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HQ 546518





February 9, 1998

VAL RR:IT:VA 546518 CRS

CATEGORY: VALUATION

Area Director
Port of New York, JFK Airport
U.S. Customs Service
Building 77
Jamaica, NY 11430

RE: IA 8/96; sale for exportation; Nissho Iwai; clearly destined

Dear Sir:

This in reply to your memorandum of January 30, 1996, under cover of which you forwarded the above-referenced request for internal advice (I/A) concerning By Design L.L.C. The I/A was routed through the Customs Information Exchange, N.Y., and was received by this office on October 10, 1996. This matter was discussed with By Design and its representatives and members of my staff at a meeting at Customs Headquarters on January 13, 1998, at which time an additional written submission, dated January 12, 1998, was made. We regret the delay in responding.

FACTS:

By Design, an importer of women's knit sweaters, pullovers and vests, purchases merchandise from Central Resources, Ltd., a related party incorporated in the British Virgin Islands, with offices in Hong Kong. There are two categories of transactions: "onshore" transactions; and "offshore" transactions. A second related party, By Design (Fashion) Ltd. (previously known as Debbie Morgan, Ltd.), located in Hong Kong, is involved in the onshore transactions.

The onshore transactions are structured as follows. By Design places purchase orders with Central Resources which, in turn, places the orders with its Hong Kong agent, By Design (Fashion) Ltd. ("Fashion Ltd."). Fashion Ltd. locates a vendor and negotiates the price of the goods, and is paid a commission for its services. The vendor, located in China, Hong Kong or Macau, may be the manufacturer of the goods or may source the goods from a factory. In the transactions documented in the January 12th submission, the vendor and the manufacturer are related; the vendor is located in Hong Kong and the manufacturer in China. Neither Fashion Ltd. nor Central Resources, nor any affiliates of By Design are related to the manufacturer/vendor of the imported merchandise. At the factory, labels are sewn into the imported garments which conform to U.S. textile labeling requirements and which reflect the identity of the U.S. distributor.

In the offshore transactions, By Design places purchase orders with Central Resources which then sources the merchandise from vendors elsewhere than in China, Hong Kong or Macau. In the instant case, the vendor/manufacturers are located in South Korea. As in the onshore transactions, neither Central Resources nor any By Design affiliates are related to the manufacturer/vendor of the imported merchandise.

By Design has submitted a variety of documentation underlying both the onshore and offshore transactions to include copies of the following: purchase orders from By Design to Central Resources; invoices from the vendors to Fashion Ltd. (in the case of onshore transactions) and Central Resources (in the case of the offshore transactions); invoices from Fashion Ltd. to Central Resources (in the case of the on shore transactions); and invoices from Central Resources to By Design. By Design has also submitted copies of packing lists, single country declarations, visaed invoices, bank statements, letters of credit and a buying agency agreement between Central Resources and Fashion Ltd. In both instances the goods are shipped directly from the manufacturer/vendors to the U.S.

In regard to the offshore transactions, your office has taken the position that the appraised value of the imported merchandise can be based on the sale from the manufacturer/vendors to the middleman. However, in regard to the onshore transactions, you believe that there is insufficient information on which to base the appraised value on the sale from the manufacturer/vendor. Instead, you contend that the appraised value should be based on the sale between the middleman, Central Resources, and the importer, By Design.

By Design's importations have been the subject of numerous protests filed at the port of New York, JFK Airport. Protest no. 1001-97-105809 has been designated the lead protest. Some protests have also been filed at the port of Los Angeles. No application for further review has been made in connection with these protests.

ISSUE:

The issue presented is whether the sales from the manufacturer/vendors to the middleman constitute sales for exportation to the United States for purposes of determining the appraised value of the imported merchandise.

