Application for Further Review of Protest 1401-18-100087; “First Sale” Appraisement

HQ H299654 March 28, 2019 OT:RR:CTF:VS H299654 CMR CATEGORY: Valuation Director Armando Taboada, Jr. U.S. Customs and Border Protection Machinery Center of Excellence and Expertise 109 Shiloh Dr., Suite 300 Laredo, Texas 78045 RE: Application for Further Review of Protest 1401-18-100087; “First Sale” Appraisement Dear Port Director: This is in response to your referral of the Application for Further Review (AFR) of Protest No. 1401-18-100087, filed by Sandler, Travis & Rosenberg, P.A., on behalf of their client, the protestant, against your decision to deny the use of first sale appraisement of merchandise entered on July 1, 2017, and liquidated on March 23, 2018. The protest was timely filed on April 18, 2018. We agree that AFR was properly approved based on 19 C.F.R. § 174.24(b) as the protestant received an earlier decision from Customs and Border Protection (CBP) on the applicability of first sale, but the facts have changed from those upon which the previous decision was based. In reaching our decision, we have considered the information submitted by the protestant in their protest; and their supplemental submissions, dated September 21, 2018, November 9, 2018, and February 4, 2019. Further, CBP personnel met with the protestant’s counsel on March 12, 2019, and has taken into consideration the counsel’s representations during the meeting. In addition, Counsel has requested confidential treatment be accorded to certain information submitted in connection with this matter. In consideration of the request and sufficient justification presented pursuant to 19 CFR 177.2(b)(7), this office will provide confidential treatment to certain information related to this matter. Information for which confidentiality is being accorded will be denoted in brackets in the confidential decision and will be redacted in any public version. FACTS: The importer, i.e., the protestant, entered a shipment of merchandise at the Port of Norfolk. The merchandise was manufactured by an unrelated party in China. The manufacturer sold the merchandise to a British Virgin Island (BVI) registered company (middleman 1) related to the Chinese manufacturer. The BVI company appears to operate from an address in Taiwan. The BVI company sold the merchandise to a U.S. company (middleman 2) related to the importer. The importer bought the merchandise from its related party (middleman 2). The importer entered the merchandise claiming the transaction value of the sale between middleman 1 and middleman 2, i.e., the “first sale” value, as the basis of appraisement for duty purposes. On July 21, 2017, your port issued a Customs and Border Protection (CBP) Form 28, Request for Information, seeking documentation to show that middleman 2, in the three-tiered transaction for export to the United States held title to the goods or bore the risk of loss at some point in the transaction. The response to the CBP Form 28 was submitted on August 17, 2017. A copy of the invoice between the importer and middleman 2 which CBP had requested was provided. In the response, importer’s counsel contends that the transaction at issue is distinguishable from transactions addressed in an earlier internal advice decision by CBP, as the manufacturer in this case is an unrelated party. In addition, counsel states that the terms and conditions applicable to the transaction at issue differ from those that applied in the transactions which were the subject of the earlier decision. Specifically, counsel states that the terms of sale between middleman 1 and middleman 2 were Free Carrier (FCA); and, the terms of sale between middleman 2 and the importer were Free on Board (FOB). The submission includes screen shots of accounting records of middleman 2 showing receipt of merchandise into inventory, receipt of an invoice in the amount of the purchase order to middleman 1 and recordation of the debit in the amount of the middleman 1’s invoice. CBP was informed that the importer and middleman 2 changed their terms and conditions for purchase orders which applied to their respective transactions related to the entry at issue. CBP was provided with a copy of each new “Terms and Conditions” for the parties, along with the letters of notification to the suppliers, i.e., the importer’s related middleman (middleman 2), and the unrelated middleman (middleman 1, who is related to the manufacturer). The letters are dated June 5, 2017. Both parties’ notifications to their respective suppliers stated that the changes in the terms and conditions would apply to all outstanding purchase orders and all future orders, “unless specifically indicated otherwise.” Middleman’s 2 purchase