Request for Internal Advice; Valuation of Bananas; First Sale

HQ H023269 October 27, 2010 VAL-2 OT:RR:CTF:VS H023269 CMR CATEGORY: Valuation Port Director U.S. Customs and Border Protection 310 East Ocean Boulevard Long Beach, CA 90802 RE: Request for Internal Advice; Valuation of Bananas; First Sale Dear Port Director: This is in response to a submission by counsel for the importer, dated February 1, 2008, requesting your port seek internal advice from this office regarding the appraisement for duty purposes of certain bananas imported from the South American country of [X]. The request was made subsequent to receipt of “Assist Audit Report”, 741-06-OFO-AU-20314, dated September 28, 2007, wherein the Office of Regulatory Audit (hereinafter, Regulatory Audit) rejected [the importer’s] use of “first sale” in multi-tiered transactions as the basis for transaction value. The audit report is based on the time period of July 1, 2001 through December 31, 2004. Counsel requested certain information, including their client’s identity, be afforded confidential treatment. Counsel identified the specific information and set forth valid reasons for providing confidential treatment to such information. The information to which confidentiality will be extended is identified in this decision by means of bracketing and underlining the information. This office will make a public version of this decision available on the Customs Rulings On-line Search System on the Customs and Border Protection (CBP) public web site 60 days after issuing the decision. FACTS: The audit report which generated this request for internal advice by [the importer] reviewed multi-tiered transactions which resulted in [the importer’s] purchase and importation of bananas from various South American countries. The number of parties involved in these transactions varies from one country to another, and within a single country, depending upon whether the growers located in a country sell bananas directly to [an international affiliate], a party related to [the importer], or whether the growers sell bananas to another company within the South American country who is related to [the importer] and [the international affiliate] which then sells the bananas to [the international affiliate]. We note that in all but one country, [X], the growers of the bananas include parties related to [the international affiliate] and parties not related to [the international affiliate]. [The international affiliate] sells the bananas to [the importer]. The audit report rejected [the importer’s] appraisement of the imported bananas using transaction value based upon a “first sale” price paid by [the international affiliate] to related and unrelated suppliers. Regulatory Audit did not believe the transactions met the requirements to qualify for first sale transaction value. They determined that the final sale in the series of sales, i.e., the sale from [the international affiliate] to [the importer], represented the transaction value of the merchandise. Counsel for the importer has requested this office only review the transactions related to the importation of bananas from the South American country of [X]. Counsel asserts that transaction value should be based on the first sale from the unrelated growers to the related [ ] entity, [XXX]. [The related entity] resells the bananas to [the international affiliate], which resells the bananas to [the importer], which imports the bananas into the United States. We note that for the entries that were the subject of the audit, the importer, [ ], did not claim the sale between the growers and [the related entity] as the “first sale” for purposes of appraisement, but claimed the sale between [the related entity] and [the international affiliate], as related parties, as the “first sale” for purposes of customs appraisement. The growers in the South American country at issue, [X], who sell to [the related entity] are either self-represented or part of an association of growers. [The related entity] contracts with the growers for the purchase of their bananas for export. Under the contracts with the growers, [the related entity] provides materials to identify and protect the stems (stem bags and colored ribbons), technical assistance and advice, and transportation from the packing plants (which [the related entity] builds on the grower’s property) to the refrigerated containers in which the bananas are shipped. In addition, [the related entity] harvests, cleans and packs the bananas, either directly or through a third party. For the entries at issue during the audit period, [the related entity] hired an independent third party, [P] to harvest, clean and pack the bananas. [The international affiliate] provides the packaging, fruit and box labels, and specific requirements for treating the fruit to meet U.S. requirements. Title to the bananas transfers from the growers to [the related entity] when the fruit is packaged, boxed and loaded into the refrigerated containers (supplied by [the related entity) at the farms’ packing plants or nearby, generally on the farm property. The refrigerated containers are, at that point, already specifically booked and designated for particular vessels. The containers are sealed after loading and remain sealed until the bananas are unloaded in the United States. Title passes from [the related entity] to [the international affiliate] FOB at the [X] port of export. After shipment of the bananas from the South American country, [X], title passes from [the international affiliate] to the consignee and importer of record, [ ], one nautical mile outside the territorial waters of the United States as the vessel is on its final approach to the U.S. port for which the bananas are destined. In support of the claim that the sale between the independent [X] growers and [the related entity] qualifies as a “first sale”, that is an arm’s length, bona fide sale of merchandise for exportation to the United States, the importer has submitted, among other things, copies of contracts between the various parties involved in the transactions, organizational charts, and a copy of the Audit Assist Report and