First Sale; Imported Apparel

HQ H291762 May 7, 2018 OT:RR:CTF:VS H291762 KF CATEGORY: ValuationElon A. PollackStein Shostak Shostak Pollack & O’Hara, LLP865 S. Figueroa St.Suite 1388Los Angeles, CA 90017RE: First Sale; Imported ApparelDear Mr. Pollack: This ruling is in response to your October 27, 2017, request on behalf of your client, Direct Sourcing Ace Asia Limited (“Direct Sourcing”), for a prospective ruling concerning the use of “first sale” appraisement of imported wearing apparel. FACTS: Direct Sourcing will acquire wearing apparel for Forever C, LLC (“Forever C”), a U.S. buyer, from garment manufacturers located in China. Direct Sourcing seeks confirmation that the sales price it pays to a manufacturer as a middleman may be used as the transaction value of the imported wearing apparel. Direct Sourcing notes that none of the parties in the transaction constitute “related parties” pursuant to 19 U.S.C. § 1401a(g). For purposes of its ruling request, Direct Sourcing has provided U.S. Customs and Border Protection (“CBP”) with sample documents evidencing how the underlying transaction is structured. Direct Sourcing explains that although its foreign garment manufacturers will vary from the entity listed in the sample documents, the transaction structure will otherwise remain unchanged for all apparel purchased by Forever C. The four-step transaction is structured as follows: First, Forever C will issue a purchase order (“PO1”) to Direct Sourcing. PO1 specifies a DDP “to door” delivery term. Direct Sourcing explains that pursuant to this DDP term, both title to the apparel, and the risk of its loss or damage, passes to Forever C only after delivery at a location specified by Forever C. PO1 also specifies that Direct Sourcing is obligated to ensure compliance with various U.S. statutory and regulatory requirements applicable to the imported wearing apparel, such as those promulgated by the U.S. Consumer Products Safety Commission. Second, Direct Sourcing will issue a purchase order (“PO2”) to a garment manufacturer in China, Zhuji Star of the Century Garments Factory (“Star”). Star will produce the wearing apparel required to fill PO1. PO2 identifies the exact apparel specified by Forever C in PO1. PO2 specifies a FOB Shanghai delivery term, with Los Angeles, CA as the delivery location. Direct Sourcing explains that pursuant to the FOB term, both title to the apparel, and the risk of its loss or damage, passes to Direct Sourcing upon loading on board a vessel it selects at the Port of Shanghai, China. PO2 also specifies that Star is obligated to ensure compliance with various U.S. statutory and regulatory requirements enumerated in PO1. Third, upon completing production, Star will issue a commercial invoice to Direct Sourcing for the wearing apparel. The invoice (“I1”) identifies Forever C as the ultimate consignee of the merchandise. I1 lists $X as the cost of the wearing apparel being exported from China. Payment is accomplished by wire transfer. Fourth, Direct Sourcing will issue an invoice to Forever C upon acquiring title to the wearing apparel at the Port of Shanghai. The invoice (“I2”) confirms that Los Angeles, CA is the goods’ delivery destination. I2 lists $Y as the cost of the wearing apparel being imported into the U.S. Payment is accomplished by wire transfer. Shipment to Los Angeles is accomplished by Direct Sourcing contracting with a logistics provider, Global Logistical Connections (“Global”), who will act at the consignee for the imported apparel. The bill of lading issued by Global identifies Direct Sourcing as the exporter of the goods. The goods’ description matches the description provided in PO1 and PO2. Direct Souring explains that Forever C will act as the importer of record for the goods upon their arrival in the U.S. We note that Direct Sourcing provided a sample certificate of conformity provided to establish compliance with consumer product safety requirements. ISSUE: Whether the price paid by Direct Sourcing, acting as a middleman, may be used as the transaction value of wearing apparel imported by Forever C. LAW AND ANALYSIS: The preferred method of appraising merchandise imported into the United States is transaction value, as set forth in section 402(b) of the Tariff Act of 1930, amended by the Trade Agreements Act of 1979 (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 the present case, there are two prices actually paid for wearing apparel on the condition of its delivery to the US: the $X price paid by Direct Sourcing to Star, and the $Y price paid by Forever C to Direct Sourcing. In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit (“CAFC”) set the standard for determining transaction value when more than one sale in a transaction may be considered a sale for purposes of exportation to the U.S. The transaction structure in Nissho likewise consisted of a foreign manufacturer, middleman, and U.S. buyer. The court held that the price paid by a middleman to a foreign manufacturer is a viable basis for transaction value as long as the sale: (1) was negotiated at arm’s length, free of any non-market influences which rendered the price artificially low, and (2) involved goods clearly destined for export to the U.S. Id. at 509; see also Synergy Sport Int’l, Ltd. v. United States, 17 CIT 18 (1993). For CBP to evaluate whether these two requirements are satisfied by a sale, the party seeking a prospective ruling determination must provide “a description of the roles of the parties involved and…relevant documentation addressing each transaction involved in” exporting the goods to the U.S. HQ H284207 (January 2, 2018) (citing T.D. 96-87 (January 2, 1997)). Relevant documentation includes, but is not limited to, purchase orders, invoices, proof of payment, contracts, and correspondence establishing how the parties deal with one another. CBP must also be informed of any applicable statutory additions to the price paid or payable, and their total amounts. Absent submission of the above information the price paid by the middleman to a foreign manufacturer may not be utilized as the goods’ transaction value. The sale between Direct Sourcing and Star