VAL OT:RR:CTF:VS H233789 RSD
Ms. Dina M. Amato
Assistant Port Director
U.S. Customs and Border Protection
Port of Miami
6601 NW 25th Street, Room 272
Miami, Florida 33112
RE: Valuation of Industrial Equipment Products Used by Military and Law Enforcement Agencies, No Sale for Exportation, Related Parties, Modified Deductive Value, Fallback, 19 U.S.C. 1401(a)(f)
Dear Assistant Port Director:
This is in response to your memorandum dated September 18, 2012, requesting internal advice concerning the proper methodology for valuing imported equipment sold to the military, homeland security, and law enforcement agencies. Eagle Industries Unlimited Incorporated (Eagle) imported the merchandise into the U.S from the Dominican Republic. The internal advice arose in connection with a prior disclosure filed by Eagle’s attorney indicating that there was an undervaluation of the imported merchandise. Your office forwarded several submissions made in connection with the prior disclosure concerning the issues involved in the internal advice.
FACTS:
Eagle is a manufacturer of specialized equipment products for use by the military, homeland security, and law enforcement agencies. The type of products that Eagle manufactures are tactical nylon gear such as backpacks, holsters, belts, gear bags, and apparel items. Eagle sells and distributes its product to customers in the military, law enforcement and security fields. The particular merchandise involved in this internal advice was produced in the Dominican Republic by a company related to Eagle, known as Eagle Industries International, Inc. (EII).
On September 4, 2010 and September 18, 2010, Eagle received Requests for Information from Customs and Border Protection (CBP) at the Port of Miami regarding certain entries of merchandise imported by Eagle from the Dominican Republic. The requests sought information regarding the valuation of the imported goods, as well as information supporting the merchandise’s eligibility for the tariff preference under the Central American Free Trade Agreement (CAFTA). Counsel claims that in the course of the company’s internal review of its entries, Eagle discovered that in certain circumstance, it had underreported the value of goods that it had imported into the United States. Eagle determined that in calculating the value of the imported merchandise, it did not report assists and other additions to value. Accordingly, Eagle filed a prior disclosure informing CBP that it had undervalued merchandise entered into the United States from the Dominican Republic through the ports of Miami, St. Louis, and Tampa during the period from January 1, 2008 through September 17, 2010. The entries covered by the prior disclosure include importation of goods manufactured by EII in the Dominican Republic.
In a submission dated March 31, 2011, Eagle’s Counsel explains that Eagle imported merchandise manufactured by its related company, EII, at facilities located in the Dominican Republic into the United States. However, EII did not sell the merchandise to Eagle. Instead, the goods were only transferred between facilities of the two companies and remained on the EII’s company’s books as its property until they were sold to end customers in the U.S. after importation. Although it did not actually purchase the goods from EII, Eagle still acted as the importer of record for the imported merchandise. Eagle concluded that there was no sale for exportation, and that it could not use transaction value to appraise the imported merchandise. Eagle also determined that it did not have sufficient information to appraise the goods under the transaction value of identical or similar merchandise.
At first, Eagle used the deductive value method based on the sales price of the imported merchandise to appraise its importations. However, due to a change in the company’s accounting system, the company decided to switch to a computed value method to appraise the merchandise. Upon review, Eagle discovered that the computed value declared on these entries did not include an addition for profit. Accordingly, Eagle determined that the valuation declared to CBP for the imported goods was incorrect and needed revision.
Through its review, Eagle identified certain entries that had valuation errors. Eagle revised its valuation method of the merchandise and decided to return to the deductive value method of appraisement. It presented a spreadsheet showing what it had determined was the correct valuation for the undervalued items. In spite of the undervaluation of the merchandise, Counsel maintains that there was no underpayment of duties because all of the subject entries were eligible for duty-free treatment under the CAFTA. However, Counsel concedes that the undervaluation did result in the loss of Harbor Maintenance Fees (HMF). The amount of the additional HMF and the interest charges that Eagle owed was tendered with its prior disclosure.
To determine a correct valuation for the imported merchandise, Eagle first identified all of the products imported during the disclosure period and created a spreadsheet to capture all of the relevant data related to these goods. The company’s initial review identified 995 products that were imported during the disclosure period. Once the relevant products were identified, the company reviewed each product’s sales history to determine a sales price for the imported products. To pull the sales history for each product, Eagle ran reports in the company’s current enterprise resource planning software and the company’s older software.
