Application for Further Review of Protest No. 4103-21-102401; Woodcraft Supply, LLC; First sale valuation

HQ H321162 February 18, 2022 OT:RR:CTF:VS H321162 UBB CATEGORY: Valuation Center Director Machinery Center of Excellence and Expertise 109 Shiloh Dr. Suite 300 Laredo, TX 78045 RE: Application for Further Review of Protest No. 4103-21-102401; Woodcraft Supply, LLC; First sale valuation Dear Center Director, The following is our decision regarding the Application for Further Review (“AFR”) of Protest No. 4103-21-102401, timely filed on February 1, 2021, on behalf of Woodcraft Supply, LLC (“Woodcraft” or “the protestant”). The importer contests U.S. Customs and Border Protection’s (“CBP”) denial of its “first sale” valuation of the imported merchandise. FACTS: This protest concerns fifteen entries made by Woodcraft during the period of September 13, 2019 and January 15, 2020. The protest was timely filed. The transactions at issue are similar to those which were the subject of Headquarters Ruling (“HQ”) H303114 (May 23, 2019). The facts in this protest are essentially identical to those presented by this importer in the advance ruling request. As in HQ H303114, the importer, Woodcraft, operates woodworking specialty retail stores across the United States. It has two trading partners: Asia Woodriver in Taiwan and Shanghai Woodriver in China. Asia Woodriver and Shanghai Woodriver (collectively, the “Woodriver entities”) are related; however, neither is related to Woodcraft. Woodcraft, Asia Woodriver and Shanghai Woodriver are not related to any of the manufacturers from whom Woodcraft’s imported products are sourced. The importer states that the manufacturers are selected solely by Asia Woodriver or Shanghai Woodriver without input from Woodcraft; Woodcraft never deals directly with the factories. In HQ H303114, we summarized the transactions between Woodcraft, the Woodriver entities and the unrelated manufacturers; the transactions underlying this protest are essentially identical. However, in this protest, Woodcraft states that while individual purchase orders originally served as the purchase contract (including at the time that HQ H303114 was issued), the Master Sales and Purchase Agreements (“MSPA”) signed on September 30, 2019, between Woodcraft and Shanghai Woodriver and between Woodcraft and Asia Woodriver now serve as the basis of the transactions. In their protest memo, Woodcraft states that the MSPA memorializes a long-standing verbal agreement between the parties that governs their transactions, and pursuant to which Woodcraft pays Shanghai Woodriver 18% over their factory cost and Asia Woodriver 12% over their factory cost. Thus, under the MSPA, Woodcraft still issues purchase orders to either Asia Woodriver or Shanghai Woodriver, who then select and contact the manufacturer. All purchase orders are sent to Asia Woodriver, and Asia Woodriver coordinates the purchase orders for both companies. The orders for Chinese produced products are forwarded to Shanghai Woodriver, while Asia Woodriver retains the remaining orders for processing in Taiwan. Both companies then place orders with appropriate factories. When the orders are ready to be shipped, Asia Woodriver coordinates the items and ships them from Taiwan, whereas the Chinese produced goods are shipped directly from the manufacturer in China to the freight forwarder. The commercial invoices for shipments from Asia Woodriver and Shanghai Woodriver are created through the Asia Woodriver location. In its protest memo, Woodcraft acknowledges that in HQ H303114, CBP ruled Woodcraft had not sufficiently demonstrated that the Woodriver entities and the manufacturers/factories functioned as buyers and sellers. Specifically, CBP found that the documentation provided did not show when risk of loss or title transferred from the manufacturer/factory to either Asia Woodriver or Shanghai Woodriver. To support their position, Woodcraft provided the following documents: a purchase order from Woodcraft to Shanghai Woodriver, a purchase order from Shanghai Woodriver to the manufacturer, an invoice from the manufacturer to Shanghai Woodriver, proof of payment from Shanghai Woodriver to the manufacturer, a commercial invoice from Shanghai Woodriver to Woodcraft, proof of payment from Woodcraft to Shanghai Woodriver, and a Bill of Lading. Subsequent to HQ H303114, each of the Woodriver entities entered into an MSPA with Woodcraft Supply, in order to “put their existing verbal agreements into written agreements which evidences and confirms that the relationship between the Woodriver companies and the various manufacturers is that of a buyer and seller and that a bona fide sale occurs between these parties.” This is the additional piece of evidence Woodcraft presents in this case as proof of the entire transaction, from manufacturer to middleman (one of the Woodriver entities) to Woodcraft, the importer. In addition, Woodcraft has provided entry documents, freight documents (issued by the freight expeditor to Woodcraft), invoices from the respective Woodriver entity to Woodcraft, packing lists (showing the responsible