Application for Further Review of Protest 4101-12-100584; 19 U.S.C. 1401a; Bona Fide Sale for Exportation; Allowable Deductions

HQ H236428 September 8, 2014 VAL-2 OT:RR:CTF:VS H236428 HkP CATEGORY: Valuation Port Director Port of Columbus U.S. Customs and Border Protection 6747 Engle Road Middleburg Heights, OH 44130-7939 RE: Application for Further Review of Protest 4101-12-100584; 19 U.S.C. 1401a; Bona Fide Sale for Exportation; Allowable Deductions Dear Port Director: This is in response to the Application for Further Review of Protest 4101-12-100584, submitted to your port on August 20, 2012, on behalf of the importer, Gauge by Design (“GBD”), and forwarded to this office for a response. We apologize for our delay in responding to you. In reaching our decision, we have considered additional information submitted by counsel to this office. FACTS: The importer, GBD, is a U.S. importer and wholesaler of apparel. GBD received orders from a U.S. company, New York & Company Lerner (“NY&C”) on Delivered Duty Paid (DDP) terms of sale. In turn, GBD issued purchase orders to a Hong Kong vendor, Michel of Hong Kong (“Michel HK”) on Free on Board (FOB) Hong Kong terms of sale. The goods were manufactured in China by Dongguan Michel Garment (“Michel China”), a wholly owned subsidiary of Michel HK. The transactions between Michel HK and Michel China are not at issue. The foreign seller, Michel HK, extended an interest free line of credit of $500,000 to the importer, and sold the goods to the importer on open account, which allowed the importer to receive the goods before paying for them. The line of credit included up to $100,000 for freight and duty costs for shipments from Hong Kong to the United States, until December 31, 2011. The five entries at issue were made between October 11, and December 7, 2011. The declared values were based on FOB Hong Kong invoices issued to the importer, GBD, by the foreign seller, Michel HK, for goods shipped to NY&C in Ohio. Also included in the entry package were: (1) Limited Brand Inc. Apparel Packing Lists (Form A or B) that listed the supplier as Michel HK, the mode of transportation as “Ocean,” and the “ship to” party as NY&C in Ohio. (2) Pre-paid, non-negotiable bills of lading for goods shipped from Hong Kong to Ohio. The shipper was listed as Michel HK and the consignee as GBD. (4) Arrival Notices/Freight Bills issued by U.S. Group Consolidator to USG Logistics, Inc. The Port issued four Requests for Information (CBP Form 28s) on the declared values on December 9, 2011, and one request on January 24, 2012. According to counsel’s Protest memorandum, the Port found the information provided by the importer to be deficient and issued Notices of Action (CBP Form 29s) in February 2012, advising the importer that the values of the imported merchandise had been advanced. On February 24, 2012, the Port liquidated all the entries based on the prices paid by the U.S. buyer, NY&C, to the importer, GBD. On August 20, 2012, the importer timely filed the instant Protest and Application for Further Review. In support of the Protest, counsel submitted an order chronology summary for each of the five entries at issue, as well as supporting documents. For example, one order summary for an entry made on October 11, 2011, covers NY&C purchase orders 25663, 25695, 25863, 25865, and 25693 for women’s sweaters, styles 2292729, 2132299, 2982710, and 2132282. As the documents underlying each purchase order are similar to each other and there are many purchase orders covered by the five entries at issue, one purchase order and one style will be taken as representative of all the purchase orders and styles covered by the entries. The documents submitted in support of PO 25663/style 2992729 are as follows: PO 25663, dated July 26, 2011, (revised July 27) from the U.S. buyer, NY&C, to the importer, GBD for 11,864 sweaters, style 2992729, at a unit price of USD 11.32, terms of sale not stated. The factory is listed as Michel China. A disclaimer at the bottom of the PO states: This Purchase Order is subject to all the terms of the Buyer’s Master Sourcing Agreement, which is incorporated in full into this Purchase Order. By accepting this Purchase Order Seller acknowledges receipt of and agrees to be bound by the terms of this Purchase order and the Master Sourcing Agreement, as well as the supplements, addenda, guides, manuals, guidelines, specifications and other instructions referenced herein and therein. Contact Buyer immediately if you do not have a copy of the Master Sourcing Agreement. If you do not agree with the terms of this Purchase Order and the Master Sourcing Agreement, do not accept of fulfill this Purchase Order. This Purchase Order is not intended to be written confirmation of any verbal order. Different or additional terms proposed by the Seller are expressly rejected and shall not become part of the agreement between the Buyer and Seller. PO 25663, dated July 26, 2011, issued by GBD to Michel HK for 11,864 sweaters, style 2992729, at a unit price of USD 6.78, FOB Hong Kong. The factory is listed as Michel China and the packing instructions state “See Guide” (copy not provided); Reciprocating sales contract for PO 25663, dated August 2, 2011, issued by