RR:IT:VA 548111 CC
Teresa M. Polino, Esq.
Gregory S. Menegaz, Esq.
Sandler, Travis & Rosenberg, P.A.
1300 Pennsylvania Ave., N.W.
Washington, D.C. 20004-3002
RE: 19 U.S.C. § 1401a(f)(1); fallback method
Dear Ms. Polino and Mr. Menegaz:
This is in response to your letter dated March 6, 2002, on behalf of
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxx], in which you request a prospective ruling regarding the method of appraisement for [xxxxxxxxxxxxxxxx]. You provided a supplemental submission, dated March 22, 2002. In addition, we met with you and representatives of the importer on July 12, 2002.
In your March 6, 2002, letter, you requested confidential treatment for the parties and for certain commercial and financial information. We agree with your confidentiality request, and the subject information is bracketed in this ruling and will not be disclosed in copies of this ruling made available to the public.
FACTS:
The imported merchandise is [xxxxxxxxxxxxxxxx]. The importer of record [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx] of this merchandise operates processing facilities in foreign countries. The parent of these foreign processing facilities is [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxx]. Each foreign processing facility acts as its own importer of record.
A transaction begins with the U.S. customer purchasing an assist, consisting of [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx]. The assist is processed [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx]. The product is then sent to the importer’s foreign processing facility for further processing. [xxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxx]. The product is then imported into the U.S., where the processed material is delivered by the importer to U.S. [xxxxxxxxxxxxxxx] consignees, who further process the product against already-contracted U.S. customer product requirements. [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.] In this process, the consignee may physically commingle the product from other [xxxxxxxx] suppliers. The consignee then delivers the merchandise to the U.S. customer.
In an overwhelming majority of transactions the assist is not purchased from the importer, which you term as “service sales” or scenario A. In this scenario, the importer does not take title to or otherwise purchase the assist overseas. In scenario B, which you term “product sales,” the importer provides the assist or purchases and takes title to the assist. In both scenarios the importer processes the assist in its foreign facilities.
You state the following concerning an overview of the transactions and the valuation practice:
[xxxxxxxxxxx], the parent company, on behalf of itself and all of its processing facilities, enters into long-term contracts with customers to supply [xxxxxxxxxxxxxxxxxx] processing services -- typically over a three to five-year period. These customers contract separately with [xxxxxxxxxxxxxxx] consignees in the United States, who accept delivery of the imported product, further process these imports, and then deliver the final finished product to the customers.
The importer rarely prepares for delivery and entry in the United States a shipment that corresponds precisely to the amount of product contracted for with a specific customer in a given timeframe. Rather, shipments will be based on the consignee’s anticipated needs for the importer’s customers collectively, estimated pursuant to their contracts. Although the importer negotiates with its customers a price for a given amount of services or for product of a given quality, it has no way to tie that contract precisely to any given entry. This is due to the practice of transferring the fungible material assist and service components associated with the product to the customer by book transfer at the consignee’s facility at some point after importation, and the requirements of the consignee’s process, including the consignee’s co-mingling and remixing the product.
In light of the importers’ inability to identify the price paid or payable for a specific import of the product at the time of entry (and to tie to a given entry the cost of the material it supplies, or … the assist it is supplied with), the importer has, until now, used published price indicators to value both the assist or importer-purchased material and the service provided. This information was reflected in a pro forma invoice, which was used as the basis of appraisement. This method was adopted because it objectively associated the product on the entry with the importer-purchased material or assist and the services provided values at the time of entry….
In particular, the pro forma invoice reflected: (1) the price of the services based on the long-term published price indicators; and (2) a price for the assist or material used (i.e., the sum of the published long-term price indicator for [xxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxx], and the published long-term price indicator for
[xxxxxxxxxxxxxxxxxxxxxxxx].
