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HQ 546233

November 25, 1996
RR:IT:VA 546233 RSD


New York, New York 10022

RE: The appraisement of imported merchandise involved in an alleged three tiered sales transaction; Nissho Iwai American Corp. v. United States

Dear Mr. [ ]:

This is in regard to your ruling request dated January 12, 1996, concerning the appraisement of "high fashion" men's and women's wearing apparel and accessories imported from a European country. A supplemental submission dated March 20, 1996 was made on your behalf. Your request that exhibits and certain information regarding the names of the parties and pricing data be kept confidential and not be released to the public has been granted. The names of the parties will be in brackets and will be deleted in copies of this ruling made available to the public. We regret the delay in responding.


[ ] (hereinafter the importer), a United
States corporation based in New York City, distributes [ ] (hereinafter the middleman) products in the United States. It imports high fashion luxury men's and women's wearing apparel and accessories, such as suits, sweaters, footwear, handbags, belts, and ties from a European country. These products are designed and manufactured in a European country to the importer's United States customers' exclusive specifications. The middleman is located in a city in Europe and is related to the importer through stock ownership. The importer sells the products to non-affiliated, upscale department and specialty stores, and to four boutiques which are owned and operated by a subsidiary of the importer.

For the transactions you are requesting a ruling on, the importer purchases merchandise from the middleman. The middleman develops the specific designs and chooses unrelated Italian manufacturers to make the merchandise based on their ability to produce high quality products. You indicate that the middleman negotiates with manufacturers on an arm's length basis. The products are priced to cover the production costs, including labor, general and administrative overhead, packing and transportation expenses and a reasonable profit.

The importer imports specific merchandise to satisfy its United States customers' particular requirements. These customers choose the fabrics, styles, and designs. The products made for the U.S. market differs dramatically from products made for other countries. Products sold in different countries carry different product identification numbers, client codes and series production numbers. In the transactions under consideration, the importer, the middleman, and the manufacturers abide by strict policies and procedures for ordering, invoicing, producing, and distributing customer orders. These policies and procedures have been developed to ensure that merchandise designed and manufactured for the United States is not shipped elsewhere.

You have provided a description of the transactions. To begin with, the middleman designs a line of apparel or accessories. The importer then exhibits samples of this apparel and accessories to its customers, who will then submit purchase orders to the importer. After receiving an order from its customer, the importer orders the specific merchandise from the middleman. The importer's orders to the middleman make reference to the original customer purchase order and designate the style (design), material, color, and sizing of the required merchandise. The orders also state that all United States standards regarding component material, sizing, and labeling must be met.

After an order is taken, the importer or the middleman personnel enter it into their proprietary international computer system, which controls production, shipping, and permits the tracking of orders. The middleman developed and maintains this system to trace and record activity through the various stages of processing customer orders, receipt, acquisition of materials, production, warehousing, and shipment to the customer. The tracking network ensures that merchandise produced for particular customers is shipped only to the customer who specifically ordered it. In other words, the system is designed to prevent diversions to unintended countries or customers. Tracking of the importer's orders is critical, because each order for the United States market is unique and must meet a specific customer's demand regarding style, size, color, material, design, and order quantity. According to your submission, the middleman orders material and components and arranges for production only to satisfy outstanding customer orders. Although the middleman can temporarily warehouse merchandise intended for the United States or other countries in its home country, to facilitate shipment schedules and consolidation, the middleman does not normally maintain an inventory for the U.S. market because merchandise is exclusively ordered from manufacturers based on the importer's current customer purchase orders.

When the middleman orders merchandise, it must inform the factory where the merchandise is ultimately being sold so that it can be properly sized and labeled. A system of numbers and codes are employed to ensure that the merchandise ordered for a customer in United States is delivered to that customer. The purchase orders from the importer to the middleman refer to the original United States customer's order. During production, articles are marked with tracking codes to ensure export to the United States. This code appears on all control system generated documents.

The transaction documents submitted include a purchase order from the importer to the middleman showing the style, the color, and the quantity of merchandise ordered. The document also indicates that merchandise is intended for a department store in the United States. You have also submitted a purchase order from the middleman to what is presumably a contract manufacturer. This document refers to the importer's purchase order number and displays the same styles of merchandise in the same color and in the same quantity as shown on the importer's purchase order. Copies of the invoices between the contract manufacturer and the middleman, and the middleman and the importer, were also submitted. We understand based on the letter submitted on your behalf that the middleman purchases the merchandise from the manufacturers on an ex-factory basis.

The submission made on your behalf also states that the middleman furnishes the contract manufacturers with designs to produce the merchandise, and in most instances, with component material as well. In a minority of instances, the middleman only provides the designs. In either case, the value of the designs and/or materials are included in the merchandise's declared U.S. Customs value.


