Appropriate Basis of Appraisement; Sale for Export

HQ H090181 April 7, 2010 OT:RR:CTF:VS H090181 ARU CATEGORY: Valuation Mr. Garth Atchley Senior Manager Expeditors Tradewin, LLC 150 Raritan Center Parkway Edison, NJ 08837 RE:     Appropriate Basis of Appraisement; Sale for Export Dear Mr. Atchley: This is in response to your ruling request dated June 29, 2009, and additional e-mail submission, dated December 22, 2009, made on behalf of Oakley, Inc. (“Oakley”). You ask whether the transaction value of identical or similar merchandise is the appropriate basis of appraisement for apparel, footwear, and accessories from China. Additional information obtained during a conference call with Oakley on February 2, 2010 was taken into consideration in reaching the following decision. FACTS: The imported items at issue are products in Oakley’s apparel, footwear, and accessories lines, such as sunglasses, prescription lenses and frames, and goggles. Oakley buys products from overseas producers and manufacturers in Asia. Upon Oakley’s issuance of a purchase order to the Asian sellers, the sellers deliver the products to Oakley’s Asian Distribution Center (“ADC”) in China. The products and quantities requested in Oakley’s purchase orders are based on an internal calculation involving market forecasts, actual orders and estimated additional needs. The purchase orders reflect Oakley’s global supply needs and include orders from Oakley in Canada and Europe, as well as the United States. At the time a purchase order is issued, it is not certain which products or how many units are destined for the United States. The ADC is not a legal entity involved in the transaction and does not take title to the goods. Rather, it is simply a consolidation and distribution center managed by Oakley’s Third Party Logistics Providers in China. Oakley receives, consolidates, and manages products for export at their ADC. The ADC uses the same SAP system used by Oakley to manage inventory and create shipping documentation. Upon delivery of the products to Oakley’s ADC, Oakley pays the foreign manufacturer per the purchase price on the purchase order. The products are thereafter exported to destinations around the world, including the United States. The products are owned by Oakley once received at the ADC. Although the products may eventually end up being exported from China to the United States, at the time Oakley purchases the products from the manufacturer in Asia, it does not know the exact destination where the product will be exported. Upon Oakley’s determination of what products should be exported from the ADC, Oakley issues an invoice to the ADC indicating the product that is ready for export. The invoice is a “pro-forma” document for transportation purposes, and not a commercial invoice indicating a sale or transfer of title. This process allows Oakley to internally track the ordering and movement of products from the ADC. The financial information of the ADC is ultimately accounted for by Oakley. The internal invoicing process essentially serves recordkeeping purposes. After the products are in the United States, they may be sent to Oakley retail stores, purchased by other retailers and online customers, or used for promotional purposes. On occasion, Oakley will import products in its apparel, footwear, and accessories line directly from the foreign manufacturer, thus by-passing the ADC. These direct shipment purchases may be used to meet urgent or special order requirements. The products shipped directly to Oakley in the United States from the foreign manufacturers are appraised under transaction value. ISSUE: What is the correct method of appraisement for apparel, footwear, and accessories sent from Oakley’s ADC in China to Oakley in the United States? 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 (19 U.S.C. § 1401a; “TAA”). 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 enumerated additions thereto to the extent they are not otherwise included in the price actually paid or payable. 19 U.S.C. § 1401a(b)(1).  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. In the instant case, while there may be a bona fide sale between the foreign manufacturers and Oakley, Oakley does not know the exact destination of the products and, therefore, the sale will not constitute a sale for export to the United States. Accordingly, the products cannot be appraised under the transaction value method set forth in section 402(b) of the TAA. Additionally, the sale that may take place between Oakley and a U.S. retailer or online customer occurs after the goods have been imported in the United States, and therefore is not a sale for export. Under the TAA, once transaction value has been eliminated as a possible basis for appraisement, it is necessary to proceed sequentially through the remaining bases of appraisement to determine the appropriate valuation method. 19 U.S.C. § 1401a(a)(1). The second appraisement method in order of statutory preference is transaction value of identical and similar merchandise under 19 U.S.C. § 1401a(c). This method refers to a previously accepted transaction value of identical or similar merchandise that was exported at or about the same time as the merchandise being valued. Treasury Decision (“T.D.”) 91-15 (March 29, 1991). The term “identical merchandise” is defined in 19 U.S.C. § 1401a(h)(2) as: (A) merchandise that is identical in all respects to, and was produced in the same country and by the same person as, the merchandise being appraised; or (B) if merchandise meeting the requirements under subparagraph (A) cannot be found …, merchandise that is identical in all respects to, and was produced in the same country as, but not produced by the same person as, the merchandise being appraised. The term “similar merchandise” is defined in 19 U.S.C. § 1401a(h)(4) as: (A) merchandise that – (i) was produced in the same country and by the same person as the merchandise being appraised, (ii) is like the merchandise being appraised in characteristics and component material, and (iii) is commercially interchangeable with the merchandise being appraised; or (B) if merchandise meeting the requirements of subparagraph (A) cannot be found …, merchandise that – (i) was produced in the same