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HQ W563545

January 9, 2007

RR:CTF:VSP 563545 GG


Leonard L. Fleisig, Esq.
Troutman Sanders LLP
401 9th Street, N.W.
Suite 1000
Washington, DC 20004-2134

RE: Multi-Tiered Transaction; Sale for Exportation; Transfer Pricing

Dear Mr. Fleisig:

This is in response to your ruling request dated July 6, 2006, concerning your client, XXXX, Inc. (“XXXX-US”). Your inquiry is about the possible use of middleman pricing under transaction value. As requested, we agree to keep the identity of your client confidential, but decline to conceal the nature of the imported merchandise.


XXXX-US, a United States corporation, is wholly owned by a holding company in the Netherlands. It has recently been established to import and sell certain footwear to retail stores in the United States. Other subsidiaries of the Dutch holding company will include a trading company based in Switzerland, XXXX-Switzerland, and a Spanish-based design company.

Unrelated manufacturers will manufacture the shoes in Spain and Italy and allegedly sell them to XXXX-Switzerland. Once manufactured, the shoes will either be shipped immediately to the United States or stored in warehouses in Spain or Italy for short periods of time depending on business conditions in the United States. Upon arrival in the United States XXXX-US will be the importer of record.

The manufacturers will transmit pertinent copies of any ocean bills of lading or airway bills, the commercial invoices between the manufacturers and XXXX-Switzerland, certificates of origin and packing lists. At the same time, XXXX-Switzerland will invoice XXXX-US for the imported footwear, using a transfer price between those two companies that will be determined after consultation with an outside consultant familiar with transfer pricing mechanisms. This transfer price will be set in a manner designed to conform to all United States Internal Revenue Service regulations for transfer pricing in international transactions.


Whether XXXX-US may declare the price between the manufacturer and XXXX-Switzerland as the basis of transaction value for the imported footwear.


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). For the purposes of this internal advice memorandum we have assumed that transaction value is the appropriate basis of appraisement.

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), and Synergy Sport International, Ltd. v. United States, the Court of Appeals for the Federal Circuit and the Court of International Trade, respectively, 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. Both cases involved a foreign manufacturer, a middleman, and a United States purchaser. In each case, the court held that the price paid by the middleman/importer to the manufacturer was the proper basis for transaction value. Each 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.

In accordance with the Nissho Iwai and Synergy decisions and our own precedent, we presume that transaction value is based on the price paid by the importer. In further keeping with the courts’ holdings, 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 will be the importer’s responsibility to show that the “first sale” price is acceptable under the standard set forth in Nissho Iwai and Synergy. 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, CBP set forth the documentation and information needed to support a ruling request that transaction value should be based on a sale involving a middleman and the manufacturer or other seller rather than on the sale in which the importer was a party. 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.” If such information is unavailable the ruling should so provide. T.D. 96-87 further provides that the importer must also inform CBP of any statutory additions and their amounts. If unable to do so, the sale between the middleman and the manufacturer cannot form the basis of transaction value.

The first issue to be addressed is whether the transactions between XXXX-Switzerland and the manufacturers are bona fide sales. CBP recognizes the term “sale,” as described in J.L. Wood v. United States, 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974), to be a transfer of property from one party to another for consideration. In ascertaining whether a bona fide sale has taken place between a purported buyer and seller of the imported merchandise, no single factor is determinative. Rather, the relationship is to be determined by an overall view of the entire situation, with the result in each case governed by the facts and circumstances of the case itself. Dorf International, Inc. v. United States, 61 Cust. Ct. 604, A.R.D. 245 (1968).

Several factors may indicate that a bona fide sale exists between the purported buyer and seller. In determining whether property or ownership has been transferred, CBP considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, CBP may examine whether the purported buyer paid for the goods, and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HRL 545474, dated August 25, 1995, and HRL 545709, dated May 12, 1995. You address this issue in footnote 6 of the ruling request, by first listing the factors that CBP considers in determining if a bona fide sale exists, and then indicating that XXXX-US will meet all of the requirements. No details, however, have been provided in this regard, such as when both putative buyers will assume risk of loss and obtain title. In footnote 1, you also mention that an agreement exists between XXXX-US and the manufacturers. Although we do not know the contents of the agreement, the fact that it is between XXXX-US and the manufacturers, instead of between XXXX-Switzerland and the manufacturers, raises a question as to the exact roles of both XXXX companies. There would be an expectation that XXXX-Switzerland would be the party entering into an agreement with the factories if it were truly an independent buyer/seller. The fact that XXXX-US performs this function raises the possibility that the Swiss company may not really function in that capacity. This presents a clear contrast to the situation in the ruling that you cite to support XXXX-US’s request to use the “first sale” price, Headquarters Ruling Letter (“HQ”) 545709, dated May 12, 1995. In that ruling, the fact that the middleman, as opposed to the importer, negotiated prices and terms with the factories played a significant role in CBP’s finding that a bona fide sale existed between the factories and the middleman. Absent further evidence, we are unable to conclude that XXXX-Switzerland will purchase footwear on its own behalf from the factories.

