Protest and Application for Further Review of 2704-17-102834; Bona Fide Sale; Apparel

 HQ H304154 August 5, 2020 OT:RR:CTF:VS H304154 JMV CATEGORY: Valuation Field Director New York Field Office Office of Regulatory Audit Office of Trade U.S. Customs and Border Protection One World Trade Center, Suite 50.800 New York, N.Y. 10007 RE: Protest and Application for Further Review of 2704-17-102834; Bona Fide Sale; Apparel Dear Director, This is in response to the Application for Further Review (“AFR”) of Protest No. 2704-17-102834, dated June 13, 2017, filed against Custom and Border Protection’s (“CBP”) decision to liquidate the merchandise at issue based on the average value of similar goods. The Protestant, Golden Horse Enterprise (NY), Inc. (“GHNY”), seeks liquidation of the merchandise using the transaction value of the first sale. FACTS: The protest at issue involves 174 entries of apparel imported by GHNY, which were value-advanced using the average transaction value of similar merchandise after a Regulatory Audit investigation. Based on the audit, your office states that transaction value could not be determined and that the value declared to CBP did not accurately reflect the price actually paid or payable. GHNY then filed this protest. GHNY claimed to be a U.S. based selling agent for the foreign seller and related party, Shanghai Fung’s Trading Co. Ltd. (“SF”). GHNY also claimed that it had no financial interest in the merchandise at issue. GHNY stated that SF appointed GHNY to act as its agent in sales to U.S. customers. GHNY’s responsibilities were to serve as Importer of Record, and to provide certain administrative services on SF’s behalf (coordinate deliveries; interface with customers regarding quality problems; collect sums due to SF from U.S. customers; etc.). Your office rejected the claimed transaction value because GHNY stated that the invoice the value was based on was used solely for customs purposes. According to GHNY, this value reflected the sale price between SF and an unrelated Chinese factory, plus assists. SF prepared a proforma invoice to convert the Chinese factory invoice price into U.S. dollars, and to add in the value of the assists. GHNY claimed to have properly made entry based upon the proforma price. GHNY also provided your office with a second, slightly higher free on board (“FOB”) invoice, which your office also believed to be unreliable. GHNY claimed that the second FOB invoice was used to determine the amounts of its payments back to the exporter, which GHNY stated it made in its capacity as a selling agent. However, your office stated that GHNY paid the exporter approximately $19 million, which was far in excess of the values represented in either of the two sets of commercial invoices. The audit did identify monthly payments to GHNY from SF, which were invoiced as “agency fees.” However, your office also noted that based on the documents provided during the audit period, GHNY was remitting payments to SF in amounts that were significantly less than what was collected from the U.S. customer. Your office stated that this demonstrated that GHNY is a reseller that was collecting a profit rather than an agent. Your office also stated that the entry documents further suggested that GHNY was more than just an agent. GHNY claimed that transactions between SF and its U.S. customers were conducted on a landed duty paid (“LDP”) or delivered duty paid (“DDP”) basis. Your office noted that entry documentation for this type of transaction should show the U.S. buyer as the consignee. However, the entry documents indicated that GHNY was both the importer and consignee, and the bills of lading showed GHNY as the consignee. Because your office believed that transaction value could not be determined, your office looked at the transaction value of similar merchandise. Your office stated that it would have been logistically impossible to find identical or similar values on an entry-by-entry basis when dealing with imports that extended over a period of several years. Therefore, your office ultimately calculated unit values based on the average transaction value of merchandise classified in the same Harmonized Tariff Schedule of the United States (“HTSUS”) subheading as the subject merchandise that was imported by a similar importer, M. Hidary. Your office selected M. Hidary because GHNY sold wearing apparel from China to M. Hidary in the past. Your office also believed that these prior importations by M. Hidary were more similar to the subject merchandise than imports from other apparel importers such as Nike, The Gap, etc. Your office noted that this methodology further suggested that both sets of commercial invoices provided by GHNY significantly undervalued the subject wearing apparel. GHNY protested your office’s rejection of the transaction value between SF and unrelated Chinese manufacturers. To support the assertion that CBP should accept the transaction value between between SF and the manufacturer as the basis of appraisal, GHNY provided this office with documents for one entry to serve as an illustrative example. GHNY provided the following for review: The Agency Agreement between SF and GHNY, A copy of Dreamwave LLC (“Dreamwave”) purchase order #5001023, dated August 29, 2014, A copy of SF’s purchase order to Xiangshan Jialong Garment Co. Ltd. (“Jialong”), The Jialong invoice to SF, A copy of SF’s “Costing Sheet” for material and trim provided to Jialong, A copy of the SF pro forma invoice and corresponding Entry, GHNY billing invoice to Dreamwave, Dreamwave payment for the invoice, and SF’s payment to Jialong. GHNY stated that SF owned no manufacturing facilities and used independent and unrelated subcontractors to manufacture the apparel for export to the United States. GHNY asserted that the transaction value between SF and an unrelated Chinese factory, Jialong, qualified as an acceptable basis for appraisement as it is a sale for export to the United States. However, your office found no indication of this sale in the entry documents provided. This particular entry