Bona fide sale; Nissho Iwai American Corp. v. U.S.; Synergy Sport International, Ltd. v. U.S.; HQ 545105

HQ 546887 June 23, 1999 RR:IT:VA 546887 DWS CATEGORY: VALUATION Ms. Joan Baumgartner O'Donnell, Byrne & Williams 20 North Wacker Drive Suite 1416 Chicago, Illinois 60606 RE: Bona fide sale; Nissho Iwai American Corp. v. U.S.; Synergy Sport International, Ltd. v. U.S.; HQ 545105 Dear Ms. Baumgartner: This is in response to your letter dated October 14, 1997, requesting a ruling on behalf of your client, Olly’s Import, Incorporated (Olly’s Import), concerning the applicability of the “first sale” rule of valuation. The issue raised is whether the appraised value of the imported apparel items should be based on the manufacturer's sale price to the importer’s parent company, or the sale price between the parent company and the importer. You made additional submissions regarding the “first sale” and other related issues. We regret the delay in responding. FACTS: The parties involved in the transaction at issue are the importer, Olly’s Import, which is located in the U.S., its parent company, Olly’s BV, located in the Netherlands, and third party manufacturers who you state are unrelated. Olly’s BV designs the products that are sold at retail outlets worldwide. In your ruling request, you question those transactions in which Olly’s Import purchases merchandise from its parent, Olly’s BV, which Olly’s BV has purchased from unrelated third party manufacturers. The country in which the merchandise at issue will be purchased is subject to quota and visa restrictions. As a result, every shipment of merchandise will be accompanied by a visa issued by the government of the exporting country establishing that the merchandise at issue is destined for the U.S. at the time the merchandise left that country. In support of your ruling request, you submitted two sets of documents which you state represent separate purchases of merchandise from an unrelated manufacturer. You state that the transactions are representative of the transactions that are the subject of this ruling request. The first set of documents relates to the purchase of an acrylic scarf called the “Orient.” Exhibit A1 is referred to as a “Package Order” which you state Olly’s Import uses to place orders through Olly’s BV. Each package order contains a separate order page for each U.S.-retail outlet which has placed an order with Olly’s Import. Each order lists the address of the store, the number of pieces, the sizes ordered, and price paid by the retail store to Olly’s Import. You state that the package order is submitted to establish that the merchandise at issue is ordered specifically for retail stores in the U.S. After receiving package orders, Olly’s BV issues an order to cut to the manufacturer in India (Exhibit A2). This order sets out the number of items ordered, packing instructions, and general terms. You also submitted the invoice issued by the manufacturer to Olly’s Import, the packing list, the textile visa issued by the Government of India for the merchandise at issue, and the air waybill for the shipments to the U.S. (Exhibit A3). Because of U.S. visa and labeling laws, you state that Olly’s BV distinguishes product which is to be shipped directly to the U.S. so that the manufacturer may obtain the necessary visas, certificates of origin and use the correct labels. You also state that the textile visa provides additional evidence that the merchandise was destined for the U.S. when it left the possession of the manufacturer. The packing list and air waybill corroborate the fact that the merchandise was shipped directly from India to New York. You also included invoices issued by the manufacturer to Olly’s Import for the 276 Orient scarves (Exhibit A4). This information confirms the price at which Olly’s BV paid for the merchandise and that the shipment went directly from the manufacturer to the U.S. Exhibit A5 shows the deduction for the invoiced amount from Olly’s BV’s bank account. Exhibit A6 is an invoice from Olly’s BV to Olly’s Import which includes the “Orient” scarves and evidence that the invoice was paid by Olly’s Import. The shipping terms on the invoice are stated as “Ex Warehouse Chicago.” Although you claim that there are two sales, one from the manufacturer to Olly’s BV and another from Olly’s BV to Olly’s Import, you state that the manufacturer issues its invoice for the 276 Orient scarves to Olly’s Import. You claim that this is done because U.S. visas require the invoice value for the merchandise to equal the value of the merchandise on the textile visa. If these values do not match, you state that Customs will deny entry to the merchandise. Additionally, since the Indian manufacturer is selling merchandise to Olly’s BV at a particular price, you state that the visa must be obtained at that price. You also note that the issuance of one invoice rather than issuing an invoice to Olly’s BV and another invoice to the ultimate purchaser avoids concern that could arise from double invoicing which may raise suspicion that the manufacturer is being paid twice. You indicated that the invoices from the manufacturer represent the price Olly’s BV pays the manufacturer. The second set of documents relates to the purchase of a fabric covered headband called the “Ahead.” Exhibit B1 is a price quote issued by the Indian manufacturer. Exhibit B2 is the package order. Exhibit B3 is an order to cut the material issued to the Indian manufacturer. Exhibit B4 includes the manufacturer’s invoice to Olly’s Import, the packing list, the air waybill, and the textile visa for shipment to the U.S. Exhibit B5 includes the invoice for the “Ahead” headbands shipped to the U.S. and two additional invoices as well as evidence of Olly’s BV’s payment of the invoiced amount. Lastly, Exhibit B6 is the invoice Olly’s BV issued to Olly’s Import and evidence of Olly’s Import’s payment of the invoice. The shipping terms on the invoice are stated as “Ex Warehouse Chicago.” We also note that the price Olly’s BV charges Olly’s Import for this item is slightly more than two and one-half times the price Olly’s BV pays the manufacturer. You state that Olly’s BV includes a 5% markup to all invoices to ensure that the design services which may be undertaken at Olly’s BV or by an outside contractor are reflected in the appraised value. In a letter dated April 13, 1998, you provided additional information with regard to the value of the design services which Olly’s BV maintains to provide designs for virtually all merchandise manufactured