VAL CO:R:C:V 544863 ILK
District Director
Laredo, Texas
RE: Application for Further Review of Protest No. 2304-90- 000281; appraisement method between related parties; profits and general expenses under TAA 402(e)(1)(B) and 402(e)(2)(B)
Dear Sir:
This subject protest and application for further review
concerns the proper appraisement method in transactions between
xxxx xxxxxxxx xxxxxxxxxxx (hereinafter referred to as the
"importer") and xxxx xxxxxxxxx xx xxxxx xxxxxx (hereinafter
referred to as the "producer"), and the dutiability of certain
costs of the producer. This ruling follows a May 16, 1994
telephone conference between counsel for the importer and members
of my staff in the Value Branch. We regret the delay in
responding.
FACTS:
The importations at issue consist of assorted footwear items
which were assembled from U.S. components in Mexico by the
producer. The importer and producer are related parties within
the meaning of 402(g)(1) of the Tariff Act of 1930, as amended
by the Trade Agreements Act of 1979 (TAA, 19 U.S.C. 1401a(c)).
This protest pertains to seventy-one entries made from July 12,
1988 to August 28, 1989. Appraisement was made on the basis of
computed value. The footwear was entered with allowances in
accordance with item 807.00, Tariff Schedule of the United States
(TSUS) and subheading 9802.00.8050 of the Harmonized Tariff
Schedule of the United States (HTS).
In response to a request by Customs, the importer filed a
cost submission dated February 7, 1990, for its fiscal year
ending June 30, 1989 based upon the format of Customs Form 247.
The cost submission included July and August of 1989 due to the
producer's suspension of operations in Mexico resulting from
destruction of the producer's facility by fire on August 24,
1989. The cost submission (containing schedules) included pre-production (training) expenses (schedule III), U.S. related costs
(schedule IV), non-production costs (schedule V), fire loss
(schedule VI) and labor inefficiency (excess start-up) costs
(schedule VII).
It is the importer's position that the imported merchandise
should have been appraised under any one of the methods preceding
computed value instead of computed value. No evidence has been
submitted supporting this contention. It is also the importer's
position that even if computed value is the appropriate method of
appraisement, Customs incorrectly included certain expenses on
the producer's books which the importer claims are nondutiable.
The importer asserts that the labor inefficiency costs and
pre-production costs are amortizable under Generally Accepted
Accounting Principles (GAAP) in Mexico. The importer has
provided a letter dated July 6, 1990, from Delfino Gonzalez Y
CIA. S.C. ("Gonzalez"), who claims to have audited the producer's
books. The letter states that under Mexican GAAP these costs are
amortizable over a period of up to, but not exceeding five years.
According to counsel for the importer, these costs were not
originally amortized by the producer. The amortization was done
in conjunction with the protest. In a June 7, 1994 submission,
the importer states that the producer's facility was destroyed as
a result of the August, 1989 fire, and the operations were never
resumed in Mexico. After the fire, these costs were written off
by the producer. The producer was not compensated by insurance
for these costs.
The importer takes the position that the U.S. related costs
and non-production costs are not usually carried on the books of
Mexican assembly plants. This is also stated in the letter of
Gonzalez. The non-production costs consist of administrative
expenses. According to the importer's Schedule V, the
administrative expenses include compensation of employees who
worked in non-production administrative capacities, computer
training in the U.S. for administrative employees, and
administrative related telephone, office supplies and expenses,
postage, and professional fees. The letter of Gonzalez states
that these costs "are not properly characterized as general
expenses under Mexican GAAP in that they are not even remotely
related to the company's production operations."
With respect to the U.S. related costs, the importer claims
that the expenditures were recorded on the producer's books
although they were incurred by the importer's Texas operation
(hereinafter referred to as the "Texas operation"). According to
Schedule IV, the producer's books include amounts for auto
depreciation for a car purchased by the Texas operation for use
by its manager in Texas, U.S. travel and entertainment and U.S.
legal fees. The letter of Gonzalez states that the U.S. costs
were improperly recorded on the books of the producer. A July
10, 1990 letter from Coopers & Lybrand states that costs such as
the U.S. costs "should be charged to an intercompany exchange
account and be reimbursed by the American parent to the Mexican
subsidiary." Then, according to Coopers and Lybrand, under GAAP
these U.S. related costs would not enter into costs reflected on
the Mexican subsidiary's financial statements.
Schedule IV includes rent allocated to a 20% portion of the
producer's facilities which remained idle during the period in
question, and had never been used.
The producer's books contain freight charges for shipment of
materials from the U.S. facility to Laredo, the port of
exportation. At the time of the telephone conference, the
importer took the position that these costs should have been
deducted from the appraised value of the imported assembled
merchandise.
ISSUES:
1. Whether the imported merchandise was properly appraised
under computed value.
2. Whether the subject expenses on the producer's books
were properly included in the computed value of the imported
merchandise.