concerned 4,950 units of toddler boy’s rash guard shirts, which were entered on October 11, 2014. The transaction was initiated when the U.S. customer of SF, Dreamwave, placed an order for 4,950 units of “Ninja Turtle Rash guard” at a cost of $1.50 per piece. The purchase order from Dreamwave indicated that the terms between the parties were LDP and the last page of the purchase order showed that the order was confirmed and accepted by SF. Upon confirming the Dreamwave order, SF placed a corresponding purchase order with the Chinese factory, Jialong, which GHNY claimed to be unrelated to any other party involved in the transaction. The order identified SF as the “Buyer,” Jialong as the “Seller,” and requested 4,950 pieces of Style no. 247009. The order specified that Jialong was to deliver the merchandise to SF at its warehouse by September 26, 2014. GHNY stated that SF provided Jialong with certain fabric and trim that were used in the manufacture of the garments. For purposes of properly declaring the full value of the merchandise to CBP, GHNY claimed that SF prepared a proforma invoice that reflected the unit price for the factory’s cut and make charge, plus assists. GHNY stated that upon collection of payment from Dreamwave, GHNY remitted funds overseas, pursuant to the instructions of SF. GHNY stated that SF instructed GHNY to retain funds to pay the following expenses in connection with the transaction: customs duties, fees and handling fees, ocean freight and GHNY office expenses. ISSUE: What is the appropriate basis of appraisal for the goods at issue? LAW AND ANALYSIS: The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”), codified at 19 U.S.C. § 1401a. Transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for five enumerated statutory additions. 19 U.S.C. § 1401a(b). In order for imported merchandise to be appraised under the transaction value method, it must be the subject of a bona fide sale between a buyer and seller, and it must be a sale for exportation to the United States. In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992) and Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993), the Court of Appeals for the Federal Circuit and the Court of International Trade (“CIT”), respectively, 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. Both cases involved a foreign manufacturer, a middleman, and a United States purchaser. In each case, the court held that the price paid by the middleman/importer to the manufacturer was the proper basis for transaction value. Each court further stated that in order for a transaction to be viable under the valuation statute, it must be a sale conducted at arm’s length, free from any non-market influences, and involving merchandise clearly destined for export to the United States at the time of the first sale. In accordance with the Nissho Iwai and Synergy decisions, we presume that transaction value is based on the price paid by the importer. In further keeping with the courts’ holdings, we note that an importer may request appraisement based on the price paid by the middleman to the foreign manufacturer in situations where the middleman is not the importer. However, it will be the importer’s responsibility to show that the “first sale” price is acceptable under the standard set forth in Nissho Iwai and Synergy. 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, 30 Cust. Bull. 52/1 (January 2, 1997), CBP set forth the documentation and information needed to support a ruling request that transaction value should be based on a sale involving a middleman and the manufacturer or other seller rather than on the sale in which the importer was a party. 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. correspondence) 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. While GHNY did provide this office with a variety of documents and an explanation of each document, GHNY did not meet the burden of demonstrating that the sale at issue was a bona fide sale for export to the United States. This office reached out to GHNY requesting additional documentation such as a manufacturing agreement, English translations of documents, and proofs of payment between GHNY and SF. Numerous follow up emails and calls went unanswered and the requested documentation was never provided. Therefore, by not providing a complete paper trail, GHNY has not established that the sale between SF and Jialong was a sale for export to the United States. Your office also determined that the sale price in the transactions analyzed in the audit between the U.S. buyers and GHNY was not an appropriate basis of appraisal because GHNY functioned as a reseller rather than an agent, and accordingly, the sale between GHNY and the U.S. buyers was a sale after exportation. In the illustrative example GHNY provided in its protest, GHNY also stated that the sale between Dreamwave and GHNY was a sale after exportation. Therefore, there was no sale from which a basis of appraisal could be determined. When imported merchandise cannot be appraised on the basis of transaction value, it is appraised in accordance with the remaining methods of valuation, applied in sequential order. The alternative bases of appraisement, in order of precedence, are: the transaction value of identical merchandise; the transaction value of similar merchandise; deductive value; and computed value. If the value of imported merchandise cannot be determined under these methods, it is to be determined in accordance with section 402(f) of the TAA. 19 U.S.C. § 1401a(a)(1). The first and second alternative bases of appraisement are the transaction value of identical merchandise and the transaction value of similar merchandise, as determined in accordance with section 402(c) of the TAA. Appraised values of identical and similar merchandise are based on values that are acceptable as appraised values under section 402(b) of the TAA. 19 U.S.C. § 1401a(c)(1). Your office stated that the number of goods entered during the period under audit was so large that it was practically impossible to find an identical or a similar value on an entry-by-entry basis. Therefore, transaction value of identical or similar merchandise is not an available method of appraisement. Deductive value pursuant to section 402(d) of the TAA is the next applicable basis of appraisement and is based on the unit price at which the merchandise concerned is sold in the United States in the greatest aggregate quantity, generally in the condition as imported and at or about the time of importation of the merchandise being appraised. Provided the merchandise is not further processed, the unit price at which imported merchandise is sold in the greatest aggregate quantity means the unit price at which it is sold to unrelated persons at the first commercial level after importation. 