RR:IT:VA 548093 CC
Susan Kohn Ross, Esq.
S.K. Ross & Assoc., P.C.
5777 West Centry Blvd., Suite 520
Los Angeles, CA 90045-5659
RE: Allowance for defective goods; HRL’s 544371 and 544762; rebates; 19 U.S.C. § 1401a(b)(4)(B); 19 CFR § 158.12; Samsung Electronics America, Inc. v. United States
Dear Ms. Ross:
This is in response to your letter of February 12, 2002, on behalf of Yamaha Corp. of America (hereafter “Yamaha America”), requesting a ruling on the valuation of musical products.
FACTS:
You state that Yamaha America imports musical products, such as instruments, home electronics, accessories and related products manufactured in various countries and shipped by Yamaha Corporation of Japan (hereafter “Yamaha Japan”) primarily through the port of Los Angeles/Long Beach. You have submitted copies of product brochures. Even though Yamaha Japan and Yamaha America are related parties, you state that prices are negotiated at arms’ length and thus do not affect the price actually paid or payable. Consequently, appraisement of the imported merchandise is based on transaction value.
The terms of sale for the imported merchandise are on a F.O.B. basis. You state that Yamaha Japan provides “warranty support” for imported merchandise which is found to be defective. This support takes two forms: 1) parts support, in which Yamaha Japan provides replacement service parts for certain parts found to be defective, and 2) monetary support, in which certain products are allowed an ad valorem price allowance. Details of the warranty support are included in the Distribution Agreement, a copy of which you have submitted.
Your ruling request concerns the monetary support or allowances. Currently, Yamaha America pays duty on transaction value of the merchandise, without deducting any allowance. For defective merchandise, Yamaha America undertakes the warranty service for certain products and is given an allowance in product pricing to offset its additional responsibilities and costs by Yamaha Japan. Yamaha Japan reimburses Yamaha America semi-annually for this warranty service, which coincides with the companies’ fiscal years and accounting audits. You state that “[w]hile it is paid semi-annually, the rebate is calculated on a monthly basis.” You have submitted documentation concerning a past payment. In addition, you have submitted documentation, a “warranty spreadsheet,” calculating a past monthly rebate.
The pricing allowances or reimbursements are based on an estimated average cost for warranty service based on the experience and records of both companies. The allowances for specific products are listed in the Distribution Agreement, as an ad valorem price allowance. The Distribution Agreement is amended from time to time, to reflect changes in the products covered or changes in the rate of the price allowance.
Yamaha Japan is considering changing its computer system so that the allowances can be reflected on individual invoices. For example, suppose the invoiced price of a piano is $1000. Currently, that is the price that would be on the invoice. You propose, however, that invoices in the future would reflect the price allowance. For example, if the price allowance on the piano were 10%, then the invoiced price would reflect a $100 deduction and be $900. However, under this new method the price paid to Yamaha Japan would still be $1000, and the allowance would be reimbursed semi-annually, as is currently done.
You request a prospective ruling on the new invoicing plan. You request that we rule that the price actually paid or payable is the price with a deduction for the allowance, which in the example above is $900. In the alternative, you request that there be an allowance for the defective merchandise pursuant to 19 CFR § 158.12 in accordance with the Samsung Electronics America, Inc. v. United States line of cases and the Fabil Manufacturing Co. v. U.S. cases.
ISSUES:
Whether the defective allowance is part of the price actually paid or payable.
2. Whether the subject merchandise is eligible for a defective merchandise allowance pursuant to 19 CFR § 158.12.
LAW AND ANALYSIS:
As you know, imported merchandise is appraised in accordance with section 402(b) of the Tariff Act of 1930, as amended by the Trade agreements Act of 1979 (TAA: 19 U.S.C. § 1401a), and that the preferred method of appraisement is transaction valuation. Transaction value is the “price actually paid or payable for merchandise when sold for exportation to the United States,” plus five statutorily enumerated additions. When parties are related, section 402(b)(2)(B) of the TAA (19 U.S.C. § 1401a(b)(2)(B)) provides that transaction value is acceptable only if an examination of the circumstances of the sale indicates that the relationship between the buyer and seller did not influence the price actually paid or payable or if the transaction value of the imported merchandise closely approximates the transaction value of identical or similar merchandise in sales to unrelated buyers in the U.S. or the deductive or computed value for identical or similar merchandise. You state that prices are negotiated at arms’ length and thus do not affect the price actually paid or payable. We are not making a determination pursuant to 19 U.S.C. § 1401a(b)(2)(B), but for purposes of this letter are assuming that the relationship does not affect the price actually paid or payable and that transaction value can be used to appraise the merchandise.
Your first major argument is that the allowance should not be included in the price actually paid or payable since the net amount ultimately being paid for the goods is determined at the time of entry by deducting the warranty allowance. You contend since the warranty allowances are firm and in effect by mutual agreement prior to exportation and thus the transaction value is known and can be reflected on the invoices at the time of exportation, the price actually paid or payable should not include the warranty allowances. You cite Headquarters Ruling Letter (HRL) 544371, dated June 11, 1990, and HRL 544762, dated January 17, 1992, in support of your arguments. You state that these rulings found that the defective product allowance was not part of the price actually paid or payable for the imported goods.
