Request for Internal Advice; Appraisement; Men’s Suits; Related Parties

HQ H303474 January 4, 2022 OT:RR:CTF:VS H303474 AP CATEGORY: Valuation Mitchel Landau, Assistant Director Apparel, Footwear and Textile CEE U.S. Customs and Border Protection Validation and Compliance Division 1100 Raymond Blvd. Newark, NJ 07102 RE: Request for Internal Advice; Appraisement; Men’s Suits; Related Parties Dear Mr. Landau: This is in response to your request for internal advice received on April 10, 2019, which was initiated by counsel for the U.S. importer of record, [X], as to whether the transaction between its related foreign factory, [X], and parent company, [X], is an acceptable basis for appraisement of men’s suits using transaction value. A virtual meeting with the importer’s counsel was held on March 18, 2021. The importer has asked that certain information submitted in connection with this internal advice be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets in italics as well as the attachments to the internal advice request and the additional documentation submitted by the importer’s counsel will not be released to the public and will be withheld from published versions of this decision. FACTS: The transaction at issue is a multi-tier transaction involving the following related parties: the U.S. importer of record located in New York, the parent company in Italy, and the foreign factory in Italy. The parent company fully owns the importer and the factory. The parent company is a producer and distributor of clothes, sportswear, and accessories for men, and has established itself as a lifestyle luxury brand. The parent company provides the materials to the foreign factory as an assist. The factory is a “cut and make” manufacturer of men’s luxury suits, sport jackets, pants, woven shirts, and overcoats. The parent company pays the factory for the production and packaging of the clothes, shirts, and related products and accessories. The offices of the parent company’s personnel are located at the same street number as the factory’s production facility. The parent company is described as an agent and sales representative on the entry documents. The parent company sells the products either to the importer, which markets and distributes the goods to wholesalers and retailers in the U.S., or directly to the final U.S. customer. The importer has a store in New York City. When the sale is between the parent company and the factory, the sale is “ex-factory” When the sale is between the parent company and the importer, the sale is delivered duty unpaid (“DDU”). When the sale is between the parent company and the final U.S. customer, the sale is DDU or cost and freight (“CFR”). Under the terms of the “purchaser contract” dated January 1, 2014, the foreign factory manufactures men’s apparel exclusively for its parent company. The parent company purchases and provides all raw materials necessary for the production of the merchandise. The raw materials remain the property of the parent company, which assumes the risk of loss unless any damage is caused by negligence of employees of the factory. The “cut and make” prices between the factory and the parent company are negotiated on an annual basis. The parent company typically applies a discount to the related importer when it is purchasing from the parent. The payment of the individual production orders must be made “within 30 days from delivery, upon receipt of an invoice.” Interest is due when a payment to the factory is delayed. According to the “lease contract for commercial use” dated January 2, 2014, the foreign factory leases the commercial property on which it operates from the parent company and pays rent to the parent company. The factory is on the ground and first floors of the parent company’s larger property. The lease was from January 2, 2014 through January 2, 2020, and is renewable. The factory is exempt from payment of a security deposit. The January 10, 2017 “commercial lease contract” was for more commercial space on the same street. The parent company can inspect the premises at any time. The premises can only be used for commercial manufacturing and packaging of clothing. The lease is for six years effective January 1, 2017, and is paid in monthly installments. According to the February 4, 2014 “contract of mandate” (also referred to as a cash pooling contract) between the parent company and the foreign factory, the factory produces the clothes while the parent company markets them. The parent company holds and controls the factory’s capital. The parent company provides administrative, accounting, financial, management, and training services. The factory authorizes the parent company to make and collect payments on its behalf. The “centralized treasury service” in place allows the parent company to make and collect payments on behalf of the factory. The importer explains that the “contract of mandate” allows the