Protest 1001-96-106230; Multi-Tiered Sales Transaction

HQ 546760 March 2, 1999 RR:IT:VA 546760 DWS CATEGORY: Valuation Port Director of Customs Building #77 JFK Airport Jamaica, NY 11430 RE: Protest 1001-96-106230; Multi-Tiered Sales Transaction Dear Port Director: The following is our decision regarding Protest 1001-96-106230 concerning your action in the appraisement of certain wearing apparel. We regret the delay in responding. FACTS: The subject merchandise, consisting of ladies wearing apparel, was purchased by Forge-Mench General Partnership d/b/a Morgan Miller (Forge-Mench), the U.S. importer, from Manchu, Inc. (Manchu), the middleman in Hong Kong, who purchased the merchandise from the Liaoning Garments Import & Export Corp. (Liaoning), an unrelated trading company in China. 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 merchandise, which was manufactured by the Fushun Woolen Garments Factory (Fushun) in China, was appraised by your office using transaction value, based upon the sale between Manchu and Forge-Mench. Counsel for the protestant, Forge-Mench, has provided us with documentation for two sets of transactions, one with the identification “I.D. 644" and the other with the identification “I.D. 679.” “I.D. 679" is referred to in the entry documents filed with Customs with regard to the subject protest. Therefore, for the purposes of stating the facts for this ruling, we will focus on the transaction with the identification “I.D. 679.” Counsel has provided Liaoning’s invoice to Manchu and Manchu’s proof of payment for this invoice, the sales confirmation from Liaoning to Manchu, Forge-Mench’s order confirmation to Manchu, the visaed invoice from Liaoning specifying Forge-Mench as consignee, and the bill of lading from Liaoning to Forge-Mench. Enclosed with a letter dated November 13, 1998, counsel submitted various documents, including a copy of the letter of credit and amendment demonstrating proof of payment by Forge-Mench to Manchu for the subject merchandise. Counsel is unable to secure a signed copy of the business contract validated by the Chinese Textile Association (CTA), a copy of payment of the processing fee to the CTA, and a copy of the Winning Tender Quota Application Form, all of which your office has requested. With regard to these documents, your office has provided the following concerning certain business practices in China. The regulations which govern all Chinese quota transactions are issued and administered by the Chinese Textile and Silk Garment Import/Export Commercial Association on behalf of the Ministry of Foreign Economic Relations and Trade (MOFERT), the agency responsible for negotiating trade policy and quota category restraints on behalf of the Chinese government. In accordance with these regulations, designed quota categories are annually opened for public tender; however, only export firms that are members of the CTA and are authorized by MOFERT to export textiles and apparel may submit tenders for quota categories. To submit a bid for quota, firms are required to submit a standard tender application form stating, inter alia, the classification, quota category, quantity, and export price of the goods. Article 7 of the regulations provide further that successful tenders must sign a formal business contract with their foreign clients within three months of the opening tender date. The price specified in the contract may equal or exceed the bidding price, but cannot be less than the bidding price. Counsel states that Liaoning and Manchu are not related in any way. Counsel notes that the sales confirmations from the parties indicate that the destination of the merchandise is “New York, USA.” In the “Remarks” portion of the provided sales confirmation, it is written that the apparel include “SHOULDER PAD, SLEEVE HEAD, TAPE, TISSUE PAPER, POLYBAG, HANGTAG, LABEL (emphasis supplied).” Counsel states that the identified labels and hangtags are in English, indicate U.S. sizes, and contain language for compliance with U.S. apparel labeling regulations. On the sales confirmation provided, under the section “General Terms & Conditions”, it states “U.S. Customer - Forge Mench Partnership” and “Brand Label - Morgan Miller.” This document is tied to Liaoning’s invoice to Manchu and the Manchu’s invoice to Forge-Mench by the identification “I.D. 679.” As established by the invoice from Liaoning to Manchu, the terms of sale between the two parties are “CFR NEW YORK.” As established by invoice G-1680/95 from Manchu to Forge-Mench, the terms of sale between the two parties are ”CFR NEW YORK” and “TITLE AND RISK OF LOSS TRANSFERS FROM MANCHU INC. TO FORGE MENCH GENERAL PARTNERSHIP AT THE INTERNATIONAL DATE LINE.” However, we note that invoice G-1421/95 (dealing with “I.D. 644" merchandise) does not contain this specific language on title and risk of loss. ISSUE: Whether the evidence submitted, pursuant to transaction value, establishes that the transaction between Liaoning and Manchu determines the price actually paid or payable for the imported merchandise. LAW AND ANALYSIS: Merchandise imported into the U.S. is appraised in accordance with section 402 of the 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 merchandise when sold for exportation to the United States," plus certain enumerated additions. Thus, for imported merchandise to be appraised under transaction value, it must be the subject of a bona fide sale between the buyer and seller and it must be a sale for exportation