CBP Finds No First Sale for Shipment Where Importer Paid Insurance and Freight, Despite Incoterms
Despite sales terms to the contrary, a Hong Kong middleman never held title to merchandise imported from China and Taiwan into the U.S., so “first sale” valuation is unavailable and the goods should be valued at the price paid by the importer, CBP said in a recent ruling. Incoterms aside, the importer paid for freight and insurance, and title transferred alongside risk of loss directly from the manufacturer to the importer, with the middleman acting more as agent, CBP said in HQ H316892.
The ruling, issued July 20 and released publicly Sept. 23, was requested as internal advice by CBP’s Machinery Center of Excellence and Expertise in Laredo. The importer, JPW Industries, designs, markets and sells the metalworking, woodworking and industrial tools. The non-exclusive middleman, JPW Tool Group Hong Kong (JPW HK), sources the tools, negotiates prices with the suppliers and supplies the products. It does not hold physical inventory of the merchandise.
For first sale treatment to apply, the importer must present evidence that the sale between the manufacturer and the middleman was a bona fide, arm’s length sale of goods clearly destined for export to the United States. Here, the middleman and the foreign manufacturers are unrelated, so the sales are at arm’s length. The documentation shows that the merchandise was either shipped directly to the U.S. or in-bond through Canada, so “it was clearly destined for the U.S. at the time of the sale between the manufacturers and the middleman,” CBP said.
The determination of whether a sale is “bona fide” turns on whether risk of loss and title transfers to the buyer, as well as whether the parties are functioning as buyer and seller. The terms of sale between the manufacturer and the middleman indicate risk of loss transferred from the manufacturer to the middleman free on board (FOB) at the port of shipment. The sales terms between the middleman and the importer were FOB international dateline, so the importer was supposed to assume risk of loss when they crossed that line in the mid-Pacific Ocean.
However, despite the terms of sale, the U.S. importer paid the freight charges and the marine cargo insurance, including between the port of shipment and the international date line. “The marine cargo insurance paid by the U.S. importer serves as evidence that in reality risk of loss to the goods transferred from the manufacturers directly to the U.S. importer at the foreign port of shipment and the middleman bore no risk of loss from the port of shipment to the international date line,” CBP said.
"Once the goods were on the ship at the foreign port of shipment, the risk of loss or damage for the goods transferred directly from the foreign manufacturers to the U.S. importer,” the agency said. “The middleman did not assume risk of loss or damage for the goods from the foreign port of shipment to the international date line.”
The only documentation that addressed transfer of title was a master supply agreement that said that risk of loss and title between the middleman and the importer pass at the same time unless otherwise agreed. As risk of loss effectively transferred directly from the manufacturer to the importer when the merchandise was placed aboard the vessel at the port of export, title also transferred directly from the manufacturer to the importer at that point, CBP said.
“A seller needs to have title to merchandise to be able to sell it,” CBP said. “Since title and risk of loss here transferred directly from the foreign manufacturers to the U.S. importer, the middleman acted more as an agent rather than as an independent seller. The middleman did not obtain title to the goods in order to sell them and could not sell what he did not own to the U.S. importer,” it said.
“Accordingly, in the absence of a passage of title and risk of loss to the middleman, there was no bona fide ‘first sale’ and the merchandise may not be appraised based on the price paid by the middleman. As the only sale that occurred is the sale between the U.S. importer and the unrelated foreign manufacturers, the merchandise may be appraised under transaction value based on the price actually paid or payable by the U.S. importer,” CBP said.