balances on various accounts to be treated collectively optimizing the amount of interest the companies pay and receive as the bank considers the pooled balance when calculating interest. According to the importer’s counsel, “[t]he [X] group uses a monthly netting process to settle the invoices issued from one company in the [X] group to another company in the [X] group. Money moves directly to and from the centralized treasury in-house bank system operated by the parent company [(X)] and is credited or debited to the factory’s [X]’s account in the in-house-bank system.” Pursuant to a “services supply contract” dated January 2, 2017, the foreign factory pays the parent company for performance of administrative and accounting services, centralized treasury, human resources services (payroll management, training, legal services), procurement services, quality control services, and information technology services. The parent company receives a fixed fee for the services it provides to the factory equal to [X]% of the annual turnover of the foreign factory within [X] Euros and [X]% of the annual turnover above [X] Euros. The percentage is subject to change every year. The service fee is due to the parent company annually when the parent company submits an invoice. PricewaterhouseCoopers (“PWC”) performed a study for the parent company entitled “[X] Manufacture of Wearing Apparel in Italy: Arm’s Length Price and Benchmarking Analysis” dated May 2018 (“2018 benchmarking study”). The study used returns on investment (“ROI”) as the transfer pricing benchmarks of the results. The ROI was calculated as operating profit expressed as percentage of turnover. The study selected 26 companies engaged in the manufacture of wearing apparel in Italy. PWC did not examine the published financial statements of the comparable companies. The median profit for these 26 manufacturers during the time period 2014-2016 was [X]%; the lower quartile was [X]% and the upper quartile was [X]%. The benchmark study further narrowed that list to the ten most similar companies in terms of their manufacturing operations and the products which those companies sell. These companies were sellers of private label clothing, dress trousers and clothing, tailor-made clothing, and of men’s and women’s clothing. The median profitability of these ten companies was [X]% and the average profitability was [X]%. Subsequently, the importer’s counsel performed its own on-line search for Italian suit, dress, trouser and jacket manufacturers and identified six factories. The median profitability of these six sellers was [X]% and the average profitability was [X]%. These selected companies manufactured men’s fashion brand suits, jackets, coats, shirts and trousers; coats and jackets for men, women and children; men’s trousers; bridegroom clothing; and everyday clothing for men and women. Their Nomenclature of Economic Activities (“NACE”) codes were 1413 (manufacture of other outerwear), 4690 (non-specialized wholesale trade), 1410 (manufacture of wearing apparel, except fur apparel), and 4642 (wholesale of clothing and footwear). The importer uses the “first sale” transaction value between the foreign factory and the parent company. The importer has submitted documentation, which tracks two style numbers of men’s wool suits in support of use of the “first sale” transaction value. Style No. [X] (“Style No. 1”) For one sample entry, the related U.S. importer places an order with the parent company for a men’s suit (style no. 1) for U.S. customer [X]. The parent company receives the order and issues an order confirmation to the importer. The order confirmation includes a 40% ($[X]) price discount to the importer, which decreases the gross price of the merchandise ($[X]) to a net price of $[X]. The terms of the sale are “DDU Del Duty UNPAID.” The parent company issues a production order to the foreign factory for the men’s suit, which identifies the final U.S. customer for whom the suit is made to measure and the price ([X] Euros, equivalent to approximately $[X]). The order confirmation issued by the factory to the parent lists the final factory price ([X] Euros, equivalent to approximately $[X]) (basically within $4 of the production order) and does not include a discount unlike what the U.S. importer received from the parent company for its order. The listed terms of the sale between the factory and the parent company are “Ex Factory.” The delivery address is the importer’s store in New York. The bill of materials details all the raw material costs related to the production of the suit and includes the purchase order and the invoice covering the fabric used in the production. The bill of materials lists the vendors who sell the raw materials and their prices. One of the vendors is [X]. The invoice from the raw materials vendor to the parent company indicates that the price for one meter of fabric was [X] Euros (approximately $[X]) and the price for 3.2 meters of fabric was [X] Euros (approximately $[X]). The parent company incurs design and final packaging costs in addition to the raw material costs. Upon completion of the suit, the factory delivers it to the parent company. The transportation document indicates that the finished suit is delivered from the factory to the parent company, and the addresses of the factory and the parent company are the same. The sewn-in label identifies the production order number and the U.S. individual for whom the suit was made-to-measure and shows that the goods are destined for the United States. A commercial invoice is issued from the foreign factory to the parent company, which indicates that the terms of the sale between the factory and the parent company are “ex factory.” The parent company is designated as an “agent/sales representative.” A January 31, 2018 letter from the factory to the parent company encloses proof of payment by the parent company on January 31, 2018, more than a month after the merchandise was shipped to the U.S. importer on December 27, 2017. The first sale pro forma invoice issued by the parent company lists the importer’s address in New York as the destination and the first sale cost per suit to be [X] Euros (consisting of [X] Euros for labor costs, [X] Euros for raw material costs, and [X] Euros for other costs per suit), which is equivalent to $[X]. The terms of sale are “ex factory.” The invoice issued by the parent company indicates that the price for the one suit is $[X] and with the 40% discount, it is lowered to $[X]. The place of delivery is the importer’s store in New York. The delivery terms are “DDU Del Duty Unpaid.” The parent company is designated as an “agent/sales representative.” The due date for the total amount of $[X] for the suit is due to the parent company by March 31, 2018, more than 90 days after the merchandise was shipped to the importer on December 27, 2017. The Entry Summary (CBP Form 7501) filed for the entry made on January 4, 2018, indicates that the total entered value for the six suits (one style no. 1 suit and five styles nos. 2 suits) imported on December 28, 2017, is $[X] (based on the first sale price between the factory and the parent of the one style no. 1 suit at [X] Euros, which is equivalent to $[X]). No ultimate consignee is identified. Style No. [X] (“Style No. 2”) For another entry, per the purchase order from the importer to the parent company, the U.S. importer orders five styles nos. 2 suits for U.S. customer [X] in Pennsylvania. The price per suit is $[X] and the total price for the five suits is $[X]. The delivery window requested is January 15-March 30, 2018. The parent company issues a confirmation identifying the styles and the price per suit ($[X]) which is a little more than the half price per suit. Other styles of suits are also included to the same customer [X]. A 10% discount ($[X]) is provided on the total price of $[X]. The delivery is to the U.S. customer in Pennsylvania [X]. The delivery window is January 15-March 30, 2018. The terms of the sale are “DDU Del Duty Unpaid.” The purchase order confirmation from the importer to the final U.S. customer [X] in Philadelphia issued on July 26, 2017 shows that the delivery to the U.S. customer will occur between January 15, 2018 and March 30, 2018. The payment terms are 30 days from the invoice date. The merchandise would be shipped to the final U.S. customer and the delivery terms are “C&F.” The price per suit is $[X] which is the same amount included in the purchase order. The parent company is listed as an “agent.” The bill of materials includes the color, size, invoice price, first cost price, and vendors for the raw materials of the suits. The purchase order from the parent company to raw materials vendor [X] lists 150 meters of fabric priced at [X] Euros (approximately $[X]) per meter. The invoice from the vendor [X] to the parent company indicates that the price for 52.90 net meters of fabric for style no. 2 is [X] Euros (approximately $[X]) per net meter amounting to a total of [X] Euros (approximately $[X]). The 2010 Incoterms listed are “ExW.” The invoice payment statement demonstrates that the parent company paid the invoiced amount on January 18, 2018. The transportation document from the factory shows that the five suits were sold to the parent company. The factory and the parent company have the same address. The product labels list the client number. The warehouse record reveals that the five suits were destined for the U.S. and includes the final customer’s [X] address is Philadelphia. The December 18 and 22, 2017 invoices from the foreign factory to the parent company list the delivery terms as “Ex Factory.” The parent company is listed as an “agent/sales representative.” The price per suit is [X] Euros (approximately $[X]) and the total import price for the five suits is [X] Euros (approximately $[X]). A January 