Request for Internal Advice; First Sale Appraisement; 19 U.S.C. § 1401a; Related Parties

HQ H273866 April 5, 2017 OT:RR:CTF:VS H273866 CMR CATEGORY: Valuation Port Director Attn: SIS Wilbur D. Jones U.S. Customs and Border Protection Port of Charlotte 1901 Crossbeam Drive Charlotte, NC 28217 RE: Request for Internal Advice; First Sale Appraisement; 19 U.S.C. § 1401a; Related Parties Dear Port Director: This is in response to your request, dated March 11, 2016, seeking internal advice on the appraisement of importations by Apex Tool Group, LLC (hereinafter, ATG). The importer, ATG, is the subject of a Focused Assessment conducted by the Office of Regulatory Audit covering the calendar year 2013. An issue has arisen regarding ATG’s use of “first sale” valuation of importations involving related parties and your port has requested our review of this matter. We have taken into consideration the information and materials presented to us in the memorandum requesting internal advice; in the May 18, 2016, Focused Assessment Pre-Assessment Survey Report Number 461-14-FA1-P1-24386 on Apex Tool Group, LLC., prepared by the Office of Regulatory Audit; in the February 7, 2017, meeting with counsel for the importer and his client’s representatives; in the March 3, 2017, and March 23, 2017, supplemental submissions by the importer’s counsel. FACTS: ATG imports merchandise from a related party, Apex Tool (HK) Limited, Taiwan Branch (hereinafter, ATT). ATT obtains the merchandise shipped to ATG from related and unrelated manufacturers. There is no issue with regard to the use of first sale appraisement for merchandise produced by unrelated manufacturers which is sold to ATT and then sold by ATT to ATG. The port takes issue with the transactions involving related manufacturers because the port does not believe that ATT takes title to the merchandise in such transactions, and therefore, two bona fide sales do not exist. The port believes that ATT is acting as an agent in related party sales, while acting as an independent buyer/seller in sales involving unrelated manufacturers. Four sample walk-through entries were provided to this office for our review. Three samples involved related manufacturers and one involved an unrelated manufacturer. These sample entries included purchase orders, invoices, and proof of payment between the parties. In addition, we were provided with copies of powerpoint presentations which had been presented to the Ports of Charlotte and Norfolk by ATG to support the use of first sale appraisement of their importations. As part of the information provided, ATG has informed Customs and Border Protection (CBP) that the middleman in the transactions at issue, ATT, also acts as an independent seller of merchandise to unrelated parties in the United States. ATT receives sales assistance from ATG with regard to these sales, for which it pays ATG commissions. The purchase orders between ATG and ATT indicate that the orders are governed by the Apex Tool Group, LLC, North America Purchase Order Terms and Conditions. “Buyer” is defined in the document as including “Apex Tool Group, LLC. and its subsidiaries and affiliates.” With regard to title, delivery and risk of loss, this document (the version effective during the audit period) provides, in relevant part: For International Orders all Products are to be shipped FOB Ocean Port/FCA Airport. Seller will comply with all country of origin marking instructions and all instructions for exports to Buyer. Title to the Products shall pass upon Buyer’s receipt at the destination. In addition, with regard to acceptance of purchase orders, the document states, in relevant part: In the event there is a conflict between the terms and conditions appearing on the face of an Order and the terms and conditions herein, the terms and conditions on the face of an Order shall prevail. Finally, with regard to choice of law, the document indicates that purchase orders, other than those “issued by affiliates of Buyer incorporated under the laws of Canada or a province of Canada, . . . shall be governed by and construed in accordance with the laws of the State of Maryland, without reference to its choice of law rules[.]” The document further states: “In all cases, the Parties expressly exclude from application the United Nations Convention on Contracts for the International Sale of Goods.” In addition, the purchase orders between ATG and ATT indicate the delivery terms which are FOB/Origin for the three related party manufacturer walk-throughs. For the unrelated party manufacturer walk-through, the purchase order indicates the delivery terms as DDU (Delivered, Duty Unpaid) destination for all but one item; one item has a delivery term of FOB/Plant. The related party invoices from ATT to ATG lack any shipping terms or references to title transfer. Only one of these invoices indicates the payment terms. Walk-through 4 reflects the shipping term used on the purchase order, however, it states “DDU to door, Duty and taxes paid.” In addition, the bill of lading indicates that it is payable at destination. Walk-throughs 1 through 3 involve related party manufacturers. The sales contracts from ATT to related manufacturers reference a “Customer PO,” which is the same PO number from the ATG to ATT purchase order. Walkthrough 1 was devoid of any terms of sale between ATT and the related party manufacturer in either the “sales contract” or the invoice. Walkthroughs 2 and 3 failed to have any terms of sale on the “sales contracts.” However, the invoices from the related manufacturers to ATT did provide information regarding delivery, i.e., FOB port of export. Only one invoice provided information regarding the payment method. Walk-through 4 