Sale for exportation of merchandise pursuant to a three tiered sale; related parties; Nissho Iwai American Corp. v. United States

HQ W545985 December 19, 1996 RR:IT:VA W545985 RSD CATEGORY: Valuation Ronald W. Gerdes, Esq. Sandler, Travis & Rosenberg 1341 G Street, NW Washington, D.C. 20005-3105 RE: Sale for exportation of merchandise pursuant to a three tiered sale; related parties; Nissho Iwai American Corp. v. United States Dear Mr. Gerdes: This is in reply to your letter dated May 2, 1995, on behalf of your client the [ ] (the importer) operating through its [ ], regarding a request for a ruling on the proper valuation of merchandise they plan to import from a Hong Kong affiliate, [ ] (the middleman). You made additional submissions concerning this matter. The most recent is dated July 10, 1996. When you made the initial ruling request, the importer was not yet importing merchandise under the scenario outlined in your letter. It is our understanding, however, that the importer has been importing merchandise obtained from the middleman. Copies of two contracts between a manufacturer and the middleman, signed by the parties on October 20 and 23, 1995, a copy of a technology and trademark agreement between the importer and the middleman, commercial documents from a sale between the middleman and the importer, and documents from a sale of appliances from the middleman to a distributor in Beirut, Lebanon accompanied your March 5, 1996, submission. Your July 10, 1996, submission contained a copy of the agreement between the importer and the middleman, blanket purchase orders and a release covering future needs. We met with you to discuss this matter on June 18, 1996. Your request for confidentiality has been granted. Therefore, documents contained in your submission will not be disclosed to the public and the names of the parties will be bracketed and will not be disclosed in copies of this ruling made available to the public. We regret the delay in responding. FACTS: The importer will order and purchase appliances from the middleman for sale and distribution in the United States. It should be noted that initially the middleman was set up to distribute the imported products in Asia. The preamble of the contract between the importer and the middleman states that the middleman is engaged in the business of manufacturing, by contract or otherwise, and selling various consumer products, components and replacement parts at facilities located throughout Asia. However, you explained that the middleman is now also purchasing products in Asia for resale to the importer.  The middleman will supply the importer by purchasing products from unrelated manufacturers located in Asia. The middleman will provide the design, detailed product specifications, and tooling used by the factory in the manufacturing process. The product samples will be disassembled and evaluated to ensure strict conformance to the middleman's quality standards. Engineers from the middleman will visit factories to monitor production, to inspect manufacturing processes, share know-how, and make suggestions for improvement in the production process. Under a schedule of required production submitted to the factories, the middleman will be obligated to purchase the converted raw materials, work in process, and finished goods related to its orders. There will be a commitment of four months of production under this schedule of required production. With respect to the finished goods, you state that the middleman will purchase the products from the unrelated manufacturers on an FOB port of export basis. Therefore, it is intended that the middleman will bear the risk of loss for the merchandise from the point that it reaches the port of export until it is delivered to the importer at the port of entry in the United States. To assist in performing certain administrative services, supervision, and inspection of manufacturing functions, the middleman will also contract for the services of the [ ], a wholly-owned American subsidiary of the importer. The middleman will reimburse [ ] for its actual costs, plus a reasonable mark-up for the services provided. It is anticipated that [ ] will also assist the middleman by giving legal advice, marketing guidance, and assistance in quality control. It is expected that the majority of the appliances manufactured in Asia will be sold to the importer for distribution in the United States. You indicate, however, that in limited circumstances, the middleman will also sell appliances to independent third parties outside of the United States. Enclosed with your submissions were copies of two contracts between the middleman and [ ], (the manufacturer) of microwave ovens. The first contract concerns built-in, over-the counter-range, microwave ovens (OTR). This product is currently to be produced only for the U.S. market. Section 6.3 of this contract with the manufacturer states that "Products sold to the middleman under this Agreement will be manufactured in accordance with engineering designs, drawings, and specifications established by manufacturer, will be in accordance with any applicable U.L. and Federal standards in the United States, will be fit for exportation to the United States without modification and will be subject to acceptance by the middleman." The second contract with the manufacturer concerns countertop microwave ovens, (CMO) a product which could be sold to other countries besides the United States. In the second contract, there is an additional sentence in Article 6.3 which reads "Upon mutual agreement between