Customs Ruling HQ H309839 - Internal Advice on Application for Further Review and Protest No. 2704-19-106358; Multi-tiered transaction; Two sales for export to the United States

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HQ H309839
Sep 09, 2020

Type : Valuation • HTSUS :

OT:RR:CTF:VS H309839 CMR

Center Director
Industrial and Manufacturing Materials CEE
726 Exchange Street
Suite 400
Buffalo, NY 14210

Attn: Ann Marie Paul

RE: Internal Advice on Application for Further Review and Protest No. 2704-19-106358; Multi-tiered transaction; Two sales for export to the United States

Dear Center Director:

This is in response to the referral to this office of the Application for Further Review (AFR) and Protest 2704-19-106358, timely filed by Mayer Brown LLP, on behalf of their client, World Wide Packaging, LLC (hereinafter, “WWP US”). The protest is against your decision to appraise merchandise in one entry based upon the price paid by the importer’s customers, rather than the price paid by the importer, WWP US, to a related party factory in China, i.e., World Wide Packaging (Suzhou) Co., Ltd. (“WWP Suzhou”).

The importer has requested confidential treatment be accorded to certain information submitted in connection with this matter. In consideration of the request and sufficient justification presented pursuant to 19 CFR 177.2(b)(7), the request for confidential treatment is approved. Information for which confidentiality is being accorded is not referenced in this ruling. FACTS:

The entry at issue consisting of two line items pertains to plastic tubes used for personal care products, which were the subject of purchase orders from two unrelated U.S. customers of WWP US. The two customers each placed three purchase orders for goods. The goods are custom-made for each customer. Line item 1 of the entry refers to the goods ordered by customer #1 and line item 2 of the entry refers to the goods ordered by customer #2.

After receipt of the purchase orders, WWP US placed six purchase orders with its related factory, WWP Suzhou. Each purchase order WWP US places with WWP Suzhou includes the name of WWP US’ customer; the U.S. customer’s purchase order number, along with a WWP reference number; and the name of the WWP US order taker, sales administrator, and sales person. The purchase orders indicate that the goods are shipped via ocean freight and the applicable Incoterm is ex-works. The WWP US purchase orders for goods intended for customer #2 include a tooling services charge from the factory. The commercial invoices from WWP Suzhou to WWP US indicate the goods are shipped via ocean from China, but are void of any Incoterms or terms of sale. The invoices identify the goods by description, quantity, unit price and total price, which in the case of goods intended for customer #2 includes the tooling charge. Separate commercial invoices and packing lists are issued by WWP Suzhou to WWP US for the goods destined for customer #1 and customer #2.

The bill of lading for the international freight indicates WWP Suzhou is the shipper and WWP US is the consignee. The invoice from the freight forwarder for the international freight charges indicates the same information and, like the purchase orders from WWP US to WWP Suzhou, indicates the applicable Incoterm is ex-works. The invoice also references the WWP US purchase order numbers for the goods intended for customers #1 and #2. An invoice for domestic freight from the port of unlading to the WWP US warehouse was submitted to show that WWP US is responsible for the domestic freight from the port of importation to the warehouse based on the Incoterm FOB (Free on Board).

Evidence of payment by WWP US to WWP Suzhou was submitted, along with evidence of payment by WWP US to the freight forwarder for both the international freight and the domestic freight from the port of entry to WWP US’ warehouse. In addition, evidence that WWP US maintains and pays for marine insurance on goods shipped internationally was submitted.

With regard to the transactions between WWP US and its customers, customer #1 and customer #2, the submitted documentation differs somewhat. For customer #1, a quotation, or bid, was submitted which shows the delivery terms to be FOB NJ/LA WWP Warehouse via Ocean. The Terms and Conditions which accompanied the quotation, provide in relevant part as follows:

General Terms: Prices are FOB NJ or LA WWP Warehouse via ocean (unless otherwise specified). Customer is responsible for local freight charges to the final destination (unless otherwise specified). * * * c. There is an additional cost for orders shipped by air freight. * * * 2. Lead Time: * * * c. Transit time via ocean is approximately 5 weeks to NJ or 2.5 weeks to LA plus 1 week for customs clearance and delivery (other destinations may extend transit time).

