OT:RR:CTF:VS H256778 GaK
Area Port Director
U.S. Customs and Border Protection
8337 NE Alderwood Road
Portland, OR 97220
RE: Internal Advice Request; Basis of Appraisement
Dear Port Director:
This is in response to your undated memorandum, forwarding an internal advice request from Shin-Etsu Handotai America, Inc. (“SEHA”), dated May 14, 2014, regarding the proper basis of appraisement of reclaim wafers. The internal advice was requested in connection with the results of a Focused Assessment of SEHA. In issuing this internal advice, we also considered supplemental material submitted by SEHA on June 12, 2015 and July 14, 2015.
FACTS:
SEHA is located in Vancouver, Washington and is one of a group of companies under a parent company, Shin-Etsu Handotai, Ltd. (“SEHJ”) located in Japan. SEHA is in the business of manufacturing silicon wafers and selling them to semiconductor manufacturers. Silicon wafers are used to create computer chips, which are at the heart of many electronic products. SEHA also provides engineering and support services for its customers in conjunction with other entities in the SEHJ group. One particular service SEHA provides its customers is reclamation of wafer substrate for further use, also known as reclaimed wafers. SEHA only provides the reclamation service to its current customers. The reclaim process is performed by Mimasu Semiconductor Industry Co., Ltd. (“Mimasu”), a related company in Japan. While SEHA does not offer the reclamation service as a stand-alone service, it is advertised in English on Mimasu’s website. SEHA states that while wafer reclamation is not uncommon in the industry, given the proprietary nature of the individual specifications, silicon purity levels, and quality standards on which their customers rely, there would be “few alternatives available to them other than through Mimasu.” SEHA further states that going back to the manufacturer for service not only maintains the original quality standards, but also protects the customers’ proprietary information from exposure to additional entities.
SEHA states that not all silicon wafers are used as they were originally intended for production into consumer products. According to SEHA, some wafers reach the end of their life cycle without ever being used, or are damaged or defective for many reasons, and are known as scrap wafers. Scrap wafers generally cannot be reclaimed, but can be sold for scrap value. Scrap wafers are primarily sold to the solar power industry, which has a less stringent requirement for quality and purity of silicon wafers. SEHA states that Mimasu is in the business of selling scrap wafers that do not meet the requirements for reclamation.
Wafers for reclamation, on the other hand, have more value than scrap wafers, depending on the potential value determined by the end user. SEHA states that wafers for reclamation are either production rejects or used as testing wafers. Testing wafers are used on a daily basis for process testing, creating an even heat distribution, machine and process calibration, in order to bring the production lines into the required product or customer specifications. While testing wafers are not meant for consumer use, they are still subject to the same quality standard for production wafers due to the sensitive requirements for calibration and testing. Testing wafers can only be used once because of contamination or other damage sustained during testing procedures. Both rejected and testing wafers must be reclaimed in order to become useful to the customer. However, they cannot be used for production.
As stated above, Mimasu performs the reclamation process for SEHA’s customers. The price for the reclamation is agreed upon by a negotiation between Mimasu and SEHA’s customers. The price is negotiated for each customer, rather than a set price, due to the fact that each customer has different needs and the cost of reclamation varies depending on the specific technical requirements. Mimasu ships finished reclaimed wafers directly to SEHA’s customers and SEHA acts as the importer of record for a vast majority of the transactions. SEHA’s customers are listed as the ultimate consignee and the terms of the sale are Delivered Duty Paid. The customers pay SEHA for the reclamation service pursuant to the price that they negotiated with Mimasu, and SEHA retains 4% of the price and pays the remaining 96% to Mimasu. SEHA claims that because Mimasu conducts the price negotiation independent from the SEHJ group, the payment from SEHA to Mimasu is not subject to transfer price testing.
In 2010, CBP Regulatory Audit conducted a Focused Assessment and discovered violations concerning valuation of various imported products, including improper declaration of transaction value of reclaimed wafers. The Focused Assessment concluded that further testing was not necessary because SEHA agreed to implement a Compliance Improvement Plan. Other valuation issues have since been resolved. In a letter dated July 19, 2010, SEHA states that sale of the reclaim silicon wafer from Mimasu to SEHA is a “minor part of the [SEHA] transactions and is still being explored by the company and company counsel.” CBP and SEHA had a teleconference on July 21, 2010 where CBP recommended SEHA should file a prior disclosure on the fair market value of the goods. On September 7, 2010, CBP requested identification of the appraisement method for Mimamu’s reclaimed wafers, but SEHA failed to provide clarification during an October 29, 2010 meeting. The audit concluded in January 2011 and the issue remains unresolved.