LAW AND ANALYSIS:
Transaction value, the preferred method of appraisement, is
defined in 402(b)(1) of the Tariff Act of 1930, as amended by
the Trade Agreements Act of 1979 (19 U.S.C. 1401a(b); TAA) as the
"price actually paid or payable for merchandise when sold for
exportation to the United States...."
With respect to related parties, 402(b)(2)(B) of the TAA
provides:
The transaction value between a related buyer and
seller is acceptable ... if an examination of the
circumstances of the sale of the imported merchandise
indicates that the relationship between such buyer and
seller did not influence the price actually paid or
payable; or if the transaction value of the imported
merchandise closely approximates [one of the enumerated
test values].
In this regard, your office has concluded that the price has
been influenced by the relationship between the parties. Since
the protestant has submitted no evidence rebutting this
particular point or otherwise in support of the acceptability of
transaction value, we have no basis for concluding that your
determination regarding transaction value was inappropriate.
Under the TAA it is necessary to proceed sequentially
through the remaining bases of appraisement to determine the
appropriate valuation method. The next basis of appraisement,
under 402(c) of the TAA, requires a previously accepted
transaction value of identical or similar merchandise which was
exported at or about the same time as the merchandise being
valued. It is the importer's position that identical or similar
merchandise was imported from Mexico, through Laredo, by a
competitor during the period in question. It is your position
that there is no previously accepted transaction value of any
identical or similar merchandise. According to the concerned
import specialist, the merchandise claimed to be identical or
similar by the importer was appraised on the basis of computed
value, and was neither similar nor identical to the imported
merchandise. Therefore the claimed transaction value of
identical or similar merchandise does not exist.
The next basis of appraisement is deductive value determined
under 402(d) of the TAA. Deductive value involves appraising
the merchandise on the basis of whichever of three prices,
adjusted as provided in 402(d)(3) of the TAA, is appropriate.
The imported merchandise was not appraised under the deductive
value method because no information was made available to Customs
to utilize deductive value, and the importer had filed a cost
submission under computed value. No additional evidence has been
submitted by the importer.
The next basis of appraisement is computed value determined
under 402(e) of the TAA. The computed value of the imported
merchandise is the sum of the cost or value of the materials and
fabrication, an amount for profit and general expenses equal to
that usually reflected in sales of merchandise of the same class
or kind, any assists, and the packing costs. See, 19 CFR
152.106. Since the U.S. related costs, non-production costs and
fire loss expenses are not assists, packing costs or costs of
materials and fabrication, we must examine whether these items
are included in "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."
The computed value statute directs Customs to base the
amount for profit and general expenses upon the producer's
records, unless the amounts in the records are inconsistent with
those usually reflected in sales of merchandise of the same class
or kind as the imported merchandise. TAA 402(e)(2)(B). The
Statement of Administrative Action ("SAA") provides that the
amount for profit and general expenses will be based on the
commercial accounts of the producer, provided that such accounts
are consistent with the GAAP applied in the country where the
goods are produced.
Gonzalez' statement that characterization of the subject
non-production expenses as general expenses is not proper under
Mexican GAAP, is qualified by the assertion that the expenses
"are not even remotely related to the company's production
operations." Computed value includes "an amount for general
expenses equal to that usually reflected in sales of merchandise
of the same class or kind as the imported merchandise...." No
information has been provided to demonstrate that the inclusion
of these non-production expenses is inconsistent with that which
is usually reflected in sales of merchandise of the same class or
kind as the imported merchandise.
Therefore, the so-called non-production expenses are
included in the producers profit and general expenses, and are
included in the computed value of the imported merchandise. This
is consistent with prior Customs decisions. See e.g. TAA No. 18
(Headquarters Ruling Letter ("HRL")542302 dated February 27,
1981)(cost of equipment not used in the production of merchandise
would be included in computed value if the cost is carried on the
books of the producer); HRL 542848 dated August 6, 1982 (where
loan interest expense incurred by assembler prior to commencement
of production appeared on the assembler's books of account, it
qualified as a general expense); HRL 543873 dated September 19,
1988 (managers salaries paid by the producer are included in
computed value). Customs position has been recently affirmed by
Campbell Soup Company, Inc. v. United States, No. 94-80, slip op.
(Ct. Int'l Trade May 16, 1994), in which the Court held that
"Customs correctly treated as general expenses the amount of
freight costs that [the producer] incurred from its loading docks
to the United States border," and held that the expense was
included in the computed value of the imported merchandise. Id.
at 24-25. The Campbell Soup Company case affirms the position
taken by Customs in Headquarters Ruling Letter (HRL) 544344 dated
November 14, 1990 (a reconsideration of HRL 543891 dated May 2,
1988). In HRL 544344 we ruled that the seller's prepaid
transportation costs and expenses which directly related to
transporting the finished product from the loading dock of the
Mexican plant to the U.S. border and which were carried on the
books of the producer are general expenses and as such they fall
within 402(e)(2)(B) of the TAA and are therefore included in the
computed value of the imported merchandise.