LAW AND ANALYSIS:

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 primary basis of appraisement under the TAA is transaction value, which is defined as "the price actually paid or payable for the imported merchandise when sold for exportation to the United States," plus certain enumerated additions thereto to the extent they are not otherwise included in the price actually paid or payable. 19 U.S.C. ? 1401a(b)(1). Transaction value is an acceptable basis of appraisement, however, only if, inter alia, the buyer and seller are not related, or if related, the circumstances of sale indicate that the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain "test values," i.e., previously accepted values of identical or similar merchandise. 19

For merchandise imported pursuant to a three-tiered transaction to be appraised on the basis of the manufacturer-middleman sale, there must first exist a bona fide sale between the manufacturer and the middleman. For Customs purposes, the term "sale", as articulated by the court in J.L. Wood v. U.S., 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974), is defined as the transfer of property from one party to another for a consideration. No single factor is decisive in determining whether a bona fide sale has occurred. Customs makes each determination on a case-by-case basis and will consider such factors as whether the purported buyer assumed the risk of loss and acquired title to the imported merchandise. In addition, Customs may examine whether the purported 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. With respect to the sales between Central Resources and the unrelated manufacturer/vendors, the information presented supports the existence of bona fide sales in respect of both the onshore and offshore transactions. However, in order for these sales to form the basis for transaction value it must also be shown that they were "sale[s] for exportation" to the United States within the meaning of section 402(b)(1) of the TAA.

In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (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 as being a sale for exportation to the United States. In so doing, the court reaffirmed the principle of a prior case, E.C. McAfee Co. v. United States, 842 F.2d 314 (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 at 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. As the government itself recognizes, that determination can only be made on a case-by-case basis." Id. at 509. See also, Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993). It is the importer's responsibility to demonstrate that the standard set forth in Nissho and Synergy has been met. E.g., Headquarters Ruling Letter (HRL) 545144 dated January 9, 1994.

To support its contention that the sales from the manufacturer/vendors to Central Resources meet the court's standard in Nissho, By Design has provided copies of purchase orders, commercial invoices and various other documentation relevant to both the onshore and offshore transactions. Since the buyer in the first sale, Central Resources, is unrelated to the manufacturer/vendors of the imported merchandise, whether purchased through the onshore or offshore scenario, the only issue under Nissho presented by the I/A is whether the goods were clearly destined for export to the U.S.

The sequence of events which culminated in the importations at issue were initiated by the purchase orders from By Design. The purchase orders are sent to Central Resources which forwards copies to the vendor. The purchase order numbers are reflected on both the manufacturer/vendor's commercial invoices, and the middleman's (Central Resources) commercial invoices, as well as the packing lists which accompany the merchandise. The commercial invoices indicate that the merchandise is to be shipped directly by the manufacturer/vendors to By Design in the U.S. By Design is designated as the consignee on all the documentation including the commercial invoices, the single country declaration and the letters of credit. In addition, we note that the labels sewn into the imported garments by the factory conform to U.S. textile labeling requirements and reflect the identity of the U.S. distributor. Thus, the information presented indicates that all parties to the onshore and offshore transactions were aware that the goods were being produced for export to the U.S. Accordingly, based on the information presented, it is our position that the merchandise in both the onshore and offshore was clearly destined for export to the U.S.

As discussed above, transaction value is defined as the "the price actually paid or payable for the imported merchandise when sold for exportation to the United States," plus certain enumerated additions thereto to the extent they are not otherwise included in the price actually paid or payable. 19 U.S.C. ? 1401a(b)(1). The term "price actually paid or payable" is defined as the "total payment (whether direct or indirect...) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C. ? 1401a(b)(4)(A). See Generra Sportswear Co. v. United States, 905 F.2d 377 (1990). The enumerated additions to the price actually paid or payable include the value of any selling commissions incurred by the buyer with respect to the imported merchandise.

In the instant case, commission payments are made by the buyer, Central Resources, to Fashion Ltd. While selling commissions are an addition to the price actually paid or payable, bona fide buying commissions are not. However, no information has been presented as to whether these payments represent bona fide buying commissions and, consequently, this ruling does not address this issue. In addition, no information has been provided with respect to quota payments, if any, associated with the purchase of imported merchandise. Quota payments paid directly or indirectly by the buyer, to or for the benefit of, the seller, are considered part of the price actually paid or payable for imported merchandise to the extent they are not otherwise included therein. Id. at 380. Nevertheless, since no information concerning such payments, if any, has been presented, this ruling likewise does not address this issue.

HOLDING:

Based on the information presented, the sales between Central Resources and the unrelated manufacturer/vendors constitute sales for exportation to the U.S. in both the onshore and offshore transactions. These sales are the basis for determining the transaction value of the imported merchandise in both instances.

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 to the public via the Diskette Subscription Service, the Freedom of Information Act and other public access channels.

Sincerely,

Acting Director
International Trade Compliance Division

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