H327987

HQ H327987 June 24, 2024 OT:RR:CTF:VS H327987 AMW CATEGORY: Valuation Field Director Office of Trade Trade Regulatory Audit San Francisco Field Office 555 Battery Street San Francisco, CA 94111 c/o Ziara Rever, Senior Auditor RE: Internal Advice; Related Party Transaction; Exercise Equipment; Computed Value; 19 U.S.C. § 1401a(e) Dear Field Director: This is in response to your memorandum submitted October 19, 2022, in which you request internal advice concerning the proper method of appraisement for various models of imported exercise and fitness products. The importer has requested confidential treatment for the information contained in its submission, which includes certain identifying information, as well as for prices, costs, and profit figures contained in their submissions. Inasmuch as the request conforms to the requirements of 19 CFR §177.2(b)(7), the company's request for confidentiality is approved. The information contained within brackets and all attachments to the request, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling FACTS: [ ] (“the importer”) is a U.S. importer and distributor of fitness equipment and miscellaneous components. The importer/company was formed by the founder [ ]. The importer is legally owned by [ ] (the “trust”), which was established with funds from the founder’s former wife, [ ]. The beneficiaries of the trust are the founder and their children. The trust is controlled by the Trustee, [ ]; however, the founder is the Chairman of the importer’s Board of Managers, which is functionally equivalent to a board of directors. The importer is required to purchase all goods from a Chinese entity, [ ] (the “manufacturer”), except for consumables or readily available items, such as nuts, bolts, washers, and chains. The manufacturer is owned by the founder but is run separately and has separate financial and profit and loss statements. The manufacturer is the importer’s primary supplier, comprising over 90 percent of its total imports. The importer purchases merchandise from the manufacturer through a related trading intermediary, [ ] (the “intermediary”). The intermediary is a separate company registered in the British Virgin Islands and located in Hong Kong; it is also owned by the founder, who serves as Chairman of the Importer’s Board of Managers and owns the manufacturer. In purchasing the subject merchandise, the importer places purchase orders with the intermediary, which then transfers them to the manufacturer. The intermediary then processes and transfers payments by the importer to the manufacturer as a trading intermediary. During the audit, the importer described to CBP that the intermediary serves as a pass-through entity that does not take title of the merchandise. (Other sources in the record indicate that the intermediary possibly takes “flash title” of the merchandise during the transactions.) The importer previously used a different intermediary, [ ], in the same manner. Neither intermediary was involved in any price negotiation. All technical discussions instead occur between the importer and manufacturer. Nevertheless, all three parties share common ownership that meets the definition of “related parties” pursuant to 19 U.S.C. § 1401(g)(l). U.S. Customs and Border Protection’s (“CBP”) Trade Regulatory Audit (“Regulatory Audit”) has conducted two audits related to the importer. First, CBP audited [ ], a former subsidiary of the importer. The audit report, issued on June 2, 2014, identified several areas of concern, including the former subsidiary’s [ ] use of transaction value as a method of appraisal for related party transactions. CBP informed the importer of the initiation of a follow-up audit on June 27, 2017. Among other issues, this audit examined the basis of appraisement for entries made by the importer from January 1, 2010, through December 31, 2017. Prior to the audit period, as noted above, the importer had entered the subject merchandise utilizing the transaction value based upon the intermediary’s FOB invoice value. During the audit period, Regulatory Audit communicated extensively with the importer regarding the appropriate method of appraisal for the imported merchandise. At various times, the importer advocated for the use of transaction value, based either on the transaction between itself and the manufacturer or between itself and the intermediary. On April 10, 2018, the importer, through its former counsel, notified CBP that transaction value could not be used as the method of appraisement “due to inability to demonstrate that the relationship between the buyer and seller [the importer and manufacturer] did not affect the price.” Specifically, the importer referenced the factors outlined in 19 CFR § 152.103(j)(1)(iv). With respect to the circumstances of the sale, the importer’s prior counsel noted that the prices charged by the manufacturer are determined via an “informal” process involving meetings between executives from the importer and manufacturer. As such, the attorney noted, an examination of the circumstances of the sale could not demonstrate that the relationship between the buyer and seller did not affect price. The importer was also unable to provide evidence that the transaction value closely approximated the transaction value of identical or similar merchandise in sales to unrelated buyers because the manufacturer had not made such sales. Finally, after conducting a deductive value study with respect to its past import transactions, the importer determined that the transaction value did not closely approximate the deductive or computed value of identical or similar merchandise. At no point does this document reference the existence or role of the intermediary. After determining that transaction value would not be an appropriate basis of appraisement, on February 21 and 22, 2018, the importer met with Regulatory Audit to propose the use of a fallback modified deductive value methodology. Specifically, the importer proposed to calculate the value based on the greatest aggregate quantity unit price less deductions for freight, insurance, profit, warehousing, and assembly. In determining like units to calculate the greatest aggregate quantity unit price, the importer proposed to group the imported merchandise into “cardio” and “strength” products, which were further divided by product line, and, if necessary, product models. Sales of like units would further be grouped by quarter (e.g., for the years 2012-2015) and the greatest quantity of products sold at a given price determined. Once the greatest aggregate quantity unit price was determined for a given product, the importer proposed to deduct freight, insurance, profit and general expenses, warehouse costs, and assembly costs. For certain costs, such as those relating to the transportation of the subject merchandise, the importer noted that it was unable to isolate the actual per-unit cost and would instead utilize a pro-rata calculation. For example, to calculate the deduction for transportation costs, the importer explained that the following steps would be taken: Locate the appropriate year of the tracking spreadsheet (e.g., 2013, 2014); Sort the tracking spreadsheet for inbound shipments into the United States only; Sort by quarter; Locate a shipment that has the desired SKU, pull the house bill of lading number and search for the relevant shipment documents in the importer’s enterprise software; Locate the packing list and arrival notice; Divide the total dollar amount listed on the arrival notice by the total cubic board meter (“CBM”) listed on the packing list; Locate the SKU on the packing list, divide the total CBM by the number of units listed on the packing list. This will provide the CBM for an individual unit; and Multiply the CBM by the freight ration to obtain a pro-rated freight value on a unit level. On November 21, 2018, Regulatory Audi

Merchandise imported into the United States is appraised for customs purposes 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 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 to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. § 1401a(b)(1). When transaction value cannot be applied, then the appraised value is determined based on the other valuation methods in the order specified in 19 U.S.C. § 1401a(a).To use transaction value, there must be a bona fide sale for exportation to the United States. However, special rules apply when the buyer and seller are related parties, as defined in 19 U.S.C. § 1401a(g). Specifically, transaction value between a related buyer and seller is acceptable only if the transaction satisfies one of two tests: (1) circumstances of sale, or (2) test values. See 19 U.S.C. § 1401a(b)(2)(B). “Test values” refer to values previously determined pursuant to actual appraisements of imported merchandise. Thus, for example, a deductive value calculation can only serve as a test value if it represents an actual appraisement of merchandise under section 402(d) of the TAA. Headquarters Ruling Letter (“HQ”) 543568, dated May 30, 1986. The purpose of these rules is to ensure the relationship between the parties does not affect the price. In this instance, the transaction involves related parties. However, no information is available concerning previously accepted test values. Consequently, the circumstances of the sale approach must be used to determine the acceptability of transaction value. Under the “circumstances of the sale” test, CBP looks for evidence showing that the parties’ relationship did not affect the price paid or payable. All releva