to the U.S. In Nissho Iwai American Corp. v. U.S., 982 F.2d 505 (Fed. Cir. 1992), the Court reaffirmed the principle of E.C. McAfee Co. v. U.S., 842 F.2d 314 (Fed. Cir. 1988), that a manufacturer's price, for establishing transaction value, is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. In reaffirming the McAfee standard the court stated that in a threetiered distribution system: [t]he 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 nonmarket influence that affect the legitimacy of the sale price *** [t]hat determination can only be made on a casebycase basis. Id. at 509. See also, Synergy Sport International, Ltd. v. U.S., 17 CIT 18 (1993). As a general matter in situations of this type, Customs presumes that the price paid by the importer is the basis of transaction value, and the burden is on the importer to rebut this presumption. See HQ 546091, dated January 3, 1996. However, to rebut this presumption, the importer must, in accordance with the court's standard in Nissho, supra, provide evidence establishing that at the time the middleman purchased, or contracted to purchase, the imported merchandise, the goods were "clearly destined for export to the United States" and that the manufacturer and middleman dealt with each other at "arm's length." We note that Fushun, not Liaoning, is the manufacturer of the subject merchandise. However, it is our understanding that the alleged sale between Liaoning and Manchu is the first possible transaction where the goods may have been clearly destined for export to the U.S. Therefore, we will apply the Nissho standard to the Liaoning-Manchu transaction which is at issue in this case. In the instant case, the protestant claims that, in accordance with Nissho, supra, the transaction value for the imported merchandise should be based on the sale between Liaoning and Manchu. Your office is concerned that the protestant does not possess the necessary documentation to prove its claim, in that various documents related to the CTA and for exportation of the subject merchandise from China have not been provided to Customs. Without these documents, your office asserts that counsel has failed to establish that Forge-Mench is the foreign client, the quantities and prices to which the parties agreed, and the identity of the actual manufacturer. In determining whether the protestant’s claim is valid, the first question to be considered is whether there was in fact a bona fide sale between Liaoning and Manchu. For Customs purposes, a “sale” generally is defined as a transfer of ownership in property from one party to another for a consideration. J.L. Wood v. U.S., 62 CCPA 25, 33; C.A.D. 1139 (1974). Although J.L. Wood was decided under the prior appraisement statute, Customs recognizes this definition under the TAA. Several factors may indicate whether a bona fide sale exists between potential seller and buyer. In determining whether property or ownership has been transferred, Customs considers whether the alleged buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, Customs may examine whether the alleged buyer paid for the goods, whether such payments are linked to specific importations of merchandise, and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HQ 545705, dated January 27, 1995. The terms of sale from Liaoning to Manchu are “CFR NEW YORK.” These terms transferred title and risk of loss to Manchu when the goods were delivered to the carrier for exportation from China. Incoterms, International Chamber of Commerce, 44-48 (1990). The sales confirmation from Liaoning to Manchu also referred to one party as the buyer (Manchu) and the other as the seller (Liaoning). The order confirmation from Forge-Mench to Manchu confirms the “purchase” of the merchandise from Manchu. The proof of payment document also indicates that Manchu paid for the merchandise described in Liaoning’s invoice. As stated previously, counsel has also submitted a letter of credit demonstrating payment by Forge-Mench to Manchu. The terms of sale from Manchu to Forge-Mench are “CFR NEW YORK” and “TITLE AND RISK OF LOSS TRANSFERS FROM MANCHU INC. TO FORGE MENCH GENERAL PARTNERSHIP AT THE INTERNATIONAL DATELINE.” These terms transferred title and risk of loss from Manchu to Forge-Mench at the International Date Line. Thus, these terms and provided documentation appear to indicate that a sale also occurred between Manchu and Forge-Mench as well as between Liaoning and Manchu. Once it has been established that there was a bona fide sale between Liaoning and Manchu, whether the merchandise will be appraised based on this sale depends upon if the requirements of the Nissho case are satisfied. As explained above, the Court in Nissho set forth a two part test that must be met for a sale between a middleman and its supplier to be the basis of a viable transaction value: 1) the goods must clearly be destined to the U.S. at the time of sale, and 2) the sale must be at arm’s length. Turning to the first part of the two part test, the evidence must establish that the merchandise was clearly destined to the U.S. at the time it was sold to the middleman. Counsel has provided Liaoning’s invoice to Manchu and Manchu’s proof of payment for this invoice, the sales confirmation from Liaoning to Manchu, Forge-Mench’s order confirmation to Manchu, the visaed invoice from Liaoning specifying Forge-Mench as consignee, and the bill of lading from Liaoning listing Forge-Mench as the party to be notified concerning the goods. The