CBP Ruling W548198

HQ W548198 December 26, 2002 RR:IT:VA W548198 AH Area Port Director Savannah, Georgia 31401 Dear Ms. Downey, This is in response to your September 23, 2002 memorandum forwarding a request for internal advice submitted by Global Logistics ("Global") on behalf of RMS Equipment Company ("RMS"). The internal advice request pertains to the proper valuation of five sub-assemblies manufactured in China and imported into the United States. By letter dated August 15, 2002, Global requested a binding ruling regarding certain valuation issues related to the subject importation transactions. After confirming that the subject transactions were no longer prospective in nature, our office concluded that a binding prospective ruling was no longer appropriate under the circumstances and advised Global by letter dated August 21, 2002 to submit a Request for Internal Advice to a port of entry where the subject merchandise is imported. Hence, this request for internal advice. We note that further documentation was requested from Global regarding the subject importations, in response to which we received various documents under cover letter dated November 26, 2002. In addition, on December 9, 2002 we participated in a telephone conference with representatives from both Global and RMS during which time we discussed Global's submission. FACTS: Michelin North America, Inc. ("Michelin"), located in Oklahoma, is the U.S. purchaser in multi-tiered sales transactions. Michelin places orders with RMS, located in Canada, for certain tire building machines. RMS in turn contracts with Dalian Bingshan Rubber & Plastics Company, Limited ("Dalian") located in the People's Republic of China for the manufacture of the sub-assemblies which are incorporated into tire building machines. The five subassemblies at issue are manufactured by Dalian, three of which are shipped directly from Dalian, China to Michelin located in Oklahoma. Michelin incorporates these sub-assemblies into existing machines. The remaining two subassemblies are shipped to RMS in Canada, where they are assembled into a completed machine by RMS and then resold to Michelin. Position of RMS Global requests Customs valuation of the subject imported merchandise be based on the "first sale" between RMS and Dalian plus the landed cost of all assists provided by RMS to Dalian. Global asserts that valuation based on the "first sale" between the manufacturer and middleman rather than the sale between the middleman and the U.S. purchaser is proper. Specifically, Global asserts that the subject three-tiered distribution system satisfies the requisites for appraisement based on the "first sale", as articulated in Nissho Iwai and subsequent Customs rulings. Global submitted the following documents in support of its contentions regarding the sale between RMS and Dalian: Statement from a RMS representative attesting that RMS, Dalian, and Michelin are not related parties as defined in 19 U.S.C. S1401a(g). Cooperation Agreement between Dalian and RMS setting forth, in general, the roles and responsibilities of the parties in their commercial dealings. Purchase Contract relating to the manufacture and sale of the merchandise at issue. Purchase Orders issued by Michelin to RMS covering the five subassemblies at issue. Copy of the parts list — those parts provided by RMS to Dalian, most of which were purchased in North America by RMS and shipped to Dalin for inclusion in subassemblies assembled at Dalian. 6) Letter from RMS indicating: total freight charges to land all parts in Dalian and copies of freight invoices as evidence, Overview of sale and associated costs (additional assists). 7) Breakdown of costs which will be added to the two BAZ units that are sent to RMS in Canada and then exported as completed machines to Michelin in the United States. In response to our request for further documentation, Global provided the following: sales invoices issued by RMS to Michelin, along with payments made against these invoices by Michelin. Purchase order issued to Dalian from RMS. Sales invoices issued from Dalian to RMS. Invoices relating to shipping costs and their payment. Information regarding engineering and design support furnished to Dalian by RMS. Bills of lading and entry documents Global contends that the submitted documents prove that RMS and Dalian are unrelated parties dealing at arms-length and that the transaction between them constitutes a sale for exportation, all criteria established by Nissho Iwai for the acceptance of a "first sale" for Customs valuation purposes. Accordingly, when entering the subject merchandise into the United States, thus far RMS has based its entered value on its "first sale" with Dalian. Port of Savannah's position You have expressed your reservations regarding the appropriateness of using the "first sale" for Customs valuation purposes. Applying the standards set forth in Treasury Decision 96-87 concerning multi-tiered transactions, you conclude that it does not appear that a bona fide sale occurred between the manufacturer and the middleman or that the merchandise was destined for the United States at the time of the "first sale". LAW AND ANALYSIS: The primary method of appraising merchandise is transaction value. The transaction value of imported merchandise is defined as the price actually paid or payable for merchandise when it is sold for exportation to the United States plus certain statutorily enumerated items contained in the Trade Agreements Act of 1979 (TAA; 19 U.S.C.