• HQ H097035
• Nov 15, 2011

• Type : Valuation • HTSUS :
•  Related:   07102; 150323; 150283; 150149; 150324; 150163; 150286; 150223; 150228; 101358; 150369; 150371; 546998; 546409; H029658; H037375; H032883; H106603; H016585; W563605   

OT:RR:CTF:VS H097035 CMR

U.S. Customs and Border Protection
Protest and Control
1100 Raymond Boulevard
Suite 402
Newark, NJ 07102

RE: Internal Advice for Protest Number 4601-09-150323; First Sale

Dear Port Director:

This is in response to your memorandum dated March 2, 2010, requesting internal advice with regard to Protest Number 4601-09-150323. By letter dated March 18, 2010, you forwarded documents relevant to the consideration of Protest Number 4601-09-150323, that is, you sent documents related to Protest Numbers 4601-09-150283; 4601-09-150149; 4601-09-150324; 4601-09-150163; 4601-09-150286; 4601-09-150223; and 4601-09-150228. All of these protests involve the same importer, and all involve the same issue, i.e., the acceptability of a first sale value between related parties. The scenarios of each protest and the parties involved vary somewhat, but the importer, the middleman, and the issue, remain the same in all. Therefore, this office will consider the information provided to the port for the related protests in reaching our decision on Protest Number 4601-09-150323. Our decision herein should assist the port in deciding the remaining protests as the issue is the same and the differences in the scenarios would not impact our decision on the “first sale” issue.

We have reviewed the protest and the accompanying documents forwarded to this office with your request. The protest was filed by FPA Customs Brokers, Inc., on behalf of the importer. Counsel for the importer, Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt, LLP, has submitted documents in support of the claim that transaction value of the sale between the manufacturer and the middleman should serve as the basis of appraisement of the imported merchandise, i.e., that “first sale” should be applied in this case. The import specialist team at the port met with counsel prior to the internal advice being sent to this office.

This office has received supplemental submissions from counsel, including a submission dated May 17, 2010, setting forth the arguments for “first sale” appraisement of the merchandise. A meeting between counsel and this office occurred on June 21, 2011 to allow counsel the opportunity to discuss the case and present any further arguments. Counsel submitted an additional supplemental submission on July 18, 2011.

After a careful review of the submitted documents, we agree with the Port that the merchandise was properly liquidated using the “last sale” of the multi-tiered transactions and that the documentary evidence necessary to establish use of the “first sale” price is lacking. Our reasons for our decision are set forth herein.  Counsel has requested confidential treatment of certain information contained in the record including cost information, the identities of the parties and attachments to various submissions. Pursuant to 19 C.F.R. § 177.2(b)(7), the information has been specifically identified and is bracketed and underlined and will be redacted in the public version of this decision.

FACTS:

In the transaction at issue and the related transactions the port has brought to our attention that the importer purchases merchandise from the middleman. The middleman purchases the merchandise from related party manufacturers located in Vietnam. The related parties either produce the merchandise themselves and sell it to the middleman or purchase the merchandise either from each other or from unrelated party manufacturers. Specifically, in some of the transactions, one of the Vietnamese manufacturers purchases the merchandise from the other related Vietnamese manufacturer or an unrelated Vietnamese manufacturer. In some transactions, the other related Vietnamese manufacturer purchases the merchandise from the other related Vietnamese manufacturer or other unrelated Vietnamese manufacturers. In the specific protest at issue, protest 4601-09-150323, the middleman purchases merchandise from one of its related party manufacturers. The importer is claiming that the merchandise in each of the protested entries should be valued based upon the sale between the Vietnamese related parties and the related middleman. Documents have been submitted for each of the variations of the transactions at issue.