Michel HK to GBD reflecting the exact details of GBD’s order; Commercial Invoice, dated September 14, 2011, issued by Michel HK to GBD, for 12,276 sweaters at a unit cost of USD 6.78, FOB Hong Kong. The “ship to” party is listed as NY&C in Ohio. The accompanying Limited Brands Inc. Apparel Packing List (Form B), Business Unit – Lerner New York, for PO 25663, on which the supplier is listed as GBD, and the mode of transportation as “truck”. According to counsel, at the relevant time NY&C was no longer a part of the Limited Group but nonetheless requested that this particular form be used. Counsel states that Michel (not clear whether HK or China) completed the packing list and incorrectly listed the buyer as NY&C, instead of GBD. Counsel also states that the list should have been completed by GBD, which should have listed itself as the buyer. Counsel states that in the future packing lists will be issued on Michel’s letterhead and will reflect that GBD is the buyer. Non-negotiable, prepaid Bill of Lading (“BoL”) USAHCH107500 with an onboard date of September 16, 2011, issued by Unitrans, listing the shipper as Michel HK, the consignee as GBD, and the place of delivery as Ohio; Invoices for freight (OE501656), customs duty (OE501737) and various fees related to importation (OE501834), dated between September 21 and October 27, 2011, issued by Unitrans to GBD in care of Michel HK, and corresponding payment information. Each invoice has a stamp indicating that the factory/customer to be charged is NY&C. According to counsel, the invoices were stamped by Michel, and the stamp indicates that Michel will pay the invoice for GBD and states the name of the GBD customer; A GBD account settlement chart showing: (1) invoices OE501698, OE501737, and OE501834, and other invoices, including for sample and courier charges; and, (2) periodic lump-sum wire payments to Michel HK, some of which are linked to specific invoices. The wire payments are substantiated by bank records, and all payments for all charges are made to Michel HK; Commercial invoice 1112033-1, dated October 12, 2011, issued by GBD to NY&C for 12,276 sweaters at USD 11.32 each, DDP Ohio (USD 138,964.32), and corresponding payment information by NY&C to GBD. Counsel also submitted a measurement grading worksheet on NY&C letterhead that, he explains, is prepared for each style of garment. According to counsel, the worksheet is prepared by the importer, GBD, and submitted to the foreign seller, Michel HK, along with the PO. In addition, counsel stated that the goods bore the labels and hangtags of NY&C that referred to the unique style numbers in question and also to NY&C bar codes, and that the labels were affixed to the center neck of each item in accordance with U.S. regulations. The labels and hangtags were not provided. NY&C’s Master Sourcing Agreement and Addenda 1 through 5 (collectively, “MSA”) establish the legal relationship between each buyer, NY&C, and each seller named in the Agreement and applies to all transactions involving the sale of goods and services between the buyer and the seller. Addendum 1 provides, in relevant part: Buyer and Seller may create binding contracts for the purchase and sale of Goods by exchanging one or more written or electronic communications by any commercially reasonable means showing agreement as to the following items: description of Goods, price, quantity, date of delivery, and means of shipment (each, a Contract). The terms of any such Contract between Buyer and Seller will be comprised exclusively of the foregoing items, the terms of the Agreement, any supplements or addenda identified herein, the terms of the Buyer’s shipping guide…, and any other applicable policies, manuals , guidelines, specifications and other instructions which have been or may be from time to time furnished to the Seller including, without limitation, letters of credit by or on behalf of Buyer or Vendor Term’s Policy (each of which is incorporated herein by reference). [Copies not provided.] … 7. Delivery. … Seller shall ensure that … in the absence of specific instructions to the contrary…, if being imported into the U.S., Incoterms 1990: “DDP destination” specified by Buyer (or, if none is specified to the central distribution facility of Buyer in Columbus, Ohio, or, if changed, then to another central distribution facility, as notified by Buyer). … 12. Price; Payment Terms: Quoted prices will include all charges which may be imposed under the terms of the any Contract under the Agreement, and in no event will any extra charges of any kind be allowed (including, without limitation, interest or service charges, taxes, duties, cartage, boxing, freight or carrying charges) unless otherwise agreed in writing by Buyer. In addition to the buyer/seller agreement, or in the alternative, the MSA and Addenda 5 and 6 are evidence of the appointment by the buyer, NY&C, of each buying agent named in the Agreement and together constitute the buying agency agreement. Addendum No. 6, Buying Agency Terms, provides, in pertinent part, that the non-exclusive buying agent will perform the services described, including placing orders and procuring commitments from sellers that are consistent with those required by the