Internal Advice; Application for Further Review and Protest No. 4601-16-100197; First Sale; Related Parties; 19 U.S.C. § 1401a(b)

HQ H275235 December 20, 2017 OT:RR:CTF:VS H275235 CMR CATEGORY: Valuation U.S. Customs and Border Protection Protest & Control 1100 Raymond Boulevard Suite 402 Newark, NJ 07102 RE: Internal Advice; Application for Further Review and Protest No. 4601-16-100197; First Sale; Related Parties; 19 U.S.C. § 1401a(b) Dear Port Director: This is in response to your memorandum, dated April 19, 2016, forwarding the Application for Further Review (AFR) and Protest No. 4601-16-100197, filed on March 1, 2016, against your decision to deny the appraisement of the merchandise based on the transaction between the manufacturer and middleman, i.e., first sale. The entry for the merchandise was filed in May 2015 and liquidated on September 4, 2015. We note the protest was timely filed, involves multiple entries, and has been designated as a lead protest. Entries at issue in other protests include entries entered in 2015 and subsequent years. While this protest fails to meet the requirements for approval of AFR as the memorandum in support of the protest did not address the question of AFR and, in box 16 of the Customs and Border Protection (CBP) Form 19, i.e. “Justification for Further Review under the Criteria in 19 CFR 174.24 and 174.25,” the protestant merely cited 19 C.F.R. § 174.25(b) and the memorandum in support of the protest, this office may review this protest under 19 C.F.R. § 177.11, and provide advice to the port. As the port forwarded this protest with questions regarding the application of the all costs plus a profit method for determining whether related parties are acting at arm’s length in the absence of a parent company, we will provide the port with internal advice on this matter. This office has taken into consideration the information presented to the port and to this office. We received supplemental submissions dated, June 2, 2017, July 14, 2017, and August 4, 2017, and met with counsel for the importer on July 19, 2017. In addition, Counsel has requested confidential treatment be accorded to certain information submitted in connection with this matter. In consideration of the request and sufficient justification presented pursuant to 19 CFR 177.2(b)(7), this office will provide confidential treatment to certain information related to this matter. Information for which confidentiality is being accorded will be denoted in brackets in the confidential decision and will be redacted in any public version. FACTS: The merchandise at issue is manufactured in Sri Lanka. The parties involved in the transactions subject to the protest are the U.S. importer, the Hong Kong middleman, a related party service provider, and the related party manufacturer. The U.S. importer orders merchandise from the Sri Lanka manufacturer’s related Hong Kong middleman via the importer’s online vendor portal to which both the middleman, i.e., vendor, and its related manufacturer have access. Both related parties are able to view all of the information related to the order. After receipt of the order from the importer, the middleman places an order for the merchandise with its related manufacturer in Sri Lanka. The middleman only purchases merchandise from its related manufacturer. The middleman’s purchase order to its related manufacturer sets the price of the ordered merchandise at approximately [x]% of the importer’s purchase order price for the goods. Therefore, the middleman retains a set percentage of [y]% per order placed by the importer. Counsel submits that it is the middleman’s order to the manufacturer that triggers the manufacturer’s obligation to produce the merchandise, and not the U.S. importer’s placement of the order into its vendor portal. In addition, the importer maintains a separate website which contains “documentation for the vendor and factories on labeling, packing trim, cartons, hangers, testing, [and] contact information.” All of the importer’s vendors and factories have credentials to log into this website. In support of the use of the “first sale” between the manufacturer and the middleman, the following documents have been submitted to CBP: purchase orders, invoices, proof of payment, airway bill, packing lists, copies of the entry documents, the first sale invoice for each entry, entry data (detailing the entry line numbers, liquidation values and “first sale” values), and a financial analysis summary for the manufacturer and the middleman. Importer’s counsel submits that the manufacturer’s profit is equal to or greater than the related middleman and thus, the parties meet the all costs plus a profit test under the circumstances of the sale method for determining related party transactions to be arm’s length. Audited financial statements for 2014/2015 and internal financial statements for 2015/2016 for the related middleman and manufacturer were submitted, at CBP’s request, to support the contention that the sales between the related parties meet the arm’s length requirement of transaction value. No sales contracts between any of the parties involved were submitted to CBP, as counsel claims that none exist. The only written agreement between the parties involved in the transaction at issue that was submitted to CBP is the agreement between the middleman and the related party service provider located in Sri Lanka. The purchase order between the middleman and the manufacturer submitted in support of the protest does not indicate anything in the section for “ship mode.” It is void of shipping terms, other than an indication that the merchandise will be shipped by