§ 1401a. Nissho Iwai In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit ("CAFC") concluded that in the case of a multi-tiered importation transaction, transaction value for Customs purposes may be the price paid by the middleman to the manufacturer in lieu of the price paid by the U.S. purchaser to the middleman so long as it is proven to be valid under Customs standards. The CACF stated that "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". Id at 509. Customs has placed the burden of proof in demonstrating that the requirements enunciated in Nissho Iwai have been met for acceptance of the sale between the middleman and the manufacturer on the importer. See T.D. 96-87(1997). In keeping with the CAFC's decision, Customs has ruled that a manufacturer's price may serve as a valid transaction value for Customs purposes provided that the importer provides sufficient proof that a bona fide sale for exportation took place and that the middleman and manufacturer conducted their negotiations at arms-length. Id. T.D. 96-87 provides guidance as to the necessary proof that an importer must furnish. Namely, T.D. 96-87 establishes a standard whereby importers are expected to provide Customs with a detailed description of the roles of the various parties and to furnish the relevant documents pertaining to the transactions at issue. As to relevant documents, Customs requires nothing less than a complete paper trail of the importation transaction including purchase orders, invoices, proof of payment, contracts and any other additional documents (including correspondence) which demonstrate the way in which the parties negotiate with one another and support the claim that the goods were clearly destined for the United States. Id. Bona Fide Sale A sale for Customs purposes is defined as a transfer of ownership in property from one party to another for consideration. JL. Wood v. United States, 62 CCPA 25, 33; C.A.D. 1139 (1974). In addition to the transfer of title a key determinant of a bona fide sale is whether the buyer of the merchandise has assumed the risk of loss for the imported merchandise. Headquarters Ruling Letter (HRL) 545506 dated November 30, 1995. Other factors indicating the occurrence of a bona fide sale include the issuance of a purchase order by the buyer to the seller and, in return, an invoice by the seller to the buyer, followed by payment against the invoice by the buyer. HRL 546553, dated March 31, 1997. However, in ascertaining that a bona fide sale has taken place no single factor is determinative. Rather, the relationship of the potential buyer and seller should be considered with an overall evaluation of the roles of the parties and the structure of the transaction. Doff International, Inc. v. United States, 61 Cust. Ct. 604, A.R.D. 245 (1968). Sales Documentation The terms of sale indicated on the purchase order and sales invoices in the Dalian/RMS transaction — FOB Dalian — indicate that title and risk of loss transferred to RMS at the port of Dalian. In addition, the sales documentation evidencing the sale including purchase order, sales invoice, and proof of payment suggest a buyer/seller relationship between the parties. Finally, the purchase contract between RMS and Dalian refers to the parties as buyer and seller, another indication of a bona fide sale. However, as noted, an overall evaluation of the roles of the parties and the structure of the transaction are necessary. See Doff. In this regard, it is important to examine all relevant documentation and evidence. HRI546871, dated February 17, 1999. Cooperation Agreement In its submission, Global included an agreement between Dalian and RMS entitled "Cooperation Agreement" ("Agreement"), which Global submits describes the roles of the parties. The tenor of this agreement is that cooperation between the parties - utilizing Dalian's low cost production capacity and RMS' technical expertise - will serve to bolster the strength of each in the world tire machinery business. Section 2 of the Agreement applies to the parties' relationship as relates to the manufacture and sale of tire building machines and other similar products. As we confirmed with RMS via telephone conference on December 9, 2002, the subject BAZ subassemblies fall within this category of machinery. Section 2.A. of the Agreement states "RMS will be the exclusive sales agent for these products.” Section 4 of the Agreement