material provided to the Office of Regulatory Audit. Supplemental submissions, dated December 10, 2009, January 14, 2010, and April 6, 2010 were submitted in response to questions raised by this office. Furthermore, CBP personnel met with counsel and his client on July 14, 2010, at which time an additional submission was presented and discussed. A review of the submitted contracts shows that the growers’ contract to sell organic bananas of a particular variety. The bananas must be of first quality and meet certain characteristics and specifications set forth in the contract. [The related entity] has the right to reject or return any bananas which do not meet the requirements set forth in the contract. We note there is no restriction on the growers regarding the disposal of rejected bananas, although there are restrictions regarding use of intellectual property, such as trademarks, designs and trade names. The sample grower’s contract specifies the amount of land planted with banana trees and it specifies the price to be paid for each 20-kilogram box of bananas. However, with regard to the amount of bananas to be supplied, the contract does not specify a quantity to be supplied, but it does provide for penalties should the grower fail to deliver the amounts requested in the terms set forth in the Purchase Order and if the grower sells bananas grown on his property (for which supplies and services provided by [the related entity] may have been used) to someone else. In the contract between [the related entity] and [the international affiliate], [the related entity] agrees to sell exclusively to [the international affiliate] all of the bananas purchased by [the related entity] in [X] and [the international affiliate] agrees to buy all of the bananas offered for sale by [the related entity] that meet [the international affiliate’s] quality specifications. In that regard, Clause 2.1 of the Fruit Purchase Agreement provides: Quality Specifications: It is agreed that the BUYER is only required to purchase (at the price set forth in Section 5) and accept delivery of Products which conform strictly to the grade specifications and quality standards set forth in Schedule A to the Agreement. It is understood that BUYER shall not be required to purchase any of the Products which do not meet such quality specifications and standards. BUYER shall have the option to purchase any or all of the Products [bananas] which do not meet such quality specifications and standards (“Second Quality Products”) at a price to be agreed agreed (sic) to by BUYER and SELLER. If such option is not exercised, SELLER agrees (i) not to sell Second Quality Products for distribution outside of the [X] market and (ii) prior to any sale in the [X] local market to remove all seals, packaging and marks used by BUYER. [Underline added]. Clause 2.2 of the Fruit Purchase Agreement provides that [the international affiliate] or its representatives may inspect the bananas for acceptance or rejection at the time the bananas are delivered to the vessels designated by [the international affiliate] for shipping. Clause 2.3 of the Agreement provides: Packaging: SELLER shall pack the Products in the type, size and style of cartons specified by BUYER and suitable for shipment to the ultimate markets. The cartons shall carry the dress, design, style and trademarks specified by BUYER. The Fruit Purchase Agreement specifies that title and risk of loss passes from [the related entity] to [the international affiliate] FOB at the port of shipment, as previously noted. It also indicates that payment is due at the time title passes to [the international affiliate] and that the purchase price [the international affiliate] is to pay [the related entity] will be an amount determined between the parties. Finally, in the contract between [the international affiliate] and [the importer], [the international affiliate] agrees to sell exclusively to [the importer] all of the fresh fruit it delivers to the United States and [the importer] agrees to buy all of the fresh fruit offered for sale by [the international affiliate] and that meet [the importer’s] quality specifications. [The importer] may inspect the fruit and with regard to fruit that fails to meet the grade specifications and quality standards agreed to by the parties, [the importer] may set-off the price of such fruit against future deliveries plus any cost to dispose of the non-conforming fruit but less any amounts received from sales of such fruit to third parties. Payment by [the importer] for the fruit, i.e., the bananas, is made on a monthly basis based upon a percentage of the total amount invoiced during the four-week accounting period to [the importer’s] third party buyers. [The importer] also pays [the international affiliate] for any surcharges for ocean freight and fuel, invoiced as such. ISSUE: Whether the sale between the independent [X] growers to [the related entity], a party related to the importer of record [ ], qualifies as a “first sale” for purposes of appraisement of the imported bananas? 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). For the purpose of this protest we have assumed that transaction value is the appropriate basis of appraisement. 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 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 (Ct. of Int’l Trade, 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, 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." 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. Furthermore, in T.D. 96-87, we stated that “[i]n general, Customs will consider a sale between unrelated parties to have been conducted at ‘arm’s length.’” However, we must determine if indeed a “sale” has occurred. 