sea. In addition, it does not have any payment terms on it. The related parties’ commercial invoice, submitted in support of the protest, indicates “FCA . . . Factory Sri Lanka” and reflects that payment is due “T/T 14 days.” The purchase orders from the U.S. importer to the middleman indicate a column for the FOB unit cost of the merchandise being ordered and that payment is due 15 days after shipment. The screen print provided shows that the orders in “plan” stage do not have a “FOB Cost” reflected in the cost column, but once approved, a price per unit is reflected in the column. The commercial invoice between the middleman and the importer indicates payment is due “T/T 12 days” and the transport terms are “FCA Colombo Port.” Counsel for the importer initially indicated that the terms of sale between the importer and the middleman are FCA [Free Carrier] [manufacturer’s] factory Sri Lanka; and that the terms of sale between the middleman and its related manufacturer are FCA Colombo. In a supplemental submission, dated June 2, 2017, counsel now submits that this was not correct and, after discussing this issue further with the parties, the middleman and the importer both purchase the merchandise on Free-on-Board (FOB) terms. No documentation was presented to substantiate this assertion. As stated in the submission, “both parties pay a single, all-inclusive price for the purchase of the goods and for the loading of the same onto the ocean vessel destined to the United States.” It is further stated that the manufacturer pays the cost of trucking the merchandise from its factory to the port of export. The payment is to a third-party logistics company. The U.S. importer takes title and risk of loss at the port of Colombo. In the July 14, 2017, submission, counsel offered that there was no “flash” title, as would occur based on the terms provided in the June 2, 2017, submission, because under Sri Lanka law, “a contract for the sale of goods was made between [the manufacturer] and [the Hong Kong middleman] the moment the [manufacturer] accepted [the middleman’s] purchase order to produce the goods at issue pursuant to Sec. 19, Rule 1 of the [Sale of Goods Ordinance No. 11 of 1986].” Counsel asserts the middleman transfers title to [the importer] once the goods are loaded onto the ocean vessel at the Port of Colombo[.]” The importer asserts that the merchandise should be appraised for duty purposes in the entries at issue based upon the sale between the manufacturer and its related middleman. With regard to the proof of payment between the middleman and its related manufacturer, a copy of a bank statement printed from HSBCnet was submitted as evidence of payment. The statement lists multiple invoices issued by the manufacturer that are paid with one payment from the middleman. In the August 4, 2017 submission, counsel provided additional documentation to show payment by the middleman to the manufacturer for the merchandise in the entries at issue in this protest. Twenty sets of documents were submitted. Each of the first 19 sets consist of an invoice from the middleman to its related manufacturer; and, an HSBCnet page indicating a payment to the manufacturer from the middleman, indicating the beneficiary bank details, and providing a check number and list of invoice numbers covered by the payment. The last set of documents consists of a HSBC bank statement which has the middleman’s name and an address in Sri Lanka for the middleman. The statement was submitted to show a withdrawal from the middleman’s account equal to listed invoices covered by the check from the middleman to the manufacturer. The address on the middleman’s bank statement is the same address as the manufacturer in Sri Lanka. Of the 20 sets of documents, five reflected payment after the 14 day payment term. One payment was only a day late; the latest payment was 13 days past due. The rest were paid within the 14 day time frame. The proof of payment submitted with regard to the importer’s payment to the middleman consists of a payment report from the importer’s bank and pages from the middleman’s “customer balance detail” ledger which lists invoice numbers, the date the invoices were issued, the date the merchandise was on board a vessel, the date payment is due, the amount due, and the amount paid. The audited financial records for the middleman reveal that while the middleman is incorporated in Hong Kong, its principal place of business and the manufacturer’s principal place of business are identified as the same address in Sri Lanka. See page 7 of the middleman’s Audited Financial Report, submitted as Attachment 3, Counsel’s June 2, 2017, submission. The related middleman has a parent, an ultimate holding company, located outside of Hong Kong and Sri Lanka, per the 2015 financial statement. In addition, the “Accounting Policies and Explanatory Notes to the Financial Statements for the period ended 31st March 2015” (hereinafter, Notes), which is part of the audited financial statement for the middleman, indicate that the costs of goods sold consists of goods purchased from related companies. The Notes also indicate that the middleman pays a related company an office management fee. This party has been identified as a related party service provider in Sri Lanka. In regard to related party transactions, Note 13 of the Notes states: “The amounts due to related companies are unsecured, interest-free and have no fixed terms of repayment.” Counsel has explained that the middleman does not have a physical presence in Sri Lanka, but “has outsourced certain operational and management support services to another related party located in Sri