* * * 4. Technical: * * * f. Country of origin is China (unless otherwise specified).

Purchase orders from customer #1 and customer #2 to WWP US were submitted. The purchase orders are void of terms of sale, but do provide the ship date, the delivery date, the time in which to pay, and the amount owed. There is no indication on the purchase orders of when risk of loss or title pass from WWP US to customer #1 or customer #2. Likewise, the invoices from WWP US to its U.S. customers do not contain any terms of sale, but do provide the payment terms, indicate that the ship method was ocean, identify the vessel by name on which the goods were shipped, and identify the WWP US sales person and WWP US customer service representative involved with that transaction. In addition, the invoices show an additional charge described as “10% Duty Incremental Tariff Increase” and referenced as WWP Item “USTR 301 Inc Tariff.” We note, however, that the goods destined to customer #1 were Korean goods and not Chinese goods and as such, were not subject to Section 301 tariffs.

One “Order Acknowledgment” issued by WWP US to customer #2 was also submitted. The document contains the order date, customer purchase order number, WWP US purchase order number, the customer’s billing address, a “ship to” address, target date and customer availability date, availability notes which indicate “WWP LA WHSE,” and indicates that the goods are shipped via ocean freight. The consignee is identified as WWP US.

The packing lists for the sales from WWP US to its U.S. customers indicate the “sold to” party as the U.S. customer, the “ship to” as a location selected by the U.S. customer, and the consignee/importer of record as WWP US. In addition to the information regarding the goods, such as description, quantity and price, the packing lists contain the name of the vessel in which the goods were shipped from China, the container number, the bill of lading number and the booking number.

Evidence of payment from customers #1 and #2 to WWP US for the goods in accordance with the invoice prices was submitted. In addition, emails were submitted to show that WWP US deals directly with the U.S. customers. The email correspondence was submitted to show that WWP US interacted with U.S. customers and was responsible for the development of those relationships without any interaction between the U.S. customers and WWP Suzhou. However, we note that in correspondence dated February 12, 2016, from a regional sales manager of WWP US to customer #2, the U.S. sales manager states: “If you would like to see a little more of what we do prior to meeting you can click on the “WWP Tube Video” link in my signature below.” The WWP Tube Video is about the production facility in Suzhou. Further, the correspondence noted the shutdown of the factory for Chinese New Year and how it would affect orders for tubes.

Customs and Border Protection (CBP) has been informed that there are no sales contracts between any of the parties involved in these transactions, simply purchase orders and invoices. Counsel for the importer submits that a bona fide sale for export to the United States occurred between WWP Suzhou and WWP US and that sale should be the transaction upon which appraisement of the goods should be based. However, it is conceded that the transaction does not meet the “arm’s length” requirement for the use of transaction value between related parties. Importer’s counsel advocates for hierarchical application of the statute and that appraisement be based upon the deductive value method.

Although in this case, the documents indicate that the goods are shipped from WWP Suzhou to the WWP US LA warehouse, the import specialist from the Industrial and Manufacturing Materials Center of Excellence and Expertise (“CEE”) received information from the importer stating that “All goods are packaged and ready to deliver to WWP US’ customers at the time of shipment from WWP Suzhou.” In response to a follow-up question, a representative of the importer stated that: Some orders are shipped to WWP US’ 3PL warehouses in Carson, CA and Carteret, NJ and then made available to or distributed to WWP US customers. Other orders are produced by WWP Suzhou and are turned over to WWP US customers.

CBP has been informed that ”[t]ypically, merchandise purchased to order sits in the warehouse between 3 and 7 days.”

Counsel for the importer submits that the sales between WWP US and its U.S. customers are domestic sales and cannot be used for purposes of assessing duties owed for the imported merchandise. Counsel states that WWP US was under no obligation to source the U.S. customers’ orders from WWP Suzhou and that neither customer required that their tubes and caps be made by WWP Suzhou. According to counsel, there was no mention of the factory’s location in any of the correspondence between the parties. Further, the U.S. customers have never conducted a product quality audit, or any other type of audit, of WWP Suzhou’s facilities.