Woodriver entity) and bills of lading for each of the protested entries. Noting that “CBP has already determined that the merchandise is clearly destined for the US [sic] at the time of first sale, and that the first sale price is at arm’s length, the focus of this narrative will be to show that a bona fide sale is occurring between the manufacturer to the middleman.” Woodcraft argues that the MSPA controls when risk of loss and title transfer at each step of the transaction and thus shows that a bona fide sale is occurring between the manufacturers and the Woodriver entities. On this basis, Woodcraft argues it is justified in claiming the first sale price for purposes of appraisement of the subject entries and requests a refund of duties paid totaling $59,940.95. ISSUE: Whether the transactions at issue in the protest may be appraised using the transaction value between the foreign manufacturer and Woodriver as a bona fide sale 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. 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. 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. Id. (citing J.L. Wood v. United States, 505 F.2d 1400). No single factor is decisive in determining whether a bona fide sale has occurred. CBP makes each determination on a case-by-case basis and will consider such factors as whether the purported buyer assumed the risk of loss and acquired title to the imported merchandise. As noted above, in HQ H303114, CBP found that the sale between the manufacturer and the Woodriver entity was at arm’s length and that it was a sale for export to the United States. Nothing in the facts or documentation provided in this protest suggests otherwise. Thus, the question that remains is whether Woodcraft can show that it was a bona fide sale. Several factors may indicate that a bona fide sale exists between the purported buyer and seller. In determining whether property or ownership has been transferred, CBP considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, CBP may examine whether the purported buyer paid for the goods and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HQ 545474, dated August 25, 1995; and HQ 545709, dated May 12, 1995 (examining the circumstances of the transaction when considering whether the parties functioned as buyer and seller). In support of their protest, Woodcraft provided entry documents, freight documents (issued by the freight expeditor to Woodcraft), invoices from the respective Woodriver entity to Woodcraft, packing lists (showing the responsible Woodriver entity) and bills of lading for each of the protested entries. Woodcraft also provided the MSPAs that govern its transactions with the Woodriver entities. Woodcraft argues that the MSPA controls when risk of loss and title transfer at each step of the transaction and thus shows that a bona fide sale is occurring between the manufacturers and the Woodriver entities. Woodcraft provides two MSPAs in support of its protest, one between Woodcraft Supply and Shanghai Woodriver, and the other between Woodcraft Supply and Asia Woodriver. The MSPAs are identical in all other respects. There are only two parties to each contract, Woodcraft Supply and the respective Woodriver entity; the “Manufacturers” are referenced in the contracts but they are not party to either contract. Woodcraft argues, and the MSPAs set forth, that the MSPA . . . establish[es] and defin[es] when ownership/title and risk-of-loss to the merchandise purchased pursuant to “Purchase Orders” (“POs”), under this MSPA first transfers from the Manufacturer to Seller/Exporter, and then subsequently when ownership/title and risk-of-loss to the merchandise is first transfers [sic] from Seller/Exporter Buyer/Importer pursuant to POs issued under the terms of this Contract. Within the contract itself, there are two sets of clauses that directly address the issues of title and risk of loss. First, 4.a.i states: Seller/Exporter Warrants Title Obtained for Each PO Good(s): Seller/Exporter understands, acknowledges, agrees, affirms and warrants that for each and every PO issued and accepted by Seller/Exporter under the terms of the MSPA, prior to shipping of said PO Good(s) to Buyer/Importer [sic] Seller/Importer shall have consummated a bona fide purchase of said PO Good(s) from the Manufacturer . . . Next, 4.b states: Liability of the Parties [Risk of Loss and Ownership of PO Goods]: The Parties understand, acknowledge and agree to the following terms of risk of loss and ownership of each set of PO Goods under the MSPA. Seller/Exporter Maintains Title and Risk of Loss Under “Stuffed at Port”: Seller/Exporter understands, acknowledges and agrees that for each and every PO under the terms of [] the MSPA, Seller/Exporter shall maintain 100% (one hundred percent) of the title for ownership of all PO Good(s) and therefore 100% (one hundred percent) of the risk of damage or loss, until, if and when said PO Good(s) is/are delivered by the Manufacturer of the PO Good(s) to the designated port AND subsequently Stuffed at Port, with the term of art “Stuffed at Port” being defined herein as the