VAL CO:R:C:V 544845 CRS
Area Port Director
U.S. Customs Service
135 High Street, Room 350
Hartford, CT 06103
RE: Internal Advice 26/91; components of jet aircraft engines;
consignment; transaction value not applicable; formula; 19 U.S.C.
1401a(f)
Dear Sir:
This is in reply to a request for internal advice filed by
**************, on behalf of the *****************************
Division of ****************** concerning the appraised value of
imported components for jet aircraft engines. ***************
have subsequently been replaced as counsel by the firm of
**************. Letters dated August 2, 1990, and June 19, 1992,
were submitted by counsel in connection with this matter.
FACTS:
**************** (the importer) and four other corporations
(the foreign suppliers) have established a joint company (Joint
Co. - a foreign corporation) to develop, manufacture, sell and
service a certain type of jet aircraft engine. In addition,
Joint Co. also leases engines. Pursuant to the collaboration
agreement (the "agreement") between the joint parties, Joint Co.
directs the development and manufacture of the engines and is
responsible for sales and after sales support. However, Joint
Co. does not produce components or assemble the finished engines.
Instead, the agreement requires that each party contribute
an allotted portion of the work necessary to design, build, test,
sell and service the engines. Accordingly, the individual
parties are responsible for providing parts or labor used to
manufacture finished aircraft engines. The foreign suppliers
ship components on consignment to the importer who assembles the
finished engines. The suppliers retain title to their components
until just before Joint Co. sells the finished engines. At this
juncture Joint Co. actually purchases the imported components
from the foreign assemblers.
Every month Joint Co. pays the individual parties an amount
for the components and work performed based on a two-part
formula, the terms of which are fixed under the agreement. The
first part of the formula is designed to approximate the
manufacturing or engineering cost of furnishing the components
and related services, and is based on the projected sales price
of the finished engines multiplied by an individual part value
expressed as a percentage of the total components and services
required to manufacture a finished engine. The second part of
the formula returns to each party a proportionate share in the
total revenue received by Joint Co. from the sale of finished
engines made from the imported and domestic components, less an
amount to cover Joint Co.'s expenses and profit. For example,
assuming that a party supplied twenty percent of the inputs of a
finished engine, it would receive twenty percent of the revenue
from the sale of that engine.
Nevertheless, in any given month a party might not receive
revenue under the first part of the formula, and yet still earn
income under the second. Payments received under the second part
of the formula are not allocated to specific components or
services.
ISSUE:
The issues presented are: (1) whether aircraft components
consigned to the importer under the payment formula set forth
above can be appraised on the basis of transaction value; and (2)
if not, what constitutes the appropriate basis 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 merchandise
when sold for exportation to the United States," plus certain
statutorily enumerated additions. 19 U.S.C. 1401a(b)(1).
For Customs purposes, the word "sale" is generally defined
as a transfer of ownership in property from one party to another
for a price or other consideration. J.L. Wood v. United States,
62 CCPA 25, C.A.D. 1139 (1974); J.H. Cottman & Co. v. United
States, 20 CCPA 344, T.D. 46114 (1932). In the instant case, the
components provided by the foreign suppliers are consigned to the
importer who combines them with domestically produced components
to manufacture finished jet aircraft engines. Transaction value
is inapplicable as a means of appraisement for merchandise
imported on consignment. Although the components are consigned
to the importer, there exists a price actually paid or payable
for the components prior to the time of importation, namely the
formula under which Joint Co. pays the foreign suppliers.
However, the components are not actually sold by the suppliers to
Joint Co. until just prior to the time Joint Co. sells the
finished engines, either to a U.S. buyer, or for export. While
there is eventually a transfer of title for a consideration, for
an indeterminate period after importation the foreign suppliers
retain title to the consigned merchandise. Consequently, as the
components are sold after importation, there is no sale for the
purposes of determining transaction value.
When imported merchandise cannot be appraised on the basis
of transaction value, it is appraised in accordance with the
remaining methods of valuation, applied in sequential order. 19
U.S.C. 1401a(a)(1). The alternative bases of appraisement, in
order of precedence, are: the transaction value of identical or
similar merchandise (19 U.S.C. 1401a(c)); deductive value (19
U.S.C. 1401a(d)); computed value (19 U.S.C. 1401a(e)); and
the "fallback" method (19 U.S.C. 1401a(f)).
The transaction value of identical or similar merchandise is
based on sales at the same commercial level and in substantially
the same quantity, of merchandise exported to the United States
at or about the same time as that being appraised. 19 U.S.C.
1401a(c). Merchandise identical to the imported components
exists in the form of spare parts. Nevertheless, counsel for the
importer advises that to date there have been few sales of spare
parts; furthermore, no further sales of spares are scheduled
until 1994. In addition, many of the original equipment parts
are not imported as spares. Finally, we are unaware of any sales
of similar merchandise. Accordingly, based on the information
that is currently available the components cannot be appraised on
the basis of the transaction value of identical or similar
merchandise.
Under the deductive value method, merchandise is appraised
on the basis of the price at which it is sold in the U.S. in its
condition as imported and in the greatest aggregate quantity
either at or about the time of importation, or before the close
of the ninetieth day after the date of importation. 19 U.S.C.
1401(d)(2)(A)(i)-(ii). This price is also subject to certain
enumerated deductions. 19 U.S.C. 1401a(d)(3). In the instant
situation the components are neither sold in their condition as
imported, nor within the allowable time constraints.
However, merchandise that is not sold in its condition as
imported, nor before the close of the ninetieth day can still be
appraised under deductive value, provided the importer so elects.
