OT:RR:CTF:VS H266540 GaK
Port Director
U.S. Customs & Border Protection
Office of Field Operations
1000 Second Ave. Suite 2100
Seattle, WA 98104
RE: Internal Advice Request; 19 U.S.C. § 1401a; First Sale; Multi-tiered transaction
Dear Port Director:
This is in response to your e-mail inquiry dated May 21, 2015, in which you request internal advice concerning the appropriate method of appraisement of certain apparel imported by American Marketing Enterprises, Inc. (“AME”). Counsel on behalf of AME responded to certain questions on March 29, 2016. At issue is whether the apparel may be appraised based on the transaction between the supplier located in China and the foreign seller. At the request of counsel, our office had a conference call on July 28, 2016, and we also considered the supplemental memorandum submitted by counsel on August 25, 2016.
FACTS:
AME is a U.S. company and imported the merchandise on September 20, 2014, appraising the value based on the transaction between the supplier and the foreign seller. AME ordered the merchandise from Millwork Pte Ltd. (“Millwork”), a related party. Millwork ordered the merchandise from Sheen Bright (Shanghai) Limited (“foreign seller”), located in Malaysia, naming LF Centennial Pte Ltd. (“buying agent”), located in Hong Kong, a related party, as its buying agent. The foreign seller then ordered the merchandise from Welfull Group Co. Ltd. (“supplier”).
AME submitted the following documents to support its claim:
Purchase order (“PO”) 4500161391 issued by AME to Millwork and the administrative office of the buying agent, dated March 19, 2014, with the Incoterm® FOB China, and final destination as Seattle, WA. The PO includes the foreign seller as the vendor and Hangzhou Hua Er Mei Co., Ltd. (“factory”) as the factory.
PO 14-HAMEBFM-0028-1 issued by Millwork, listing its buying agent, to the foreign seller, dated March 19, 2014, with the Incoterm® FOB China, and final destination as Seattle, WA. The unit price is the same as the PO issued by AME to Millwork; however, a 3% trade discount is applied.
PO 4500161391 issued by the foreign seller to the supplier, and listing the factory, dated July 16, 2014, with the Incoterm® FOB China, and final destination as Seattle, WA. The unit price is 36% lower than the price in POs 4500161391 (issued by AME) and 14-HAMEBFM-0028-1.
Certification from the foreign seller that the merchandise sold to AME was not manufactured by convict labor, forced labor, or indentured labor. It references invoice SBSH282/14.
Textile Declaration by the factory, dated September 1, 2014, stating the country of origin of the merchandise in PO 4500161391 is China.
Certificates of compliance with the Consumer Product Safety Improvement Act. A separate certificate is included for each style of merchandise, and references PO 4500161391.
First Sale Vendor Coversheet for invoice F0214D129, dated September 1, 2014.
Invoice F0214D129 issued by the factory, dated September 1, 2014, merchandise destined to Seattle, WA. The invoice is billed to the foreign seller, consigned to AME, and Incoterm® FOB Port Ningbo, China. The invoice does not reference the supplier.
Invoice F0214D129 issued by the supplier, dated September 1, 2014, billed to the foreign seller, consigned to AME, and Incoterm® FOB Port Ningbo, China.
Invoice SBSH282/14 issued by the foreign seller, dated September 1, 2014, billed to Millwork, consigned to AME, and Incoterm® FOB Ningbo.
Invoice 14-HAMEBFM-0028 issued by Millwork, dated September 4, 2014, billed to AME, with a 5% mark up, and Incoterm® FOB Ningbo.
Bank advice for payment from AME to Millwork, for order 14-HAMEBFM-0028/4500161391.
Bank advice for payment from Millwork’s buying agent to the foreign seller, for order SBSH282/14.
Telegraphic transfer application for payment from the foreign seller to the supplier, for order F0214D129.
A packing list of merchandise, scheduled to load at the Ningbo Port in China on September 1, 2014, and destined to Seattle, WA. The merchandise is consigned to AME and references PO 4500161391.
