First Sale; Multi-Tier Transactions

H300408 September 10, 2019 OT:RR:CTF:VS H300408 TMF CATEGORY: Valuation Christopher M. Kane Simon Gluck & Kane LLP 535 Fifth Avenue, 4th Floor New York, New York 10017 RE: First Sale; Multi-Tier Transactions Dear Mr. Kane: This is in response to your request of July 28, 2018, on behalf of your client, [XXXXX], hereinafter referred to as the “Company” for a ruling on the use of “first sale” valuation of certain tools to be imported into the United States. At your client’s request, you have asked that certain information submitted in connection with this request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets in this ruling and in the ruling request, along with attachments thereto, which were forwarded to our office will not be released to the public and will be withheld from published versions of this ruling. FACTS: In your submission, you stated that the distributor, the Company [XXXXX], is a provider of consumer products. The Company is based in the United States and is part of the multinational company, [XXXXX], hereinafter referred to as the “Parent.” The parent of this multinational company is based in Finland [XXXXX]. You state that the Company purchases from a related party, [XXXXX], (hereinafter referred to as the “Principal”), a subsidiary of [XXXXX], the same foreign parent. You state that both the Company and the Principal are 100 percent held by the Parent, [XXXXX]. The Principal sells four types of products to the Company: Hand and stick tools for gardening and related outdoor activities. Products include loppers, pruners, axes, and rakes. Hand tools used in crafting, sewing and similar activities. Products include scissors, hole punchers and paper cutters. Other hand tools including snips, mauls, and hammers. Watering tools for lawn and garden. Products include hoses, sprinklers, and couplings. The Principal is responsible for global sourcing of all the products sold by the Company worldwide and in the U.S. The Principal purchases the goods from non-related Asian manufacturers for resale to the Company. The Seller is not in all cases, the Manufacturer; but in cases where the Seller and Manufacturer are different entities, all arrangements, negotiations, and agreements are between the Principal and Seller. You provided corresponding documents to exhibit the contemplated transaction and describe the purchasing process as follows: The Principal coordinates the design and development of the goods with the Seller according to the Principal’s specifications. Purchase orders are issued by the Company to the Principal. The Principal issues corresponding PO to Seller. The terms of sale between the Seller and Principal is Free On Board (FOB) place of export. The terms of sale between the Principal and the Company is Delivered At Place (DAP). An ocean bill of lading is generated and the goods are shipped directly to a U.S. company address. The Seller arranges for the goods to be delivered to the place of export FOB. You claim that the Principal bears the risk of loss based on DAP Incoterms of sale unless superseded by contractual language. You also state the Principal is responsible for transportation and insurance from the FOB point to a U.S. DAP location. You indicate the Principal takes title to the goods at the foreign port of export, with the specific ports of export determined by the Seller and stated on the Seller/Principal’s purchase orders. With regard to consideration, the two levels of transactions (Seller/Principal and Principal/Company) are in U.S. dollars. The Principal pays the Seller by wire transfer from the Parent’s bank account in the Parent’s country. The Principal references PO numbers and invoice numbers used for importation on the payments. The Company pays all of the Principal’s invoices monthly. The Company’s payments to the Principal are linked to specific import transactions, referencing its PO numbers and the Principal’s commercial invoices used for importation. You also state that the prices for the goods sold to the Company by the Principal allow the Principal to cover costs, overhead and to enjoy a profit margin on an arm’s length basis. Concerning the contracts, the Principal selects and vets all potential Sellers and negotiates contracts with the Sellers. The Principal makes all “make or buy” decisions for the goods purchased and sold to the Company. With regard to market prices, you claim these are negotiated at arms-length between the Seller and the Principal, who are unrelated. You claim the Seller establishes prices based on fair market conditions and determines the prices on a conventional cost-plus profit methodology. Costs include material, labor, design and development and other normal and customary manufacturing costs (which were not provided.) The Seller’s prices may take into account volume and other buyers’ selling prices when selling to the Principal. The Seller charges the same prices for the same goods to the Principal regardless of destination. Packaging requirements, which vary in countries, may nominally affect prices. You state for purchases between the Company from the Principal, the goods may be warehoused in any one of multiple U.S. cities depending on the Company’s distribution decisions for resale. The goods are generally sold in the U.S. by the Company to its U.S. customers. You state that certain statutory additions must be made to the sales price for export if not already included in the price, such as tooling, non-U.S. design work, and packaging that is provided free or at the reduced cost by the Principal to the Seller. In some cases, the Seller may invoice the Company for tooling and/or other assists. On March 20, 2019, in response to this office’s request for additional information relating to any agreements between your client and other parties, you provided a supply agreement between the Manufacturer/Seller and the Middleman, as well as an intercompany distribution agreement between the Principal in Finland and the Company, the U.S. distributor. ISSUE: Whether the transaction between the Principal and the unrelated manufacturer/seller may be used to determine the transaction value of the imported merchandise. 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). Your client seeks to use the transaction value of the sale of imported merchandise between the Principal (the Middleman) and its unrelated Seller. 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 was more than one sale which may be considered as being a sale 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, 17 C.I.T. 18 (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 is a bona fide “arm’s length sale,” and that it is “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 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 payments, 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. First, we must determine if indeed a “sale” occurred. 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. In this case, you state that the Principal issues a corresponding PO to the Seller for the merchandise order by the Company. The PO from the Principal to the Seller shows that it is for export to the U.S. You also state that the Seller arranges for the goods to be delivered to the Company’s U.S. address according to DAP Incoterms with the title and risk of loss held by the Middleman/Principal until it reaches the Company’s U.S. warehouse, with the importer/Company paying import duty and taxes. You also mention that the Middleman/Principal has insurance; however, you did not provide any insurance documentation to support this claim. According to the decision in 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 parties are unrelated. See T.D. 96-87, supra. You also provided the Frame Supply Agreement between the Principal and the Seller, which supports title passage upon delivery subject to the applicable Incoterms. Based on our review of the documents submitted, we find the Middleman/Principal and the Seller/Manufacturer are not related. Therefore, we are inclined to accept the sales transactions meet the arm’s length requirement set forth in 19 U.S.C. § 1401a(b)(2)(B).  In sum, we find a bona fide sale conducted at arm’s length between the Principal and the Seller. Accordingly, the imported merchandise may be appraised under transaction value based upon the price actually paid or payable between the Principal and Seller. HOLDING: The information provided indicates that the sales transactions between the Middleman and the Seller are bona fide sales for exportation to the United States. The merchandise may be appraised based upon transaction value of the price actually paid or payable between the Principal and the Seller. Sincerely, Monika Rice Brenner, Chief Valuation and Special Programs Branch