Customs Ruling HQ H301778 - Restrictions on Disposition or Use; Price Actually Paid or Payable; Dutiability of Service Fees; Related Party Transactions

Star
Send

HQ H301778
Jun 04, 2024

Type : Valuation • HTSUS :
Related: 545998; 543512; 546979; 548482; 547672; 546998; 548095; H038381; W563404; H242894; H239496; H302184; H032883; H029658; H037375; H106603; H065015; H065024; H235527; H228298; H219515

OT:RR:CTF:VS H301778

Gail T. Cumins, Esq.
Sharretts, Paley, Carter & Blauvelt, PC
75 Broad Street
New York, NY 10004

RE: Restrictions on Disposition or Use; Price Actually Paid or Payable; Dutiability of Service Fees; Related Party Transactions

Dear Ms. Cumins:

This is in response to your letter of June 20, 2018, requesting a ruling on the valuation of goods that [ ] ("the Importer") purchases from a related party, [ ] ("the Seller"). Specifically, you ask for confirmation: (1) that the imported goods are not subject to any restrictions on disposition or use that preclude the use of the transaction value method; (2) that certain service fees associated with retail operations in the United States are not part of the price actually paid or payable for the imported goods; and (3) that the related-party price is acceptable as transaction value for the imported goods.

You have requested confidential treatment for certain information contained in your submission and in the file. Inasmuch as this request conforms to the requirements of 19 C.F.R. 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets in your request will not be released to the public and will be withheld from published versions of this ruling.

FACTS:

The Seller is a parent company located in Europe. The Seller globally promotes and sells brand-name merchandise for which it owns all the intellectual property, brand names, and trade names. The merchandise includes luxury goods such as large and small leather goods, shoes, apparel, watches, jewelry, fashion accessories, and books. The Seller designs and develops the merchandise, oversees its production by both related and unrelated manufacturers located abroad and in the United States, and purchases the finished products from the manufacturers.

The Importer is a subsidiary of the Seller based in the United States. The Importer acts as a corporate wholesaler that sells all its inventory to [ ] and [ ] two U.S. "Retail Groups" that are also wholly owned by the Seller. In addition to the imported goods at issue in this case, the Importer also purchases U.S.-made goods that it sells to the Retail Groups. Over the period of 2018 to 2021, U.S.-made goods accounted for between [ ]%-[ ]% of the Importer's total purchases by value. Once the Retail Groups acquire the merchandise, whether imported or produced in the United States, they offer it to customers through their website and a network of retail stores that they own or operate in the United States.

Restriction on Disposition or Use

In this case, you note that the Seller provides "retrieval dates" for its products, which you characterize as "recommendations" about when certain products should be removed from the shelves in retail stores. In support of your contention that the retrieval dates are suggestions, rather than an enforceable requirement that could constitute a "restriction on disposition or use" of the goods under 19 U.S.C. 1401a(b)(2)(A)(i), you provided a non-exhaustive table of 186 products that continued to be sold in the United States after the retrieval date specified by the seller in 2017. In your view, the fact that the Retail Groups continued to sell these products after the retrieval date demonstrates that the Seller cannot exercise control over the final disposition or use of the goods.

Additionally, regarding the ultimate disposition of the goods in the United States, you acknowledge that Seller and its subsidiaries do not engage in any outlet store or discounted retail activities. Unsold merchandise from the Retail Groups is returned to the Importer, with a small percentage sold to employees via staff sales. Obsolete products are destroyed locally by the Importer, and where applicable, duty drawback is claimed. Small quantities of active sellable products are returned to the Seller's overseas headquarters. In your view, no restriction on disposition or use should be inferred either from this business practice or from the Seller's "recommendations" as to when certain products should be removed from the shelves in the Retail Groups' U.S. stores.

Service Fees

In addition to merchandise, the Seller bills the Importer fees that relate to retail services provided to the two U.S. Retail Groups. The retail service fees cover the following eight categories:

1) Merchandising and commercial assistance services, which include architecture, visual merchandising, and sales training;

2) Advertising and communication services, which include advertising campaigns, media strategy, catalogues, brochures, leaflets, and tools for working with clients;

3) Sales and marketing services, which include product launches and sales aid documents;

4) Supply chain and logistics services, which include supply chain & products assortments and logistics, all of which relate solely to the distribution of products in the United States by the retail stores;

5) Information systems (IS) services;

6) Human resources (HR) services, which include HR tools and internal communication;

7) Financial assistance services; and

8) Administration and risk management services.

You claim that the retail service fees are 100% pass-through, meaning that the Importer passes them along to the two U.S. Retail Groups in their entirety. Additionally, the Importer adds local administrative and logistics service fees for retail services provided by the Importer to the Retail Groups. The Retail Groups pay the Importer the full amount of the service fees billed by the Seller and the Importer, and the Importer passes along to the Seller the payment for the services fees paid by the Retail Groups.

The Seller calculates the fees according to the following principles:

. Analysis of the cost centers of each department in the statutory accounting of the Seller, in order to identify:

. The cost centers which relate to one of the services rendered to the retail affiliates, and which thus give rise to full or partial re- invoicing;

. The cost centers which do not relate to the services and are not re-invoiced;

. Categorization of these costs per type of service (Merchandising & commercial assistance, Advertising & communication, etc.);

. Determination of complete costs for each category of services, through the inclusion of a portion of the Seller's indirect costs;

. Application of a retail allocation percentage to this complete cost basis, in order to reflect management's best estimate of time spent and/or costs allocated by each department to provide services to the retail business; . Application of a mark-up to each category of services, reflecting the value-added component of this service, from 5% to 15%;

. Allocation of the full retail services charge between the retail affiliates, based on their respective contribution to the worldwide net sales; and

. Conversion in local currency.

While there is no retail services agreement between the Seller and the Importer, you have provided a Services Agreement, dated January 1, 2012, which was executed between the Seller and one of the U.S. Retail Groups. Under the Services Agreement, the fees are invoiced as follows:

. During a given calendar year, the Importer is charged by the Seller with a monthly amount equal to 1/12 of the past year total charge (Advanced payments); and

. The service fee calculation described above is done only after the annual closure of accounts (generally in February), and the gap between the Advanced payments invoiced over the 12 months and the actual calculation gives rise to regular invoicing.