MSA, as well as applicable addenda, supplements and terms identified therein. In addition, all contracts with sellers that the agent enters into on behalf of NY&C shall be subject to and governed by the MSA, and all orders issued by the agent on behalf of NY&C shall contain a statement that incorporates by reference the terms of the MSA. The addendum also covers the payment of the agent’s commission, based on the FOB value of the goods, and the reimbursement of the agent’s expenses by NY&C, which may not be paid, directly or indirectly, by any party, to any seller, or inure to the benefit of any seller in any way. The agent is not allowed to have ownership of or financial interest in the goods and may not sell to the buyer for its own account. The MSA submitted did not name a seller or agent and was not otherwise filled out but counsel later provided a copy of the executed buyer and seller portion. The seller was listed as GBD. Counsel states that he did not provide a copy of the buyer/agent execution portion of the form because NY&C did not use a buying agent to place orders with GBD. The Port denied the Protest on the basis that no sales took place between Michel HK, the seller in Hong Kong, and GBD, the importer. The Port believed that the money paid by the U.S. buyer, NY&C, to the importer was routed through the importer to the seller in Hong Kong to give the appearance of sales between the importer and the seller. In addition, the Port believed that the importer and the seller in Hong Kong are related and that their relationship affected the price of the imported merchandise, evidenced by the interest free line of credit extended by the seller to the importer. The Port liquidated the entries using the purchase orders issued by the U.S. buyer to the importer because the Port believed that those were the only non-related party transactions and were the sales for exportation to the United States. ISSUE: Whether the imported merchandise may be appraised based on the transactions between the importer and the seller in Hong Kong. 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. 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 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 a seller, and it must be a sale for exportation to the United States. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the CAFC 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 Sale – Michel HK and GBD In determining whether a bona fide sale has occurred between a potential buyer and seller, no single factor is determinative. CBP reviews all the facts and circumstances of the transaction and makes its determination on a case-by-case basis. Dorf International, Inc. v. United States, 61 Cust. Ct. 604, A.R.D. 245 (1968). In making its determination as to whether property or ownership has been transferred, CBP initially considers whether the alleged buyer has 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 parties are functioning as buyer and seller. See Headquarters Ruling Letters (“HQ”) HQ H006576, dated December 19, 2007; HQ 547071, dated November 1, 2001; HQ 545709, dated May 12, 1995; and HQ 545474, dated August 25, 1995. Counsel argues that the sales between the foreign seller, Michel HK, and the importer, GBD, were bona fide sales because the foreign seller sold the goods to the importer on FOB Hong Kong terms of sale, and the importer took possession of the goods in Hong Kong, where they were delivered to the importer’s freight forwarder for shipment to the United States. Counsel points to the bill of lading and accompanying packing lists as evidence of GBD’s ownership of the goods in Hong Kong. The importer then resold the goods on DDP Columbus terms to the U.S. buyer, which meant, according to counsel, that there was no simultaneous passage of title. Accordingly, counsel argues that the importer held title to the goods from the time they were placed on board the ship in Hong Kong until they were delivered to the buyer in Ohio. According to the protest memorandum, the seller, Michel HK, prepaid the shipping charges to the United States and was reimbursed by GBD. There is no Incoterm for this arrangement. However, in the shipping industry this arrangement is known as “FOB origin, freight prepaid and charged back,” which means that although the shipper pays the freight, the cost is actually borne by the buyer, who assumes title and the risk of loss at the FOB port, prior to shipment. In addition, according to invoices issued by the shipping company and Michel HK’s payment records, Michel HK also paid the customs duties and related customs fees when the goods were imported into the U.S., and was also reimbursed by GBD for these payments. The Incoterm for these arrangements (FOB origin, freight prepaid and charged back + duty and fees paid and charged back) is DDP (Delivered Duty Paid). Under DDP terms of sale, the seller bears all the costs and risks involved in bringing the goods to the named destination and placing the goods at the disposal of the buyer, and has an obligation to clear the goods for export and import, pay any duty, and to carry out all customs formalities. The cost to the seller of these obligations is normally recovered in the price charged to the buyer, the