The company used the Eagle Valuation Spreadsheet and the Eagle Sales Report to determine the sales price of the greatest aggregate quantity of each product sold within a calendar quarter. This is the sales price that was then recorded in the “sales price” column of the Eagle Valuation Spreadsheet. This process was repeated for all products imported by Eagle during the disclosure period, and these values were then entered as the corrected unit price indicated in the prior disclosure perfection letter and used to calculate the corrected declared value.
In some cases, there were an equal number of sales at different prices during the quarter under review, which prevented the company from determining a greatest aggregate quantity sales price. When this occurred, the company reviewed only sales made within 90 days after invoice. If this approach did not provide a clear sales price determination, then the higher sales price was used as the corrected value. If there were no sales of the product during the quarter of importation or within 90 days of the EII invoice date, the company used the sales price for the greatest quantity sold in the closest quarter following the importation. If there were no sales for the product during any quarter prior to or after importation, the company identified a comparable product and then followed the methodology outlined above. This situation occurred in rare instances when Eagle imported promotional items, or samples made by EII that were not sold to end customers.
To arrive at the values of the allowable deductions under deductive value, Eagle used something called a deductive factor. This deductive factor was calculated by taking the total amount of Eagle Industries’ yearly expenses for each of the “allowable deductions” categories under deductive value and then dividing that amount by the total U.S. sales price of the imported merchandise. We note that Eagle did not provide actual financial documentation to substantiate Eagle’s yearly expenditures in each of the allowable deduction categories. The Company reviewed the annual expenses for the following deduction categories for the merchandise imported from the Dominican Republic during the applicable time period:
Any commission usually paid or agreed to be paid, or the addition usually
made for profit and general expenses, in connection with sales in the United
States of imported merchandise that is of the same class or kind, regardless
of the country of exportation as the merchandise concerned;
The actual costs and associated costs of transportation and insurance
incurred with respect to international shipments of the merchandise
from the country of exportation to the United States;
The usual cost and associated costs of transportation and insurance
incurred with respect to shipments of such merchandise from the place of
importation to the place of delivery in the United Sates, if such costs are not
included as a general expense;
The customs duties and other Federal taxes currently payable on the
merchandise by reason of its importation, and any Federal excise
tax on or measured by value of such merchandise for which vendors in the
United States are ordinarily liable; and
The value added by the processing of the merchandise after importation to
extent that value is based on sufficient information relating to the cost of such
processing.
Based upon the expenses determined for these five categories for the importations made during each calendar year, the company determined a deduction factor that was to be applied to the entries made during the disclosure period. This deduction factor was calculated by taking the total amount of expenses and dividing this amount by the U.S. sales price of the merchandise imported from the Dominican Republic.
We note that the deduction made for profit and general expenses was calculated for all of the subject entries based on a transfer pricing study prepared by the accounting firm of Ernst & Young at Eagle’s request. The transfer pricing study reviewed the intercompany transactions between Eagle Industries and its affiliated companies, including EII in the Dominican Republic. Ernst & Young calculated the appropriate markup amount for these transactions using a comparable profits method which was based on the markup amount from similar companies in similar transactions.
The transportation and insurance costs deduction for the subject entries was determined based on a per shipment estimate calculated on various freight charges and quotes from their freight company, Expeditors, for shipments made during the disclosure period.
The customs duties deduction was calculated for each annual period based on the total customs duties paid divided by total entered value. The duty and entered value information was taken from the company’s internal data tracking system called ITRAC. Because the subject merchandise was imported in a finished condition ready for sale, Eagle did not make a deduction for the cost of processing the merchandise after importation. Based upon the expenses determined for each of the categories listed above for the importations made during each calendar year, the company determined a total deduction factor. This deduction factor was subtracted against the U.S. sale prices for the entries made during the disclosure period to determine the appropriate value of the imported merchandise.
ISSUE:
What is the appropriate method of appraisement for the imported merchandise?
LAW AND ANALYSIS:
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, including selling commissions incurred by the buyer and proceeds of subsequent resale of the imported merchandise. See 19 U.S.C. §1401a(b).