involved an unrelated manufacturer. The purchase order between ATT and the unrelated manufacturer reference attached terms and conditions as applying to the purchase order. At our request, ATG provided those terms and conditions which, upon review, are remarkably similar to those set forth in the Apex Tool Group, LLC, North America Purchase Order Terms and Conditions. In fact, the document is titled “Apex Tool Group, LLC, Purchase Order Terms and Conditions.” “Buyer” is defined in the document as including “Apex Tool Group, LLC and its subsidiaries and associates.” With regard to purchase orders, it states, in relevant part: The terms and conditions contained herein shall govern the purchase of products and services (collectively, the “Products”) pursuant to a purchase order issued to Seller by Buyer (“Order”), subject to any additional terms and conditions appearing on the face of the Order. With regard to title, delivery and risk of loss, the document provides, in relevant part: All products are to be shipped CPT (Destination as stipulated by the Order)(Incoterms 2000). Seller will comply with all country of origin marking instructions for exports to Buyer. Title to the Products shall pass upon Buyer’s receipt at the destination. Finally, with regard to choice of law, as in the Terms and Conditions applicable to the purchase orders between ATG and ATT, this document states: “In all cases, the Parties expressly exclude from application the United Nations Convention on Contracts for the International Sale of Goods.” The document indicates that purchase orders and “this terms and conditions shall be governed by and construed in accordance with the laws of the People’s Republic of China, without reference to its choice of law rules.” Counsel for ATG submits that CBP should look at ATT’s course of dealing and its actions as an independent trading company. Counsel states that “when ATT acted as a middleman in any related or unrelated transaction, it assumed title to the merchandise it sold and acquired the risk of loss at the time the goods were delivered to the vessel in the foreign port of origin.” We note there is no issue as to whether the importations from related party manufacturers are clearly destined to the U.S. at the time of shipment, or whether the transactions between the related parties are conducted at arm’s length. The issue, as presented to this office, is whether ATT, as the middleman, received title to merchandise produced by related party manufacturers and shipped directly to ATG, so as to constitute a bona fide sale between the manufacturer and ATT. ISSUE: Whether the sales between the related manufacturers and the middleman, ATT, are bona fide sales which may be used for first sale appraisement 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 statutory additions. 19 U.S.C. § 1401a(b)(1). ATG believes the merchandise supplied by related manufacturers may be appraised under the “first sale” transaction value method of appraisement based on Nissho Iwai American Corp. v United States, 16 C.I.T. 86, 786 F. Supp. 1002, reversed in part, 982 F. 2d 505 (Fed. Cir. 1992). In that case, 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. The court held that the price paid by the middleman to the manufacturer was the proper basis for transaction value. The court further stated that in order for a transaction to be viable under the valuation statute, it must be a sale negotiated at arm’s length, free from any non-market influences, and involving goods clearly destined for the United States. See also, Synergy Sport International, Ltd. v. United States, 17 C.I.T. 18 (1993). In accordance with the Nissho Iwai decision and our own precedent, we presume that transaction value is based on the price paid for the merchandise in the last sale for export to the United States. In further keeping with the court’s holding, we note that an importer may request appraisement based on the price paid by a middleman to a foreign manufacturer in situations where the middleman is not the importer. However, it is the importer’s responsibility to show that the “first sale” price is acceptable under the standard set forth in Nissho Iwai. That is, the importer must present sufficient evidence that the alleged sale was a bona fide “arm’s length sale,” and that it was “a sale for export to the United States” within the meaning of 19 U.S.C. § 1401a. In Treasury Decision (T.D.) 96-87, dated January 2, 1997, the Customs Service (now Customs and Border Protection (CBP)) advised that the importer must provide a description of the roles of the parties involved and must supply relevant documentation addressing each transaction that was involved in the exportation of the merchandise to the United States. The documents may include, but are not limited to purchase orders, invoices, proof of payments, contracts, and any additional documents (e.g. correspon- dence) that establishes how the parties deal with one another. The objective is to provide CBP with “a complete paper trail of the imported merchandise showing the structure of the entire transaction.” T.D. 96-87 further provides that the importer must also inform CBP of any statutory additions and their amounts. If unable to do so, the sale between the middleman and the manufacturer cannot form the basis of transaction value. In this case, the port does not believe that the middleman, ATT, receives title to the merchandise produced by related manufacturers and shipped directly from the manufacturer to ATG in the U.S. Thus, the port believes that the merchandise should be appraised based upon the price paid by ATG to ATT. ATG asserts that ATT is an independent buyer/seller of merchandise and cites to evidence of ATT selling to