Request for Reconsideration of Headquarters Ruling Letter H275755

U.S. Department of Homeland Security Washington, DC 20229 U.S. Customs and Border Protection H298040 September 15, 2020 OT:RR:CTF:VS H298040 JK David Cohen Sandler, Travis & Rosenberg, P.A. 1300 Pennsylvania Ave NW, Suite 400 Washington, DC 20004 RE: Request for Reconsideration of Headquarters Ruling Letter H275755 Dear Mr. Cohen: This is in response to your letter of June 14, 2018, on behalf of your client, KHQ Investment LLC (KHQ), requesting reconsideration of Headquarters Ruling Letter (HQ) H275755, dated January 26, 2018. The two entries at issue in HQ H275755, Entry A and Entry B, were subject to a multi-tier transaction involving four parties. KHQ, a U.S. company, ordered the merchandise from Millwork Pte. Ltd. (Millwork), a Singapore entity related to KHQ. Millwork ordered the merchandise from J.S.G. America Inc. (J.S.G.), an unrelated U.S. entity that served as a vendor. J.S.G. then ordered the merchandise from Yangzhou Zongheng, an unrelated Chinese garment manufacturer. KHQ served as the importer of record, declaring the price between J.S.G. and Millwork under the transaction value method of appraisement. CBP determined that the sales between J.S.G. and Millwork were not bona fide sales for exportation to the United States and therefore the price between J.S.G. and Millwork could not serve as a "first sale” transaction value for purposes of appraisement of the imported merchandise. We have reviewed your request for reconsideration and considered the arguments you presented during our conference on January 21, 2020. However, for the reasons we outline below, we find that the conclusion reached in HQ H275755 should stand. You contend that KHQ provided CBP a complete “paper trial” to support the first sale claim in accordance with Treasury Decision 96-87, Determining Transaction Value in Multi-Tiered Transactions, 30 Cust. Bull. 52/1, dated January 2, 1997 (T.D. 96-87). You further argue that our entire decision to disallow first sale valuation for Entry A rested on the potential ambiguities in one document, the Purchase Contract between Millwork and J.S.G (Purchase Contract), and the totality of the evidence supported Millwork’s role as a bona fide buyer and reseller of the imported merchandise. We disagree. At the outset, we note that when determining whether the evidence or documentation supports whether a bona fide sale has occurred, CBP’s Informed Compliance Publication entitled “Bona Fide Sales and Sales for Exportation” explains that “[s]uch documentation should be consistent in its entirety and with the transaction in general (i.e., consistent prices, dates, parties and merchandise).” Despite the effort to downplay the inconsistencies in the documentation, we find that they raise serious questions as to whether Millwork was acting as an independent bona fide buyer and seller in these transactions. Furthermore, our decision in HQ H275755 did not rest merely on the inconsistencies identified in the Purchase Contract, but also factored in other anomalies discovered in the documentation, such as the use of incorrect shipping terms for Entry B, as well as the lack of sufficient evidence to demonstrate that Millwork acted as an independent buyer. You make several arguments to dismiss the issues we identified with the Purchase Contract. First and foremost, you take issue with the way that we interpreted a key provision in section 9 of the Purchase Contract Terms and Conditions, which states, “[r]isk of loss or damage to any of the Goods and title thereto shall pass to Buyer when they shall have been delivered effectively to and accepted by Buyer in Singapore…” While we read this to mean that the Buyer must take physical possession of the goods “in Singapore” to receive title to the goods, you argue that this reading would produce an absurd or commercially untenable result. Rather, you advance the reading that the phrase “in Singapore” was intended to merely describe the location of the Buyer, Millwork, not the place of delivery. We find that this reading is doubtful and in violation of the principles of contract interpretation. In every other instance where the Purchase Contract Terms and Conditions reference the “Buyer”, the phrase “in Singapore” does not follow it.1 Only in section 9 of the Purchase Contract Terms and Conditions does the phrase “Buyer in Singapore” exist. To read the phrase “in Singapore” to merely describe the location of the Buyer would require us to ignore the way the Purchase Contract Terms and Conditions use the phrase “Buyer” in every other provision and essentially render the phrase “in Singapore” to provide no meaning at all. Furthermore, we do not find it at all absurd or commercially untenable for the Purchase Contract to require the Buyer to take physical possession of the goods “in Singapore” to receive title, if indeed the Buyer 1 See e.g., Purchase Contract Terms and Conditions at section 2(c) (“No modification of the Contract or of these conditions shall be effect unless made in writing between Buyer and Seller…”); at section 6 (“In event of the Goods, in the sole and absolute opinion of Buyer, not being equal to sample or to description, as the case may be, notwithstanding shipment or payment, Buyer may reject the whole or any part of the Goods.”); at section 10 (“Acceptance of the Goods by Buyer or any part thereof after the date or dates for shipment fixed by the Contract…”). is Millwork and is a bona fide buyer and seller of the goods. Under ordinary commercial practices, requiring a buyer to take physical possession of goods to receive title would be entirely unremarkable. Under the principles of contract interpretation that you espouse, we simply cannot read the Purchase Contract in a way that would make the use of “in Singapore” to be superfluous. See LaSalle Bank Nat. Ass’n v. Nomura Asset Capital Corp., 424 F.3d 195, 206 (2d Cir. 