With regard to the documentation submitted to support the argument that these transactions qualify for valuation based upon the “first sale” price between related parties, counsel has submitted for each protest: A summary diagram of the transaction The importer’s source order summary (purchase order) to the middleman The middleman’s purchase order to its related factory in Vietnam The middleman’s related factory’s invoice to the middleman The middleman’s invoice to the importer The Air Waybill showing the Vietnamese related factory as the shipper, the importer as the consignee and a customs broker as the point of contact; Air Waybill indicates “Freight Collect” in some cases, and “[x]% Prepaid [x]% Collect” in other cases Proof of payment – the importer to the middleman Proof of payment – the middleman to its related Vietnamese factory A cost breakdown sheet for the style at issue Fabric and trim documents relevant to assist costs

For four of the related protests, counsel included documents relating to production by a subcontractor of the Vietnamese related factory, including the purchase order from the Vietnamese related factory to the unrelated subcontractor, the invoice from the subcontractor to the factory and proof of payment from the factory to the subcontractor.

As the sale which is being claimed as the “first sale” for purposes of appraisement is between related parties, counsel initially submitted documentation to show the prices between the related parties allegedly approximated a test value. Five separate transactions were presented. By letter, dated May 17, 2010, counsel submitted a narrative explaining the documentation that had been submitted to the port and why these “test values” served to show that the transactions between the middleman and its related parties in Vietnam qualified as arm’s length sales of goods for export to the United States.

The following transactions were submitted:

A women’s 100% cotton woven skirt with belt which is the subject of Protest No. 4601-09-150228. A women’s 100% cotton knitted cotton polo shirt with capped sleeves which is the subject of Protest No. 4501-09-150149. A women’s 95% cotton/5% spandex jersey knit polo shirt with a 100% cotton rib knit collar and cuffs with a hemmed bottom featuring side vents (liquidated as entered at “first sale” price); and, a women’s 100% cotton knitted polo shirt with a woven collar, hemmed short sleeves and a hemmed bottom featuring side vents (liquidated as entered at “first sale” price; a paperless bypass entry). A women’s 95% cotton/5% spandex French terry knit pant with a drawstring waist (liquidated as entered at “first sale” price); and, a women’s 60% cotton/40% polyester French rib knit pull-on pant with either a self-fabric waistband or banded waistband (subject of approved Protest No. 3901-09-101358). A women’s 96% cotton/4% spandex jersey knit pullover with three-quarter length sleeves, a scoop neck with top center smocking and a hemmed bottom (liquidated as entered at “first sale” price); a women’s 100% cotton jersey knit pullover with three-quarter length sleeves, a scoop neck with trapunto stitching and a hemmed bottom (subject of Protest No. 4601-09-150369); and, a women’s 96% cotton/4% spandex rib knit pullover with three-quarter length sleeves, a scoop neck with a ruffle trim and a hemmed bottom (subject of Protest No. 4601-09-150371).

At the meeting held with counsel at our offices, counsel informed us that they would not pursue test values as a means to show that the transactions between the related parties, i.e., the middleman and the Vietnamese parties, qualified as arm’s length transactions. No arguments were made to show that test values as set forth in 19 CFR 152.103(j)(2)(i) and further discussed in 19 CFR 152.103(l)(2) were satisfied. Instead, in their supplemental submission counsel argues that the circumstances of the sale show that the related parties’ relationship did not influence their transaction price. To support their argument, counsel submitted comparison transaction prices charged by unrelated Vietnamese manufacturers for goods sold to the related Vietnamese manufacturers who, in turn, sold the same goods to their related manufacturer for the same price paid to the unrelated Vietnamese manufacturers. In addition, comparison transactions between another middleman and its related Vietnamese manufacturer were submitted. Further, it was stated that the middleman conducted market research to determine prevailing prices for similar products in preparation for negotiating with its related factories. However, no market research was submitted for our consideration.

ISSUE:

Does the submitted documentary evidence support the claim that the “first sale” transaction should be the basis of appraisement for the merchandise at issue?

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).

In Nissho Iwai American Corp. v. United States, 16 C.I.T. 86, 786 F. Supp. 1002, reversed 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 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 in order 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. See also, Synergy Sport International, Ltd. v. United States (Ct. of Int’l Trade, 1993).

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 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.

With respect to the protests before the port, counsel submitted purchase orders, invoices, shipping documents to show shipment from the manufacturer to the importer and proof of payment. In addition, information was presented regarding various assists provided to the actual manufacturer of the merchandise. We note that for some of the assist documentation, the middleman is identified as the buyer, yet on other documents the buyer is identified as the importer.

