Request for Ruling concerning Nissho Iwai; First Sale; Bona Fide Sale; Sale for Exportation to the United States; Multi-tier Transactions

HQ H259476 March 24, 2015 OT:RR:CTF:VS H259476 AJR CATEGORY: VALUATION John A. Bessich, Esq. 33 Walt Whitman Road, Suite 310 Huntington Station, NY 11746 RE: Request for Ruling concerning Nissho Iwai; First Sale; Bona Fide Sale; Sale for Exportation to the United States; Multi-tier Transactions Dear Mr. Bessich: This is in response to your letter of November 6, 2014, submitted on behalf of your client, [XXXX] (hereinafter, the “Company”), requesting a ruling pertaining to the valuation of merchandise imported into the United States via a multi-tiered transaction with non-related manufacturers located in Asia. You have requested that certain information submitted in connection with the ruling request, including the company’s name, be treated as confidential. Inasmuch as the request conforms to the requirements of 19 CFR §177.2(b)(7), your request for confidentiality is approved. The information contained within brackets and all attachments to the ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this decision. FACTS: The Company is a global provider of consumer and industrial products and services (e.g. power and hand tools; mechanical access equipment; electronic security and monitoring systems; and healthcare products and services), which are sold under a variety of familiar trademarks and trade names. The Company is based in the United States and has a related foreign subsidiary, [XXXX] (hereinafter the “Subsidiary”), located in Asia. Per an agreement between the Company and the Subsidiary (the “Company Agreement”), the Company outsources the manufacturing of some of its branded products to non-related third party manufacturers (the “Manufacturers”) from countries in Asia through the Subsidiary. The Manufacturers and the Subsidiary are located in different Asian countries, and neither the Company nor the Subsidiary are related to any of the Manufacturers. The Company Agreement was submitted as Exhibit A. It sets forth the specific terms and conditions under which the Subsidiary will fill orders that it receives from the Company for the Company’s branded products, either from the Manufacturers or the Subsidiary itself. You state that, though the Company Agreement contemplates that the Subsidiary could sell products to the Company that the Subsidiary itself manufactures, the Subsidiary currently has no manufacturing capabilities, and this ruling request only involves products that the Subsidiary purchases from the Manufacturers and resells to the Company. The Company Agreement states that title and risk of loss and damages for the products will pass from the Subsidiary to the Company at the delivery point specified by the Company. The commercial invoices between the Subsidiary and the Company, for the four representative sample entries submitted under Exhibit D, specify that title transfers from the Subsidiary to the Company five days from the bill of lading date. You indicate that the Company Agreement, together with the instructions from the commercial invoices in Exhibit D, form a modified “FOB port of lading” term, where the point of title transfer and risk of loss between the Company and the Subsidiary does not occur until five days after the shipment has been laden on board the vessel for shipment to the Company in the United States. In connection with the Company Agreement, the Subsidiary has written agreements with the Manufacturers to produce and supply the branded products (the “Manufacturing Agreements”). Representative samples of the Manufacturing Agreements were submitted as Exhibit B. Pursuant to the Manufacturing Agreements, the Manufacturers are provided with specifications for the branded products that will meet the Company’s requirements for resale in the United States market. The Manufacturing Agreements, except for one, specify the shipping terms between the Manufacturers and the Subsidiary as “FOB port of loading,” where the title and risk of loss will pass from the Manufacturers to the Subsidiary when the shipment is loaded on board the vessel at the FOB point. The differing Manufacturing Agreement pertains to [XXXX] from [XXXX] and has a shipping term of “FOB [XXXX]” rather than “FOB port of loading.” The Manufacturing Agreements also specify that the payments from the Subsidiary to each of the Manufacturers will be transmitted via telegraphic transfer (“T/T”) by a certain number of days. The bank records submitted in Exhibit E reflect these payment terms and match their respective invoice amounts from Exhibit D. Furthermore, the Manufacturing Agreements provide that the Subsidiary may furnish or pay for tooling, dies, and other materials, if needed by the Manufacturers for production. You state that to date, no such tooling, dies, and other materials, have been furnished by the Subsidiary to the Manufacturers. You state that if such materials were ever furnished, then they will either be furnished at the Subsidiary’s expense, or will be obtained by the Manufacturer and billed to and paid by the Subsidiary separately, and in both cases the Subsidiary will retain ownership of these materials and the Subsidiary will recover the cost of the tooling from the Company. The Company’s specifications for the products it requires are made available to the Subsidiary and the Manufacturers through an internal database system described in the flowchart submitted as Exhibit