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HQ 547797

May 18, 2001



Port Director
U.S. Customs Service
Attn.: Mark Parker, CST 258
JFK Airport, Building 77
Jamaica, NY 11430

RE: Request for internal advice; Nissho Iwai, sale for export, bona fide sale; arm’s length transaction; selling agent; Countrywide Fashions, Inc.

Dear Port Director:

This is in response to your memorandum dated August 7, 2000, forwarding a request for internal advice submitted by counsel on behalf of Fu Tou Textiles, Ltd. The request concerns the appraisement of ladies’ knitted garments using the price between the supplier, DGL, Ltd. and Fu Tou Textiles, Ltd., the middleman under the standards set forth by the Court in Nissho Iwai American Corp. v. United States.


Fu Tou Textiles, Ltd. (“Fu Tou”), a Hong Kong company, imports ladies’ knitted garments through its selling agent, Countrywide Fashions Ltd. (“Countrywide”), a U.S. company. Fu Tou states that it buys its merchandise on an FOB Macau basis from supplier, Diorva Garments, Ltd. (DGL), a Hong Kong company, and sells it to various customers in the United States on a Landed Duty Paid (“LDP”) basis. The manufacturer of the merchandise is Fab. De Art. De Vest. Fu To Lda (“Macau Factory”). The Macau Factory purchases fabric and materials from DGL. Countrywide, Fu Tou, DGL, and the Macau Factory are all part of the Diorva group (“Group”) of companies. The information submitted indicates that all of the parties, except the U.S. purchasers (Fred Meyer, Kohls, and Marmaxx), 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. 1401a.

In addition to the multi-tiered transaction described above, Fu Tou pays a commission and royalty to Martin Stuart Ltd. Martin Stuart Ltd. also acts as a selling agent for Fu Tou, but the company is unrelated. A copy of the January 19, 1999, agreement between Fu Tou and Martin Stuart Ltd. was submitted, however, you have not requested our review of the dutiability of those items. Accordingly, we do not address the commissions and royalties here.

Fu Tou’s declared value for the shipments in question, as shown on the entry documentation, is the price between Fu Tou and DGL. Counsel claims that “this price encompassed nearly all of the profit enjoyed by the Group, and was thus an arm’s-length price.” In support of its claim, Fu Tou submits the following documentation: invoice from the Macau Factory to DGL; an invoice by DGL to FuTou/Countrywide a bill of lading, purchase order from the U.S. customer. No formal purchase orders were issued by Fu Tou to DGL.

You find that the sales between the members of the Group are not free of non-market considerations. You state that the sale between Fu Tou and DGL is precluded because no profit was realized and the total cost of the raw materials sold to the manufacturer is not reflected in the price paid by DGL (which is the same price as paid by Fu Tou). Further, the you state that the only statutorily viable sale for transaction value is that between Fu Tou and the unrelated ultimate purchasers in the United States, because it is the impetus for the entire production cycle.


Should the transaction between Fu Tou and its U.S. customer or the transaction between DGL and Fu Tou serve as the basis for transaction value?


As you are aware, 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.

Prior to Nissho Iwai American Corp. v. United States, 16 CIT 86; 786 F.Supp. 1002 (1992), reversed in part, 982 F.2d 505 (1992), and Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993), the policy of the Customs Service was to appraise imported merchandise under transaction value based on the sale which most directly caused the merchandise to be exported to the United States. However, in Nissho, the court reviewed the basis for determining transaction value when there is more than one sale that may have caused the exportation to the United States. The Court affirmed the analysis of E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that a manufacturer’s price, rather than the middleman’s price, is valid so long as the transaction between the manufacturer and the middleman constitutes a viable transaction value. The Court stated that in a multi-tiered transaction:

“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 absence of any non-market influences that affect the legitimacy of the sales price. The determination can only be made on a case-by-case basis.”

Id. at 509. See also, Headquarters Ruling Letter (“HRL”) 545648 dated August 31, 1994.

Thus, prerequisite to the use of transaction value is finding that a sale for exportation has occurred. The facts stated present a multi-tiered transaction with merchandise allegedly being sold by DGL to Fu Tou who sells it to customers in the United States using its agent, Countrywide, as the importer of record. DGL, Fu Tou, and Countrywide are all related. Fu Tou/Countrywide declared on its entry papers that the sale for exportation and appropriate transaction value is the price between DGL and FuTou.