the parties Product sold to the middleman under this agreement will be fit for exportation to countries other than the United States." You state that the transfer price between the middleman and the importer will be established to compensate the middleman for the risks assumed and for the functions and activities  the middleman performs. The importer will be reflected as the consignee on the bill of lading for the merchandise and the goods should generally be shipped on a through bill of lading to the United States. The goods will be sold from the middleman to the importer, on a FOB port of entry basis. It is intended that the title to the goods and the risk of loss for the goods will pass from the middleman to the importer immediately before the merchandise clears U.S. Customs. In your latest submission dated July 10, 1996, you have provided a copy of the agreement between the importer and the middleman for appliance products. Article 2.1 of the agreement indicates that in the event the importer desires to purchase product for delivery to the importer in a country, other than the United States of America, the parties shall negotiate price and terms such which shall then be incorporated into the attachment "B". Article III of the agreement specifies the ordering procedures, in which the importer will issue blanket purchase orders. Under Article 3.2, on or before the tenth day of each month, the importer will provide a written release specifying by quantities and model products to be made available by the middleman during the fourth month in the future. A written estimate of the product requirements by model will be supplied for the fifth and sixth months in the future. If the shipment is destined for the United States, under section 4.2 of the agreement, title to the products shall pass from the middleman to the importer immediately prior to the carrier's passage over the continental shelf of the United States. If the products are intended for countries other than the United States, title will pass to the importer three (3) miles from the port of entry for the destination country. The middleman retains risk of loss, destruction, or damage to the products until title to the same passes to the importer. Under Article 3.3, within 14 days of each shipment, the middleman will send the importer a Shipment Notification, and the middleman will issue shipping documents and invoices to the importer. In Article 10.1, the middleman agrees to be responsible to ensure that the products comply with all applicable federal, state, and local laws, rules, and regulations of the United States and Canada. In addition, the middleman shall be responsible to ensure that the products comply with such foreign laws as proposed by the importer and agreed to by the middleman. The first set of documents that accompanied a March 5, 1996, submission contained a "commercial invoice" for OTRs microwaves, dated December 15, 1995, showing [ ] as the shipper and exporter. The invoice also shows that the shipment is for the account and risk of the middleman, and lists the notifying party as "Expeditors International" located in El Segundo, California. Under a section labeled "Remarks" the [ ] with an address in [Walnut, California] is shown. The next page displays the model numbers, the quantity sold, the unit price, and the total amount of money in U.S. dollars that is due. There is a bill of lading showing the importer as the final consignee. A commercial invoice between the middleman and the importer in the United States is included in the package. Finally, there is a copy of the shipping container which displays the [ ] and states "Ship to: Port of Los Angeles Made in [ ]." The second set of documents relates to a shipment of CMOs sent to Beirut, Lebanon. The first document dated August 11, 1995, is untitled. It appears to be a set of instructions on where  to ship merchandise. It shows 297 units were to be shipped, and in the section labeled export marks, it lists "Kettaneh Freseres" Beirut, Lebanon. A corresponding invoice dated October 9, 1995 indicates that 297 units were sold by the manufacturer to the middleman, and lists the notifying party as "F.A. Kettaneh" in Beirut, Lebanon. On the bill of lading, F.A. Kettaneh S.A. in Beirut, Lebanon is shown as the ultimate consignee. ISSUE: Based on the scenario described above, whether the transaction value of the imported appliances should be based on the sale between the foreign manufacturers and the middleman or the sale between the middleman and the importer? LAW AND ANALYSIS: Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act ofl930, as amended by the Trade Agreements Act of 1979 (TAA: 19 U. S.C. § 140la). The preferred method of appraisement is transaction value, which is defined as the "price actually paid or payable for merchandise when sold for exportation for the United States," plus certain enumerated additions. For purposes of determining transaction value in appraising imported merchandise, a sale for exportation to the United States must take place at some unspecified time prior to the exportation of the goods. Headquarters Ruling Letter (HRL) 545434, dated May 31, 1994. In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir 1992), the Court reaffirmed the principle of E.C McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that a manufacturer's price, for establishing transaction value, is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation . In reaffirming the McAfee standard the court stated 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 influence that affect the legitimacy of the sale price... [T]hat determination can be made on a case-by-case basis. 