A prerequisite to finding a transaction value acceptable is the finding that a bona fide sale for exportation to the United States has occurred. 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 vs. United States, 62 CCPA, 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). Several factors may indicate whether a bona fide sale occurs between a potential buyer and seller of the imported merchandise. In determining whether property or ownership has been transferred, 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 (“HQ”) H092448, dated May 4, 2010; HQ H012659, dated November 14, 2007; and, HQ 548273, dated April 17, 2003.
Finally, pursuant to the CBP’s Informed Compliance Publication, entitled “Bona Fide Sales and Sales for Exportation,” CBP will consider whether the buyer provided or could provide instructions to the seller, was free to sell the transferred item at any price he or she desired, selected or could select its own downstream customers without consulting with the seller, and could order the imported merchandise and have it delivered for its own inventory.
In the current situation, the imported nylon gear equipment was not the subject of a sale between the Eagle and its related company, EII. EII manufactures the imported goods in the Dominican Republic and maintained the ownership of the merchandise after it was imported into the United States. Although the goods were transferred from EII in the Dominican Republic to an Eagle facility in the United States, the title/risk of loss remained on the books of EII until they were sold to the ultimate consumer in the United States, which is usually a government entity such as the military or a law
enforcement agency. As such, no sale for exportation to the United States between EII and Eagle occurred. Thus, the absence of a bona fide sale for export eliminates the use of transaction value as the method to appraise the imported nylon gear equipment.
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 sequential order. 19 U.S.C. §1401a(a)(1). The alternative bases 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)). Specifically, this method refers to a previously accepted transaction value of identical or similar merchandise that was exported at or about the same time as the merchandise being valued. Treasury Decision (“T.D.”) 91-15 (March 29, 1991).
You have advised that there is no merchandise similar or identical to the imported merchandise. Accordingly, because sufficient information is not available concerning identical or similar merchandise, the imported merchandise cannot be appraised on the basis of the transaction value of similar or identical merchandise.
The next method of appraisement is deductive value. 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 the date of importation. 19 U.S.C. §1401a(d)(2)(A)(i)-(ii). Eagle’s attorney has attempted to devise a method to value the merchandise that Eagle imported using the deductive method of appraisement. However, the value does not provide the actual amounts of the eligible deductive expenses. Instead, a deductive factor was calculated by taking the total amount of Eagle’s yearly expenses in each of the allowable deductible categories and dividing that amount by the total U.S. sales price of the imported merchandise. We specifically note that Eagle has not provided the actual profits made on the sales of the merchandise in the United States. Rather, Eagle applied the same profit rate for all the sales of merchandise in the U.S., determined in accordance with a transfer pricing policy study based on similarly structured companies that do not sell imported merchandise of the same class or kind. Similarly, Eagle has only presented estimated costs for transportation and insurance expenses. Because Eagle has not provided the actual deductible expenses in connection with the U.S. sales of the imported merchandise, the deductive value method of appraisement is inapplicable under the circumstances of the instant case.
The next method of appraisement is the computed value method, set forth in section 402(e) of the TAA. Computed value is defined as the sum of, inter alia: the cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise; and an amount for profit and general expenses equal to that usually reflected in sales for export to the U.S., by producers in the country of exportation, of merchandise of the same class or kind. 19 U.S.C. § 1401a(e)(1). In this instance, according to Eagle’s attorney, the computed value method cannot be used because all of the cost and profit/general expense information necessary to determine a computed was not available. Again, because the necessary information was not available, the computed value cannot be used to determine the value of the imported merchandise.
When the value of imported merchandise cannot be determined under 19 U.S.C. § 1401a(b) through § 1401a(e), it may be appraised under 19 U.S.C. § 1401a(f) on the basis of a value derived from one of those methods, reasonably adjusted to the extent necessary to arrive at a value. This is known as the "fallback" valuation method. Certain limitations exist under this method, however. For example, merchandise may not be appraised on the basis of the price in the domestic market of the country of
export, the selling price in the United States of merchandise produced in the U.S., minimum values, or arbitrary or fictitious values. 19 U.S.C. § 1401a(f); 19 CFR § 152.108.
Under section 500 of the Tariff Act of 1930, as amended, which constitutes CBP’s general appraisement authority, the appraising officer may:
fix the final appraisement of merchandise by ascertaining or estimating the value thereof, under section 1401a of this title, by all reasonable ways and means in his power, any statement of cost or costs of production in any invoice, affidavit, declaration, other document to the contrary notwithstanding…. 19 U.S.C. § 1500(a).