order terms and conditions, which apply to the transactions with middleman 1, state at paragraph 3(a): Title, Delivery and Risk of Loss All Products are to be shipped FCA (Free Carrier)/Foreign Port (Airport) of Export. Seller will comply with all country origin marking instructions from the Buyer. Title and risk of loss to the products shall pass from the Seller to the Buyer at the time goods are delivered to the port/airport of export and are ready for the Buyer to load onto the vessel/aircraft. The importer’s purchase order terms and conditions, which apply to the transactions with the middleman 2, state at paragraph 3(a): Title, Delivery and Risk of Loss All products are to be shipped FOB Ocean Port/FCA Airport-Loaded on Aircraft. Seller will comply with all country of origin marking instructions and all instructions for exports to Buyer. Title and risk of loss to the products shall pass from the Seller to the Buyer at the time goods are loaded on board the vessel (or aircraft) at the foreign port (airport) of export, consistent with the FOB Port/FCA Airport-Loaded on Aircraft delivery terms. In support of the importer’s claim that appraisement should be based upon the sales transaction between middleman 1 and middleman 2, importer’s counsel submitted copies of purchase orders and commercial invoices between middleman 1 and middleman 2 and middleman 2 and the importer. The purchase order between middleman 2 and middleman 1 indicates the terms of sale as FCA Shanghai, while the purchase order between the importer and middleman 2 indicates the terms of sale as FOB/Origin Port. In addition, counsel has submitted a packing list, bill of lading and proof of payment between the parties, in addition to the previously mentioned documents. Counsel also submitted “Certificates of Insurance” as evidence that middleman 2 carried cargo insurance during the time of the entry at issue. At our request, counsel for the importer submitted the purchase order from middleman 1 to the manufacturer; the manufacturer’s invoice to middleman 1; the manufacturer’s packing list; and, proof of payment from middleman 1 to the manufacturer. The purchase order, with a P.O. number, from middleman 1 to the manufacturer indicated the terms of sale as FOB Shanghai. This purchase order showed the customer’s purchase order number as middleman 2’s purchase order number to middleman 1. The invoice from the manufacturer to middleman 1 indicates the terms of sale as FCA, as does the manufacturer’s packing list. By letter, dated September 21, 2018, this office was informed that the merchandise was delivered to the port facility for exportation on May 29, 2017. The shipping container for the merchandise was loaded onboard the ocean vessel on June 5, 2017. The merchandise was scheduled to ship on June 3, 2017, and the waybill is dated June 5, 2017. In addition, we were informed that middleman 1, through its related manufacturer, emailed the freight/shipping company (hereinafter, freight forwarded) requesting a container with a June 3, 2017 sailing date. The email referenced a “booking note” number which was the Waybill number for the shipment at issue. A container was transported to the manufacturer for loading of the merchandise at issue and for delivery back to the port facility. By letter, dated November 9, 2018, importer’s counsel informed CBP that middleman 1 and the manufacturer are not, in fact, related parties, and submitted a “Relationship Affidavit”, dated October 16, 2018, signed by a sales representative of middleman 1. Counsel indicates that middleman 1, through the manufacturer, contracted with the freight forwarder to perform its FCA delivery obligations to middleman 2. Counsel affirms in the November 9, 2018 submission that neither middleman 1 nor middleman 2 were separately billed by the freight forwarder for container loading charges for the shipment in question. By letter, dated March 1, 2019, counsel informed this office that the manufacturer did not bill any of the parties involved in the transaction, nor did the manufacturer receive any payment for any of the foreign inland freight charges paid by the manufacturer to the freight forwarder. By email, dated March 5, 2019, counsel informed this office that none of the parties involved in the transaction reimbursed the manufacturer for any of the charges reflected on the Shanghai VAT invoice. The Shanghai VAT invoice included charges for loading the container onto the vessel (a charge which should be borne by a buyer receiving goods under FCA port of export terms). On June 9, 2017, an invoice, entitled Shanghai Value Added Tax, was issued to the manufacturer. The invoice lists the following services: booking fee (international freight forwarder