OT:RR:CTF:VS H088115 ARU
Port Director
U.S. Customs and Border Protection
Port of Laredo
P.O. Box 3130
Laredo, TX 78044-3130
RE: Request for Internal Advice Concerning Payments for Under-Amortized
Tooling and Die Costs
Dear Port Director:
This is in response to a request for Internal Advice received from American Honda Motor Co., Inc. (“American Honda”) on November 30, 2009. American Honda requests a ruling pertaining to the customs valuation treatment of certain under-amortized tooling and die costs. Specifically, they ask whether certain payments for “under-amortized tooling costs” paid by the importer, American Honda, to the foreign manufacturer, Honda de Mexico (“HdM”), are dutiable as part of the price actually paid or payable for imported merchandise. American Honda states that this request involves both past and future entries. As such, we are issuing this Internal Advice decision to the Port of Laredo. American Honda’s request includes a Statement of Support executed by the Senior Manager for Business Planning and Administration in the Parts and Services Division of American Honda as well as an attached Exhibit and several additional Attachments.
Pursuant to 19 C.F.R. § 177.2(b)(7), American Honda requests confidential treatment of certain information. American Honda claims that disclosure of such information would cause substantial harm to its competitive position by revealing details of its amortization and sourcing practices related to its service parts imports. Customs and Border Protection ("CBP") will extend confidential treatment in accordance with the request dated November 30, 2009.
FACTS:
American Honda imports a variety of steel and plastic service parts from HdM. During the period at issue, American Honda sold tooling to HdM for HdM’s use in producing these service parts. The understanding between American Honda and HdM was that HdM would recover its tooling costs by calculating an amortization amount for the tooling and including this amount in HdM’s prices charged to the importer for these service parts. This amortization amount was based on estimates of HdM’s sales over a depreciation period for the tooling. According to the importer, this amortization amount was based on estimates of its purchases over a depreciation period for the tooling. Accordingly, HdM’s total cost of the tooling would be fully amortized and fully declared on the entries of the service parts involved provided that the importer purchased the forecasted quantities of service parts during the period that the service parts price included the amortization amount. When the quantity purchased by the importer was less than the forecasted quantity, the foreign manufacturer has invoiced the importer for the difference between the tooling costs recovered through the parts prices and the total cost of the tooling. Similarly, when the quantity purchased by the importer was greater than the forecasted quantity, the foreign manufacturer has credited the importer for the difference.
American Honda claims that the process of forecasting the quantities of service parts that HdM will sell over the amortization period is somewhat uncertain since American Honda’s need for service parts depends upon a number of circumstances, including the quantity of parts required for warranty repair purposes, the quantity of parts required to repair vehicles damaged in accidents, and so forth. American Honda further claims that despite this uncertainty, American Honda and HdM made a reasonable effort to forecast these quantities, by part number, over the amortization period in order to minimize the extent to which additional payments or credits would be required. Given the nature of the forecasting process, there have been variations by vehicle model in the difference between the forecasted quantity and the actual quantity purchased.
ISSUE:
Whether American Honda has properly determined the price actually paid or payable for the imported merchandise, or whether it must be increased to reflect the amounts referred to as “under-amortized tooling costs.”
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 under the TAA is transaction value, defined in section 1401a(b)(1), as the price actually paid or payable for the merchandise when sold for exportation to the United States, plus amounts for enumerated statutory additions.
The term "price actually paid or payable" is defined in 19 U.S.C. § 1401a(b)(4)(A) as:
[t]he total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for, the benefit of, the seller.
Normally, all payments made by a buyer to a seller, or a party related to a seller, are part of the price actually paid or payable. See Headquarters Ruling Letter ("HRL") 545663, dated July 14, 1995. This position is based on the meaning of the term "price actually paid or payable" as addressed in Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990). In Generra, the court considered whether quota charges paid to the seller on behalf of the buyer were part of the price actually paid or payable for the imported goods. In reversing the decision of the lower court, the appellate court held that the term "total payment" is all-inclusive and that "as long as the quota payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods." Id. at 379. The court also explained that Congress did not intend for Customs to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, were for the merchandise or something else. Id.