In order to benefit from a “first sale” value at importation, an importer must be able to establish all the elements of transaction value set forth in 19 U.S.C. § 1401a(b). From the shipping documents, it is clear that the goods at issue were clearly destined for the United States. However, we must determine if a bona fide sale occurred between the middleman and its Vietnamese related parties.

We have been told that there is no contract between the middleman and its related parties. The purchase orders from the middleman to its Vietnamese related parties specify:

Title and risk of loss for the merchandise pass to vendor [the middleman] at the factory. These goods are sold for export to the U.S. only. [The middleman] will accept merchandise within [x]% of the quantity listed on this contract.

The sales between the middleman and its related Vietnamese manufacturers are “ex-factory” and the sales between the middleman and the importer are “FOB Vietnam.” No documentation has been presented regarding the inland freight. This office inquired of counsel as to who arranged and paid for the inland freight from the factory to the point of export. The response was that the “factories transported the merchandise to the port of export using their own trucking.” This was also the reason given why the factories are listed as the shippers on the Air Waybills.

In the case of an ex-factory sale, also known as “ex-works”, the buyer assumes the responsibility for transporting the merchandise from the factory to the port of lading. Using the shipping term “ex-factory” in the purchase order indicates that the buyer takes delivery of the merchandise at the factory door. The buyer takes on the risk of loss and all costs related to the merchandise from the point of delivery at the factory door. Under an FOB sale, the risk of loss transfers when the goods pass the ship’s rail.

In this case, the factories transported the merchandise to the port of export and the factories are identified as the shippers in the shipping documents. The factories did not receive a separate payment for this service. If the factories transported the merchandise to the port of export, be it by air or by sea, we presume the factories were operating under an FOB shipping contract and not an ex-factory one. In fact, the payment information provided by counsel on the “Payment Details” chart shows that for the merchandise at issue in Protest No. 4601-09-150323, the middleman paid the Vietnamese related party factory for “sewing.” The chart also lists the factory under the header “Shipper” in the chart. This supports a conclusion that the “sale” between the middleman and its Vietnamese related party was not an ex-factory sale, but was an FOB sale.

The parties’ use of the term “ex-factory” and the recitation of the risk of loss and title transferring to the middleman at the factory are in conflict as regards the passage of the risk of loss. While true that the purchase orders between the middleman and its Vietnamese related parties state – “Title and risk of loss for the merchandise pass to vendor [i.e., the middleman] at the factory”, it is also clear that the factories were operating under an FOB sale which would mean, under INCOTERMS, risk of loss transferred at the ship’s rail, not at the factory. The shipping term in the purchase order between the importer and the middleman is FOB. Counsel indicates that title and risk of loss transferred to the importer when the merchandise was laden on board the export carrier. The risk of loss of the goods passes simultaneously from the factories to the middleman to the importer. The middleman, therefore, does not truly bear the risk of loss, in spite of the indication on the purchase order.

We also note another apparent error on the purchase orders. With regard to payment terms, the purchase orders issued by the middleman to its related parties in Vietnam all indicate “Terms of Payment: L/C.” We have been informed however that no letter of credit is issued. Evidence of payment by wire transfers was submitted.

As noted by counsel in the July 18, 2011 submission, shipping terms, i.e., INCOTERMS, do not indicate transfer of title. This is true, unless the parties choose to use them for that purpose and so indicate. If we ignore the conflict between the use of “ex-factory” and the explicit statement regarding the passage of the risk of loss set forth on the purchase orders, ignore the error regarding terms of payment, and accept that title passed at the factory as stated on the purchase orders, we still must ascertain whether the sales at issue between the related parties are acceptable per 19 U.S.C. § 1401a(b)(2)(B).

Under 19 U.S.C. § 1401a(b)(2)(B), sales between related parties may be acceptable under transaction value if an examination of the circumstances of the sale shows the relationship between the buyer and seller did not influence the price actually paid or payable or if the transaction value of the merchandise closely approximates the transaction value of identical merchandise or of similar merchandise in sales to unrelated buyers in the United States (or the deductive value or computed value for identical merchandise or similar merchandise) and such identical or similar merchandise was exported to the United States at or about the same time as the imported merchandise at issue.