country as, but not produced by the same person as, the merchandise being appraised, and (ii) meets the requirement set forth in subparagraph (A) (ii) and (iii). Based on the representations made by Oakley in a February 2, 2010 conference call that it occasionally imports products in its apparel, footwear, and accessories line directly from the foreign manufacturer, which are appraised under transaction value, it may be possible to appraise some shipments from the ADC pursuant to 19 U.S.C. § 1401a(c) using the previously accepted transaction values. See Headquarters Ruling Letter (“HRL”) H005402, dated April 11, 2007; HRL W563485, dated September 10, 2007; and HRL 548380, dated October 23, 2003. In accordance with T.D. 91-15, 25 Cust. Bull. 31 (1991), it must be demonstrated that the transaction value is fully acceptable under section 402(b) at the time of appraisement of the merchandise under consideration in order to be applied as the transaction value of identical or similar goods under section 402(c). In T.D. 91-15 it was explained that the information necessary for the determination of the transaction value of identical or similar merchandise under section 402(c) could be made on the basis of information provided by the importer or already available to Customs. Provided Oakley can establish that the transaction value of the identical products may serve as the basis for appraising the products that are first transferred to the ADC prior to importation to the United States, namely by showing that the products are identical, and involve the same person, country, and time of export, CBP officials at the port of importation should appraise the merchandise accordingly, subject to adjustments for commercial level or quantity if supported by sufficient information. As noted above, during a February 2, 2010 conference call Oakley stated that in some cases there will be a direct shipment of goods from the foreign manufacturer to Oakley in the United States. Oakley explained that these direct sales for export are infrequent and comprise a small percentage of Oakley’s total imports. As a result, the transaction value of identical or similar merchandise will not be an appropriate appraisement method for many Oakley products and Oakley must proceed to the next available appraisement method. This is the deductive value of imported merchandise, unless the importer elects at the time of entry summary to have the computed value method applied before the deductive value method. Under the deductive value method, merchandise is appraised on the basis of the price at which the “merchandise concerned” is sold in the United States in its condition as imported and in the greatest aggregate quantity either at or about the time of importation, or before the close of the 90th day after the date of importation. 19 U.S.C. § 1401a(d)(2)(A)(i)-(ii). This price is subject to certain enumerated deductions. 19 U.S.C. § 1401a(d)(3). “Merchandise concerned” means the merchandise being appraised, identical merchandise, or similar merchandise. 19 U.S.C. § 1401a(d)(1). The goods imported by Oakley are sold domestically from their U.S. warehouse. Based on this information, it would appear that the deductive value method presents a viable alternative appraisement method if the preceding methods are unavailable. Should the goods not meet the requirements for appraisement under deductive value, the next appraisement method is computed value. Under this method, merchandise is appraised on the basis of the material and processing costs incurred in the production of imported merchandise, plus an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind, and the value of any assists and packing costs. 19 U.S.C. § 1401a(e)(1). No information has been presented about this appraisement option, therefore we are unable to comment on its possible use, although we do note that since the buyer and sellers are unrelated companies it may be difficult for Oakley to obtain the necessary production information to enable appraisement under the computed value method. Where merchandise cannot be appraised under the methods set forth in 19 U.S.C. § 1401a(b)-(e), value is to be determined in accordance with the “fallback” method of section 402(f) of the TAA. The fallback method provides that merchandise should be appraised on the basis of a value derived from one of the prior methods reasonably adjusted to the extent necessary to arrive at a value. 19 U.S.C. § 1401a(f)(1). In Oakley’s case, resort to this last method will only be necessary if all the other appraisement methods previously discussed are unavailable. If that is the case, then appraisal will be based on the fallback method. HOLDING: As a general rule, there is no sale for export when the apparel, footwear, and accessories are transferred from Oakley’s ADC to the United States, therefore transaction value is not an appropriate appraisement method. A limited exception may exist in those infrequent cases where Oakley purchases merchandise from the foreign sellers and the merchandise is shipped directly from the factory to Oakley. Where such an exception does not exist, Oakley must proceed sequentially through the remaining bases of appraisement in order to properly appraise the imported merchandise. The next possible valuation method, the transaction value of identical or similar merchandise, may be appropriate for the items also directly imported from the foreign manufacturer, provided that all statutory requirements are met at the time of import. The remaining merchandise, those items not involved in a direct sale between the foreign manufacturer and Oakley, must be appraised under the next available appraisement method as discussed in this ruling. In most instances, it is our opinion that deductive value should be used. Reference to this ruling letter should be made in the entry documents filed at the time the subject goods are entered. See CBP Form 7501 – Instructions, Additional Data Elements (available online at: www.cbp.gov). If the entry summary has been filed without reference to this ruling letter, the ruling letter should be brought to the attention of the appraising officer at the port of entry. Sincerely, Monika R. Brenner, Chief       Valuation & Special Programs Branch