VAL:RR:IT:VA 548331 jsj
U.S. Customs and Border Protection
Assistant Field Director
Regulatory Audit
South Florida Field Office - Charlotte Branch
2001 Cross Beam Drive
Charlotte, North Carolina
28217-2856
Attn.: Mr. R. Keith Richard
Re: Request for Internal Advice; Appraisement; Research and Development; Transaction Value; Price Actually Paid or Payable; Related Party Transaction; 19 U.S.C. 1401a (b)(4)(A).
Dear Assistant Field Director:
The purpose of this letter is to respond to your request for Internal Advice (I.A.), forwarding correspondence from Barnes, Richardson & Colburn, on the behalf of Continental Teves, Inc. (CT). The correspondence in issue requested internal advice concerning the appraisement of merchandise sold by subsidiaries of Continental Aktiengesellschaft of Hanover, Germany (CAG), CT’s parent company, to CT for which research and development (R&D) expenses are shared by CAG, CT and seven other foreign subsidiaries of CAG. The R&D expenses are shared pursuant to an agreement between the parties, but are not included in the value declared to Customs and Border Protection (CBP) at the time of entry.
This I.A. response is being issued subsequent to the following: (1) A review of the submissions of counsel for CT dated: May 2, 2003, August 28, 2003 and September 9, 2003; (2) A review of a document entitled: “Agreement on the Cooperation in Research and Development” attached to the submission of CT and identified as Appendix “A”; (3) A review of a document entitled: “Report on the review of R&D allocation brakes & chassis 2001 within the Continental-Group” attached to the submission of CT and identified as Appendix “B”; and (4) A telephone conference conducted on August 6, 2003, between a representative of the Office of Regulations and Rulings, Customs and Border Protection, counsel for CT and the Customs Manager for CT.
Continental Teves requested confidential treatment pursuant to 19 C.F. R. 177.2 (b)(7) for information denoted in brackets and for Appendices “A” and “B” of its submission of May 2, 2003, and for the attachment to its August 28, 2003 submission. Customs and Border Protection will, therefore, extend confidential treatment in accordance with the request of counsel for CT dated May 2, 2003 and August 28, 2003. Information determined to be confidential will be denoted in brackets in this I.A. response and will be redacted in the public version.
FACTS
Continental Teves, Inc. is a corporation in the United States that manufactures and markets automotive parts and systems to automobile producers. Continental Aktiengesellschaft (CAG) is the foreign, related parent company of CT and seven other foreign subsidiaries (hereinafter “Continental Group” or “Continental Pool companies”). CT does not purchase merchandise from CAG, but does purchase merchandise from some or all of the seven foreign subsidiaries of CAG and imports that merchandise into the United States.
Customs and Border Protection is advised by counsel for CT that CT and the other Continental Group companies are parties to an agreement entitled “Agreement on the Cooperation in Research and Development” (hereinafter the “R&D Agreement”). The R&D Agreement addresses the rights and obligations of the Continental Pool companies with regards to research and development in the area of automotive brake and chassis systems. Section 5, “Cost Sharing,” of the R&D Agreement provides:
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Appendix A to the R&D Agreement reiterates that the Continental Group companies have “agreed to jointly use the R&D activities” and establishes that research and development costs “are billed via a pool in accordance with the cost sharing method” and that the R&D pool is to be managed by Continental Teves AG & Co. oHG (CToHG). CT oHG is the “pool administrator” and is also one of the CAG subsidiaries.
According to section 2.1 of Appendix A to the R&D Agreement,
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Section 2.1 additionally provides that the “Total primary R&D cost” is :
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Section 2.4 of Appendix A is entitled and addresses the “Sharing of R&D Cost and Information to the Companies.” Section 2.4 provides:
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The entered value of the merchandise CT purchases from the Continental Group foreign subsidiaries and imports into the United States does not include any sum for research and development expenses paid by CT into the Continental Group research and development pool. Customs and Border Protection specifically notes that it was not provided copies of CT invoices for purchases from foreign Continental Group companies, supply agreements or transfer pricing agreements. The dutiability of CT’s research and development expenses as a part of the price actually paid or payable or as an assist arose during an audit of CT undertaken by CBP’s Office of Strategic Trade, Regulatory Audit Division.
