Internal Advice concerning dutiability of fabric waste as assists, bona fide sales and sales for exportation; HRLs 545627, 543789

HQ W546015 December 13, 1996 VAL RR:IT:VA W546015 LPF CATEGORY: Valuation Port Director U.S. Customs Service JFK Airport – Bldg. #77 Jamaica, NY 11430 RE: Internal Advice concerning dutiability of fabric waste as assists, bona fide sales and sales for exportation; HRLs 545627, 543789 Dear Director: This is in response to your memorandum dated February 13, 1995, forwarding a request for internal advice, submitted by counsel on behalf of Asiawealth Apparel, Inc. (Asiawealth US). The request concerns the dutiability of fabric waste and the bona fides of the sales between the parties. We also are in receipt of submissions from counsel and the National Import Specialist. We regret the delay in responding due to the conflicting information provided. FACTS: The importer of record, Asia wealth US, imports ladies wearing apparel from its factory, Asiawealth Apparel Corporation (Asiawealth Corp) in the Philippines. As the principals of the U.S. company have a controlling interest in the factory, the parties are related pursuant to section 402(g) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 140la. Asiawealth Corp performs cut, make, and trim operations (CMT) among other operations on fabric, to produce the garments. You provide that neither Asia wealth US nor Asiawealth Corp purchases the fabric it processes, but depends on its clients to supply the fabric. Asiawealth US seeks out customers in the U.S. who wish to have garments made for them on a CMT basis. Asiawealth US solicits samples and sketches from potential customers, forwards this information to Asiawealth Corp, and obtains a quotation for the CMT garment. Counsel provides that Asia wealth US may negotiate with the factory to reduce the price of the garment in order to reduce its own bid and secure sales. It also may negotiate changes to the garment with the customer which will reduce cost if its bid is unacceptably high. Once the contract is confirmed, the U.S. customers purchase fabric to be used in the manufacture of the garments and ship that fabric to Asiawealth Corp. Upon completion of the order, Asiawealth Corp advises Asiawealth US and ships and bills the garments to them on FOB terms. You state that Asiawealth US bills its customers the FOB price from Asiawealth Corp plus a markup which varies depending on the quantity and style produced. The customers then deduct the cost of the fabric and remit payment for the balance of the invoice plus the portion of the duty amount paid for the fabric on entry. Upon receipt of payment, Asiawealth US remits payment for manufacturing costs to Asiawealth Corp. You explain that when entry is made by Asiawealth US, the initial yardage and original total value of fabric supplied for the manufacture is declared to Customs. However, the fabric value is reduced by a wastage factor. Duty is tendered only on the value of the actual amount of yardage which appears in the imported garment. The wastage factor is calculated based on a fabric utilization percentage obtained by a computer generated sketch of all the parts of the garment laid out within the dimensions of the fabric to be cut. You state that the loss factor under this format can be anywhere from 10 to 40 percent. An invoice from Asiawealth Corp to Asiawealth US was submitted where an amount for the wastage factor was deducted from the invoice price for the garments, to arrive at the entered value reflected on the Entry Summary (Customs Form 7501). Documents itemizing the costs comprising the total price for the goods (i.e., for local and consigned materials and accessories, labor, and mark-up) as well as for the wastage costs were submitted. These figures coincide with the amounts included on the Asia wealth Corp/Asia wealth US invoice for the total price of the goods and the wastage deduction. An invoice, packing list and a bill of lading for fabric provided from a Korean supplier, on behalf of a U.S. purchaser, to Asiawealth Corp also were submitted. ISSUE: Based on the submitted evidence, whether transaction value appropriately is based on the price actually paid or payable by the ultimate U.S. purchasers or Asiawealth US, adjusted to deduct amounts attributable to the fabric waste. LAW AND ANALYSIS: As you are aware, the preferred method of appraising merchandise imported into the United States is transaction value pursuant to 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. Section 402 (b)(l) of the TAA provides, in pertinent part, that 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 the enumerated statutory additions (emphasis added). Accordingly, a bona fide sale must exist between either Asiawealth US and Asiawealth Corp or the ultimate purchasers and Asiawealth Corp, if transaction value is based on the price actually paid or payable by either of the former parties to Asiawealth Corp. In determining whether a bona sale has taken place between a potential buyer and seller of imported merchandise, no single factor is determinative. Rather, the relationship is to be ascertained by an overall view of the entire situation, with the result in each case governed by the facts and circumstances of the case itself Dorf International, Inc. v. United States, 61 Cust. Ct. 604, A.R.D. 245 (1968). Customs recognizes the term "sale," as articulated in the case of J.L. Wood v. US. , 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974), to be defined as: the transfer of property from one party to another for consideration. However, several factors may indicate whether a bona fide sale exists between a potential buyer and seller. In determining whether property or ownership has been transferred, Customs considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, Customs may examine