OT:RR:CTF:VS H275755 RMC
Mr. Mitchel Landau, Assistant Director
Apparel, Footwear & Textiles
Center of Excellence and Expertise
U.S. Customs & Border Protection
1100 Raymond Blvd.
Newark, NJ 07102
Re: Internal Advice Request; 19 U.S.C. § 1401a; First Sale; Multi-Tiered Transaction
Dear Mr. Landau:
This is in response to your correspondence requesting internal advice, as authorized by 19 C.F.R. § 177.11, on the proper method of appraisement of two entries of apparel imported from China by KHQ Investment LLC (“KHQ”). Three additional submissions dated October 5, 2016, April 25, 2017, and August 22, 2017, were provided by counsel for KHQ. A teleconference with counsel was also held on August 15, 2017.
FACTS:
Both entries at issue in this case (“Entry A” and “Entry B”) were subject to a multi-tier transaction involving four parties: (1) KHQ, a U.S. company and the importer of record; (2) Millwork Pte. Ltd. (“Millwork”), a Singapore entity related to KHQ that served as a middleman; (3) J.S.G. America Inc. (“J.S.G.”), an unrelated U.S. entity that served as a vendor; and (4) Yangzhou Zhongheng (“Yangzhou”), an unrelated Chinese garment manufacturer. KHQ ordered the merchandise from Millwork, specifying Yangzhou as the factory/supplier, which in turn ordered the merchandise from J.S.G. Yangzhou produced the goods in China, which were then shipped by a third-party licensed exporter from Shanghai to Los Angeles. KHQ served as the importer of record, declaring the price between J.S.G. and Millwork under the transaction value method of appraisement.
KHQ provided the following documentation, listed in chronological order, to support its claim that the merchandise should be appraised based on the sale between J.S.G. and Millwork:
Entry A
Purchase Order No. 4500156526, dated January 24, 2014, from KHQ to Millwork. J.S.G. is listed as the vendor, Yangzhou is listed as the supplier, and the shipping terms are FOB. The “total” is $590,695.20, with an additional mark-up of $41,348.66, with a “grand total” of $632,043.86.
Purchase Contract No. 14-CKHQI-0104-1, dated January 24, 2014, issued by Millwork, and Purchase Order 4500156526. The purchase contract lists the seller as J.S.G. and the buyer as KHQ and states that “MILLWORK PTE. LTD. Have this day purchased from the undermentioned Seller, per terms and conditions stated on the face and overleaf hereof.” The total value of the order is $590,695.20 with shipping terms “FOB-CNSHA-Sea-Shanghai.”
Document Entitled “Purchase Contract Terms and Conditions” which states that “for the purpose of these terms and conditions, the word ‘Buyer’ shall mean MILLWORK PTE LTD. The work ‘Seller’ shall mean the company, firm or person whose name and address appear under the heading ‘manufacturer’ overleaf.’” It also states that “[r]isk of loss or damage to any of the Goods and title thereto shall pass to Buyer when they shall have been delivered effectively to and accepted by Buyer in Singapore except that title to the Goods shall pass to Buyer upon payment of the price if made prior to delivery.”
Invoice No. WW20ZB903407-3, dated June 15, 2014, between J.S.G. and Millwork. The invoice lists the shipping terms as “FOB-CNSHA-Sea-Shanghai,” the Port of Discharge as Los Angeles, and the consignee name as KHQ. The total amount is listed as $590,695.00 for 16,560 pieces.
Invoice for Order No. 4500156526, dated June 17, 2014, from Millwork. The invoice states: “Goods Consigned for Account and Risk of Messrs. KHQ.” The invoice also lists the manufacturer as Yangzhou, the condition of sales as “FOB CNSHA-Sea-Shanghai,” and the total amount as $602,043.86.
J.S.G. America Packing List, dated June 20, 2014, for invoice number WW20ZB903407-3.
Arrival Notice / Invoice from De Well Container Shipping Corp., dated June 23, 2014, listing the consignee as KHQ.
Invoice No. JFK425609700, dated June 26, 2014, from LF Logistics, corresponding to Bill of Lading (“BoL”) No. 14245377069. The invoice lists KHQ as the consignee and notes that the merchandise arrived in Los Angeles on the vessel M/S Ever Lasting. The “Bill To” party is listed as KHQ and the “Shipper” is listed as Yangzhou Zhongheng (Hirepu) Garment.
CBP Form 7501 indicating an entry date of June 30, 2014, and listing KHQ as the importer of record. The total entered value of the merchandise is listed as $590,695.00.
Warehouse Receipt for Transaction No. R-20140702-21758, received on July 2, 2014, listing the customer reference as EMCU8039433-WW20ZB9034 for the account of KHQ.