You argue that the service fees should not be dutiable as part of the price actually paid or payable because the fees constitute retail-related services carried out in the United States that are "a separate flow, completely unrelated" to the sale or importation of the merchandise. Regarding the connection between the retail fees and the goods ultimately sold in the retail stores, you emphasize again that a substantial portion of the goods sold at retail are not imported; in recent years, U.S.-made goods accounted for between [ ]%-[ ]% of the Importer's total purchases by value. Moreover, the calculation of the fee does not depend on either the purchase price or the retail price of the goods, whether imported or not. Finally, you observe that the fees accrue even when no merchandise is purchased and imported. For example, during the Covid-19 lockdowns, the Seller continued to provide the services discussed above for the benefit of the retail entities, which remained obligated to pay for the services even though the retail stores were closed at that time and the purchase and importation of merchandise was paused.

Acceptability of Related-Party Prices as Transaction Value

If U.S. Customs and Border Protection ("CBP") finds that no restrictions on disposition or use of the goods exist that preclude the application of the transaction value method and that the service fees discussed above are not included in the price actually paid or payable for the goods, you argue that CBP should accept the related-party price between the Seller and the Importer as transaction value. Your argument is based on the information in a Transfer Pricing Study ("TPS"), a "Luxury Retail Industry Benchmarking Analysis," and profitability figures from the Seller and the Importer. Transfer Pricing Study

The Seller engaged an independent accounting firm, Ernst & Young, LLP, to evaluate the arm's-length nature of the transfer pricing policy to be implemented by and between the Seller and its various distribution affiliates. Although the TPS dates from November 1993, you state that the Seller has consistently used the methodology described in the study since then and that it continues to accurately reflect the Seller's business practices.

According to the TPS, the Seller's traditional transfer pricing policy yielded transfer prices that were a function of the production costs, currency fluctuations, marketing requirements and retail sales prices. However, to maintain control and coordination over retail prices, and to "ensure a more cogent transfer pricing policy from a global tax perspective," the Seller restructured its transfer pricing policy to a resale price approach." Under this approach, the calculation of the FOB transfer price from the seller under the resale price method and its corresponding retail price is: Seller's FOB price (in foreign currency) = .[ ] x retail price including sales tax (in foreign currency).[1] Accordingly, all of the Seller's distributors operate with the same gross margin-namely, [ ]%.

The TPS was conducted in accordance with Section 482 of the Internal Revenue Code and also contains analyses of the transfer pricing policy under the domestic law of foreign jurisdictions. You state that, since 1993, the transfer pricing policy "has been reviewed and validated by numerous national tax authorities" including the United States, Japan, the United Kingdom, Germany, Hong Kong and France. However, there is no evidence that an Advance Pricing Agreement exists between the Seller and the Internal Revenue Service.

Section 482 of the Internal Revenue Code (26 U.S.C. 482) requires that the arm's-length result of a controlled transaction be determined under the method that, given the facts and circumstances, provides the most reliable measure of an arm's-length result. The application of the best method establishes an arm's-length range of prices or financial returns with which to test controlled transactions. As stated in the Seller's TPS, "for purposes of the Comparable Uncontrolled Price ("CUP") and Resale Price ("RP") methods, the scope of this study did not permit the comparability analysis that would be necessary to rely on either of these methods as a best method." As explained in further detail below, the search for comparables that sell "luxury goods" similar to those of the Seller resulted in three results. However, as the data available for any one of the companies was found to be insufficient for purposes of applying the CUP or RP methods, "the companies together as a comparable company sample allowed for the use of the [Comparable Profits] Method ('CPM') to approximate an arm's length price."

The CPM examines whether the amount charged in a controlled transaction is an arm's-length price by comparing the profitability of the tested party to that of comparable companies. In this case, the Importer was selected as the tested party, as it is the "entity for which it [was] easiest to find comparable companies (i.e., that entity which undertakes the simpler set of functions, has less relative risk and uses either little or no intangibles)." The search for comparable companies began by searching computer databases by using a combination of Standard Industrial Classification codes (e.g., distributor) and keywords (e.g., luxury goods, luggage, handbag, purse, accessory, etc.) based on merchandise sold by the Seller. This initial search resulted in over 1,000 comparables. Then, company descriptions were examined to determine whether the potential comparables were functionally similar to the Seller, which narrowed the field to 30 potential comparables. The TPS contains a full list of these 30 potential comparables, a description of their businesses, and notes on why companies were eliminated for further consideration in the next step of the analysis (e.g., not a wholesaler, does not sell branded merchandise, does not sell luxury merchandise, significant research and design expenses, etc.). Next, 10-K reports were reviewed to further examine comparability, which eliminated 23 further potential comparables. After performing a more detailed comparison of the potentially comparable companies, only three remained. The profit level indicator selected for purposes of the comparison was operating margin.

According to the information provided, using the CPM approach, the Seller's "1989 to 1991 average performance compared favorably to the operating margins of comparable companies." However, the information in the TPS does not appear to have been updated since 1993 when the transfer pricing policy was first introduced. In addition to the TPS, the Importer has also provided a supplemental study, discussed immediately below.

PwC Luxury Retail Industry Benchmarking Analysis

The Importer engaged the services of PricewaterhouseCoopers ("PwC") to prepare an "Assessment of transaction value for related party transactions." The objective of the analysis is to determine whether the intercompany prices between the Seller and the Importer are at arm's length for purposes of customs valuation. Specifically, PwC "conducted several distinct analyses to ascertain the prevailing 'normal pricing practices of the industry' in order to provide a complete examination of the Seller's global intercompany pricing policy as it pertains to the Importer, as outlined [in] 19 C.F.R. 152.103(l)(1)(ii)."

19 C.F.R. 152.103(l)(1)(ii) provides that:

If it is shown that the buyer and seller, although related, buy from and sell to each other as if they were not related, this will demonstrate that the price has not been influenced by the relationship, and the transaction value will be accepted. If the price has been settled in a manner consistent with the normal pricing practices of the industry in question, or with the way the seller settles prices for sales to buyers who are not related to him, this will demonstrate that the price has not been influenced by the relationship.

Emphasis added.