On May 14, 2014, SEHA requested internal advice from CBP and proposed a methodology for appraising the reclaimed wafers for future entries. SEHA states that transaction value is not applicable because the price paid or payable for the reclaimed wafers only represents the cost of the reclaiming service and does not include the value of the finished merchandise. SEHA also states that due to the unique and proprietary nature of the silicon wafer industry, there are no identical or similar products to the reclaimed wafers and it cannot use the transaction value of identical or similar merchandise. SEHA further states that it is not able to use deductive value because there is no retail value for the reclaimed wafers from which to make the appropriate deductions.
According to SEHA, computed value is the best method of appraisement for the reclaimed wafers. SEHA states that the computed value of the reclaimed wafer consists of two components: the market value of scrap wafers supplied to Mimasu, and the costs incurred by Mimasu during the reclaiming. Since Mimasu is in the business of offering scrap wafers for sale that do not meet the requirements for reclaiming and the current market price of the scrap wafers on the commercial invoice will be used, this is allegedly determined by open market supply and demand. SEHA states that it does not have access to production or accounting records to calculate Mimasu’s cost of reclamation for each customer. In the alternative, SEHA proposes to use the negotiated price between the customer and Mimasu to determine the cost of the reclaiming service and profit. SEHA states that the computed value will include any applicable packing or shipping costs, which are included in the price negotiated between Mimasu and the customer, but that transportation expenses to send scrap wafers to Mimasu should not be included in the computed value. SEHA cites Headquarters Ruling Letter (“HQ”) 548557, dated October 20, 2004, and HQ W548453, dated March 8, 2005, to support the argument that the transportation cost for sending the scrap wafers to Mimasu should not be included as part of the computed value and the value of the scrap wafer should not be included as an assist pursuant to 19 U.S.C. § 1401a(h)(1) because it is the actual imported merchandise.
Your office, on the other hand, believes that SEHA has not sufficiently eliminated the transaction value of identical or similar merchandise. Your office disagrees that SEHA’ proposed methodology is not reflective of computed value pursuant to 19 U.S.C. § 1401a(e), but a derivation of computed value as provided for in 19 U.S.C. § 1401a(f). Furthermore, your office states that while the price negotiated between Mimasu and the customers may not be subject to transfer pricing issues, it does not prove that the price was not influenced by the relationship between Mimasu and SEHA. Notably, your office states that there is insufficient information to show that Mimasu makes an independent profit sufficient to establish that it is an arm’s length transaction. In addition, Mimasu is in the regular business of selling scrap wafers that do not meet the requirements for reclamation and there is a significant difference in scrap wafers and wafers for reclamation. Therefore, your offices concludes that it is “unacceptable…to apply the value of scrap to a product that can be reconditioned and put to a new purpose.”
Counsel also provided a letter dated July 14, 2015, explaining why SEHA is not able to enter the reclaimed wafers under subheading 9802.00.50 of the Harmonized Tariff Schedule of the United States (“HTSUS”), because they are unable to meet the documentary requirements of 19 C.F.R. § 10.8.
ISSUE:
Whether SEHA has appropriately eliminated the transaction value of identical or similar merchandise and whether the proposed computed value is an appropriate basis of appraisement.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the U.S. is the transaction value method as set forth in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”), codified at 19 U.S.C. § 1401a. Transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for five enumerated statutory additions. 19 U.S.C. § 1401a(b). In order for imported merchandise to be appraised under the transaction value method, it must be the subject of a bona fide sale between a buyer and seller, and it must be a sale for exportation to the U.S. In this transaction between SEHA and Mimasu, there is no transfer of ownership and the price paid does not include the value of the wafer itself, only the cost of the reclamation process. Therefore, we find that there is no sale and agree that the reclaimed wafers cannot be appraised on the basis of transaction value.
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 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 U.S. at or about the same time as that being appraised. See 19 U.S.C. § 1401a(c). If no such sale is found, sales of identical merchandise or similar merchandise at either a different commercial level or in different quantities or both, shall be used but adjusted to take account of any such difference. Any adjustment made under this paragraph shall be based on sufficient information, e.g. valid price lists containing prices referring to different levels or quantities. We note that the HTSUS includes a tariff provision for wafers generally, but not reclaimed wafers and your office is unable to provide any information on imports of reclaimed wafers. Since the Automated Commercial Environment (“ACE”) requires a specific HTSUS tariff provision to produce statistical data on entries, your office is not able to separately identify reclaimed wafer entries from general wafer entries. Even though it is not possible to identify reclaimed wafer entries, your office is of the opinion that there is ample evidence of reclaimed wafers being imported into the U.S., and that SEHA has not sufficiently established that there is no identical and similar merchandise available.