Payment Record, dated July 17, 2014, between LF Credit Pte. Ltd., the financial arm of Millwork, and J.S.G. in the amount of $597,006.50.
BoL No. FGLV14245377069, undated, listing the port of discharge as Los Angeles and the consignee as KHQ.
Bank statement, undated, from KHQ showing a “Foreign Open Amount” of $632,043.86 with payment reference to CU1M/140243.
Entry B
Purchase Contract No. 13-CKHQI-0981-1, dated August 14, 2013, issued by Millwork. The purchase contract lists the seller as J.S.G., the buyer as KHQ, and a customer order number of 4500141455. The total value of the order is $832,508.57 with shipping terms “C&F Los Angeles.”
The “Purchase Contract Terms and Conditions” included with Entry A.
Purchase Contract No. 13-CKHQI-0984-1, dated August 14, 2013, issued by Millwork. The purchase contract lists the seller as J.S.G., the buyer as KHQ, and a customer order number of 4500141412. The total value of the order is $237,994.80 with shipping terms “C&F Los Angeles.”
The “Purchase Contract Terms and Conditions” included with Entry A.
Purchase Contract No. 13-CKHQI-1040-1, dated August 18, 2013, issued by Millwork. The purchase contract lists the seller as J.S.G., the buyer as KHQ, and a customer order number of 4500141710. The total value of the order is $16,704.72 with shipping terms “C&F Los Angeles.”
The “Purchase Contract Terms and Conditions” included with Entry A.
Purchase Order No. 4500141412, dated August 14, 2013, from KHQ to Millwork. J.S.G. is listed as the vendor, Yangzhou is listed as the supplier, and the shipping terms are FOB. The “total” is $242,851.84, with an additional mark-up of $16,999.63, with a “grand total” of $259,851.47.
Purchase Order No. 4500141455, dated August 14, 2013, from KHQ to Millwork. J.S.G. is listed as the vendor, Yangzhou is listed as the supplier, and the shipping terms are FOB. The “total” is $849,498.54, with an additional mark-up of $59,464.90, with a “grand total” of $908,963.44.
Purchase Order No. 4500141710, dated August 18, 2013, from KHQ to Millwork. J.S.G. is listed as the vendor, Yangzhou is listed as the supplier, and the shipping terms are FOB. The “total” is $17,045.63, with an additional mark-up of $1,193.19, with a “grand total” of $18,238.82.
Invoice No. WW20ZB903239-8, dated January 11, 2014, between J.S.G. and Millwork. The invoice lists the shipping terms as “CNF Los Angeles,” the Port of Discharge as Los Angeles, and the consignee name as KHQ. The total is listed as $1,109,396.01 “less 2% GRP” of $22,187.92, for a total amount of $1,087,208.09.
BoL No. EGLC142354802161, dated January 12, 2014, listing the export reference as WW20ZB903239-B. The port of discharge is Los Angeles and the consignee is KHQ.
Invoice for Order Nos. 4500141455, 4500141412, and 4500141710, dated January 14, 2014, from Millwork. The invoice states: “Goods Consigned for Account and Risk of Messrs. KHQ.” The invoice also lists the manufacturer as Yangzhou, the condition of sales as “C&F Cost & Freight,” and the total amount as $1,187,053.74.
Invoice No. JFK424623800, dated January 21, 2014, from LF Logistics, corresponding to BoL No. 142354802161. The invoice lists KHQ as the consignee and notes that the merchandise arrived in Los Angeles on the vessel M/S Xin Ou Zhou. The “Bill To” party is listed as KHQ and the “Shipper” is listed as Yangzhou Zhongheng (Hirepu) Garment.
CBP Form 3461, dated January 23, 2014, listing KHQ as the importer of record and ultimate consignee.
CBP Form 7501 indicating an entry date of January 26, 2014, and listing KHQ as the importer of record. The total entered value of the merchandise is listed as $1,087,208.00.
Four warehouse receipts, indicating a date received of January 29, 2014, for KHQ’s XINU8126188-WW20ZB90323, BSIU9486781-WW20ZB90323, HMCU1025852-WW20ZB9032, and DRYU9305298-WW20ZB9032.
Payment Record, dated February 13, 2014, between LF Credit Pte. Ltd., the financial arm of Millwork, and J.S.G. in the amount of $399,202.12.
Payment Record, dated February 13, 2014, between LF Credit Pte. Ltd., the financial arm of Millwork, and J.S.G. in the amount of $800,000.00.
J.S.G. America Packing List, undated, for invoice number WW20ZB903239-6.
Bank statement, undated, from KHQ. A payment with an invoice date of January 11, 2014, is highlighted. The payment is in the amount of $1,187,053 with a remark “13CKHQ10981 4500141455.”
