Internal Advice for Protest Number 4601-09-150323; First Sale

HQ H097035 November 15, 2011 OT:RR:CTF:VS H097035 CMR CATEGORY: Valuation U.S. Customs and Border Protection Protest and Control 1100 Raymond Boulevard Suite 402 Newark, NJ 07102 RE: Internal Advice for Protest Number 4601-09-150323; First Sale Dear Port Director: This is in response to your memorandum dated March 2, 2010, requesting internal advice with regard to Protest Number 4601-09-150323. By letter dated March 18, 2010, you forwarded documents relevant to the consideration of Protest Number 4601-09-150323, that is, you sent documents related to Protest Numbers 4601-09-150283; 4601-09-150149; 4601-09-150324; 4601-09-150163; 4601-09-150286; 4601-09-150223; and 4601-09-150228. All of these protests involve the same importer, and all involve the same issue, i.e., the acceptability of a first sale value between related parties. The scenarios of each protest and the parties involved vary somewhat, but the importer, the middleman, and the issue, remain the same in all. Therefore, this office will consider the information provided to the port for the related protests in reaching our decision on Protest Number 4601-09-150323. Our decision herein should assist the port in deciding the remaining protests as the issue is the same and the differences in the scenarios would not impact our decision on the “first sale” issue. We have reviewed the protest and the accompanying documents forwarded to this office with your request. The protest was filed by FPA Customs Brokers, Inc., on behalf of the importer. Counsel for the importer, Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt, LLP, has submitted documents in support of the claim that transaction value of the sale between the manufacturer and the middleman should serve as the basis of appraisement of the imported merchandise, i.e., that “first sale” should be applied in this case. The import specialist team at the port met with counsel prior to the internal advice being sent to this office. This office has received supplemental submissions from counsel, including a submission dated May 17, 2010, setting forth the arguments for “first sale” appraisement of the merchandise. A meeting between counsel and this office occurred on June 21, 2011 to allow counsel the opportunity to discuss the case and present any further arguments. Counsel submitted an additional supplemental submission on July 18, 2011. After a careful review of the submitted documents, we agree with the Port that the merchandise was properly liquidated using the “last sale” of the multi-tiered transactions and that the documentary evidence necessary to establish use of the “first sale” price is lacking. Our reasons for our decision are set forth herein.  Counsel has requested confidential treatment of certain information contained in the record including cost information, the identities of the parties and attachments to various submissions. Pursuant to 19 C.F.R. § 177.2(b)(7), the information has been specifically identified and is bracketed and underlined and will be redacted in the public version of this decision. FACTS: In the transaction at issue and the related transactions the port has brought to our attention that the importer purchases merchandise from the middleman. The middleman purchases the merchandise from related party manufacturers located in Vietnam. The related parties either produce the merchandise themselves and sell it to the middleman or purchase the merchandise either from each other or from unrelated party manufacturers. Specifically, in some of the transactions, one of the Vietnamese manufacturers purchases the merchandise from the other related Vietnamese manufacturer or an unrelated Vietnamese manufacturer. In some transactions, the other related Vietnamese manufacturer purchases the merchandise from the other related Vietnamese manufacturer or other unrelated Vietnamese manufacturers. In the specific protest at issue, protest 4601-09-150323, the middleman purchases merchandise from one of its related party manufacturers. The importer is claiming that the merchandise in each of the protested entries should be valued based upon the sale between the Vietnamese related parties and the related middleman. Documents have been submitted for each of the variations of the transactions at issue. With regard to the documentation submitted to support the argument that these transactions qualify for valuation based upon the “first sale” price between related parties, counsel has submitted for each protest: A summary diagram of the transaction The importer’s source order summary (purchase order) to the middleman The middleman’s purchase order to its related factory in Vietnam The middleman’s related factory’s invoice to the middleman The middleman’s invoice to the importer The Air Waybill showing the Vietnamese related factory as the shipper, the importer as the consignee and a customs broker as the point of contact; Air Waybill indicates “Freight Collect” in some cases, and “[x]% Prepaid [x]% Collect” in other cases Proof of payment – the importer to the middleman Proof of payment – the middleman to its related Vietnamese factory A cost breakdown sheet for the style at issue Fabric and trim documents relevant to assist costs For four of the related protests, counsel included documents relating to production by a subcontractor of the Vietnamese related factory, including the purchase order from the Vietnamese related factory to the unrelated subcontractor, the invoice from the subcontractor to the factory and proof of payment from the factory to the subcontractor. As the sale which is