Internal Advice; Related Party Transaction; Transaction Value; Reconciliation of Transfer Prices

H349773 May 13, 2026 OT:RR:CTF:VS H349773 AMW CATEGORY: Valuation Center Director Apparel, Footwear and Textiles CEE U.S. Customs and Border Protection 555 Battery Street, Room 401 San Francisco, CA 94111 ATTN: Patricia Walters, Import Specialist RE: Internal Advice; Related Party Transaction; Transaction Value; Reconciliation of Transfer Prices Dear Center Director: This is in response to your memorandum submitted on June 30, 2025, in which you request internal advice regarding an importer’s claimed deductions from the entered value of imported merchandise based on a purported transfer-pricing agreement with a related party. The importer, Corneliani USA Inc. (“Corneliani USA” or the “importer”), originally raised the issues via Protest and Application for Further Review (“AFR”) No. 470124103001. As the criteria for further review as outlined in 19 CFR § 174.24 has not been met, we are instead responding via this internal advice. FACTS: The present matter relates to one entry of men’s suits imported by Corneliani during the year 2023. Corneliani USA purchased the subject merchandise from a related party, Corneliani SpA. Both companies are affiliated with the Corneliani Group, a menswear designer and manufacturer based in Italy. Upon entry, dated March 30, 2023, Corneliani USA declared the sales price between itself and Corneliani SpA based on the transaction value method. The merchandise was later liquidated, and duty paid, on this value. In January 2024, Corneliani SpA issued a credit note to Corneliani USA intended to bring Corneliani USA’s operating profit margin within an acceptable arm’s length range as calculated by a Transfer Pricing Analysis prepared for the years 2020-2022. Based on this adjustment, Corneliani USA has challenged the valuation of the subject entry, seeking to make a reconciliation entry and adjust the valuation downward. 2 Corneliani USA asserts that the transfer pricing policy in effect at the time of importation is contained in the Distribution Agreement between Corneliani USA and Corneliani SpA signed on March 1, 2022. Specifically, section 6.b. of the Distribution Agreement states: Corneliani [SpA] verifies at least at the end of each financial year if [Corneliani USA] realized a net operating margin on sales (i.e., Return on Sales – ROS) in line with the arm’s length principle. To prove the conformity with arm’s length principles, the transfer prices are set up by considering a benchmark analysis, to which the ROS of the Distributor shall be aligned. Such benchmark analysis shal [sic] be done on a yearly basis by a reputable international accounting firm by comparing businesses of either a similar nature as Distributor’s in the same industry or similar industries, and which have the same of comparable profile of functions and risks. Section 6.d. of the Distribution Agreement further clarifies: If the achieved operating profit margin according to local GAAP lies within the interquartile range calculated based on the financial data of the benchmark analysis prepared for a fiscal year, the Parties based on the circumstances decide to which value of the range align the ROS of [Corneliani USA]. However, if the achieved net operating margin of [Corneliani USA] according to local GAAP lies beyond the said interquartile range (i.e., lower the first quartile of higher that [sic] the third quartiles), an upward or a downward transfer pricing adjustment is performed in order to let the ROS of the Distributor be aligned to a value between the first and the third quarter of the interquartile range. Corneliani USA explains that it calculated the proposed adjustments based on the results of a “Transfer Pricing Benchmarking Analysis” (the “TPA”) prepared for the year ending December 31, 2022, and issued in November 2023. The TPA states that the Comparable Profits Method (“CPM”) was selected as the best method to evaluate the intercompany tangible transactions between Corneliani USA and Corneliani SpA. The CPM tests the arm’s length character of transfer prices by comparing the operating profits earned by one of the parties engaged in a controlled transaction (in this case Corneliani USA) to the operating profits earned by uncontrolled parties engaged in similar business activities. As explained in the relevant Internal Revenue Service (“IRS”) regulations, CPM is calculated by “determining a profit level indicator for an uncontrolled comparable, and applying the profit level indicator to the financial data related to the tested party’s most narrowly identifiable business activity for which data incorporating the controlled transaction is available (relevant business activity).” Further, “[i]f there are any differences between the tested party and an uncontrolled comparable that would materially affect the profits determined under the relevant profit level indicator, adjustments should be made according to the comparability provisions of [26 CFR] § 1.482-1(d)(2).” See 26 CFR § 1.482-5. 