Application for Further Review and Protest No. 1401-08-100275; Valuation; First Sale

HQ H043478 March 23, 2009 VAL-2 OT:RR:CTF:VS H043478 CMR CATEGORY: Valuation Port Director U.S. Customs and Border Protection Port of Norfolk 101 E. Main Street Norfolk, VA 23510 RE: Application for Further Review and Protest No. 1401-08-100275; Valuation; First Sale Dear Mr. Laria: This decision is in response to an application for further review of protest 1401-08-100275, filed by Neville Peterson LLP, on behalf of their client, Target Stores (hereinafter Target), against your decision to appraise forty-three entries of various footwear based on the transaction value of the last sale in a multi-tiered sales transaction. The protest was timely filed. This office set aside the denial of the application for further review and voided the denial of the protest on September 16, 2008. We note the port denied the protest for “insufficient evidence (documents requested but not received).” FACTS: The entries at issue all involve footwear produced in China and subject to multi-tiered transactions. The importer, Target, purchases footwear from a Hong Kong company, Kenth Limited (hereinafter Kenth). Kenth does not manufacture the footwear, but places orders with other companies to have the footwear made in accordance with Target’s specifications. In the case of the entries at issue, three different companies (sellers) sold footwear to Kenth for export to Target. Kenth provides these companies with Target’s specifications for the footwear including Target’s purchase order number, the style numbers and names Target assigns to the footwear it has ordered, and the quantity ordered. However, the sellers do not actually make the merchandise. They contract with factories in China to produce the actual footwear. As part of this multi-tiered transaction, Kenneth Cole Productions, Inc., a party related to Kenth, provides assistance in designing and sourcing the footwear for which it is paid a commission. The design work is performed in the United States. The sellers with which Kenth places orders for the footwear know that the footwear is being produced to be shipped to Target in the United States. The information provided to them by Kenth indicates the footwear is destined for export to the United States. To substantiate the claim that the transaction value should be based on the sale between the sellers and Kenth, counsel for Target submitted, for each entry: (1) The relevant entry summary, (2) Kenth’s invoice to Target, (3) Target’s purchase order to Kenth, (4) The seller’s invoice to Kenth which references the relevant Target purchase order, style names and numbers, and the quantity indicated in the referenced Target purchase order. The protestant asserts that the transaction value of the footwear is based on the price actually paid or payable between the sellers and Kenth (the first sale). To this first sale price, protestant believes additions for royalties for the use of a patent under a Technology and License Agreement with a third party should be added, but notes that only certain entries under this protest are subject to this licensing agreement. In addition, an assist cost, i.e., the value of boxes provided by Kenth to the sellers is also added. We note that documentation has been provided for only forty-two of the forty-three entries. Counsel for Target notified this office that Target was withdrawing its claim with regard to the entry for which documentation has not been submitted, i.e., entry XXXXXX-X. In addition, at our request counsel provided copies of bank payment advices as evidence of Kenth’s payments to the sellers. ISSUE: Is the sale between the sellers and the middleman, Kenth, of the footwear purchased from Kenth by Target a sale for exportation to the United States for purposes of determining the transaction value of the footwear under 19 U.S.C. § 1401a(b)? LAW AND ANALYSIS: I. Appraisement 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 nonmarket 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. corre- spondence) 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. In this case, the protestant has submitted for each entry at issue documents to support that a sale of merchandise occurs between the sellers and the middleman. The invoices from the sellers identify Kenth as the party to whom the footwear was sold and identify Target as the party to receive the footwear. Kenth’s invoices to Target identify Target as the buyer, identify the actual manufacturer, and identify Target’s purchase order numbers. The sellers’ invoices to Kenth identify the actual manufacturer and identify Kenth as the buyer and Target as the recipient of the shipment. The sellers’ invoices also identify Target’s purchase order numbers and information identifying the footwear so that the Target purchase order and identifying information for the footwear subject to that purchase order appears on both the sellers’ invoices and Kenth’s invoices to Target. Finally, the bank payment advices show debits from Kenth’s account for payment and payment to the sellers and they identify specific invoice numbers and payment amounts for each invoice. Kenth and the sellers of the footwear are not related. 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)). Based on the submitted information, including the sellers’ invoices which indicate that the merchandise has been sold to Kenth and the proofs of payment by Kenth to the sellers for the merchandise, we are satisfied that the sales between the sellers and Kenth were at arm’s length, were bona fide sales, and were sales for export to the United States. We note that counsel submitted a chart for the entries at issue in this protest indicating sales prices and additions, and the amount of duties for which protestant seeks reimbursement. We note the first entry on the chart contains an error in the amount of the first sale price due to a switching of the second and third digits in the amount. A copy of the chart is included with this decision as well as a copy of the entry packets. The port will need to verify the protestant’s calculations. Procedural Considerations Notwithstanding the appraisement determination above, we find it necessary to comment on the procedural aspects of the AFR. This office set aside the denial of AFR and voided the protest denial for the reasons set forth in our letter of September 16, 2008 to counsel which was forwarded to the port. Initially, the port denied the protest and did not consider the AFR because the protestant failed to submit the necessary documentation to support a claim of first sale. The protest was filed on May 22, 2008, with an indication by counsel that supporting documents would be filed within the time frame provided for in the Customs and Border Protection (CBP) regulations, specifically 19 CFR § 174.28. Section 174.28 provides: In determining whether to allow or deny a protest filed within the time allowed, a reviewing office may consider alternative claims and additional grounds or arguments submitted in writing by the protesting party with respect to any decision which is the subject of a valid protest at any time prior to disposition of the protest. In any case in which alternative claims or additional grounds or arguments are submitted orally, they shall be considered in the allowance or denial of the protest only if submitted in writing in conjunction with, or no later than 60 days after, such oral submission. Section 174.28 provides a time limit of 60 days for written submission of additional grounds or arguments which have been submitted orally, and no time limit other than “prior to disposition of the protest” for submission of additional grounds or arguments or alternative claims. As such, it is incumbent upon a protestant to communicate with a port regarding the time needed for submitting additional documentation to support a claim, as in this case. The Port of Norfolk issued a “Resolution Request” on May 28, 2008 to the broker for the protestant requesting “paperless entry summary packages” for the entries at issue in this protest and setting a deadline of 30 days for submission of the requested documentation. The documentation was not received by the port and the protest was denied on July 24, 2008. The merits of the protest and the merits of an AFR are separate questions and given the disposition of prior entries in similar transactions, this denial of AFR was set aside which afforded the protestant and protestant’s counsel the opportunity to provide the necessary documentation to this office. Nonetheless, regarding the numerous related protests pending before the port of Norfolk, it is best that the review of the documentation necessary to support the claim is handled by the port as this pertains to a review of the facts of the transactions. Counsel for protestant in her letter of August 21, 2008 objected to the port placing a time limit on the importer for providing supporting documentation. It is not unreasonable for CBP to place reasonable time frames on requested actions. We note that the importer always has the option of requesting an extension of time. However, failure to respond to a request from a port, failure to request more time in which to respond, and failure to provide a port with the necessary documentation to support the claim are grounds for a port to deny a protest. As noted above, each transaction must satisfy the documentary requirements as requested by the port. HOLDING: The protest is allowed. In accordance with the Protest/Petition Processing Handbook (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 the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision Regulations and Rulings of the Office of International Trade will make the decision available to 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, Myles B. Harmon, Director Commercial and Trade Facilitation Division