OT:RR:CTF:VS H278748 CMR
Sidney H. Kuflik, Esq.
Lamb & Lerch
233 Broadway
Suite 2702
New York, NY 10279
RE: Prospective ruling request; First Sale; Wearing Apparel
Dear Mr. Kuflik:
This is in response to your request of August 22, 2016, on behalf of your client, JV Apparel Corporation (hereinafter, JV Apparel), for a prospective ruling regarding the use of “first sale” transaction value appraisement for merchandise it imports into the United States. In addition, you submitted a supplemental submission, dated February 2, 2017, which responded to questions posed by this office. You have identified specific information for which you seek confidential treatment in your submission. As you have met the requirements of 19 C.F.R. § 177.2(b)(7), the information will be afforded confidential treatment and not referenced in this ruling.
FACTS:
Your client imports wearing apparel into the U.S. via multi-tiered transactions involving four parties – the manufacturer, middleman 2, middleman 1, and your client. You have provided documents from a pending transaction (attachments 1 – 5) and a completed transaction (attachments 6 – 12) to illustrate how your client’s multi-tiered transactions operate.
According to your submission, a transaction begins with an order to your client from a customer in the U.S. You state that the customer’s order is sent via email with a document referred to as a Customer Worksheet. The Customer Worksheet indicates the goods that the customer wants to order, including the style numbers, sizing, colors, and pricing. Based on the Customer Worksheet, JV Apparel generates a purchase order and sends it to middleman 1. You state that the submitted sample purchase order indicates terms of sale as FOB China with a ship to destination identifying a party and address in California. Middleman 1 sends a sales confirmation to JV Apparel identifying the factory that will make the wearing apparel, the payment terms, and the method of shipment.
Middleman 1 then places an order with middleman 2. You indicate that middleman 1 does this, rather than dealing directly with the factory, because the factory cannot conduct sales in U.S. dollars, but middleman 2 can. Middleman 1 and Middleman 2 enter into a Purchase Contract for the wearing apparel. A sample Purchase Contract was submitted. We note that while the contract identifies the factory and the four types of apparel ordered by a customer in the U.S., it lacks specificity. Middleman 1 and middleman 2’s contract identifies a total quantity by category only, i.e., men’s, women’s, youth or toddler, with no mention of quantity per size within categories or color, as identified on the Customer Worksheet. The contract specifies the port of loading and the U.S. port of destination. It also provides for payment within 45 days of shipment and specifies the terms as FOB China.
You also submitted a copy of the contract between middleman 2 and the factory. However, this contract is in Chinese. You indicate that you are submitting it for informational purposes only as the sale for export to the U.S. which your client wishes to utilize for purpose of appraisement of its merchandise at importation is the sale between middleman 1 and middleman 2. You indicate that all of the parties involved in the multi-tiered transactions are unrelated.
An English translation of the contract between middleman 2 and the factory was provided at our request. Three provisions are of note:
2) Seller product standard: Follow both parties’ approved sample (or quality standard) to deliver the good on time. (see attachment)
3) Seller is responsible for all the fees charged in the port.
* * *
6) Special agreement: this contract is made, based on the requirements from buyer’s customer; Hence, seller has to take full responsibility on product quality and delivery. Payment will only be made to seller after buyer collecting the payment from its customer.
* * *
You have also indicated that the specific garment details are furnished to the factory by Middleman 1.
On February 23, 2017, you informed us that the reference to an attachment in the contract between middleman 2 and the factory is a reference to documentation referred to as a “Tech Package.” This is the method by which the specific garment details are furnished to the factory. Middleman 1 presents the Tech Package to the factory. You describe the Tech Package as:
The Tech Package consists of the production file created for each and every garment style that is placed with the factory. The Tech Package will include written information about the garments to be made, including all fabric qualities, trims, etc., as well as a sample of each garment. The “Tech Package” will initially be put together by the importer, JV Apparel, and passed along to Middleman 1 . . . . [who] will, in turn, then meet with the factory and physically hand deliver to them the Tech Package. While the initial package prepared by JV Apparel will be in English, to the extent required, [Middleman 1] will translate any necessary terms for the factory.
You submitted a bill of lading from a completed transaction to illustrate a bill of lading for the pending transaction as the information for the pending transaction will be similar in all material respects with exception of items such as, the quantity of cartons and the port of lading. In the pending transaction, the port of lading would be Yantian, China. We note that middleman man 1 is identified as the shipper and JV is identified as the consignee on the bill of lading.
Additional documentation submitted from a completed transaction to illustrate a “first sale” appraisement claim includes: a commercial invoice from middleman 1 to JV Apparel; a Documentary Collection Order from JV Apparel’s bank showing payment to middleman 1; a Credit Advice from middleman 1’s bank stating it received the money from JV Apparel; a Chinese Customs Declaration for the completed shipment listing middleman 2 to middleman 1 purchase price; a Remittance Statement to middleman 1 for multiple shipments, including the shipment contained in the submitted Chinese Customs Declaration; a Bank Advice showing payment from middleman 1 to middleman 2 for the multiple shipments, a customer’s manual indicating that garments must comply with U.S. regulatory requirements, and a copy of a test report performed by a third party and paid for by JV Apparel to ensure that ordered garments meet various U.S. requirements applicable to sleepwear garments sold within the U.S.
