OT:RR:CTF:VS H343362 AP
Sara Arami, Manager
Customs and International Trade
PwC US Tax LLP 1
N Wacker Dr.
Chicago, IL 60606
RE: Prospective ruling request; First Sale
Dear Ms. Arami:
This is in response to your request of November 7, 2024, on behalf of your client, the
U.S. importer [X], for a prospective ruling regarding the use of “first sale” transaction value
appraisement for merchandise it imports into the United States.
The importer has asked that certain information submitted in connection with this ruling
be treated as confidential. Inasmuch as this confidentiality request conforms to the requirements
of 19 C.F.R. § 177.2(b)(7), it is approved. The information contained within brackets in italics
will not be released to the public and will be withheld from published versions of this ruling
letter.
FACTS:
[X] is a Chinese manufacturer and distributor of metal, woodworking, and industrial
tools, which sells to the U.S. importer [X] through a middleman [X] based in Hong Kong. All
parties to the transaction are related entities and their parent company [X] is a holding company.
You have provided documentation from a completed transaction which was the subject of
Headquarters Ruling letter (“HQ”) H323585, dated Aug. 31, 2022, as well as revised purchase
order, purchasing agreement, supplementary terms and conditions of purchase and distribution
agreement to illustrate how this multi-tier transaction will operate.
The transaction begins with a purchase order from the importer to the middleman, which
indicates the goods the importer wants to order, the price, and the quantities. The Incoterms will
be Delivered Duty Paid (“DDP”). The port of loading will be Nanjing, China and the port of
discharge will be Los Angeles, CA. The middleman will place a purchase order with the
manufacturer, which specifies that the manufacturer will deliver the goods to the preferred
Chinese port, the Incoterms will be Free on Board (“FOB”) Chinese port, the final destination
will be [X] (importer) c/o [X] Warehouse in Missouri, and the payment terms will be “/T 120
days after receipt date.” The purchase order from the middleman states that “Nothing in this
document supersedes the terms in the Purchasing Agreement between [the manufacturer] and
[middleman] in the absence of a duly executed Change Order.”
The Revised purchasing agreement between the middleman and the manufacturer states:
3.1 The supplier shall be responsible to transport the Products to the place
designated in the purchase order in a timely manner, deliver the Products to Buyer
or any designated person by Buyer, and carry out the hand-over of the Products ….
3.3 All expenses and costs for insurance, packaging, transportation, loading and
unloading and all risks of damage, injury or loss of the Products prior to the arriving
[i]f Products at the delivery place and delivery to Buyer or its designated person
shall be borne by the Supplier …
3.4 Title to and risk of loss of products pass from supplier to buyer at the port of export
unless a change order specifying alternate terms is executed.
According to the revised distribution agreement between the middleman and the
importer:
5.3. Shipment. All products supplied by the Principal [the middleman] shall be
delivered by DDP method. Principal [middleman] shall bear logistics risks and
expenses accordingly, unless a Change order specifying alternate terms is executed.
Under the revised Supplementary Terms and Conditions of Purchase between the
importer and middleman, “Title to and risk of loss of Products shall pass from Supplier to Buyer
upon delivery to named place of destination, unless a Change Order specifying alternate terms is
executed.” The Supplementary Terms and Conditions of Purchase provide for price discount and
allowance:
1.5 Price Discount & allowance
Supplier provides an agreed percentage of 5% defective allowance on the price
quoted to Buyer in the purchase order to compensate future warranty related costs
incurred by Buyer on the products sold to customers. The defective allowance
percentage is negotiated and determined by both Supplier and Buyer based on actual
cost incurred on product warranty costs. Compensation percentage is subject to
periodical review and modification as necessary in order to provide Buyer an
appropriate and arm’s length remuneration for its activates with the approval of both
parties. Supplier is still required to compensate any excessive warranty costs
incurred by Buyer exceeding the allowance[] granted.
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According to the commercial invoice from the manufacturer to the middleman, the
Incoterms between these parties will be FOB Shanghai or Nanjing and the port of destination
will be Long Beach, CA. There are no payment terms. The invoice from the middleman to the
importer will include a deduction for an allowance (“Unsaleable Merchandise allowance 5%”),
ocean and insurance charges, and DDP Incoterms. The payment terms will be 200 days.
