VAL-CO:R:C:V 545088 GG
Mr. Robert Holler
District Director
U.S. Customs Service
9400 Viscount Blvd., Suite 104
El Paso, Texas 79925
RE: Application for Further Review of Protest 240292100024
Dear Mr. Holler:
This is in reply to the application for further review of the protest referenced above. We regret the delay in responding.
FACTS:
Buffalo China, Inc. ("Buffalo") imports unfinished ceramic tableware produced by its related subsidiary in Mexico, Ceramica de Juarez, S.A. De C.V. ("Ceramica"). The merchandise has been appraised under computed value. 1.
On a semi-annual basis, Buffalo states that it has reconciled its entered costs to actual costs, and has submitted to Customs a cost submission with tender of any additional duties owed. The actual dutiable costs reported include the cost and/or value of materials, freight and tools, dies and molds provided by Buffalo, plus the cost of fabrication as reflected in the accounting records of Ceramica.
Following an internal review of its import operations, Buffalo decided to take over the accounting function of Ceramica's operations, and to book certain general expense items that had previously been recorded by Ceramica. These changes were made effective in the last half of Buffalo's 1991 fiscal year. The expense categories are depreciation; dues and subscriptions; education and morale; hourly wages; miscellaneous; salaries; services; and supplies. They do not fall within the _____________
1. In reviewing the documents submitted, we are unable to determine why transaction value does not apply. If transaction value is found, the merchandise must be appraised on that basis and in accordance with section 152.103(a)(3), Customs Regulations (19 CFR 152.103(a)(3)), regarding assembled merchandise.
definition of assists. They are reflected on Buffalo's cost accounts and form part of their profit and loss statements. According to Buffalo, where a particular type of expense, for example, supplies, is incurred by what would be a dutiable activity, such as direct labor, the appropriate share of that expense item continues to be paid by, and reflected on the books of, Ceramica. As such, it is included in the assembler's cost and remains part of the appraised value of the merchandise.
Buffalo explains that it purchases services by using Ceramica as its agent. At month end each line item is transferred to Buffalo through an inter company account. Ceramica credits line by line contra accounts, resulting in the line items not being reflected as costs of the Mexican operation or shown on Ceramica's books, but rather appearing as costs of Buffalo. According to Buffalo, contra accounts are used so there is a trail which the Mexican government can audit to verify that all currency transactions are legitimate.
According to counsel for Buffalo, Ceramica's Mexican accountants (Coopers and Lybrand) have stated that the accounting procedures discussed above conform to generally accepted accounting principals in Mexico. Regulatory Audit in El Paso has expressed the opinion that the transfers may be in accordance with GAAP, but consider it unusual for a company in Mexico to not have general and administrative expenses on their books. Such expenses apparently appear on the books of most other Mexican maquiladora companies that export to the United States.
Buffalo requested in writing on its entry summaries that its merchandise be appraised under computed value if no transaction value were found.
The entered values were derived from standard costs that the protestant claims were subject to review at the end of the relevant accounting period.
ISSUE:
Where the producer's amount for general expenses and profit is recorded on the producer's books in a manner consistent with GAAP, is there authority to add to that figure certain amounts recorded on the importer's books for purposes of determining the computed value of imported merchandise?
LAW AND ANALYSIS:
Pursuant to Section 402(e) of Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a), the computed value of imported merchandise is the sum of
(A) the cost or value of materials and fabrication costs employed in the production of the imported merchandise;
(B) an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind as the imported merchandise that are made by the producers in the country of exportation for export to the United States;
(C) any assist, if its value is not included under (A) or (B);
(D) the packing costs.
With regard to profit and general expense figures under computed value, section 402(e)(2)(B) of the TAA states:
The amount for profit and general expenses shall be based upon the producer's profits and expenses, unless the profits and expenses are inconsistent with those usually reflected in sales of merchandise of the same class or kind as the imported merchandise that are made by producers in the country of exportation for export to the United States, in which case the amount shall be based on the usual profit and general expenses of such producers in such sales, as determined from sufficient information.