31, 2018 letter from the factory to the parent company encloses proof of payment by the parent company on January 31, 2018, more than a month after the merchandise was shipped on December 27, 2017. The first sale pro forma invoice dated December 27, 2017, from the factory to the parent company states that the terms of the sale between the factory and the parent company are “Ex Factory.” The first sale pro forma invoice dated December 27, 2017, from the parent company to the U.S. subsidiary in New York indicates that labor costs per suit are [X] Euros ($[X]), the raw material costs per suit are [X] Euros ($[X]), the other costs per suit are [X] Euros ($[X]), the total first sale customs price for the five suits is [X] Euros (approximately $[X]), and the destination is the address of the U.S. subsidiary [X] in New York. The invoice from the parent company to the U.S. importer issued on December 27, 2017, indicates that the five suits would ship via FedEx to the U.S. final consumer [X] in Philadelphia. The terms of the sale are “DDU Del Duty Unpaid.” The price per suit is $[X] and the total price for the five suits is $[X]. The parent company is listed as an “agent/sales representative.” The payment due date is March 31, 2018, which is more than 90 days after the merchandise is shipped. The December 27, 2017 invoice from the importer to the U.S. final customer [X] states that the payment terms are “30 days net,” the parent company is the “sales rep.,” the delivery terms are “cost and freight,” the forwarding agent is “FedEx,” and the price per suit is $[X]. After a 10% discount ($[X]), the total price for the five suits was $[X]. The payment statement confirms that the U.S. customer paid the invoice on February 28, 2018 and March 15, 2018, more than “30 days net” from December 27, 2017. The December 27, 2017 transportation document from the parent company reveals that the five suits are shipped from Italy to the final U.S. customer [X] in Philadelphia. The shipping terms listed are “Cost and Freight.” The shipment is made via FedEx. The submitted profit and loss statement for the foreign factory ([X] to May 24, 2018 submission) reveals that the factory realized a 6% profit in its sales of merchandise to the parent company in 2017. The cost sheet for both styles numbers ([X] to May 24, 2018 submission) indicates that the total cost for the six suits for the factory was [X] Euros (equivalent to approximately $[X]), the factory price was [X] Euros (approximately $[X]), the net profit for the factory was [X] Euros (approximately $[X]), and the profit ratio was 4.60%. The income statement of the parent company for the year ending December 31, 2017 ([X] to July 17, 2018 submission) reveals that the parent company realized a profit of 10% in 2017. The Entry Summary (CBP Form 7501) filed for the entry made on January 4, 2018, indicates that the total entered value for the six suits (one style no. 1 suit and five styles nos. 2 suits) imported on December 28, 2017, is $[X] (based on the first sale price; the total first sale price of the five styles nos. 2 suits is [X] Euros, which is equivalent to $[X]). No ultimate consignee is identified. ISSUE: Whether the transaction between the related foreign factory and parent company may be used to determine the transaction value of the men’s suits and if not, whether the transaction between the related parent company and U.S. importer or the transaction between the U.S. importer and final U.S. customers may be used. 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). When transaction value cannot be applied, then the appraised value is determined based on the other valuation methods in the order specified in 19 U.S.C. § 1401a(a). In Nissho Iwai Am. Corp. v. United States, 16 CIT 86, 786 F. Supp. 1002 (1992), rev’d in part, 982 F.2d 505 (Fed. Cir. 1992) (“Nissho”), the court addressed the methodology for determining the transaction value of merchandise imported pursuant to a three-tiered transaction. The court held that the price paid by the middleman could serve as the basis for transaction value for the shipments in question. However, for the transaction to be viable, the sale must be negotiated at arm’s length, free from non-market influences, and involve goods clearly destined for the U.S. In accordance with Nissho, CBP presumes that the transaction value reported by the importer on CBP Form 7501 is based on the price paid by the importer. Where the importer requests that appraisement be based upon the “first sale” price paid by the middleman to the foreign factory, and the importer is not the middleman, the importer bears the burden of showing that the price is acceptable based upon the Nissho standard. The importer must present sufficient evidence that the “first sale” is a bona fide arm’s length sale involving “goods clearly destined for export to the United States.” In the present case, the parent company is the middleman, and