CBP Says No Fixed Terms of Payment Shows Transaction Between Related Companies Not Arm's Length

The transactions between a Sri Lankan manufacturer and a related Hong Kong middleman don't satisfy the requirements for "first sale" appraisement due to the lack of fixed terms of payments, CBP said in a Dec. 20 ruling. While CBP declined to take up the issue in an Application for Further Review, the agency did address some questions in response to an internal advice request. The goods at issue are manufactured in Sri Lanka and "the U.S. importer orders merchandise from the Sri Lanka manufacturer’s related Hong Kong middleman via the importer’s online vendor portal," CBP said. All three entities are related through common ownership.

The importer claimed to CBP "that the merchandise at issue should be appraised based upon the transaction value of the sales between the Hong Kong middleman and its related manufacturer." The importer must be able to show that a "first sale" appraisement is appropriate for transactions between related parties, CBP said. While the importer provided a large amount of evidence, "significantly, the submitted audited financial statement for the middleman states that the amounts due to related companies 'have no fixed terms of repayment,'" CBP said.

Not having "fixed terms of repayment with regard to amounts due for the purchase of goods, as reported in the financial statement, is problematic with regard to determining (1) whether there was a sale and (2) if there was a sale, whether the related parties’ transaction was a bona fide arm’s length sale," the agency said. Also, the importer provided three versions of how the transactions occurred, CBP said. "If the related parties in this case had bona fide sales, it would be expected that they would know at what point title passed from one to the other, and three versions of the transactions cast doubt on whether the parties were in an actual buyer-seller relationship."

CBP also noted that the middleman doesn't carry liability insurance. "While the choice to insure against loss is an individual business decision, in view of the equivocal nature of the terms of sale in these transactions, the failure of a middleman to insure against the possible loss of merchandise may draw into question whether the middleman actually ever truly assumed that risk," the agency said. "Based upon our review of the facts, we do not believe the requirements for 'first sale' appraisal have been met in this case," CBP said in the ruling.