relates to RMS' marketing of products produced by Dalian. Section 4.A. states "RMS has a sales agent network with access to most of the world market". Section 4.B. further states that "DRP" (Dalian) will provide RMS with detailed descriptions and prices for its major product lines and permit RMS to sell said products outside of China". During our telephone conference, we discussed the Cooperation Agreement and its meaning with RMS. We specifically inquired as to Section 4's provision designating RMS as the exclusive sales agent for the products such as the subject merchandise. RMS contends that despite this language, RMS is an independent buyer vis a vis Dalian. RMS explains this contention in stating that the subject provision was drafted so as to ensure that RMS was granted the exclusive right to sell the merchandise produced by Dalian with the intention of precluding Dalian from selling its manufactured products directly to U.S. purchasers. RMS assured us that this provision did not create a sales agency relationship within its normal meaning. This interpretation offered by RMS does not comport with any fair interpretation of this language. The designation "exclusive sales agent" does not carry the meaning that RMS offers but instead denotes RMS' role vis a vis Dalian as one of selling agent acting on behalf of Dalian in selling its products in the United States. Section 4.B.'s language providing that Dalian will permit RMS to sell products outside of China is more along the lines of a selling agent relationship than that of an independent buyer. An independent buyer would normally not require such language of permission. We cannot accord this language the meaning RMS submits. If RMS intended to preclude Dalian from selling to U.S. purchasers merchandise it manufactured utilizing RMS' expertise, as RMS argues, different language would be required. Although the purchase contract refers to the parties as buyer and seller, we are unable to accord weight to these terms where conflicting designations are contained in the parties' general agreement, which Global itself states in its submission, defines the roles of the parties. Accordingly, given our reservations with the language contained within the parties' Agreement, we are unable to conclude that the transaction between the manufacturer and the middleman in this case constituted a bona fide sale. Arms-length Sale Global submits that Dalian and RMS are not related parties within Customs meaning and has provided a letter from a representative from RMS attesting to that fact. Customs will generally presume that transactions between unrelated parties are conducted at arms-length. Without evidence to the contrary, we do not find that the parties are related within Customs meaning. This conclusion notwithstanding, we are unable to accept the "first sale" without finding the occurrence of a bona fide sale that was clearly destined for export to the United States. Clearly Destined for Export to the United States Even assuming the occurrence of a bona fide sale, a central consideration in a case such as this is whether the sale between a foreign middleman and manufacturer was clearly intended for export to the United States. In Nissho Iwai, the CAFC was willing to accept the manufacturer's price to the foreign middleman given the circumstances of that particular case, namely that the imported merchandise was manufactured to the specifications of the U.S. purchaser to the point that the merchandise could only have been sold to the U.S. purchaser and that the manufacturer of the imported merchandise was specifically aware that the merchandise it contracted with the middleman to produce was intended for sale to a U.S. purchaser. Given these particular circumstances, the CAFC was willing to accept this foreign sale given the indisputable destination of the merchandise at the time the parties formed their transaction. In applying the CAFC's reasoning in Nissho Iwai, Customs rulings have required that the merchandise be clearly destined for the United States from the earliest stages of the parties' transaction. HRI- 546658, dated January 30, 1998. In other words, it must be clear from the inception of the dealings between the foreign middleman and the manufacturer that the goods were destined for export to the United States. Id. In addition, the sequence of certain transaction documents and their contents should illustrate that the goods were clearly destined for export to the United States. HRL 545902, dated June 18, 1997. The purchase orders from the U.S. purchaser to the middleman should predate the purchase order sent to the manufacturer in order to demonstrate that the middleman transacted with the manufacturer for the manufacturer of the goods specifically for the U.S. purchaser. Id In addition, the documentation between the middleman and the manufacturer should contain references to the U.S. purchaser and/or it original purchase order submitted to the middleman. HRL 