Application for Further Review of Protest Number 2704-16-101142; First Sale; Related Parties; All Costs Plus a Profit

HQ H286286 June 9, 2018 OT:RR:CTF:VS H286286 SMS Port Director U.S. Customs and Border Protection 301 East Ocean Boulevard Long Beach, CA 90802 Attn: Brenda Cruz, Import Specialist RE: Application for Further Review of Protest Number 2704-16-101142; First Sale; Related Parties; All Costs Plus a Profit Dear Port Director: This is in response to your correspondence forwarding the Application for Further Review (“AFR”) of Protest 2704-16-101142 to this office for our review. The protest was filed on September 13, 2016, by Sandler, Travis, and Rosenberg, P.A., (“Counsel”) on behalf of their client, against your liquidation of 46 entries of merchandise. The protest challenges the appraised value used for purposes of liquidation and assessment of duties and fees. This protest has been designated as a lead protest and Protest 2704-16-100745, dated June 15, 2016, against the liquidation of another four entries, is pending under it. We note initially that the refusal to re-liquidate an entry and the appraised value of an entry are protestable pursuant to 19 U.S.C. § 1514(a), and the instant protests were timely filed, within 180 days from the date of liquidation. See 19 U.S.C. § 1514(c)(3)(A). FACTS: The Protestant is engaged in the design, marketing, sale, and distribution of footwear in the United States. Between February 3, 2015 and September 16, 2015, Protestant made fifty entries of footwear. The Protestant sources a significant portion of its merchandise from Asia. The Protestant/Importer explains its sourcing structure as follows: it issues a purchase order to an unrelated vendor (“Vendor”), a registered trading company in Macau, China, who then issues a purchase order to its related intermediary (“Middleman”), registered in the British Virgin Islands, who then issues a purchase order to the related manufacturer (“Manufacturer”), also registered in Macau. Counsel explained, via an August 24, 2017, conference call, that the Middleman is the parent/owner of the Manufacturer. Once the merchandise is produced in the Manufacturer’s subcontracting factory, the Manufacturer ships the finished product directly from China to the Importer in the United States. “All subject goods are tagged and packed for shipment at the factory and sent directly to the U.S. without an opportunity of diversion.” Once the goods are shipped, the Manufacturer issues a corresponding invoice to the Middleman for the goods at the “first sale” value. The Middleman then issues a commercial invoice to the Vendor, at the “second sale” price, who then issues a commercial invoice to the Importer at the “third sale” price. The Middleman acts as a buyer and a seller in this transaction. After reviewing its transactions, the Protestant now protests the original entered value of its previous fifty entries, and requests that U.S. Customs and Border Protection (“CBP”) re-liquidate the entries at the “first sale” value charge between the Middleman and its related Manufacturer. Counsel asserts that the related party transaction is at arm’s length and meets the “all costs plus a profit test.” Your office denied the instant protests and contends that the entities involved in the first sale, appear to be agents, with the potential of unreported commissions, which would affect the transaction value. Your office asserts that because no evidence was provided to support that the transaction is at arm’s length, the protest should be denied. Financial Documentation: Provided with the lead protest, to substantiate the first sale claim, the Importer submitted one sample set for one of the entries under protest, which includes: Importer’s September 9, 2014, purchase order number 87942 to Vendor for 1,056 shoes (third sale), which lists the Manufacturer’s subcontracting factory as the facility. The terms of sale are Free-on-Board (“FOB”) “any port unknown”; Vendor’s October 10, 2014, purchase order to the Middleman, for the corresponding 1,056 shoes at a price difference of $1.15 less the third sale price per unit (second sale), with the instructions to ship to the Importer’s address in the United States and the statement “Goods for Export to the US only”, and listing the Manufacturer’s subcontracting factory. The terms of sale are Free Alongside Ship (“FAS”) Tianjin; Middleman’s October 10, 2014, purchase order to the Manufacturer, for the corresponding 1,056 shoes at a price difference of $0.29 less than the second sale price per unit and $1.44 less than the third sale price, per unit (first sale), with the instructions to ship to the Importer’s address in the United States and the statement “Goods for Export to the US only”, and listing the Manufacturer’s subcontracting factory. The terms of sale are Free Carrier (“FCA”) consolidator’s warehouse; Corresponding December 30, 2014, invoice from the Manufacturer to the Middleman, at the first sale price, which lists the Importer’s address in the United States as the ultimate “ship to” address, including the statement “Goods for Export to the US only” and referencing the purchase order between the Importer and Vendor. The terms of sale are FCA consolidator’s warehouse; The Sales Summary of the first sale price includes a $0.10 tooling assist and a $0.02 raw material assist added to the purchase price. Corresponding January 4, 2015, invoice between the Middleman and Vendor, at the second sale price, with instructions to ship to the Importer’s address in the United States and the statement “Goods for Export to the US only.” The terms of sale are FAS Tianjin; Corresponding January 4, 2015, invoice between the Vendor and Importer at the third sale price. The