Form of Certification issued by the foreign seller, dated October 14, 2014, to Millwork, stating that the merchandise was sold for exportation to the U.S. and that it is not related to any factory, or middleman, from which it purchases the merchandise for resale to Millwork.
Four pictures of a shipper display cartons.
CBP Form 7501 and 3461.
Sea waybill, dated September 1, 2014, which states that the merchandise is shipped by the factory from Ningbo, China for discharge in Seattle, WA. AME is listed as the consignee and the waybill references PO 4500161391.
Shipper display packaging layout.
ISSUE:
Whether the imported merchandise may be appraised based on the transaction between the supplier and the foreign seller.
LAW AND ANALYSIS:
Merchandise imported into the U.S. 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 U.S. The case involved a foreign manufacturer, a middleman, and a U.S. 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 U.S. 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 U.S. The documents may include, but are not limited to purchase orders, invoices, proof of payments, contracts, and any additional documents (e.g. correspondences) 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.
First, we must determine if indeed a “sale” occurred. 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)). No single factor is decisive in determining whether a bona fide sale has occurred. See Headquarters Ruling Letter (“HQ”) 548239, dated June 5, 2003. 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. Payment must be made for the imported merchandise at issue; a general transfer of money from one corporate entity to another, which cannot be linked to a specific import transaction, does not demonstrate passage of consideration. See HQ 545705, dated January 27, 1995. 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 HQ H005222, dated June 13, 2007. Finally, pursuant to the CBP's Informed Compliance Publication, entitled “Bona Fide Sales and Sales for Exportation,” CBP will consider whether the buyer provides or could provide instructions to the seller, is free to sell the transferred item at any price he or she desires, selects 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.
A determination of when title and risk of loss pass from the seller to the buyer in a particular transaction depends on whether the applicable contract is a “shipment” or “destination” contract. FOB point of shipment contracts and all CIF and C&F contracts are “shipment” contracts, while FOB place of destination contracts are “destination” contracts. Unless otherwise agreed by the parties, title and risk of loss pass from the seller to the buyer in “shipment” contracts when the merchandise is delivered to the carrier for shipment, and in “destination” contracts when the merchandise is delivered to the named destination. The question of whether the proposed transactions involved are shipment contracts or destination contracts depends on the shipment terms specified in the documentation.
Simultaneous or flash transfer of title, where the parties obtain title at virtually the same moment, as evidenced by parties having the same terms of sale, may cause CBP to more closely scrutinize a transaction. As noted above, the terms of sale on all POs and invoices between the parties are FOB Ningbo, China and delivery to the U.S. AME states that this is an example of “flash title” and that the simultaneous passage of title does not negate its first sale claim. AME cites to HQ W563605, dated November 19, 2009, and states that the merchandise exported to the U.S. under the above transactions should be appraised at entry based on the price between the supplier and the foreign seller. By itself, flash transfer of title does not equate to a failure to show a bona fide sale, 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. AME states that the facts are remarkably similar to HQ W563605 and that AME has provided the same documents as the importer in HQ W563605, with the exception of the sales confirmations. In HQ W563605, all the parties were unrelated, and a review of all the transaction documents supported the finding of a bona fide sale, even though there was a simultaneous transfer of title and a lack of a profit on the alleged sale. A significant difference between this case and HQ W563605 is that AME and Millwork are related, and there is an additional sale to AME after the merchandise is invoiced to Millwork by the foreign seller.
In HQ H016966, dated December 17, 2007, CBP stated that “[w]henever 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 HQ H016966, CBP held that the use of identical terms of sale suggested that there was only one sale. In addition, there was evidence suggesting that the parties were not acting as independent buyer and seller. The Supply Agreement between the parties allowed the middleman to not pay for the merchandise if the middleman was unable to receive payment from the U.S. customers, and the manufacturer was to be responsible for paying for disposal of the merchandise in cases of excess inventory. Based on that and other factors in HQ H016966, CBP concluded that there was not a bona fide sale between the manufacturer and the middleman.