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 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). Bona Fide Arm’s Length Sale In this case, counsel for the importer contends that the sale between the independent [X] banana growers and [the related entity] meets all of the requirements of a bona fide sale for export to the United States. The growers and [the related entity] are unrelated parties and as such, there is a presumption that the parties transact business with each other at arm’s length. To substantiate that a sale occurs between the growers and [the related entity] for the bananas grown on the growers’ land, documents known as “Liquidacion de Compra” (Purchase Liquidation) were submitted as proof of purchase and screen prints from [the related entity’s] account records were submitted to show amounts owed to growers per Purchase Liquidation documents and amounts paid to growers. After a review of the submitted documentation, we are satisfied that bona fide sales occur between [the related entity] and the unrelated growers. Clearly Destined for Export to the United States Counsel for [the importer] has argued that at the time title to the bananas passes from the growers to [the related entity], the bananas have been labeled with stickers specific to the U.S. market and packed in cartons using plastic bags designed for shorter journeys, i.e., to the U.S., as opposed to bags designed for use when shipping bananas to Europe. Furthermore, even the pallets used for shipping are distinct between bananas shipped to Europe and bananas shipped to the United States. The packed bananas are placed in containers already booked and designated for particular vessels which have already been scheduled for sailing to ports in the United States. Therefore counsel argues, at the time title passes to [the related entity] from the growers, the bananas are clearly destined for the U.S. market. However, the contract between [the related entity] and [the international affiliate] clearly allows for a diversion of bananas that fail to meet the quality specifications and standards of [the international affiliate] into the local [X] market. See Clause 2.1 of the Fruit Purchase Agreement. As such, it would appear that not all of the bananas purchased by [the related entity] from the independent growers are clearly destined for the United States. Counsel argues that this option was never exercised and that this provision does not appear in subsequent contracts between the parties. It is maintained that the only inspection of bananas prior to exportation occurs at the packing sheds by [the related entity] and its inspectors. Furthermore, it is asserted that [the related entity] and its inspectors perform this inspection not only for [the related entity], but also as designees of [the international affiliate]. Once the containers are packed, they are sealed and locked and not reopened prior to exportation from [X].  Whether the option was ever exercised, it would appear that the option of diverting bananas into the local market existed contractually and could have been exercised at [the international affiliate’s] discretion. In Headquarters Ruling Letter (HQ) 546069, dated August 1, 1996, the U.S. Customs Service, predecessor of U.S. Customs and Border Protection (CBP) considered whether a sale between a cheese manufacturer in Lithuania to a buyer in Holland qualified as a “first sale” for purposes of appraising cheese imported into the United States. The cheese, intended for the U.S. market, was first shipped through Holland and placed in a bonded warehouse for inspection to ensure it met contract specifications. If the cheese did not meet specifications, it could be sold in the European market. Given those facts Customs found that the evidence submitted did not establish that the cheese was clearly destined for the U.S. market at the time of exportation from Lithuania. In HQ 546427, dated December 19, 1996, wearing apparel was imported into Canada from Germany for sale in the United States or Canada. The U.S.-market wearing apparel were subjected to a quality control inspection at a warehouse in Canada and any such apparel found to be inferior was either entered in the Canadian market for possible sale, or returned to the German manufacturer. Citing HQ 546069, Customs found that because some or all of the U.S. destined merchandise which failed to meet the quality control inspection could be sold in the Canadian market, a contingency of diversion existed and the merchandise was not clearly destined. The situations described in HQ 546069 and HQ 546427 are similar to the allowance in the contractual provision between [the related entity] and [the international affiliate] whereby rejected bananas could enter into the local [X] market. Based on this provision in the contract, it appears that a contingency of diversion existed at the time of shipment of the entries under consideration. However, counsel argues that the contractual provision that would allow for diversion of rejected bananas into the local market should not preclude a finding that the bananas were clearly destined for the United States and furthermore, that the provision was never exercised. It is argued that only first quality bananas were intended for sale to the U.S. and any bananas rejected as not meeting first quality would be replaced by bananas meeting the standard. Thus, all first quality bananas were clearly destined for the U.S. With regard to the contractual provision, it is CBP’s view that it does constitute a contingency of diversion of the bananas such that the sales prior to the sale from [the international affiliate] to [the importer] could not be considered to meet the requirement that the merchandise be clearly destined at the time of sale for export to the United States. The diversion of rejected bananas into the local market would mean that not all of the bananas purchased from the growers, the sale being claimed as the first sale, were clearly destined for the U.S. at the time of sale. This view does not negate the use of “first sale” in all situations in which contracts contain inspection provisions as counsel argues. Counsel cites United States v. Hugo Stinnes, 66 CCPA 84, C.A.D. 1226 (1979) wherein the court cited to the lower court’s opinion wherein it is stated: . . . Every contractual agreement carries with it the inherent possibility of change, substitution, modification or nonperformance. However, in order to constitute a contingency of diversion sufficient to bear on plaintiff’s intent, the possibility of such diversion must