C. This database system allows: the Company to enter its specifications; the Company and the Subsidiary to enter purchase orders, confirmations, invoices, shipping and billing information, and documents for the branded products; transactions between the Company and the Subsidiary, or the Subsidiary and the Manufacturers, to be entered, processed, and tracked; and the Company’s customs brokers and freight forwarder to access required information for shipping and customs clearance. You describe the timeline of the transaction process seen in the flowchart from Exhibit C as follows: The Company enters a forecast of its product requirements, quantities needed, and delivery time frames into the internal database system for the Subsidiary to review; The Subsidiary begins negotiations with Manufacturers for production, pricing, quantities, and delivery times; The Manufacturers supply samples of the products in question to ensure conformity, which both the Company and the Subsidiary review, but where the Subsidiary is solely responsible for procuring the manufacture of the branded product; Once the Subsidiary and the Manufacturer agree on their terms for the product in question, the Subsidiary calculates its pricing to the Company by [XXXX]; Once all the parties agree on their terms for the products to be manufactured, the Company prepares and issues purchase orders to the Subsidiary for such products; The Subsidiary prepares and issues its own purchase orders to the Manufacturer, which mirrors the Company’s purchase orders to the Subsidiary; The product order, order confirmation, and product, shipping, and billing information and documents are entered into the internal database system for access by the Company, the Subsidiary, and the Manufacturers as authorized per their respective product order; When a product is ready to ship, its Manufacturer prepares an invoice for the Subsidiary, noting the product is shipped as destined to the Company in the United States, and enters the invoice into the internal database system; Based on the Manufacturer’s invoice, the Subsidiary prepares an invoice for the Company, and enters it into the internal database; The branded products are shipped directly from the Manufacturers to the Company or one of the Company’s affiliates in the United States; The Subsidiary pays the Manufacturers directly for the branded products at the prices reflected on the Manufacturer’s respective invoice; and The Company pays the Subsidiary through a netting process, where several invoices from the Subsidiary are combined and paid periodically, rather than directly per invoice. You state that all the branded products ordered by the Company from the Subsidiary, and by the Subsidiary from the Manufacturers, are labeled at the time of manufacture with United States trademark names. You also state that all such products are packaged by the Manufacturers and labeled for the United States market. Additionally, you state that the country of origin, product description, and UPC labels on all products ordered by the Subsidiary for resale and shipment to Company are marked, labeled, and coded, respectively for the United States market. Along with Exhibits A, B, and C, you also submitted the following: Exhibit D, a collective sample documentation with respect to four entries of branded products sold and shipped by the Subsidiary and imported and entered by the Company. This documentation includes entry summaries, invoices from the Subsidiary and the Manufacturers, packing lists from the Manufacturers, bills of lading, purchase orders from the Company and from the Subsidiary, and photos of the branded products and packaging; Exhibit E, a collective proof of payment documentation for the four entries described in Exhibit D. This documentation includes both summary prints prepared from computerized payment records maintained by the Company, and copies of bank account payment records maintained by the Subsidiary; and Exhibit F, a CD-R compact disk containing spreadsheets that detail the netted payment transactions made by the Company to pay the Subsidiary. The spreadsheets cross reference the payments to each Manufacturer linking their respective invoices and invoice amounts to the amount paid by the Company to the Subsidiary under the netting payment procedure. For instance, the Subsidiary paid $[XXXX] to a Manufacturer for an invoice corresponding to the second submitted entry, and in turn the Company made a netted payment to the Subsidiary for $[XXXX], which included the $[XXXX] owed by the Company to the Subsidiary under this second submitted entry, and $[XXXX] that was owed to the Subsidiary for a separate transaction. ISSUE: Whether the imported merchandise may be appraised based on the transaction between the Subsidiary and the Manufacturers? 