In Chrysler Corp. v. United States, 17 Ct. Int’l Trade 1049 (1993), the court analyzed Generra and determined that although tooling expenses incurred for the production of the merchandise were part of the price actually paid or payable for the imported merchandise, certain shortfall and special application fees which the buyer paid to the seller were not a component of the price actually paid or payable. With regard to the latter fees, the court found that the evidence established that the fees were independent and unrelated costs assessed because the buyer, Chrysler, failed to purchase other products from the seller. Id. at 1056. As such, the fees were not a component of the price of the imported engines. Id. Therefore, Chrysler was able to show that the shortfall charges were completely unrelated to the imported merchandise.
American Honda claims that the under-amortized tooling costs at issue in this case are similar to those considered in HRL W563531, dated October 27, 2006 (the “Reebok” ruling). Reebok involved payments for “under-amortized tooling costs” paid by Reebok International, Ltd. (“Reebok”) to the foreign manufacturers from which Reebok purchased sports, fitness and casual footwear. Relying on Chrysler, Reebok
argued that no adjustment to the price actually paid or payable was necessary because the under-amortized tooling payments did not relate to the imported merchandise. We disagreed, holding that payments made by Reebok relating to tooling were properly considered part of the price actually paid or payable.
The tooling charges to be included in Reebok’s purchase prices were calculated by allocating the total tooling costs over a forecasted quantity that Reebok expected to order within 15 months. Further, when the actual production quantity was less than the forecasted quantity, Reebok reimbursed the vendors for any tooling costs still due to the vendor with a corresponding process, whereby Reebok recovered any overpayment for tooling. As in Reebok, here the price paid by American Honda to HdM includes a charge for tooling and molds amortized over an estimated production quantity. The amortization quantity varies by part number and is based on market forecasts. In addition, American Honda and HdM agree that HdM will invoice American Honda for any under-amortized tooling costs, and credit American Honda for any over-amortized tooling costs.
Accordingly, we agree with the arguments advanced by American Honda and conclude that the payments made by American Honda relating to tooling are considered part of the price actually paid or payable. Next, we must address whether American Honda properly apportioned the tooling payments in the purchase price of the imported articles. As indicated above, an amortized amount was included in the purchase price of each imported article based on the anticipated number of goods that were to be produced. If the method of apportionment is acceptable, then no adjustment to the price actually paid or payable is required based on the "under-amortized tooling costs."
In Chrysler, the court also considered payments that the buyer made to the seller for tooling expenses. See 17 Ct. Int’l Trade at 1052. After determining that the tooling payments were not assists, but were instead part of the price actually paid or payable, the court found that it was necessary to determine which portion of the tooling expenses were directly or indirectly part of the price paid for the subject merchandise. Noting that the tooling expenses were incurred in anticipation of the production of 181,423 engines, the court determined that the tooling expenses should be apportioned over 181,423 engines, and not the actual number of engines imported. The court determined that once allocated in this manner, these expenses are properly considered part of the price actually paid or payable for the subject merchandise. Id. at 1059.
Subsequent to Chrysler, Customs has looked to the intent of the parties and the evidence presented and found the apportionment of such costs acceptable if it is reasonable, in accordance with Generally Accepted Accounting Principles, and not in violation of other provisions of the Customs laws. See HRL 548196, dated December 13, 2002; HRL 546771, dated March 27, 1998; and HRL 545500, dated March 24, 1995. Similarly, based on the intent of the parties and the evidence presented, we find that the tooling payments in the instant case were properly apportioned over the total number of products that the parties anticipated to be produced. We note that American Honda’s purchase price from HdM includes a charge for certain tooling and molds that is amortized over the anticipated production quantity. The amortization quantity represents American Honda’s anticipated need based on market forecasts.
Upon examination of the facts in this case and the documentary evidence submitted, we find American Honda’s method of allocation to be reasonable and consistent with the court’s decision in Chrysler and Customs’ decision in Reebok. Therefore, the price actually paid or payable already includes these allocated tooling payments, and no further adjustments are needed on the basis of the under-amortized tooling costs.
HOLDING:
American Honda has properly determined the price actually paid or payable for the imported merchandise, including a reasonable allocation of tooling payments, and no further adjustments are needed on the basis of the under-amortized tooling costs.
Please mail this decision to the internal advice applicant no later than sixty (60) days from the date of this letter. Sixty days from the date of this letter, the Office of International Trade: Regulations and Rulings will take steps to make the public version of this decision available to CBP personnel and to the public on the CBP 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.
Sincerely,
Monika R. Brenner, Chief
Valuation & Special Programs Branch