Lanka.” A copy of the agreement between the related parties was submitted and indicates that the Sri Lankan company agreed: . . . to provide the operational management services and support services, including, but not limited to, Back-office support; Merchandising, Sampling, Quality Inspections, Shipping – commercial, Procurements and HR, Legal, Finance; financial reporting and analytical support; in accordance with the terms of [the] Agreement. The agreement is signed by the sole director of middleman, on behalf of his company, and the chairman of the related party service provider in Sri Lanka, on behalf of his company. The related service provider performs services only for the middleman and no other entities, related or unrelated. In exchange for providing the services described above, the Sri Lankan related party is to be paid a monthly fee based upon a fixed full time employee rate within 30 days of receipt of an invoice issued by it to the middleman. The related party service provider is located at the same address as the related manufacturer. Copies of invoices from the related party service provider to the related middleman were provided for each month of the year 2015. The invoices reflect the number of full-time employees employed by the related service provider, the rate charged per employee, and the total amount due. Based upon a review of the invoices, the related service provider employed between 70 and 94 employees during the course of 2015. The invoices also state: “We hereby debit your account for the above value.” Counsel has indicated that “[a]ccording to the parties’ accountant, [this phrase] merely reflects an accounting term denoting that the supplier ledger account has or will be debited for the value of said services.” We note that the invoices from the related service provider also reflect the bank details for the related service provider, including the SWIFT code and account numbers. Counsel also provided pages from the related party service provider’s “Invoices and Remittance schedule” to show that payments were received in response to the invoices. The audited financial statement ending 31st March, 2015, for the manufacturer and its group, indicates that the manufacturer has no ultimate parent. See Paragraph 1.3 at page 6 of the manufacturer’s “Financial Statements for the Year Ended 31st March, 2015.” It also indicates that the related party service provider employed by the middleman to provide operational management and support services to the middleman owed money to the related manufacturer. Counsel explained in the August 4, 2017 supplemental submission that the related party service provider “shares/rents space” from the related manufacturer and thus, “there are certain costs that are common and shared between the parties.” Counsel characterized the relationship between the service provider and manufacturer as a landlord-tenant relationship. With regard to transactions with related parties, Note 39.2 of the manufacturer’s 2015 audited financial statement states that they are “carried out in the ordinary course of the business. Outstanding current account balances at year end are unsecured, interest free and settlement occurs in cash.” The related companies underwent a corporate restructuring in 2016. Prior to the restructuring, the same three individuals owned the parent holding company of the middleman and owned the related party service provider employed by the middleman. The same three individuals, plus two more, owned the related manufacturer. After the restructuring, the same five individuals own the manufacturer, the related party service provider and, through ownership of the related party service provider, the Hong Kong middleman who is wholly owned by that party. Counsel submits that all three related parties are deemed equal in terms of corporate structure due to the common ownership of all three. The middleman has a single director and no employees. This director also serves as a director of the manufacturer and the related party service provider. In fact, this director is the managing director of the manufacturer and one of the five owners of the related party companies. The related party service provider has two additional directors who also serve as directors of the manufacturer. The three directors of the related party service provider are three of the five owners of the company. The manufacturer has two additional directors. Both of these additional directors are also owners of the manufacturer. Note 13 of the middleman’s 2015 Audited Financial Statement Notes states that the director of the middleman “controls both the [middleman] and the related companies” to whom the middleman owes money. ISSUE: Whether the sales between the middleman and its related factory are bona fide sales which may serve as the basis for appraisement of the goods under 19 U.S.C. § 1401a(b) under the “first sale” principle of appraisement. LAW AND ANALYSIS: 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 “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). First Sale Claim In accordance with Nissho Iwai, infra, and Synergy, infra, appraisement of imported merchandise based on a bona fide sale of goods for export to the U.S., prior to the last sale for export to the U.S., is a legitimate basis of appraisal and CBP will appraise merchandise for which a “first sale” claim is made when it meets the requirements for such appraisement. The importer claims 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. In Nissho Iwai American Corp. v United States, 16 C.I.T. 86, 786 F. Supp. 1002, reversed 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 in order 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. See also, Synergy Sport International, Ltd. v. United States, 17 C.I.T. 18 (1993). 