VAL CO:R:C:V 545112 ILK
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RE: Ruling request pertaining to appraisement of leased imported
merchandise
Dear ---------:
This is in response to your letter of October 2, 1992
(hereinafter referred to as the "request"). On behalf of your
client --------------- ----------- --------- --------, --- -----
------, Inc. (hereinafter referred to as the "importer"), a
United States corporation, you request a ruling on the
appraisement of leased imported merchandise. The request was
followed by a March 24, 1993 meeting between you and members of
my staff in the Value and Marking Branch.
FACTS:
The importer has entered equipment leased from a related
company, --------------- ----------- --------- (hereinafter
referred to as the "lessor"), a company of the United Kingdom.
At the time the request was submitted for consideration
importation of the merchandise was scheduled to commence in
January, 1993. Customs personnel at the Port of Baltimore are
postponing liquidation of the entry pending this ruling.
The importer is in the business of selling imported metal
boxes for cookies, candies, etc., but now intends to begin
manufacturing some boxes in the U.S. In order to produce the
metal boxes the importer will rent from the lessor the die heads
and forming jigs, and ancillary elements such as feed plates, bed
plates, hardware, etc., (hereinafter collectively referred to as
"equipment"), which are needed to manufacture the metal boxes.
Each piece of equipment makes one kind of box, and the lessor has
an inventory of thousands of pieces of equipment, to make
thousands of different kinds of metal boxes. The equipment is
all in used condition, and the median life of the equipment is
ten years. The Equipment Lease Agreement ("agreement") between
the importer and lessor allows the importer to rent a particular
piece of equipment for the period of time it takes the importer
to manufacture the agreed upon quantity of boxes +/-10%, after
which time the equipment will be returned to the lessor. The
agreement provides for the execution of a new lease in the event
the importer wishes to produce an additional quantity of boxes.
The agreement requires that any new lease be filed with U.S.
Customs and that any additional duty be deposited with Customs or
as Customs directs. The agreement also provides that it shall be
in force for one year and shall automatically be extended from
year to year thereafter until one of the parties gives notice of
termination. The agreement itself does not specify the specific
equipment to be leased, and does not identify the number of boxes
to be produced by the importer. At the March 24 meeting, you
described the agreement as a "background lease" and stated that
the details of each lease transaction, such as the number of
units expected to be manufactured, would be contained in a
separate purchase order.
The agreement provides that the rent for each and every item
of equipment will be calculated according to a formula. All of
the equipment, during its lifetime, is expected to produce a
total of 20,000,000 pieces or more, therefore the figure of
20,000,000 is agreed to as the standard quantity of pieces the
equipment can produce in its lifetime. The formula for
calculating the rent is as follows:
(A) The cost of materials, labor, overhead and profit
incurred by Lessor in making the Equipment shall be
called the Original Value of the Equipment.
(B) The Original Value must be depreciated to reflect
the fact that it is used Equipment. The Equipment is
depreciated to its cost of maintenance. To reflect
depreciation the Original Value shall be multiplied by
a factor of .25. This shall result in a value to be
called the Current Value. The Current Value represents
the continuing maintenance cost invested each year to
keep the Equipment usable.
(C) The Current Value must be adjusted to reflect the
fact that only a portion of the productive lifetime of
the Equipment is being leased. Therefore the Current
Value shall be multiplied by a fraction to be called
the Production Fraction, which represents the actual
percentage of use of the Equipment during the term of
the Lease. The Production Fraction is derived as
follows:
Lessee's intended quantity of production using Equipment
20,000,000 pieces
(D) When the Current Value is multiplied by the
Production Fraction, a figure is obtained that is
called the Lease Value. The Lease Value represents the
value of the intended percentage of use of the
Equipment during the Lease. The Lease Value therefore
is the rent chargeable to Lessee to use the Equipment
to make the pieces intended.
The entire formula to reach the Lease Value is:
(Original Value x .25) x intended production quantity in U.S.
20,000,000
The agreement provides that the importer shall pay for all
assembly and disassembly costs, all normal equipment maintenance
costs for set-up, lubrication, cleaning, etc. incurred during the
term of the lease, the costs of all transport, insurance and
delivery from the U.K. to the importer, and the costs of all
duties, taxes and charges on importation.
At the March 24 meeting you stated that it may be more
appropriate to adjust the production fraction to reflect that
each piece of equipment is estimated to produce 1,000,000 pieces
annually. Accordingly the formula to reach lease value would be:
(Original Value x .25) x intended production quantity in U.S.
