VAL OT:RR:CTF:VS H125115 BGK
Richard G. Bridenbaugh
J.P. Morgan Chase Vastera Professional Services Inc.
20700 Civic Center Drive
Suite 500
Southfield, MI 48076
RE: Valuation Method for Inventory Management System
Dear Mr. Bridenbaugh:
This is in reply to your letter, dated September 21, 2010, requesting a prospective ruling on behalf of Alcatel-Lucent USA Inc. (Alcatel-Lucent or the company), as to the proper valuation method Alcatel-Lucent should use for a new inventory management system. You submitted a chart of historical pricing for suppliers, additional information per our telephone conversations of October 12, 2010 and December 21, 2010, and a template purchase agreement used by the company in negotiating with suppliers for the new system.
FACTS:
Alcatel-Lucent is developing a new inventory management system with its suppliers. Under the new system, suppliers will ship goods to a warehouse in the U.S. managed by Alcatel-Lucent, however, the goods will be owned by their respective suppliers until they are withdrawn from the warehouse when necessary by Alcatel-Lucent. The goods will be used to manufacture telecommunications networking equipment, and therefore, will not be sold in their condition as imported.
Alcatel-Lucent will act as the importer of record in these transactions and enter the goods into its warehouse under a pro forma invoice. Title and risk of loss will transfer from the supplier to the company upon the withdrawal of the goods from the warehouse in the U.S. The only exception to this is if the loss is caused by wrongful acts and/or omissions by Alcatel-Lucent. Alcatel-Lucent is responsible for insuring the goods against any loss due to their own wrongful acts and/or omissions, but the suppliers are responsible for maintaining insurance against everything else. The agreement states that some General Purchase Agreements (GPA) will include DDP delivery terms and some will contain FCA delivery terms. Although these terms normally also indicate when title and risk of loss transfer, you state that these are used separate from the paragraph on title and risk of loss because they are used solely to determine who is responsible for costs associated with delivery.
Consideration is paid when the goods are withdrawn from the warehouse in the U.S., based on the price agreed to at that time. Price changes are typically implemented on a quarterly basis. The goods are typically consumed within 60-90 days of delivery; therefore, in 96 percent of all situations the price either stays the same as the pro forma invoice price or decreases. No assists are currently provided or contemplated, but it is possible some may be provided in the future.
Alcatel-Lucent purchases both custom product and standard product. Approximately 99 percent of the goods are custom product. The company is obligated to purchase the custom product if it is not withdrawn from the warehouse within six months of delivery, however, it is under no obligation to purchase standard product.
ISSUE:
What is the correct method of valuation for the goods imported under the inventory management system?
LAW AND ANALYSIS:
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 the preferred method of appraisement is transaction value. Transaction value is the “price actually paid or payable for merchandise when sold for exportation to the United States,” plus five statutorily enumerated additions. 19 U.S.C. § 1401a(b)(1). The term “price actually paid or payable” is defined as the “total payment (whether direct or indirect. . .) 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).
Inasmuch as the transaction value method requires a sale for exportation to the U.S., there must exist a bona fide sale between the buyer and seller in order for merchandise to be appraised accordingly. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit found that the term “sold” for purposes of 19 U.S.C. § 1401a(b)(1) means a transfer of title from one party to another for consideration, (citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33; C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). However, several factors may indicate whether a bona fide sale occurs between a potential buyer and seller of imported merchandise. In determining whether property or ownership has been transferred, U.S. Customs and Border Protection (CBP) considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, CBP may examine whether the potential buyer paid for the goods and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. See Headquarters Ruling Letter (HRL) H092448, dated May 4, 2010; HRL H012659, dated November 14, 2007; and HRL 548273, dated April 17, 2003.
You state that in all cases, title and risk of loss do not pass to Alcatel-Lucent until the goods are withdrawn from the warehouse in the U.S. Consideration is also not paid until that point, unless the goods are custom product. If custom product is not withdrawn from the warehouse for six months, Alcatel-Lucent becomes obligated to pay consideration for the goods at that point. The company is under no obligation to purchase standard product.
Concerning whether the pro forma invoice price represents the price actually paid or payable, 19 C.F.R. § 152.103(a)(1) provides the following:
In determining transaction value, the price actually paid or payable will be considered without regard to its method of derivation. It may be the result of discounts, increases, or negotiations, or may be arrived at by the application of a formula, such as the price in effect on the date of export in the London Commodity Market. The word “payable” refers to a situation in which the price has been agreed upon, but actual payment has not been made at the time of importation. . . . (emphasis added).
The pro forma invoice price is not the agreed upon price. The agreed price will not be known until the merchandise is withdrawn from the warehouse, and payment will be based on the price at the time of withdrawal. The definition given in 19 C.F.R. § 152.103(a)(1) indicates that the price payable and the price ultimately paid are the same. Therefore, the pro forma invoice price cannot be considered the price payable because it does not always equal the price paid. We have found that under certain circumstances a pre determined formula agreed to by the parties prior to importation may be used to arrive at transaction value. However, neither the price paid for the goods when withdrawn from the warehouse nor the pro forma invoice price is based on a predetermined formula.