for Olly’s BV worldwide. More specifically, you stated that the total expense (salaries, benefits, clerical expense, etc.) for running the in-house design department for the Fall/Winter season of 1997 was approximately $241,197.16. The total number of items produced in the Fall/Winter season was 1,263,616 items. These numbers produce an average of approximately $0.19 per item. You state that the transactions described above are representative of the transactions at issue in this ruling request and future importations made pursuant to this ruling will include comparable documentation. ISSUE: Whether the transaction between Olly’s BV and the unrelated third party manufacturers, or the transaction between Olly’s BV and Olly’s Import, determines the "price actually paid or payable" for the imported merchandise for purposes of determining transaction value. LAW AND ANALYSIS: The preferred method of appraising merchandise imported into the U.S. is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 1401a. Section 402(b)(1) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus numerated additions. The terms “price actually paid or payable” is defined in section 402(b)(4)(A) of the TAA as the "total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise...) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller." 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). You contend that this situation is similar to the factual scenarios in Nissho Iwai and Synergy. In regard to this matter, you have advised, supported by several documents, that the middleman, Olly’s BV, and the foreign manufacturers are not related in accordance with 19 U.S.C. 1401a(g), and these sales represent freely negotiated, arm’s length transactions. Subsequent to Nissho Iwai, supra, Customs has received numerous ruling requests asserting that transaction value is properly based on the sale which does not involve the importer, but rather between a middleman and the manufacturer or other seller. See Treasury Decision (T.D.) 96-87, dated December 13, 1996. 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 Iwai, 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." As stated in Nissho Iwai, our analysis of these issues is dealt with case-by-case based upon the evidence presented. To conclude that a sale for exportation occurred, Customs must conclude that a sale first occurred. In determining whether a bona fide sale has taken place between a potential buyer and seller of imported merchandise, no single factor is determinative. Rather, the relationship is to be ascertained by an overall view of the entire situation, with the result in each case governed by the facts and circumstances of the case itself. Dorf International, Inc. v. U.S., 61 Cust. Ct. 604, A.R.D. 245 (1968). Customs recognizes the term “sale,” as articulated in the case of J.L. Wood v. U.S., 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974), to be defined as: the transfer of property from one party to another for consideration. 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 existed between a 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. See HQ 545105, issued November 9, 1993. 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 seller and buyer. Based on our review of the evidence submitted, Customs is not convinced you have established that transaction value should be based on the alleged sale involving Olly’s BV and the manufacturer rather than on the alleged sale between Olly’s BV and Olly’s Import. The invoice from the manufacturer to Clubhouse Marketing Inc. as consignees on behalf of Olly’s Import (your Exhibit A3) and the invoice from the manufacturer to Olly’s Import (your Exhibit B4) are inconsistent with your claim that there was a bona fide sale between the manufacturer and the middleman (Olly’s BV), as an invoice from the manufacturer to Olly’s BV does not appear to exist. These documents are consistent with a finding that the only sale was between the manufacturer and Olly’s Import. Your explanation for the need to have only one commercial invoice prepared is unpersuasive in light of T.D. 8656, dated March 6, 1986. Customs will not always deny entry to merchandise if the invoice value and the value as presented on the textile visa do not match. In fact, instructions regarding the implementation of T.D. 8656, issued by this office on May 1, 1986 (HQ 543731), indicated that if an importer provides an acceptable explanation for differences in the price or value information in visas and invoices, then the entry may be accepted by Customs. Accordingly, we cannot conclude that you have demonstrated that the Indian manufacturer sold the merchandise at issue to Olly’s BV so the existence of a bona fide sale has not been established in light of the fact that no commercial invoice between the manufacturer and Olly’s BV was presented. As we have not determined that a bona fide sale occurred between the manufacturer and Olly’s BV, the transaction between these parties cannot be the basis for transaction value. Rather, appraisement will be based on the price the importer, Olly’s Import, pays for the imported merchandise. Only if a sale occurs between the manufacturer and the middleman (Olly’s BV) as well as between the middleman (Olly’s BV) and the importer (Olly’s Import), do the decisions reached in Nissho Iwai and Synergy become relevant. Absent any concern that the price between Olly’s BV and Olly’s Import was influenced by their related party status, the fact that Olly’s BV provided an assist to the Indian manufacturer will not by itself disturb the appraisement at transaction value between Olly’s BV and Olly’s Import because the cost of the design services is presumed to be included within Olly’s Import’s price actually paid or payable. See Section 402(b)(1). If the value of the assist is not included within the price actually paid or payable, it must be added to the price actually paid or payable. HOLDING: Based on the evidence presented, the importer has not established that the manufacturer’s price to the middleman, Olly’s BV, may be used as the basis of appraisement consistent with the standard set forth in Nissho Iwai. Accordingly, the price between Olly’s BV and the unrelated manufacturer may not constitute the price actually paid or payable for purposes of determining the transaction value of the imported wearing apparel. Instead, the price actually paid or payable by the importer, Olly’s Import, to Olly’s BV will be the proper basis of appraisement. Sincerely, Thomas L. Lobred Chief, Value Branch