identity of which is yet to be determined in this case. Accordingly, we find that Michel HK sold the goods on DDP Ohio terms of sale, not FOB Hong Kong, and that risk of loss and title passed from Michel HK when the goods were delivered to the DDP destination, Ohio. However, the invoices from GBD to NY&C also state that NY&C acquired the goods under DDP terms of sale. Simultaneous or flash transfer of title, where the middleman and the buyer obtain title at virtually the same moment, as evidenced by both parties having the same terms of sale (e.g., DDP Ohio), may cause CBP to more closely scrutinize a transaction. By itself, flash transfer of title does not equate to a failure to show a bona fide sale, but this factor along with who carries the risk of loss are considered by CBP in its determination of whether or not a bona fide sale has occurred. For e.g., in HQ W563605 (Nov. 19, 2009), there was a simultaneous transfer of title and no profit on the alleged sale. All the parties were unrelated and a review of all the transactional documents supported the finding of a bona fide sale. In HQ H016966, dated December 17, 2007, CBP stated that “Whenever there is a purported series of sales, and the same terms of sale are used in both transactions, there is a concern that the middleman obtains risk of loss and title only momentarily or never at all, and thus has nothing to sell to the ultimate purchaser. In such situations the middleman may be a buying or selling agent rather than an independent buyer/seller and the sale will be said to occur between the party identified as the first seller and the ultimate U.S. purchaser.” In HQ H016966, CBP held that the use of identical terms of sale suggested that there was only one sale. Based on that and other factors, CBP concluded that there was not a bona fide sale between the manufacturer and the middleman. In HQ 546192, dated February 23, 1996, CBP also considered whether the buyer provided or could provide instructions to the seller, was free to sell the transferred item at any price he or she desired, selected or could select its own downstream customers without consulting with the seller, and could order the imported merchandise and have it delivered for its own inventory. In this case, based on the documentary evidence, it has not been proven that GBD, the importer, acted as an independent buyer or seller. First, GBD did not choose the factory to produce the goods. The factory was specified by NY&C in its purchase order. Second, there are no documents to show that GBD could sell the goods to any other party or at another price, had any dealings with any other buyers, or could purchase the goods for its own account. We note in particular that the orders were made according to NY&C measurement grading sheets that were specific to each style, and that the goods had to be packed and labeled by the manufacturer according to NY&C requirements. According to counsel, GBD provided design direction to Michel HK on sampling, fit, and construction, and also monitored Michel HK’s progress. Counsel states that the measurement grading sheet is an example of GBD’s design work, which he states was prepared by GBD after consulting with NY&C. However, the sheet submitted is on NY&C letterhead and there is no other evidence of GBD’s activities. In sum, none of these actions attributed to GBD by counsel separately or together prove that GBD was an independent buyer or seller. Third, although counsel points to the non-negotiable BoL and packing lists as evidence that GBD took possession of the goods in Hong Kong, it was the seller, Michel HK, not GBD that actually shipped the goods from Hong Kong. Moreover, a non-negotiable BoL names the consignee to whom the goods are to be shipped but does not represent ownership of the goods, unlike a negotiable BoL that represents title to and control of the goods. According to the bill of lading, GBD was only the consignee. Rather than the BoL showing that GBD owned the goods, the non-negotiable BoL is definitive proof that GBD did not have an ownership interest in the goods at the time they were shipped. Additionally, we cannot rely on the packing lists because counsel has informed CBP that the lists are incorrect in that the buyer (presumably the “ship to” party) should have been listed as GBD, not NY&C. Further, we note that the packing lists provide conflicting information - the packing lists submitted with the entries named Michel HK as the supplier, but the packing lists submitted in support of the protest named GBD as the supplier, although both sets of packing lists named NY&C as the “ship to” party. Fourth, while Michel HK was reimbursed by GBD for freight, duty and other charges associated with the importations, according to Michel HK’s own stamp on the invoices, the customer to be charged was NY&C, not GBD. We have considered counsel’s explanation that “the stamp indicates that Michel will pay the invoice (for GBD) and states the name of GBD’s customer,” and the fact that the invoices are addressed to GBD in care of Michel HK, but question why Michel HK would stamp GBD’s invoices and allocate costs to a GBD’s customer account if GBD and Michel HK are totally independent of each other. Moreover, as