In HRL 548273, the importer did not take title or become obligated to pay for the goods housed in a third-party warehouse until the goods were withdrawn from the warehouse. The risk of loss also did not pass to the importer until that point, and the importer was under no obligation to purchase the goods stored. The goods were entered under a pro forma invoice; however the price actually paid was the quarterly price agreed to at the time of withdrawal from the warehouse. CBP held that there was no sale for exportation. Similarly, in HRL 548236, dated March 27, 2003, the importer did not take title to the merchandise or become obligated to pay until the merchandise was withdrawn from a third party storage center. The importer was not required to withdraw the merchandise from storage. Like in HRL 548273, the goods were entered at the contract price in effect at the date of exportation, but the importer actually paid the price that was in effect at the time of withdrawal. CBP held that the goods were not sold for exportation. Also, in HRL 548574, dated March 17, 2005, an importer received supplies into both a third party warehouse and a facility run by the importer. In both cases the importer was under no obligation to purchase the supplies, and did not pay for the supplies until they were withdrawn from the warehouse. This was also held to not constitute a sale for exportation.
In contrast, in HRL H012659, CBP held that there was a bona fide sale for exportation. The seller issued a pro forma invoice on the date of exportation, and then issued a commercial invoice, subsequent to importation. The risk of loss passed to the importer when the goods passed the ship’s rail at the port of exportation, and title passed to the importer either upon delivery or 63 days after the issuance of the pro forma invoice. The importer was obligated to purchase the merchandise. Similarly, in HRL H092448, the importer acquired title to the goods after importation, either at the time a purchase order was received from an end customer or after the passage of a specific period of time (90 or 120 days, depending on the type of merchandise). The importer also bore the risk of loss from the time the goods were delivered to the named destination after importation. In both cases, CBP held that although title did not pass until after importation, the presence of other factors suggested the transactions were bona fide sales for exportation to the United States.
The facts of this case, for standard product, are similar to those of HRL 548273, HRL 548236, and HRL 548574. Alcatel-Lucent is under no obligation to purchase the goods, neither title nor risk of loss pass to the company until the goods are withdrawn from the warehouse, and consideration is not paid until the goods leave the warehouse. The consideration paid upon withdrawal of the goods from the warehouse is based on the quarterly price at the time of withdrawal. Therefore, there is no sale for exportation of standard product.
Custom product, however, makes up 99 percent of the merchandise that will be imported under this inventory system. Like in HRL 548273, HRL 548236, and HRL 548574, title and the risk of loss do not pass to Alcatel-Lucent until the goods are withdrawn from the warehouse. The price is also not set until the goods are withdrawn from the warehouse. However, like in HRL H012659 and HRL H092448, if the goods remain in the warehouse for six months, Alcatel-Lucent is under an obligation to purchase the goods at that point. Consideration is not paid until the goods are withdrawn from the warehouse, or the goods reach the six month mark. The main point of distinction between the facts here and HRL H012659 and HRL H092448, is the point at which the risk of loss passes. In the facts here, the risk of loss does not pass until the goods are withdrawn from the warehouse. In HRL H012659 the risk of loss passed at the point of shipment for exportation. In HRL H092448, the risk of loss passed when the goods reached their destination in the United States after importation. Therefore, unlike these rulings, the facts here suggest Alcatel-Lucent is not under a complete obligation to purchase the custom goods once they reach the warehouse. It is possible the goods could be destroyed before the six month requirement occurs. Therefore, unlike in HRL H012659 and HRL H092448 where it was concluded a sale for exportation occurred in spite of title not passing until after importation, there are not enough other factors present in this situation to make the same conclusion. As in the situation for standard product, no sale for exportation of custom product occurs.
As a sale for exportation does not occur, the subject merchandise cannot be appraised on the basis of transaction value, pursuant to 19 U.S.C. § 1401a(b). When imported merchandise cannot be appraised on the basis of transaction value, it is appraised in accordance with the remaining methods of valuation, applied in hierarchical order. 19 U.S.C. § 1401a(a)(1). The alternative basis of appraisement, in order of precedence, are: the transaction value of identical or similar merchandise (19 U.S.C. § 1401a(c)); deductive value (19 U.S.C. § 1401a(d)); computed value (19 U.S.C. § 1401a(e)); and the “fallback” method (19 U.S.C. § 1401a(f)).
The transaction value of identical or similar merchandise is based on sales, at the same commercial level and in substantially the same quantity, of merchandise exported to the United States at or about the same time as that being appraised. (19 U.S.C. § 1401a(c)). As 99 percent of the goods are custom products, it is unlikely there will be identical or similar transactions. Consequently, it is not possible to appraise the goods on the basis of the transaction value of identical or similar merchandise. However, we note that if sales of identical or similar merchandise do exist, then transaction value of identical or similar merchandise would be the appropriate basis of appraisement.