ISSUE
Should the appraised value of merchandise sold by foreign subsidiaries of Continental Aktiengesellschaft to Continental Teves, Inc., the United States domestic subsidiary of Continental Aktiengesellschaft, all parties to a research and development expense sharing agreement, include in the price actually paid or payable pursuant to the transaction value method of appraisement costs incurred for the research and development of the imported merchandise ?
LAW AND ANALYSIS
The federal agency responsible for interpreting and applying the United States Code and the regulations of the Bureau of Customs and Border Protection, as they relate to the final appraisement of merchandise, is U.S. Customs and Border Protection. Customs and Border Protection, in accordance with its legislative mandate, appraises imported merchandise in accordance with Section 402 (b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979. See 19 U.S.C. 1401a.
The preferred method of appraisement is transaction value. The transaction value of imported merchandise is:
the price actually paid or payable for merchandise when sold for exportation to the United States, plus amounts equal to –
(A) the packing costs incurred by the buyer with respect to the imported merchandise;
(B) any selling commissions incurred by the buyer with respect to the imported merchandise;
the value, apportioned as appropriate, of any assist;
any royalty or license fee related to the imported
merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States; and
(E) the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller. 19 U.S.C. 1401a (b)(1). (Emphasis added).
When parties are related 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. The Charlotte Regulatory Audit office did not request a determination concerning the acceptability of using the transaction value method of appraising CT’s entries. This internal advice response will not address the relationship between CT, CAG or any of the seven other foreign subsidiaries of CAG. Consequently, we are not making a determination pursuant section 1401a (b)(2)(B), but for purposes of this internal advice response 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.
The “price actually paid or payable,” as defined in the Trade Agreements Act, is:
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)(A). (Emphasis added).
The payments made by CT into the Continental Group R&D pool for research and development are not encompassed within the enumerated transaction value additions of subparagraphs (A) through (E) of section 1401a (b)(1), nor are they expressly excluded pursuant to section 1401a (b)(3). The resolution of the issue presented in this I.A. is, therefore, dependent on the interpretation of the phrase “price actually paid or payable” of section 1401a (b)(4)(A).
Customs and Border Protection has long held the position that all monies paid to a foreign seller or to a party related to a seller are part of the price actually paid or payable for imported merchandise pursuant to the transaction value method of appraisement. See HQ 542169 (Sept. 18, 1980), TAA #6; HQ 547532 (Nov. 2, 2001). The presumption that all payments made by a buyer to a seller are part of the price actually paid or payable for imported merchandise was affirmed by the Court of Appeals for the Federal Circuit in Generra Sportswear Co. v. United States, 905 F. 2d. 377 (Fed. Cir. 1990), rehearing denied, (Fed. Cir. 1990). See also HQ 547532 (Nov. 2, 2001). The court in Generra held that the term “total payment” in the definition of the phrase “price actually paid or payable” was intended to be all inclusive. See id. at 379. The reasoning underlying the Court’s decision stems from the language of section 1401a (b)(4)(A) which states that the price actually paid or payable is the “total payment” made for imported merchandise whether the payments are “direct or indirect.” 19 U.S.C. 1401a (b)(4)(A).
The Generra court further held that:
Congress did not intend for [Customs and Border Protection] to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, are for the merchandise or for something else. Id. at 380.
The court, quoting Moss Mfg. Co. v. United States, 896 F. 2d 535, 539 (Fed. Cir. 1990), concluded that the “straightforward approach [of section 1401a (b)] is no doubt intended to enhance the efficiency of [CBP’s] appraisal procedure; it would be frustrated were we to parse the statutory language…and require [CBP] to engage in [a] formidable fact-finding task….” Id. at 380 (Emphasis added).
Although the presumption that payments made directly or indirectly by a buyer to or for the benefit of a seller are part of the price actually paid or payable is rebuttable, the burden of establishing that the payments are unrelated to the imported merchandise rests on the importer. See id. HQ 547532. See also Chrysler Corp. v. United States, 17 C.I.T. 1049 (Ct. Int’l Trade 1993). Continental Teves has not carried this burden.
CT has not established that the payments it makes into the Continental Group R&D pool are not indirect payments by a buyer to or on the behalf of a seller of merchandise exported to the United States. CBP acknowledges CT’s position that payments made into the R&D pool today may not result in the production of merchandise exported to the United States for a number of years, but concludes that issue is an accounting matter. Advice received by the Office of Regulations and Rulings from the Regulatory Audit Division confirms that proper corporate financial accounting should involve the tracking of payments made into the R&D pool and the production of merchandise that subsequently results from R&D pool activities.
Continental Teves suggests that CBP is misinterpreting the Generra and Chrysler decisions. CT argues, relying on language in the Generra decision, that R&D pool payments made by CT are not payments “made to a seller in exchange for merchandise sold for export to the United States” and that the “focus of transaction value is the actual transaction between the buyer and seller….” Submission of CT (Aug. 28, 2003) quoting Generra. CT further suggests that no payment was made by CT to or for the benefit of any seller.
Customs and Border Protection’s review of section 1401a and the relevant jurisprudence causes it to conclude otherwise. Section 1401a (b)(4), defining “price actually paid or payable,” states, as previously noted, that the phrase means “the total payment” whether “direct or indirect,” provided the payments are “made, or are to be made, for imported merchandise by the buyer to, or for the benefit of the seller.” The Generra court, subsequent to reviewing section 1401a (b)(4) and the pertinent regulations, 19 C.F.R. 152.103 (a), stated that:
as long as the…payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in the transaction value, even if the payment represents something other than the per se value of the goods. The focus of transaction value is the actual transaction between the buyer and the seller…. Generra, supra at 380.
Considering the transactions between CT and other members of the Continental Group, a part of the research and development costs born by CT and paid into the Continental Group R&D pool are indirect payments made to or on the behalf of a seller in exchange for merchandise sold for export to the United States. Absent payment into the R&D pool for research and development costs, the other Continental Group companies that manufactured merchandise for export to CT in the United States would not recover their research and development expenses from the transfer price. CT has not offered CBP a reason to conclude, contrary to the presumption that all payments made to or on the behalf of a seller from a buyer are part of the price actually paid or payable. See HQ 544972 (Oct. 20, 1993). The R&D payments made by CT are indirect payments that represent “something other than the per se value of the goods” and constitute part of the price actually paid or payable. Generra, supra at 380.
Continental Teves additionally asserts that its “Imports from pool participants are miniscule” and that there is “no relationship between pool payments and imported merchandise.” Submission of CT (Aug. 28, 2003). CBP initially notes that the importer offers no legal authority, nor is CBP aware of any, supporting why the quantity of CT’s imports from pool participants should be significant. Customs and Border Protection specifically disagrees with the importer’s contention that no relationship exists between the payments it makes to the Continental R&D pool and merchandise subsequently imported by CT. It is the understanding of Customs and Border Protection that CT makes payments into the Continental R&D pool. The pool payments fund research and development, in some instances, undertaken by other CAG subsidiaries that are outside of the United States. The research and development efforts result in the subsequent production of merchandise by the foreign subsidiary that is sold by the foreign Continental Group subsidiary to CT and imported into the United States.
It is the position of Customs and Border Protection that the relationship between the pool payments made by CT and the merchandise imported into the United States that results from the Continental R&D pool are sufficiently direct to conclude that they be included in the price actually paid or payable. See HQ 548306 (July 9, 2003). CBP is of the understanding that sound corporate accounting can provide the importer with a basis for determining the percentage of R&D pool payments that were devoted to a specific R&D project, which percentage of pool payments are part of the price actually paid or payable for the developed, imported merchandise. The precise determination of the appropriate allocation of research and development payments to specific merchandise imported by Continental Teves should be decided on a case-by-case basis.
HOLDING
The appraised value of merchandise sold by the foreign subsidiaries of Continental Aktiengesellschaft to Continental Teves, Inc., the United States subsidiary of Continental Aktiengesellschaft, all of whom are parties to the research and development expense sharing agreement, should include in the price actually paid or payable pursuant to the transaction value method of appraisement the research and development costs incurred for the development of the merchandise imported into the United States.
You are to mail this decision to the internal advice applicant no later than 60 days from the date of this letter. On that date, this office will make a public version of the ruling available to Customs personnel and to the public on the Customs Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act and other methods of public distribution.
Sincerely,
Virginia L. Brown, Chief
Value Branch