OT:RR:CTF:VS H301860 JMV
Ms. Michelle Schulz
Akerman, LLP
2001 Ross Avenue, Suite 3600
Dallas, TX 75201
RE: Valuation of Combustion Components transferred between Related Parties
Dear Ms. Schulz:
This is in response to your letter dated November 6, 2018, on behalf of [XXXX XXXXXXX] (“Importer”), in which you request a ruling, pursuant to 19 C.F.R. Part 177, regarding the acceptable basis of appraisement of combustion components that will be transferred between related parties.
You have asked that certain information submitted in connection with this request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets in this ruling or in the attachments to this ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling.
FACTS:
Importer is a U.S. company that custom engineers, manufactures, installs and services front-end combustion components for the electric utilities, chemical processing, pulp/paper, and cement industries. Importer’s full line of combustion products include igniters, flame detectors, Burner Management Systems, dampers, burners, and duct burners. Importer outsources the manufacturing of its products exclusively to its subsidiary maquiladora in Mexico, [XXXXXXX XXXXXXXXX], (“Subsidiary”).
In the prospective transaction you describe, Importer will act as the importer of record in all U.S. import transactions, even when Importer’s customer is also physically located in the United States. A typical transaction will begin when Importer sends a production schedule or production order to Subsidiary. Importer may request products either to fill specific customer orders, or to replenish limited inventory at Importer’s U.S. warehouse. Custom orders are common, and orders are typically unique to the end customer. As a result, the items that Subsidiary produces are not typical commercial off-the-shelf retail items. Thus, Importer has no standard price list for these items on which to base standard sale prices to U.S. customers.
However, Importer and Subsidiary share an accounting system that allows them to enter detailed cost data from both the U.S. and Mexican sides of the border. This cost data consists of actual costs and, you assert, includes the cost data elements set forth in 19 U.S.C. § 1401a(e)(1)(A-D), which outlines the elements of computed value. You claim the cost data is specific, auditable, and traceable within the accounting system.
From time to time, Importer will supply Subsidiary with machinery and raw materials free of charge or at a reduced cost for use in the production of imports, thus providing assists to Subsidiary. Importer will track the actual values of any assists as part of its detailed cost data within the accounting system so that Importer can include assists in the values of products manufactured by Subsidiary.
Subsidiary will manufacture the products, prepare the shipping and export documents, and coordinate with its forwarder to export the goods via freight carrier from Mexico to Importer’s warehouse. Once Importer enters the goods and receives them at its warehouse, Importer may:
• Arrange for pickup by U.S. customers,
• Store products in inventory,
• Export products to Importer’s affiliated entity in China, or
• Export products to other customers outside the United States.
Based on these scenarios, Importer may or may not have a sale price in the United States, and exports abroad may well include related-party transfer pricing. In a telephone call with this office, you stated various products are delivered in a single shipment. You stated that some of these imported goods may be parts under warranty, products for sale to a foreign customer or a related entity, or may not yet have a destination. You further stated that it would not be feasible to determine which shipments are going where because all of the parts and products are commingled when imported.
Importer operates on a project-by-project basis, and therefore, will compensate Subsidiary for the products through a monthly fee rather than a per unit price. This monthly fee is based on Subsidiary’s costs and expenses plus a manufacturing fee as determined pursuant to a transfer pricing agreement. The transfer pricing agreement permits intracompany transfers that are not at arm’s length. For example, Subsidiary may not always earn a profit and the intracompany price will not always reflect the fair market value.
Acknowledging that transaction value will not be the appropriate bases of appraisal, you propose that Importer calculate a value using actual costs, profits, and expenses using data that both Importer and Subsidiary will have readily available in their accounting system. With regard to profit calculations, you propose that the value be calculated using an amount based on Importer’s profit data, as opposed to the producer’s profit, on sales of the same types of products from the previous year.