have a realistic basis in fact and not mere conjecture. Hugo Stinnes at 94. Counsel cites to the lower court’s opinion emphasizing the following: . . . It indeed, would be unusual and contrary to commercial practice to construe the right of inspection in order to insure contract conformity to constitute such a contingency of diversion as would negate the plaintiff’s intention to transship the same to the United States. However, the court went on to point out that: . . . Where, as indicated by the record, the specifications and the markings thereon conformed to its agreement with La Metallurgie, the plaintiff had no legal right to refuse the acceptance of the merchandise. * * * . . . the plaintiff was protected not by a right of rescission or rejection in case the merchandise was damaged in whole or in part upon its arrival in Antwerp, but by the right of recovery upon the policy of insurance thereon. * * * . . . The court, accordingly, finds nothing in the inspection of the steel and the resulting insurance settlement which in any way negates plaintiff’s intention to transship the merchandise to the United States. In the lower court’s decision we find facts which make clear that Hugo Stinnes is distinguishable from the matter at hand. There was no possibility of diversion in Hugo Stinnes based upon the contract for sale and the facts in the case. As noted earlier, the importer argues that only one inspection of the bananas occurred prior to packing and placement in the shipping containers which were locked, sealed and not reopened until arrival in the United States (with the rare exception of reapportionment of shipments occurring in a bonded area in [the transit South American country] thus requiring the opening of the sealed containers). Although the contract between [the related entity] and [the international affiliate] provided for an inspection, and thus possibility of diversion of second quality bananas into the local market, that provision of the contract was never exercised. The parties by their actions modified their contract. The contract between [the related entity] and [the international affiliate] provides that it is governed by the laws of the State of California. The importer’s counsel provided CBP with copies of the California Civil Code § 1698 and of the California Commercial Code §§ 2202 and 2209. These provisions make clear that the [the related entity] and [the international affiliate] could modify their written contract by an oral agreement to the extent that the agreement was executed by the parties. As the actions of the parties reflect that only one inspection of the bananas occurred in [X] prior to the sealing of the shipping containers in which the bananas were packed, the provision of the contract allowing [the international affiliate] to inspect bananas at the time the fruit was delivered to the vessels for shipping was rescinded by the parties and we find that it is no bar to finding that the bananas were clearly destined for shipment to the United States at the time title passed from the [X] growers to [the related entity]. Therefore, the sale between the [X] growers and [the related entity] qualifies as the first sale. However, although the sale between the [X] growers to [the related entity] may be used for purposes of appraisement of the bananas entered into the U.S. during the audit period, we note that questions exist regarding the calculation of the packing costs as additions to the price actually paid or payable. The submitted contracts clearly indicate the prices which may be charged the growers, per box, for the packing of the bananas (materials and labor). However, 19 U.S.C. 1401a(b)(1)(A) states: 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 amounts equal to – The packing costs incurred by the buyer with respect to the imported merchandise[.] [Emphasis added.] The file contains documents, Purchase Liquidations, which indicate payments to the growers without any indication of deduction for packing materials. We received copies of two Liquidacion of Fruta documents which show the price for the fruit less deductions for harvesting and packing and the total payment to the grower. However, it is not what the buyer charges the seller for packing materials which is of concern, but what costs the buyer incurred in obtaining the packing materials subsequently provided to the seller. In the translated contracts between growers and [the related entity], in the sixth clause we find the following language: THE GROWER authorizes [the related entity] to deduct and withhold from the payment for supplied fruit an amount to be specifically determined thereby for the payment of agricultural supplies and any other purpose which it may assign. This deduction shall be made provided that THE GROWER has a positive balance in its favor from the fruit liquidation. In other words, the grower will be charged packing costs and other costs only if the grower has a positive balance. Therefore, we believe it is unreliable to conclude that the packing costs incurred by [the related entity] are accurately reflected in the price paid to the growers for the bananas. Again, the addition for packing costs to the price actually paid or payable is the costs incurred by the buyer, not the costs the buyer charges the seller for providing the materials and packing services. HOLDING: The sale between the growers and [the related entity] qualifies as a “first sale” which may be used for purposes of determining transaction value for the bananas imported from [X] during the audit period, provided that [the related entity] can document its packing costs. We note this decision is limited to the transactions involving bananas imported from [X] as we have not examined the sales from any of the other South American countries from which bananas were imported during the audit period. Sixty days from the date of this letter, Regulations and Rulings of the Office of International Trade will take steps to make this decision available to Customs and Border Protection ("CBP") personnel and to the public on the CBP 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 and Special Programs Branch