Request for Internal Advice; transaction value; Nissho Iwai; First Sale

HQ H014885 September 18, 2008 VAL-2 OT:RR:CTF:VS H014885 KSG CATEGORY: Valuation Port Director U.S. Customs & Border Protection 6747 Engle Road Middleburg Heights, Ohio 44130 Re: Request for Internal Advice; transaction value; Nissho Iwai; First Sale Dear Port Director: This is in reply to request for a ruling filed by Hogan & Hartson on behalf of its client, the U.S. importer, dated July 19, 2007, as to the proper method of appraisement pursuant to 19 U.S.C. 1401a for certain imported goods. As of the date of the submission, the importer has made entries of this product at the ports of Los Angeles and Cleveland, commencing on July 13, 2007. Sample documentation submitted in this case relates to an entry entered on July 13, 2007. Because this case involves entries that have already been filed, we are treating it as a Request for Internal Advice. Additional information submitted in letters dated November 7, 2007, and July 23, 2008, are considered as part of the file in this case. Counsel proposed three scenarios for shipment of the imported goods. Only one scenario applies to the entries already made in Cleveland and Los Angeles. We find that the issuance of a ruling letter on the other proposed scenarios that are prospective and hypothetical in nature would be contrary to the sound administration of the Customs and related laws. Therefore, this ruling is limited to consideration of the scenario that applies to the entries already made. FACTS: This case involves xxx, , a purifier product. The imported good is sourced from multiple foreign manufacturers/ suppliers in China. Sometimes, one or more types of the finished good are blended to achieve the U.S. importer’s tightly-defined specifications of the finished product. The product may also be ground and shifted to obtain specified grain sizes. This product originating from China is subject to antidumping duties. The importer has a proprietary list of standard product brand names and corresponding stock-keeping units (“SKU”) numbers, which you have provided. The importer states that product SKU number corresponds to a defined set of physical specifications. xxxx The SKU numbers describe the product type, and its packaging type and are used on the sales, shipping and internal accounting documents. For purposes of quality control and tracking, every lot of the imported good produced by a foreign supplier from China is assigned a batch number specified by the middleman that identifies the unique batch and the supplier. The batch number refers to an individual production run by the unrelated foreign supplier and allow the middleman to trace the origin of every production run by the foreign supplier. Tracing to individual production runs is important as physical properties of the products can vary slightly from batch to batch. The batch numbers all begin with “T” and are further coded to identify the date of the order, the supplier identity code, and a final sequential number for each unique batch. This batch number follows the imported good from the factory to the middleman and to the U.S. The batch number can be easily linked to the SKU by virtue of the associated purchase order numbers and product descriptions on the order and sales documents referencing the batch number. The batch number appears on purchase orders, invoices and packaging at each stage in the sales process. The suppliers are not related to the importer or the middleman. The suppliers will manufacture or procure the imported good in accordance with the importer’s ordered specifications as provided for in a purchase order from the middleman. You have provided a sample purchase order. The supplier will receive orders and shipping instructions from the middleman, provide order confirmation, produce the product according to the specifications, mark each package with a pre-determined SKU and quantity, send a sample to the middleman for quality approval, invoice the middleman on an ex-factory basis, and receive payment from the middleman. The middleman is a wholly owned subsidiary of the importer established under the laws of China. The middleman operates a processing and packaging facility in China. The middleman’s role will include the following: enter into independent arms length purchase agreements with unaffiliated manufac- turer’s/suppliers in China; conduct quality testing of samples before the purchase; receive purchase orders from the importer and place corresponding purchase orders and shipping instructions with suppliers; pay the suppliers; arrange and pay for inland freight from the supplier’s premises to the port; invoice the importer for the imported good on an FOB basis; and receive payment from the importer for the imported good. The middleman’s operations consist of: 1) the purchase and resale of the imported good to affiliated and unaffiliated customers; and 2) warehousing of product prior to sale or shipment. In addition to sales to the importer, which accounted for xxx percent of the middleman’s YTD 2007 shipments, the middleman also sold the product to a variety of unaffiliated end users located in China xxxx percent of YTD 2007 shipments, and to three other affiliates located outside the U.S. xxx. Counsel states that none of the imported merchandise was further processed after shipment from the unrelated foreign producer and prior to importation into the U.S. The importer is a publicly traded corporation engaged in the development of, marketing, and distribution of the imported goods, along with services related to that good. The importer will place purchase orders for the imported good with the middleman, pay ocean freight and related transportation charges from the port in China to the U.S., pay the middleman for the product, and sell the imported good to unaffiliated customers. The importer claims that the transaction involves a sale from the supplier to the middleman and sale from the middleman to the importer. Counsel has described a scenario which it describes as shipment of the product from the supplier to the foreign port for export to the U.S. The