thus, the U.S. importer must present sufficient evidence that the sale between the factory and the parent is a bona fide arm’s length sale of “goods clearly destined for export to the United States.” Based on the documentation presented to CBP, there is no question that the merchandise manufactured in Italy was clearly destined for the United States. We must determine, however, whether the transaction between the factory and the parent company is a bona fide sale, i.e., was the parent company acting as a buyer/seller of the merchandise, and whether the related parties’ transaction was conducted at arm’s length. To have a sale, there must be a transfer of property from one party to another for consideration. See VWP of Am., Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, 505 F.2d 1400, 1406 (1974). According to thelaw.com legal dictionary and the Black’s Law Dictionary 2d Ed., “A consideration of some sort or other, is so absolutely necessary to the forming a good contract, that a nudum pactum, or an agreement to do or to pay anything on one side, without any compensation to the other, is totally void in law, and a man cannot be compelled to perform it … Negotiable instruments, as bills of exchange and promissory notes, carry with them prima facie evidence of consideration.” Evidence to establish that consideration has passed includes payment by check, bank transfer, or payment by any other commercially acceptable means. See Headquarters Ruling Letter (“HQ”) H024857, dated Jan. 7, 2014. No single factor is decisive in determining whether a bona fide sale has occurred. See HQ 548239, dated June 5, 2003. CBP will consider whether the purported buyer assumed the risk of loss for, and acquired title to, the imported merchandise. In addition, CBP may examine whether the purported buyer paid for the goods, and whether, in general, the roles of the parties and the circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HQ H005222, dated June 13, 2007. Finally, pursuant to the CBP’s Informed Compliance Publication, entitled “Bona Fide Sales and Sales for Exportation to the United States,” CBP will consider whether the buyer provides or could provide instructions to the seller, is free to sell the transferred item at any price he or she desires, selects, or could select its own downstream customers without consulting with the seller, and could order the imported merchandise and have it delivered for its own inventory. As all parties are related, we must determine whether the transaction between them meets the arm’s length requirement set forth in 19 U.S.C. § 1401a(b)(2)(B). To have a sale under 19 U.S.C. § 1401a(b)(1), the risk of loss must pass from the buyer to the seller, who takes title to the merchandise. The submitted documentation does not state when passage of title occurs between the factory and the parent company and between the parent company and the related U.S. importer or the final U.S. customer. As title must pass to have a sale, we will assume that title will pass with the risk of loss based on the Incoterms. See HQ H268741, dated Feb. 27, 2018. The sales between the foreign factory and the parent company are ex-factory. The sales between the parent company and the related U.S. importer when the merchandise is shipped to the importer’s store in New York are DDU. When the merchandise is shipped directly to the unrelated final customer [X] in Pennsylvania, it is unclear whether the sale between the parent company and the unrelated final U.S. customer are DDU or CFR. The December 27, 2017 transportation document from the parent company indicates that the shipment to the U.S. final customer [X] is made via FedEx and the shipping terms are CFR. The December 27, 2017 invoice from the related importer to the unrelated final U.S. customer [X] indicates that the shipping terms are “cost and freight.” The December 27, 2017 invoice from the parent company to the related U.S. importer indicates that the suits ship to the U.S. final consumer [X] in Philadelphia and the sale is DDU. In the case of an ex-factory sale, the seller takes on the risk of loss and all costs related to the merchandise from the point of delivery at the factory door. Under a DDU sale, the risk of loss transfers from the seller to the buyer when the goods are delivered to the destination. Under a CFR sale, the seller is obligated to pay the costs and freight necessary to bring the merchandise to the named U.S. port of destination but is not responsible for the cargo insurance for loss and damage during transportation. In the transaction between the foreign factory and the parent company, the title and risk of loss pass from the foreign factory to the parent company when the merchandise is delivered to the parent company. The parent company paid the factory’s invoice on January 31, 2018, more than a month after the merchandise was shipped on December 27, 2017 and imported on December 28, 2017. To have