The Statement of Administrative Action ("SAA"), adopted by Congress with the passage of the TAA, explains that
The amount for profit and general expenses will be determined on the basis of information supplied by, or on behalf of, the producer and will be based upon the commercial accounts of the producer, provided that such accounts are consistent with the generally accepted accounting principles applied in the country where the goods are produced and unless the figures provided are inconsistent with those usually reflected in sales of merchandise of the same class or kind as the imported merchandise, that are made by producers in the country of exportation for export to the United States. . .
The amount for profit and general expenses will be taken as a whole. . .. Where the producer's own figures for profit and general expenses are not consistent with those usually reflected in sales of goods of the same class or kind as the goods being valued, which are made in the country of exportation for export to the United States, the amount for profit and general expenses will be based upon reliable and quantifiable information other than that supplied by or on behalf of the producer of the goods. (Regulation)
Counsel for Buffalo states that Ceramica's Mexican accountants (Coopers and Lybrand) have determined that Ceramica's accounting procedures conformed with Mexican GAAP; however, there is no documentary evidence supporting this claim in the file. Accordingly, the presentation to Customs of a letter confirming Coopers and Lybrand's opinion, stating the authority upon which the opinion is based, should be a prerequisite to final action being taken on the protest.
Assuming Ceramica's books do conform to Mexican GAAP, the figure for profits and general expenses provided to Customs must nonetheless be consistent with that usually reflected in sales of merchandise of the same class or kind as the imported merchandise that are made by producers in the country of exportation for export to the United States. Buffalo states that it is not aware of any other Mexican producer and exporter to the U.S. of ceramic bisque products. Customs in El Paso views all Mexican maquiladora companies that import through El Paso to be producers of same class or kind merchandise. Further, they believe that since the maquiladoras typically show the types of expenses at issue on their books as general and administrative expenses, then Ceramica's failure to do so now illustrates that their figures are inconsistent.
Same class or kind merchandise is defined under Section 402(g)(2) of the TAA as merchandise (including, but not limited to, identical merchandise and similar merchandise) that is within a group or range of merchandise produced by a particular industry or industry sector. Sales for export to the United States of the narrowest group or range of imported merchandise, will be examined to determine usual profit and general expenses. For purposes of computed value, merchandise of the same class or kind must be from the same country as the merchandise being appraised. 19 CFR 152.106(e). Categorizing all products of maquiladoras that enter through El Paso as same class or kind merchandise is beyond our legal authority because the range is too broad. Absent information on sales for export to the U.S. of Mexican ceramics of the same class or kind, Ceramica's actual profit and general expenses as reflected on the assembler's books will be used as the "usual" profit and general expenses for purposes of determining a computed value. See HRL 543502, dated June 11, 1985; HRL 543268, dated December 14, 1984; HRL 542849, dated August 8, 1982; and HRL 543031, dated April 12, 1983.
As explained above, in the absence of any evidence that the amount for general expenses and profit of the producer is not recorded in a manner consistent with the generally accepted accounting principles in Mexico or that the amount is inconsistent with the amount for general expenses and profit usually reflected in sales of merchandise of the same class or kind, there is no authority to include in the computed value the amount reflected on the importer's accounts for general expenses and profit. See HRL 545045, dated February 1, 1994; and TAA 44 and supplement HRL 543872, dated July 20, 1982.
HOLDING:
Where the producer's amount for general expenses and profit is recorded on the producer's books in a manner consistent with GAAP, there is no authority to add to that figure certain amounts recorded on the importer's books. Accordingly, the amount for general expenses and profit recorded on the importer's books is not included in the computed value of the imported merchandise.
You are directed to ALLOW the protest, provided satisfactory documentation is presented to verify that Ceramica's commercial accounts were kept in accordance with Mexican GAAP. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Lexis, Freedom of Information Act and other public access channels.
Sincerely,
John Durant
Director, Commercial
Rulings Division