19 U.S.C. 1401a(d)(2)(A)(iii). In this case the importer has
not elected this method. Furthermore, the method is not normally
applicable when as the result of further processing, imported
merchandise loses its identity unless the value added by the
processing can be determined accurately without unreasonable
burden on the importer or Customs. Section 152.105(i)(2),
Customs Regulations (19 CFR 152.105(i)(2)). Counsel for the
importer also maintains, and we concur, that appraisement on this
basis would impose an unreasonable burden. Finally, the imported
components are assembled into engines that are sold by Joint Co.
to foreign purchasers as well as to U.S. buyers. As a result,
the imported original equipment components cannot be appraised on
the basis of deductive value method.
Under the computed value method, merchandise is appraised on
the basis of the material and processing costs incurred in the
production of imported merchandise, plus an amount for profit and
general expenses equal to that usually reflected in sales of
merchandise of the same class or kind, and the value of any
assists and packing costs. 19 U.S.C. 1401a(e)(1). In this
regard the Customs Regulations state that it will be presumed a
computed value cannot be determined if the importer is unable to
provide the required information within a reasonable time, and/or
the foreign producer refuses to provide, or is legally prevented
from providing the information. The imported aircraft parts are
manufactured by a number of different manufacturers, many of
which are not party to the joint agreement. Counsel has advised
that computed value information is not provided to the importer.
This information is confidential and would not likely be
disclosed. Since there is no information on which to base
computed value, this method of appraisement is also inapplicable.
Where merchandise cannot be appraised under the methods set
forth in 19 U.S.C. 1401a(b)-(e), its value is to be determined
in accordance with the "fallback" method of section 402(f) of the
TAA. The fallback method provides that merchandise should be
appraised on the basis of a value derived from one of the prior
methods reasonably adjusted to the extent necessary to arrive at
a value. 19 U.S.C. 1401a(f)(1).
Transaction value was originally eliminated as a basis of
appraisement due to the fact that the components are imported on
consignment. However, under section 402(f), the components may
be appraised based on a reasonably adjusted transaction value.
Transaction value is defined as the price actually paid or
payable for the merchandise when sold for exportation to the
United States. The term price actually paid or payable" means:
The total payment (whether direct or indirect, and
exclusive of any costs, charges or expenses incurred
for transportation, insurance and related services
incident to the international shipment of the
merchandise from the country of exportation to the
place of importation in the United States) made, or to
be made, for imported merchandise by the buyer to, or
for the benefit of, the seller.
19 U.S.C. 1401a(b)(4).
Here, the imported components are ultimately sold to Joint
Co. under the formula negotiated between the parties; however,
Customs has the authority to appraise on the basis of a formula.
19 CFR 152.103(a)(1). The formula is set forth in Appendix L
of the agreement and is fixed prior to exportation; however,
elements thereof may be reviewed and adjusted periodically.
Under the formula the parties contract to sell parts in
exchange for a consideration based on the estimated engineering
or manufacturing cost of the parts plus a share of the profits
from the sale of the finished engines assembled from the
components. Counsel contends that only the first part of the
formula should serve as the basis of appraised value since any
amounts returned under the second part are unrelated to the
components. Counsel maintains that these amounts include costs,
expenses and profits incurred by the importer that are expressly
excluded from the appraised value of imported merchandise under
section 402(b)(3), which provides in pertinent part:
The transaction value of imported merchandise does
not include any of the following, if identified
separately from the price actually paid or payable...
(A) Any reasonable cost or charge that is
incurred for
(i) the construction, erection, assembly, or
maintenance of, or the technical assistance
provided with respect to, the merchandise
after its importation into the United
States...
19 U.S.C. 1401a(b)(3). Accordingly, counsel maintains that all
costs associated with the assembly of finished engines should be
excluded from transaction value.
Section 402(b)(3) governs various costs and charges incurred
by the seller of imported merchandise after importation into the
U.S. In the instant case costs and charges for assembly are
recovered by each party under the second part of the formula,
specifically, through each party's work share percentage. Given
that the second part of the formula returns to each party its
proportionate share of the work program, the use of the formula
as the basis of appraisement does not result in any assembly
costs incurred by the importer in the U.S. being captured by the
formula. For example, the distribution under the second part
returns to the importer its costs and charges for assembly.
These amounts, reflecting domestically produced components and
labor would not be dutiable. Since these amounts are not
included in the formula, there is no need to adjust for them
under section 402(b)(3). As a result, amounts returned under the
second part of the formula should be included in transaction
value as part of the price actually paid or payable for the
components.
Nevertheless, it should be noted that the parties to the
agreement are related through their joint ownership of Joint Co.
Section 402(b) provides that merchandise can be appraised under
transaction value only if, inter alia, the buyer and the seller
are not related, or the buyer and seller are related but the
transaction is acceptable on other grounds. 19 U.S.C.
1401a(b)(2)(B). One method for validating a transaction value is
to examine the circumstances of the sale. If they indicate that
the relationship did not influence the price actually paid or
payable, the transaction value will be acceptable.
The "sale" of parts from the joint parties to Joint Co. is
based on the sale of finished engines. The higher the price of
the latter, the more the joint parties will benefit from the sale
of parts. Conversely, the lower the price obtained for finished
engines, the lower the return to the joint parties. The instant
transaction is therefore structured so that the parties share in
both the risk and the return of the deal. The circumstances of
sale therefore indicate that price actually paid or payable has
not been influenced in such a way as to render transaction value
unacceptable. Consequently, transaction value applied pursuant
to section 402(f) is the appropriate basis of appraisement.
HOLDING:
The imported merchandise should be appraised in accordance
with the fallback method as provided for in 19 U.S.C. 1401a(f).
Under the fallback method, the imported components should be
appraised under the transaction value established by the formula
negotiated between the parties as set forth in Appendix L of the
agreement.
Sincerely,
John Durant, Director