The CBP Regulations at 19 CFR Part 152 set forth illustrative examples of how to determine if the relationship between the buyer and the seller influences the price. See also HQ H029658, dated December 8, 2009; HQ H037375, dated December 11, 2009; and, HQ H032883, dated March 31, 2010. CBP will examine the manner in which the buyer and seller organize their commercial relations and the way in which the price in question 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 the seller settles prices with unrelated buyers, this will demonstrate that the price has not been influenced by the relationship. See 19 CFR §152.103(l)(1)(i)-(ii). In addition, CBP will consider the price not to have been influenced 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 CFR §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.

In this case, test values were submitted of transactions between another middleman and its related manufacturer in sales of merchandise to the same importer. With regard to test values, 19 U.S.C. § 1401a(b)(2)(B) states in relevant part:

The transaction value between a related buyer and seller is acceptable for the purposes of this subsection . . . 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.

Counsel indicated at the meeting held on June 21, 2011 that the test value method was being abandoned as a means to show the transactions between the related parties were arm’s length transactions. However, to support the argument that the sales at issue were arm’s length sales, counsel submitted two of the previous test values between another middleman selling to the same importer and the middleman’s Vietnamese related party manufacturer. These examples were submitted not as test values, but to show that the prices between the related parties at issue herein were reached in a manner consistent with the normal pricing practices of the apparel industry in Vietnam at the time.

While the merchandise at issue in the example transactions are similar and the prices are also either identical or vary slightly with reasonable explanations of the variances, because the comparison transactions are between related parties, it must be shown that the parties’ transfer prices reflect arm’s length transactions. In order to show that the related parties in the comparison transactions operated at arm’s length with one another, counsel submits that under the all costs plus a profit method a comparison of the profit and loss statements of each company for two successive years encompassing the time frame of the entries at issue reflects that “the transfer prices between the two companies were adequate to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit realized over a representative period of time . . . in sales of merchandise of the same class or kind.” We disagree.

In applying the all costs plus a profit test, CBP normally considers the “firm’s” overall profit to be the profit of the parent company. Thus, if the seller of the imported goods is a subsidiary of the parent company, the price must be adequate to ensure recovery of all the seller’s costs plus a profit that is equivalent to the parent company’s overall profit. See HQ 546998, dated January 19, 2000. The regulations do not give us the definition of “equivalent” profit; however, if the profit of the seller is equal to or higher on the goods sold for export to the U.S. than the firm’s overall profit, the sales price would not be artificially low for Customs purposes. See HQ H106603, dated July 25, 2011.

Counsel submits that for the year 2007, the related party manufacturer realized an operating profit of 1.83 percent, while the related middleman (its parent) realized an operating profit of 2.39 percent. For 2008, the related party manufacturer realized an operating profit of 3.41 percent, while the related middleman (its parent) realized an operating profit of 4.3 percent. Counsel refers to the manufacturer’s and middleman’s profits as comparable.  While the percentages may be comparable, it is apparent that for both years the related party manufacturer’s profit was less than its related middleman. This indicates that the price charged by the seller was not sufficient to recover all costs associated with production of the goods plus a profit equivalent to the parent’s overall profit over a period of time.

In Headquarters Ruling Letter (HQ) H016585, dated December 30, 2008, a similar comparison was submitted of the operating profits of related parties. In that case, the related party manufacturer realized an operating profit of 1.2 percent (2004), 1.5 percent (2005) and 1.4 percent (2006). However, the related party middleman (the parent) realized an operating profit ranging from 5.4 percent to 6.3 percent for the same time frame. CBP stated in the decision:

. . . Since TWT did not realize an operating profit equivalent to the parent firms’ (sic) profit over the same period of time, we find that Tumi has not shown that the transaction between TWT Thailand and WWT was an arm’s length transaction. . . .

HQ H016585 is directly on point with the information provided here. Although the difference in the operating profit percentages between the manufacturer and the middleman is not as great in this case as in HQ H016585, the related party manufacturer does not realize an operating profit equivalent to the parent firm’s (middleman buyer’s) profit over the same period of time.