For purposes of identifying the relevant industry, PwC first observed the following characteristics of the Importer:

. Engages primarily in sales of handbags, accessories, small leather goods, and footwear; . Engages in sales activity in the U.S. region; . Operates as a regional distributor and retailer, through onward sales by its retail affiliates; and, . Operates in the very limited luxury retail segment, which involves unique considerations, customer experience implications, and value drivers.

Based on these characteristics, the PwC analysis identified "luxury retail" as a relevant industry for purposes of applying the circumstances of the sale test. In order to identify peer companies operating in this industry, PwC used S&P Capital IQ, which independently identified a proposed set of comparables based on the characteristics of the Importer. The initial list of comparables comprised nine unrelated entities engaged in sales of products similar to the Importer's primary product categories (i.e., footwear, handbags, and to a lesser extent, fashion apparel). However, as some of the comparables focused on product groupings that were more removed from the Importer's activities (such as jewelry, beauty and cosmetic products, and sportswear), a second, "tailored" set of results was identified. Specifically, PwC removed from the set comparables that were not primarily engaged in sales of comparable products in the Importer's primary product categories and conducted research to identify additional comparables in the luxury market.

|Global Results |Return on Sales (ROS) | |# |Company Name |Wtd. Avg. |2018 |2017 |2016 | |1 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |2 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |3 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |4 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |5 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |6 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |7 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |8 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |9 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |10 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |11 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |12 |[ ] |[ ]% |[xxx]% |[ ]% |[ ]% |

Next, the benchmarking study set forth the same data set narrowed to the U.S. segments of the same entities. The U.S. segment data set is set forth below.

|Global Results |Return on Sales (ROS) | |# |Company Name |Wtd. Avg. |2018 |2017 |2016 | |1 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |2 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |3 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |4 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |5 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |6 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |7 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |8 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |9 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |10 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |11 |[ ] |[ ]% |[ ]% |[ ]% |[ ]% | |12 |[ ] |[ ]% |[xxx]% |[ ]% |[ ]% |

Next, PWC proceeded to consolidate the Return on Sales U.S. segment data set for comparable retailers to provide benchmarking results, which are set forth below.

| |Return on Sales (ROS) | | |Wtd. Avg. |2018 |2017 |2016 | |Count |12 |12 |12 |12 | |Min |[ ]% |[ ]% |[ ]% |[ ]% | |Lower |[ ]% |[ ]% |[ ]% |[ ]% | |Median |[ ]% |[ ]% |[ ]% |[ ]% | |Upper |[ ]% |[ ]% |[ ]% |[ ]% | |Max |[ ]% |[ ]% |[ ]% |[ ]% |

The benchmarking study also set forth the Importer's Return on Sales data for fiscal years 2016 - 2018, which is set forth below.

|Importer Result |Return on Sales | | |Wtd. Avg. |2018 |2017 |2016 | | |[ ]% |[ ]% |[ ]% |[ ]% |

Taking the benchmarking analyses into account, PwC concluded that the Importer's results were consistent with the financial results observed in the tailored luxury industry benchmarking set. PwC observed that in the tailored comparable set, the lower bound of the range was 10.5% with an upper bound of 34.5% (with an interquartile range of 12.6% to 20.2%). By comparison, the Importer's observed Return on Sales range for the same period was 12.1%. PwC noted that this was well within the observed range of return on sales results under each benchmarked set. The study concluded that based on these results the Importer should be able to utilize its invoice price to declare value under the transaction value basis of appraisement.

Seller and Importer Profitability Figures - All Costs Plus a Profit

In addition to the above, the report reproduces a table, initially provided as part of the ruling request, containing the Seller's financial data for fiscal years 2016 and 2017 both for global sales and for U.S. sales. The financial data includes the gross sales of finished goods, cost of goods sold on an FOB basis, and the gross margin. These figures are presented individually across five categories of goods (shoes, small leather goods, leather goods, ready-to-wear, and other) as well as in the aggregate. The referenced information is provided below.

Seller's Global Sales

|kEUR |2017 |2016 | |Seller's Sales of |Gross Sales of |Cost of Goods sold |Gross Margin |Gross Sales of |Cost of Goods Sold |Gross Margin | |Finished Goods |Finished Goods |FOB | |Finished Goods |FOB | | |Worldwide | | | | | | | |Shoes |[ ] |[ ] |[ ]% |[ ] |[ ] |[ ]% | |Small Leather Goods |[ ] |[ ] |[ ]% |[ ] |[ ] |[ ]% | |Leather Goods |[ ] |[ ] |[ ]% |[ ] |[ ] |[ ]% | |Ready-To-Wear |[ ] |[ ] |[ ]% |[ ] |[ ] |[ ]% | |Other |[ ] |[ ] |[ ]% |[ ] |[ ] |[ ]% | |TOTAL |[ ] |[ ] |[ ]% |[ ] |[ ] |[ ]% |

Seller's Sales to the Importer

|kEUR |2017 |2016 | |Seller's Sales of |Gross Sales of |Cost of Goods sold |Gross Margin |Gross Sales of |Cost of Goods Sold |Gross Margin | |Finished Goods |Finished Goods |FOB | |Finished Goods |FOB | | |Worldwide | | | | | | | |Shoes |[ ] |[ ] |[ ]% |[ ] |[ ] |[ ]% | |Small Leather Goods |[ ] |[ ] |[ ]% |[ ] |[ ] |[ ]% | |Leather Goods |[ ] |[ ] |[ ]% |[ ] |[ ] |[ ]% | |Ready-To-Wear |[ ] |[ ] |[ ]% |[ ] |[ ] |[ ]% | |Other |[ ] |[ ] |[ ]% |[ ] |[ ] |[ ]% | |TOTAL |[ ] |[ ] |[ ]% |[ ] |[ ] |[ ]% |

On an aggregate basis, the figures show that in both years, the Seller earned slightly higher profits (i.e., between one and four percentage points) on its sales of finished goods to the Importer than it did in its sales of finished goods worldwide. Regarding the five categories of goods, the figures show that in both 2016 and 2017, the Seller earned higher gross margins in its sales to the Importer on shoes, small leather goods, and ready-to-wear. The gross margins for leather goods were identical. The figures for the "other" category are within 1-2 percentage points, with the Seller earning a slightly higher gross margin in worldwide sales in 2017 and a slightly higher gross margin in sales to the Importer in 2016.