19 U.S.C. § 1401a(d). This price is then reduced by an amount equal to profit and general expenses. Since GHNY did not provide CBP with this information, this method is unavailable. The next method of appraisement is the computed value method, set forth in section 402(e) of the TAA. Computed value is defined as the sum of, inter alia: the cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise; and an amount for profit and general expenses equal to that usually reflected in sales for export to the United States, by producers in the country of exportation, of merchandise of the same class or kind. 19 U.S.C. § 1401a(e)(1). Again, because GHNY has not responded to any inquiries from this office, CBP does not have the information required to arrive at a computed value. Therefore, computed value is not an available method of appraisement. When the value of imported merchandise cannot be determined under 19 U.S.C. § 1401a(b-e), it may be appraised under 19 U.S.C. § 1401a(f) on the basis of a value derived from one of those methods, reasonably adjusted to the extent necessary to arrive at a value. This is known as the “fallback” valuation method. Certain limitations exist under this method, however. For example, merchandise may not be appraised on the basis of the price in the domestic market of the country of export, the selling price in the United States of merchandise produced in the United States, minimum values, or arbitrary or fictitious values. 19 U.S.C. § 1401a(f); 19 C.F.R. § 152.108. Under section 500 of the Tariff Act of 1930, as amended, which constitutes CBP’s general appraisement authority, the appraising officer may: fix the final appraisement of merchandise by ascertaining or estimating the value thereof, under section 1401a of this title, by all reasonable ways and means in his power, any statement of cost or costs of production in any invoice, affidavit, declaration, other document to the contrary notwithstanding… 19 U.S.C. § 1500(a). In this regard, the Statement of Administrative Action (SAA), which forms part of the legislative history of the TAA, provides in pertinent part: Section 500 is the general authority for Customs to appraise merchandise. It is not a separate basis of appraisement and cannot be used as such. Section 500 allows Customs to consider the best evidence available in appraising merchandise. It allows Customs to consider the contract between the buyer and seller, if available, when the information contained in the invoice is either deficient or is known to contain inaccurate figures or calculations. . . . Section 500 authorize [sic] the appraising officer to weigh the nature of the evidence before him in appraising the imported merchandise. This could be the invoice, the contract between the parties, or even the recordkeeping of either of the parties to the contract. Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 67. Section 152.107 of the CBP regulations (19 C.F.R. § 152.107) provides: (a) Reasonable adjustments. If the value of imported merchandise cannot be determined or otherwise used for the purposes of this subpart, the imported merchandise will be appraised on the basis of a value derived from the methods set forth in §§ 152.103 through 152.106, reasonably adjusted to the extent necessary to arrive at a value. Only information available in the United States will be used. Ultimately, average unit values of similar merchandise based on HTSUS subheading numbers were used as the basis of appraisement. Your office explained that it used this method because it would have been logistically impossible to find identical or similar values on an entry-by-entry basis when dealing with imports extended over several years. While this is not consistent with the transaction value of identical or similar goods method, it is a reasonable adjustment of the transaction value of similar goods. CBP has allowed importers to use averages when calculating values under 19 U.S.C. § 1401a(f). See Headquarters Ruling Letter (“HQ”) H116829, dated September 28, 2010 (finding that an importer may add the average purchase price of new and used parts to the actual repair costs to arrive at a value of repaired aircraft parts) and HQ H085036, dated December 18, 2009, (finding that an importer may base the value of imported antiques on average of auction estimates). Additionally, similar merchandise is defined in 19 C.F.R. § 152.102 as “merchandise produced in the same country and by the same person as the merchandise being appraised, like the merchandise being appraised in characteristics and component material, and commercially interchangeable with the merchandise being appraised.” The merchandise your office chose to serve as the basis of appraisal was sold by the same seller, from the same country, classified in the same HTSUS subheading, and purchased by a buyer of a comparable caliber as Dreamwave and other relevant buyers. Therefore, the method used by your office, the transaction value of similar merchandise reasonably adjusted, is the appropriate basis of appraisement. HOLDING: The protest in this case should be denied. The appropriate basis of appraisement is the transaction value of similar merchandise reasonably adjusted. 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, Craig T. Clark, DirectorCommercial and Trade Facilitation Division