CLA-2 RR:CR:SM 562302 KSG
Port Director
U.S. Customs Service
1624 East 7th Avenue
Suite 101
Tampa, Florida 33605
RE: Protest No. 1801-00-100014; GSP eligibility
Dear Director:
This is in response to a Protest and Application for Further Review filed by counsel on behalf of American Power Conversion, concerning the eligibility of certain power supplies imported from the Philippines for duty- free treatment under the Generalized System of Preferences (“GSP”).
We have considered the submission of July 25, 2002, and the submissions of September 25, 2002, by counsel in reaching our decision.
At the request of counsel, a conference was held on this matter.
FACTS:
American Power Conversion ("APC") made eleven entries of power supplies classified in subheading 8504.40.7012, HTSUS, between December, 1996, and February 1997. The power supplies are "Back-UPS," models BK200, BK280 and BK400. The Back-Ups are high performance standby uninterruptible power sources designed to protect computers and peripheral devices such as monitors, modems, tape drives, etc. from utility line failures and the resulting hardware damage and data loss. In the event of a utility line failure such as a blackout, brownout, or sag, the Back-UPS rapidly transfers loads to an alternative power source. This alternative power source is derived from a battery within the Back-UPS and provides the user with ample time to save files and properly close operations. Counsel submitted a publication which describes the specifications and applications of the Back-UPS and a sample.
These items were purchased from a related seller. APC initially entered the power supplies at one price (ex. $30.00 per unit for the BK 200 and BK 280)), and then changed that price on the Customs Form 7501 entry summary to a price that was more than double the initial price (ex. $64.00 per unit for BK 200 and BK280 and $66 per unit for the BK $400). Fifteen pages of cost sheets for 1997 were submitted by counsel on September 25, 2002. Counsel also submitted a summary cost sheet that states that the cost for the PCB board for the BK200 and BK280 are $14.21 and for the BK400, $15.708. The total cost for the processing of the components in the Philippines is $25.53 for the BK200 and BK280 and $27.03 for the BK400. The entries were liquidated on November 19, 1999. The protest was timely filed on February 9, 2000.
ISSUES:
Whether the imported power supplies were correctly valued at liquidation.
Whether the imported power supplies are eligible for special tariff treatment under the GSP.
LAW AND ANALYSIS:
I. Valuation
The protestant, American Power Conversion (“APC”), claims that the appraised value of the imported power supplies was too high, and that it should be adjusted downwards to enable APC to secure duty free entry under the Generalized System of Preferences (“GSP”).
These items were purchased from a related seller. APC initially entered the model BK 200 and BK280 Back-UPS at $30.00 per unit, and then changed that price on the Customs Form (CF) 7501 entry summary to $64.00. The increased price rendered the power supplies ineligible for duty-free entry under GSP, because the merchandise no longer met the 35% value-content requirement.
APC claims that, because of the start-up nature of the manufacturing facility in the Philippines, the power supplies were appraised incorrectly. It bases this claim on a Transfer Pricing Study performed by outside auditors which reportedly revealed a significant discrepancy between the estimated values and the actual values. A report from the auditor, dated January 30, 1998, was submitted with the protest. As a result, APC maintains that the appraised value of the affected items should have been lower. In the alternative, APC requests that the power supplies be appraised under computed value.
Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. § 1401a). The primary basis of appraisement under the TAA is transaction value, which is defined as “the price actually paid or payable for the imported merchandise when sold for exportation to the United States”, plus certain enumerated additions thereto to the extent they are not otherwise included in the price actually paid or payable. Section 402(b)(1) of the TAA. Transaction value is an acceptable basis of appraisement, however, only if, inter alia, the buyer and seller are not related, or if related, the circumstances of sale indicate that the relationship does not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain “test values”, i.e., previously accepted values of identical or similar merchandise. Section 402 (b)(2)(B) of the TAA.
The price actually paid or payable is defined in section 402(b)(4)(A) of the TAA as “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 the imported merchandise by the buyer to, or for the benefit of, the seller.
Validation of transaction value for related party purposes is discussed in 19 CFR § 152.103(l). That regulation states in pertinent part that:
[t]here will be related person transactions in which validation of the transaction value, using the procedures contained in §152.103(j)(2), may not be necessary. Customs may have previously examined the relationship or may already have sufficient detailed information concerning the buyer and seller to be satisfied that the relationship did not influence the price actually paid or payable. In such case, if Customs has no doubts about the acceptability of the price, the price will be accepted without requesting further information from the importer. . .
This regulation clearly indicates that Customs is not required to question the acceptability of the related party price. APC submitted the invoice price as “the price actually paid or payable” and this price was accepted as accurate by Customs. (We note that the audit report submitted by APC in support of using the readjusted prices was merely an update to an earlier transfer pricing analysis, and that it was dated one, or in some cases, two years after the entries in question were filed. Its relevance is thus questionable).