Under the deductive value method, merchandise is appraised on the basis of the price at which it is sold in the U.S. in its condition as imported and in the greatest aggregate quantity either at or about the time of importation, or before the close of the 90th day after importation. 19 U.S.C. § 1401a(d)(2)(A)(i)-(ii). In this case, the imported goods are not resold in their condition as imported. If not sold in the condition as imported, the importer may elect to use a deductive method for the good sold after further processing. See 19 U.S.C. § 1401a(d)(2)(A)(iii). You have not made this election; therefore, the merchandise cannot be appraised under the deductive value method.
Deductive value is also not available in transactions that involve assists. See 19 U.S.C. § 1401a(d)(3)(D). While no assists are currently being provided or contemplated, it is possible there may be some in the future. These transactions will also not be eligible for appraisement under the deductive value method.
Under the computed value method, merchandise is appraised on the basis of the material and processing costs incurred in the production of imported merchandise, plus an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind, and the value of any assists and packing costs. 19 U.S.C. § 1401a(e)(1). As the goods in this case will be purchased from unrelated suppliers, this information will not be available. Therefore, the merchandise cannot be appraised under the computed value method.
When merchandise cannot be appraised under the methods set forth in 19 U.S.C. § 1401a(b)-(e), its value is to be determined in accordance with the “fallback” method, set forth in 19 U.S.C. § 1401a(f). The fallback method provides that merchandise should be appraised on the basis of a value derived from one of the prior methods reasonably adjusted to the extent necessary to arrive at a value. 19 U.S.C. § 1401a(f)(1).
You suggest that the goods should be appraised under the fallback method using the pro forma invoice price as a reasonably adjusted transaction value. You state that normally the price actually paid will be the same as the price on the pro forma invoice because goods will normally be consumed within 60-90 days of delivery. According to the facts provided, in 96 percent of the situations the price actually paid is either the same as the pro forma invoice price or there is a price decrease. Negotiated pricing changes are typically implemented on a quarterly basis.
In similar circumstances, we have permitted the use of this reasonably adjusted transaction value under the fallback method. In HRL 548273 (citing HRL 546953, dated May 5, 1999), CBP held that because the goods did not remain in the inventory for long periods of time (typically less than 60 days) and the price on the pro forma invoice would most likely remain the same as the price actually paid, there was a clear relationship between the price actually paid and the pro forma invoice price. Therefore, CBP permitted the use of the pro forma invoice price under the fallback method. However, CBP stated that if the price were to increase from the pro forma invoice price, the company must alert CBP to this fact so that it could be verified that price increases were indeed rare and whether the ruling was still applicable. Similarly, in HRL 548236, CBP allowed the use of the invoice price for the same reasons. Due to the short period of time the goods would remain in inventory (typically less than 10-30 days), the price was not likely to change from the one given on the invoice, and if it did change, it would most likely decrease. It was also stated that there would be a method for auditing the importations because the invoice price should be the same as the price for any merchandise being withdrawn from the warehouse that same day because both were based on the current contract price.
As in the above cases, the goods here are not expected to remain in inventory for long periods of time (typically 60-90 days). Also, the price actually paid is likely to remain the same as the price on the pro forma invoice or decrease. The pricing is also based on a negotiated quarterly price. Consequently, we find the pro forma invoice price acceptable under a fallback transaction value method of appraisement. However, like in transaction value, any additions to value must be added to the pro forma invoice price. These additions are listed in 19 U.S.C. § 1401a(b)(1) and include (A) packing costs incurred by the buyer, (B) any selling commission incurred by the buyer, (C) any assists, (D) any royalty or license fee related as described in subparagraph (D), and (E) any proceeds that accrue to the seller.
In addition, as in HRL 548273 and HRL 548236, this ruling is being issued based on the assumption that the unit price for the imported goods, as it appears on the pro forma invoice, is the same as the price actually being paid for identical goods withdrawn from the warehouse on the same day, and this can be verified by CBP.
If the price paid on withdrawal from the warehouse increases from the price on the pro forma invoice, then this ruling may not be applicable in accordance with 19 C.F.R. § 177.9(b)(1). Consequently, when the price paid on withdrawal from the warehouse increases from the price on the pro forma invoice, Alcatel-Lucent should notify CBP of this fact, so that CBP is able to verify that a price increase indeed is only occurring rarely and whether the ruling is applicable.
HOLDING:
The subject merchandise cannot be appraised using the transaction value method. A fallback transaction value method of appraisement should be used. The pro forma invoice price represents a reasonably adjusted transaction value under the fallback method, with the addition of all applicable additions to value listed in 19 U.S.C. § 1401a(b)(1).
A copy of this ruling letter should be attached to the entry documents filed at the time the goods are entered. If the documents have been filed without a copy of this ruling, it should be brought to the attention of the CBP officer handling the transaction.
Sincerely,
Monika R. Brenner
Chief, Valuation and Special Programs Branch