As such, the examples of transactions by a different Vietnamese manufacturer and its related party middleman cannot serve to show the prices of the parties in this case were settled in a manner consistent with the normal pricing practices of the apparel industry in Vietnam at the time because there is insufficient evidence to support that the comparison transactions meet the arm’s length requirement of related party sales.

Further, in arguing that the middleman and its related Vietnamese parties organized their commercial relations and arrived at prices in a manner that was not influenced by the relationship, counsel looks to two examples whereby the Vietnamese related parties subcontracted production of goods to unrelated parties. The unrelated parties sold the goods to the Vietnamese related parties who then sold the goods to their related party, the middleman, for the same price. Counsel argues that the willingness of unrelated parties to produce the goods for the same price agreed to by the related parties demonstrates that the middleman and its Vietnamese related parties “organized their commercial relations and arrived at prices in a manner that was not influenced by the relationship.”

First we note that the transactions to which counsel directs our attention are the subject of protests 4601-09-150228 and 4601-09-150149. Counsel argues that the transactions with the unrelated subcontractors “confirm that the prices that were arrived at between [the middleman] and the related factories, were, in effect, the same as if [the middleman] had dealt directly with the unrelated factories to produce the goods.” However, the middleman did not deal directly with the unrelated factories; its related party did. Counsel would have us ignore the subsequent sales between the related parties and equate the subcontractors’ sale as equal to them. However, the sale for which “first sale” is claimed is the sale between the related parties. We are told that “in certain circumstances, due to a lack of capacity, or other manufacturing considerations,” the Vietnamese related parties are unable to fulfill the middleman’s orders and outsourced the production. Sometimes they outsource the production to unrelated parties, but sometimes they outsourced the production to one another. As already noted, when the related party manufacturer outsources production to a subcontractor, at least in the examples provided, it resells the merchandise to its related middleman for the same price that it purchases the merchandise from the subcontractor. In other words, it makes no profit on the sale to the middleman. While failure to make a profit may draw greater scrutiny in examining a transaction to determine if it is a bona fide sale, it does not preclude the reality of such a sale. See HQ W563605, dated November 19, 2009, and HQ 546409, dated July 9, 1997.

When examining a transaction between related parties to determine whether the transaction meets the arm’s length requirements of 19 U.S.C. 1401a(b)(2)(B), CBP does look to whether a profit is made. If no profit is made, a reasonable explanation would need to be presented in order to successfully show that the parties nevertheless operated at arm’s length. Certainly, we would not expect to see the related party sellers in this case to not make a profit. We are not told why the Vietnamese related parties sell goods they purchase from unrelated subcontractors to their related middleman without making a profit, only that they sometimes outsource production when they cannot fill an order.

The transactions between the related party manufacturers and the unrelated Vietnamese subcontractors are reflected by the following documents submitted by counsel:

For the first example:

Delivery receipt Commercial Invoice Proof of Payment

For the second example:

Processing contract between the related manufacturer and the unrelated subcontractor Invoice spreadsheet prepared by the unrelated subcontractor Proof of Payment