In this regard, the Statement of Administrative Action (SAA), which forms part of the legislative history of the TAA, provides in pertinent part:
Section 500 is the general authority for Customs to appraise merchandise. It is not a separate basis of appraisement and cannot be used as such. Section 500 allows Customs to consider the best evidence available in appraising merchandise. It allows Customs to consider the contract between the buyer and seller, if available, when the information contained in the invoice is either deficient or is known to contain inaccurate figures or calculations….Section 500 authorize [sic] the appraising officer to weigh the nature of the evidence before him in appraising the imported merchandise. This could be the invoice, the contract between the parties, or even the recordkeeping of either of the parties to the contract.
Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 67. Section 152.107(a) of the CBP Regulations (19 CFR § 152.107(a)) provides: Reasonable adjustments. If the value of imported merchandise cannot be determined or otherwise used for the purposes of this subpart, the imported merchandise will be appraised on the basis of a value derived from the methods set forth in §§ 152.103 through 152.106, reasonably adjusted to the extent necessary to arrive at a value. Only information available in the United States will be used.
Eagle’s attorney has alternatively proposed to value the imported merchandise under the fallback method of 19 U.S.C. § 1401a(f) by using a method derived from deductive value. Under this proposed value method, the value of the imported merchandise products would be determined based on the prices from sales of the imported merchandise in the United States after importation. Since all the imported merchandise is sold to the military or law enforcement agencies, the amounts obtained in these sales are readily verifiable. It is our understanding that Eagle can determine the sales price of the greatest aggregate quantity of each product sold within 90 days after its importation. If there were no sales of a product during the quarter of importation or within 90 days of the EII invoice date, Eagle was able to able make certain adjustments, noted previously, to determine a reasonable version of the U.S. sales prices for the imported merchandise that could be used in determining a deductive value.
Counsel first proposed that the value of the merchandise be set using the U.S. sales price of the imported merchandise and then subtracting from that price certain deductible expenses for transporting the merchandise to the United States along with profits and other selling expenses incurred after the merchandise had been imported into the United States. However, counsel acknowledges that it cannot provide the actual amounts of these deductible expenses and profits. Instead the proposed deductible expenses and profits were based on calculations estimating the profits and expenditures. Among the proposed deductions was a deduction made for profit and general expenses that was calculated based on a transfer pricing study from the accounting firm of Ernst & Young. However, Counsel concedes that the actual amount of profit realized on the sales of each imported item in the United States could not be determined. In essence, Eagle cannot document the actual costs incurred in either transporting the merchandise to the United States or the profits and expenses that were involved in selling the merchandise after it was imported. Counsel, however, notes that there are no duty consequences, as the imported goods were entitled to duty-free treatment under CAFTA. Thus, in appraising the merchandise, even eliminating all the deductions from the U.S. sales price, would not result in an increase in the duty owed on the merchandise. Nonetheless, because Eagle is unable to provide an accurate assessment of the amount of the actual deductible profits and expenses, reducing the U.S. sales price of the merchandise by the applicable deductions must be disallowed. Accordingly, we find that the imported merchandise that Eagle acquired from its related company in the Dominican Republic, EII, is to be appraised under the fallback method of 19 U.S.C. 1401a(f) using a modified deductive value based on the U.S. sales price without any deductions being made for the expenses for transporting the merchandise to the United States or profits and expenses incurred after importation into the United States.
HOLDING:
The merchandise produced in the Dominican Republic and imported into the United States by Eagle is to be appraised under the fallback method of 19 U.S.C. 1401a(f) using a modified deductive value based on the prices from the sales of the merchandise made in the U.S. Because accurate determinations of the deductible expenditures and profits are not ascertainable, no deductions from the U.S. sale prices will be allowed in setting the value of the imported merchandise.
This decision should be mailed by your office to the party requesting Internal Advice no later than 60 days from the date of this letter. On that date, Regulations and
Rulings, Office of International Trade, will make the decision available to CBP personnel and the public on the CBP Home Page at www.cbp.gov, by means of the Freedom of Information Act and other methods of public distribution. Sincerely,
Monika R. Brenner, Chief,
Valuation & Special Programs Branch