As noted above, the TPS mandates that all of the Seller's distributors operate with an overall gross margin of [ ]%. The financial figures provided for fiscal years 2016 and 2017 indicate that, both at the global level and the U.S. level, the Seller operated with gross margins within 3 percentage points of that target. You further observe that the margins for all of the product subcategories, as well as the overall total, were remarkably consistent between the two years, with only one product category differing by as much as five percentage points. Therefore, you argue that these "strong gross margins" further compel the conclusion that the Seller's prices are settled at arm's length because it allows the for recovery of all costs plus an appropriate profit.

ISSUES:

1. Whether the imported goods are subject to restrictions on disposition or use that precludes the use of the transaction value method;

2. Whether certain service fees associated with retail operations in the United States are part of the price actually paid or payable for the imported goods; and

3. Whether the related-price price is acceptable as transaction value for the imported goods.

LAW AND ANALYSIS:

Merchandise imported into the United States is appraised for customs purposes in accordance with U.S. value law under section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a). The primary 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 amounts for certain statutorily enumerated additions. 19 U.S.C. 1401a(b)(1).

Restriction affecting value; 19 U.S.C. 1401a(b)(2)(A)(i)

19 U.S.C. 1401a(b)(2) states, in relevant part:

A) The transaction value of imported merchandise determined under paragraph (1) shall be the appraised value of that merchandise for the purposes of this chapter only if -

i) there are no restrictions on the disposition or use of the imported merchandise by the buyer other than restrictions that - I) are imposed or required by law. II) limit the geographical area in which the merchandise may be resold, or III) do not substantially affect the value of the merchandise;

(ii) the sale of, or the price actually paid or payable for, the imported merchandise is not subject to any condition or consideration for which a value cannot be determined with respect to the imported merchandise;

(iii) no part of the proceeds of any subsequent resale, disposal, or use of the imported merchandise by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment therefor can be made under paragraph (1)(E); and

(iv) the buyer and seller are not related, or the buyer and seller are related but the transaction value is acceptable, for purposes of this subsection, under subparagraph (B).

Emphasis added.

In your submission, you acknowledge precedent in which CBP held that transaction value was inapplicable because the foreign seller retained a right to withdraw and stop the sale of certain merchandise. See Headquarters Ruling ("HQ") H038381, dated November 17, 2014. In that case, a distribution agreement contained provisions granting the seller an unqualified right to withdraw certain products from distribution and to prevent their sale, notwithstanding the fact that the importer purportedly owned (i.e., held title to) the goods. As a result, CBP found that these contractual terms constituted a restriction on disposition or use of goods that substantially affected the value of the goods. Therefore, in accordance with 19 U.S.C. 1401a(b)(2)(A)(i), CBP concluded that the transaction value method was inapplicable.

We agree that the lack of a binding distribution agreement containing contractual clauses allowing the seller an unqualified right to control the resale of the goods in the United States is one factor that distinguishes this case from HQ H038381. Here, the Seller provides "retrieval dates" for its products, which you characterize as "recommendations" about when certain products should be removed from the shelves in retail stores. Such recommendations are consistent with the Seller's interests in optimizing the stores' sales and clearing space for launches of new, upcoming products. Moreover, the non-exhaustive table of 186 products that continued to be sold in the United States after the retrieval date specified by the seller in 2017 demonstrates the non-binding nature of retrieval dates and the fact that they are indeed recommendations, rather than types of legally enforceable obligations considered in HQ H038381. As a result, the retrieval dates do not constitute a restriction on disposition or use of the goods under 19 U.S.C. 1401a(b)(2)(A)(i).

Similarly, the fact that Seller and its subsidiaries do not engage in any outlet store or discounted retail activities also does not constitute a restriction on disposition or use of the goods that precludes the application of the transaction value method. The meaning of the term "restrictions" as it applies to Article 1.1(a)(iii) of the WTO Customs Valuation Agreement, which is the basis for 19 U.S.C. 1401a(b)(2)(A)(i)(III), is discussed in Commentary 12.1 issued by the Technical Committee on Customs Valuation ("TCCV"). The TCCV issues instruments on the interpretation of the WTO Customs Valuation Agreement that, although not binding upon member countries, provide instructive guidance. Commentary 12.1 states, in relevant part:

An example of restrictions as to the disposition or use of the goods which do not substantially affect the value of the goods is mentioned in the Interpretative Notes to Article 1, i.e. where a seller requires a buyer of automobiles not to sell or exhibit them prior to a fixed date which represents the beginning of a model year. Another such example would be where a manufacturing firm of cosmetics imposes through contractual provisions a requirement on all importers that its product be sold to consumers exclusively through individual sales representatives undertaking house-to-house sales since its whole distribution system and advertising approach is based on this kind of sales effort.

On the other hand, a restriction which could have a substantial effect on the value of the imported goods is one that is not usual in the trade concerned.

Here, even assuming that a "restriction on disposition or use" could be inferred from a business practice, rather than imposed by the seller in a binding legal agreement, the practice of Retail Groups returning all unsold merchandise to the Importer, with a small percentage sold to employees via staff sale, is "usual in the trade concerned"-namely, the luxury fashion market. See, e.g., Snapshot: Intellectual Property for Fashion Goods in USA, available at: https://www.lexology.com/library/detail.aspx?g=593bc43c-c9b7-45f0-97ea-cd8d44b68a2b ("Luxury goods derive value in part from scarcity and brand reputation; therefore, exclusivity in distribution channels and brand protection are key.") Indeed, the Seller's "whole distribution system and advertising approach" is based on selling its goods exclusively through its global network retail stores and websites. Therefore, consistent with the nonbinding guidance in TCCV Commentary 12.1, no restriction on disposition or use can be inferred from the Seller's businesses practices in this case.

Service Fees

As stated above, transaction value is defined as "the price actually paid or payable for the merchandise when sold for exportation to the United States," plus amounts for certain statutorily enumerated additions. 19 U.S.C. 1401a(b)(1). Under 19 U.S.C. 1401a(b)(4)(A), the term "price actually paid or payable" means:

the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.

Here, you argue that the service fees should not be dutiable as part of the price actually paid or payable because the fees result from an agreement between the Seller and the Retail Groups, rather than the Importer. For support, you cite to the Services Agreement, dated January 1, 2012, which was executed between the Seller and one of the domestic Retail Groups. However, you also acknowledge that the fees "pass through" the Importer, meaning that the Retail Groups pay the Importer the full amount of the service fees billed by the Seller, which then passes them along to the Seller. As the service fees at issue flow from the Retail Groups to the Importer and ultimately on to the Seller, the question is therefore whether the payments are part of the "total payment . . . for imported merchandise."