whether the potential 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. In determining whether the relationship of the parties to the transaction in question is that of a buyer-seller, where the parties maintain an independence in their dealings, as opposed to that of a principal-agent, where the former controls the actions of the latter, Customs will consider whether the potential buyer: provided (or could provide) instructions to the seller; was free to sell the items at any price he or she desired; selected (or could select) his or her own customers without consulting the seller; and could order the imported merchandise and have it delivered for his or her own inventory. Based on the conflicting information and documentation provided, we cannot conclude whether Asiawealth US acted as a buyer/seller or as a selling agent regarding the transactions in question. First, the shipping terms provided on the submitted invoices are inconclusive as to whether property or ownership was transferred to Asiawealth US. No invoices from the ultimate purchasers were submitted. Moreover, evidence such as proof of payment demonstrating the manner in which consideration, or payment, passed between the parties is lacking. Furthermore, we do not possess evidence and documentation (such as invoices, purchase orders, supply and shipping agreements, proof of payment, etc.) concerning the roles of Asiawealth Corp, Asiawealth US and the ultimate US purchasers as well as the transaction in general, necessary to conduct such a comprehensive review. Assuming Asiawealth US served as a selling agent, as opposed to an independent buyer/seller, transaction value would be based on the price actually paid or payable by the US purchasers with additions, as appropriate, for selling commissions incurred by the US purchasers pursuant to section 402(b)(l)(B). Nevertheless, we recognize that numerous factors do indicate that Asiawealth US may have acted as an independent buyer/seller. In particular, because Asiawealth US could negotiate the prices with Asiawealth Corp as well as the US purchasers, it appears to have been free to sell the items at any price it desired. Furthermore, because Asiawealth US solicits samples and sketches from the potential customer in the U.S. and appears to deal with the customers independently, it may have selected its customers without consulting Asiawealth Corp. Our understanding that Asiawealth US was billed by, and remitted payment to, Asiawealth Corp and that the ultimate U.S. purchasers were billed by, and remitted payment to, Asiawealth US also is consistent with the finding of a buyer/seller relationship. In the event Asiawealth US was serving as a buyer/seller, the decisions reached in Nissho Iwai American Corp. v. United States, 786 F. Supp. 1002 (CIT 1992) rev'd 982 F.2d 505 (Fed. Cir. 1992) and Synergy Sport International, Ltd., v. United States, 17 CIT 18 (1993) are relevant. In Nissho Iwai and Synergy, the U.S. Court of Appeals for the Federal Circuit and the Court of International Trade, respectively, addressed the proper dutiable value of merchandise imported pursuant to a three-tiered distribution arrangement involving a foreign manufacturer, a middleman, and a U.S. purchaser. In both cases the middleman was the importer of record. Both courts held that the manufacturer's price, rather than the middleman's price, was valid as long as the transaction between the manufacturer and the middleman fell within the statutory provision for valuation. The courts explained 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 nonmarket influences and involving goods "clearly destined for export to the United States." In regard to this particular matter, insofar as Asiawealth Corp and Asiawealth US are related parties and we do not possess information concerning the influence this relationship may have had on the negotiations or dealings between the parties, it cannot be concluded that such transactions were conducted at arm's length. In other words, it has not been demonstrated that the transaction value between the related parties is acceptable in accordance with section 402(b)(2)(B). Although the evidence may indicate that the merchandise clearly was destined to the U.S., this is insufficient, by itself, to satisfy the two part standard set forth in Nissho Iwai. See Headquarters Ruling Letter (HRL) 545627, issued September 13, 1995. As previously discussed, the Nissho Iwai and Synergy courts found the transaction between the manufacturer and the middleman/importer of record statutorily viable under section 402 and accordingly based transaction value on the manufacturer's price. Consequently, the courts did not specifically address whether transaction value could be based on the subsequent transaction between the middleman/importer of record and U.S. purchaser in cases where the transaction between the manufacturer and middleman/importer of record was not statutorily viable. Nevertheless, we find it consistent with the position articulated by the Nissho Iwai and Synergy courts to consider appraisement based on the transaction between the middleman and U.S. purchaser in cases where the middleman serves as the importer of record and the transaction between the manufacturer and middleman is not statutorily viable. It would be necessary, however, for such a transaction to constitute a sale for exportation to the U.S., within the meaning of section 402(b)(1). In the instant matter it is our understanding that Asiawealth US and its U.S. customers are not related and the transaction between the parties would be acceptable in accordance with section 402(b)(2)(B). Further, the fact that the U.S. purchasers provide assists to the manufacturer to be used in connection with the production of the merchandise is persuasive evidence indicating that the alleged sale between