982 F2d at 509. See also, Synergy Sport International. Ltd. v. United States, 17 C.I.T. , Slip Op. 93-5 (CT. Int'l Trade January 12, 1993). As a general matter in situations of this type, Customs presumes that the price paid by the importer is the basis of transaction value. In order to rebut this presumption, the importer must in accordance with the court's standard in Nissho, provide evidence that establishes that at the time  the middleman purchased, or contracted to purchase, the imported merchandise the goods were "clearly destined for export to the United States" and that the manufacturer and middleman dealt with each other at "arm's length." In the instant case, you contend that in accordance with Nissho, the transaction value for the imported merchandise should be based on the sales between the middleman and the unrelated manufacturers located in Asia. In determining if this claim is valid, the first question to be addressed is whether there will be bona fide sales between the middleman and the manufacturer. For Customs purposes, a "sale" generally is defined as a transfer of ownership in property from one party to another for a consideration. J L Wood v. United States, 62 CCPA 25, 33; C.A.D. 1139 (1974). Although J.L. Wood was decided under the prior appraisement statute, Customs recognizes this definition under the TAA. Several factors may indicate whether a bona fide sale exists between potential seller and buyer. In determining whether property or ownership has been transferred, Customs considers whether the alleged buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, Customs may examine whether the alleged buyer paid for the goods, whether such payments are linked to specific importations of merchandise, 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 HRL 545705, January 27, 1995. In assessing whether there will be sales between the manufacturers and the middleman, we note that although this a prospective ruling, the importer has begun to import the products in question, and that you have provided certain transaction documents. The invoices show that the shipping terms between the middleman and the manufacturers are FOB port of export. Accordingly, the middleman will assume title and the risk of loss upon the delivery of the products by the manufacturers to the possession of the ocean or air carrier. Under the contract between the middleman and the importer, title does not pass from the middleman to the importer until immediately prior to the carrier's passage over the continental shelf of the United States. Therefore, the middleman holds title from the time the merchandise is delivered to the carrier until the carrier reaches the continental shelf of the United States. While the shipping terms, passage of title and risk of loss are indications that there are sales between the middleman and the Asian manufacturers, Customs will consider other factors to determine if there are sales between the middleman and the manufacturers. In this instance, the documents related to the transactions, such as purchase contracts between the middleman and the manufacturer and the invoices from the manufacturer demonstrate that the middleman is purchasing the goods from the manufacturer. Specifically, we note that the purchase contracts are extensive and detailed in specifying the various aspects of the transaction between the middleman and the manufacturer and indicate that the parties act as buyer and seller. Based on these documents, we are satisfied that there is a sale between the middleman and the manufacturer. Once it is established that there is a sale between the middleman and the manufacturer, the appliances will be appraised on the manufacturer's price if the requirements of Nissho-Iwai case are satisfied. Regarding the arm's length requirement part of the test, if the Asian  manufacturer is not related to the middleman, it will be presumed that they negotiate with each other at arm's length. This case is similar to the facts of HRL 545368, dated July 6, 1995, where subsidiaries of a U.S. company, were purchasing hair dryers from unrelated manufacturers in China for export to and for sale in the United States. We held that absent evidence to show that the sale between the manufacturers and the middleman was not at arm's length, transaction value could be based on the manufacturer's price that the middleman paid. The same principle would apply in this case. Turning to the second part of the test set forth in Nissho-Iwai, the evidence must establish that the merchandise was clearly destined to the United States. In the documents presented, you have described two types of microwave ovens that the middleman purchases from the manufacturer, OTRs and CMOs. You state that all of the OTRs will be sold to the United States, but a few of the CMOs will be sold to countries other than the United States. In HRL 545625, dated March 4, 1994, we indicated that since the middleman's total inventory is sold to purchasers in the U.S. and only in the U.S., every item the middleman purchases from its suppliers, whether for inventory or in response to a specific purchase order, was destined for the U.S. at the time of sale. In this case, there is no documentation to establish that the middleman's inventory is sold only to the United States. In fact, it is clear that some of the microwaves will go to countries other than the United States. We also note that the middleman is engaged in the business of selling various