In HRL 544371, the importer had previously filed credit claims for imported merchandise with manufacturing defects. Then the importer and manufacturer agreed upon a 0.75% discount on every shipment to cover defective merchandise. This discount was deducted on the FOB Hong Kong value and was reflected on the commercial invoice. We found that if the price actually paid or payable reflected the discount, then it should not be included in the transaction value.
In HRL 544762 the commercial invoices listed an original as well as an adjusted price. The adjusted price was arrived at by deducting a defective allowance, ranging from 1% to 7% of the original price. This allowance represented goods that were either damaged in transit or defective. The importer paid the adjusted price. Citing HRL 544371, we found that the defective allowance was not part of the price actually paid or payable.
Rather than supporting your position, the above rulings refute it. In both HRL 544371 and HRL 544762 not only do the commercial invoices include a defective allowance, the amount paid by the buyer to the seller reflects this allowance. Therefore, the buyer paid the agreed upon price for the goods which included the deduction for the defective allowance. This is not the case for the factual situation you present. Instead, Yamaha America will pay the full agreed upon price without a deduction for the defective allowance. Consequently, the defective allowance is part of the price actually paid or payable; no deduction for the allowance should be made to arrive at transaction value.
You argue that the semi-annual payments made by Yamaha Japan to Yamaha America constitute the defective allowance which should be deducted from the price actually paid or payable to arrive at transaction value. 19 U.S.C. § 1401a(b)(4)(B) provides that any rebate of, or other decrease in, the price actually paid or payable that is made or otherwise effected between the buyer and seller after the date of importation of the merchandise into the United States shall be disregarded in determining transaction value. The payments made by Yamaha Japan to Yamaha America are clearly rebates. In fact, you state in your submission more than once that these payments are rebates. These rebates are made after the importation of the merchandise. Consequently, pursuant to 19 U.S.C. § 1401a(b)(4)(B), these rebates are disregarded in determining transaction value.
Your second major argument is that the subject merchandise should receive a defective merchandise allowance based on Fabil Manufacturing Co. v. U.S., 23 CIT 395, 56 F.Supp. 2d 1183 (1999), reversed and remanded by 237 F.3d 1335 ( Fed. Cir. 2001); and Samsung Electronics America, Inc. v. United States, 19 CIT 1307, 904 F.Supp. 1402, reversed and remanded by 106 F.3d 376 (Fed. Cir. 1997); 23 CIT 2, 35 F.Supp. 2d 942 (1999), affirmed by 195 F.3d 1367 (Fed. Cir. 1999). Those cases concerned whether merchandise which had latent manufacturing defects was eligible for a defective merchandise allowance pursuant to 19 CFR § 158.12. You argue that “Yamaha has proper records which allow it to identify the goods subject to warranty rebate by invoice number which ties directly to a consumption entry.”
19 CFR § 158.12(a) provides, in pertinent part, that merchandise which is subject to ad valorem or compound duties and found by the port director to be partially damaged at the time of importation shall be appraised in its condition as imported, with an allowance made in the value to the extent of the damage.
The Samsung opinions delineate evidentiary requirements in substantiating an allowance for goods with latent manufacturing defects under 19 CFR § 158.12. According to the Samsung cases, the importer should provide “specific descriptions of the damage or defect alleged and, in some manner, relate that defective merchandise to a particular entry.” Samsung Electronics America, Inc. v. United States, 23 CIT 2, 8. In addition, the importer must show a link in the diminution in value due to defects in specific merchandise to particular entries. Samsung had claimed its allowance utilizing a “Defective Merchandise Factor,” derived “by dividing the total warranty costs and losses per year by the total FOB value of merchandise for that year.” Samsung, supra, p. 4. The courts found that Samsung was not permitted to take this allowance since there was insufficient evidence to show which entries had latent defects and how an appropriate allowance in value could be calculated for the alleged defects in the entries at issue.
In Fabil plaintiff sought an allowance under 19 CFR § 158.12, claiming that all of the imported merchandise was defective and totally worthless. On appeal to the Court of Appeals for the Federal Circuit (CAFC) no contrary facts were presented by the government. The CAFC decided that there was no need for plaintiff to tie the alleged defects to particular entries to survive a motion for summary judgement. That case was decided on the specific facts, that the only evidence presented indicated that all the imported merchandise was defective and totally worthless.
We fail to see how either of these cases in any way support a claim for a defective merchandise allowance pursuant to 19 CFR § 158.12. In Fabil all of the imported merchandise was defective and totally worthless. There is no claim made here that all of the merchandise is defective and totally worthless, nor does the evidence presented support such a conclusion. Consequently, Fabil is inapplicable to this factual situation. The Samsung cases, however are applicable. The Defective Merchandise Factor is similar to the allowance you seek in that both are estimates, both cannot be tied to specific entries, and for both it is not possible to show a link in the diminution in value due to defects in specific merchandise to particular entries. Therefore, a defective merchandise allowance pursuant to 19 CFR § 158.12 has not been substantiated.
HOLDINGS:
The defective allowance is part of the price actually paid or payable and may not be deducted to arrive at transaction value. The amounts Yamaha Japan reimburses Yamaha America are rebates pursuant to 19 U.S.C. § 1401a(b)(4)(B) and are disregarded in determining transaction value.
2. For the subject merchandise, a defective merchandise allowance pursuant to 19 CFR § 158.12 has not been substantiated.
Sincerely,
Virginia L. Brown
Chief, Value Branch