OT:RR:CTF:VS H357206 ZJK
Mr. Matthew Clark
Director, Trade Consulting Solutions
Kuehne + Nagel Inc.
20000 S. Western Ave.
Torrance, CA 90501
Re: Prospective Ruling Request; First Sale
Dear Mr. Clark:
This is in response to your letter dated December 1, 2025, on behalf of your client [ ], in
which you request a binding ruling pursuant to 19 C.F.R. Part 177 regarding the acceptability of
“first sale” transaction value appraisement for merchandise which [ ] imports to the United
States.
[ ] 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:
[ ] (the “Importer”) is an importer of mixing equipment with medical and industrial
applications. In addition to the Importer, there are two other relevant parties identified in the
ruling request: [ ] (the “Manufacturer”) and [ ] (the “Intermediary”). It is undisputed that all
three parties qualify as “related” in accordance with 19 C.F.R. § 152.102(g).
In support of its ruling request, the Importer submitted several documents which provide
information regarding representative transactions. The transaction begins with the Importer
placing a purchase order with the Intermediary that identifies the requested items, quantities,
price per unit, and net value of each line item in USD. The purchase order also includes the date
of delivery, identifies the delivery term as Delivered at Place (DAP) [ ], and specifies the terms
of payment as 30 days net. While the purchase orders provide information regarding the
Importer’s contention that the Intermediary is a “true middleman,” the terms of sale between the
Intermediary and the Manufacturer warrant greater attention.
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The transfer price between the Intermediary and the Manufacturer is governed by an
intercompany contract manufacturing and supply agreement. The agreement specifies that the
transfer price shall be the forecasted direct costs (raw materials, labor, packaging), plus an
“appropriate proportion” of indirect overhead costs (engineering, quality, information
technology, logistics, etc.), plus a fixed 7% markup. The agreement allows for ex-ante price
adjustment if order volumes are “well below or above” the forecasted volumes submitted by the
Intermediary at the end of the prior year; however, a price adjustment will not be made due to
cost efficiency or inefficiency on the part of the Manufacturer. Further, the Intermediary makes
payment to the Manufacturer monthly, one month after receiving the invoice. Finally, risk and
title pass to the Intermediary upon delivery to the Intermediary. If delivery terms specify that the
Manufacturer must deliver directly to the customer, then it is the customer who assumes the risk
and takes title upon delivery. In either scenario, the Manufacturer retains title to the goods until
delivery.
The Importer requests a ruling from CBP allowing the first sale price between the
Manufacturer and the Intermediary to serve as the basis for appraisement using the transaction
value method of valuation. In support of its request, the Importer argues that (1) the first sale
between the Manufacturer and the Intermediary is a bona fide sale conducted at arm’s length,
and (2) the merchandise is clearly destined for export to the United States at the time of first sale.
The Importer provided several documents in support of their ruling request which detail
representative transactions. Regarding their contention that the first sale between the
Manufacturer and the Intermediary is a bona fide sale conducted at arm’s length, the Importer
submitted two case studies with supporting documents including invoices, an intercompany
netting statement, a bulk payment confirmation, bills of lading, entry summaries, and delivery
notes.
The complexity of the two case studies warrants some additional discussion. The first
case study includes one invoice between the Manufacturer and the Intermediary ([ ]) with the
terms of payment listed as [ ]. However, there is no corresponding proof of payment because the
Intermediary makes a monthly bulk payment to the Manufacturer. The submitter included proof
of bulk payment for a value of CNY[ ], or roughly $[ ]. The first case study also includes an
invoice between the Intermediary and the Importer ([ ]) with terms of payment listed as [ ].
Further, the first case study includes a bill of lading ([ ]) which lists the total weight as [ ] kg and
an entry summary ([ ]) which lists the gross invoice value as $[ ]. The gross invoice value
corresponds with line [ ] on the intercompany netting statement, and the total weight corresponds
with the weight listed on the delivery note ([ ]).
The second case study references two invoices between the Manufacturer and the
Intermediary ([ ]), but the submitter only included a copy of the former. The payment terms are [
], and like the first case study, there is no corresponding proof of payment because the
Intermediary makes a monthly bulk payment to the Manufacturer. The bulk payment record
referenced above presumably includes both case studies. The second case study also includes
two invoices between the Intermediary and the Importer ([ ]) with terms of payment as [ ].