In a supplemental submission dated April 25, 2017, counsel for KHQ explained how payment was made between the parties. An entity called LF Credit Pte, Ltd. (“LF Credit”), which is an entity related to both KHQ and Millwork, served as a “factor.” Counsel described the “factor” as an entity that a vendor will use when it wants payment earlier than the terms typically granted by Millwork, which generally provide for payment 60 days after the departure of the export carrier. According to counsel, the vendor transfers the right to payment to LF Credit against its invoice at a discount. LF Credit then collects the full invoice price from the buyer.
This office also received a supplemental memorandum from counsel for KHQ on October 5, 2016. In his supplemental memorandum, counsel argues that first-sale appraisement using the price paid by Millwork to J.S.G. is appropriate in this case. According to counsel, the documentation presented shows two separate sales (from J.S.G. to Millwork, and then from Millwork to KHQ), and “flash title” occurred when the goods were delivered to the exporting carrier. Additionally, counsel states that the Millwork invoices show a substantial markup over the price paid to J.S.G., which provides further evidence of a sale. Furthermore, according to counsel, despite the fact that KHQ’s purchase orders identify J.S.G. as the vendor and Yangzhou as the supplier, Millwork collaborates with KHQ in determining the source of the goods to be ordered. Accordingly, counsel states that Millwork has a role in factory and/or vendor selection.
In his submission, counsel also clarified the shipping terms applicable to each sale. As indicated in the documentation submitted for Entry A, the shipping terms for each sale were FOB. The documentation for Entry B, however, is inconsistent as to the shipping terms. The purchase order from KHQ to Millwork for Entry B states that the shipping terms were FOB, while all other documents list the shipping terms as C&F. According to counsel, “the apparent discrepancy is a systems issue” and the correct shipping term for each transaction in Entry B was C&F, as evidenced by the fact that freight was prepaid.
ISSUE:
Whether the transaction between Millwork, a middleman related to the importer, and J.S.G, an unrelated vendor, may be used to determine the transaction value of the imported merchandise.
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.
In this case, the “Purchase Contract Terms and Conditions” document provided for both Entry A and B states that “[r]isk of loss or damage to any of the Goods and title thereto shall pass to Buyer when they shall have been delivered effectively to and accepted by Buyer in Singapore except that title to the Goods shall pass to Buyer upon payment of the price if made prior to delivery.” There is no evidence, however, that the goods were delivered to Singapore or that payment of the price was made before delivery. Counsel argues that the language in the “Purchase Contract Terms and Conditions” document should not be read to require that the goods be delivered to Singapore. Instead, according to counsel, the reference to Singapore is merely a reference to Millwork’s headquarters and the purchase orders are clear that the delivery point is not Singapore.
Because the “Purchase Contract Terms and Conditions” do not accurately reflect the transactions at issue, they are not instructive as to when risk of loss and title transfer in this case.
In the absence of written instruction to the contrary, however, it is commonly accepted that title passes simultaneously with the assumption of risk of loss, as indicated by the terms of sale. The terms of sale between all the parties are identical for both Entry A and Entry B. All commercial documents for Entry A indicate that the terms of sale are FOB. For Entry B, there is a discrepancy in the terms of sale: the purchase orders from KHQ to Millwork state that the purchase terms are FOB, while the purchase contracts issued by Millwork and the invoice from Millwork show C&F terms. As noted above, however, counsel stated in his supplemental submission that “the apparent discrepancy is a systems issue” and the correct shipping term for each transaction in Entry B was C&F, as evidenced by the fact that freight was prepaid. Accordingly, counsel for KHQ argues that simultaneous or “flash” transfer of title occurred from J.S.G. to Millwork to KHQ in Entry A and Entry B when the goods were laden on the outgoing carrier. See Incoterms 2010, International Chamber of Commerce, 87 (2010).
As explained in HQ H016966, dated December 17, 2007, “[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.” By itself, simultaneous or flash transfer of title does not equate to failure to show a bona fide sale. However, it may cause CBP to more closely scrutinize a transaction.
CBP has previously held that a similar multi-tiered transaction involving Millwork and a related U.S. buyer was not a bona fide sale conducted at arm’s length. In HQ H266540, dated September 8, 2016, as is the case here, a U.S. company ordered merchandise from Millwork, a related party. Millwork then ordered the merchandise from a Malaysian seller, which contracted with a Chinese firm to supply the goods. Millwork also named a Hong Kong entity as the buying agent. Like the transactions in this case, each transaction in HQ H266540 involved the same shipping terms (i.e., all purchase orders and invoices between the parties listed shipping terms as FOB Ningbo, China) and the documents were silent as to the passage of title and the risk of loss between the foreign seller and Millwork. Therefore, Millwork and the related U.S. buyer took title at the same time. Although we noted that flash title does not necessarily preclude a finding of more than one viable sale, we emphasized that the simultaneous transfer of title from the parties indicated a possible existence of an agency relationship. Accordingly, we held that first-sale appraisement was inappropriate.