With respect to the U.S. related costs, neither the letter
of Gonzalez, nor the letter from Coopers and Lybrand state that
the records of the producer are inconsistent with Mexican GAAP.
The letter from Coopers and Lybrand states that if the U.S.
related expenses were reimbursed by the American parent to the
Mexican subsidiary, then the costs would not be general expenses
of the producer. However, there is no evidence in this case that
these costs were reimbursed to the producer by the importer, and
that the costs are not reflected on the producer's books. There
is no indication that the accounts of the producer are
inconsistent with GAAP. We further find that the letter of
Gonzalez is insufficient to demonstrate that the producer's
accounts are inconsistent with what is usual. The U.S. related
costs are included in the producers profit and general expenses,
and as such are included in the computed value of the imported
merchandise.
The importer's cost submission includes fire loss expenses.
The fire loss expenses are considered to be extraordinary
expenses under GAAP and are not included in a producer's general
expenses. Therefore, the fire loss expenses are not reflected in
profit and loss (from operations). We have recently taken a
similar position in HRL 545529 dated May 6, 1994 (a
reconsideration of 545384 dated November 23, 1993), regarding
uncollectible receivables which were written off by the producer.
In HRL 545529, we confirmed that an unusual and non-recurring
expense for losses suffered by the producer may not be used to
calculate the amount for profit and general expenses for computed
value purposes.
The importer's cost submission includes rent for a portion
of the assembly facility that had never been utilized. Rent for
space in the assembly facility, that had never been utilized,
constitutes an overhead cost, which is included in the cost of
fabrication and other processing employed in the production of
the imported merchandise. This position is consistent with our
prior ruling in TAA #44, dated January 12, 1982.
With respect to the excess start-up and pre-production
costs, the importer does not dispute that they are included in
the appraised value of the imported merchandise. The issue
presented is whether those costs can be amortized over a period
of five years. According to the letter of Gonzalez, these costs
are amortizable over a period of up to five years. These costs
are carried on the books of the producer. Letter of Gonzalez.
If the excess start-up and pre-production costs are carried on
the producer's books as amortized costs, then, whether they are a
cost or value of the materials and the fabrication and other
processing, or general expenses, the merchandise is to be
appraised based upon those costs and general expenses as
amortized. If the subject costs are not amortized in the
producer's books, then the appraised value of the merchandise is
to be determined based upon the non-amortized costs, as reflected
in the producer's books.
With respect to freight charges for transporting U.S.
components from the U.S. facility to the port of exportation, a
question has arisen regarding a Customs Regulations 19 C.F.R
10.17 adjustment. Customs Regulations 19 C.F.R 10.17 provides
for the amount to be subtracted from the full value of the
assembled article:
The value of fabricated components to be subtracted from the
full value of the assembled article is the cost of the
components when last purchased, f.o.b. United States port of
exportation or point of border crossing as set out in the
invoice and entry papers, or, if no purchase was made, the
value of the components at the time of their shipment for
exportation, f.o.b. United States port of exportation or
point of border crossing, as set out in the invoice and
entry papers.
Assuming that the importer can verify that the freight costs
claimed to have been incurred for transporting U.S. components
from the U.S. facility to the port of exportation, these costs
may be included as part of the cost or value of the U.S.
components to be deducted from the full value of the imported
merchandise pursuant to item 807.00, TSUS, and subheading
9802.00.80, HTS. See TAA No.53.
HOLDINGS:
1. Under the facts presented, computed value is the
proper method of appraisement for the imported merchandise.
2. In this case, the subject U.S. related costs and non-production costs are general expenses of the producer and are
included in the computed value of the imported merchandise. The
fire loss expenses are extraordinary expenses under GAAP and are
not included in the computed value of the imported merchandise.
The rent expense for the 20% portion of unused space is a cost of
fabrication or other processing and is included in the computed
value of the imported merchandise. The excess start-up and pre-production costs are included in the computed value of the
imported merchandise. Whether or not those costs are amortized,
depends upon their treatment in the producer's books. Verified
freight charges for transporting U.S. components from the U.S.
facility to the port of exportation are part of the cost or value
of the U.S. components to be deducted from the full value of the
imported merchandise entered under 807.00 TSUS and 9802.00.80
HTS.
Accordingly, you are directed to grant this protest in part
and to deny this protest in part. In accordance with Section
3A(11)(b) of Customs Directive 099 3550-065, dated August 4,
1993, Subject: Revised Protest Directive, this decision should be
mailed by your office to the protestant no later than 60 days
from the date of this letter. Any reliquidation of the entry in
accordance with the decision must be accomplished prior to
mailing of the decision. Sixty days from the date of the
decision the Office of Regulations and Rulings will take steps to
make the decision available to customs personnel via the Customs
Rulings Module in ACS and the public via the Diskette
Subscription Service, Freedom of Information Act and other public
access channels.
Sincerely,
John Durant, Director
Commercial Rulings Division