The packing list from the middleman indicates that the Incoterms between the middleman
and the importer will be DDP and the payment terms will be DDP 200 days.
The Distribution Agreement between the Importer (distributor) and the middleman
(principal) states:
PURCHASE PRICE AND PAYMENTS
6.1. Purchase Price. The purchase price for the Products shall be an amount as
agreed to by the Parties (the “Purchase Price”). The Purchase Price shall allow
Distributor to earn an aim’s length profit as determined by appropriate benchmarks.
The Purchase Prices and terms and conditions of sale shall be periodically reviewed
and modified as agreed upon by the Parties during the term of this Agreement as
often as may be necessary to reflect arm’s length pricing. Principal and Distributor
shall calculate and, if necessary, may pay a compensating adjustment, or “true up,”
as often as they determine necessary, but no less often than annually, to ensure that
Distributor’s profit level is arm’s length. The Parties acknowledge that such
compensating adjustments may require payments from Principal to Distributor or
from Distributor to Principal.
6.2. Invoicing and Payment. Unless otherwise agreed by the Parties, Principal shall
invoice Distributor for the amount of the Purchase Price when the ownership of the
Products are legally transferred to Distributor in accordance with the incoterms.
Distributor shall pay the full amount of the Purchase Price when payment collection
from its customers is completed. Unless otherwise agreed to by the Parties,
payment of any amount by either Party to the other under this Agreement shall be
effected by direct bank transfer to the payee’s bank account or by debit or credit to
the relevant Party’s intercompany account as notified to the payer from time to time.
Any payments made pursuant to this Agreement after the due date shall bear interest
from the applicable due date at the United States applicable federal rate, as
determined under Section 1274(d) of the United States Internal Revenue Code of
1986, as amended.
. . .
10. PRINCIPAL’S WARRANTY
During the warranty period as set forth in the then-current standard warranty
furnished with the Products, Principal warrants that the Products (a) shall be of
merchantable quality; (b) shall be free from defects in design, materials, and
workmanship; and (c) shall substantially conform with any Product specifications
communicated to Distributor by Principal. If Distributor establishes a breach of the
warranty, within the applicable warranty period, Principal shall bring the Product
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into conformance with the warranty or refund the Purchase Price therefor, including
freight, insurance, and other charges, to Distributor. Principal shall indemnify and
hold Distributor harmless against any damages and losses resulting from the
nonconformance of the Products with this warranty.
The Purchasing Agreement between the Middleman and the Manufacturer states:
4.2 Payment
The Supplier shall provide Buyer with necessary documents as the payment
vouchers, packing list, inspection form, warehouse receipt, proforma invoice. After
receipt and verification of the aforesaid payment vouchers without finding any
mistakes, Buyer shall make the payment to the Supplier via bank transfer at the time
agreed between the Parties.
The importer makes payments to the middleman 140 or 158 days after the invoices are
issued. The middleman makes payments to the manufacturer 146 or 156 days after the invoices
are issued. The payments do not include interest.
The merchandise will be shipped directly by the manufacturer through the designated
freight forwarder to the United States from China. The port of loading will be Shanghai or
Nanjing, China and the port of delivery Los Angeles or Long Beach, CA.
The manufacturer [X] is owned by the parent holding company [X]. You state that the
prices charged by the manufacturer [X] to the middleman [X] will be sufficient for the
manufacturer to recover all of its costs as indicated by its positive profit margin for 2018. The
profitability of the manufacturer as identified through the full cost mark-up (“FCM”),
representing the operating income (operating profits/loss) over total production, exceeded that of
the parent entity in 2018. You state that the parent’s FCM for 2018 was 2.11 percent and the
seller’s FCM was 5.22 percent. You also summarize the results of a benchmark study which
compared the manufacturer’s operating margin during 2018-2021 against the operating margin of
manufacturers and distributors of industrial and commercial machinery and computer equipment
(specifically, farm and garden machinery and equipment, and metalworking machinery and
equipment) in Eastern Asia. The FCM of the manufacturer was within the interquartile range in
2018, 2019 and 2021, and was outside the interquartile range in 2020.