unrelated importers in the U.S. Even if we accept the assertion that ATT operates as an independent buyer/seller with regard to merchandise it sells to unrelated importers in the U.S., this does not mean that it may not also act as an agent with regard to sales of merchandise destined to its related party, ATG. As noted above, the purchase orders (POs) between ATG and ATT presented with the four sample transactions (related and unrelated manufacturers) indicate the orders are governed by the Apex Tool Group, LLC, North America Purchase Order Terms and Conditions. Under that document, title to goods passes upon the buyer’s receipt of the goods at the destination. “At the destination” means, in our view, the ultimate end point. The goods at issue were destined for the United States. This is clear in the purchase orders between ATG and ATT and those between ATT and the unrelated manufacturers through the use of the ATG purchase order on the sales contract. Further, the invoices from the manufacturers to ATT indicated the destination of the shipments as somewhere in the U.S. “Receipt” is defined, in relevant part, as: “the act of process of receiving; the act, process, or fact of taking possession;” “the act or transaction of accepting or taking anything delivered.” “Receipt” means that the buyer takes physical possession of the goods. This understanding of the term “receipt” accords with the definition of “receipt” in Article 2 of the Uniform Commercial Code (U.C.C.). Section 2-103(1)(c) defines the term as follows: “‘receipt’ of goods means taking physical possession of them.” Counsel for ATG urges us to ignore the U.C.C. and interpret “receipt” to mean “constructive receipt” as interpreted by the court in In Re: World Imports, Ltd., 549 B.R. 820 (E.D. Pa 2016). However, that decision involved the interpretation of “receive” for the purpose of determining when goods were received by a debtor from a creditor so as to establish an administrative claim in a bankruptcy proceeding. In reaching its decision on the proper interpretation of “receive,” the court applied and interpreted the United Nations Convention on Contracts for the International Sale of Goods (CISG) because, as the court stated, “there [was] no indication that the parties elected to exclude the application of the CISG”. 549 B.R. at 823. In this case, the terms and conditions applicable to the transactions between ATG and ATT, clearly exclude the application of the CISG and indicate that the laws of the State of Maryland are to be applied, without reference to its choice of law rules. Further, the terms and conditions which apply in walk-through 4 between ATT and an unrelated manufacturer also clearly exclude the application of the CISG and indicate that the laws of the People’s Republic of China, without reference to its choice of law rules, apply. As the parties exclude application of the CISG in these transactions, we will not infer application of it to the transactions between ATT and related manufacturers based on “sales contracts.” As the parties in this matter excluded application of the CISG from their transactions, In Re: World Imports, Ltd., is not applicable herein. Based on the above discussion, title passing upon receipt of the goods at the destination means that ATG acquires title to the goods when it takes possession of the goods at delivery in the United States. The difficulty arises is ascertaining who has title to the goods from the point of delivery at the port of export until delivery in the U.S. In the sample transactions presented to this office, one transaction provides no information regarding the terms of sale between ATT and its related manufacturer; three provide the Incoterm FOB on the invoices from the manufacturers (2 related, 1 unrelated), and only 1 (the unrelated manufacturer sample, walk-through 4) provides information regarding transfer of title. In examining walk-through 4, the terms and conditions which apply, like the terms and conditions applicable for the transactions between ATG and ATT, indicate that title to the goods passes upon buyer’s receipt at destination. The goods are shipped from the manufacturer to ATG. The purchase order and invoice between ATT and the unrelated manufacturer clearly show delivery terms, FOB port of export. They also clearly show where the goods are to be shipped. Based upon the applicable terms and conditions, for walk-through 4, while risk of loss transfers from the manufacturer to ATT at the port of export, title does not transfer until receipt by ATG at the destination in the U.S. In this walk-through, ATT never obtains title to the goods. In the other three walk-throughs, ATG’s purchase orders to ATT indicate delivery terms of FOB/Origin. The invoices from ATT to ATG are void of any delivery terms. The purchase orders (sales contracts) to the related manufacturers are void of any delivery terms, but the invoices from the manufacturers to ATT indicate delivery terms of FOB port of export in two samples and nothing in the third. Based on the documents, risk of loss transfers from the manufacturers to ATT to ATG at the port of export, i.e., there is a flash transfer of the risk of loss. The importer asserts that risk of loss transfers similarly, i.e., that flash title occurs between ATT and ATG. In Rosenthal-Netter, Inc. v. United States, 12 CIT 77, 679 F. Supp. 21 (1988), aff’d 861 F.2d 261 (1988), the Court of International Trade articulated various factors that should be considered in deciding whether a bona fide agency relationship exists. The court stated, at 12 CIT at 79: These factors include: the right of the principal to control the agent’s conduct; the transaction documents; whether the importer could have purchased