In HQ 546192, dated February 23, 1996, CBP also considered whether the middleman 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. The terms of sale was CIF, which held the seller responsible for the costs, insurance and freight necessary to bring the merchandise to the named port of destination, but the risk of loss or damage to the merchandise was transferred from the seller to the middleman. However, the middleman stated that insurance was arranged by the U.S. purchaser, which meant that the risk of loss immediately transferred from the seller to the U.S. purchaser. CBP also noted that the goods were shipped directly from Sweden to the U.S., and the middleman neither held title nor bore the risk of loss of the merchandise. CBP concluded that the only sale was between the U.S. purchaser and the foreign seller and the middleman was acting as the agent for the U.S. purchaser.
We have examined the documents submitted by AME and the terms of sale are FOB Ningbo, China in all of the POs and invoices. There are multiple simultaneous passages of title: supplier to the foreign seller, to Millwork, and to AME. In a FOB port of export term of sale, the risk of loss transfers from the seller to the buyer upon lading on the outgoing carrier. See Incoterms 2010, International Chamber of Commerce, 87 (2010). In the absence of a written instruction to the contrary, it is commonly accepted that title passes simultaneously with the assumption of risk of loss. Based on the documents submitted, it appears that the foreign seller, Millwork, and AME take title at the same time, i.e., FOB Ningbo, China. Although simultaneous transfer of title or “flash title” causes CBP to more closely scrutinize the transactions to confirm that there were, in fact, two, or three in this case, viable transactions, the simultaneous transfer of title does not by itself preclude a finding of more than one viable sale. See HQ 548526, dated January 5, 2005.
Nevertheless, in this instance, CBP cannot conclude that there is a bona fide sale for export between the foreign seller and Millwork, and between Millwork and AME. While AME provided documents for our review concerning the transactions at issue, such as POs, invoices, and proof of payment, they are insufficient to show a bona fide sale for export. The documents are silent as to the passage of title and the risk of loss between the foreign seller and Millwork, and between Millwork and AME. Thus, there is insufficient and incomplete documentation to show that there are bona fide sales between the foreign seller, Millwork, and AME. Therefore, we do not find that there is a bona fide sale for export between the foreign seller, Millwork, or AME, and the simultaneous transfer of title from the parties indicates a possible existence of an agency relationship. See HQ H225295, dated July 1, 2013.
Furthermore, the “flash title” raises questions as to the foreign seller, the factory, and Millwork’s roles in the transaction. The transaction was initiated by AME’s PO containing the garment specifications and naming both the foreign seller and the factory to be used to produce the merchandise. Therefore, we have evidence that neither Millwork nor the foreign seller looked for a buyer for the goods and also did not choose the factory to produce the goods. AME has not submitted any documents that show Millwork or the foreign seller could sell the merchandise to any other party or at another price, or that Millwork or the foreign seller has any dealings with any other buyers or initiated transactions on its own behalf. See HQ H097616, dated November 21, 2011; and HQ H016966, dated December 17, 2007. AME states that its transaction is remarkably similar to the circumstances in HQ W563605, however, we note that the relationship of the parties and the additional sale add to the complexity of the transaction in this case. The foreign seller was invoiced by the supplier and the factory on the same day, both for the same price, and neither the supplier’s nor the factory’s invoice references the other party. The roles of the parties in this transaction are not clearly identified and AME has not met the Nissho Iwai standard to use the “first sale” price between the supplier and the foreign seller.
Accordingly, there is insufficient support for the conclusion that the transactions between AME, Millwork, and the foreign seller are bona fide sales. The imported merchandise shall be appraised under transaction value based on the price actually paid or payable between AME and Millwork.
HOLDING:
The information presented in this case does not indicate that the sales between the foreign seller, Millwork, and AME constitute bona fide sales conducted at arm’s length at the time the foreign seller purchases, or contracts to purchase, the merchandise. Therefore, we find that the price paid between the supplier and the foreign seller may not serve as the basis of appraisement for the imported merchandise. The proper basis for appraisement is the price paid by AME to Millwork.
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.”
You are to mail this decision to the internal advice requester no later than 60 days from the date of the decision. At that time, 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,
Monika R. Brenner, Chief
Valuation & Special Programs Branch