full completion of said delivery and loading the PO Good(s) onto the container ship, with no further action/steps required by the Manufacturer or Seller/Exporter. Buyer/Importer Assumes Title and Risk of Loss After Stuffed at Port: Buyer/Importer understands, acknowledges and agrees that for each and every PO under the terms of the MSPA, based upon the FOB terms of shipment, Buyer/Importer shall assume 100% (one hundred percent) of the title for ownership of all PO Good(s) and therefore 100% (one hundred percent) of the risk of damage or loss, upon the PO Good(s) being Stuffed at Port as defined herein. As noted above, the “Manufacturers” are referenced in the contract but they are not party to either contract, and no contract or document was provided in support of the transaction between the manufacturer/factory and a Woodriver entity (middleman) as part of this protest. Woodcraft has not provided sufficient proof that a bona fide sale exists between the manufacturer/factory and the Woodriver entity (middleman). The MSPA is its sole piece of evidence in support of this claim. However, in each case, the MSPA is a contract between a Woodriver entity (middleman) and Woodcraft, and the manufacturer/factory is not a party, i.e. it is a contract for a sale between the importer and the middleman and does not control the sale between the middleman and the manufacturer. Merely including a clause within the contract that attests to certain facts about a sale taking place between the middleman and the manufacturer does not provide actual proof of the facts of that sale or whether risk of loss and title actually transfer to the Woodriver entity (middleman) before it enters into the transaction with the importer, Woodcraft. As Woodcraft provides no other evidence to support its claim that risk-of-loss and title transfer from manufacturer to the Woodriver entity (middleman), it has failed to show that the manufacturer and the Woodriver entities were functioning as buyer and seller. Separately, it is worth noting that the MSPAs also contain a clause that suggests the contract were not in operation at the time that Woodcraft made the subject entries. Specifically, 6.c. states: Contract Shall Only Become Effective Upon Written Approval by U.S. Customs: The Parties understand, acknowledge and agree that their respective signatures on the MSPA confirm their agreement to the MSPA without reservation, objection, modification or waiver of any type. The Parties understand, acknowledge and agree that the MSPA shall only become effective and binding upon The Parties in the event U.S. Customs confirms in writing its approval and/or agreement and/or satisfaction that the MSPA and/or other/additional documents and/or related facts, establish a “Bona Fide” purchaser relationship between the factory and Seller/Exporter regarding all of the to-become PO Goods which Seller/Exporter will purchase from said factory to sell under the MSPA to Buyer/Importer, and a second Bona Fide purchase relationship between Seller/Exporter and Buyer/Importer of said PO Goods, as defined herein. Reversal of Written Approval by U.S. Customs Renders Contract Voidable: Seller/Exporter understands, acknowledges and agrees that in the event U.S. Customs, after initial approval, subsequently withdraws or in any way modified its prior written approval as defined herein, that the MSPA shall become unilaterally voidable by Buyer/Importer. Given that CBP has not issued any ruling or as-yet approved any protest confirming Woodcraft’s claims that a bona fide sale exists between the manufacturer/factory and the Woodcraft entity (seller/exporter), a plain language reading of 6.c means the contract was not in fact in operation at the time that Woodcraft made the subject entries. However, this is not pertinent to our findings because, even if the contract had been in operation, it still does not prove the facts of the sale between the manufacturer and the Woodcraft entity (middleman), and as such, Woodcraft is unable to show that a bona fide sale exists. Accordingly, we are unable to conclude that the transactions between the manufacturer and the Woodriver entities were bona fide sales. Since the importer has not met the Nissho Iwai standard to use the “first sale” price between the middleman and the foreign manufacturer, the appraisement of the merchandise should be based upon the price paid by the U.S. importer. HOLDING: The protest should be DENIED. Appraisement of the merchandise should be based upon the price paid by the U.S. importer. In accordance with Sections IV and VI of the CBP Protest/Petition Processing Handbook (HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the Protestant no later than 60 days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision. Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and to the publish on the Customs Ruling Online Search System (CROSS) at https://rulings.cbp.gov/ which can be found on the U.S. Customs and Border Protection website at http://www.cbp.gov and other methods of public distribution. Sincerely, For Craig T. Clark, Director Commercial and Trade Facilitation