Finally, the second case study includes a bill of lading covering both transactions ([ ]) which lists
the combined weight as [ ] kg and an entry summary covering both transactions ([ ]) which lists
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two separate gross invoice values: $[ ] and $[ ]. The values correspond with lines [ ] and [ ] on
the intercompany netting statement, and the total weight corresponds with the total combined
weights of two delivery notes ([ ]).
Additionally, the Importer provided an internal transfer pricing standard operating
procedure, a pan-Asian benchmarking study, and an intercompany contract manufacturing and
supply agreement between the Manufacturer and the Intermediary. Regarding the Importer’s
argument that the merchandise was clearly destined for export to the United States at the time of
sale, the requester provided copies of purchase orders, shipping labels, and corresponding
delivery notes.
ISSUE:
Whether the first sale between the related Manufacturer and the Intermediary is a sale for
exportation 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 “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 use the transaction value of the first sale between the Manufacturer
and the Intermediary. 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, an intermediary, and a United States purchaser. The court held that the price paid
by the intermediary/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
intermediary to the foreign manufacturer in situations where the intermediary 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
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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 inform CBP of any statutory additions and their amounts. If unable to do so, the
sale between the intermediary and the manufacturer cannot form the basis of transaction value.
Bona Fide Sale
First, we address whether the first sale between the Manufacturer and the Intermediary
qualifies as a bona fide sale conducted at arm’s length despite the parties being related. The
transaction value of imported merchandise shall be the appraised value only if “the buyer and
seller are not related, or the buyer and seller are related but the transaction value is
acceptable….” 19 U.S.C. § 1401a(b)(2)(A)(iv). The buyer and seller are “related persons” if, in
relevant part, they are considered “two or more persons directly or indirectly controlling,
controlled by, or under common control with, any person.” 19 C.F.R. § 151.102(g)(7). It is
undisputed that the Manufacturer and the Intermediary are related in this case. Accordingly, the
transaction value between these parties is “acceptable” only if:
an examination of the circumstances of the sale of the imported merchandise
indicates that the relationship between such buyer and seller did not influence the
price actually paid or payable (“circumstances of the sale”); or if the transaction
value of the imported merchandise closely approximates: (i) the transaction value
of identical merchandise, or of similar merchandise, in sales to unrelated buyers in
the United States; or (ii) the deductive value or computed value for identical
merchandise or similar merchandise; but only if each value referred to in clause (i)
or (ii) that is used for comparison relates to merchandise that was exported to the
United States at or about the same time as the imported merchandise (“test values”).
19 U.S.C. § 1401a(b)(2)(B) (explanatory parentheticals added). To summarize the above, CBP
regulations provide that a related buyer and seller may demonstrate that their relationship did not
influence the transaction price by satisfying one of two tests: (1) the “circumstances of the sale”
test; or (2) by providing test values. 19 C.F.R. § 152.103(l).
CBP’s evaluation of the “circumstances of the sale” test is informed by the regulations set
forth in 19 C.F.R. § 152.103(l)(1) which provide illustrative examples to assist CBP in
determining whether the relationship between the buyer and the seller influences the price. CBP
is instructed to examine the manner in which the buyer and seller organize their commercial
relations and the way in which the price was derived in order to determine whether the
relationship influenced the price. If it can be shown that the price was settled in a manner
consistent with the normal pricing practices of the industry in question, or with the way in which
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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). Additionally, CBP will
consider the price not to have been influenced by the parties’ relatedness if the price was
adequate to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit
realized over a representative period of time. 19 C.F.R. § 152.103(l)(1)(iii). These examples
illustrate situations in which the relationship has not influenced the price, but other factors may
be relevant as well. See 19 C.F.R. §152.103(I); see also HQ H037375 (Dec. 11, 2009); HQ
H029658 (Dec. 8, 2009); and HQ H032883 (Mar. 31, 2010).
Regarding the circumstances of the sale test, the case studies, intercompany contract
manufacturing and supply agreement, transfer pricing benchmarking study, and the transfer
pricing standard operating procedure document are particularly relevant.
With respect to the case studies, we note that while the requester submitted several
documents that cover each stage of the transactions, there is one notable omission: proof of
payment covering the first sale between the Intermediary and the Manufacturer. The documents
include a record of a monthly bulk payment from the Intermediary to the Manufacturer, but this
has limited evidentiary value because it does not demonstrate first-sale payment that can be
referenced against the invoices. It is unclear from the submission whether the bulk payment
record can be deconsolidated because the screenshot of the bulk payment record is totally
illegible. As we are unable to link the first sales that occurred in both case studies to the price
actually paid, the case studies do not support the ruling request on the first sale argument.