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 a middleman to a 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 the meaning of 19 U.S.C. § 1401a. In Treasury Decision (T.D.) 96-87, dated January 2, 1997, the Customs Service (now Customs and Border Protection (CBP)) advised that the importer must provide a description of the roles of the parties involved and must supply relevant documentation addressing each transaction that was involved in the exportation of the merchandise to the United States. The documents may include, but are not limited to purchase orders, invoices, proof of payment, contracts, and any additional documents (e.g. correspon- dence) that establishes how the parties deal with one another. The objective is to provide CBP with “a complete paper trail of the imported merchandise showing the structure of the entire transaction.” T.D. 96-87 further provides that the importer must also inform CBP of any statutory additions and their amounts. If unable to do so, the sale between the middleman and the manufacturer cannot form the basis of transaction value. Bona fide sale Based on the documentation presented to CBP, there is no question that the merchandise manufactured in Sri Lanka was clearly destined for the U.S. In order to have the imported merchandise appraised based on the first sale, we must determine, however, whether the transactions between the Hong Kong middleman and its Sri Lankan manufacturer were bona fide sales, i.e., whether the middleman was an actual buyer/seller of the merchandise; and, if yes, whether the related parties conducted their transactions at arm’s length. In order to have a sale, there must be a transfer of property for consideration. See VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999); and J.L. Wood v. United States, 62 CCPA 25, 505 F.2d 1400, C.A.D. 1139 (1974). In this case, as evidence of a transfer of property for consideration, i.e., a sale, the parties have submitted pages from the HSBCnet website and a bank statement, along with check numbers and the middleman’s listing of invoices covered by the amount withdrawn, to show that the middleman paid its related manufacturer money for purchased goods. The purchase order and commercial invoice submitted to CBP indicate that the middleman’s payment to the manufacturer was due 14 days from shipment. The evidence of payments submitted indicate that, for the entries at issue in this protest, most were paid within that time frame, however, some were not. Significantly, the submitted audited financial statement for the middleman states that the amounts due to related companies “have no fixed terms of repayment.” The amounts due from the middleman to related parties consisted of amounts due for the purchase of goods and an office management fee. The office management fee was due to the related party service provider in Sri Lanka who was engaged to provide the middleman with certain operational and management support services. The amount of that fee consisted of the salaries of the employees of the service provider. The goods were purchased from the related manufacturer. Having no 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. Further, with respect to if title passed from the manufacturer to the middleman, CBP has been provided with three versions of how the transactions between the middleman and its related manufacturer occurred. While Incoterms indicate when risk of loss transfers between parties, it is asserted that title to the merchandise transferred with the risk of loss. Thus, in the first version of the transactions, i.e., that the sales between the manufacturer and the middleman were FCA factory; and, between the middleman and the importer were FCA port of Colombo, the middleman assumed risk of loss and title for the merchandise at the factory door, and the importer assumed risk of loss and title when the merchandise was cleared for export at the port. In the second version of the transactions, i.e., the FOB port of Colombo for both transactions, risk of loss and title to the merchandise passed from the manufacturer to the middleman and then to the importer simultaneously, i.e. “flash title.” In the third version of the transactions, risk of loss passed to the middleman when title passed which was when the manufacturer accepted the middleman’s purchase order, and the importer assumed risk of loss and title FOB port of Colombo. 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 inquired as to whether the middleman carried insurance to cover any claims against it by the importer or other purchasers. Counsel informs us that the middleman does not carry liability insurance. Counsel indicates that the middleman is ultimately responsible to the importer for any defective or non-conforming merchandise. As evidence, counsel cited to debit notes from the importer to the middleman. The middleman, in turn, then issued debit notes to the manufacturer. While this may work for claims involving defective or non-conforming merchandise, it would not protect the middleman against loss should the merchandise be destroyed through an accident or other unforeseen occurrence, once the risk of loss passed from the manufacturer to the middleman. 