1,000,000
You also stated at the meeting that the current value of the
merchandise is the inventory value of the goods.
The request states that the importer and lessor maintain an
arms length relationship. In support of the importer's position,
at the meeting you stated that the two companies have independent
profit centers, and arrived at the lease value by means of a
formula.
The importer takes the position that the imported
merchandise cannot be appraised under 402(b)-(e) of the Tariff
Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA,
19 U.S.C. 1401a(b)-(e)). In its request, the importer states
that there is no sale of merchandise identical or similar to the
leased merchandise, deductive value cannot be used because the
merchandise is not sold in the U.S., and computed value cannot be
used because the merchandise consists of used goods and
individual records do not exist for the production of the
merchandise. It is the importer's position that therefore the
merchandise should be appraised under 402(f) of the TAA, and
that the rental charge paid to the lessor pursuant to the lease
should be accepted as the adjusted transaction value of the
imported merchandise. It is the importer's position that it
would be inequitable to assess duty based upon the full value of
the imported equipment, as the importer has no right to keep the
equipment beyond the period of time it takes to manufacture the
intended quantity of pieces, and because the importer may find it
necessary to import the same equipment again after returning it
to the lessor.
ISSUE:
1. Whether 402(f) is the appropriate method of appraisement
for the leased imported merchandise.
2. What is the appropriate method of appraisement of leased
imported merchandise under 402(f).
LAW AND ANALYSIS:
Transaction value, the preferred basis of appraisement under
the TAA, is defined in 402(b) as "the price actually paid or
payable for the merchandise when sold for exportation to the
United States." In this case, as the merchandise is leased, it
cannot be considered to be "sold for exportation to the United
States" as required under 402(b) of the TAA. See C.S.D. 83-58.
Therefore, transaction value would be eliminated as the basis of
appraisement.
The second appraisement method in order of statutory
preference is transaction value of identical and similar
merchandise under 402(c) of the TAA. According to the importer,
no identical or similar merchandise is imported into the U.S. If
the imported merchandise cannot be appraised under this method
the merchandise will be appraised on the basis of either
deductive value under 402(d) or computed value under 402(e) of
the TAA. According to the facts, the imported merchandise is not
sold in the U.S., and records are not available to determine
computed value. Therefore, based on the information provided in
the request, it appears that none of the above methods of
appraisement can be used with respect to the imported
merchandise.
Section 402(f) of the TAA provides that if the value of
imported merchandise cannot be determined under subsections (b)
through (e):
...the merchandise shall be appraised for the purposes
of this Act on the basis of a value that is derived
from the methods set forth in such subsections, with
such methods being reasonably adjusted to the extent
necessary to arrive at a value.
Pursuant to this authority, we believe that the transaction
value method of appraisement can be reasonably adjusted to permit
the rental value of the equipment over its full economic life to
represent the value of the merchandise. 19 U.S.C. 1500(a)
requires Customs to "appraise merchandise by ascertaining or
estimating the value thereof." Accordingly, Customs is to
appraise the value of the merchandise as opposed to the value of
the merchandise to the importer. With respect to transactions
between related parties, 402(b) is only applicable to
transactions where the relationship between the parties does not
affect the price actually paid or payable. In this case, there
is no information to establish whether or not the relationship
affects the lease price. However, it is assumed that the current
value, or inventory value of the equipment is determined in
accordance with generally accepted accounting principles.
The current value of the equipment is provided for in the
formula contained in the agreement:
Original Value X .25 = Current Value
As the rent for the equipment is determined by adjusting the
current value of the equipment based upon the amount of use of
the equipment in proportion to the productive lifetime of the
equipment, the current value reflects the rental value of the
equipment over its productive lifetime. Therefore, the basis of
appraisement of the imported merchandise is its current value, as
calculated by the above formula. This method of appraisement is
consistent with Customs' ruling in C.S.D. 83-58, in which leased
imported merchandise was appraised based on the purchase price
given in the option to purchase, as opposed to the lease price.
The actual appraisement of the imported merchandise is however
the responsibility of the appraising officer.
HOLDING:
1. Based upon the facts presented with regard to the subject
imported leased merchandise, as appraisement of the merchandise
is not possible under 402(b)-(e), appraisement under 402(f) of
the TAA is appropriate.
2. In appraisement of the imported leased merchandise under
402(f) of the TAA, the transaction value method can be
reasonably adjusted to permit the rental value of the equipment
over its full economic life to represent the value of the
imported merchandise.
Sincerely,
John Durant, Director