a sale under 19 U.S.C. § 1401a(b)(1), we must have an independent buyer and seller, which is not the case here. The parent company wholly owns and controls the factory. The factory leases the commercial property on which it operates from the parent and pays a lease without a security deposit. The factory’s production facility is on the ground and first floors of the parent company’s larger property where the parent’s personnel are located. The parent supplies all raw materials for the suits; controls the factory’s capital; provides administrative, accounting, financial, management, and training services; and exercises control over the factory’s finances. The parent company can make and collect payments on behalf of the factory. Through the cash pooling arrangement in place, the parent makes payments on behalf of the factory, which means it would also invoice itself on behalf of the factory and would take care of the factory’s payroll. In addition to owning and controlling the factory, the parent serves as an agent/sales representative on behalf of the factory and charges a fixed agency fee equal to [X]% of the annual turnover of the foreign factory within [X] Euros and [X]% of the annual turnover above [X] Euros according to the “services supply contract” dated January 2, 2017. The shipping documents identify the parent as an “agent” and a “sales representative.” In the transaction between the parent company and the related U.S. importer, title and risk of loss are supposed to pass to the importer when the merchandise is delivered in New York. Even though the importer receives a significant 40% discount on the purchase price and will take possession of the goods upon delivery, its payment to the parent company was due on March 31, 2018, which was more than 90 days after the shipment of goods on December 27, 2017. “Sale” is a transfer of ownership from one party to another for consideration. The importer has submitted no proof of payment and it is unclear whether there was a “sale” between the parent/middleman and the importer, and if the importer had title to the goods when they were delivered to it by the foreign factory. If the transaction between the parent company and the final U.S. customer [X] is CFR then the final U.S. customer will receive title/risk of loss when the suits are dropped to FedEx in Italy. If it is DDU then the final U.S. customer [X] will receive title/risk of loss when the merchandise is delivered in Philadelphia. The December 27, 2017 invoices and transportation document for the suits with style no. 2 contain both sale terms and it is unclear whether the transaction with the final U.S. customer [X] is CFR or DDU, and when the title/risk of loss pass to the final U.S. customer [X]. The payment terms according to the December 27, 2017 invoice are “30 days net.” The final U.S. customer paid the importer for the five suits on February 28 and March 15, 2018, which is more than 30 days from the invoice date of December 27, 2017. We have received no information when the importer paid the parent company. While the related U.S. importer in New York receives a generous 40% discount when it purchases a suit from its parent company, the unrelated final U.S. customer [X] in Philadelphia receives a much lower 10% discount when it purchases suits from the parent company through the importer. The invoiced payment from the related U.S. importer is due to the parent by March 31, 2018, which is more than 90 days after shipment of the suit to the U.S. importer [X]. The invoiced payment from the final U.S. customer [X] is due to the importer [X] “30 days net” from the date of the invoice. Thus, the related importer gets much better invoice payment terms than the unrelated final purchaser [X]. Therefore, we find, based on the totality of the information presented and the above analysis, that the transactions between the related parties (foreign factory, parent, and U.S. importer) do not constitute bona fide sales. Even if there was a bona fide sale between the factory and the parent company, the “first sale” price proposed by the parties still would not be acceptable. According to the court holding in Nissho, in order for a transaction to be viable for transaction value purposes, it must be a sale negotiated at arm’s length and free from any non-market influences. There is a presumption that a transaction will meet this standard if the buyer and seller are unrelated. See Treasury Decision (T.D.) 96-87, dated Jan. 2, 1997. Here, it is not disputed that the factory, the parent company, and the U.S. importer in New York are related parties for purposes of section 402(g) of the TAA. Transaction value between a related buyer and seller is acceptable only if the transaction satisfies one of the two tests: (1) circumstances of the sale; or (2) test values. See 19 U.S.C. § 1401a(b)(2)(B); 19 C.F.R. § 152.103(l). No information regarding test values has been submitted or is