Introduction: The US Tariff challenge
On 2 April 2025, the United States issued Executive Order 14257 imposing reciprocal tariffs on imports from countries that apply higher tariffs on U.S. goods . In the context of India, the US declared a 25% reciprocal tariff, effective 7 August 2025. Additionally, a 25% additional tariff on Indian goods were also imposed from 27 August 2025, following India’s continued Russian oil imports, effectively making the US tariffs on Indian exports to 50%.
These measures have increased the landed cost of Indian imported goods entering the United States. The resulting cost pressures have led businesses to review all legally permissible methods to manage their tariff liability within the framework of U.S. customs law.
Under the U.S. law, the determination of the customs value is the foundation for calculating import duties. The primary basis for customs valuation is the transaction value. Within the framework of transaction value, U.S. customs law recognizes the ‘first sale’ principle that permits an importer to declare the customs value based on the price of an earlier sale in the supply chain. In other words, when goods are sold more than once before they are imported (i.e., sales involving middleman), the First Sale principle allows an earlier sale in the supply chain to be used in declaring customs value. This can lawfully reduce the transaction value and, consequently, the total duty and tariff payable on the imported goods.
This article examines the legal foundation of the first sale principle, its practical application, and its potential role as a compliance-based tool for managing tariff exposure in a changing trade policy environment.
Legal framework of customs valuation
The valuation of imported goods for customs purposes in the United States is governed by Section 402 of the Tariff Act of 1930. The statute provides that the primary basis of valuation is the transaction value, defined as the price actually paid or payable for the merchandise when sold for exportation to the United States, plus certain additions enumerated in the statute.
In many global supply chains, goods are sold multiple times before importation into the U.S. The key question in such cases is which sale qualifies as the sale for exportation to the United States. Customs Border Protection (‘CBP’) has published interpretive guidance on the Bona Fide Sales & Sales for Exportation to the United States, which consolidates CBP’s views on identifying qualifying sales.
Understanding the first sale principle
The First Sale Principle is a recognized method of customs valuation under U.S. Customs law that allows an importer, in certain circumstances, to base the customs value of imported goods on the price paid in an earlier sale in a multi-tiered transaction, rather than the final sale to the U.S. buyer. The practical effect of using this methodology is that the value for Customs duty purpose is determined at an earlier point in the supply chain, where the price typically excludes later markups such as resale profit or distribution expenses.
Importers who can substantiate an earlier sale in the supply chain may lawfully reduce their duty liability, provided all documentary and transactional conditions are satisfied. This forms the foundation of what is now known as the First Sale Principle.
A common example illustrates the application of the principle:
Assuming the rate of duty to be 50%, the total duties would be calculated as follows:
| Basis of valuation | Transaction Value (USD) | Duty Amount @50% |
| Without First Sale | 100 | 50 |
| With First Sale | 80 | 40 |
It can be seen that the importer can lawfully reduce its duty / tariff cost by $10 per unit through application of the First Sale Principle. This can result in significant savings when applied across high-volume import transactions.
The First Sale Principle was firmly established in U.S. customs law through judicial decisions:
1. Nissho Iwai American Corp. v. United States
The U.S. Court held that when there are successive sales prior to importation, the transaction value may be based on the first sale if that sale is a bona fide sale for export to the United States and conducted at arm’s length.
2. McAfee Co. v. United States
Although predating Nissho Iwai, this case contributed to the interpretation that the statute does not require that the sale be the last one before importation, so long as it is a sale for export to the United States.
Together, these cases establish that an importer may declare the value of goods based on the first sale in the supply chain, provided the following three elements are satisfied:
* The sale was a bona fide sale involving a transfer of title and risk;
* The sale was for exportation to the United States; and
* The sales price was not influenced by any relationship between the parties.
The First Sale Principle is not a special exemption or preferential treatment but a method of determining transaction value within the scope of the statute. CBP continues to evaluate each case on its facts and has, in recent years, adopted a stricter approach to verifying compliance.
Application of the first sale principle in related party transactions
The application of the First Sale Principle becomes more complex when the manufacturer and the exporter (or middleman) are related parties. In such cases, in addition to the condition discussed in the preceding paragraph, the CBP imposes a heightened evidentiary burden to demonstrate that,
* the transaction between the related entities constitutes a bona fide sale, and
* the relationship did not influence the price actually paid or payable.
CBP will accept a first sale between related parties only where it is shown that a genuine transfer of title and risk occurred for consideration, and the parties behaved as independent buyer and seller. In number of rulings, the CBP has emphasized several indicators of a bona fide sale:
* The buyer assumed risk of loss and acquired title to the goods;
* The buyer paid for the merchandise by verifiable means (e.g., bank transfer or other commercial payment);
* The documentation (purchase orders, invoices, and proof of payment) linked to specific shipments supported the transfer of ownership.
* The intermediary could select its own downstream customers and determine resale prices; and
Further, number of CBP’s rulings also highlight the manner to substantiate that the relationship did not affect pricing. Some of the indicators to establish the same are:
* The related middleman sold identical products to an unrelated buyer at similar weighted-average prices; an
* The related-party transaction ensured recovery of all costs plus an industry-consistent profit margin.
* It is to be demonstrated that the related-party pricing was settled in a manner consistent with unrelated-party sales and therefore was not influenced by the relationship.
Best practices & compliance approach
Before applying the First Sale Principle, importers should conduct a thorough mapping of the supply chain to identify all sales occurring before importation. CBP applies a strict, documentation-based approach to assess whether an earlier sale qualifies as a sale for export to the United States. Importers must provide complete and verifiable records linking all stages of the transaction, including purchase orders, invoices, payment proofs, bills of lading showing the United States as the destination, and contracts identifying transfer of title and risk. Any missing documentation may result in rejection of the first sale claim. Although CBP sets a high threshold, these rulings confirm that the First Sale Principle remains legally available in related-party transactions as well.
For transactions involving complex or multi-tiered supply chains, importers may obtain a binding advance ruling from CBP. Once issued, a ruling provides legal certainty and may be relied upon for subsequent importations under substantially identical facts. However, importers must ensure that all factual circumstances remain unchanged; otherwise, CBP may revoke or modify the ruling.
Conclusion
In conclusion, while the First Sale Principle is not without complexity, it continues to serve as a lawful and effective valuation tool for U.S. importers operating in a tariff-intensive environment. Its lawful application enables importers to determine transaction value based on an earlier qualifying sale in a multi-tiered supply chain, thereby managing duty and tariff exposure in compliance with U.S. Customs law.
[The authors are Associate Partner and Senior Associate, respectively, in International Trade and WTO practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]