3 The TPA states that its CPM analysis was based on a study of “a range of comparable companies.” In this case, the TPA defined “comparability” as including “resources employed and risks assumed, as well as activities performed.” Specifically, the TPA selected companies “that perform functions similar to the wholesale distribution of finished goods.” In total, the TPA selected six comparable companies, none of which are involved in the distribution of menswear or apparel. Instead, the comparable companies are involved in the following industries: entertainment industry (e.g., vinyl records, video games), precious metals, “consumer products” (e.g., candy, tobacco, beverages, beauty care), water and wastewater products, industrial and maintenance products, and swimming pool supplies. During the period for which the data was collected (i.e., 2020-2022), the TPA calculated the range of operating margins for the comparable companies to be a median of 6.0% with an interquartile range of 1.6% to 9.2%. As a result, Corneliani USA seeks a downward adjustment for the subject entry, dated March 30, 2023, based on the assessment that “[i]n fiscal year 2023, Corneliani USA did not realize an operating profit falling within the arm’s length range….” In your June 30, 2025, communication, you asked our office for internal advice “regarding transfer-pricing valuation concerning Corneliani USA Inc.” Your request goes on to note that your Center “believes that considering HQ H228298, the [post-importation] deduction in this case may not be allowed based on the transfer-pricing analysis provided.” ISSUE: Whether transaction value was the appropriate method of valuation for the imported merchandise. LAW AND ANALYSIS: Based on our review of the transaction, it is unclear whether the Center should have accepted the transaction value between Corneliani SpA and Corneliani USA. Merchandise imported into the United States is appraised for customs purposes 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 primary 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 amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. § 1401a(b)(1). When transaction value cannot be applied, the appraised value is determined based on the other valuation methods in the order specified in 19 U.S.C. § 1401a(a). Special rules apply when the buyer and seller are related parties, as defined in 19 U.S.C. § 1401a(g). Specifically, transaction value between a related buyer and seller is acceptable only if the transaction satisfies one of two tests: (1) test values or (2) circumstances of the sale. See 19 U.S.C. § 1401a(b)(2)(B). “Test values” refer to values previously determined pursuant to actual appraisements of imported merchandise. In its Protest, Corneliani USA did not submit evidence that would support the use of transaction value under the “test values” method. However, Corneliani USA’s TPA may be considered when assessing the circumstances of the sale. 4 Under the circumstances of the sale approach, the transaction value between a related buyer and seller is acceptable if an examination of the circumstances of the sale indicates that although related, the relationship between the buyer and the seller did not influence the price actually paid or payable. Illustrative examples are set forth in 19 CFR Part 152 showing how to determine whether the relationship between the buyer and the seller influenced the price. In this respect, CBP will examine the manner in which 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 CFR § 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 time period. See 19 CFR § 152.103(l)(1)(iii). Nonetheless, these are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well. See 19 CFR § 152.103(I); see also HQ H037375, dated December 11, 2009; HQ H029658, dated December 8, 2009; HQ H032883, dated March 31, 2010; and, HQ H219515, dated October 11, 2012. As discussed in HQ H287110, dated August 12, 2020, information provided to CBP in a transfer pricing study may be relevant in examining circumstances of the sale, and such information will vary in probative value depending on the details set forth in the study. See, e.g., HQ 548482, dated July 23, 2004. For example, in examining a transfer pricing study for purposes of determining whether transaction value is appropriate between related entities, CBP considers the methodology applied CBP also considers whether the products sold by the comparable parties in a transfer pricing study are similar to the merchandise sold by the tested entity. CPM, which compares the profitability of the related party to the profitability of companies that are functionally comparable (i.e., companies that undertake