ex-factory date is December 30, 2014, with an expected shipment date of January 2, 2015, and an estimated arrival date of January 21, 2015. The terms of sale are FOB Tianjinxingang, Tianjin, China; Sea Waybill, dated January 3, 2015, identifying the Manufacturer’s subcontractor factory in China as the shipper and the Importer as the ultimate consignee; Vendor’s Packing List dated December 12, 2014, listing Importer as the buyer and consignee, and the Manufacturer’s subcontractor factory as the shipper; Bank Internal Transfer/Proof of payment, dated March 24, 2015, from the Middleman to the Manufacturer; Bank Internal Transfer/Proof of payment, dated March 24, 2015, from the Vendor to the Middleman; and Bank Inward Remittance/Proof of payment, dated March 4, 2015 from the Importer to the Vendor. On February 1, 2017, after CBP requested more information, Counsel provided the audited income statements for the related Middleman and Manufacturer for the fiscal year ending in 2015, transaction value cost buildup documentation, bill of materials (“BOM”) for the relevant styles, and another sample set of documents. The commercial documents are for a near identical transaction to those listed above, and were for the Importer’s December 22, 2014, purchase order number 88589 of 3,024 shoes. The Vendor’s corresponding December 22, 2014, purchase order to the Middleman, was at a price difference of $0.78 less the third sale price per unit (second sale). Middleman’s December 22, 2014, purchase order to the Manufacturer, for the corresponding 3,024 shoes was at price difference of $0.19 less than the second sale price per unit and $0.97 less than the third sale price, per unit (first sale). The documents contained the instructions to ship to the Importer’s address in the United States and the statement “Goods for Export to the US only”, as well as references to the Importer’s purchase number 88589, and to the Manufacturer’s subcontracting factory. The 2015 income statements provided show that the Manufacturer realized an operating profit margin of 1.33 percent and the Middleman realized a profit margin of .84 percent. The statements do not go into detail, but only list the companies’ revenue, sales and returns, cost of sales, gross profit, other income, administrative expenses, taxes, and profit for the year. No taxes are shown as paid from either company. The cost breakdown provided lists the materials used to produce the style purchased at the first sale value. Also included in this submission is an April 19, 2016, e-mail between Counsel and the Vendor, which requests documentation regarding “tooling and raw material assists” provided to Manufacturer’s subcontracting factory, as well as payment amount discrepancies. After an in-person meeting with Regulations and Rulings, on February 1, 2018, and a request for more information to document title and risk of loss, Counsel submitted additional documentation to further outline the transaction and to substantiate the costs and charge backs to each party in accordance with their respective terms of purchase on April 12, 2018. In this submission, Counsel expounds that the Manufacturer buys the goods from the factory at “Ex-Factory” terms, and title and risk of loss transfers to the Manufacturer at the factory door in Hebei, China. The Manufacturer is responsible for the trucking fee from the factory to the Consolidators Terminal in the port of export in Shanghai, China. The invoice is charged to the logistics company, but it is borne by the Manufacturer through charge back. The Middleman then buys the goods from the Manufacturer at “FCA Consolidator Terminal” and the risk of loss transfers to the Middleman at the Consolidator Terminal in the port of export in Shanghai. The Middleman is responsible for the port handling charges and the consolidation fee. The invoice is first charged to the logistics company and then is charged back to the Middleman. Title and risk of loss then transfer from the Middleman to the Vendor beside the ship at the port of export in Shanghai. The Vendor is responsible for loading the goods and bears the risk of loss or damage to the goods, and is responsible to pay for the terminal handling charges, including loading fees and the customs clearance fee. The transportation cost is charged to the logistics company and then charged back to the Vendor. The Vendor then sells to the Importer at FOB Shanghai, and title and risk of loss transfers to the Importer when the goods are loaded on board the vessel at the port of export in Shanghai. Included in the April 12, 2018 submission was: Shipment Summary of three shipments dated October 9, 2017, with an estimated arrival of October 22, 2017; Party invoices from October 3, 5, and 9, 2017; Illegible logistic company invoices; Summary of transportation related costs allocations; Payment request from the logistics company to the factory, dated October 14, 2017; Payment advanced by the factory to the logistics provider on October 17, 2017; Breakdown of associated logistics and transportation costs for each party; November 25, 2017 debit note issued by factory to the Manufacturer for the full amount of all the transaction logistics and transportation fees; November 25, 2017 debit note from Manufacturer to Middleman for its portion of the fees, approximately 11 percent of the total fee; and November 25, 2017 debit note from the Middleman to Vendor for approximately 50 percent of the fees charged to the Middleman. All costs are originally charged to the logistics company, which charges the Manufacturer’s subcontracting factory. The factory then issues debit notes to the Manufacturer for all the transportation costs. The Manufacturer issues a debit note to the Middleman for the port handling fees and other filing fees, and lastly, the Middleman issues a debit note to the Vendor for terminal handling and customs clearance fees. Lastly, CBP reviewed the Vendor’s 2015 Annual Report online, which listed the Manufacturer as the related party from which it purchases footwear products, and failed to mention the Middleman as a related transacting party. The report listed $132,494 worth of footwear product purchases from the Manufacturer, these amounts represent prepayments for the purchase of goods and are unsecured and interest free. The Vendor’s 2015 Annual Report also listed the Manufacturer as an associate, with $36,863 outstanding due to Vendor. ISSUE: Whether the entries at issue may be appraised based upon the transaction value between the Manufacturer and its related Middleman Buyer as sales for export to the United States. 