Asiawealth US and its U.S. customers is a sale for exportation to the U.S. It is apparent that after manufacture abroad, Asiawealth US sold the goods to its customers incorporating the samples and sketches as well as fabric assists. Hence, at the time of sale by Asiawealth Corp and Asiawealth US it is plausible that the U.S. purchasers had at least a security interest in the final goods. For these reasons, in accordance with Nissho Iwai the transactions between As1awealtb US and the ultimate U.S. purchasers would form the bases of appraisement for the garments. Cf. HRL 543789, issued February 17, 1987, where a sale between the U.S. importer of record and U.S. purchaser was found to constitute a domestic sale. Therefore, regardless as to whether Asiawealth US functioned as a selling agent or a buyer/seller, transaction value appropriately is based on the price actually paid or payable by the ultimate U.S. purchasers. With regard to the dutiability of the fabric waste, a deduction for the fabric waste from the price actually paid or payable for the merchandise is inappropriate. The "price actually paid or payable" is defined in section 402(b)(4)(A) of the TAA as the "total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise ...) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller." We note, in particular, that section 402(b)(1) provides, in pertinent part, that the price actually paid or payable for imported merchandise is increased by amounts for the enumerated statutory additions insofar as they are not otherwise included within the price actually paid or payable. Two recent court cases have addressed the meaning of the term "price actually paid or payable." In Generra Sportswear Co. v. United States, 8 CAFC 132, 905 F.2d 377 (1990), the court considered whether quota charges paid to the seller on behalf of the buyer were part of the price actually paid or payable for the imported goods. In reversing the decision of the lower court, the appellate court held that the term "total payment" is all-inclusive and that "as long as the quota payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods." The court also explained that it did not intend that Customs engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, were for the merchandise or something else. In Chrysler Corporation v. United States, 17 CIT 1049 (1993), the Court of international Trade applied the Generra standard and determined that although tooling expenses incurred for the production of the merchandise were part of the price actually paid or payable for the imported merchandise, certain shortfall and special application fees which the buyer paid to the seller were not a component of the price actually paid or payable. With regard to the latter fees, the court found that the evidence established that the fees were independent and unrelated costs assessed because the buyer failed to purchase other products from the seller and not a component of the price of the imported engines. Accordingly, it is our position based on Generra, that there is a presumption that all payments made by a buyer to a seller are part of the price actually paid or payable for the imported merchandise. However, this presumption may be rebutted by evidence which clearly establishes that the payments, like those in Chrysler, are completely unrelated to the imported merchandise. In this case, the parties bill each other an FOB price, which based on the Asiawealth Corp. Asiawealth US invoice consists of amounts for the fabric assists, including that attributable to the fabric waste which is subsequently deducted from the total price to arrive at the entered value. We note that the documents itemizing the costs comprising the total price for the goods (i.e., for local and consigned materials and accessories, labor, and mark-up) as well as the wastage coincide with the amounts included on the Asia wealth Corp/ Asia wealth US invoice. Although, to the contrary, it is submitted that the U.S. customers deduct the cost of the fabric and remit payment for the balance of the invoice plus the portion of the duty amount paid for the fabric on entry and that Asiawealth US only remits payment for manufacturing costs to Asiawealth Corp, no documentation such as invoices or proof of payment has been tendered in this regard. Whereas information has not been presented to rebut the presumption that such payments are part of the price actually paid or payable as the payments comprise the total payment for the goods, it is our position that there can be no deductions for fabric waste and the amounts are part of the transaction value of the merchandise. Because the merchandise at issue was entered previous to the effective date of the General Notice of Modification and Revocation of Customs Ruling Letters Relating to Assists, Customs Bulletin, Vol. 29, No. 51 (December 20, 1995), the amounts attributable to the fabric waste would not be included in the transaction value of the instant merchandise if counsel could rebut the presumption that such payments were part of the price. This not being the case, based on the evidence submitted, it is not necessary to address the appropriateness or accuracy of Asiawealth Carp's method of computing fabric waste. HOLDING: Based on the submitted evidence, regardless as to whether Asiawealth US functions as a selling agent or a buyer/seller, transaction value appropriately is based on the price actually paid or payable by the ultimate U.S. purchasers, including any amounts attributable to the fabric waste. This decision should be mailed by your office to the internal advice requester no later than sixty days from the date of this letter. On that date the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels. Sincerely, NEED TO ASK MONIKA WHAT THIS NAME IS Acting Director International Trade Compliance Division