Turning next to the Nissho Iwai requirement that the factory to middleman transaction must be an arm’s length sale, there is a presumption that a transaction will meet this standard if the buyer and seller are unrelated. See T.D. 96-87, supra. You represent that in the transactions at issue XXXX-Switzerland and the factories will be unrelated. Assuming this to be correct, XXXX-USA has satisfied this aspect of the Nissho Iwai test.

The next requirement imposed by Nissho Iwai is that when the middleman purchases the goods from the factory they are clearly destined for the United States. There is a presumption that goods are clearly destined when they are shipped directly from the factory to the United States. In this case, however, the finished footwear may first go to warehouses in Spain or Italy, where they may remain for some time. Whenever goods go to an intermediate location before being shipped to the United States there is a “contingency of diversion.” See HRL 547197, dated August 22, 2000; HRL 546427, dated December 19, 1996; HRL 544450, dated November 5, 1990. The possibility of diversion is lessened when the ordered goods are custom-made for a U.S. purchaser or have other attributes that indicate that they are intended only for the U.S. market. No information has been provided regarding safeguards that may be in place to prevent diversion. Accordingly, we are unable to make a determination that the footwear is clearly destined for the United States when it is sold.

XXXX-US’s ruling request also is silent with respect to statutory additions. T.D. 96-87 requires importers seeking to use the factory to middleman price to inform CBP about any such additions. The ruling request makes reference to a related Spanish-based design company. This may indicate that assists or royalties may factor into these future transactions, either or both of which may constitute a statutory addition.

As articulated in T.D. 96-87, CBP’s decisions on the acceptability of a “first sale” price are based on the evidence presented when the ruling request is submitted. Although CBP is not precluded from asking for additional information, the notice cautions that this will not be done routinely. It also indicates that if insufficient information is provided, the claim will be denied. We have noted several deficiencies of information in our discussion above. Accordingly, we are unable to rule at this time that XXXX-US is able to appraise its imported footwear based on the “first sale” price.

It is also incumbent upon us to comment on the proposed pricing between XXXX-Switzerland and XXXX-US, since this is the transaction that will be the focus of appraisement. You indicate that the transfer price between these two related companies will be established after consultation with an outside consultant familiar with transfer pricing mechanisms. That transfer price will be set in a manner designed to conform to all U.S. Internal Revenue Service regulations in international transactions. As you are aware, a sale between a related buyer and seller must be at arm’s length for the merchandise to be appraised under transaction value. 19 U.S.C. § 1401a(b)(2)(A)(iv). To prove the arm’s length nature of the transaction, an importer has to satisfy one of two tests, otherwise known as the “circumstances of sale test” or “test values.” 19 U.S.C. § 1401a(b)(2)(B). Although IRS approval of a transfer price will satisfy that agency’s tax requirements, such approval does not automatically translate into an acceptable price for customs purposes. The importer is still required to demonstrate that the pricing structure meets one of CBP’s two tests. This requirement is discussed in several CBP rulings, for example, HQ 548482, dated July 23, 2004; HQ 548233, dated November 7, 2003; and HQ 546979, dated August 30, 2000. If the importer cannot so demonstrate, the use of transaction value will be ruled out and valuation will be based on the next available appraisement method.


On the basis of the information presented, the imported footwear may not be appraised under transaction value on the basis of the price paid by the middleman XXXX-Switzerland to the factories. Appraisement shall instead be based on the price paid by XXXX-US to XXXX-Switzerland, provided the importer can demonstrate that the transfer price is acceptable in accordance with 19 U.S.C. § 1401a(b)(2)(B).

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 Customs official handling the transaction.


Monika R. Brenner
Chief, Value and Special Programs Branch

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