service fee), origin terminal handling charge (international freight port terminal agency fee), seal agent service fee, international export freight forwarder service fee, haulage (international freight forwarder trucking service fee), diesel freight forwarder service fee, international freight forwarder handling service fee, and AMS (Advanced Manifest System) charge. The origin terminal handling charge includes the charge for loading the container onto the vessel. The invoice identifies the freight forwarder as the seller and the manufacturer as the buyer of the services. The port issued a CBP Form 29, Notice of Action, on November 28, 2017, notifying the importer it was rate advancing the importer’s entry because the port believed middleman 2 was an agent and not an independent buyer/seller of goods. As noted above, the entry was liquidated on March 23, 2018, and a timely protest was filed on April 18, 2018. ISSUE: Whether the importer is entitled to use the transaction value reflected on the invoice from middleman 1 to middleman 2 for the appraisement of the merchandise for duty purposes at entry. 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). In accordance with 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), and Synergy Sport International, Ltd. v. United States, 17 C.I.T. 18 (1993), appraisement of imported merchandise based on a bona fide sale of goods for export to the U.S., prior to the last sale for export to the U.S., is a legitimate basis of appraisal and CBP will appraise merchandise for which a “first sale” claim is made when it meets the requirements for such appraisement. In Nissho Iwai, supra, the case involved a foreign manufacturer, a middleman, and a United States purchaser. The court held that the price paid by the middleman/importer 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, supra. The importer claims that the merchandise at issue should be appraised based upon the transaction value of the sale between middleman 1 (related to the manufacturer) and the importer’s related middleman, middleman 2. In accordance with the Nissho Iwai decision and our own precedent, we presume that transaction value is based on the price paid by the importer.  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 payment, 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, or any other party, cannot form the basis of transaction value. In this case, the port believes middleman 2 did not act as an independent buyer and reseller of merchandise, but as an agent, and rejected the importer’s first sale claim on that basis. The importer claims a bona fide sale occurred between middleman 1 and middleman 2 and wishes to use that sale for purposes of valuation of the merchandise at issue. We disagree with the importer. In order to have a bona fide sale for export to the United States, middleman 1 must have title to the merchandise to pass on to middleman 2. This requires an examination of the transaction between the manufacturer and middleman 1. Without a contract or other document containing terms of sale between these parties, CBP presumes the parties intended title and risk of loss to pass in accordance with the Incoterms contained in the purchase order and invoice documents. As pointed out in the FACTS portion of this decision, middleman’s 1’s purchase order indicates “Term: FOB Shanghai” and the manufacturer’s invoice to middleman 1 indicates “Incoterm: FCA.” The terms are inconsistent. However, other documentary evidence indicates that the purchase order’s “FOB Shanghai” was the correct term of sale. The emails, dated May 12, 2017, to the freight forwarder from the manufacturer and the freight forwarder’s response, and the Shanghai Value Added Tax (VAT) invoice issued to the manufacturer serve as evidence that the manufacturer arranged for the shipping and paid all of the shipping charges to have the shipping container filled with merchandise transported from its premises on board the vessel at the port of export, cleared for export. According to Incoterms® 2010, ICC Rules for the use of domestic and international trade terms, published by the International Chamber of Commerce (2010), at 87, the term “Free on Board,” or FOB, means: . . . that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards. * * * FOB requires the seller to clear the goods for export, where applicable. The importer claims the merchandise should be appraised based upon a sale between middleman 1 and middleman 2. However, the manufacturer fulfilled the requirements of a seller under the FOB terms. As such, the manufacturer retained risk of loss and title to the goods until the goods passed the rail of the vessel upon which the goods were loaded. The importer obtained title