Sometime after import, when delivery actually has been made of the appropriate quantity of product and services, the importer issues a commercial invoice to the customer, normally only for services, stating the final price under the contract. The time of delivery is the date of book (and title) transfer between the importers’ and the customers’ accounts by the consignee. Payment is made by the customer according to the terms of the customer’s contract with the importer. There is ordinarily a price escalation component included ab initio in these contracts that is tied to independent economic indicators.
Although you believe that the importer’s current practice of using published prices is a reasonable and permissible methodology pursuant to the fallback method, you propose basing appraisement of the imported product upon an average of the previous year’s price of services invoiced in that year for all of the importer’s product entered into the United States. Under your proposal the valuation of the assist would remain the same, using published prices. The reason for your proposal is that you believe that it would result in more accurate values than the current method. You state that this methodology would more closely approximate prices for the services provided by the importer under the specific product contracts (some of which have been entered into several years ago) than does the current published price indicator which is a “snapshot” of only the most recent contract prices.
ISSUE:
Whether the proposed method is permissible under 19 U.S.C. § 1401a(f)(1), the fallback method.
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 preferred method of appraisement is transaction valuation, which is defined as the “price actually paid or payable for merchandise when sold for exportation to the United States,” plus five statutorily enumerated additions. 19 U.S.C. § 1401a(b)(1). In this case, the merchandise that is imported is not the same merchandise that is purchased by the ultimate consumer. The reason for this is because the merchandise is commingled with other merchandise once it arrives and is reprocessed. Consequently, there is no price actually paid or payable for the imported merchandise. In addition, you state that the value of the assist is often unknown. 19 U.S.C. § 1401a(b)(1) provides that if there is insufficient information concerning the amount of any of the five statutorily enumerated additions, including assists, then transaction value cannot be determined. Consequently, the imported merchandise at issue 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 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)). In this case, we assume there will be no sales of similar or identical merchandise made at or about the same time as the merchandise imported. Thus it is not possible to appraise on the basis of the transaction value of identical or similar merchandise.
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). This price is subject to certain enumerated deductions.
19 U.S.C. § 1401a(d)(3). The imported merchandise is not sold in the U.S. in its condition as imported; consequently, the merchandise cannot be appraised under the deductive value method.
Under the computed value method, merchandise is appraised on the basis of the material and processing costs incurred in the production of imported merchandise, plus an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind, and the value of any assists and packing cost. 19 U.S.C. § 1401a(e)(1). Since there is no information on which to base computed value, this method is also unavailable.
When merchandise cannot be appraised under the methods set forth in 19 U.S.C. § 1401a(b)-(e), its value is to be determined in accordance with the “fallback” method set forth in section 402(f) of the TAA. The fallback method provides that merchandise should be appraised on the basis of a value derived from one of the prior methods reasonably adjusted to the extent necessary to arrive at a value. 19 U.S.C. § 1401a(f)(1).
Under the current method of valuation of the subject merchandise under the fallback method, published market price indicators are used as the price of the services provided. The market price indicators you employ are published on a monthly basis. Thus, the price indicator used for an entry would be the most recent one published, which would be the month prior to the entry being made. Although these are long-term price indicators, they represent a “snapshot” of the most recent contracts signed.
Under your proposed method, appraisement of the imported merchandise would be based on an average of the previous year’s price of services invoiced in that year for all of the importer’s product entered into the United States. Because the importer enters into long-term contracts, typically lasting several years, you believe that this method more closely approximates prices for services provided by the importer, rather than published market prices of the most recent contracts signed. We note that under both methods, the valuation of the assist is the same, using published prices.
We have examined your proposed method, including all of your submissions related to them. Based on the information you have provided, we concur that the proposed method more accurately reflects the price of services provided by the importer under the fallback method. Consequently, this proposed method is permissible under the fallback method. We note that this ruling does not apply to the current methodology based on the public market indicators. In addition, in order to verify any declared value made under this method, any relevant information, including contracts, must be made available to Customs upon request.
HOLDING:
The proposed method is permissible under 19 U.S.C. § 1401a(f)(1), the fallback method.
Sincerely,
Virginia L. Brown
Chief, Value Branch