Turning to the intercompany contract manufacturing and supply agreement, the
Manufacturer may make an ex-ante price adjustment if the actual order volumes differ from the
volumes forecasted by the Intermediary at the end of the prior year. Specifically, the provision
reads “if special circumstances have occurred such as [Intermediary’s] total order volume is well
below or above the budgeted volumes leaving the [Manufacturer] with less or above actual costs
plus 7%, an ex-ante adjustment shall be made by the [Manufacturer] to ensure renumeration….”
In effect, this provision allows for a post-importation price adjustment in the sale between the
Manufacturer and the Intermediary.
CBP previously disfavored the transaction value methodology for related parties when
the transfer price agreement provided for post-importation adjustments. See HQ 547654 (Nov. 8,
2001) (revoked by HQ W548314 (May 16, 2012)). However, CBP had occasion to revisit this
matter in HQ W548314 and proposed a broader interpretation of the methodologies permitted
under transaction value to allow for transfer pricing policies to be considered a “formula” if
certain criteria are met. HQ W548314 concerned post-import adjustments made pursuant to a
transfer pricing policy and explained that although a transfer price is not fixed at the time of
importation, transaction value may still be an acceptable method of valuation if the importer
demonstrates that the formula used to arrive at the price meets the following criteria:
(1) a written transfer pricing policy is in place prior to importation and the policy
is prepared taking IRS code section 482 into account;
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(2) the U.S. taxpayer uses its transfer pricing policy in filing its income tax return,
and any adjustments resulting from the transfer pricing policy are reported or used
by the taxpayer in filing its income tax return;
(3) the company’s transfer pricing policy specifies how the transfer price and any
adjustments are determined with respect to all products covered by the transfer
pricing policy for which the value is to be adjusted;
(4) the company maintains and provides accounting details from its books and/or
financial statements to support the claimed adjustments in the United States; and,
(5) no other conditions exist that may affect the acceptance of the transfer price by
CBP.
CBP formalized its expanded view in Customs Bulletin Vol. 46, No. 23, dated May 30,
2012 (effective July 30, 2012). When a related party price is determined in accordance with a
formal transfer pricing policy that is in place prior to importation, the transfer price may be
considered “fixed” for purposes of applying transaction value even though the policy provides
for post-importation adjustments to the transfer price. However, the formula employed to arrive
at the price must be objective, i.e., it must satisfy the requirements identified in HQ W548314.
As described above, the intercompany contract manufacturing and supply agreement sets
the transfer price based on the Manufacturer’s direct and indirect costs plus a fixed 7% markup.
While this basic framework likely qualifies as an objective formula, the possibility of a post-
importation price adjustment is conditioned on an order volume fluctuation that is “well below or
above” the budgeted volumes. It is not clear from the documents what level of fluctuation
qualifies as “well below or above” the forecasted volumes such that the price adjustment is
triggered. Further, CBP does not have visibility regarding the occurrence of a price adjustment
because the adjustment is applied to the first sale between the foreign Manufacturer and the
foreign Intermediary and likely occurs post-importation. While post-importation adjustments are
permissible under the circumstances identified in HQ W548314, the Importer in this case has not
sufficiently demonstrated that these circumstances exist. Specifically, the Importer has not
provided evidence regarding the extent of deviation in order volumes that is permissible before a
price adjustment is triggered. The adjustment provision presumably grants wide discretion to the
Manufacturer to apply a price adjustment based on their opinion that the quantity ordered was
“well below or above” the forecasted quantity. This level of discretion renders the formula for
determining price subjective rather than objective. It is also unclear whether other “special
circumstances” may trigger this adjustment. The provision uses the phrase “such as” which
indicates that the volume fluctuation situation is an example of a special circumstance, but there
is no language indicating that volume fluctuation is the only special circumstance that triggers
the price adjustment.
Further, one of the transfer price components is an “appropriate proportion of indirect
overheads including but not limited to….” This provision is overly flexible because: (1) it is not
clear what an “appropriate proportion” means; and (2) there may be other costs tacked on as
indirect overhead that are not listed in the provision which would result in a higher transfer price.
