CLA-2 CO:R:C:S 557841 WAS
David R. Ostheimer, Esq.
Lamb & Lerch
233 Broadway
New York, N.Y. 10279
RE: Use of a weighted-average value method of accounting in
determining the duty allowance under subheading 9802.00.80,
HTSUS, for U.S.-origin tires; 19 CFR 10.17; 19 CFR 10.24;
557615
Dear Mr. Ostheimer:
This is in reference to your letter dated March 15, 1994, on
behalf of Mazda Motor of America, Inc. ("MMA"), concerning the
use of the weighted-average value method of accounting for
purposes of calculating the subheading 9802.00.80, Harmonized
Tariff Schedule of the United States (HTSUS), allowance for U.S.
fabricated tires used on the 1994 Model Year Miata MX-5s produced
in Japan and imported into the U.S. by MMA. We had an
opportunity to meet with you on August 30, 1994, to further
discuss this matter. After the meeting, you submitted additional
information by letter dated October 7, 1994.
FACTS:
You state that each and every Miata MX-5 produced by Mazda
Motor Corporation ("MC") in Japan and imported into the U.S. by
MMA has four tires, all of which are of U.S. origin and are
produced either by Dunlop Tire Corporation at its facility in
Alabama or Bridgestone/Firestone, Inc. ("BFI") at its facility in
Tennessee. You submit that for any given shipment of Miata MX-5s
which are exported to MMA in the U.S., MC can verify that every
tire contained on each Miata MX-5 is, without exception, a U.S.-origin tire. You further claim that MC has established and
maintains reliable controls to insure that all the tires used on
the Miata MX-5 for which subheading 9802.00.80, HTSUS, allowance
is claimed are, in fact, products of the U.S., pursuant to the
documentary requirements in 19 CFR 10.24(d). According to your
submission, these controls include strict physical segregation of
the U.S.-origin Dunlop and BFI tires from any foreign tires as
well as the maintenance of records showing quantities, sources,
costs, and other information regarding the U.S.-origin tires.
However, you state that MC cannot verify on a vehicle-by-vehicle
basis the identity of the U.S. manufacturer of the tires (Dunlop
or BFI). You state that in its inventory system, MC has assigned
the U.S. fabricated Dunlop tires and the U.S. fabricated BFI
tires used on the Miata MX-5 the same single part number and the
system does not make a distinction between the tires. Therefore,
in order to calculate the subheading 9802.00.80, HTSUS, allowance
for the U.S. tires produced by either Dunlop or BFI, MC proposes
to use the weighted-average value method of accounting. You
describe an example of the weighted-average value method of
accounting as follows:
Dunlop supplies 25% of the U.S. fabricated tires used by MC
on the Miata MX-5 it produces for export to the United
States whereas BFI supplies 75% of the U.S. fabricated tires
used by MC on the Miata MX-5 it produces for export to the
United States. Therefore, the weighted-average value is
equal to 1/4 of the U.S. FOB Port of Export price of the
Dunlop tires and 3/4 of the U.S. FOB Port of Export price of
the BFI tires.
It is your position that use of the weighted-average value
method of accounting for subheading 9802.00.80, HTSUS, allowance
purposes, is, with regard to the facts stated in your ruling
request, entirely acceptable.
ISSUE:
Whether a weighted-average value method of accounting may be
used for purposes of calculating the subheading 9802.00.80,
HTSUS, allowance for U.S.-origin fabricated components which have
been assembled abroad.
LAW AND ANALYSIS:
Subheading 9802.00.80, HTSUS, provides a partial duty
exemption for:
[a]rticles assembled abroad in whole or in part of
fabricated components, the product of the United States,
which (a) were exported in condition ready for assembly
without further fabrication, (b) have not lost their
physical identity in such articles by change in form, shape,
or otherwise, and (c) have not been advanced in value or
improved in condition abroad except by being assembled and
except by operations incidental to the assembly process,
such as cleaning, lubricating and painting.
All three requirements of subheading 9802.00.80, HTSUS, must be
satisfied before a component may receive a duty allowance. An
article entered under this tariff provision is subject to duty
upon the full cost or value of the imported assembled article,
less the cost or value of the U.S. components assembled therein,
upon compliance with the documentary requirements of section
10.24, Customs Regulations (19 CFR 10.24).
Section 10.14(a), Customs Regulations (19 CFR 10.14(a)),
states in part that:
[t]he components must be in condition ready for assembly
without further fabrication at the time of their exportation
from the United States to qualify for the exemption.
Components will not lose their entitlement to the exemption
by being subjected to operations incidental to the assembly
either before, during, or after their assembly with other
components.
Section 10.16(a), Customs Regulations (19 CFR 10.16(a)),
provides that the assembly operation performed abroad may consist
of any method used to join or fit together solid components, such
as welding, soldering, riveting, force fitting, gluing,
lamination, sewing, or the use of fasteners.
Operations incidental to the assembly process are not
considered further fabrication operations, as they are of a minor
nature and cannot always be provided for in advance of the
assembly operations. However, any significant process, operation
or treatment whose primary purpose is the fabrication,
completion, physical or chemical improvement of a component,
precludes the application of the exemption under subheading
9802.00.80, HTSUS, to that component. See 19 CFR 10.14(a).
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
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 the 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. Such controls shall
include strict physical segregation of U.S. and foreign
components showing quantities, sources, costs, dates shipped
abroad, etc.