Whether the imported merchandise should be appraised based on the alleged sales between the contract manufacturers and the middleman or on the sales between the importer and the middleman?


As you know 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 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. (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.

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. However, 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, the importer is claiming that based on Nissho, the transaction value for the imported merchandise should be based on the sales between the middleman and the manufacturers in the European country. In determining if this claim is valid, the first question to be addressed is whether there were bona fide sales between the middleman and the manufacturers.

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 reviewing the documents from the sample transactions, we are satisfied that there are bona fide sales between the middleman and the manufacturers. The middleman issues purchases orders to the manufacturers for specific merchandise. The purchase orders show the quantity, sizes, styles, and prices of the merchandise ordered. In turn, the contract manufacturers issue invoices to the middleman for the merchandise, which correspond with the middleman's purchase orders. These documents are consistent to a traditional buyer-seller relationship. According to your submission, the middleman pays manufacturers in exchange for the goods and the payments will be linked to specific merchandise that the middleman orders and which the manufacturers actually produce. Based on the totality of the circumstances, we conclude that the evidence presented establishes that a bona fide sale occurs between the middleman and the manufacturers.

Once it has been established that there were sales between the middleman and the manufacturers, whether the merchandise will be appraised based on the manufacturer's price depends upon if the requirements of the Nissho-Iwai case are satisfied. As explained above, the court in Nissho set forth a two part test that must be met for a sale between a middleman and its supplier to be the basis of a viable transaction value: 1) the goods must clearly be destined to the United States at time they are purchased, and 2) the sale must be at arm's length. Turning to the first part of the two part test, the evidence must establish that the merchandise was clearly destined to the United States at the time it was sold to the middleman. In HQ 545420, dated May 20, 1995, we indicated that among the information that would support a finding that the goods are clearly destined to the U.S. at the time of sale is that the factory produces garments to fulfill a pre-existing purchase order issued by a U.S. retailer. In the present case, it appears that the ordering of the imported merchandise is initiated when the importer receives an order from one of its U.S. customers, which in this case is a U.S. retailer [ ]. Once it receives an order, the importer in turn will place an order for the merchandise with the middleman. Pursuant to the instructions received from the importer, the middleman arranges to have the merchandise manufactured by one of the contract manufacturers. Consequently the imported merchandise is produced in accordance with an order made by the importer's U.S. customer, who chooses the fabrics, style, and design of the merchandise. To comply with the order from the importer's U.S. customer, the merchandise must also be sized and labeled to meet United States standards.

The transaction documents submitted with your request indicate that the merchandise is made for a specific retailer in the United States. The middleman's purchase order to the manufacturer refers to a client code no. identifying a specific retailer [ ] to which the merchandise is sold to in the United States. The middleman order also indicates that the merchandise was designed, manufactured, and labeled according to the importer's specifications. These instructions correspond to those contained in the importer's order to the middleman and those on the middleman's documents generated by the control system. The middleman's purchase orders to the manufacturers also contain tracking codes and the instructions reference the importer's purchase orders.

The middleman's extensive tracking system for merchandise also ensures the articles are clearly destined to the United States. During the production, the articles are marked with tracking codes to ensure that the products arrive at the intended destination and are not diverted to alternative purchasers and locations. This code also appears on all control system generated documents. The use of this tracking system and inventory control, which the manufacturers must abide by, further demonstrates that the parties understand that the merchandise is intended for the United States when it is sold to the middleman. Based on the information presented, regarding how the middleman places orders with the manufacturers in response to the orders it gets from the importer, and the extensive tracking procedures that have been put into place, we find that the merchandise is clearly destined to the United States when the middleman purchases it.

Regarding the second part of the test, because the contract manufacturers are 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 should be based on the manufacturer's price that the middleman paid. The fact that the middleman and U.S. importer were related to each other was not relevant. The same principle would apply in this case. The fact that the middleman, and the importer are related is not relevant as long as the middleman and the contract manufacturers are not related to each other.

Therefore, because the requirements of Nissho Iwai will be met, the transaction value of the imported merchandise would be based on the manufacturers' prices that the middleman pays the manufacturers.

In addition, you have indicated that the middleman provides the manufacturers with design and/or components used to produce the imported merchandise. These items constitute assists as defined by section 402(h)(1)(A) of the TAA. Therefore, the value of these items must be added to the price actually paid or payable to determine the transaction value of the imported merchandise.


Pursuant to the foregoing, the evidence presented with the ruling request establishes that there will be arm's length sales for exportation between the manufacturers, and the alleged middleman, and that the merchandise is clearly destined to the United States when it was sold to the middleman.


Acting Director
International Trade Compliance Division

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