Mr. Michael S. O’Rourke
Ride & Qualey
55 West 39th Street
New York, NY 10018
RE: Request for Prospective Ruling, Nokia, Inc.
Dear Mr.O’Rourke:
This is in reference to your letter of December 10, 2002, requesting a ruling on behalf of your client, Nokia Inc., (Nokia). The Nokia Mobile Phones division (NMP) is involved in the manufacture, assembly, sale and distribution of mobile phone handsets and related accessories. In a prior letter dated October 7, 2002, you requested a valuation ruling on behalf of Nokia regarding the same issues, and we responded indicating that an internal advice request was in order. However, we now understand that this ruling applies only to future transactions, and the importations have not yet occurred. You indicate that U.S. Customs completed an audit of Nokia to determine whether the entries by Nokia met an acceptable level of compliance with Customs laws and regulations.
This ruling request is the result of recommendations made by the auditors with regard to the valuation of the imported merchandise.
FACTS:
This ruling request involves two of Nokia’s divisions, Nokia Mexico, S.A. de C.V., located in Reynosa, Tamaulipas, Mexico (hereinafter referred to as Reynosa), and the other is located at 5650 Alliance Gateway, Fort Work, Texas, (hereinafter referred to as Alliance). The products are manufactured and/or assembled for NMP either at Alliance, Reynosa, or another of its foreign assembly plants. The primary function of Alliance is for assembly where, customer specific software is loaded into a handset. The handsets are completed with front and back covers and final sales packaging for specific customers then occurs. There are times when there is a transfer of raw components or parts between Reynosa and the United States.
When Reynosa manufactures products for NMP, there is a certain amount of scrap material which results from the manufacturing operations. Also, items may be scrapped if NMP ceases production of a particular item. Some of the scrap material is disposed of or is sold in Mexico; however, on occasion, scrap material is shipped from Reynosa to Alliance.
ISSUES:
What is the proper method of appraising the raw components and parts shipped from Reynosa to Alliance?
What is the proper method of appraising the scrap material that is entered into the United States by NMP?
LAW AND ANALYSIS:
The primary basis of appraisement of imported merchandise is transaction value pursuant to section 402(b) of the TAA, which is defined as the “price actually paid or payable for merchandise when sold for exportation to the United States,” plus five enumerated additions. In order for transaction value to be used as a method of appraisement, it is essential that a “sale” between the parties is available. Without a sale for exportation to the United States, transaction value must be eliminated as a means of appraisement.
If transaction value is not accepted as a method of appraisement, the appraised value must be determined by proceeding sequentially through the alternative bases of appraisement to the first such method that can be determined. These alternative methods, listed in order of precedence for use are: transaction value of identical or similar merchandise, section 402(c) of the TAA, deductive value, section 402(d), computed value, section 402(e), and value if other values cannot be determined, section 402(f).
Appraisement of Raw Components and Parts:
Regarding the appraisement of the raw components and parts shipped to the U.S., it is your contention that the most suitable method of appraisement is transaction value, i.e., the last price Reynosa paid to an unrelated vendor or seller for the raw component or part. You indicate that the relationship between Reynosa and Alliance is such that when the merchandise is transferred, there will be an internal accounting procedure that takes the product off of Reynosa’s account and a corresponding entry will be made to Alliance’s account showing the acquisition of the raw component or part. The value in the transaction is the value that Alliance is charged for the merchandise. You indicate that this is the price actually paid or payable for the goods.
Prior to the audit, the raw components and parts were being appraised pursuant to computed value. With regard to the use of computed value, the audit report concluded the following: “Nokia did not meet an acceptable level of compliance for reporting the computed value of imported merchandise. The accounting system (SAP) used to provide the material cost reflected in the computed value submission for the related maquiladora, Nokia Reynosa S.A. de C.V., was driven by the purchase order price, instead of the actual invoice price.”
It is important to note that Nokia’s use of computed value resulted in a substantial overstatement of the valuation of the goods resulting in an overpayment of duty at the time of entry.
The use of transaction value is not proper with respect to the transfer of the raw components and parts. There is no “sale for exportation to the United States” between Reynosa and Alliance upon which to base a transaction value. In addition, there is no transaction value of identical or similar merchandise pursuant to section 402(c) of the TAA available. Your claim regarding that the transaction value be based on either identical or similar raw components or parts does not satisfy the requirements of section 402(c). It must be demonstrated that a transaction value of the merchandise under consideration is fully acceptable under section 402(b) of the TAA, in order to be applied as the transaction value of identical or similar goods pursuant to section 402(c). Basing the transaction value of identical or similar merchandise on the transaction between Reynosa and a supplier in Mexico is not in accordance with section 402(c). Absent additional information on the use of section 402(c), it may not be used in this case.
Proceeding sequentially through the remaining bases of appraisement, neither deductive nor computed value, sections 402(d) or (e), respectively, are available. No deductive value information has been provided, and as indicated in the audit report, the computed value used by Reynosa was driven by the purchase order price, instead of the actual invoice price.
It appears as though section 402(f), value if other values cannot be determined, is appropriate. Regarding section 402(f), the merchandise shall be appraised on the basis of a value that is derived from the methods set forth in sections 402(b) through (e), reasonably adjusted to the extent necessary to arrive at a value. The method you describe appears to be reasonable and meets the recommendations of the audit team. The invoice values between Reynosa and the suppliers coupled with the accounting entries between Reynosa and Alliance for the same merchandise is appropriate using a section 402(f) appraisement.
Scrap Shipments
As indicated above, on occasion, scrap material is shipped from Reynosa to NMP in the United States. You indicate that there is a market price available for identical or similar scrap materials. You claim that transaction value should be used and that the value should be based on the price in effect for similar scrap on the date of export.
Again, as in the case of the shipments of raw components and materials, because there is no sale for export to the United States, the scrap can not be appraised under the transaction value method. Additionally, the scrap shipments may not be appraised under any of the alternative bases of appraisement, and should be appraised pursuant to section 402(f), value if other values cannot be determined. It appears as though a modified transaction value of identical or similar merchandise may be available, i.e., using the market price that is available for either identical or similar scrap materials.
HOLDING:
The raw components and materials imported by Alliance from Reynosa should be appraised pursuant to section 402(f), value if other values cannot be determined. In addition, the scrap shipments should also be appraised pursuant to section 402(f), value if other values cannot be determined.
Sincerely,
Virginia L. Brown
Chief, Value Branch