H343362

H343362 May 6, 2025 OT:RR:CTF:VS H343362 AP CATEGORY: Valuation Sara Arami, Manager Customs and International Trade PwC US Tax LLP 1 N Wacker Dr. Chicago, IL 60606 RE: Prospective ruling request; First Sale Dear Ms. Arami: This is in response to your request of November 7, 2024, on behalf of your client, the U.S. importer [X], for a prospective ruling regarding the use of “first sale” transaction value appraisement for merchandise it imports into the United States. The importer has asked that certain information submitted in connection with this ruling be treated as confidential. Inasmuch as this confidentiality request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), it is approved. The information contained within brackets in italics will not be released to the public and will be withheld from published versions of this ruling letter. FACTS: [X] is a Chinese manufacturer and distributor of metal, woodworking, and industrial tools, which sells to the U.S. importer [X] through a middleman [X] based in Hong Kong. All parties to the transaction are related entities and their parent company [X] is a holding company. You have provided documentation from a completed transaction which was the subject of Headquarters Ruling letter (“HQ”) H323585, dated Aug. 31, 2022, as well as revised purchase order, purchasing agreement, supplementary terms and conditions of purchase and distribution agreement to illustrate how this multi-tier transaction will operate. The transaction begins with a purchase order from the importer to the middleman, which indicates the goods the importer wants to order, the price, and the quantities. The Incoterms will be Delivered Duty Paid (“DDP”). The port of loading will be Nanjing, China and the port of discharge will be Los Angeles, CA. The middleman will place a purchase order with the manufacturer, which specifies that the manufacturer will deliver the goods to the preferred Chinese port, the Incoterms will be Free on Board (“FOB”) Chinese port, the final destination will be [X] (importer) c/o [X] Warehouse in Missouri, and the payment terms will be “/T 120 days after receipt date.” The purchase order from the middleman states that “Nothing in this document supersedes the terms in the Purchasing Agreement between [the manufacturer] and [middleman] in the absence of a duly executed Change Order.” The Revised purchasing agreement between the middleman and the manufacturer states: 3.1 The supplier shall be responsible to transport the Products to the place designated in the purchase order in a timely manner, deliver the Products to Buyer or any designated person by Buyer, and carry out the hand-over of the Products …. 3.3 All expenses and costs for insurance, packaging, transportation, loading and unloading and all risks of damage, injury or loss of the Products prior to the arriving [i]f Products at the delivery place and delivery to Buyer or its designated person shall be borne by the Supplier … 3.4 Title to and risk of loss of products pass from supplier to buyer at the port of export unless a change order specifying alternate terms is executed. According to the revised distribution agreement between the middleman and the importer: 5.3. Shipment. All products supplied by the Principal [the middleman] shall be delivered by DDP method. Principal [middleman] shall bear logistics risks and expenses accordingly, unless a Change order specifying alternate terms is executed. Under the revised Supplementary Terms and Conditions of Purchase between the importer and middleman, “Title to and risk of loss of Products shall pass from Supplier to Buyer upon delivery to named place of destination, unless a Change Order specifying alternate terms is executed.” The Supplementary Terms and Conditions of Purchase provide for price discount and allowance: 1.5 Price Discount & allowance Supplier provides an agreed percentage of 5% defective allowance on the price quoted to Buyer in the purchase order to compensate future warranty related costs incurred by Buyer on the products sold to customers. The defective allowance percentage is negotiated and determined by both Supplier and Buyer based on actual cost incurred on product warranty costs. Compensation percentage is subject to periodical review and modification as necessary in order to provide Buyer an appropriate and arm’s length remuneration for its activates with the approval of both parties. Supplier is still required to compensate any excessive warranty costs incurred by Buyer exceeding the allowance[] granted. 2 According to the commercial invoice from the manufacturer to the middleman, the Incoterms between these parties will be FOB Shanghai or Nanjing and the port of destination will be Long Beach, CA. There are no payment terms. The invoice from the middleman to the importer will include a deduction for an allowance (“Unsaleable Merchandise allowance 5%”), ocean and insurance charges, and DDP Incoterms. The payment terms will be 200 days. The packing list from the middleman indicates that the Incoterms between the middleman and the importer will be DDP and the payment terms will be DDP 200 days. The Distribution Agreement between the Importer (distributor) and the middleman (principal) states: PURCHASE PRICE AND PAYMENTS 6.1. Purchase Price. The purchase price for the Products shall be an amount as agreed to by the Parties (the “Purchase Price”). The Purchase Price shall allow Distributor to earn an aim’s length profit as determined by appropriate benchmarks. The Purchase Prices and terms and conditions of sale shall be periodically reviewed and modified as agreed upon by the Parties during the term of this Agreement as often as may be necessary to reflect arm’s length pricing. Principal and Distributor shall calculate and, if necessary, may pay a compensating adjustment, or “true up,” as often as they determine necessary, but no less often than annually, to ensure that Distributor’s profit level is arm’s length. The Parties acknowledge that such compensating adjustments may require payments from Principal to Distributor or from Distributor to Principal. 6.2. Invoicing and Payment. Unless otherwise agreed by the Parties, Principal shall invoice Distributor for the amount of the Purchase Price when the ownership of the Products are legally transferred to Distributor in accordance with the incoterms. Distributor shall pay the full amount of the Purchase Price when payment collection from its customers is completed. Unless otherwise agreed to by the Parties, payment of any amount by either Party to the other under this Agreement shall be effected by direct bank transfer to the payee’s bank account or by debit or credit to the relevant Party’s intercompany account as notified to the payer from time to time. Any payments made pursuant to this Agreement after the due date shall bear interest from the applicable due date at the United States applicable federal rate, as determined under Section 1274(d) of the United States Internal Revenue Code of 1986, as amended. . . . 10. PRINCIPAL’S WARRANTY During the warranty period as set forth in the then-current standard warranty furnished with the Products, Principal warrants that the Products (a) shall be of merchantable quality; (b) shall be free from defects in design, materials, and workmanship; and (c) shall substantially conform with any Product specifications communicated to Distributor by Principal. If Distributor establishes a breach of the warranty, within the applicable warranty period, Principal shall bring the Product 3 into conformance with the warranty or refund the Purchase Price therefor, including freight, insurance, and other charges, to Distributor. Principal shall indemnify and hold Distributor harmless against any damages and losses resulting from the nonconformance of the Products with this warranty. The Purchasing Agreement between the Middleman and the Manufacturer states: 4.2 Payment The Supplier shall provide Buyer with 

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 4 

“price actually paid or payable for the merchandise when sold for exportation to the United States” plus certain statutory additions. 19 U.S.C. § 1401a(b)(1). The importer seeks to utilize the transaction value of the first sale between the manufacturer and the middleman. In Nissho Iwai American Corp. v United States, 16 C.I.T. 86 (1992), rev’d in part, 982 F.2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit reviewed the standard for determining transaction value when there is more than one sale which may be considered as being a sale for exportation to the United States. The case involved a foreign manufacturer, 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 for a transaction to be viable under the valuation statute, it must be a sale negotiated at arm’s length, free from any non-market influences, and involving goods clearly destined for the United States. In accordance with the Nissho Iwai decision and our own precedent, we presume that transaction value is based on the price paid by the importer. In further keeping with the court’s holding, we note that an importer may request appraisement based on the price paid by the 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