In Headquarters Ruling Letter (HRL) 556960 dated April 1,
1993, involving the documentation required under 19 CFR 10.24,
Customs held that if the importer was able to document the U.S.-origin of the imported components on an entry-by-entry basis, and
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 that 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 the ensure compliance with record requirements.
Customs also recognizes the 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, and as a logical
extension of Customs position, under certain circumstances
related to the difficulty in tracking the cost of a specific U.S.
part, Customs may accept as evidence of the "cost of the
components when last purchased" under 19 CFR 10.17, a cost
determined through an appropriate methodology in lieu of a method
of direct identification of the cost of the specific U.S.
component.
In HRL 557615 dated September 7, 1994, concerning the
methodology for determining the cost of U.S. components under
subheading 9802.00.80, HTSUS, we held that:
the costs derived from methods proposed in the ruling letter
(Ruling Requests #1 and #2), which use standard turnaround
times for various types of components based on supporting
documentation and identified by manufacturer number, and
employ manufacturer's actual prices, may be accepted under
certain circumstances as evidence of the cost of U.S.
components when last purchased under 19 CFR 10.17.
HRL 557615 actually covered two separate ruling requests,
each of which incorporated certain basic methodologies for
determining the cost of a given U.S. part, but which also differ
in certain respects. In lieu of determining a specific price for
each of the numerous exported U.S. parts, the importer requested
that Customs accept a price application methodology, based on a
"standard turnaround time" ("STT"), for given parts. The STT
would be applicable to both ruling request situations presented.
The difference in the two systems is in the method used to update
price information. In support of the validity of its
methodologies, the importer conducted two studies, a "Price
Stability Study", and a "Turnaround Time Study." In Ruling
Request #1, under an "Automated Purchasing System," prices for
subheading 9802.00.80, HTSUS, claims would be updated
electronically from the new purchasing system as frequently as
the parts are purchased by the importer. The importer stated
that the determination of a price for a given part incorporated
in an exported vehicle depended on the STT for that part. The
STT was 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, five components, or time intervals, were
analyzed in order to determine a STT for various types of parts.
Based on the Turnaround Time Study, the importer determined three
standard turnaround times to be applied in determining a cost for
a part, depending upon the type of part involved. The STT was to
be applied to each and every part based on the part number.
Under this system, the price to be used for a given part depends
on the appropriate turnaround time for the part.
In Ruling Request #2, the importer proposed to use a manual
STT method, rather than an automated system for determining the
price of a part. Under this system, the importer proposed to
manually collect price data at certain intervals, based on the
most recent invoice issued by the exporter. The importer
conducted a "price Stability Study" which compared 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 of parts, versus the exemption determined by using
a monthly and quarterly update of prices, as proposed, and found
that the percentage difference was approximately 0.06%.
In HRL 557615, we further stated that our acceptance of the
STT methodology for determining the value of U.S. fabricated
components for purposes of subheading 9802.00.80, HTSUS, 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 manner. In
this regard, we stated that Regulatory Audit, or other Customs
offices, may be required to verify the turnaround times and
prices of the various components, and to ensure that the systems
are operating in compliance with Customs requirements.
We are of the opinion that the weighted average method of
accounting which you propose to use to determine the cost of U.S.
fabricated tires for purposes of subheading 9802.00.80, HTSUS, is
not an acceptable method. We believe that the methodology which
you propose to use is distinguishable in several respects from
the methodology used in HRL 557615. In 557615, the methodology
used for determining the cost of the components when last
purchased (19 CFR 10.17) was based on a system of actual prices
paid, and not on estimates or averages, as in the instant case.
The price for a particular part in HRL 557615 was based upon the
appropriate turnaround time for the part, and thus, by using this
methodology the actual cost of a part could be linked to a
specific vendor invoice for that part on the day of exportation
from the U.S. In the instant case, you propose to average the
cost of the tires over an unspecified period of time.
Although all of the tires in the instant case are of U.S.-origin, MMA is not able to verify to the district director the
actual cost of a particular tire as required under 19 CFR 10.17,
since the methodology which you propose to use does not relate
the tires to a particular invoice price that was paid for a
particular tire at the time of export. No provision is made in
the instant case for fluctuations in the price of the tires over
the one year period during which you intend to use an average
method of accounting. Moreover, the parts in HRL 557615 were
sourced from only one supplier and the part number for a
particular part was assigned a single turnaround time. In the
instant case, the parts are purchased from two different U.S.
vendors and, based on Mazda Motor Corporation's record keeping
system, the particular manufacturer of the tires cannot be
identified from the invoice as the Dunlop tires and the BFI tires
have been assigned the same part number.
Our conclusion in this case should not be construed as
disallowing an exemption from duty under subheading 9802.00.80,
HTSUS, for the cost or value of the U.S.-origin tires. Rather,
we find that your proposed method of determining the cost or
value of the U.S. components for purposes of this subheading is
unacceptable.
HOLDING:
Based upon the information provided, we are of the opinion
that the use of a weighted-average value method of accounting for
purposes of calculating the allowance under subheading
9802.00.80, HTSUS, is not permitted as evidence of "the cost of the components when last purchased, f.o.b. United States port of
exportation," under 19 CFR 10.17.
Sincerely,
John Durant, Director
Commercial Rulings Division