Late Payment by Middleman Disqualifies Imports From First Sale Treatment, CBP Says

The ruling, HQ H343362, involves several unnamed companies: a Chinese manufacturer and distributor of metal, woodworking and industrial tools, a U.S. importer and middleman based in Hong Kong that acts as a go-between for the Chinese manufacturer and the U.S. importer. All three companies belong to the same parent company.

Their initial purchase and distribution agreement involved multiple steps: the importer makes a purchase order to the middleman indicating the goods that the importer wanted to order, along with the price and the quantities. The incoterms for this phase are delivered duty paid (DDP). Then the middleman places a purchase order with the manufacturer, which specifies that the manufacturer will deliver the goods to the preferred Chinese port, with the incoterms being Free on Board (FOB) Chinese port. The final destination then is to a warehouse in Missouri that's affiliated with the importer. The purchase order said payment was due within 120 days of receipt of the invoice, and that interest would accrue on any late payment.

The companies involved argued the prices charged by the manufacturer to the middleman should be sufficient for the manufacturer to recover all of its costs as indicated by its positive profit margin for 2018. The profitability of the manufacturer, as identified through the full cost mark-up (FCM) and representing the operating income (operating profits/loss) over total production, exceeded that of the parent entity in 2018.

However, for a transaction to qualify for first sale treatment, 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,'" CBP said.

While the submitted documents show that the goods are clearly destined to the United States and the importer and middleman pay for the goods, the documents also show that the middleman submitted payment beyond the payment deadline, 146 or 156 days after receiving the invoice. And the payment didn't include any interest for the period that the payment was past due.

"This shows that the middleman as a related party receives favorable payment terms that it would not have received if it were an unrelated party. Therefore, the sale transaction between the manufacturer and the middleman as presented does not constitute a bona fide sale because it is not between an independent seller and buyer," CBP said.

Furthermore, "even if there is a bona fide sale, the first sale price still will not be acceptable," CBP continued. It found that "the FCM of the manufacturer has not consistently stayed within the interquartile range since 2018," CBP said, pointing to an instance in 2020 when the FCM was outside the range. "The importer has not shown that the manufacturer’s (seller) profits will be equivalent or greater than the profits earned by the parent company in sales of merchandise of same class or kind."

CBP continued: "Even though the importer claims that the seller’s operating income over total production costs exceeded that of the parent entity in 2018, the importer did not explain in detail how the operating profits of the parent and the seller were calculated, and did not provide documentation (e.g., profit and loss statements, financial statements, income tax returns, costing sheets, profit projection statements, and sample calculations) to support the calculation."

As a result, the "'first sale' transaction value appraisement may not be utilized by the importer for the transaction described herein," CBP ruled.