The CEE believes the importer, as the middleman in the transactions, was a selling agent for WWP Suzhou and that the customers in the U.S., i.e., customer #1 and customer #2, were the actual buyers. The CEE considers the sale to be between WWP Suzhou and the U.S. customer. However, the CEE indicates that even if a bona fide sale exists between the related parties, because it cannot be appraised under transaction value, the goods must be appraised under transaction value based on the price actually paid or payable by the customer in the U.S.

ISSUE:

Whether the transactions at issue consist of two sales of goods for export to the United States within the meaning of 19 U.S.C. § 1401a(b)(1) and, if yes, whether the merchandise should be appraised based upon the second sale in the multi-tiered transaction. 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 Nissho Iwai American Corporation (NIAC), a U.S. subsidiary of Nissho Iwai Corporation (NIC), a Japanese company, contracted to sell subway cars to the New York City Metropolitan Transportation Authority. In that case, the importer of record was a U.S. company, NIAC, selling subway cars to a U.S. buyer, i.e., the New York City Metropolitan Transportation Authority. The contract for sale indicated the name of the producer in Japan of the subway cars, Kawasaki Heavy Industries Ltd. NIAC assigned its rights and responsibilities under the contract to its parent company, NIC. NIC ordered the subway cars from the producer named in the contract between NIAC and the New York City Metropolitan Transportation Authority. Thus, two separate transactions were at issue in appraising the merchandise – the transaction between the two U.S. entities, i.e., NIAC and the New York City Metropolitan Transportation Authority, and, the transaction between NIC and Kawasaki Heavy Industries Ltd.

The Court of International Trade upheld the U.S. Customs Service (now, CBP) decision to appraise the merchandise based upon the transaction value of the sale between NIAC and the New York City Metropolitan Transportation Authority. See Nissho Iwai American Corp. v. United States, 16 CIT 86, 786 F. Supp. 1002 (1992). The Court of Appeals for the Federal Circuit reversed the lower court on this issue, and held that the sale from Kawasaki Heavy Industries Ltd. to NIC was a viable sale for export to the United States upon which to base appraisement under transaction value. In discussing the “first sale” rule, the court stated:

. . . the rule only applies where there is a legitimate choice between two statutorily viable transaction values. 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.

The court further stated:

Accepting that both the manufacturer's price and the middleman's price may serve as the basis of transaction value, the critical issue on appeal here centers upon which price is legally proper.

In accordance with Nissho Iwai and Synergy Sport International, Ltd. v. United States, 17 C.I.T. 18 (1993), appraisement of imported merchandise based on a bona fide sale of goods for export to the U.S., prior to the last sale for export to the U.S., is a legitimate basis of appraisal and CBP will appraise merchandise for which a “first sale” claim is made when it meets the requirements for such appraisement. When two bona fide sales for export to the United States exist in accordance with the Nissho Iwai decision and our own precedent, we presume that transaction value is based on the price paid in the last sale for export to the United States within the meaning of 19 U.S.C. § 1401a. In keeping with the court’s holding, an importer may request appraisement based on the price paid by a middleman to a foreign manufacturer in a sale earlier in time than the last sale in a multi-tier transaction resulting in an importation of merchandise into the United States. 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 payment, 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, or any other party, cannot form the basis of transaction value.

In this case, it is submitted that title passed with risk of loss based upon the Incoterms. We have reviewed all of the documentation presented and agree with counsel that based upon the purchase orders, invoices, proof of payment, and marine insurance, that sufficient evidence has been presented to support the existence of a sale between the importer and its related factory with title and risk of loss passing from WWP Suzhou to WWP US at the factory door based upon the Incoterm ex-works. It appears that WWP US holds title to the merchandise until it reaches the WWP warehouse in the United States, and in some cases, beyond that point. In the case of at least one U.S. customer, title passes upon receipt of the goods at the customer’s designated delivery location.

The importer claims that the goods at issue should be appraised based upon the sale between the importer and the importer’s related factory in China. Although we agree with counsel that a sale occurs between WWP Suzhou and WWP US, we also agree with the CEE that the sale is not a bona fide sale within the requisites of Nissho Iwai, supra, as it is not an arm’s length sale. The relationship of the parties influenced the price. This is a point that has been conceded by the importer. Thus, CBP cannot use transaction value appraisement for the sale between WWP Suzhou and WWP US. However, counsel urges CBP to proceed through the hierarchy of the valuation statute to value the merchandise based upon this sale using the deductive value method. Counsel objects to CBP using the transaction between the importer and the importer’s U.S. customer as the basis to appraise the merchandise under transaction value.