importer places an order with the middleman for a specific product identified by SKU number and packing type, quantity and delivery date. The middleman contacts the supplier for the product and places a corresponding purchase order with that supplier. The purchase order from the middleman to the supplier includes: the middleman’s purchase order number; the importer’s purchase order number; the price and quantity ordered; the product description, SKU number and specifications for the product; the specified batch number used to identify and track the product; packing requirements; the delivery terms (ex-factory); requested delivery date; payment terms and delivery instructions. The purchase order also includes the statement “For shipment to the United States of America per importer purchase order listed below. Irrevocably Destined for the U.S. No substitutions or Diversions permitted. Ocean Container to be Stuffed by the Supplier. Purchase Order No. xxxxx. Batch Number xxxxx.” If the order is accepted, the supplier issues a written purchase order confirmation to the middleman confirming the sale to the importer and repeating the sales terms and conditions described in the above purchase order, including specific acknowledgement that the product is “irrevocably destined for the U.S.” The PO is entered into the importer’s system, which is shared with the middleman, and is therefore electronically transmitted to the middleman. The supplier packages the product in pre-printed sacks on pallets, labeling each sack with the batch number, SKU number, PO number, and language indicating that the shipments are irrevocably destined for the U.S. Once the product is packed and ready for shipment, the supplier will notify the middleman and issue an invoice. The amount listed on the invoice is the price to the middleman in local currency, as previously negotiated and agreed to between the middleman and the supplier. The middleman pays the supplier based on the invoice out of their own accounts in China. The sales terms are “ex-factory FAC Supplier Plant,” between the supplier and the middleman and between middleman and the importer, FOB port of shipment. Title and risk of loss passes to the middleman upon delivery of the imported good to the transportation company at the supplier’s loading dock. The middleman assumes the risk of loss from the time the goods leave the factory to the time the goods pass the ships rail at the port of shipment. The “Ship To” address listed on the invoice from the supplier is the destination in the U.S. specified in the middleman’s PO. The imported goods will then be stuffed directly into an ocean shipping container at the supplier’s premises or will be shipped by truck or rail to the port where the sacks will be immediately stuffed in ocean containers for continued shipment to the U.S. As stated above, the delivery terms are FOB. The importer makes the arrangements and pays for transportation from the foreign port to the location specified in the U.S. (either to one of the importer’s warehouses or to the customer in the U.S.). After shipment from the supplier and receipt of the invoice from the supplier, the middleman issues a sales invoice to the importer. The importer pays the middleman based on this invoice by means of electronic transfer. The importer of record is responsible for the payment of duties, freight charges from the U.S. port of arrival and inland transportation in the U.S. ISSUE: Whether the transaction between the foreign supplier and the middleman may be used to determine the transaction value of the merchandise described above. LAW AND ANALYSIS: The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in 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. Transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for five enumerated statutory additions. 19 U.S.C. 1401a(b). In order for imported merchandise to be appraised under the transaction value method, it must be the subject of a bona fide sale between a buyer and seller, and it must be a sale for exportation to the United States. We will assume for the purposes of this ruling that transaction value is the appropriate basis of appraisement. In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992) and Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993), the Court of Appeals for the Federal Circuit and the Court of International Trade, respectively, 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. Both cases involved a foreign manufacturer, a middleman, and a United States purchaser. In each case, the court held that the price paid by the middleman/importer to the manufacturer was the proper basis for transaction value. Each court further stated that in order for a transaction to be viable under the valuation statute, it must be a sale conducted at arm’s length, free from any non-market influences, and involving merchandise clearly destined for export to the United States at the time of the first sale. In accordance with the Nissho Iwai and Synergy decisions and our own precedent, we presume that transaction value is based on the price paid by the importer. In further keeping with the courts’ holdings, 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 will be the importer’s responsibility to show that the “first sale” price is acceptable under the standard set forth in Nissho Iwai and Synergy. 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, 30 Cust. Bull. 52/1 (January 2, 1997), CBP set forth the documentation and information needed to support a ruling request that transaction value should be based on a sale involving a middleman and the manufacturer or other seller rather than on the sale in which the importer was a party. 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. correspondence) 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.” If such information is unavailable the ruling should so provide. 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. I. Bona Fide Sale 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 CCPA 25, 505 F.2d 1400 (1974). No single factor is decisive in determining whether a bona fide sale has occurred. CBP makes each determination on a case-by-case basis and will consider such factors as whether the purported buyer assumed the risk of loss and acquired title to the imported merchandise. 