Regarding the scope of the term "total payment," in Luigi Bormioli Corp., Inc. v. United States, 304 F.3d 1362, 1367 (Fed. Cir. 2002), the Court of Appeals for the Federal Circuit explained that:

We have interpreted the term "total payment" in the "price actually paid or payable" definition to be "all-inclusive." Generra Sportswear Co. v. United States, 905 F.2d 377, 379 (Fed. Cir. 1990). Therefore, we have held that the "price actually paid or payable" includes payments made by the buyer to the seller in exchange for merchandise even if the payment "represents something other than the per se value of the goods." Id. at 379-80 (holding that quota payments were properly included in the "price actually paid or payable"). This interpretation is consistent with the broad definition of "price actually paid or payable" adopted by the GATT.

Although the total payment is "all inclusive," it does not encompass payments that are totally unrelated to the imported merchandise. In Chrysler Corp. v. United States, 17 C.I.T. 1049 (1993), the importer challenged Customs' decision to include "shortfall" and "special application fees" in the price actually paid or payable for imported automobile engines. The contract between the importer and the seller specified that the fees were payable if the importer failed to meet purchasing requirements. The Court found that the obligation to pay both fees arose from the plaintiff's failure to purchase engines and noted that "[a]n expense arising from the failure to purchase certain merchandise is not a component of the price paid for the acquisition of other products." As a result, the expenses were not part of the price actually paid or payable for the imported engines.

However, as the Court of Appeals for the Federal Circuit noted in Generra, 905 F.2d 377:

Congress did not intend for the Customs Service to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, are for the merchandise or for something else. As we said in Moss Mfg. Co. v. United States, 896 F.2d 535 (Fed. Cir. 1990), the "straightforward approach [of section 1401a(b)] is no doubt intended to enhance the efficiency of Customs' appraisal procedure; it would be frustrated were we to parse the statutory language in the manner, and require Customs to engage in the formidable fact-finding task, envisioned by [appellant].

Thus, if the importer seeks to exclude payments to the seller from the "total payment . . . for [the] imported goods," it carries the burden of establishing that the payments are totally unrelated to the imported merchandise. See, e.g., HQ W563404, dated March 3, 2006.

Whether a payment is "for imported merchandise" (and thus included in the price actually paid or payable) or totally unrelated to the imported merchandise (and thus excluded from the price actually paid or payable) depends on the nexus between the payment and the imported goods. See VWP of Am. v. United States, 25 C.I.T. 1056, 1062 (2001) ("Whether a particular [payment] provokes liability for customs duties depends upon its relevance to importation."). In VWP, the CIT reviewed a three-tiered transaction in which the Canadian parent company Victor Woolen Product, Ltd. of Canada ("VWC") sold woolen fabrics to its U.S. subsidiary Victor Woolen Products of America, Inc. ("VWPA"), which in turn sold the fabrics to U.S. customers. The U.S. Court of International Trade ("CIT") examined whether certain fees should be added to the price actually paid or payable for the merchandise. The CIT described the fees as follows:

The "charge back" expenses included customer and clerical services (communication and telephone expenses, office rent, stationary [sic], and accounts receivable insurance), management fees, and data processing. The plaintiff asserts that VWPA's financial statements, audited by an internationally recognized accounting firm, establish that these expenses were billed monthly by VWPC to VWPA and paid separately from the invoices for the imported fabrics.

163 F. Supp. 2d at 650.

The CIT observed that:

At a minimum, it would appear that the general interpretation of Customs is that characterization of an expense does not determine its dutiability, a position with which this Court would agree: the inquiry should focus on whether the expenditure proximately results in or is connected in some way to importation.

See id. at 654.

Examining these fees and the relevant precedent, the CIT concluded that "[c]onceptually, the economic 'value' of merchandise in its state as imported would include all matters which accrue in advance and are incidental to placing it into the international stream of commerce." Id. at 653. The CIT concluded that since these charges arose post-importation, that they could not be considered part of the price actually paid or payable.[2]

Consistent with these cases, CBP rulings examine the nature of the additional payments, whether the amount of the payments varies according to the value or quantity of merchandise, the timing and frequency of the payments, and whether the payments add value to the imported goods. See, e.g., HQ H242894, dated December 4, 2013. Accordingly, CBP has generally held that service fees that are entirely separate from the amounts paid for the imported merchandise are not part of the price actually paid or payable. For example, in HQ 545998, dated November 13, 1996, CBP held that a "co-promotion" fee that the importer paid to a related licensor was not part of the "total payment . . . for imported merchandise." In that case, the importer purchased an active pharmaceutical ingredient from an unrelated company in Belgium. Upon importation, the importer combined the product with other ingredients of U.S. origin to produce Zyrtec. Among the five agreements that the buyer entered into was a "co-promotion" agreement which permitted the related licensor to assist the importer in marketing Zyrtec in the United States by making sales presentations to licensed prescribers of medications. In exchange for its marketing and promotion efforts in the U.S., the licensor earned a "co-promotion" fee in accordance with a formula in the contract.

CBP agreed with the importer's argument that the co-promotion fees were not payments associated with the sale for exportation of the imported merchandise. The evidence indicated that the co-promotion fees resulted from specific undertakings of the licensor in promoting the sale of the product in the United States and that the amount the licensor received under the agreement directly related to those specific undertakings. As a result, the price actually paid or payable was "entirely separate from any amounts that the importer/buyer pays to the licensor as a result of the latter's participation in marketing events." Thus, even though the payments were made to a party related to the seller, they were not part of the price actually paid or payable for the imported merchandise.

Similarly, in HQ H239496, dated March 13, 2015, CBP held that an "administrative fee" that the importer paid to the related seller was not part of the price actually paid or payable for imported jewelry. The administrative fee, which was calculated as a percentage of net sales, was designed to compensate the seller for marketing, sales support, administration, information technology, finance, legal, human resources, and logistics arrangements. CBP agreed with the importer that the administrative fee was not part of the price actually paid or payable because the fee was not connected to the imported merchandise, but was paid for specific undertakings of the seller in the United States. See also HQ 543512, dated April 9, 1985 (holding that fees paid by the buyer to the related seller for accounting, financing, planning, management, marketing, and clerical services "were not tied to the sale of exportation of any specific merchandise" and thus were not "for" the imported merchandise).