The sale between WWP US and its U.S. customers are sales for export to the United States within the meaning of 19 U.S.C. § 1401a(b)(1), just as the sale in Nissho Iwai between NIAC and the New York City Metropolitan Transportation Authority was a sale for export to the United States. The sale between WWP US and its U.S. customers meet the requisites of 19 U.S.C. § 1401a(b) and afford CBP with a valid sale for export to the United States on which to base appraisement of the imported goods under the transaction value method. The court stated in Nissho Iwai that “both the manufacturer's price and the middleman's price may serve as the basis of transaction value”, however, the same is not true here. In this case, the manufacturer’s price fails to meet the requirements of transaction value under the statute as the relationship of the parties influenced the price. Thus, CBP is left with one price, one sale for export that meets the statutory requirements of transaction value, i.e., the middleman’s price. WWP US’ sales to its U.S customers meet the requirements of 19 U.S.C. § 1401a(b). The fact that WWP US is the importer of record and a U.S. company does not negate consideration of these sales. NIAC was the importer of record in Nissho Iwai and it was the U.S. subsidiary of NIC.

In Orbisphere Corp. v. United States, 13 CIT 866, 726 F.Supp. 1344 (1989), relied upon by protestant’s counsel, the government argued there was one sale between a foreign related party, Orbisphere Laboratories, a subsidiary of Orbisphere Corporation, a U.S. company, and the ultimate U.S. customers. The focus of the case was on the terms and the procedures undertaken in conducting the sales. While the terms on the invoices issued pre- and post-1983 differed as to when title and risk of loss passed from Orbisphere to its U.S. customers, that is, whether the U.S. customer received title and assumed risk of loss based upon “FOB Geneva, Switzerland” or “FOB Haworth, N.J.;” the court took into account the testimony of witnesses as to the procedures of the company in conducting its sales. Orbisphere maintained that the sales with U.S. customers were domestic sales and not sales for export to the United States. The Court of International Trade agreed with Orbisphere.

Counsel, relying on Orbisphere, argues that because WWP US is a US company selling to US companies, the sales to WWP US’ customers are domestic sales. Counsel points to certain facts in this matter which are similar to facts in Orbisphere for support that the sales between WWP US and its U.S. customers are domestic sales. The facts that counsel relies upon are that (1) WWP US solicits the orders from the U.S. customers and WWP Suzhou has no direct contact with these customers; (2) WWP US pays the international freight and insurance, and acquires title and assumes the risk of loss for the merchandise based upon the Incoterm ex-works; (3) WWP US invoices its U.S. customers, receives payment from its U.S. customers, and deposits these payments into a U.S. bank; and, (4) title to and risk of loss for the merchandise passes from WWP US to its U.S. customers in this case at WWP US’ Los Angeles warehouse. These are not the only facts to be considered. There are other relevant facts in this matter that distinguish this situation from that in Orbisphere.

While in Orbisphere, we know the Incoterms that appeared on the invoices, we know little else of the information provided on the invoices issued to the U.S. customers. However, in this case, we know a great deal with regard to the information on the invoices and the terms and conditions of sale to the U.S. customers. We believe the documentation between WWP US and its U.S. customers support CBP’s view that the sales transactions between these parties are not “domestic” sales, but sales of merchandise for export to the United States.

Counsel points to title and risk of loss for the goods passing to WWP US’ customers at the WWP US warehouse after importation as an argument to support the transactions between WWP US and its US customers as domestic sales, relying upon Orbisphere. However, the timing of the passage of title and risk of loss similarly occurs after importation in the case of delivered duty paid (DDP) transactions and such transactions are still considered to be sales for export to the United States.