Additionally, you state that for about 5% of imports, Subsidiary may unexpectedly incur costs during the course of a project (e.g., one year or more), and Importer anticipates it will not be able to verify all final costs specific to a given project until the end of that same project. The end of a project could exceed the 21-month period specified under the Reconciliation Program. In these situations you propose that Importer should submit the best value available at the time to CBP along with a written request explaining why liquidation should be withheld and for how long.
ISSUE:
Whether the correct method of appraisement of the imported combustion components is the computed value or a modified computed value under section 402(f).
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 method of appraisement is transaction value, defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States” plus the value of certain statutorily enumerated additions. 19 U.S.C. § 1401a(b)(1).
When the buyer and seller are related parties as defined in 19 U.S.C. § 1401a(g), transaction value is acceptable only if the transaction satisfies one of the two tests: (1) circumstances of the sale; or (2) test values. See 19 U.S.C. § 1401a(b)(2)(B); 19 C.F.R. § 152.103(l). Here, Importer states that the goods are not sold on a per unit basis, but are transferred pursuant to a monthly fee determined by a transfer pricing agreement. Importer further concedes that Importer and Subsidiary are “related persons” as defined by 19 C.F.R. § 152.102(g) and that the price paid for the imported merchandise is affected by the relationship of the parties; therefore, transaction value is precluded as the basis of appraisal.
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. The alternative bases of appraisement, in order of precedence, are: the transaction value of identical merchandise; the transaction value of similar merchandise; deductive value; and computed value. If the value of imported merchandise cannot be determined under these methods, it is to be determined in accordance with section 402(f) of the TAA. 19 U.S.C. § 1401a(a)(1).
The first and second alternative bases of appraisement are the transaction value of identical merchandise and the transaction value of similar merchandise, as determined in accordance with section 402(c) of the TAA. Appraised values of identical and similar merchandise are based on values that are acceptable as appraised values under section 402(b) of the TAA. 19 U.S.C. § 1401a(c)(1).
Here, Importer is not aware of any identical or similar merchandise being sold to unrelated parties from Mexico because the goods at issue are highly specialized and produced to the end user’s specifications.
Deductive value pursuant to section 402(d) of the TAA is the next applicable basis of appraisement and is based on the unit price at which the merchandise concerned is sold in the United States in the greatest aggregate quantity, generally in the condition as imported and at or about the time of importation of the merchandise being appraised. Provided the merchandise is not further processed, the unit price at which imported merchandise is sold in the greatest aggregate quantity means the unit price at which it is sold to unrelated persons at the first commercial level after importation. 19 U.S.C. § 1401a(d).
Deductive value is also inapplicable in this case because, in most cases, there will be no U.S. retail price. Many of the goods imported will be delivered and sold to Importer’s affiliates in China or other foreign countries rather than to U.S. customers. Many of the products that do go to U.S. customers are parts under warranty, not for sale. Other products will sit in U.S. warehouses for extended periods of time. Since there will not be a sale to a U.S. customer at or about the time of importation, deductive value is not available as a method of valuation.
The next method of appraisement is the computed value method, set forth in section 402(e) of the TAA. Section 402(e) of the TAA (19 U.S.C. 1401a(e); TAA) provides:
The computed value of imported merchandise is the sum of:
the cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise;
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;
any assist, if its value is not included under subparagraph (A) or (B); and
the packing costs.
The amount for general expenses and profit is considered as a whole. Section 152.106(c), Customs Regulations (19 C.F.R. 152.106(c)) provides as follows:
Profit and general expenses. The amount for profit and general expenses will be taken as a whole. If the producer’s profit figure is low and general expenses high, those figures taken together nevertheless may be consistent with those usually reflected in sales of merchandise of the same class or kind.
Interpretative note 2 to the regulations states:
If the producer’s own figures for profit and general expenses are not consistent with those usually reflected in sales of merchandise of the same class or kind as the merchandise being valued which are made in the country of exportation for export to the United States, the amount for profit and general expenses will be based upon reliable and quantifiable information other than that supplied by or on behalf of the producer of the merchandise.