In HQ H302184 dated December 7, 2021, the importer paid its related parent company, on a cost-plus-10% basis, for the following services to "assist the Importer in the proper and efficient conduct and control of its business" in the United States: business development and marketing, finance and legal, human resources, and product management. In holding that the fees were not dutiable as part of the price actually paid or payable for imported goods, we emphasized that the amount that the importer paid for the services did not appear to be tied to the sale for exportation of the merchandise. The service agreement did not mention products to be purchased and imported or create any obligation for the importer to purchase goods from the parent company. Accordingly, the service fee was designed to compensate the parent company for providing specific undertakings on behalf of the importer in the United States. The payments therefore were not "for imported merchandise" under 19 U.S.C. 1401a(b)(4)(A).

Here, the information indicates that the Seller provides numerous services to the Retail Groups in order to enhance their operations in the United States, including merchandising, advertising, sales and marketing, supply chain and logistics, information systems, human resources, financial assistance, and administrative and risk management services. We note that none of these services relate to the production of any merchandise. Instead, the fees are paid to assist the Retail Groups in their efforts to resell goods-both imported and domestically produced-in the United States. The fees become payable not when goods are purchased or imported, but when the Seller provides the agreed-upon services in the United States. Therefore, the fees do not "proximately result in" importation, nor are they "connected in some way to importation." See VWP at 654.

The separate nature of the fees is further supported by the calculation methodology, which depends on the cost of providing the service plus a markup, rather than the value of any merchandise when sold for exportation, acquired domestically, or resold in the United States. The lack of nexus between the obligation to pay the service fees and the sale for exportation of imported goods is further supported by the fact that the fees remain payable even if no goods are purchased or imported, as was the case for a period of time during the Covid-19 pandemic. As in the CBP decisions cited above, the fees compensate the seller for specific undertakings in the United States that are unrelated to the production or sale for export of any specific imported goods. Accordingly, we find that they are not payments "for imported merchandise" within the meaning of 19 U.S.C. 1401a(b)(4)(A) and are not part of the price actually paid or payable.

Acceptability of Price Actually Paid or Payable as Transaction Value

Having established that the imported goods are not subject to restrictions on disposition or use that preclude the use of the transaction value method and that the service fees are not part of the price actually paid or payable, the next issue is whether the price actually paid or payable between the related Importer and Seller is acceptable as transaction value. While the fact that a buyer and seller are related is not in itself grounds for regarding transaction value as unacceptable, where CBP has doubts about the acceptability of the price and is unable to accept transaction value without further inquiry, the importer is given the opportunity to supply such further detailed information as may be necessary to support the use of transaction value. See 19 C.F.R. 152.102(l)(1)(i); see also VWP of Am., Inc. v. United States, 175 F.3d 1327, 1337 (Fed. Cir. 1999) ("A sale by a corporation to 'a subsidiary' cannot serve as the basis for transaction value unless (i) the parent corporation and the subsidiary properly qualify as 'persons who are related' under 19 U.S.C. 1401a(g)(1)(F) and (ii) the acceptability of the sales price as a transaction value is established by one of the methods set forth in 19 U.S.C. 1401a(b)(2)(B).").

The importer may substantiate the use of transaction value in a related-party transaction if it satisfies one of 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). More specifically,

Section 1401a(b)(2)(B) establishes two methods for determining whether the value of a transaction between a related buyer and seller may serve as the basis for appraising imported merchandise. Under the first method, if an examination of the circumstances of the sale of the imported merchandise indicates that the relationship between the related parties did not influence the price, the transaction value is acceptable for purposes of 1401a(a)(1)(A). The second method involves comparing the transaction value between the related buyer and seller to determine whether it "closely approximates" either the transaction value of identical or similar merchandise in sales to unrelated buyers in the United States or the deductive or computed value for identical or similar merchandise. See 19 U.S.C. 1401a(b)(2)(B)(i-ii). These two methods for determining the acceptability of the value of a transaction between related parties are intended to "insure that a particular transaction is bona fide and 'at arm's length' before the transaction value standard will apply." See S. Rep. No. 96-249, at 115, 1979 U.S.C.C.A.N. at 501.

VWP, 175 F.3d at 1335.

Here, no information regarding test values has been submitted or is available. Consequently, the circumstances of the sale approach must be used to determine the acceptability of transaction value.

Under the circumstances of the sale approach, the transaction value between related parties will be considered acceptable if the parties buy and sell from one another as if they were unrelated, meaning their relationship did not influence the price actually paid or payable. See e.g., HQ H032883 dated March 31, 2010. All relevant aspects of the transaction are analyzed including: (1) the way the buyer and seller organize their commercial relations, and (2) the way that the price was determined. Id.; see also 19 C.F.R. 152.103.

The three examples to demonstrate that a relationship did not influence the price under 19 C.F.R. 152.103(l) are: (i) the price was settled in a manner consistent with the normal pricing practices of the industry in question; (ii) the price was settled in a manner consistent with the way the seller settles prices for sales to buyers who are not related to it; or (iii) the price is adequate to ensure recovery of all costs plus a profit that is equivalent to the firm's overall profit realized over a representative period of time in sales of merchandise of the same class or kind.

Transfer Pricing Study

CBP has long held that the existence of a transfer pricing study does not, by itself, obviate the need to examine the circumstances of the sale to determine whether a related-party price is acceptable. See, e.g., HQ 546979, dated August 30, 2000. Even so, information provided to CBP in a transfer pricing study may be relevant in examining circumstances of the sale, and such information will vary in probative value depending on the details set forth in the study. See, e.g., HQ 548482, dated July 23, 2004.

CBP also considers whether the products sold by the comparable parties in a transfer pricing study are similar to the merchandise sold by the tested entity. CPM, which is applied in the TPS provided here, compares the profitability of the related party to the profitability of companies that are functionally comparable (i.e., companies that undertake similar functions and risks), and thus has little similarity to the customs methods in 19 C.F.R. 152.103, which require product similarity.