consumer products throughout Asia. You also concede that in some circumstances the middleman will also sell some of the microwaves (CMOs) to independent third parties outside of the United States. Accordingly, for both the CMOs and OTRs imported into the United States, the evidence must establish that they were clearly destined to the United States. In making this determination, it is necessary to review the sales contracts between the importer and the middleman, the middleman and the manufacturer, and how the parties will order merchandise. While Section 6.3 of the sales contract between middleman and the manufacturer states that products sold to the middleman will be manufactured in accordance with U.L. and Federal standards in the United States, and will be fit for exportation to the United States without modification, the contract does not require that the microwaves must be exported to the United States or that they could not be sold to a country other than the United States. Although currently the OTRs may be sold only to the U.S., there is no indication why they could not be sold to other countries. Under the contract between the importer and the middleman which covers all merchandise to be purchased, on or before the tenth day of each month during the term of the agreement, the importer will provide the middleman with a written release, specifying by the quantities and model products to be made available by the middleman during the fourth month in the future. There is nothing, however, in the procedures described in the contract or in the importer's purchase orders to the middleman that indicates which of the microwaves are bought with the intention of selling  them to the United States. The language of section 2.1 of the contract between the importer and the middleman implies that the parties could envision selling products to countries other than the United States. Furthermore, Section 10.1 of the same contract indicates that the purchase of the goods could be for the United States, Canada or some other unspecified country. Clearly, the contract between the importer and the middleman contemplates that any of the products the importer orders could go to the United States, Canada, or other unspecified countries. The contract between the middleman and the manufacturer provides on or before the 15th of the month, the middleman will provide the manufacturer with a written release, specifying quantities and models to be shipped during the fourth month in the future. These orders constitute a firm commitment by the middleman to purchase the products, unless quantities are changed by mutual agreement. The same written estimates for the fourth and fifth months are required. Section 6.3 of the contract for the CMOs also states that the products will be manufactured in accordance with applicable U.L. and Federal standards in U.S. and be fit for export to the U S., but upon mutual agreement products sold to the middleman will be fit for exportation to countries other than the U.S. Under the purchase contracts between the middleman and the manufacturer, you argue that the manufacturer will make and ship all the microwaves, including the CMO's, to the United States unless the middleman directs them to have the products made for shipment to another country. As noted previously, Article 6.3, of the purchase contract between the middleman and the manufacturer for both types of microwaves, requires that the appliances must be fit for exportation to the United States. You contend that the language "upon mutual agreement between the parties Product sold to the middleman under this agreement will be fit for exportation to countries other than the United States," requires that there must be special agreement between the parties to have the microwave ovens exported to any country other than the United States. You do not state how or when this agreement for having the CMOs fit for exportation to countries other than the United States will be reached. To illustrate the point that before merchandise is sold, the middleman must inform the manufacturer when it will send merchandise to a country other than United States, you have furnished a copy of the documents from transactions for CMO's that the manufacturer sold to the middleman for exportation to Lebanon on October 9, 1995. Almost two months prior to the shipment of the CMO's to Lebanon, on August 11, 1995, instructions were issued indicating that 297 units were to be shipped to Lebanon. Your position is that this indicates that the manufacturer was told prior to the production of the microwaves, they were to be made for sale to Lebanon. However, from our perspective questions still remain as to whether the transaction to Lebanon would be representative of how transactions would work under the actual contracts between the middleman and the manufacturer. Significantly, there is no indication that the microwaves going to Lebanon are any different from the CMOs going to the United States. In addition, because the instructions from Lebanon appear to have been given to the middleman, we have no indication how the middleman ordered the merchandise and informed the manufacturer that certain microwaves were going to Lebanon.  