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. Counsel for the importer submits that there is a sale between the middleman and its related manufacturer as evidenced by the paperwork, i.e., purchase orders and invoices, produced by these related parties, and the exchange of consideration as evidenced by the movement of money from one related party’s bank account to the other related party’s bank account. However, in order to determine whether the claimed transaction is a bona fide, arm’s length, sale for export to the U.S, CBP must review all of the information submitted. In this case, the Sri Lankan manufacturer and the Hong Kong middleman are separate legal entities and, in addition to the paperwork related to the merchandise, present certain elements to demonstrate their separate legal status, such as, separate articles of incorporation and the filing of separate tax returns. However, the middleman (vendor) and the manufacturer each have access to the importer’s websites through which the importer places orders for merchandise and provides documentation and information for vendors and factories. Thus, the manufacturer and middleman have access to the same information regarding the order placed by the importer. The middleman’s purchase order price to the manufacturer for merchandise is always [x]% of the purchase order price of the importer, leaving [y]% of that amount for the middleman. The middleman purchases and sells only merchandise obtained from its related manufacturer. The middleman, the manufacturer, and the related party service provider hired by the middleman to perform operational and management services all share the same physical address in Sri Lanka and are all controlled by the director of the middleman. Although informed by counsel that the middleman has no physical presence in Sri Lanka, the middleman’s 2015 audited financial statement provides this address as its principal place of business and a bank statement submitted as evidence that the middleman paid the manufacturer for goods belies the assertion as it too provides the same address. Counsel submits that as “(1) [the middleman], as a corporate entity, does not currently have any employees, either in Hong Kong or Sri Lanka, to receive and respond to the bank’s correspondence; (2) [the middleman’s] sole director resides in Sri Lanka, and (3) the operational and management support services are conducted by [the related service provider], the receipt of and response to any bank-related correspondence would need to be handled by either [the middleman’s] sole director . . . or [the related service provider], both of which are located in Sri Lanka at” the same address as the manufacturer. However, if the related service provider does not have access to the middleman’s accounts, it is difficult to understand how the related service provider is able to handle the middleman’s bank-related correspondence. The submitted invoices from the related service provider to the middleman are dated on the last day of each month and indicate the invoice is for services for that month, e.g. “Fee charged for Back office services Provided to [middleman] May ‘15”. However, a review of the service provider’s “Invoices and Remittance schedule” shows that the invoice to the middleman dated May 31, 2015 equals the total of payments remitted on June 3, 10, 17, 24, 29, and July 2 and 8, 2015. Each payment is associated with the invoice reference number in the service provider’s “Invoices and Remittance schedule,” and the payments are not equal installments, but vary. Counsel explains for the varying dates of payment as follows: As the monthly invoiced amounts generally equate to anywhere from [z]% to [y]% of [the middleman’s] total monthly revenue, [the middleman] makes payment to [the related service provider] for the monthly invoiced amounts over several remittance payments. . . . This practice, which frankly, resembles the payment processes for most companies (i.e., paying one-half of an employee’s monthly salary every two weeks instead of one, large monthly payment, etc.), helps ensure that [the middleman] can effectively manage its cash-flow based on a monthly basis. Counsel’s explanation is not persuasive. The agreement between the middleman and the related service provider is based, not on a percentage of the middleman’s revenue, but on a set dollar amount per fixed full-time employee employed by the related service provider. In addition, the timing of the payments is irregular, not reflecting any kind of structured payment schedule. Further, while the agreement allows the middleman to pay the invoiced amount within 30 days of receipt of the invoice, fees not paid within 30 days are subject to a monthly service charge of 1.5% on the unpaid balance. In the May example, two payments were beyond the 30 days for payment. A review of the invoices provided to CBP indicate that several other payments from the middleman to the related service provider were made beyond the 30 days for payment under their agreement. Yet, no invoice indicates the service charge was ever incurred or paid on any delinquent amount. There is no record of service charge payments in the related service provider’s “Invoices and Remittance schedule” record. Based on our review of the record, it appears that the middleman and the related service provider did not follow the terms of their agreement with regard to payments for services. The amounts and timing of payments appear to simply be a shifting of funds as desired by the parties. The middleman, manufacturer, and related party service provider are related through common ownership which, after a restructuring in 2016, is identical. The middleman has a sole director who is also the managing director of the manufacturer and an owner of all three related parties. The 2015 audited financial statement of the middleman states that this individual, at least in 2015, controlled not only the middleman, but the manufacturer and the