Your office states that the reclamation process and the reclaimed wafers are not as “unique” as they once were. SEMI is a global industry association serving the manufacturing supply chain for the micro and nano-electronics industries, including semiconductors. SEMI publishes an annual report on the silicon wafer reclaim market, with an analysis of market trends, prices, and forecasts. The 2015 report discusses the global wafer reclaim market, including information on reclaim wafer suppliers by region, the non-Japanese market served by Japanese-headquartered suppliers, and comparisons of the worldwide market by region, etc. In an article published by SEMI’s Industry Research and Statistics team on April 7, 2015, the worldwide silicon reclaim wafer market was estimated at $485 million in 2014 and is forecasted to reach $513 million by 2016. The article also states that in 2013, “reclaim [wafer] volumes experienced 18 percent growth while bulk silicon shipments were essentially flat.” While we agree with your office that wafer reclamation services are not “unique” as SEHA claims, in order to use the transaction value of identical or similar merchandise on which to base appraisement of the reclaimed wafers, they must be values previously identified and accepted by your office. Therefore, as this information is not easily identified by your office, we find that the reclaimed wafers cannot be appraised using transaction value of identical merchandise or similar 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). However, at the time of entry, an importer may elect to reverse the order of appraisement under deductive and computed value. See 19 U.S.C. § 1401a(a)(2) and 19 CFR § 152.101(c). If the importer makes the request, but the value of the imported merchandise cannot be determined using the computed value method, the merchandise will be appraised using the deductive value method if it is possible to do so. If the deductive value cannot be determined, the appraised value will be determined as provided for in 19 CFR § 152.107.
Here, SEHA has elected to exercise the option to reverse the order of appraisement under deductive value and computed value. 19 U.S.C. § 1401a(e) provides the following regarding computed value:
(1) The computed value of imported merchandise is the sum of -- (A) the cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise; (B) an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind as the imported merchandise that are made by the producers in the country of exportation for export to the United States; (C) any assist, if its value is not included under subparagraph (A) or (B); and (D) the packing costs.
SEHA claims that computed value is the best method of appraisement and proposes using the market value of the scrap wafers and the costs incurred by Mimasu during the reclamation process. The market value of the scrap wafers will be derived from the current market price of the scrap wafers since Mimasu is in the regular business of offering scrap wafers for sale. As for the production costs, SEHA states that they are “not comfortable” providing figures that “may be difficult to quantify” and proposes using the value of the reclamation service agreed upon between Mimasu and the customer as the amount for profit and general expenses under 19 U.S.C. § 1401a(e)(1)(B). However, SEHA also states that they do not have access to actual production or accounting records to calculate Mimasu’s cost of reclamation and that Mimasu has not been forthcoming in previous instances when additional paperwork or attestations have been requested. Therefore, without such data, computed value cannot apply.
If SEHA is not able to obtain the necessary data from Mimasu, the value of reclaimed wafers cannot be determined using the computed value method, and the merchandise will be appraised using the deductive value method if it is possible to do so. See 19 C.F.R. § 152.101(c). SEHA states that it is not able to use deductive value because there is no retail value for the reclaimed wafers from which to make the appropriate deductions. However, as stated above, there is a worldwide wafer reclaim market and we find that SEHA has not sufficiently eliminated deductive value as an appropriate basis of appraisement.
Based on the information provided by SEHA, we agree that computed value is the most appropriate method for valuing the imported merchandise, provided SEHA is able to obtain the necessary information from Mimasu to ensure that the technical requirements are satisfied to appraise the reclaimed wafers under the computed value method as specified in 19 U.S.C. § 1401a(d), and verify whether the final accounting of all pertinent review and expenses figures are maintained in accordance with generally accepted accounting principles (“GAAP”).
HOLDING:
Based on the totality of information presented, we find that SEHA may use computed value as an appropriate basis of appraisement, provided the necessary information can be obtained.
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, the Office of Regulations and Rulings will make the decision available to CPB personnel, and to the public on the CPB Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and satisfaction of any conditions on which the ruling was based.”
Sincerely,
Monika R. Brenner, Chief
Valuation & Special Programs Branch