available; consequently, the circumstances of the sale must be examined. Under the circumstances of the sale approach, the transaction value between related parties will be considered acceptable if the parties buy and sell from one another as if they were unrelated meaning their relationship did not influence the price actually paid or payable. The CBP Regulations in 19 C.F.R. Part 152 set forth illustrative examples of how to determine if the relationship between the buyer and the seller influences the price. In this respect, CBP will examine how the buyer and seller organize their commercial relations and the way in which the price in question was derived to determine whether the relationship influenced the price. If it can be shown that the price was settled in a manner consistent with the normal pricing practices of the industry in question, or with the way in which the seller settles prices with unrelated buyers, this will demonstrate that the price has not been influenced by the relationship. See 19 C.F.R. § 152.103(l)(1)(i)-(ii). In addition, CBP will consider the price not to have been influenced if the price was adequate to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit realized over a representative period of time. See 19 C.F.R. § 152.103(l)(1)(iii). For the circumstances of sale test, the importer was unable to demonstrate that the price was settled in a manner consistent with the normal pricing practices of the industry in question. The 2018 benchmarking study is not sufficient to establish that a related party transaction value is acceptable. The mere fact the factory supposedly earned in its sales to the parent company an operating profit comparable to other manufacturers of wearing apparel is not sufficient to establish compliance with the normal pricing practices of the industry, or that the related party price paid or payable by the parent to the factory for the merchandise was settled in a manner consistent with the normal pricing practices of the industry in question. See HQ H138203, dated Oct. 11, 2011; HQ H260036, dated Feb. 24, 2015. The pricing practices must relate to the industry in question, which generally includes the industry that produces goods of the same class or kind as the imported merchandise. See HQ 546998, dated Jan. 19, 2000; HQ 548095, dated Sept. 19, 2002. The companies in the 2018 benchmarking study were not comparable to the factory as they did not operate in the same industry (manufacturers of men’s fashion brand suits) and did not sell merchandise of the same class or kind (luxury men’s suits). As a result, the factory did not satisfy the normal pricing practices of the industry test. We note that the second circumstances of sale test is not applicable, as beginning in 2014 the factory serves as a “cut and make” manufacturer to its parent company, which purchases and provides all raw materials for the production of the merchandise, and only sells merchandise to the parent company and not to unrelated sellers. The third circumstances of sale test, known as the “all costs plus a profit” method considers whether the price is “adequate to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit realized over a representative period of time … in sales of merchandise of the same class or kind.” 19 C.F.R. § 152.103(l)(iii). In brief, the “all costs plus a profit” methodology examines whether a related party price compensates the seller for all its costs plus a specified amount of profit. Thus, if the seller of the imported merchandise is a subsidiary of the parent company, the price must be adequate to ensure recovery of all the seller’s costs plus a profit that is equivalent to the parent company’s overall profit. See HQ 546998, supra. CBP has interpreted the term “equivalent” to mean equal or greater to the overall firm’s profit and typically considers the “firm” to be the parent. See HQ H292850, dated Dec. 13, 2018. CBP regulations do not define whether gross profit or operating profit should be considered. CBP is of the view that the operating profit margin is a more accurate measure of a company’s real profitability because it reveals what the company actually earns on its sales once all associated expenses have been paid. In certain circumstances, gross profit can be considered. See HQ H037375, dated Dec. 11, 2009. Pursuant to 19 C.F.R. § 152.102(h), “merchandise of the same class or kind” means “merchandise (including, but not limited to, identical merchandise and similar merchandise) within a group or range of merchandise produced by a particular industry or industry sector.” In this case, the importer has presented the parent company’s consolidated financial statement for December 31, 2017, which includes a consolidated profit and loss statement for the parent and an income statement of the parent company for the year ending December 31, 2017. The importer has also submitted a financial statement for the factory for December 