being claimed as the “first sale” for purposes of appraisement is between related parties, counsel initially submitted documentation to show the prices between the related parties allegedly approximated a test value. Five separate transactions were presented. By letter, dated May 17, 2010, counsel submitted a narrative explaining the documentation that had been submitted to the port and why these “test values” served to show that the transactions between the middleman and its related parties in Vietnam qualified as arm’s length sales of goods for export to the United States. The following transactions were submitted: A women’s 100% cotton woven skirt with belt which is the subject of Protest No. 4601-09-150228. A women’s 100% cotton knitted cotton polo shirt with capped sleeves which is the subject of Protest No. 4501-09-150149. A women’s 95% cotton/5% spandex jersey knit polo shirt with a 100% cotton rib knit collar and cuffs with a hemmed bottom featuring side vents (liquidated as entered at “first sale” price); and, a women’s 100% cotton knitted polo shirt with a woven collar, hemmed short sleeves and a hemmed bottom featuring side vents (liquidated as entered at “first sale” price; a paperless bypass entry). A women’s 95% cotton/5% spandex French terry knit pant with a drawstring waist (liquidated as entered at “first sale” price); and, a women’s 60% cotton/40% polyester French rib knit pull-on pant with either a self-fabric waistband or banded waistband (subject of approved Protest No. 3901-09-101358). A women’s 96% cotton/4% spandex jersey knit pullover with three-quarter length sleeves, a scoop neck with top center smocking and a hemmed bottom (liquidated as entered at “first sale” price); a women’s 100% cotton jersey knit pullover with three-quarter length sleeves, a scoop neck with trapunto stitching and a hemmed bottom (subject of Protest No. 4601-09-150369); and, a women’s 96% cotton/4% spandex rib knit pullover with three-quarter length sleeves, a scoop neck with a ruffle trim and a hemmed bottom (subject of Protest No. 4601-09-150371). At the meeting held with counsel at our offices, counsel informed us that they would not pursue test values as a means to show that the transactions between the related parties, i.e., the middleman and the Vietnamese parties, qualified as arm’s length transactions. No arguments were made to show that test values as set forth in 19 CFR 152.103(j)(2)(i) and further discussed in 19 CFR 152.103(l)(2) were satisfied. Instead, in their supplemental submission counsel argues that the circumstances of the sale show that the related parties’ relationship did not influence their transaction price. To support their argument, counsel submitted comparison transaction prices charged by unrelated Vietnamese manufacturers for goods sold to the related Vietnamese manufacturers who, in turn, sold the same goods to their related manufacturer for the same price paid to the unrelated Vietnamese manufacturers. In addition, comparison transactions between another middleman and its related Vietnamese manufacturer were submitted. Further, it was stated that the middleman conducted market research to determine prevailing prices for similar products in preparation for negotiating with its related factories. However, no market research was submitted for our consideration. ISSUE: Does the submitted documentary evidence support the claim that the “first sale” transaction should be the basis of appraisement for the merchandise at issue? 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). 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, the Customs Service (now Customs and Border Protection (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. With respect to the protests before the port, counsel submitted purchase orders, invoices, shipping documents to show shipment from the manufacturer to the importer and proof of payment. In addition, information was presented regarding various assists provided to the actual manufacturer of the merchandise. We note that for some of the assist documentation, the middleman is identified as the buyer, yet on other documents the buyer is identified as the importer. In order to benefit from a “first sale” value at importation, an importer must be able to establish all the elements of transaction value set forth in 19 U.S.C. § 1401a(b). From the shipping documents, it is clear that the goods at issue were clearly destined for the United States. However, we must determine if a bona fide sale occurred between the middleman and its Vietnamese related parties. We have been told that there is no contract between the middleman and its related parties. The purchase orders from the middleman to its Vietnamese related parties specify: Title and risk of loss for the merchandise pass to vendor [the middleman] at the factory. These goods are sold for export to the U.S. only. [The middleman] will accept merchandise within [x]% of the quantity listed on this contract. The sales between the middleman and its related Vietnamese manufacturers are “ex-factory” and the sales between the middleman and the importer are “FOB Vietnam.” No documentation has been presented regarding the inland freight. This office inquired of counsel as to who arranged and paid for the inland freight from the factory to the point of export. The response was that the “factories transported the merchandise to the port of export using their own trucking.” This was also the reason given why the factories are listed as the shippers on the Air Waybills. In the case of an ex-factory sale, also known as “ex-works”, the buyer assumes the responsibility for transporting