In this case, the November 1993 TPS provided for our review states that Seller sets prices charged to related entities using the resale price approach. Under this approach, the calculation of the FOB transfer price from the seller under the resale price method and its corresponding retail price is: Seller's FOB price (in foreign currency) = .[ ] x retail price including sales tax (in foreign currency). Accordingly, all of the Seller's distributors operate with the same gross margin-namely, [ ]%.

However, as stated the Seller's TPS, "for purposes of the CUP and RP methods, the scope of this study did not permit the comparability analysis that would be necessary to rely on either of these methods as a best method." As explained above, the search for comparables that sell "luxury goods" similar to those of the Seller resulted in three results. However, as the data available for any one of the companies was found to be insufficient for purposes of applying the CUP or RP methods, "the companies together as a comparable company sample allowed for the use of the CPM to approximate an arm's length price." The TPS concludes that the transactions were conducted at arm's length for tax purposes because "the Seller's "1989 to 1991 average performance compared favorably to the operating margins of comparable companies."

Although the TPS contains useful information about how the Seller sets prices with related entities, the profitability figures used for the comparables are more than 30 years old. Therefore, even assuming that the Seller could establish that the comparables selected for the study sell similar products and that the CPM-based TPS otherwise satisfied the requirements for use in the customs context, the information presented in the report sheds little light on whether the Seller is currently transacting at arm's length. The TPS is therefore inadequate, by itself, to establish that prices set under the Seller's transfer pricing policy have not been influenced by the relationship.

Normal Pricing Practices of the Industry in Question - Industry Benchmarking Analysis

As indicated in 19 C.F.R. 152.103(l)(i), if it can be shown that the price in question was settled in a manner consistent with the normal pricing practices of the industry in question, this will demonstrate that the price has not been influenced by the relationship. CBP precedent has established that studies of industry pricing practices may have probative value in this regard. See, e.g., HQ H029658, dated December 8, 2009. However, CBP has emphasized that the importer must present objective evidence of how prices are set in the relevant industry in order to establish the "normal pricing practices of the industry" in question, and present evidence that the transfer price was settled in accordance with these industry pricing practices. See, e.g., HQ 547672, dated May 21, 2002. The pricing practices must relate to the industry in question, which generally includes the industry that produces goods of the same class or kind as the imported merchandise. See HQ 546998 dated January 19, 2000; and HQ 548095, dated September 19, 2002. CBP does not consider the industry in question to consist of other functionally equivalent companies if those companies do not sell goods of the same class or kind. See HQ 548482, dated July 23, 2004.

With respect to the pricing practices of the entire industry, the burden of proof lies with the importer to establish that its pricing is consistent with that of the industry. In prior cases where we have accepted the way in which the importer sets its prices, the importer has submitted evidence that its prices and methodology are in accordance with that of the industry. See, e.g., HQ H029658; HQ H037375, dated December 11, 2009. In HQ H029658, for example, the importer submitted a paper, prepared by their accountants, that detailed pricing practices in the automotive industry. See HQ H029658. The paper indicated that pricing in the industry is essentially "market driven MSRP," meaning that the end consumer determines the actual price they will pay for the vehicles they purchase. This end price takes into account the dealer's return and the distributor's return to cover its cost of distribution to the dealers. Any remaining profit or loss goes back to the parent company (manufacturer). Although CBP highlighted that information in the report was "not entirely objective," it acknowledged that vehicle pricing at all levels is based on market-driven MSRP. Accordingly, the paper on the pricing practices was one "useful consideration" in examining whether the relationship between the buyer and seller had influenced the price.

Here, in contrast, the PwC report does not indicate whether the Seller's method of setting prices (i.e., FOB price (in foreign currency) = .[ ] x retail price including sales tax (in foreign currency) is a normal practice in the relevant industry. Instead, the report analyzes the financial results observed in the tailored luxury industry benchmarking set. This information generally shows that the Seller's observed range of return on sales was within the range of results in each benchmarked set. However, based on the information presented in the report, we have no way to determine whether the manner in which the Seller sets its prices is in line with the normal pricing practices of the industry. All Costs Plus Profit

To explain the "all costs plus a profit" test, Interpretative Note 3, at 19 C.F.R 152.103(l)(1)(iii) states as follows:

If it is shown that the price is adequate to ensure recovery of all costs plus a profit which is equivalent to the firm's overall profit realized over a representative period of time (e.g., on an annual basis), in sales of merchandise of the same class or kind, this would demonstrate that the price has not been influenced.

An important consideration in the "all costs plus a profit" method is the "firm's" overall profit in sales of merchandise of the same class or kind. In applying the "all costs plus a profit" test, CBP normally considers the "firm" to be the parent company. 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 in sales of merchandise of the same class or kind. See HQ 546998, dated January 19, 2000. In this case, the relevant "firm" is Seller, which is the parent company to the Importer and other related entities that distribute its merchandise around the world. Although the CBP regulations do not define "equivalent profit," if the profit that the seller earns in a related-party transaction equals or exceeds its overall profitability in sales of the same class or kind, the purchase price would not be artificially low for Custom's purposes. See, e.g., HQ H106603, dated July 25, 2011; HQ H065015, dated April 14, 2011; and, HQ H065024, dated July 28, 2011.

Further, the CBP regulations do not define what type of profit should be considered. However, CBP usually considers operating profit because it is a more accurate measure of what the company actually earns on sales once associated expenses have been paid. See, e.g., HQ H037375. Nevertheless, CBP has considered gross profit in certain circumstances. For example, CBP has considered gross profit where, as here, only gross profit information was provided for the relevant period. See HQ H235527, dated August 4, 2015. Therefore, in analyzing whether the "all costs plus a profit" test has been satisfied, we will use the gross profit information provided.

In deciding whether the "all costs plus a profit" test has been satisfied, we must consider whether the Seller's overall profits that are used as a comparison were calculated from sales of merchandise of the same class or kind. See 19 C.F.R. 152.103(l)(1)(iii). Merchandise of the "same class or kind" means "merchandise (including, but not limited to, identical merchandise and similar merchandise) within a group or range of merchandise produced by a particular industry or industry sector." 19 C.F.R. 152.102(h).