We note our earlier discussion that the related parties’ sale was an FOB sale. In the case of the sale between the unrelated subcontractor and the related manufacturer, it too appears to be an FOB sale. The delivery receipt for the first example has been translated and indicates “Airport out put” and identifies truck numbers. From the translation, it appears that the price paid to the subcontractor includes transportation from the factory to the airport, i.e., the point of exportation. Thus, the sale between the subcontractor and the related manufacturer appears to be an FOB sale. The delivery receipt and the commercial invoice from the subcontractor are both dated May 7, 2008. The airway bill was executed on May 7, 2008 by the freight forwarder indicating the goods were in the freight forwarder’s possession on May 7, 2008 for placement on the air carrier. Therefore, it appears that the risk of loss passed from the subcontractor to the related manufacturer to the related middleman to the U.S. importer simultaneously. It is unclear at what point the related middleman acquired title to the goods as the agreement between the related parties reflected in the purchase order was that the middleman acquired title at the factory door, i.e., ex-factory, but that was the related manufacturer’s factory, not a subcontractor’s factory. The goods are not delivered to the factory, but are apparently delivered to the airport. In addition, it is not clear when the related manufacturer acquired title to the goods as the translated delivery receipt and commercial invoice make no indication of shipping terms or contract terms which would indicate the transfer of title or risk of loss. As it is not clear when the related manufacturer acquired title, it is difficult to ascertain when the middleman acquired title. Therefore, it is possible that this transaction not only involved a flash transfer of the risk of loss, but also a flash transfer of title through all parties from the subcontractor to the U.S. importer. Due to the uncertainties regarding the transfer of risk of loss and transfer of title from the subcontractor to the related manufacturer, it is not clear whether the related manufacturer was acting as an independent buyer/seller or as an agent for its related middleman in this transaction. For this reason and the failure to make a profit in the “sale” of the goods to its middleman, we find that no bona fide sale for export to the United States occurred between the related parties for this transaction. Therefore, the price per unit agreed to by the related manufacturer and the subcontractor is not useful as an example to show that the price between the related parties was not influenced by their relationship.

With regard to the second example, a review of the processing contract between the related manufacturer and the unrelated subcontractor indicates that the subcontractor is responsible for delivering the merchandise to the related manufacturer, but there is no indication in the document of the place of delivery. It is unclear as to which party is responsible for the cost of the delivery to the related manufacturer as the contract states “Note: The price above included fees: sewing, iron, packing and delivery charge, the price excluded 10% VAT”; but the contract also states under section III “Delivery – Transportation: Party A is responsible for delivery of fabric and accessories to Party B and transportation costs under the Party B.”

Further, with regard to payment, the processing contract states:

Party A will settle CMP charge & VAT in VND at the current exchange rate of Vietcombank in Viet Nam by T/T in 14 days after Party B delivery cargo to Party A.

The argument submitted by counsel is that since the unrelated subcontractor is willing to produce the apparel for the same price per unit as the related manufacturer is selling to its related middleman, this shows the related party price was not influenced by the relationship. However, we note that the related manufacturer is paying more for the merchandise than it will receive from its related middleman. The related manufacturer is paying the agreed price per unit plus a 10 percent value added tax. Thus it appears that in the series of transactions from the subcontractor through the related manufacturer to the related middleman, the related manufacturer loses money as it only receives the agreed price per unit from its related middleman. As the related manufacturer actually pays more in this transaction than it receives and because the processing contract is not clear on place of delivery and does not provide information when risk of loss and title transfer, we find that the second example is deficient for its intended purpose. Therefore, we disagree that the submitted examples (the sales by unrelated subcontractors of orders to the related manufacturers for the same price the identical goods were sold for export by the manufacturers to the related middleman) demonstrate that the related party prices were not influenced by the relationship.

After considering counsel’s arguments, we find the related party transactions do not meet the circumstances of the sale as required by 19 U.S.C. § 1401a(b)(2)(B). It has not been shown that the related party price is sufficient to recover all costs plus a profit equivalent to the parent firm’s profit. In fact, in some sales there is not only no profit, but there seems to be a loss on the part of the related party manufacturer. The arguments presented and examples provided to show that the related parties organized their commercial relations and arrived at prices in a manner that was not influenced by the relationship are simply not persuasive. Therefore, the sales transaction between the related parties cannot be used as the first sale for purposes of appraisement of the imported merchandise as it fails to meet the requirements for transaction value acceptability between related parties.

HOLDING:

There is insufficient evidence to substantiate that the transfer price between the related parties for the “first” sale of the imported merchandise meets the arm’s length requirement of 19 U.S.C. 1401a(b)(2)(B). As such, the merchandise cannot be appraised based on the “first” sale price. The port was correct to appraise the merchandise under transaction value on the sale between the middleman and the importer. The protest should be denied.

Sixty days from the date of this letter, Regulations and Rulings of the Office of International Trade will take steps to make this decision available to Customs and Border Protection ("CBP") personnel and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Monika R. Brenner, Chief
Valuation and Special Programs Branch