Counsel for KHQ argues that this case is distinguishable from HQ H266540 in several ways. First, counsel notes that that HQ H266540 involved five parties—including a buyer agent—whereas this case involves only four parties and no buying agent. Counsel also states that the primary reason that CBP rejected the first sale claim in HQ H266540 was “purchase order anomalies” that do not exist here. Next, counsel notes that an additional reason for CBP’s rejection of the first sale claim in HQ H266540 was the discrepancies between the Purchase Memorandum and the POs between the buying agent and the second middleman. According to counsel, these discrepancies are absent here because there is no buying agent involved in the transactions. Furthermore, counsel states that in our unpublished response to the request for reconsideration of HQ H266540, which we upheld, CBP concluded that no contract existed between the parties involved in the first sale claim. Here, counsel argues that this case involves an enforceable contract between the parties to the first sale claim. Finally, as CBP issues decisions based on the particular facts and circumstances of each case, counsel urges a different result in this case.
Although we agree that CBP decisions are issued according to the facts and circumstances of each case, the facts and circumstances here do not compel a result different from the one reached in HQ H266540. The additional party to the transaction in HQ H266540 (the buying agent) does not significantly change the overall structure of the transaction, which in both cases involves Millwork as a middleman, a related U.S. buyer, and flash transfer of title. Furthermore, while the same documentary anomalies are not present here, this case has its own anomalies that raise doubt about the validity of the first sale claim. For example, the Purchase Contract Terms and Conditions state that “[r]isk of loss or damage to any of the Goods and title thereto shall pass to Buyer when they shall have been delivered effectively to and accepted by Buyer in Singapore . . .” and the goods in this case were never delivered to Singapore. The Purchase Contract Terms and Conditions also list the buyer as Millwork and state that “the word ‘Seller’ shall mean the company . . . under the heading ‘manufacturer’ overleaf,” while the purchase contract itself lists the buyer as KHQ and the seller as JSG. The LF Freight invoices add more inconsistencies. As counsel states that Entry A involved a FOB contract, the “bill to” party on the freight invoice should be the buyer. However, as mentioned above, it is unclear from the purchase contract and the Purchase Contract Terms and Conditions whether Millwork or KHQ was the buyer, and, according to the LF Freight invoice, KHQ paid for the freight. Moreover, in Entry B, which counsel claims is a C&F contract, the “bill to” party is still listed as KHQ even though, in a C&F contract, the seller would be expected to pay the shipping charges. As for the lack of contract between the parties in HQ H266540, we agree that this issue does not arise here. The lack of contract in HQ H266540, however, was just one factor in our decision in that case and thus the presence of a valid, enforceable contract is not dispositive here.
On balance, we find that there are more similarities than differences between this case and HQ H266540 and that many of the factors that caused us to reject first-sale appraisement in HQ H266540 are also present here. As in HQ H266540, there is insufficient evidence to show that Millwork is an independent buyer. For example, KHQ has not submitted any documents showing that Millwork could sell the merchandise to any other party or at another price, or that Millwork initiated transactions on its own behalf. See HQ H097616, dated November 21, 2011; and HQ H016966, dated December 17, 2007. Furthermore, KHQ’s purchase orders identify the vendor and the factory, which suggests that Millwork could not choose the source of the goods. Although counsel states that Millwork collaborates with KHQ in determining the source of the goods to be ordered, no evidence of collaboration was provided. Accordingly, as in HQ H266540, the circumstances of this case indicate a possible agency relationship between the U.S. buyer and Millwork.
Counsel cites HQ W563605, dated November 19, 2009, for the proposition that a mark-up between the middleman and the buyer is evidence of a sale. As we noted in the previous internal advice concerning Millwork, however, HQ W563605 involved unrelated parties and lacked an additional sale, which adds to the complexity of the transaction. See HQ H266540 (“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.”). Like HQ H266540, this case also involves an additional sale after the merchandise is invoiced to Millwork by the foreign seller, i.e., the sale between Millwork and the importer, KHQ. Therefore, both HQ H266540 and this case are distinguishable from HQ W563605.
Based on these facts, and consistent with HQ H266540, in which we held that a similar multi-tiered transaction involving Millwork and a related U.S. buyer was not a bona fide sale conducted at arm’s length, KHQ has not met the Nissho Iwai Nissho Iwai standard to use the “first sale” price between the supplier and the foreign seller in this case. Accordingly, the imported merchandise must be appraised under transaction value based on the price actually paid or payable by KHQ.
HOLDING:
The information provided does not indicate that the sales between J.S.G. and Millwork are bona fide sales for exportation to the United States. The merchandise must be appraised under transaction value based on the price actually paid or payable by KHQ.
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 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 and Special Programs Branch