For this ruling request, the Importer provided sales and gross margin figures for both the Seller's worldwide sales and the Seller's sales to the Importer in 2016 and 2017. The figures present both the Seller's overall gross margins in total sales to these entities as well as the Seller's gross margins earned on five separate categories of goods: (1) shoes; (2) small leather goods; (3) leather goods; (4) ready-to-wear; and (5) other. On an aggregate basis, the figures show that in both years, the Seller earned slightly higher profits (i.e., between one and four percentage points) on its sales of finished goods to the Importer than it did in its sales of finished goods worldwide. Although the fact that the Seller earns slightly higher gross margins in its sales to the Importer generally suggests that the relationship has not resulted in artificially low prices, these figures are insufficient by themselves to satisfy the "all costs plus profit" test because they are not specific to sales of "goods of the same class or kind."

The profitability figures provided for the five categories of goods gives a more specific sense of the gross margins that the Seller earns across the range of goods that it sells. Those figures show that in both 2016 and 2017, the Seller earned higher gross margins in its sales to the Importer on shoes, small leather goods, and ready-to-wear. The gross margins for leather goods were identical. The figures for the "other" category are within 1-2 percentage points, with the Seller earning a slightly higher gross margin in worldwide sales in 2017 and a slightly higher gross margin in sales to the Importer in 2016.

While this segmented profitability information also suggests that the relationship between the Seller and the Importer has not resulted in artificially low prices across its product range, it likewise is insufficient to satisfy the "all costs plus profit" test because the categories do not represent "goods of the same class or kind." Most importantly, the "other" category would presumably include items such as jewelry, fashion accessories, and books-goods which cannot be construed to be "merchandise (including, but not limited to, identical merchandise and similar merchandise) within a group or range of merchandise produced by a particular industry or industry sector." See 19 C.F.R. 152.102(h). As no information was provided about which specific goods were included in the calculations for each category, we are unable to conclude that these categories align with the definition of "same class or kind." Nonetheless, as with the overall profitability figures, the gross margins earned in each category provide useful information.

Totality of the Circumstances

Even when the evidence presented does not fall strictly within a single illustrative example specified in 19 C.F.R. 152.103(l)(1)(i)-(iii), CBP may conclude, base on the totality of the evidence, that the buyer and seller's relationship did not affect the price. In HQ H029658, discussed above, the Importer provided various evidence to show that the prices were at arm's length, including: (1) a detailed description of its sales process and price negotiations; (2) a bilateral APA that was approved by the IRS (the Importer was a tested party under the APA, with CPM chosen as the best method to evaluate inter-company transactions); and, (3) a paper, prepared by the Importer/Buyer's accountants, which provided details with respect to the pricing practices in the automotive industry. The evidence presented by the Importer did not fall strictly within a single illustrative example, specified in 19 C.F.R. 152.103(l)(1)(i)-(iii), such as the normal pricing practices of the industry. Nevertheless, taken together, the documents provided by the Importer assisted CBP in reaching its conclusion that the relationship of the parties did not influence the price.

Similarly, in HQ H228298, dated June 3, 2014, the importer asserted that its transfer pricing methodology, which was based on consistent U.S. list prices and a bilateral APA approved by the IRS, met the requirements of the circumstances of the sale test. The importer provided evidence including detailed pricing processes, a relevant report on the machine tool industry prepared by Ernst & Young LLP, and the bilateral APA, to support its claim that the buyer and seller's relationship did not influence the price. Although the comparable companies in the APA did not sell merchandise of the same class or kind of the importer and the information provided did not fall strictly under the illustrative examples in 19 C.F.R. 152.103(l)(1)(i)-(iii), CBP held that the relationship had not influenced the price. See also HQ H219515, dated October 11, 2012.

Taken in isolation, each of the three main pieces of evidence that the Importer has provided to support the arm's-length nature of the transactions is, by itself, insufficient to establish that the relationship has not influenced the price. First, as discussed above, the TPS applies the CPM, which generally has the least relevance for customs valuation purposes, and the profitability figures used have not been updated in over 30 years. Second, the industry benchmarking analysis does not establish that the Seller's method of setting prices is a normal practice in the relevant industry. And third, the profitability figures provided for the Importer and its parent company were not broken down into appropriate categories for purposes of the all-costs-plus-profit test.

Even so, each of these three pieces of evidence has probative value in our analysis of whether the relationship has influenced the price. Despite the shortcomings described above, the TPS establishes that the Seller has maintained a consistent method of setting prices to its related affiliates for over 30 years. The industry study shows that the Seller's observed range of return on sales was within the range of results in each benchmarked set. Finally, the profitability figures for the Importer and the Seller generally show that the Seller earned very similar, and in many cases higher, gross margins in its sales to the Importer than it did in its worldwide sales across five different categories of goods.

Therefore, taken together, even though none of the information provided strictly falls under the three illustrative examples under 19 C.F.R. 152.103(l)(1)(i)-(iii), we find that the sales price will not be considered influenced by the relationship for purposes of the circumstances of the sale test, based on the totality of the information considered and our review and examination of all relevant aspects of the transaction, including the way in which the Importer and the Seller organize their commercial relations and the way in which the price in question was arrived at. As a result, we hold that transaction value is the proper method of appraisement for the related-party import transactions.

HOLDING:

The imported goods are not subject to restrictions on disposition or use that preclude the use of the transaction value method. Furthermore, the fees associated with the with retail operations in the United States are not part of the price actually paid or payable for the imported goods. Finally, the related-party price is acceptable as transaction value for the imported goods.

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 R. Brenner, Chief
Valuation and Special Programs Branch

-----------------------
[1] According to a USA Competition Pricing Analysis provided for our review, U.S. business teams from both the Importer and the Retail Groups prepare an analysis of U.S. competitor pricing four times per year. The analysis includes a "grid scale" comparing the prices of specific products offered for sale by the Seller to similar products offered by competitors. When discussing prospective retail prices with the Seller, both the Importer and the Retail Groups use the pricing grid to ensure that retail prices are competitive with the market.
[2] We note that the CIT subsequently considered whether the charges could be considered proceeds under 19 U.S.C. 1401a(b)(1)(E). The proceeds provision is inapplicable here because the service fees do not result from the subsequent resale, disposal, or use of the merchandise. Instead, they result from specific services that the Seller provides to the Retail Groups (on a cost-plus basis), which do relate to any specific purchase or importation of merchandise. See, e.g., HQ H302184 dated December 7, 2021.