and assumed risk of loss at the time the goods were loaded on board the vessel at the foreign port of export. It appears the sale was truly between the manufacturer and the importer. CBP will not only consider the language of contracts between parties and the terms of sale they assert, but the parties’ actions in executing their transactions. CBP looks at the totality of the evidence to determine if sales are truly as represented to CBP, i.e., ex-factory, FCA, FOB, etc. See Headquarters Ruling Letter (HQ) H215658, dated June 11, 2012, citing HQ H097035, dated November 15, 2011; HQ 544875, dated March 2, 1992; and HQ 547886, dated July 30, 2002. See also, Cutter & Buck, Inc. v. United States, 37 CIT , Slip Op. 13-45 2013 Ct. Intl. Trade LEXIS 47, (2013) If CBP were to assume that FCA on the invoice to middleman 1 was FCA Shanghai, and on that basis title to the merchandise passed to middleman 1, such title passage would be fleeting, if it existed at all, as the claimed sale between middleman 1 to middleman 2 was FCA Shanghai. Such a situation is known as “flash title” transfer. In this case, CBP has reason to believe that both middlemen were nothing more than agents. CBP believes the evidence supports a conclusion that the manufacturer held title and risk of loss to the goods until they passed the ship’s rail in the loading process and, at that point, title and risk of loss passed to the importer. In this case, Middleman 2’s terms and conditions, at paragraph 3(a), specifically provide that: Title and risk of loss to the products shall pass from the Seller to the Buyer at the time goods are delivered to the port/airport of export and are ready for the Buyer to load onto the vessel/aircraft. [Bold added.] It is claimed that middleman 2 sold the merchandise to the importer based upon FOB terms and received the merchandise under FCA terms. Middleman 2’s terms and conditions specifically provided that title and risk of loss passed when the merchandise was delivered to the port ready for middleman 2 to load onto the vessel. Thus, middleman 2’s terms and conditions make clear that middleman 2 bore the responsibility for loading the merchandise onto the vessel. The term FCA does not require the seller to incur expenses which occur after delivery of the merchandise to the buyer, unless it relates to an obligation specifically borne by the seller under FCA, such as the seller’s obligation to clear the merchandise for export and bear the related costs. Furthermore, under FCA and FOB, it is the buyer’s responsibility and expense to carry out all customs formalities for the importation of the merchandise. See Incoterms® 2010, at 25 and 89. The charge for the origin terminal handling charge, which appears on the Shanghai VAT Invoice issued to the manufacturer by the freight forwarder, includes the charge for loading the container onto the vessel. It also includes an AMS charge which is a charge for sending information electronically to CBP on the merchandise being shipped for importation to the United States. It is unclear why the manufacturer would pay this charge when under both FCA and FOB this expense is the responsibility of the buyer; yet, the Shanghai VAT Invoice indicates otherwise. CBP has been informed that neither of the middlemen reimbursed the manufacturer any of the costs of the origin terminal handling charge. As this charge includes the cost of loading the merchandise on board the vessel, based upon the terms between the parties in this case, it was not the responsibility of the manufacturer. However, under an FOB sale, it would be the responsibility of the manufacturer. Thus, CBP believes the evidence supports our conclusion that the manufacturer sold the merchandise at issue based upon FOB terms of sale, in accordance with the purchase order received by the manufacturer. Thus, middleman 1 never attained title to the merchandise. As the protestant has failed to substantiate the claim that a bona fide sale occurred between middleman 1 and middleman 2, we agree with the port that the merchandise should be appraised based upon the invoice price paid by the importer. HOLDING: The protest should be denied. Appraisement of the merchandise should be based upon the price paid by the importer. In accordance with the Protest/Petition Processing Handbook (CIS HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with this decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and to the public on the Customs Rulings Online Search System (CROSS) at https://rulings.cbp.gov/ which can be found on the U.S. Customs and Border Protection website at http://www.cbp.gov and other methods of public distribution. Sincerely, Myles B. Harmon, Director Commercial and Trade Facilitation Division