the merchandise from the factory to the port of lading. Using the shipping term “ex-factory” in the purchase order indicates that the buyer takes delivery of the merchandise at the factory door. The buyer takes on the risk of loss and all costs related to the merchandise from the point of delivery at the factory door. Under an FOB sale, the risk of loss transfers when the goods pass the ship’s rail. In this case, the factories transported the merchandise to the port of export and the factories are identified as the shippers in the shipping documents. The factories did not receive a separate payment for this service. If the factories transported the merchandise to the port of export, be it by air or by sea, we presume the factories were operating under an FOB shipping contract and not an ex-factory one. In fact, the payment information provided by counsel on the “Payment Details” chart shows that for the merchandise at issue in Protest No. 4601-09-150323, the middleman paid the Vietnamese related party factory for “sewing.” The chart also lists the factory under the header “Shipper” in the chart. This supports a conclusion that the “sale” between the middleman and its Vietnamese related party was not an ex-factory sale, but was an FOB sale. The parties’ use of the term “ex-factory” and the recitation of the risk of loss and title transferring to the middleman at the factory are in conflict as regards the passage of the risk of loss. While true that the purchase orders between the middleman and its Vietnamese related parties state – “Title and risk of loss for the merchandise pass to vendor [i.e., the middleman] at the factory”, it is also clear that the factories were operating under an FOB sale which would mean, under INCOTERMS, risk of loss transferred at the ship’s rail, not at the factory. The shipping term in the purchase order between the importer and the middleman is FOB. Counsel indicates that title and risk of loss transferred to the importer when the merchandise was laden on board the export carrier. The risk of loss of the goods passes simultaneously from the factories to the middleman to the importer. The middleman, therefore, does not truly bear the risk of loss, in spite of the indication on the purchase order. We also note another apparent error on the purchase orders. With regard to payment terms, the purchase orders issued by the middleman to its related parties in Vietnam all indicate “Terms of Payment: L/C.” We have been informed however that no letter of credit is issued. Evidence of payment by wire transfers was submitted. As noted by counsel in the July 18, 2011 submission, shipping terms, i.e., INCOTERMS, do not indicate transfer of title. This is true, unless the parties choose to use them for that purpose and so indicate. If we ignore the conflict between the use of “ex-factory” and the explicit statement regarding the passage of the risk of loss set forth on the purchase orders, ignore the error regarding terms of payment, and accept that title passed at the factory as stated on the purchase orders, we still must ascertain whether the sales at issue between the related parties are acceptable per 19 U.S.C. § 1401a(b)(2)(B). Under 19 U.S.C. § 1401a(b)(2)(B), sales between related parties may be acceptable under transaction value if an examination of the circumstances of the sale shows the relationship between the buyer and seller did not influence the price actually paid or payable or if the transaction value of the merchandise closely approximates the transaction value of identical merchandise or of similar merchandise in sales to unrelated buyers in the United States (or the deductive value or computed value for identical merchandise or similar merchandise) and such identical or similar merchandise was exported to the United States at or about the same time as the imported merchandise at issue. The CBP Regulations at 19 CFR Part 152 set forth illustrative examples of how to determine if the relationship between the buyer and the seller influences the price. See also HQ H029658, dated December 8, 2009; HQ H037375, dated December 11, 2009; and, HQ H032883, dated March 31, 2010. CBP will examine the manner in which the buyer and seller organize their commercial relations and the way in which the price in question was derived in order to determine whether the relationship influenced the price. If it can be shown that the price was settled in a manner consistent with the normal pricing practices of the industry in question, or with the way in which the seller settles prices with unrelated buyers, this will demonstrate that the price has not been influenced by the relationship. See 19 CFR §152.103(l)(1)(i)-(ii). In addition, CBP will consider the price not to have been influenced if the price was adequate to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit realized over a representative period of time. 19 CFR §152.103(l)(1)(iii). These are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well. In this case, test values were submitted of transactions between another middleman and its related manufacturer in sales of merchandise to the same importer. With regard to test values, 19 U.S.C. § 1401a(b)(2)(B) states in relevant part: The transaction value between a related buyer and seller is acceptable for the purposes of this subsection . . . if the transaction value of the imported merchandise closely approximates – (i) the transaction value of identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United States; or (ii) the deductive value or computed value for identical merchandise or similar merchandise; but only if each value referr