546871. This demonstrates that throughout the transaction the goods were intended for the U.S. purchaser and that the manufacturer is aware of that intended destination. Id As recognized in Nissho Iwai, another example of such awareness is when the manufacturer is responsible for manufacturing products to specifications unique to U.S. purchasers or its use in the United States. Finally, Customs generally finds that goods not shipped directly to the United States are not clearly destined for exportation to the United States. HRL 547038, dated August 18, 1999; HRI- 547349, dated May 5, 2000; HRL 547197, dated August 22, 2000. While prior Customs rulings generally made such a finding based on the possibility of the merchandise's diversion, we note that Customs in general will treat the indirect shipment of imported merchandise as an important factor in determining whether merchandise was clearly destined for the United States, which will likely lead to a conclusion that it did not. HRL 547035. However, we note that an indirect shipment does not preclude a finding that the merchandise was clearly destined for exportation to the United States. Id. Documentation During our telephone conference, RMS asserted that Dalian was aware from the inception of the subject transaction that the goods were destined for export to the United States and that at all times the merchandise was clearly destined for the United States according to the intentions of the parties. However, for our analysis we must rely on the transaction documentation to demonstrate that the "clearly destined for" standard has been met. From the submitted documentation, we are unable to conclude that this standard has been met. As noted, the sales documentation must demonstrate that from the inception of the transaction, the parties intended the merchandise be exported to the United States. However, in the instant case, the stream of sales documentation does not contain any reference to the United States until the bill of lading, a reference occurring too late in the flow of documents. Neither RMS' purchase order to Dalian nor Dalian's sales invoices to RMS contain a reference to the United States purchaser, its purchase order or even the mere fact that the goods are being manufactured and bought with the objective of exporting them to the United States. On the contrary, the documents exclusively reference RMS, oftentimes as the consignee and refer only to RMS' purchase order. Nothing contained in the early sales documentation between RMS and Dalian evinces the intended destination of the goods as the United States. Moreover, the purchase contract contains an N/A next to the port of destination for the goods. Initial identification of the United States as the destination for the merchandise in the bill of lading is too late to meet the "clearly destined for" standard. HRI- 546658, dated January 30, 1998. Moreover, as noted, merchandise that is not directly shipped to the United States is generally not considered to have been destined for the United States. Although the circumstances of the instant case differ somewhat from prior Customs rulings finding that the merchandise was not clearly destined — in that we are not questioning here whether there was a possibility of the merchandise's diversion to another country — we find the circumstances of this particular case as compelling. Here, two of the subassemblies are shipped to Canada before their eventual importation into the United States. In Canada, the merchandise undergoes further manufacturing by RMS, adding substantial value to the merchandise and altering its physical nature to a significant extent. The product that is eventually imported into the United States is therefore not the same product that was the subject of the "first sale" between the middleman and manufacturer. Accordingly, we cannot conclude that these two subassemblies were destined for the United States, for the product exported to the United States is not the same product. HOLDING: As the record contains conflicting terms as to the parties designations and because we are unable to apply the meaning to the parties' Agreement as the importer requests, we are unable to unequivocally conclude that a bona fide sale occurred between the foreign middleman and the manufacturer of the imported merchandise. Moreover, even assuming the occurrence of a bona fide sale, we do not conclude that the imported merchandise was clearly destined for export to the United States, a major tenet of the acceptance of a "first sale" for Customs appraisement purpose pursuant to the principles enunciated in Nissho Iwai. In conclusion, it is our determination that appraisement utilizing the "first sale" between the foreign middleman and manufacturer pursuant to Nissho Iwai is inappropriate in this case. Accordingly, the subject imported merchandise should be appraised based on the price paid by Michelin to
RMS. Sincerely, Virginia L. Brown Chief, Value Branch