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. T.D. 96-87 states as follows: In order for an importer to rebut the presumption “[that the price paid by the importer is the basis of transaction value]”, certain information and documentation must be provided. Specifically, the requestor must describe in detail the roles of all the various parties and furnish relevant documents pertaining to each transaction that was involved in the exportation of the merchandise to the United States. If there is more than one possible sale for exportation, information and documentation about each of them should be provided. Relevant documents include, purchase orders, invoices, proof of payment, contracts and any additional documents (e.g. correspondence), which demonstrate how the parties dealt with one another and which support the claim that the merchandise was clearly destined to the United States. If any of these documents do not exist, or exist but are not available, the ruling request should so provide. What we are looking for is a complete paper trail of the imported merchandise showing the structure of the entire transaction In summary, CBP presumes that transaction value is based on the price paid by the importer and in order to rebut this presumption and prove that transaction value should be based on some other price, complete details of all the relevant transactions and documentation (including purchase orders, invoices, evidence of payment, contracts and other relevant documents) must be provided, including the relationship of the parties and sufficient information regarding the statutory additions. Bona Fide Sale First, we must determine if indeed a “sale” will occur. 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)). No single factor is decisive in determining whether a bona fide sale has occurred. See Headquarters Ruling Letter (“HQ”) 548239, dated June 5, 2003. CBP will consider such factors as to whether the purported buyer assumed the risk of loss for, and acquired title to, the imported merchandise. Evidence to establish that consideration has passed includes payment by check, bank transfer, or payment by any other commercially acceptable means. Payment must be made for the imported merchandise at issue; a general transfer of money from one corporate entity to another, which cannot be linked to a specific import transaction, does not demonstrate passage of consideration. See HQ 545705, dated January 27, 1995. In addition, CBP may examine whether the purported buyer paid for the goods, and whether, in general, the roles of the parties and the circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HQ H005222, dated June 13, 2007. Finally, pursuant to the CBP’s Informed Compliance Publication, entitled “Bona Fide Sales and Sales for Exportation,” CBP will consider whether the buyer provides or could provide instructions to the seller, is free to sell the transferred item at any price he or she desires, selects 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. A determination of when title and risk of loss pass from the seller to the buyer in a particular transaction depends on whether the applicable contract is a "shipment" or "destination" contract. FOB point of shipment contracts and all CIF and C&F contracts are "shipment" contracts, while FOB place of destination contracts are "destination" contracts. Unless otherwise agreed by the parties, title and risk of loss pass from the seller to the buyer in "shipment" contracts when the merchandise is delivered to the carrier for shipment, and in "destination" contracts when the merchandise is delivered to the named destination. The question of whether the proposed transactions involved in the ruling request are shipment contracts or destination contracts depends on the shipment terms specified in the documentation. In this case, under an FOB sale, the risk of loss transfers when the goods pass the ship’s rail. See HQ H097035 dated November 15, 2011. In this regard, the submitted documentation, including the commercial invoice and the purchase order, between the Subsidiary and the Manufacturers shows that a “FOB port of loading” term of sale will be used in the transactions between the Subsidiary and each of the Manufacturers, respectively, except for one Manufacturer [XXXX] which specifies “FOB [XXXX]” in its Manufacturing Agreement and “FOB [XXXX]” in its invoice, where the Manufacturer is located. An FOB port of loading term of sale means that risk of loss transfers from the seller to the buyer upon lading on the outgoing carrier. Absent a written instruction to the contrary, it is commonly accepted that title passes simultaneously with assumption of risk of loss. Here, the Manufacturing Agreements, except for the one pertaining to the one Manufacturer [XXXX], specify that title passes simultaneously with assumption of the risk of loss. Despite the difference noted with the one Manufacturer [XXXX], there is no indication that the risk of loss and title transfer aspects associated with its FOB sale will have any bearing that a sale occurs between [XXXX] and the Subsidiary. Rather, the only difference is the city at which the risk of loss and title will pass. Furthermore, the Company Agreement indicates that the Company will specify the delivery point at which the title and risk of loss will pass from the Subsidiary to the Company, and the commercial invoices in Exhibit D instruct that the title for the merchandise will transfer from the Subsidiary to the Company five days from the bill of lading date. Therefore, the Subsidiary will assume title and risk of loss from the point that the branded product is loaded on board the vessel in the city where the Manufacturer is located, and keep such title and risk of loss for a period of five days before it transfers to the Company. Though the one Manufacturer [XXXX] uses different port cities in its Manufacturing Agreement and its invoice, the outcome remains the same because such invoice and the corresponding invoice between the Subsidiary and the Company use the same port city and refer to the same bill of lading date. Therefore, provided the FOB place and date on the invoice correspond to the reference