“Sale” means a transfer of ownership from one to another for consideration. J.L. Wood v. U.S., 505 F.2d 1400, 1406 (1974). Although this definition was derived under the prior appraisement statute, Customs adheres to this definition under the TAA. The primary factors for determining whether there has been a transfer of ownership are whether the alleged buyer has assumed the risk of loss, and whether the buyer has acquired title to the imported merchandise. See HRL 545105 dated November 9, 1993; HRL 544775 dated April 3, 1992; and HRL 543633 dated July 7, 1987.

In HRL 545105 we reiterated the standard regarding the transfer of title and the assumption of the risk of loss stated in HRL 543708 dated April 21, 1988. To determine when title and risk of loss pass from the seller to the buyer in a particular transaction customs examines whether the applicable contract is a “shipment” or “destination” contract. FOB point of shipment contracts are “shipment” contracts, while FOB place of destination contracts are “destination” contracts. Generally, title and risk of loss pass from the seller to the buyer in “shipment” contracts when the merchandise is delivered to the carrier for shipment. In a “destination” contract title and risk of loss pass from seller to buyer when the merchandise is delivered to the named destination.

The invoice from DGL to Countrywide (Fu Tou’s agent) states two different sets of shipping terms. At the top of the invoice it indicates dispatch from Macau to Newark and states “Terms L.D.P.” We find this to be a destination contract. However, in another portion of the invoice it states “FOB Hong Kong” as the shipping terms, indicating a shipment contract. Further, counsel for Fu Tou insists that the terms of sale are actually FOB Macau, a shipment contract. (See page 5 of submission by counsel dated Feb. 14, 2000) However, none of the documentation submitted contains FOB Macau shipping terms.

The purchase order of the U.S. ultimate consignee states “FOB ship point” and freight “Collect”. The bill of lading lists Countrywide as the consignee and states that the shipper is the factory in Macau with the port of loading as Hong Kong. The manufacturer’s invoice states the terms of sale as FOB Hong Kong. Each invoice states that the merchandise is shipped from Macau to Newark or to the United States. It appears that if DGL ever takes title, it does so in Hong Kong simultaneously with Fu Tou. We note that the bill of lading lists the shipper as the manufacturer and the consignee as Fu Tou/Countrywide in the U.S. Based on the documents submitted, we conclude that title and risk of loss passes from the manufacturer directly to Fu Tou/Countrywide upon delivery of the merchandise to the carrier in Hong Kong without an intervening sale between DGL and Fu Tou. See HRL 544775 dated April 3, 1992.

Even if we were to find that a sale occurred between Fu Tou and DGL, we have insufficient evidence to show the transaction was conducted at arm’s length, the second prong of the Nissho Court’s analysis. Further, no evidence was submitted to substantiate the arm’s length nature of the transaction between the Macau factory and Fu Tou. Thus, we cannot find that either transaction represents a viable transaction value for appraisement purposes.

Fu Tou suggests that if customs does not find a viable transaction value between DGL and Fu Tou, it must look to the other basis of appraisement, rather than to the transaction between Fu Tou and the U.S. purchaser. However, the Court of Appeals for the Federal Circuit in VWP of America, Inc., v. United States, recognized that where a transaction between a related middleman and manufacturer does not constitute a viable transaction value, the transaction between the middleman and the purchaser is considered in determining transaction value. 175 F.3d 1327 (1999). Nothing in the statute or regulations precludes customs from considering a legitimate sale as a sale for exportation when fixing the value of imported merchandise. As the sale to the U.S. purchaser was contracted for prior to exportation, we find that the sale is a legitimate “sale for exportation” for which we believe a viable transaction value may be discerned.

In addition, as stated above, the court in Nissho and again in VWP observed that the rule for using the sale from the manufacturer applies only where there is a legitimate choice between two statutorily viable transaction values. Thus, the court recognized that the sale to the U.S. customer may also represent a statutorily viable transaction value. In order for the supplier’s (DGL’s) price to the middleman (Fu Tou) to constitute a viable transaction value, all elements must exist: 1) a bona fide sale; 2) merchandise must be clearly destined for export to the United States; and 3) the transaction must be at arm’s length. We find that the transaction between DGL and Fu Tou fails to meet all of the elements required, based upon the information submitted. Accordingly, that transaction does not yield a viable transaction value for customs appraisement


Based upon the information submitted, we find that no sale occurred between DGL and Fu Tou. Accordingly, no legitimate choice exists between two statutorily viable transactions as directed by the court in Nissho Iwai. Thus, only the sale between Fu Tou and the unrelated U.S. purchasers should be the basis for determining the transaction value of the imported merchandise.

This decision should be mailed by your office to the party requesting internal advice no later than sixty days from the date of this letter. On that date the Office of Regulations & 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.


Virginia L. Brown
Chief, Value Branch

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