In other words based on the documentation that has been presented, it is not clear when the manufacturer is informed which microwaves are going to the United States and which may be going to some other country. You also have not provided any information which shows that the microwaves sent to the United States will be different than the microwaves that may be sent to other countries. Accordingly, it appears that when the middleman orders the merchandise from the manufacturer or even when the merchandise is being manufactured, there is no clear indication that it is clearly destined to the United States. Because the contracts and the other evidence do not establish that the microwaves will be going to the United States until they are put in their addressed shipping cartons and presented to the carrier for shipment to the United States, it appears that you are essentially contending that if the cartons are addressed to the United States and a carrier is informed that the merchandise is being shipped to the United States, the importer has established that the merchandise was clearly destined to the United States. We believe that such a position is not correct and not supportable under the Federal Circuit's decision in Nissho lwai. In Nissholwai the subject merchandise, subway cars, were ordered and manufactured for a specific purchaser in the United States, the Metropolitan Transit Authority of New York City. The Federal Circuit pointed out that the vehicles that were the subject of the KHI-NIC contact were manufactured for a specific United States purchaser, the contract between the importer and the middleman MTA. They were unquestionably intended "for exportation to the United States and had no alternative destination". (Emphasis added) Nissho lwai at 509. Accordingly to satisfy the requirements of Nissho Iwai, we conclude that it must be evident throughout the transaction that the merchandise is clearly destined for the United States. It is not sufficient to establish after the merchandise was ordered and manufactured, at the time of shipment, near the end of the transaction that it will be going to the United States. There may be various circumstances surrounding a transaction which can indicate that merchandise was clearly destined to the United States. For example, a middleman receiving an order or having a contractual obligation from a buyer in the United States, or there may be something about how the merchandise is made, labeled, or sold that indicates that it is intended only for the United States. Such was the case in HRL 545271, dated March 4, 1994, which also involved a three-tiered distribution arrangement in which the middleman was not the importer. The evidence presented which showed that the merchandise was destined for the U.S. when sold to the middleman consisted of purchase contracts between the importer and the middleman indicating that the goods were designed and manufactured according to the importer's specifications. The merchandise was also tagged with the importer's label and sent directly from the manufacturer to the importer. The purchase contracts also indicated that the manufacturer had access to the quota/visa required to ensure entry of the merchandise into the U.S. In addition, purchase orders between the middlemen and the manufacturer showed that the manufacturer was to provide the importer with specification and pre-production samples of the garments and that the goods were to be shipped by the manufacturer directly to the importer. Based on this evidence, we ruled that transaction value should be based on the sale between the manufacturer and the middleman. 9 You have not presented this type of evidence in the case of the microwaves. Prior to when the microwave boxes are addressed and delivered to a carrier, we have no indication that the microwaves were specifically ordered and made only for the United States. Because the contracts between the parties indicate that the merchandise could be going to countries other than the United States, we find that the importer has not established that the merchandise is clearly destined to United States, and therefore the requirements under Nissho lwai for having merchandise be appraised based on the middleman 's price have not been met. Finally, because we have determined that the relevant transaction for appraisement purposes is between the middleman seller, and the importer buyer, who are related parties pursuant to section 402(g)(I)(G) of the TAA, transaction value may not be the acceptable method of appraisement. Imported merchandise is appraised under transaction value only if the buyer and seller are not relate, or if related, the transaction value is deemed to be acceptable. Section 402(b)(2)(B) of the TAA provides that a transaction value between related parties will be deemed acceptable if an examination of the circumstances of sale indicates that the relationship between the parties did not influence the price actually paid or payable or where the transaction value closely approximates certain "test" values. 19 U.S.C. 140la(b)(2)(B). However, we do not have any evidence to rule on if the tests to determine whether transaction value would be deemed acceptable have been met. HOLDING: Based on the factual scenario you have presented, we are satisfied there will be a sale of the imported appliances from the unrelated Asian manufacturers to the middleman and the parties deal with each other at arm's length. However, the evidence does not establish that the merchandise at issue is clearly destined to the United States. Therefore, the transaction value of the imported microwaves cannot be based upon the price that the middleman pays to the manufacturer. Rather, the transaction value should be based on the sale between the importer and the middleman, provided all conditions for the use of transaction value have been met. Sincerely,
Acting Director International Trade Compliance Division