In addition, if transaction value is not accepted as a means of appraisement, the appraised value is determined by proceeding sequentially through the alternative bases of appraisement of the first such basis that can be determined. These alternative methods, listed in order of precedence for use are: transactions value of identical or similar merchandise, section 402(c) of the TAA, deductive value, section 4402(d), and computed value, section 402(e). APC has not provided information regarding the use of transaction value of identical or similar merchandise pursuant to section 402(c). Before resorting to a deductive value or computed value, section 402(c) must be eliminated as a means of appraisement.
Moreover, regarding the use of computed value in appraising merchandise, 19 CFR § 152.101(c) provides for the following:
The importer may request the application of the computed value method before the deductive method. The request must be made at the time the entry summary for the merchandise is filed with the port director. . .
There is no evidence that APC made an election at the time of entry. Its current request to have its merchandise appraised under computed value is, therefore, untimely.
In conclusion, APC’s merchandise was properly appraised by Customs. The information submitted at the time of entry regarding transaction value was accepted by Customs, and we have no authority to reject transaction value and utilize another means of appraisement. The protest concerning the value of the merchandise should be denied.
II. The Generalized System of Preferences
Congress originally enacted the GSP program to extend preferential tariff treatment to the exports of less-developed countries to encourage economic diversification and export development within the developing world. SDI Technologies Inc. v. United States, 977 F. Supp. 1235 (CIT 1997), quoting S. Rep. No. 93-1298, (1974). Under the GSP, eligible articles the growth, product or manufacture of a designated beneficiary developing country (BDC) which are imported directly into the customs territory of the U.S. from a BDC may receive duty-free treatment if the sum of (1) the cost or value of materials produced in the BDC, plus (2) the direct costs of the processing operations performed in the BDC, is equivalent to at least 35 percent of the appraised value of the article at the time of entry into the U.S. See 19 U.S.C. 2463(a).
General Note 3(c)(i), HTSUS, provides, in part, that special tariff treatment under the GSP is indicated in the “Special” subcolumn in the tariff by the symbols “A”, “A*,” or “A+”. It is assumed for the purposes of this ruling that the imported gold jewelry is classified in Chapter 71, HTSUS. The tariff provision is GSP-eligible. Under General Note 4(a), HTSUS, the Philippines is designated as a beneficiary developing country for GSP purposes.
The power supplies must be determined to be a “product of” the Philippines. The “product of” requirement means that to receive duty-free treatment, an article either must be made entirely of materials originating in the BDC, or if made of materials imported into the BDC, those materials must be substantially transformed in the BDC into a new and different article of commerce.
A substantial transformation occurs “when an article emerges from a manufacturing process with a name, character, or use which differs from those of the original material subjected to the process.” Texas Instruments Inc. v. United States, 681 F.2d 778 (1982). Although we have little descriptive information regarding the processing of foreign-origin components used, based on the number of parts listed in the cost sheets and counsel's statement that PCB boards are stuffed and then assembled into the finished product in the Philippines, we find that a substantial transformation takes place in the Philippines. Therefore, the "product of" requirement is satisfied.
To be eligible for duty-free treatment under the GSP statute, merchandise must also satisfy the 35% value-content requirement. If an article consists of materials that are imported into a BDC, as in the instant case, the cost or value of these materials may be counted toward the 35% value-content requirement only if they undergo a double substantial transformation in the BDC. See 19 CFR 10.177(a)(2). Materials imported into the BDC must first be substantially transformed into a new and different article of commerce which becomes “material produced” and these materials produced in the BDC must then be substantially transformed into a new and different article of commerce (the final article). This intermediate product must be a distinct article of commerce. An article of commerce is commercially recognizable as an article which is readily susceptible of trade and one that persons might well wish to buy and acquire for their own purposes of consumption or production. See Azteca Mill Co. v. U.S., 703 F. Supp. 949 (CIT 1988), and F.F. Zuniga a/c Refractarios Monterrey, S.A. v. United States, 996 F.2d 1203 (Fed. Cir. 1993).
Therefore, the issue remaining is whether the 35% value-content requirement is satisfied in this case. Counsel submitted "Bill of Material Cost Reports" from 1997 for the three models involved. We note that counsel did not submit to Customs any supporting documentation to substantiate the cost figures. The figures submitted to Customs on September 25, 2002, state that the cost of components assembled in the Philippines, direct labor and production overhead are $25.53 for the models BK 200 and BK280 and $27.03 for the BK400. These values would be 39.90% of the vale of the models BK 200 and BK280 and 40.96% for the BK model 400. Accordingly, based on these figures, the imported Back-UPS would satisfy the 35% value-content requirement. Accordingly, if the figures are correct, the protest should be granted.
HOLDING:
To the extent that your office is satisfied that these figures represent the actual cost figures, the protest should be granted. You may initiate any verification procedures that you deem reasonable.
In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any
reliquidation of the entry or entries in accordance with the decision should be accomplished prior to mailing of this decision. Sixty days from the date of this decision, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Acting Director
Commercial Rulings Division