• HQ H097616
• Nov 21, 2011

• Type : • HTSUS :
•  Related:   100488; 548239; 546192; H005222; W563605; H016966   

VAL-2 OT:RR:CTF:VS H097616 KSG

Port Director
Attn: Chief, Trade Operations Branch D
U.S. Customs and Border Protection
Building 77
JFK International Airport
Jamaica, NY 11430

RE: Application for Further Review of Protest 4601-09-100488; first sale; bona fide sale; flash title; trust receipt

Dear Director:

This is in response to an Application for Further Review of Protest 4601-09-100488 filed by counsel on behalf of Jordache Limited (“Jordache”) regarding the appraisement of certain imported men’s cotton woven shirts. At the request of counsel, a conference was held on this matter at our office on November 9, 2010. In addition, submissions dated November 23, 2010, and March 11, 2011, were considered.

FACTS:

This case involves certain men’s cotton woven shirts imported into the U.S. from Vietnam by Jordache. Jordache Enterprises is the parent corporation, with headquarters in New York City.

The Customs Form 6445A indicates that Epic Designers Ltd. (“Epic”) located in Bien Hoa City, Vietnam was the foreign manufacturer. Counsel states that Epic, the foreign manufacturer, is unrelated to Jordache. MG Macau Commercial Offshore Ltd. (“MG Macau”), the middleman, is a related party to Jordache. The imported goods were entered based on transaction value between the “first sale” of Epic, the foreign manufacturer, and MG Macau, the middleman.

The Office of Regulatory Audit conducted a Pre-Assessment Survey (“PAS”) on goods entered in calendar year 2004 and issued a report that concluded that the first sale claim for those goods was not substantiated because Jordache did not provide a complete paper trail of the transaction. The 2004 Report refers to an additional related-party, Iron Will Group, located in Hong Kong, that was involved with transactions concerning 2004 entries that the PAS examined and found to be a selling agent. The 2004 entries are not covered by the protest at issue. Rather this protest concerns 2007 entries.

Based upon the results of the PAS addressing the 2004 entries, CBP reviewed 11 unliquidated entries filed at the Port of Newark that are the subject of this protest. CBP concluded in its Technical Assist Audit Report, dated September 4, 2008, that the importer had not submitted sufficient documentation to establish that the 11 entries were properly entered using the “first sale.”

CBP issued a Request for Information dated July 14, 2009, pertaining to the 2007 entry that is the subject of this Protest, asking Jordache to submit a purchase order from Jordache to MG Macau, payment information from Jordache to MG Macau, and any information regarding a contract termination between Jordache and Iron Will. The Port rate advanced the 11 entries, reflecting an alleged 12 percent mark-up to the middleman and an 8 percent mark-up to Iron Will, an alleged selling agent based on the PAS findings in 2004 that Iron Will was a selling agent. The Port’s calculation of the 20 percent mark-up was based on information regarding MG Macau and Iron Will related to the 2004 entries.

The only information regarding Iron Will concerning this protest relates to the termination of the relationship between Iron Will and Jordache. Jordache submitted an e-mail dated December 31, 2005, addressed “Dear All” which states that beginning January 1, 2006, Iron Will would no longer be an agent for Jordache and that MG Macau’s mark-up would “drop from 12 percent to 10 percent.”

Counsel filed three protests to contest CBP’s rate advance of the 11 entries. Protest 4601-09-100488 is the lead protest.

CBP selected a particular style (23789H3Q 1JB, one of seven styles included in the entry), to review the paper trail. In response, the protestant submitted the following documents:

Jordache order sheets with sample specifications for Fall 2007, dated March 5, 2007, referencing Purchase order (“PO”) number 7549UN and the style number, and indicating purchase from MG Macau, with terms of sale FOB Vietnam, at a price of $[xxx] each, and specifying Epic Designers Ltd. in Vietnam as the manufacturer;

MG Macau’s contract with Epic dated May 16, 2007, referencing PO number 7549UN and showing a vendor mark-up with terms of sale FOB Vietnam;

commercial invoice #0034482 from Epic to MG Macau dated June 21, 2007, showing shipment to Jordache in the U.S. listing the appropriate PO number, terms of sale FOB Vietnam and the price of [xxx]/piece;