related service provider. This same audited financial statement states that amounts due to related parties are unsecured, interest free and have no fixed terms of repayment. Such an arrangement regarding the transfer of funds from one related party to another creates the appearance, at the very least, that the parties do not operate at arm’s length. Based upon our review of the facts, we do not believe the requirements for “first sale” appraisal have been met in this case. To have a sale under 19 U.S.C. § 1401a(b)(1), we must have a buyer and a seller. In this case, CBP does not believe the middleman is a true buyer of the merchandise from the manufacturer. The access of both the manufacturer and the middleman to the importer’s vendor portal to receive information on the placement of orders, including all the details of the transaction between the middleman and the importer; the three versions of when title and risk of loss transfers from the manufacturer to the middleman; the fact that the manufacturer, middleman and related party service provider are all located at the same physical address in Sri Lanka; the fact that the middleman has a single director, living in Sri Lanka, and no employees; the fact that the director of the middleman also controls the manufacturer and the related party service provider; the fact that the middleman hires a related party service provider who (based on the totality of the information with regard to the middleman’s payments to the related service provider previously discussed), appears to have the ability to withdraw funds from the middleman’s bank account; the varying amounts and irregular timing of payments from the middleman to the related service provider (creating the appearance of simply shifting funds as desired by the parties); and, the evidence provided by the middleman’s audited financial statement that the middleman did not have fixed terms for payments to related parties, lead us to conclude that there is no bona fide sale between the middleman and its related manufacturer. Arm’s length CBP does not believe there exists any bona fide sales between the related manufacturer and middleman for the reasons set forth above. Although finding no bona fide sale between the middleman and its related manufacturer, we briefly address why the related party transactions also fail under the statute’s requirement that related party transactions must be arm’s length, i.e., an examination of the circumstances of the sale must indicate that the relationship of the parties did not influence the price. See 19 U.S.C. § 1401a(b)(2)(B). Counsel for the importer relies upon a provision of the CBP Regulations in arguing that the related parties operate at arm’s length. Specifically, counsel relies upon 19 U.S.C. § 152.103(l)(1)(iii), Interpretative note 3: If it is shown that the price is adequate to ensure recovery of all costs plus a profit which is equivalent to the firm’s overall profit realized over a representative period of time (e.g., on an annual basis), in sales of merchandise of the same class or kind, this would demonstrate that the price has not been influenced. Information regarding the profit levels of the middleman and its related manufacturer have been submitted as evidence that the related parties operate at arm’s length. However, as already noted in our earlier analysis, as the payments from the middleman to the manufacturer and the payments to the related middleman are not subject to any fixed terms for payment, per the Hong Kong middleman’s 2015 audited financial statement, the parties do not appear to operate at arm’s length. Further, as discussed earlier, the middleman pays the related party service provider in Sri Lanka for operational and management services. Those payments are part of the calculation for determining the middleman’s profit margin. Based on our earlier discussion, it appears that those payments are simply a shifting of funds as desired by the related parties and not based on any structured system. While evidence was presented to show that payments from the middleman to the manufacturer occurred timely, out of 20 purchase orders presented, 15 were paid by the middleman within the specified time frame, 5 were not. Although this is an extremely small sampling, 25% of the invoices were not paid within the required time frame. Taking into consideration the manner of the shifting of funds from the middleman to the related service provider, the fact those parties did not follow their own agreement with regard to payments, the impact such payments have on the calculation of the middleman’s profit margin, and considering all the elements discussed above, we do not believe that the related parties operate at arm’s length with one another. Having determined that there is no bona fide, arm’s length sale between the related middleman and manufacturer, appraisement of the merchandise should be based upon the price paid by the importer for the merchandise. HOLDING: Based on the analysis set forth above, we agree that the merchandise at issue cannot be appraised based on a transaction between the manufacturer and its related middleman. Protest No. 4601-16-100197 is referred back to your port for appropriate action. Application for Further Review of Protest No. 4601-16-100197 should not have been approved as the AFR request did not meet the requirements of 19 CFR §§ 174.24 and 174.25. Sixty days from the date of this letter, Regulations and Rulings of the Office of Trade will take steps to make this decision available to CBP personnel and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Monika R. Brenner, Chief Valuation & Special Programs Branch