Importer claims that this is the most accurate method given Importer’s project-based business model and regularly customized products. Importer states that it can calculate actual costs, profits, and expenses using data that both Importer and Subsidiary have readily available in their shared information system. However, computed value must include profit and the Subsidiary here often does not make a profit. Additionally, neither Importer nor Subsidiary are privy to the profits of other producers of similar products in Mexico, the country of export. Therefore, the computed value method cannot be used because the profit information necessary to calculate a computed value is not available.
When the value of imported merchandise cannot be determined under 19 U.S.C. § 1401a(b-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 United States, minimum values, or arbitrary or fictitious values. 19 U.S.C. § 1401a(f); 19 C.F.R. § 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 of the CBP regulations (19 C.F.R. § 152.107) provides:
(a) 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.
You propose to value the imported goods under the fallback method of 19 U.S.C. § 1401a(f) by using a method derived from computed value. Specifically, you propose that the Importer will calculate a value using actual costs plus an amount equal to Importer’s average profit margin relative to its end-customers based on sales from the previous year.
Here, because a modified computed value under § 402(f) is being applied to appraise the imported merchandise, it can be administered flexibly. This means that in appraising the merchandise, the formal requirements of computed value do not have to be strictly followed. The only element of computed value that is not available here is profit. As mentioned above, the SAA states that Section 500 of the TAA “allows Customs to consider the best evidence available in appraising merchandise.” You therefore propose that the imported goods be valued using a computed value method but, rather than include the profit of the exporter, the previous year’s average profit margin of the Importer on sales to its end customers should be used. Generally, under the computed value, CBP requires profit be equal to that usually reflected in sales of merchandise of the same class or kind made by the producers in the country of exportation for export to the United States. If CBP accepts your proposed method of valuation, it would instead be using the profit of a U.S. entity in domestic and export sales. However, as Importer is a parent company of the Subsidiary located in the country of export, there is support for this method of valuation.
In appraising merchandise, CBP has looked to the profit of a parent company under certain circumstances. For example, when considering whether transaction value is an acceptable basis of appraisal in related party transactions, CBP may consider whether the supplier is earning a profit equal to or greater than the profit the parent company receives in sales of goods of the same class or kind. See Headquarters Ruling Letter (“HQ”) H238990, dated April 7, 2014. Therefore, we find your proposed method of valuation is based on the best evidence available as it is consistent with how CBP assesses related party pricing. Accordingly, the combustion components imported from Mexico may be appraised using a modified version of computed value under the fallback method set forth in 19 U.S.C. § 1401a(f) as described above.
In the instances where the final costs will not be known until after the 21-month period specified under the reconciliation program, CBP guidelines state:
If elements of value, 9802, or classification remain unknown when the Reconciliation is due, the importer must submit a timely-filed Reconciliation with best available information or no changes, along with a written request explaining why liquidation of the Reconciliation should be withheld and for how long. If the importer justifies good cause on why the extension should be granted, CBP will issue a letter of approval to the importer to document the decision and the date of that decision. Changes to the Reconciliation entry itself may then be made once the information is obtained.
Automated Commercial Environment Reconciliation (Prototype): A Guide to Compliance 20 (2016). Therefore, Importer may submit the best value available to CBP at the time of Reconciliation along with a written request explaining why liquidation should be withheld and for how long. If Importer justifies good cause on why an extension should be granted, actual costs may then be added to the Reconciliation entry once the information is obtained.
HOLDING:
The combustion components imported from Mexico may be appraised using a modified version of computed value under the fallback method set forth in 19 U.S.C. § 1401a(f) as described above. It is acceptable to use the profits of Importer, as the parent company, in calculating profits for a modified computed value.
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 CBP 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 the satisfaction of any conditions on which the ruling was based.”
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch