CLA-2 CO:R:C:S 557615 BLS
John B. Rehm, Esq.
Dorsey & Whitney
1330 Connecticut Avenue, N.W.
Suite 200
Washington, D.C. 20036
RE: Value of U.S. components for purposes of determining duty
allowance under subheading 9802.00.80, HTSUS; cost of
components when last purchased; 19 CFR 10.17
Dear Mr. Rehm:
This is in reference to your letter dated October 5, 1993, and
subsequent correspondence, on behalf of Toyota Motor Sales, U.S.A.,
Inc. (TMS), requesting a ruling that certain methods for
determining the cost of U.S. fabricated components purchased by
Toyota Motor Corporation (TMC), a related company, satisfy the
requirements of section 10.17, Customs Regulations (19 CFR 10.17).
If acceptable under section 10.17, these costs may be used to
determine the duty allowance under subheading 9802.00.80,
Harmonized Tariff Schedule of the United States (HTSUS), for
eligible articles upon return from abroad.
FACTS:
The inquiry is presented in the form of two separate ruling
requests, each of which incorporates certain basic methodologies
for determining the cost of a given U.S. part, but which also
differ in important respects. You have also orally advised this
office that TMC will not employ the manual system for an interim
period prior to implementation of the automated system, as
originally indicated. However, as previously stated in the
original request, the manual system will be implemented on a
permanent basis for certain parts purchased from Japanese
distributors, as more fully described, below.
Background
You state that TMC purchases some 200 different U.S. parts
from approximately 25 vendors which are exported to Japan at
various ports to be assembled in vehicles returned to the U.S.
Most of the parts are purchased from U.S. exporters, but certain
- 2 -
parts are purchased directly from the U.S. manufacturers' Japamese
distributors.
The U.S parts purchased from U.S. exporters will be warehoused
in Japan for varying lengths of time before shipment to the plant,
depending on stock levels and production schedules. You state that
under TMC's just-in-time delivery system, minimal inventory is
maintained at the plant site.
For parts purchased from Japanese distributors, the U.S.
manufacturer sells and ships the parts to its Japanese distributor
which warehouses them until they are purchased by TMC for immediate
delivery to the plant. Currently, these parts are predominantly
tires, although a few other parts are also procured through
Japanese distributors.
In lieu of determining a specific price for each of the
numerous exported U.S. parts, TMS requests that Customs accept a
price application methodology, based on a "standard turnaround
time" (STT), for given parts. The STT will be applicable to both
ruling request situations. The difference in the two systems will
be in the method used to update price information. In support of
the validity of its methodologies, TMS has conducted two studies,
a "Price Stability Study", and a "Turnaround Time Study", which are
more fully described, below.
Ruling Request # 1
Under the contemplated "Automated Purchasing System" ("APS"),
prices for subheading 9802.00.80, HTSUS, claims will be updated
electronically from the new purchasing system as frequently as the
parts are purchased by TMC. Purchase data from the U.S. will be
sent to TMC daily. Due to time zone differences, the APS will be
updated the day following the day of purchase.
The determination of a price for a given part incorporated in
an exported vehicle will depend on the STT for that part. The STT
is considered to be the interval between the day a U.S. part is
exported from the U.S. and the day a motor vehicle incorporating
that part is exported from Japan. Under the Turnaround Time Study
("Time Study"), five components, or time intervals, were analyzed
in order to determine a STT for various types of parts. These
components are ocean freight (from port of export), import
processing, warehouse and subassembly, final assembly, and export
processing.
The study reflects differences in two of the five time
components, i.e., ocean freight and warehouse and subassembly. The
other three intervals remain the same. The difference in ocean
- 3 -
freight is determined by the port of export from the U.S., which
in turn, is determined by the locations of the U.S. purchasing
affiliate and the consolidation point in the U.S. The differences
in the warehouse and subassembly interval are determined by the
time in warehouse and the extent of subassembly of the particular
part. According to the study, ocean transit may typically differ
by one day, while the warehouse and subassembly time interval will
normally range from 14 to 45 days.
Based on the study, TMC has determined three standard
turnaround times, 43 , 51, and 74 days, to be applied in
determining a cost for a part, depending on the type of part
involved. In this regard, you state that the STT will be applied
to each and every part based on the part number, which will be
determined by manufacturer. You also state that TMC will be able
to make a change in the system if a part undergoes a change in the
STT.
Under this system, the price to be used for a given part will
depend on the appropriate turnaround time for the part. You set
forth the following example: Assume that the STT for a given part
is 43 days. Thus, the price for purposes of 19 CFR 10.17 would be
the price that was invoiced on the day which was 43 days before the
day on which the motor vehicle incorporating that part was exported
from Japan. If there was no invoice on the 43rd day, the invoice
issued on the next earliest day, i.e., 44th day, 45th day, etc.,
would be used.
In support of the methodology used for determining these
prices, you submit a "Price Stability Study", and "Price Change
Schedule for U.S. Parts 1993/1994", which uses a sampling of 20
parts in order to show the extent of price fluctuation for the
various types of parts. You state that for most parts, the time
period studied is the most recent 12-month period for which vendor
invoices were obtained for Customs auditors. For the remaining
parts, the time period is either calendar year 1992 or mid-1991 to
mid-1992. The prices were taken directly from vendor invoices.
The study reflects that with the exception of catalysts, price
changes are made either quarterly, semi-annually, or annually.
Price adjustments for catalysts are made on a monthly basis.
In summary, TMC claims that the described methodology for
determining "the cost of the components when last purchased" (19
CFR 10.17), should be acceptable to Customs because 1) it is based
on a system of actual prices paid, not on "estimates" or
"averages"; 2) it is based on a turnaround time for parts that are
constant and rarely change; 3) a given part is sourced from only
one supplier and the part number would therefore be assigned a
single turnaround time; 4) prices for parts are stable and
- 4 -
fluctuate, for most parts, on a semi-annual basis; and 5) TMC will
be able to make changes in the system if a part undergoes a change
in turnaround time.
Ruling Request #2
Under this system, applicable only to parts purchased from
Japanese distributors, the STT methodology described in Ruling
Request # 1 will also be employed. However, a manual rather than
automated system will be utilized to collect manufacturer's price
information, since TMC will not have access to those commercial
invoices. Rather, you state that TMS will manually collect price
data at certain intervals, based on the most recent invoice issued
by the exporter. Most of the parts purchased in this manner will
be tires, for which prices will be updated monthly. Other parts
acquired from Japanese distributors will be updated at either
quarterly or monthly intervals, at fixed times, depending on the
type of part. The dates for collection of price changes would be
established at a time following the date by which price
negotiations are normally concluded.
You state that this methodology should also prove to be
reliable, since actual price changes for most parts, as reflected
on the submitted "Price Change Schedule for U.S. Parts 1993/1994",
occur on an annual basis, and for selected parts, on a quarterly
or monthly basis. As described, the system will allow for monthly
and quarterly price updates. In further support of the reliability
of this system, you have submitted a "Price Stability Study", which
compares the duty exemption under subheading 9802.00.80, HTSUS, for
a sampling of 20 parts during a 12-month period based on a direct
identification method of parts, versus the exemption determined by
using a monthly and quarterly update of prices, as proposed. Under
this Study, the percentage difference for all parts, comparing the
two systems for this period, amounts to 0.06%.
ISSUE:
Whether the methodologies described under Ruling Requests #
1 and Ruling Request # 2, may be used in determining the cost of
U.S. fabricated components when last purchased, for purposes of
determining the duty allowance under subheading 9802.00.80, HTSUS.
LAW AND ANALYSIS:
Section 10.17, Customs Regulations (19 CFR 10.17), provides
in pertinent part that the value of fabricated components to be
subtracted from the full value of the assembled article, if
acquired by purchase, is the cost of the components when last
purchased, f.o.b. United States port of exportation or point of
- 5 -
border crossing as set out in the invoice and entry papers.
However, if the appraising officer concludes that the cost or value
of the fabricated components so ascertained does not represent a
reasonable cost or value, then the value of the components shall
be determined in accordance with section 402 or section 402a,
Tariff Act of 1930, as amended (19 U.S.C. 1401a, 1402). It is
Customs opinion that the "cost of the components when last
purchased", refers to the price in effect at date of exportation.
Customs has long recognized the difficulty under certain
circumstances in tracking specific U.S. parts acquired from various
sources and returned to the U.S. in an entry of merchandise claimed
to be subject to the exemption under subheading 9802.00.80, HTSUS.
Section 10.24(d), Customs Regulations (19 CFR 10.24(d)), provides
that where large quantities of U.S. components are purchased from
various sources and exported at various ports and dates on a
continuing basis, so that it is impractical to identify the exact
source, port and date for each particular component, the district
director may waive these details and applicable documentation if
convinced that the importer and assembler have established reliable
controls to insure that all components for which the exemption is
claimed are in fact products of the U.S.
In Headquarters Ruling Letter (HRL) 556960, dated April 1,
1993, involving the documentation required under 19 CFR 10.24 in
connection with a claimed subheading 9802.00.80, HTSUS, exemption,
we stated that if the importer was able to document the U.S.-
origin of the imported components on an entry-by-entry basis, or
establish to the district director's satisfaction that the required
controls were maintained to strictly segregate U.S.-origin and
foreign components, the imported articles would be eligible for the
subheading 9802.00.80, HTSUS, exemption, provided all other
documentary requirements were satisfied. We also noted that the
assistance of Regulatory Audit or other Customs office might be
required to verify the required controls, and to ensure compliance
with record requirements.
Similarly, Customs also recognizes the administrative
difficulty in tracking the cost of a specific U.S. part sent abroad
to be incorporated in a returned article, when numerous parts are
sent abroad and returned on a continuing basis. As a result, based
on recognition of these tracking difficulties, under certain
circumstances Customs will accept as the "cost of the components
when last purchased" under 19 CFR 10.17, a value determined through
a methodology which establishes, to Customs satisfaction, that it
is the best evidence available of the actual price of the
components, at date of exportation, in lieu of a method of direct
identification of the cost of the specific U.S. component. Such
system must be based on actual prices, and any subheading
- 6 -
9802.00.80 claim which is based on a method involving averages or
estimates, or other accounting procedures, such as LIFO, or FIFO,
will not be acceptable.
Customs believes that the facts in the instant case warrant
substitution of an acceptable method of determining the "cost of
the components when last purchased", in lieu of identifying the
specific cost for each component. We also find that the methods
proposed in both Ruling Requests # 1 and #2 are acceptable methods
for determining the cost of the U.S. components under 19 CFR 10.17.
Our acceptance is necessarily based on the maintenance of reliable
controls so that the system operates as intended, and that
invoices, prices, and changes in turnaround time are updated in a
timely fashion. In this regard, the Office of Regulatory Audit,
or other Customs office, may be required to verify the required
controls, and to ensure compliance with record-keeping
requirements. It is further noted that our decision in this matter
involves only a determination of the cost of U.S. components for
subheading 9802.00.80, HTSUS, purposes. Any other issues which may
arise under HTSUS subheading 9802.00.80, such as commingling of
U.S. and foreign components, which may cause denial of a claim
under subheading 9802.00.80, is beyond the scope of this ruling.
In this regard, eligibility for the exemption is also dependent
upon the submission of the required documentation, in accordance
with 19 CFR 10.24.
HOLDING:
Where large quantities of U.S. components purchased from
various sources are exported from various ports on a continuous
basis, so that it is impractical to determine the specific price
for each particular component, Customs may accept, for purposes of
determining "the cost of the components when last purchased" under
19 CFR 10.17, a price application methodology which uses 1) an
automated system based on the manufacturer's payment invoices and
an average turnaround time for the particular part; or 2) a manual
system based on the manufacturer's actual prices updated monthly
or quarterly, and an average turnaround time, depending on the type
of component involved.
The systems to be employed will be subject to verification by
the Office of Regulatory Audit, or other Customs office, to ensure
that actual prices are being utilized, that such prices are being
updated in a timely manner, and that turnaround times are
appropriate for specific components. It is further noted that any
claim under subheading 9802.00.80, HTSUS, in addition to satisfying
the eligibility requirements of the statute, must also satisfy the
- 7 -
documentary requirements of 19 CFR 10.24, before a determination
is made as to cost or value under 19 CFR 10.17.
Sincerely,
John Durant, Director
Commercial Rulings Division