ISSUE:
Whether the sale between the related manufacturer and the middleman is a sale for export
to the United States that may be used for appraisement purposes under transaction value.
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
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“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).
The importer seeks to utilize the transaction value of the first sale between the
manufacturer and the middleman. In Nissho Iwai American Corp. v United States, 16 C.I.T. 86
(1992), rev’d in part, 982 F.2d 505 (Fed. Cir. 1992), 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 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 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.
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 the
middleman to the 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. correspondence) that establish 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.
The submitted documents show that the Incoterms between the manufacturer and
middleman are FOB port of shipment and the Incoterms between the middleman and importer
are DDP. The purchasing and distribution agreements indicate that the middleman has risk of
loss/title to the goods when the merchandise is loaded on the ship at the port in China and the
risk of loss/title transfers to the importer when the goods are delivered in the United States. The
goods are clearly destined to the United States and the importer and middleman pay for the
goods. However, despite the extended payment terms (120 days pursuant to the purchase order
from the middleman), the middleman submits payment to the manufacturer 146 or 156 days after
the invoices are issued. The payments do not include interest even though the payment is made
more than 120 days from the receipt of the invoice. This shows that the middleman as a related
party receives favorable payment terms that it would not have received if it were an unrelated
party. Therefore, the sale transaction between the manufacturer and the middleman as presented
does not constitute a bona fide sale because it is not between an independent seller and buyer.
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Even if there is a bona fide sale, the first sale price still will not be acceptable. According
to the court holding in Nissho, in order for a transaction to be viable for transaction value
purposes, it must be a sale negotiated at arm’s length and free from any non-market influences.
Here, all parties are related parties for purposes of section 402(g) of the TAA and transaction
value between the manufacturer and the middleman will be acceptable only if the transaction
satisfies one of the two tests: (1) circumstances of the sale; or (2) test values. See 19 U.S.C. §
1401a(b)(2)(B); 19 C.F.R. § 152.103(l). No information regarding test values has been submitted
or is available, and the circumstances of the sale must be examined.
For the circumstances of the sale approach, 19 C.F.R. Part 152 sets forth illustrative
examples of how to determine if the relationship between the buyer and the seller influences the
price. CBP examines the manner in which the buyer and seller organize their commercial
relations and the way in which the price in question is derived to determine whether the
relationship influences the price. If it can be shown that the price is settled in a manner
consistent with the normal pricing practices of the industry in question, or with the way in which
the seller settles prices with unrelated buyers, this will demonstrate that the price has not been
influenced by the relationship. See 19 C.F.R. § 152.103(l)(1)(i)-(ii). In addition, CBP will
consider the price not to have been influenced if the price is adequate to ensure recovery of all
costs plus a profit equivalent to the firm’s overall profit realized over a representative period of
time. See 19 C.F.R. § 152.103(l)(1)(iii). These are examples to illustrate that the relationship has
not influenced the price, but other factors may be relevant as well.
The FCM of the manufacturer has not consistently stayed within the interquartile range
since 2018. For instance, in 2020 it was outside the interquartile range. Further, the importer has
not shown that the manufacturer’s (seller) profits will be equivalent or greater than the profits
earned by the parent company in sales of merchandise of same class or kind. Even though the
importer claims that the seller’s operating income over total production costs exceeded that of the
parent entity in 2018, the importer did not explain in detail how the operating profits of the
parent and the seller were calculated, and did not provide documentation (e.g., profit and loss
statements, financial statements, income tax returns, costing sheets, profit projection statements,
and sample calculations) to support the calculation.
HOLDING:
Based on the information our office reviewed, “first sale” transaction value appraisement
may not be utilized by the importer for the transaction described herein.
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the
assumption that all of the information furnished in connection with the ruling request and
incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and
complete in every material respect. The application of a ruling letter by a [CBP] field office to
the transaction to which it is purported to relate is subject to the verification of the facts
incorporated in the ruling letter, a comparison of the transaction described therein to the actual
transaction, and the satisfaction of any conditions on which the ruling was based.”
A copy of this ruling letter should be attached to the entry documents at the time this
merchandise is entered. If the documents have been filed without a copy, this ruling should be
brought to the attention of the CBP officer handling the transaction.
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Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch
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