MG Macau invoice to Jordache dated July 5, 2007, showing PO number, sale of 2,394 shirts and the price of [xxx]/piece; constructed entry summary dated July 12, 2007, for entry xxxx4129;

letter on Hang Seng Bank letterhead addressed to MG Macau, dated July 24, 2007, showing payment to Epic in the amount of $USD [xxx];

letter on Hang Seng Bank letterhead dated July 24, 2007, addressed to MG Macau showing the terms of a loan in the amount of HKD [xxx]%, and a due date for the loan of October 22, 2007;

voucher payment report dated October 2, 2007, showing HSBC wire transfer of Jordache in the amount of USD$ [xxx] along with other invoices to MG Macau;

letter on Hang Seng Bank letterhead addressed to MG Macau, dated October 17, 2007, stating that the loan in the amount of HKD [xxx] plus interest was paid in full;

Certificate of Origin issued by the Vietnam Chamber of Commerce that names Epic Designer and Jordache, with no reference to MG Macau;

bill of lading showing that the goods were shipped from Vietnam to Jordache, in the U.S.

As noted above, the terms of sale on both invoices and the contract between MG Macau and Epic are FOB Vietnam; the protestant acknowledges that the terms of sale are the same between Epic and MG Macau and MG Macau and Jordache.

Counsel states that MG Macau used a trust receipt to finance the transaction between it and Epic. Counsel states that on July 24, 2007, the Hang Seng Bank advised MG Macau that it had paid Epic and on that date, issued a trust receipt whereby MG Macau was required to pay Hang Seng by October 22, 2007. The goods were imported into the United States on July 12, 2007. MG Macau repaid the loan on October 17, 2007. As stated above, Jordache paid MG Macau on October 2, 2007.

As noted above, CBP issued a CBP Form 29 dated July 25, 2008, stating that a rate advance had been taken. Counsel timely filed a Protest disputing the rate advance.

ISSUE:

Whether the imported men’s shirts may be appraised based upon the transaction between Epic, the foreign manufacturer, and MG Macau, the middleman. 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. 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 five enumerated statutory additions. 19 U.S.C. 1401a(b). 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.

In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the U.S. Court of Appeals for the Federal Circuit reviewed the standard for transaction value when there is more than one sale which may be considered as being a sale for exportation to the United States. The court ruled that for imported merchandise to be appraised on the basis of the manufacturer-middleman sale, the transaction must be conducted at arm’s length and the merchandise must be clearly destined for exportation to the United States at the time of the sale. The court reaffirmed the principle established in E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that the manufacturer’s price, rather than the middleman’s price, is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. In upholding the McAfee standard the court stated that in a three-tiered distribution system, “the manufacturer’s price constitutes a viable transaction value when the goods are clearly destined for export to the United States and when the manufacturer and the middleman deal with each other at arm’s length, in the absence of any non-market influences that affect the legitimacy of the sales price.”

As a general rule, CBP presumes that the price paid by the importer is the appropriate basis for determining transaction value, and the burden is on the importer to rebut this presumption. See Treasury Decision (“T.D.”) 96-87, 30 Cust. Bull. 52/1 (January 2, 1997). To rebut this presumption, the importer must, in accordance with the court’s standard in Nissho, provide evidence that at the time the middleman purchased, or contracted to purchase, the imported merchandise, the goods were clearly destined for exportation to the United States and that the manufacturer and middleman dealt with each other at arm’s length. This documentary evidence must satisfy the requirements set forth in Nissho Iwai. CBP stated in T.D. 96-87 that it is looking for “a complete paper trail of the imported merchandise showing the structure of the entire transaction.” In addition, to establish whether the transaction is “at arm’s length,” the ruling request must state the relationship, if any, of the parties.

In order for transaction value to be used as a method of appraisement, it is essential that there is a "sale" between the parties. In a multi-tiered transaction, there must be a bona fide sale between the middleman and the manufacturer in order to be able to use the first sale as a basis of appraisement. The issue presented in this case is whether the protestant has demonstrated that there is a bona fide sale between the middleman and the foreign manufacturer.

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 CCPA, 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). No single factor is decisive in determining whether a bona fide sale has occurred. See Headquarters Ruling letter (“HRL”) 548239, dated June 5, 2003. CBP stated in HRL 546192, dated February 23, 1996, that “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.”

CBP will consider such factors as to whether the purported buyer assumed the risk of loss for, and acquired title to, the imported merchandise. Evidence to establish that consideration has passed includes payment by check, bank transfer, or payment by any other commercially acceptable means. In addition, CBP may examine whether the purported buyer paid for the goods, and whether, in general, the roles of the parties and the circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HRL H005222, dated June 13, 2007.