ISSUE:
Whether the sale between middleman 1 and middleman 2 is a sale for export to the U.S. that may be used for appraisement purposes under transaction value.
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).
Your client seeks to utilize the transaction value of the sale between the middlemen in their multi-tiered transaction described above. 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, you have submitted documents to show that the sale between the two middlemen qualifies as a sale for export to the United States within the meaning of 19 U.S.C. § 1401a(b). You submit that all parties involved are unrelated. As the parties are unrelated, the sale between them is presumed to be at arm’s length. In addition, the documentation shows that the garments are clearly destined for the U.S. at the time of the sale between the two middlemen.as the Purchase Contract shows the port of lading and the port of destination, i.e. “From Yantian, China to Los Angeles, U.S.A.” In addition, the sales confirmation number used by middleman 1 in its confirmation to JV Apparel appears on the sales contract between middleman 1 and middleman 2. Further, the necessity of the garments to meet U.S. regulatory requirements regarding garments, and more specifically, sleepwear, also supports that the garments are clearly destined for the U.S. This leaves the question of whether the sale between the middlemen is a bona fide sale.
The submitted documents show delivery terms as FOB China for middleman 1 and middleman 2. The same delivery terms appear on the documents issued to JV Apparel. Based on the assumption that title transfers at the same time as risk of loss, as we have no other information regarding transfer of title, these documents indicate a “flash title” transfer. While Customs and Border Protection recognizes that bona fide sales may occur in instances of “flash title,” such transactions generally are viewed with greater scrutiny so as to determine whether the middleman truly is an independent buyer/seller of goods or is actually acting as an agent on the part of one of the other parties. See Headquarters Ruling Letter (HQ) H097616, dated November 21, 2011; See also HQ W563605, dated November 19, 2009.
An examination of the purchase orders reveals that while the purchase order issued to middleman 1 is quite detailed, middleman 1’s purchase order to middleman 2 lacks the requisite detail to accurately reflect the order it receives. However, you have addressed this by indicating that middleman 1 provides the garment details to the factory via the Tech Package (described in the FACTS). In addition, the translated contract between middleman 2 and the factory, indicates that the seller must follow an approved sample or quality standard and refers to an attachment.
Each transaction must be individually assessed and all the information considered in determining whether sufficient information has been provided to support a determination that separate bona fide sales occur when “flash title” transfer occurs. In HQ 547697, dated December 27, 2001, CBP stated in regard to a multi-tiered transaction:
The fact that title and risk of loss transferred simultaneously from the Manufacturer to License Holder to the Middleman to the Importer in each of the four transactions—i.e., Manufacturer/License Holder, License Holder/Middleman, Manufacturer/Middleman, and Middleman/Importer—suggests that there were no bona fide sales between the Manufacturer, License Holder and Middleman. See HRL 545980, dated December 12, 1995 (finding evidence insufficient to support claim of a bona fide sale in two-tiered transaction when first and second sale were FOB foreign port of export), and HRL 546225, dated April 14, 1997 (declaring that a bona fide sale did not appear not to have occurred when there was simultaneous passage of title between the manufacturers and the middleman).
However, in HQ 545271, dated March 4, 1994, it was determined that the price between the manufacturers and the middleman constituted the price actually paid or payable for purposes of determining transaction value of the merchandise. In that case, the manufacturers shipped the merchandise directly to the importer per the terms of the purchase orders between the middleman and the manufacturers. A review of the entire transaction and the documentary evidence, including copies of the purchase contracts between the importer and the middleman, and copies of purchase orders between the middleman and the manufacturers, led CBP to conclude a bona fide sale of merchandise for export to the United States occurred between the manufacturers and the middleman even though the middleman never took physical possession of the merchandise. See also, HQ W563605, dated November 19, 2009.
A review of the documentation submitted shows the flow of the ordering process from one party to the next and the flow of the payment process follows a reasonable and expected pattern. The roles of the middlemen involved in the transaction has been adequately explained. Therefore, based on all of the information presented to CBP, we agree that your client, JV Apparel, has presented sufficient information to support making a claim for “first sale” appraisement of its merchandise.
HOLDING:
Based on the information the office reviewed, “first sale” transaction value appraisement may be utilized by JV Apparel for the transaction described herein. JV Apparel may be asked to present additional information to the ports for specific entries to support its use of “first sale” appraisement of those entries and should be prepared to present such information.
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 CBP 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.”
A copy of this ruling letter should be attached to the entry documents at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.
Sincerely,
Yuliya A. Gulis, Acting Chief
Valuation & Special Programs Branch