was negotiated at arm’s length. Accordingly, to determine whether the sale between Direct Sourcing and Star satisfies the two Nissho requirements we must examine the documents provided to explain the underlying transaction. We have been provided with sample purchase orders, commercial invoices, proof of payment, a bill of lading, and a certificate of conformity with consumer product safety requirements. Although no contracts have been provided which establish how the parties deal with one another, Direct Sourcing maintains that the parties are unrelated pursuant to 19 U.S.C. § 1401a(g). In general, CBP presumes a sale between unrelated parties has occurred at arm’s length. See HQ H240423 (July 31, 2013). To determine whether the parties’ sale was bona fide and in fact negotiated at arm’s length, we begin with the definition of “sale” for purposes for 19 U.S.C. § 1401a(b)(1) as a transfer of title from one party to another for consideration. See VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999) (citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). Here, the wire transfer documents for the sample transaction establish that consideration will pass from Direct Sourcing to Star for the specific merchandise imported by Forever C, as evidenced by the matching product specifications and style numbers listed in PO1 and PO2, which are mirrored in I1 and I2. Although no single factor is determinative in proving a bona fide sale, CBP considers factors such as assumption of risk, arrangement of title transfer, payment by commercially acceptable means, and importation of the purchased merchandise. See HQ H284207. Additionally, pursuant to CBP’s Informed Compliance Publication titled “Bona Fide Sales and Sales for Exportation,” CBP considers whether the buyer provided or could provide instructions to the seller concerning the merchandise, is able to freely sell the merchandise at any price, is able to select downstream customers without consultation or approval from the seller, and could import the merchandise for their personal inventory. See CBP.gov, Publications (last updated April 25, 2016). Here, the delivery term specified in PO2 between Direct Sourcing and Star is FOB Shanghai. Pursuant to the Incoterms 2010, a FOB or Free on Board delivery term obligates a seller to deliver goods on board the vessel nominated by a buyer at a named port of shipment. See HQ H284207. The risk of loss or damage to the goods passes from the seller, Star, to the buyer, Direct Sourcing, once the goods are on board a nominated vessel. The delivery term specified in PO1 between Direct Sourcing and Forever C is DDP “to door.” Pursuant to the Incoterms 2010, a DDP term obligates a seller to retain the risk of loss or damage until the goods have been delivered to the buyer at a named location specified by the buyer (if any). See Jan Ramberg, ICC Guide to Incoterms 2010, 151-152 (2011). Accordingly, Direct Sourcing retains the risk of loss or damage until the apparel is delivered to Forever C’s doorstep. In a letter to our office, dated February 22, 2018, you explain that title transfer is arranged so that Direct Sourcing acquires title to the wearing apparel from Star once it is on board a nominated vessel. Payment is due to Star within 90 days of the date indicated on the bill of lading. Forever C acquires title to the apparel once Direct Sourcing completes delivery to Forever C’s doorstep. According to the information provided: Direct Sourcing and Star are not related; Direct Sourcing establishes product specifications for the manufacturers in order to fill purchase orders for Forever C; Direct Sourcing will bear the risk of loss or damage until delivery to Forever C; and after acquiring title to the wearing apparel, Direct Sourcing is free to sell the apparel to Forever C. Based on these factors, we find that the transaction between Direct Sourcing and Star is a bona fide arm’s length sale of the merchandise imported by Forever C. The sale between Direct Sourcing and Star involves goods clearly destined for export to the U.S. In both PO1 and PO2, we see evidence that the wearing apparel purchased by Direct Sourcing is clearly destined for export to the U.S. In PO2, Star is obligated to deliver the goods to Los Angeles. In PO1, Direct Sourcing is obligated to deliver the goods to a location specified by Forever C within the U.S. The corresponding bill of lading also specifies Los Angeles as the goods’ destination. Additionally, the style numbers and descriptions of the wearing apparel used in both PO1 and PO2 are in English. Further, CBP has determined that manufacturing products abroad to specifically comply with the requirements of the U.S. Consumer Product Safety Commission evidences the products are destined for the U.S. See HQ H284207; HQ H255028 (November 21, 2014). In PO2, Direct Sourcing requires Star to ensure compliance with various U.S. statutory and regulatory requirements. Upon completing production of the wearing apparel, Star will issue a General Conformity Certificate stating the apparel “complies with applicable rules, bans, regulations, and standards under applicable Acts enforced by the U.S. Consumer Product Safety Commission.” In reviewing the totality of the above evidence, we thus find that the wearing apparel purchased by Direct Sourcing will clearly be destined for export to the U.S. HOLDING: The information presented in the above sample transaction establishes that the sale between Direct Sourcing as a middleman and a Chinese manufacturer will constitute a bona fide sale conducted at arm’s length, for goods clearly destined for export to the U.S. Consequently, we find that the price paid by Direct Sourcing to a Chinese manufacturer may be used as the transaction value of wearing apparel imported by Forever C. Please note that pursuant to 19 C.F.R. § 177.9(b)(1), “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a [CBP] field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.” A copy of this ruling letter should be attached to the entry documents at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction. Sincerely, Monika R. Brenner, Chief Valuation and Special Programs Branch