31, 2017, which includes a profit and loss statement for the factory for the year ending December 31, 2017, and a cost sheet for styles numbers 1 and 2 for 2017. The parent earned a 10% overall profit in 2017 while the factory earned a 6% overall profit. Thus, the related factory’s overall profits in 2017 were less than the parent company’s overall profits for the same year. This demonstrates that the price charged by the factory was not sufficient to recover all costs associated with production of the goods plus a profit equivalent to the parent’s overall profit over a period of time. The financial documentation does not reveal whether the parent’s overall profits in 2017 were in the sale of merchandise of the same class or kind. While the factory earned a 4.6% profit from the sale of styles numbers 1 and 2 in 2017, it is unknown what the parent’s profits were from the sales of the same merchandise during the same time period. The submitted documentation reveals that the factory did not profit much if at all from the sale of the style no. 1 suit because the difference between the final factory price for the suit ($[X]) and the cost of the raw materials for the suit ($[X]) was only $40. Therefore, the “all costs plus a profit” test cannot be applied here. Accordingly, we conclude that the relationship between the related factory and the parent company affected the price, and the “first sale” value between them is not an acceptable basis of appraisement. The “second sale” between the related parent company and the U.S. importer also cannot be used to appraise the merchandise under transaction value. There is no evidence of payment by the importer to the parent, and without “consideration” there is no sale. In addition, the relationship between the related parent and importer influenced the prices between them as explained above. See La Perla Fashions v. United States, 22 CIT 393, 9 F. Supp. 2d 698 (1998), aff’d, 185 F.3d 885 (Fed. Cir. 1999) (the Court of International Trade found that the parent company and the importer were related parties, and the transfer price was affected by their relationship and held that “… there is only one bona fide transaction: the sale between [the importer] and its U.S. customers. Transaction value cannot be based on a transaction that is found not to be a bona fide sale. Therefore, the Court finds that transaction value can only be based on [the U.S. importer’s] price charged to its U.S. customers.”); see also HQ H309839, dated Sept. 9, 2020 (finding that there was only one bona fide sale in a multi-tiered transaction and like in La Perla Fashions that sale was the sale between the U.S. importer and its U.S. customers). Similar to La Perla Fashion and HQ H309839, there is only one bona fide transaction here: the sale between the U.S. importer [X] and its unrelated final U.S. customers, and it qualifies as a sale for exportation into the U.S. The court in La Perla Fashions distinguished United States v. Massce & Co., 21 C.C.P.A. 54 (1933) (three-tiered transaction involving offers of sale, agreements to sell, and sales all made in the U.S.) and Orbisphere Corp. v. United States, 13 CIT 866, 726 F. Supp. 1344 (1989) (three-tiered transaction between an importer and its U.S. customers qualifying for a domestic sale). In Massce & Co. and Orbisphere Corp., there were two bona fide sales in the three-tiered transactions while in La Perla Fashions there was only one bona fide transaction, and the transaction value could only be based on the importer’s price to its U.S. customers. In the instant matter, the transaction between the U.S. importer and its final U.S. customers qualifies as a sale for exportation to the U.S. and is not a U.S. domestic sale because the offer by the U.S. purchaser was transmitted to and accepted by the foreign factory, the U.S. customers were identified on the sales documents and labels, and the merchandise was custom-made according to the customers’ measurements, and labelled and packaged in Italy, and the sewn-in labels and packaging labels including the U.S. customers’ names were attached to the suits. Therefore, the transaction value here can only be based on the U.S. importer’s price charged to its U.S. customers. As the final U.S. customers are unrelated to the U.S. importer, the sale to the final U.S. customers is presumed to be at “arm’s length.” The merchandise is “clearly destined” for the U.S. when sold to the final U.S. customers because it was made per order and the only possible destination was the United States. HOLDING: The merchandise should be appraised based upon the transaction value of the sale between the U.S. importer ([X]) and its U.S. customers ([X] and [X]). Sixty days from the date of this letter, Regulations and Rulings, Office of Trade will take steps to make this decision available to CBP personnel and to the public on the CBP Home Page 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