2005) (a contract interpretation “that has the effect of rendering at least one clause superfluous or meaningless is not preferred and will be avoided if possible”); United Int’l Investigative Servs. v. United States, 109 F.3d 734, 737 (Fed. Cir. 1997) (“The court must interpret [a contract] as a whole ‘in a manner which gives reasonable meaning to all its parts and avoid conflict or surplusage of its provisions’ [citing Granite Constr. Co. v. United States, 962 F.2d 998, 1003 (Fed. Cir. 1992)]); see also Dalton v. Cessna Aircraft Co., 98 F.3d 1298, 1305 (Fed. Cir. 1996) (describing as a “settled principle[ ] of contract interpretation” that courts “view [ ] the contract as a whole”). You also claim that even if our reading of “in Singapore” is accurate, it is of no consequence because you have already conceded that these transactions involve “flash title”. We disagree. While the scenario of “flash title” could have occurred under the facts of this case in the absence of a contractual agreement providing for the passage of title, in this case, the Purchase Contract Terms and Conditions explicitly provide that “title…shall pass to Buyer when [the goods] shall have been delivered effectively to and accepted by Buyer in Singapore…” Given this language, it is our view that rather than having received “flash title” to the goods, the Buyer (Millwork) did not receive title to the goods at any point as they were not delivered to and accepted by Millwork in Singapore. In support of your position that Millwork is a bona fide buyer and seller of goods rather than an agent of KHQ, you make much of the fact that the Purchase Contract Terms and Conditions contain provisions that give the Buyer the power to reject non- conforming goods and to resell the goods. However, the same section of the Purchase Contract Terms and Conditions from which you selectively quote also provides that “[n]otice of such rejection shall be given by the Buyer to seller within thirty (30) days after receipt of the shipment…” As Millwork in this case never received title to the goods to begin with, we consider this power to reject non-conforming goods to be merely a nominal right. Likewise, the power to “resell the Goods for the best price which can reasonably be obtained in the country of place of their destination” also carries little weight in this context as it is only applicable in the event the Buyer rejects the goods for being non-conforming, a right which Millwork would be unable to exercise, having never received delivery of the goods nor title to them. You also claim that Millwork’s role as a bona fide buyer and seller is supported by the commercial documents and business records submitted with this request, which include Millwork’s financial annual report for 2014 and an Advance Pricing Agreement (APA) between KHQ’s parent company and the Internal Revenue Service. In particular, you note that Millwork’s financials show that “only 85%” of the sales of Millwork’s goods are to related companies such as KHQ and the remaining 15% of their sales are to non- related U.S. importers. In our view, this fact appears to cut against Millwork’s role as a bona fide buyer and seller, at least in cases such as this, since the vast majority of its sales are to related companies such as KHQ. You also note that these documents show, among other things, that Millwork’s parent company consistently categorizes Millwork as a “trading company” and that Millwork records its sales and purchases to and from KHQ as “sales of goods” and “costs of sales,” respectively. However, we accord little weight to these general descriptions when the facts and circumstances here do not indicate that Millwork, in this particular case, could sell the merchandise to any other party or at another price, initiate these transactions on its own behalf, or collaborate with KHQ in determining the source of the goods. As we have held before, “[t]he relationship of the parties involved in the transaction is to be evaluated by an overall view of the entire situation, with the result in each case governed by the facts and circumstances of the individual case—and not by the labels that the parties may attach to the relationship.” See HQ W548600, dated February 5, 2009 (citing Dorf International, Inc. v. United States, 61 Cust. Ct. 604, 610; 291 F. Supp. 690, 694 (1968)); see also CBP’s Informed Compliance Publication entitled “Bona Fide Sales and Sales for Exportation.” Finally, we disagree that the facts of this case are “virtually identical” to HQ W563605, dated November 19, 2009, where we found that the first sale price between the middleman and the license holders/factories was applicable. As we noted in the ruling under reconsideration, unlike this case, HQ W563605 involved unrelated parties, which creates a presumption that their transactions are conducted at arm’s length. We also note that in HQ W563605, the middleman used various manufacturers and license holders at its own choosing to fulfill orders from its U.S. importer, and that the middleman was free to set its own prices and determine its own profit in each transaction. It is still our view that this case has more similarities than differences to HQ H266540, dated September 8, 2016, where we rejected the first-sale appraisement involving KHQ as the importer and a related middleman under similar facts. Ultimately, each case must be assessed based upon the facts and the evidence available in each individual case. In view of the totality of the evidence, we conclude that HQ H275755 was correct in finding that the sales between J.S.G. and Millwork were not bona fide sales for exportation to the United States and that the merchandise must be appraised under transaction value based on the price actually paid or payable by KHQ. Sincerely, Digitally signed by CRAIG T CLARK CLARK Date: 2020.09.15 11:13:29 -04'00' Craig T. Clark, Director Commercial and Trade Facilitation Division