CBP Further Defines Parameters That Determine Bona Fide Sale
A recent CBP ruling, HQ H347879, indicates that CBP is scrutinizing the evidence that importers give to the agency when trying to prove that a bona fide sale has taken place.
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Merely providing delivery terms listed on commercial invoices is not enough to prove a bona fide sale, CBP said in the ruling, denying the importer's request for first sale treatment. Rather, an importer must provide sufficient evidence to demonstrate that a middleman held title to goods or bore the risk of loss.
Furthermore, because a sale between a factory and a middleman is not a bona fide sale, the transaction value for any transactions at issue is the amount paid by the importer for the merchandise, CBP said.
The proceeding involves Brooklyn Lollipops, an importer that sought a prospective ruling on the use of “first sale” valuation of its imports of toys into the U.S. Brooklyn Lollipops imports goods from China through a middleman, Hipro Trade Limited in Hong Kong, according to the CBP ruling.
Hipro invoices the importer in the U.S. and, as the middleman, is responsible for handling quality control and ensuring that the importer’s specific requirements are met before shipment. As such, Brooklyn Lollipops was asking if the “first sale” price, or the price between the factories and the middleman, should be the basis for transaction value for customs purposes. The importer pointed to the 1992 Federal Circuit Court decision Nissho Iwai American Corp. v. United States, in which the court held that the price paid by the middleman to the foreign manufacturer was the proper basis for transaction value.
In reviewing Brooklyn Lollipops' submissions, CBP said it is the importer’s responsibility to show that the “first sale” price is acceptable under the standard set forth in Nissho Iwai. "The U.S. 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,'" CBP said.
The importer also must provide sufficient documentation supporting such a sales arrangement, per Treasury Decision 96-87 from January 1997. This includes purchase orders, invoices, proof of payments, contracts and any additional documents (i.e., correspondence) "that establish how the parties deal with one another," CBP said.
"CBP is looking for 'a complete paper trail of the imported merchandise showing the structure of the entire transaction.' If unable to do so, the sale between the middleman and the manufacturer cannot form the basis of transaction value," CBP said.
But in this situation, the documentation to CBP, which included a pro forma invoice from the factory to the middleman and from the middleman to the importer, which specifies an FOB Shenzhen term of sale, indicates a "flash title" transfer.
That type of transaction warrants greater scrutiny, CBP said, referencing two rulings: H097616, dated Nov. 21, 2011, and HQ W563605, dated Nov. 19, 2009.
"While CBP recognizes that bona fide sales may occur in instances of 'flash title,' such transactions generally are viewed with greater scrutiny so as to determine whether the middleman truly is an independent buyer/seller of goods or is actually acting as an agent on the part of one of the other parties," CBP said.