directly from the manufacturers without employing an agent; whether the intermediary was operating an independent business, primarily for its own benefit; and, the existence of a buying agency agreement. Although no single factor is determinative, the primary consideration is the “right of the principal to control the agent’s conduct with respect to the matters entrusted to him.” [Citations omitted.] Citing to the Restatement (Second) of Agency § 14K comment a(2) (1958), the court pointed out that “a characteristic of a seller is ‘[that] he acts in his own name and receives the title to the property which he thereafter is to transfer.’” While a seller must have title to merchandise in order to sell it, as you cannot sell what you do not own; an agent may obtain title to merchandise without it negating the agency. See Rosenthal-Netter, Inc., at 79 F. Supp. 26, Footnote 6, citing J.C. Penney Purchasing Corp. v. United States, 80 Cust. Ct. 84, C.D. 4741, 451 F. Supp. 973 (1978) which relied on Mitsui & Co. (U.S.A.), Inc. v. United States, 66 Cust. Ct. 553, 556, R.D. 11740 (1971). However, with regard to bearing the risk of loss, the court in Pier I Imports, Inc. v. United States, 13 CIT 161, 168; 708 F. Supp. 351, 357 (1989), quoting from Rosenthal-Netter at 83, stated: “’It is uncharacteristic of an agency relationship to allow the intermediary to bear the risk for damaged, lost, or defective merchandise.’” In this case, as noted, the risk of loss transferred simultaneously from the related manufacturer to ATT to ATG. Therefore, we do not believe that ATT truly ever bore the risk of loss. Taking into consideration the totality of the circumstances of the transactions, including the documentation regarding walk-through 4, we conclude that ATT was an agent for ATG and not an independent buyer/seller of goods. The use of the ATG purchase order number in the ATT sales contracts to the related party manufacturers and the failure of ATT to ever have risk of loss would support a view that ATT was acting as an agent for ATG. Further, while it is asserted there is a flash title transfer between the parties at the port of export, there is no evidence that ATT ever held title to the goods, or bore the risk of loss. The invoices for the transactions only reflect the price actually paid or payable for the goods in the entries, i.e., the payment from ATG to ATT for the goods. Although, ATT may be acting as a buying agent for ATG, there is no separately identifiable amount on the invoices to reflect an amount owed to ATT for its services. Therefore, the transaction value for the transactions at issue is the amount paid by ATG to ATT for the goods. See Monarch Luggage Co., Inc. v. United States, 13 CIT 523; 715 F. Supp. 1115 (1989) wherein the court ruled that amounts claimed to be buying commissions that were part of the price paid for the goods, i.e., included in the invoice price, were properly included in the dutiable value. We note that in its response to Regulatory Audit’s Focused Assessment Pre-Assessment Survey Report, ATG raised the issue of an Established Uniform Practice. With regard to an established and uniform practice, 19 U.S.C. § 1315(d) provides, in relevant part: No administrative ruling resulting in the imposition of a higher rate of duty or charge than the Secretary of Treasury shall find to have been applicable to imported merchandise under an established and uniform practice shall be effective with respect to articles entered for consumption or withdrawn from warehouse for consumption prior to the expiration of thirty days after the date of publication in the Federal Register of notice of such ruling; . . . . Additionally, 19 CFR § 177.10(c) provides: Changes of practice. Before the publication of a ruling which has the effect of changing an established and uniform practice and which results in the assessment of a higher rate of duty within the meaning of 19 U.S.C. 1315(d), notice that the practice (or prior rulings on which that practice was based) is under review will be published in the FEDERAL REGISTER and interested parties will be given an opportunity to make written submissions with respect to the correctness of the contemplated change. As the decision regarding the proper valuation method for the goods imported by ATG does not affect the duty rates applicable to the imported goods, 19 U.S.C. § 1315(d) is not applicable in this case. Finally, ATG sought to have this office comment on the issue of reasonable care. The reasonable care standard is contained in 19 U.S.C. § 1484, which requires the importer of record to use reasonable care to enter, classify and determine the value of imported merchandise and to provide any other information necessary to enable CBP to properly assess duties, collect statistics and determine if any other applicable legal requirements have been met. Since the issue of reasonable care has not been raised by your port in this internal advice request, we will defer to you and decline to comment. HOLDING: The sales between the related manufacturers and the middleman, ATT, are not bona fide sales which may be used for first sale appraisement of the imported merchandise. As the middleman, ATT, never holds title to the goods, there is only one bona fide sale for export to the U.S., i.e., the sale from the related manufacturer to the importer. The proper value for appraisement purposes is the amount paid by ATG for the goods. Sixty days from the date of this letter, Regulations and Rulings of the Office of Trade will take steps to make this decision available to Customs and Border Protection (“CBP”) personnel and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Yuliya A. Gulis, Acting Chief Valuation and Special Programs Branch