similar functions and risks), thus has little similarity to the customs methods in 19 C.F.R. § 152.103, which require product similarity. Here, as explained above, Corneliani USA’s transfer pricing procedures apply the CPM methodology, which generally has the least relevance for customs valuation purposes. As for product similarity, the TPS recognizes that “comparability of the functions and risks between a tested party and uncontrolled companies is more important than exact product comparability.” Despite the focus on functions and risks, however, the comparable companies in Corneliani USA’s TPA do not operate in the same industry and do not import products remotely similar to the subject menswear. As such, the tested companies do not sell goods in the same class or kind as Corneliani USA. In addition, we also note that Corneliani USA has not provided evidence in the form of a prospective advance pricing agreement demonstrating how the initial price is negotiated or set between the related parties. Instead, Corneliani USA asserts that its APA is memorialized in the form of two provisions in its Distribution Agreement. This agreement, however, merely specifies that prices should be based on arm’s length principles and that downward or upwards 5 adjustments should be made to match the interquartile range of profits achieved by comparable companies. Based on the foregoing, Corneliani USA has not satisfied the circumstances of sale test. Accordingly, transaction value was not an acceptable method of appraisement for the related-party sale between Corneliani SpA and Corneliani USA. Assuming for argument’s sake that transaction value was available, Corneliani USA did not provide sufficient evidence to justify a downward adjustment based on its subsequent credit note. On May 30, 2012, CBP published a notice concerning the treatment of post-importation adjustments made pursuant to a formal transfer pricing policy. See Customs Bulletin, Vol. 46, No. 23, dated May 30, 2012 (and incorporating Headquarters’ Ruling HQ W548314, dated May 16, 2012). In HQ W548314, CBP established a broader interpretation of what is permitted under transaction value to allow a transfer pricing policy/APA to be considered a “formula” in the transfer pricing context provided certain criteria are met. HQ W548314 specifically referred to the adjustments made pursuant to a company’s formal transfer pricing policy or APA. In order to claim the post-importation adjustments (upward and downward), all of the following factors must be met: 1. A written transfer pricing policy is in place prior to importation and the policy is prepared taking IRS code section 482 into account; 2. The U.S. taxpayer uses its transfer pricing policy in filing its income tax return, and any adjustments resulting from the transfer pricing policy are reported or used by the taxpayer in filing its income tax return; 3. The company’s transfer pricing policy specifies how the transfer price and any adjustments are determined with respect to all products covered by the transfer pricing policy for which the value is to be adjusted; 4. The company maintains and provides accounting details from its books and/or financial statements to support the claimed adjustments in the United States; and, 5. No other conditions exist that may affect the acceptance of the transfer price by CBP. Corneliani USA has not satisfied at least two of the abovementioned factors. With respect to the first factor, the language in the Distribution Agreement is not specific enough to constitute a transfer pricing policy, and makes no reference to the IRS code. Further, the Transfer Pricing Analysis presented in Corneliani’s protest is dated November 2023, and therefore was not in place prior to the subject entry (i.e., March 30, 2023). Next, with respect to the third factor, neither the Distribution Agreement nor the Transfer Price Analysis specify how the transfer price and any adjustments are to be determined. Instead, both documents merely 6 clarify that adjustments shall be made to bring Corneliani USA’s profits in line with an interquartile range. HOLDING: Based on the information provided, we determine that transaction value was not the proper method of appraisal for the related party transaction between Corneliani SpA and Corneliani USA. Furthermore, even if transaction value was available, Corneliani USA would not be able to retroactively adjust the customs valuation of the imported menswear. You are to mail this decision to the importer no later than 60 days from the date of the decision. At that time, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and the public on the Customs Rulings Online Search System (“CROSS”) at https://rulings.cbp.gov, which can be found on the CBP website and other methods of public distribution. Sincerely, Monika Brenner, Chief Valuation and Special Programs Branch