Simultaneous or flash transfer of title, where the middleman and the buyer obtain title at virtually the same moment, as evidenced by both parties having the same terms of sale (ex. FOB Vietnam for both parties), may cause CBP to more closely scrutinize a transaction. By itself, flash transfer of title does not equate to a failure to show a bona fide sale, (for instance, see HRL W563605, dated November 19, 2009), but this factor along with who carries the risk of loss are considered by CBP in its determination of whether or not a bona fide sale has occurred. In HRL W563605, there was a simultaneous transfer of title and no lack of a profit on the alleged sale. All the parties were unrelated and a review of all the transaction documents supported the finding of a bona fide sale. A significant difference between this case and HRL W563605 is that MG Macau is related to Jordache.

In HRL H016966, dated December 17, 2007, CBP stated that “Whenever there is a purported series of sales, and the same terms of sale are used in both transactions, there is a concern that the middleman obtains risk of loss and title only momentarily or never at all, and thus has nothing to sell to the ultimate purchaser. In such situations the middleman may be a buying or selling agent rather than an independent buyer/seller and the sale will be said to occur between the party identified as the first seller and the ultimate U.S. purchaser.” In HRL H016966, CBP held that the use of identical terms of sale suggested that there was only one sale. Based on that and other factors in HRL H016966, CBP concluded that there was not a bona fide sale between the manufacturer and the middleman. In HRL 546192, dated February 23, 1996, CBP also considered whether the buyer provided or could provide instructions to the seller, was free to sell the transferred item at any price he or she desired, selected or could select its own downstream customers without consulting with the seller, and could order the imported merchandise and have it delivered for its own inventory.

We have examined the documents submitted by the protestant and do not find the protestant has shown that MG Macau acted as an independent buyer and seller. The transaction was initiated by a Jordache order sheet containing the garment’s specifications and naming both the middleman and the factory to be used to produce the garments. Therefore, we have evidence that MG Macau did not look for a buyer for the goods and also did not choose the factory to produce the goods. The protestant has not submitted any documents that show the middleman could sell the goods to any other party or at another price, or that the middleman has any dealings with any other buyers or initiated transactions on its own behalf.

The terms of sale between Epic and MG Macau and MG Macau to Jordache were both FOB Vietnam, as shown on the invoices. MG Macau never had physical possession of the goods, which were shipped directly from the factory to Jordache. Counsel argues that even though the middleman may not take physical possession of the merchandise before shipment of the merchandise to the importer or that the shipment terms suggest a “flash title” transfer, a finding of a bona fide sale is not negated because the importer has demonstrated that title had been transferred for consideration.

The middleman financed the purchase of the garments with a trust receipt. In the Dictionary of International Trade by Edward G. Hinkelman, 9th Ed., a trust receipt is defined in the following manner:

A declaration by a client to a bank that ownership in goods released by the bank are retained by the bank, and that the client has received the goods in trust only. Release of merchandise by a bank to a buyer in which the bank retains title to the merchandise. The buyer, who obtains the goods for manufacturing or sales purposes, is obligated to maintain the goods (or the proceeds from their sale) distinct from the remainder of his/her assets and to hold them ready for repossession by the bank. Trust receipts are used under letters of credit or collections so that the buyer may receive the goods before paying the issuing bank or collecting bank.

At www.investopedia.com, a trust receipt is described as a situation in which the buyer of merchandise is required to maintain the merchandise and any proceeds of the sale of the merchandise, for remittance to the bank. The buyer is permitted the use of the merchandise but the bank’s interest in the ownership of the merchandise is protected. The bank retains ownership of the merchandise but the buyer is allowed to hold the merchandise in trust for the bank. At the website BusinessDictionary.com, a trust receipt is defined as a method where a bank allows an importer to take delivery of the imported goods but retains title to them. This arrangement allows the importer to take delivery of and sell goods without making payment under a letter of credit.

Counsel states that the middleman had title to the goods before title transferred to Jordache but also states that pursuant to the trust receipt, the bank had title to the goods until it was paid (which was after Jordache received the goods). The protestant has not shown that the middleman ever had clear title to the goods. The foreign manufacturer was paid on July 24, 2007, by the Hang Seng bank after the date on which the goods were imported (July 12, 2007). The foreign manufacturer was paid after Jordache took possession of the goods. The bank was not paid until October 17, 2007, which was several months after the imported goods were entered by Jordache. The middleman, MG Macau, did not hold title to the goods prior to the sale to Jordache and never took delivery of the goods. Further, the Protestant did not show that the middleman ever had risk of loss.

