Bona Fide Sales Required for Use of Transaction Value, CBP HQ Rules
The use of transaction value is inappropriate when there is insufficient documentation to prove bona fide sales, CBP ruled in HQ ruling H323585, dated Aug. 31.
The ruling was in response to a request for internal advice from CBP's Machinery Center of Excellence and Expertise concerning the correct appraisement method of metal, woodworking and industrial tools, manufactured and distributed by an unnamed Chinese company and sold to a related importer through another related middleman based in Hong Kong. The manufacturer, middleman and importer are legally independent parties, and maintain their own independent financial statements and cost accounts, file their own tax returns, and operate businesses in their names. The manufacturer owns its own buildings, machinery, equipment and assets, and is responsible for all activities involved in the manufacture of the finished products, including the purchasing of raw materials. The middleman orders the imported products from the manufacturer and directs that they be delivered to the U.S.
In order to use transaction value, there must be a bona fide sale for exportation to the U.S. and special rules apply when the buyer and seller are related parties. Transaction value between a related buyer and seller is acceptable only if the transaction satisfies the circumstances of sale test or test values. In this instance, CBP said that no information was available concerning previously accepted test values, so the circumstances of the sale needed to be examined.
On behalf of the importer, PricewaterhouseCoopers (PwC) argued to CBP that the transfer prices between the manufacturer and the middleman were not influenced by their relationship because the price was adequate to ensure recovery of all costs plus a profit that is greater to the firm’s overall profit. However, CBP noted that the profit comparison must be "of merchandise of the same class or kind" and that, as a holdings company, the parent in this case holds controlling interest in the securities of other companies, and did not produce or sell goods itself. Therefore, CBP concluded that there was insufficient evidence that sales between the middleman and the manufacturer were made at arm's length.
In addition, CBP said that it was unclear whether those transactions constituted bona fide sales. PwC argued that title and risk of loss to the goods passed from the manufacturer to the middleman in accordance with FOB Port of Export INCO terms when the product was loaded onto the shipping vessel at the port of export and then passed from the middleman to the importer upon delivery to the named place of destination.
CBP reviewed the purchasing agreement between the middleman and the manufacturer, which the agency said suggested that the parties agreed that the manufacturer would maintain title and risk of loss of the imported goods until they were delivered to the U.S. CBP ruled that when the purchase order and purchasing agreement are read together, the manufacturer bore the title and risk of loss until the goods are delivered to the U.S. Therefore, CBP found that the middleman never received the title of risk of loss so there was no bona fide sale. Without a bona fide sale, CBP said, the transaction value could not be used.