The Importer provided a transfer price benchmarking study to support their contention
that the 7% fixed markup is within an acceptable range for the intercompany sale of similar
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products in the same market. The existence of a transfer pricing study does not obviate the need
for CBP to examine the circumstances of sale to determine whether a related party price is
acceptable. See HQ H037375 (Dec. 11, 2009) and HQ 546979 (Aug. 30, 2000). Information
provided to CBP in a transfer pricing study may be relevant in examining the circumstances of
the sale, but the weight to be given this information will vary depending on the details set forth
in the study. See HQ H037375 (Dec. 11, 2009) and HQ 548482 (Jul. 23, 2004).
The Importer submitted information regarding the intercompany sale of similar
merchandise in pan-Asian and pan-European settings. The pan-Asian study is very limited and
does not provide sufficient detail supporting its evidentiary value. The pan-European transfer
price benchmarking study provides greater detail and includes information explaining the study.
Taking the pan-European study on its face, it appears that the 7% fixed markup is between the
median and upper quartile range for intercompany sales of similar merchandise by nine
comparable companies from 2017-2022. We point out, however, that the transfer pricing study
evaluates the markup only and does not include information on the other price components.
Additionally, the study does not include any information beyond the year 2022. Notwithstanding
these limitations, the reasonableness of the 7% fixed markup is not the problematic component
of the transfer price. Rather, the parties’ discretion over the proportion of indirect costs which
shall be reflected in the transfer price, as well as the Manufacturer’s discretion for adjusting price
based on order volume fluctuations render the actual transfer price indiscernible at the time of
importation.
Finally, the internal transfer pricing standard operating procedure document provides
company-wide transfer pricing guidelines as well as technical information for using internal
systems to arrive at the correct transfer price. While this document provides detailed information
demonstrating how the parties arrive at the correct transfer price from a calculation standpoint, it
does not shed any light on the price components that are not firm at the time of importation (i.e.,
proportion of indirect overhead costs and post-importation adjustments).
Based on CBP’s review of the evidence presented, the Importer has not demonstrated that
the circumstances of the sale between the Manufacturer and the Intermediary are such that the
relationship between them did not influence the price actually paid or payable. The relationship
of the parties likely contributed to three price provisions that would not be present in an arm’s
length transaction: (1) the indeterminate proportion of indirect overhead costs which are
included in the transfer price; (2) the possible inclusion of other, non-listed indirect overhead
costs in the price; and (3) and the ability of the Manufacturer to independently determine when
order volumes have sufficiently fluctuated such that an ex-ante price adjustment is triggered.
Further, as mentioned above, the case studies also do not have evidentiary value because
payment for the first sale occurs on a consolidated basis and the submission does not include
sufficient evidence of the payment made on a transaction-by-transaction basis at the first-sale
stage.
Regarding “test values,” 19 C.F.R. § 152.103(l)(2) provides that related parties may
prove that transaction price is not influenced by the parties’ relationship by submitting test values
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which demonstrate that the transaction value “closely approximates” (A) the transaction value of
identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United
States; or (B) the deductive value or computed value of identical merchandise, or of similar
merchandise; and (C) the values used for comparison relate to merchandise that was exported to
the United States at or about the same time as the imported merchandise. 19 C.F.R. §
152.103(j)(2)(i).
The Importer has not submitted evidence that the transaction value of the sale between
the Intermediary and Manufacturer closely approximates the transaction value of identical or
similar merchandise to unrelated buyers in the United States. In fact, the Importer did not
provide any information involving unrelated buyers of identical or similar merchandise in the
United States. Accordingly, the Importer has not demonstrated that the transaction value “closely
approximates” (A) the transaction value of identical merchandise, or of similar merchandise, in
sales to unrelated buyers in the United States; or (B) the deductive value or computed value of
identical merchandise, or of similar merchandise. 19 C.F.R. § 152.103(j)(2)(i).
As we do not find that a basis for first sale appraisement is merited based on the
information presented, we do not address the additional requirements pertaining to whether the
articles are clearly destined for exportation to the United States.
HOLDING:
Under the facts presented, CBP finds that the first sale transaction value between the
Manufacturer and the Intermediary does not form an acceptable basis of appraisal under 19
U.S.C. § 1401a(b).
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 Customs Service 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 filed 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.
Sincerely,
Monika Brenner, Chief
Valuation and Special Programs Branch
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