Michel HK was named as the shipper in the shipping documents, and the goods were shipped on DDP terms, Michel HK was obligated to pay the invoices whether or not it stamped the invoices. Based on these facts, we find that there is not enough evidence that GBD ever took title to the goods from Michel HK. As there is no evidence of a sale between the foreign seller, Michel HK, and GBD, the goods cannot be appraised on the basis of this transaction. The Port appraised the entries based on the DDP prices paid by NY&C to GBD. Counsel argues that these are domestic sales from a U.S. importer to a U.S. retailer and cannot be used to appraise the merchandise. As we have previously found, it cannot be proven that GBD took title to the goods and so sold them to NY&C in its own right and for its own account. Nonetheless, NY&C ordered the goods from GBD and made corresponding payments to GBD, and those transactions caused the goods to be exported to the U.S. and delivered to NY&C. For all the entries, in all cases but one, the importer’s orders to the Hong Kong seller correspond to the styles and quantities of merchandise listed in NY&C’s orders to the importer, and were made on the same dates as NY&C’s orders to GBD. In one case, PO 25865, dated July, 28, 2011, NY&C ordered 7,898 items, but GBD’s order to Michel HK was only for 3,846 items; nevertheless, the same goods that were ordered were imported. Moreover, the goods were manufactured according to NY&C’s specifications, labeled with NY&C’s unique label, and shipped directly from Hong Kong by the seller to NY&C in Ohio. Consequently, the goods may be appraised using the DDP prices paid by NY&C. The Port should note counsel’s explanation in the protest memorandum concerning the differences in DDP prices for the same styles because of differences in yarn prices. Allowable Deductions Counsel argues that the prices charged by GBD to NY&C were DDP prices, which were made up of costs for foreign and U.S. inland transportation, customs duties and fees, freight and other importation charges that should either not be included in or deducted from the dutiable value. The term "price actually paid or payable" is defined in 19 U.S.C. § 1401a(b)(4)(A) as: [T]he total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. In Treasury Decision (“T.D.”) 00-20 (34 Customs Bull. & Dec. No.13, at 85, March 29, 2000), CBP reiterated its longstanding position that with regard to freight, insurance and other costs incident to international shipment, including foreign inland freight, the importer of record must deduct the actual costs for these charges from the price actually paid or payable in determining transaction value, if these costs are included in the price actually paid or payable. The notice advised that CBP considers actual costs to constitute those amounts ultimately paid to the international carrier, freight forwarder, insurance company or other appropriate provider of such services. Commercial documents to and from the service provider such as an invoice or written contract separately listing freight/insurance costs, a freight/insurance bill, a through bill of lading or proof of payment of the freight/insurance charges (i.e., letters of credit, checks, bank statements) are examples of some documents which typically serve as proof of such actual costs. Other types of evidence may be acceptable. In addition, CBP has previously determined that the 10+2 management fee, carrier agent booking fee, carrier bill of lading, CFS receiving, foreign customs clearance, CY monitoring, documentation fee, equipment management fee, FCR/HBL issuance, LCL handling, port construction charge, port security charge, supply chain security fee, terminal handling charge, and wharfage fees are charges incident to the international shipment of the merchandise. See HQ H092560, dated April 7, 2010; see also HQ H119858, dated September 9, 2010; and HQ H119857, dated September 9, 2010. Moreover, the transaction value of imported merchandise does not include reasonable charges for post-importation transportation and for customs duties and taxes, and other specified charges, provided that such charges are separately identified from the price paid or payable. 19 U.S.C. § 1401a(b)(3). In this case, the importer is able to provide actual evidence of payments made for international freight, duty, and other services provided that were incidental to the international shipment of merchandise, as well as for post-importation transportation. Accordingly, to the extent that this evidence is provided to the port, these costs may be deducted from the DDP prices. HOLDING: The protest is denied, except that deductions may be made from the DDP prices for substantiated charges for international shipping, customs duty, services incidental to the international shipment of the merchandise, and post-importation transportation. In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2002, pp. 18 and 21), you are to mail this decision, together with the Customs 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 the Office of International Trade, Regulations and Rulings, will make the decision available to CBP personnel and to the public 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