Bona fide sale; sale for exportation; Nissho Iwai

HQ W546288 July 11, 1996 VAL RR:IT:VA W546288 CRS CATEGORY: Valuation Leonard L. Rosenberg, Esq. Sandler, Travis & Rosenberg, P.A. The Waterford 5200 Blue Lagoon Drive Miami, FL 33126-2022 RE: Bona fide sale; sale for exportation; Nissho Iwai Dear Mr. Rosenberg: This is in reply to your letter dated February 29, 1996, on behalf of your client, Synergy International, L.L.C. ("LLC"), in which you requested a ruling as to whether the sale between the manufacturer and the middleman in the three-tiered transaction described below constitutes a sale for exportation to the United States. FACTS: LLC, a U.S. importer and the importer of record in the instant transaction, solicits orders for articles of wearing apparel from its U.S. customers and places them with its related company in Hong Kong, Synergy Sport International, Ltd. (SSI). In turn, SSI places the orders with various unrelated manufacturers in the People’s Republic of China (the "manufacturers"). SSI will supply the manufacturers with accessories and may, on occasion, supply fabric. SSI’s price to LLC will include all costs, including the manufacturers’ price, or cut, make, and trim (CMT) charge, materials, inland freight and profit. SSI will purchase either ex-factory (EXW) or FOB Hong Kong. In respect of these transactions you have advised as follows. The commercial invoice between SSI and the manufacturers will contain a statement that the goods are being manufactured for export to the U.S. and will reflect LLC’s and/or the U.S. customer’s purchase order number. In addition, the specifications required by the U.S. customer will be provided to the manufacturer by SSI. Purchase orders between SSI and the manufacturers will state that the finished goods are for export to the U.S. and must comport with the U.S. customer’s specifications. Furthermore, the agreement between SSI and the manufacturers will provide that export packing must bear markings which indicate that the goods are destined for the U.S. Risk of loss for and title to the goods will pass from the manufacturers to SSI either EXW or FOB Hong Kong, then from SSI to LLC either FOB Hong Kong, on the water, or at the time of importation into the U.S. There will not be any sales between SSI and LLC which occur simultaneously with the sales between the manufacturers and SSI. SSI will provide all instructions to the manufacturers relative to the production of the goods. The manufacturers will have no control over the price at which SSI resells the garments nor will they have any control over SSI’s customers or any say as to the disposition of the merchandise manufactured for SSI. ISSUE: The issue presented is whether the sale between the manufacturers and SSI constitutes both a bona fide sale and a sale for exportation to the United States for purposes of determining 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 enumerated additions thereto including the value, apportioned as appropriate, of any assist. 19 U.S.C. § 1401a(b)(1). You contend that the imported merchandise should be appraised on the basis of the sale between the manufacturers and SSI. However, in order for the imported merchandise to be appraised on this basis, a bona fide sale must exist between the suppliers and the middleman and this sale must constitute a sale for exportation to the U.S. In regard to this first point, Customs recognizes that the term "sale," as articulated in J.L. Wood v. U.S., 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974), means the transfer of property from one party to another for a consideration. In determining whether a bona fide sale has taken place between a potential buyer and seller of imported merchandise, no single factor is determinative. Instead, Customs reviews all the facts and circumstances present and makes each determination on a case-by-case basis. Dorf International, Inc. v. United States, 61 Cust. Ct. 604, A.R.D. 245 (1968). Several factors may indicate the existence of a bona fide sale. In making its determination, Customs considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In this regard, Customs may examine whether the potential 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. E.g., Headquarters Ruling Letter (HRL) 545709, dated May 12, 1995, HRL 545474, dated August 25, 1995. In addition, in order to determine whether the parties function as buyer and seller, rather than as principalagent, where one controls the actions of another, 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 desired; selected or could select his own customers without consulting the seller; and could order the imported merchandise and have it delivered for his own inventory. HRL 545709. Based on the information provided, SSI will acquire title and risk of loss to the imported merchandise either EXW, or FOB Hong Kong. Subsequently, title and risk of loss will pass from SSI to LLC either FOB Hong Kong, "on the water", or at the time of importation. In any event, you have advised that the transaction will be so structured that sales between SSI and LLC will not occur simultaneously with sales between the manufacturers and SSI. SSI will provide all instructions to the manufacturers. The manufacturers will have no control over the price at which SSI resells the garments nor will they have any control over the disposition of the merchandise manufactured for SSI. Accordingly, it appears that there is a valid sale between the manufacturers and SSI. Assuming that the relevant documents, correspondence and other evidence submitted at the time of importation is consistent with the above and supports a finding that SSI functions as an independent buyer in its dealings with the manufacturers, it is our position that there is a bona fide sale upon which transaction value can be based. In Nissho Iwai American Corp. v. United States, 786 F.Supp. 1002 (Ct. Int’l Trade 1992), rev’d in part, aff’d 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 is more than one sale which may be considered a sale for exportation to the United States. In so doing, the court reaffirmed the principle of E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that the manufacturer's price, rather than the middleman's price, is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. Nissho Iwai, 982 F.2d 505, 511. 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 influences that affect the legitimacy of the sales price....[T]hat determination can only be made on a case-by-case basis. Id. 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 it 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." It is the importer's responsibility to demonstrate that this standard has been met. E.g., HRL 545144 dated January 9, 1994. In regard to the clearly destined standard, you have advised that the finished garments will be made pursuant to the U.S. customers’ specifications. These specifications will be set forth on the purchase orders LLC receives from its customers. LLC will provide the specifications to SSI which, in turn, will relay them to the manufacturers. Moreover, the purchase orders between SSI and the manufacturers will state that the finished goods are for export to the U.S. and must comport with the specifications. Customs has looked to factors such as these in order to determine whether goods were clearly destined to the U.S. E.g., HRL 545271, dated March 4, 1994 (evidence 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). In addition, the commercial invoices between SSI and the manufacturers will contain a statement that the garments are being manufactured for export to the U.S. The invoices will also reflect LLC’s and/or the U.S. customers’ purchase order numbers. Finally, you have indicated that the export packing will identify the goods as destined for the U.S. Synergy, slip op. at 6-7. In the instant case, based on the information submitted, it is therefore our position that the garments are clearly destined for export to the U.S. when sold by the manufacturers to SSI. Nissho also requires that in order for a sale to be a sale for exportation to the United States within the meaning of section 402 of the TAA, the manufacturer and middleman must have dealt with each other at arm's length. In the instant case, SSI is not related to the manufacturers who produce the imported merchandise. Absent any information to the contrary, we have therefore presumed that the sale is an arm’s length sale and is free from any non-market influences that would affect the legitimacy of the sales price. Accordingly, based on the information submitted, the sale between the manufacturers and SSI constitutes a sale for exportation to the U.S. for purposes of determining transaction value. Given that SSI supplies the manufacturers with assists, as defined by section 402(h)(1)(A), the transaction value of the imported merchandise should include the value of the assists pursuant to 19 U.S.C. § 1401a(b)(1)(c). HOLDING: Based on the information submitted, and assuming that the relevant documents, correspondence and other evidence submitted at the time of importation supports a finding that SSI functions as an independent buyer in its dealings with the manufacturers, it is our position that there is a bona fide sale between the manufacturers and SSI. This sale constitutes a sale for exportation to the United States for purposes of determining transaction value. A ruling letter is issued on the assumption that all of the information furnished in connection therewith and incorporated therein, either directly, by reference, or by implication, is accurate and complete in every material respect. Pursuant to section 177.9(b), Customs Regulations (19 C.F.R. § 177.9(b)), the application of a ruling letter to the transaction to which it purports to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction and the satisfaction of any other pertinent conditions. In particular, valuation rulings will only be applied with respect to transactions involving like facts. 19 C.F.R. § 177.9(b)(3). Sincerely, Acting Director International Trade Compliance Division