documentation establishes a paper trail of the imported merchandise demonstrating both the structure of the transaction from Liaoning to Manchu to Forge-Mench, and that the merchandise was destined for export to the U.S. at the time of sale. Specifically, the imported merchandise may be traced through the transaction by the use of identification “I.D. 679": the quantity involved (5876 sets) and invoice price (USD 87,728). The destination of the goods is evidenced by Liaoning’s invoice which indicates a destination of New York. The sales confirmation also indicates “Destination, New York, USA” as the destination of the merchandise. The same document also indicates the requirement that each piece of merchandise has attached to it a hangtag and label. These attachments are claimed to be in English, indicate U.S. sizes, and contain language for compliance with U.S. apparel labeling regulations. The bill of lading further indicates the port of discharge as New York. The order confirmation from Forge-Mench to Manchu additionally specifies shipment to New York. The visaed invoice additionally specifies a destination of New York. Therefore, we find that the provided documentation supports the conclusion that the merchandise was clearly destined for export to the U.S. at the time of sale. Regarding the second part of the Nissho test, although it is our understanding that Manchu is wholly-owned by a party who partially owns Forge-Mench, counsel states that there is no relationship between Fushun and Manchu or between Liaoning and Manchu. Generally, Customs will presume that a transaction between parties which are not related, within the meaning of 19 U.S.C. 1401a(g), is conducted at “arm’s length.” See HQ 545878, dated July 31, 1996. Therefore, based upon counsel’s assertion and the lack of evidence to the contrary, we will consider the transaction between Liaoning and Manchu to be at arm’s length. With regard to the various documents related to the CTA and for exportation of the subject merchandise, counsel has provided a copy of the visaed invoice. This document lists Liaoning as exporter, Forge-Mench as consignee, the quantity and price of the goods, and the destination of shipment as New York. Therefore, this document appears to provide the requested information. Consequently, it is our position that the failure to provide the documents your office requested is not determinative in this instance with regard to a Nissho analysis. We note that in several instances we have held that, because of discrepancies in the documentation, the transaction between the middleman and the manufacturer or exporter does not determine the price actually paid or payable for imported merchandise. For example, in HQ 545920, dated July 25, 1996, we held that the imported merchandise should be appraised, pursuant to transaction value, on the basis of the price actually paid or payable by the importer and the middleman instead of the transaction between the middleman and the manufacturer. See also HQ 546353, dated December 15, 1998. In HQ 545920, we stated that: [i]n the instant case, the documentation submitted in connection with the protested entries contains certain discrepancies. In particular, there are discrepancies between the manufacturer’s price as reflected on the commercial invoice and the manufacturer’s price as stated on the visaed invoices. For example, the unit value of sweaters made from seventy-three percent acrylic, twenty-six percent nylon and one percent other fibers is shown as $100.00 on the vised invoice but as either $115.00, or $118.00, on the manufacturer’s commercial invoice, depending on the style concerned. The reason for the discrepancies has not been explained. ***** In the circumstances of this case, however, it is our position that, *** the discrepancies between the commercial and visaed invoices raise the presumption that the documents contain false or erroneous information in regard to appraisement. As noted above, it is the importer’s responsibility to demonstrate that the standard set forth in Nissho has been met. Here, the protestant has not satisfactorily explained the discrepancies between the visaed and commercial invoices, e.g, by providing the documentation requested by your office. ***** In the instant case, unlike the circumstances in HQ 545920 and other similar rulings, there does not appear to be any discrepancy in the provided documentation. Specifically, the information in the visaed invoice matches the information in the invoice from Liaoning to Manchu. Again, as we stated earlier based upon the information provided, we find that the documentation establishes a paper trail of the imported merchandise demonstrating both the structure of the transaction from Liaoning to Manchu to Forge-Mench, and that the merchandise was destined for export to the U.S. at the time of sale. HOLDING: The evidence submitted establishes that the transaction between Liaoning and Manchu determines the “price actually paid or payable” for the imported merchandise pursuant to transaction value. The protest should be GRANTED. In accordance with Section 3A(11)(b) of Customs Directive 099 3550065, dated August 4, 1993, Subject: Revised Protest Directive, 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 or entries in accordance with the decision must be accomplished prior to mailing the decision. Sixty days from the date of the decision, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Thomas L. Lobred Chief, Value Branch