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 Headquarters Ruling Letter (“HRL”) 547197, dated August 22, 2000, and HRL 546602, dated January 295, 1997. The sample documentation submitted, which includes purchase orders, order acknowledgement, invoices and evidence of payment indicate a bona fide sale occurs. This conclusion is further supported by the fact that the terms of sale between the middleman and the foreign supplier were such that the middleman took title and assumed the risk of loss from the supplier at the supplier’s loading dock and retained it until the merchandise crosses the rail of the ship at the port of shipment. It appears that the middleman freely negotiated the price of the goods with the supplier. Accordingly, the available evidence suggests that there was a bona fide sale between the supplier and the middleman in this case. Arms Length Sale According to Nissho Iwai, in order for a transaction to be viable for transaction value purposes, it must be a sale negotiated at arm’s length, free from any non-market influences. There is a presumption that a transaction will meet this standard if the buyer and seller are unrelated. See T.D. 96-87, supra. You have submitted an affidavit supporting the statement that the suppliers and middleman in this case are unrelated. Assuming this to be correct, this aspect of the Nissho Iwai test is satisfied. Clearly Destined for Export to the U.S. Under Nissho Iwai and Synergy, in order for a transaction to be based on the first sale or earlier sale, the importer must provide sufficient evidence that at the time of the first sale or earlier sale, the merchandise was clearly destined for exportation to the U.S. In another ruling under Nissho dealing with the “clearly destined” issue, CBP ruled that imported Russian titanium sponge should be valued on the price between the second middleman and the importer, not the earlier sale between the second middleman and the first middleman. Headquarters Ruling Letter (“HRL”) 547035, dated August 18, 1999. In this case, the first middleman was not aware of the U.S. destination of the imported good. The documents between the first middleman and the second middleman indicated that the final destination of the goods as a warehouse in Finland. The material was not produced to any specific U.S. standards nor in accordance with any unique specifications by the second middleman. There was no easily followed chain of sales clearly linked to show the material was purchased by the second middleman expressly to fulfill a prior existing sale to the U.S. to the importer. CBP stated that while not dispositive, the shipment of the goods to Finland was an important factor to be considered. Further, there was no documentation on the sale between the first and second middleman that the titanium sponge was to be exported to the U.S. In HQ 546658, dated January 30, 1998, CBP held that imported microwaves were clearly destined for the U.S. CBP stated that both the Court of International Trade and the Court of Appeals for the Federal Circuit, “considered whether throughout the entire transaction (including the time of production) the goods were destined only for the U.S.” CBP concluded that “in determining that the imported merchandise was clearly destined to the United States, the courts focused on the fact that throughout the entire transaction the imported merchandise was intended for a specific customer in the United States.” The microwaves had to be produced so that they were compliant with the U.S. electrical requirements. In the instant case, the importer has shown that the imported merchandise was clearly destined for the United States at the time of production. As stated infra, the importer has a proprietary list of standard product brand names and corresponding SKU numbers, which were provided. The importer states that product SKU numbers corresponds to a defined set of physical specifications. The SKU numbers describe the product type, and its packaging type and are used on the sales, shipping and internal accounting documents. For purposes of quality control and tracking, every lot of the imported good produced by a foreign supplier from China is assigned a batch number specified by the middleman that identifies the unique batch and the supplier. The batch number refers to an individual production run by the unrelated foreign supplier and allow the middleman to trace the origin of every production run by the foreign supplier. Tracing to individual production runs is important as physical properties of the products can vary slightly from batch to batch. The batch numbers all begin with “T” and are further coded to identify the date of the order, the supplier identity code, and a final sequential number for each unique batch. This batch number follows the imported good from the factory to the middleman and to the U.S. The batch number can be easily linked to the SKU by virtue of the associated purchase order numbers and product descriptions on the order and sales documents referencing the batch number. The batch number appears on purchase orders, invoices and packaging at each stage in the sales process. Unlike in HQ 547035, the batch numbers and SKU numbers provided in this case allow for the tracking of the order to the goods and furnish complete details about the shipment. The goods may be appraised under transaction value on the basis of the “first sale,” the price paid by the middleman to the foreign supplier. HOLDING: Based on the evidence presented, we find that the imported goods may be appraised under transaction value on the basis of the “first sale,” the price paid by the middleman to the foreign supplier. This decision should be mailed by your office to the party requesting Internal Advice no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to CPB personnel, and to the public on the CPB 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 & Special Programs Branch