In summary, this case involves a simultaneous transfer of title, a lack of clarity on the title of the middleman due to the trust receipt, and looking at the behavior of the parties, no showing that the middleman operates as an independent buyer and seller. Based upon the totality of the circumstances in this case, the protestant has not demonstrated that a bona fide sale occurred between MG Macau and Epic. The Protest is denied with respect to this issue.

The second question presented in this case is the proper appraisement of the imported goods.

Having concluded that there is no sale between MG Macau and Epic, it is clear that transaction value cannot be used as a basis of appraisement. When imported merchandise cannot be appraised on the basis of transaction value, it is appraised in accordance with the remaining methods of valuation, applied in sequential order. 19 U.S.C. 1401a(a)(1). The alternative bases of appraisement, in order of precedence, are: the transaction value of identical or similar merchandise (19 U.S.C. 1401a(c)); deductive value (19 U.S.C. 1401a(d)); computed value (19 U.S.C. 1401a(e)); and the “fallback” method (19 U.S.C. 1401a(f)).

The fallback method provides that merchandise should be appraised on the basis of a value derived from one of the prior methods reasonably adjusted to the extent necessary to arrive at a value. See 19 U.S.C. 1401a(f) and 19 CFR 152.107. However, it may not be appraised, inter alia, on the basis of the price in the domestic market of the country of export, the selling price in the U.S. of merchandise produced in the U.S., minimum values, or arbitrary or capricious values. 19 U.S.C. 1401a(f); 19 CFR 152.108.

Under section 500 of the Tariff Act of 1930, as amended, 19 U.S.C. 1500(a) which constitutes CBP’S general appraisement authority, the appraising officer may “fix the final appraisement of merchandise by ascertaining or estimating the value thereof, under section 1401a of this title, by all reasonable ways and means in his power, any statement of cost or costs of production in any invoice, affidavit, declaration, other document to the contrary notwithstanding…”

As the protestant has not submitted any information on the transaction value of identical or similar merchandise or on the computed or deductive value, the merchandise should be appraised using the Fallback method, using the price actually paid by Jordache to MG Macau as evidenced by the invoices and bank records showing payment from Jordache to MG Macau.

The Port issued a rate advance on the entries, adding 20 percent to the amount of the invoice between MG Macau and Epic Designers. Counsel states that the mark-up of MG Macau on the sale to Jordache was 10 percent of the purchase price from Epic, as reflected by the invoice from MG Macau to Jordache, and that payment made by Jordache was for $[xxx], which roughly represents 10 percent. Further, there is no evidence that either Jordache or MG Macau paid any commissions or made any other payments to any party over and above the payments reflected by the invoice paid by Jordache. Counsel submitted an e-mail dated December 31, 2005, stating that beginning January 1, 2006, Iron Will was no longer an agent for Jordache and that MG Macau’s mark-up would be 10 percent. Counsel also submitted evidence regarding Jordache’s payment for the goods, which matches the invoice amount. There is no evidence in the file that Iron Will had any role in the transaction subject to this protest. Further, there is no evidence that MG Macau received any monies beyond the amount shown in the invoices and bank payment from Jordache to it. Accordingly, we do not find a basis to appraise the merchandise using the 20 percent markup applied by the Port. Rather, we find that the price paid by Jordache to MG Macau should be the basis of appraisement under the fallback method applying the principles of transaction value.

Lastly, we note that the Port stated that there was some indication in a multiple country declaration that fabric had been imported into Vietnam. Without further documentation and an indication that such fabric was used to produce the imported articles in this case, we are unable to determine if there was a fabric assist. Further, there was no addition to the price paid or payable in the rate advance issued by CBP for a fabric assist. Accordingly, absent evidence to the contrary, we find no basis to add a fabric assist to the price paid by Jordache. HOLDING:

The protestant has not shown that there was a bona fide sale between the middleman and the foreign manufacturer in this case. The price paid by Jordache to MG Macau should be the basis of appraisement under transaction value for imported mens’ shirts. The protest should be denied and granted, in part.

In accordance with Sections IV and VI of the CBP Protest/Petition Processing Handbook (HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the 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 & Trade Facilitation Division