Furthermore, we find support for our view that WWP US was selling tubes produced overseas for export to their U.S. customers in the correspondence submitted to show that WWP US developed the relationships with U.S. customers. As noted above in the Facts portion of this decision, in correspondence dated February 12, 2016, reference was made by a WWP US regional sales manager to a “WWP Tube Video” in correspondence with customer #2. That video, which is viewable on youtube, touts WWP’s Suzhou tube manufacturing facility as being comparable to a U.S. production facility. The video makes it abundantly clear that the production of tubes will occur at the Suzhou facility. It would be nonsensical to conclude that two parties sitting within the United States could not form a contract for a sale of merchandise for export to the United States simply because the parties are sitting in the United States at the time the contract is formed. It is the terms of the contract for sale and not the location of the parties to the contract that determines whether the sale is a sale of merchandise for export to the United States.

Further support of our view may be found in La Perla Fashions, Inc. v. United States, 9 F. Supp. 2d 698 (1998), aff’d without opinion, 185 F.3d 885 (Fed. Cir. 1999). La Perla involved a three-tiered transaction wherein La Perla imported merchandise from its parent company and resold that merchandise to U.S. retailers. The imported merchandise was appraised based upon the sale between La Perla, the importer, and its U.S. customers, i.e., the U.S. retailers. La Perla contended the correct transaction value was the price paid by La Perla to its related supplier. The terms of sale between La Perla and its related supplier was ex-works, plus insurance. The terms of sale between La Perla and its U.S. customers were delivered at customer's premises, duty-paid.

In La Perla, as in this case, there were two transactions – the transaction between the related supplier and La Perla; and the transaction between La Perla and its U.S. customers. As in this case, the transaction between the related parties was influenced by the relationship and therefore, could not be used for purposes of transaction value appraisement. La Perla cited United States v. Massce & Co., 21 C.C.P.A. 54 (1933), and Orbisphere Corp. v. United States, 13 C.I.T. 866, 726 F. Supp. 1344 (1989), to argue that its sales to U.S. customers were not “sales for export to the United States,” but domestic sales with all the indicia of U.S. sales contracts.

As stated in La Perla, United States v. Massce & Co. involved “a three-tiered transaction where the court found that ‘where offers of sale, agreements to sell, and sales are all made in the United States, and none in a foreign country, there cannot be an export value of the exported merchandise involved in such transactions, . . ." La Perla, at 703, citing United States v. Massce & Co, at 60. Further, Orbisphere Corp. involved a “three-tiered transaction where the Court found that the transaction between the importer and its U.S. customers qualified for a domestic sale and not a sale for exportation.” See La Perla at 704.

In addressing La Perla’s reliance upon United States v. Massce & Co. and Orbisphere Corp., the court stated: The courts found two bona fide sales involved in the three-tiered transactions in both Massce and Orbisphere. In the instant case, however, the Court finds that there is only one bona fide transaction: the sale between La Perla and its U.S. customers. Transaction value cannot be based on a transaction that is found not to be a bona fide sale. Therefore, the Court finds that transaction value can only be based on La Perla's price charged to its U.S. customers.

Like La Perla, there is only one bona fide sale in the multi-tiered transaction at issue, and that sale is the sale between WWP US and its U.S. customers. In accordance with Nissho Iwai and La Perla, the goods at issue should be appraised based upon the transaction value of the sale between WWP US and its U.S. customers.

Counsel submits that should CBP find, as we have, that a sale for export under 19 U.S.C. § 1401a exists between WWP US and its U.S. customers, that WWP US is entitled to deduct certain expenses from the invoice prices. Counsel refers to deductions allowed under DDP transactions, i.e., deductions for international freight, insurance, customs duties, and various other charges incidental to the international shipment of the merchandise.

HOLDING:

The protest should be denied. The goods at issue should be appraised based upon the transaction value of the sale between WWP US and its U.S. customers. As in the case of a DDP transaction, if the CEE determines that sufficient evidence is presented to support deductions for international freight, insurance, customs duties, and various other charges incidental to the international shipment of the merchandise, including proof of payment of these charges, then such deductions should be allowed.

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, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and to the

public on the Customs Rulings Online Search System (CROSS) at https://rulings.cbp.gov/ which can be found on the U.S. Customs and Border Protection website at http://www.cbp.gov and other methods of public distribution.

Sincerely,

for Craig T. Clark, Director
Commercial and Trade Facilitation Division