D.N.Y. Mar. 26, 2002). The agreement between the parent and the supplier does not indicate when title for the merchandise transfers from the supplier to the parent. However, the agreement does indicate that German law is to be applied. “German law . . . recognizes passage of risk and transfer of title as two independent legal acts. . . . In fact, it is standard ‘practice under German law to agree that the transfer of title will only occur upon payment of the entire purchase price, well after the date of passing of risk and after receipt of the goods by the buyer.” (citations omitted) St. Paul Guardian Ins. Co. v. Neuromed Med. Sys. & Support, GmbH, at *14. Therefore, the merchandise remained the property of the Hong Kong supplier until payment by the parent which occurred on February 2, 2007, after entry of the merchandise into the U.S.
Based on the facts of this entry, that is, the evidence of the sale between the parent and the supplier supported by the agreement between the parties, the purchase orders and invoices, the proof of payment, the direct shipment from the supplier to New York, and the fact that at the time of entry title to the goods was held by the Hong Kong supplier, we agree with the protestant that the sale between the parent company and the supplier is the sale for export to the U.S. for purposes of appraisement.
As we have determined that the sale between the parent and the supplier is a bona fide sale of goods for export to the U.S., there is no need for us to address the question of the acceptability of the transfer price between the parent and its subsidiary.
HOLDING:
Protest 4701-08-100654 should be approved. Although designated a lead protest, this decision is limited in application to only those suspended protests where the facts are identical or substantially similar to the facts of this transaction. This decision is not to be used as a basis for deciding to allow or deny suspended protests where the basis of appraisement is claimed to be a first sale value on shipments from Europe after consolidation of the merchandise or the transfer price between the parent and the U.S. subsidiary, as we are not addressing either of those issues herein.
In accordance with the Protest/Petition Processing Handbook (CIS HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with this decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision, Regulations and Rulings of the Office of International Trade will make the 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