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. 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 seller, and it must be a sale for exportation to the United States. We will assume for the purposes of this ruling that transaction value is the appropriate basis of appraisement. In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992) and Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993), the Court of Appeals for the Federal Circuit and the Court of International Trade (“CIT”), respectively, reviewed the standard for determining transaction value when there is more than one sale which may be considered as being a sale for exportation to the United States. Both cases involved a foreign manufacturer, a middleman, and a United States purchaser. In each case, the court held that the price paid by the middleman/importer to the manufacturer was the proper basis for transaction value. Each court further stated that in order for a transaction to be viable under the valuation statute, it must be a sale conducted at arm’s length, free from any non-market influences, and involving merchandise clearly destined for export to the United States at the time of the first sale. In accordance with the Nissho Iwai and Synergy decisions, we presume that transaction value is based on the price paid by the importer. In further keeping with the courts’ holdings, 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 will be the importer’s responsibility to show that the “first sale” price is acceptable under the standard set forth in Nissho Iwai and Synergy. 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, 30 Cust. Bull. 52/1 (January 2, 1997), CBP set forth the documentation and information needed to support a ruling request that transaction value should be based on a sale involving a middleman and the manufacturer or other seller rather than on the sale in which the importer was a party. 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. According to Nissho Iwai, in order for a transaction to be viable for transaction value purposes, it must be a sale negotiated at arm’s length, free from any non-market influences. There is a presumption that a transaction will meet this standard if the buyer and seller are unrelated. See T.D. 96-87. If the parties are related, then “it is necessary to provide Customs with information which demonstrates that transaction value may be based on the related party sale as provided in 19 U.S.C. § 1401a(b)(2)(B) (stating that the circumstances of the sale indicate that the relationship did not influence the price or that the transaction value closely approximates certain test values). See T.D. 96-87, supra. “Test values” refer to values previously determined pursuant to actual appraisements of imported merchandise. Furthermore, transaction value between a related buyer and seller may be acceptable if an examination of the circumstances of the sale indicates that although related, their relationship did not influence the price actually paid or payable. The CBP Regulations specified in 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 Headquarters Ruling (“HRL” or “HQ”) H241090 (Dec. 23, 2013); HRL H029658 (Dec. 8, 2009); H037375 (Dec. 11, 2009); and, HRL H032883 (March 31, 2010). In this respect, 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. Clearly Destined for Export to the United States The U.S. Court of Appeals for the Federal Circuit has established that for merchandise imported pursuant to a three-tiered transaction to be appraised on the basis of the first sale, the merchandise must be clearly destined for export to the United States. In Nissho Iwai, the court reaffirmed the rationale established in M.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that in a three-tiered distribution system, “the manufacturer’s price constitutes a viable transaction value when the goods are clearly destined for export to the United States and when the manufacturer and the middleman deal with each other at arm’s length, in the absence of any non-market influences that affect the legitimacy of the sales price.” Nissho Iwai, at 509. In multi-tiered transactions, CBP has previously been hesitant to find a sale for export where merchandise is not shipped directly to the United States. See e.g., HRL 547382 (Feb. 14, 2002). Here Counsel cites to HQ 545420, dated May 31, 1995, in support of their claim. In HQ 545420, CBP noted that the following information would support a finding that merchandise was clearly destined for exportation to the United States: (1) The factory produces the garments to fulfill a pre-existing purchase order issued by the U.S. retailer; (2) the factory places labels in the garments which identify or represent the trademarks of U.S. retailers; (3) the factory packs the garments in shipping cartons which identify the U.S. retailer, by marks and numbers, as the ult