• HQ H170395
• Jun 15, 2011

• Type : Valuation • HTSUS :
•  Related:   98101; H170359; W548164; H019722; H125103   

VAL-2 0T:RR:CTF:VS H170359 RSD

Joel R. Junker, Esq.
1191 Second Avenue
Suite 1800
Seattle, Washington 98101

RE: Request for Ruling regarding the Proper Appraisement of Fertilizer Products Imported from Canada by Related Companies, 19 U.S.C. 402(f), Modified Computed Value

Dear Mr. Junker:

This is in response to your letter dated May 30, 2007, on behalf of Agrium U.S., Inc. (Agrium US) requesting a ruling on the proper valuation of certain bulk fertilizers imported from Canada. In an email dated October 29, 2010, you sent a supplemental submission. A supplemental submission further explaining your position was sent via email on May 18, 2011.

FACTS:

Agrium US is a Colorado corporation that imports fertilizer products into the United States from Canada. Agrium US is indirectly and wholly owned by its Canadian parent corporation, Agrium, Inc. Although Agrium US acts an importer of record, it is Agrium’s head office in Alberta, Canada that manages the CBP entry activity and the U.S. corporate compliance activity. Agrium US’s import functions are supervised and reviewed internally through an in-house counsel and an import compliance manager.

Both Agrium US and Agrium sell agricultural nutrients and industrial products in North America and throughout the world. The companies produce and market three primary fertilizer products: 1) “nitrogen products” including Urea, Anhydrous Ammonia, Ammonium Sulfate, and Ammonium Nitrate; 2) “phosphate products” such as Monoammonium Phosphate; and 3) “potash” products. According to CBP entry data, Agrium US has imported a significant amount of products into the United States in the past. You further indicate that the imported fertilizer products are classified in a duty-free subheading, and the products are also NAFTA originating goods.

The price of fertilizers sold into the agricultural market is generally determined by negotiations at the time of sale depending on the supply and demand for each nutrient and for the particular forms of the product. Prices vary from region to region based largely on variances in transportation costs and by localized conditions such as the weather and the level of product inventory in the applicable region. In determining the proper method of appraising the imported fertilizer products, you point out that the market demand for fertilizer products is seasonal. Yet, fertilizer production facilities operate throughout the year. In addition, the price of fertilizers is also affected by their supply, and the supply of fertilizer products is largely influenced by changes in production capability and fluctuations in the input costs, particularly in the cost of natural gas.

In this case, the bulk fertilizer products that Agrium US imports into the United States are sold in two different ways: 1) Internal transfers and 2) Direct Sales. Internal Transfers involve products shipped from Agrium in Canada to Agrium US and placed in a United States storage location. From the U.S. storage location, the fertilizer products will eventually be sold to a third party customer. A final sales price on transferred products is not determined until the products are sold out of inventory. Thus, the price paid or payable of the imported products is not known until after importation. In the direct sales, Agrium US purchases products from Agrium and the shipment goes directly from Agrium to Agrium US’s customers (rather than into inventory). Often, at the time of shipment in a direct sale, the price between Agrium US and its customer is also not known. You explain that in the case of both transfers and direct sales, there are transactions between related parties.

The price paid or payable for the fertilizers is determined under an internal transfer pricing policy, in which the relationship of the parties does affect the price. Agrium assigns a transfer price to its internal transfers of its products based on a transfer pricing policy and study using a comparable profits methodology. The comparable taxpayers used in determining the averages of pricing in the controlled transactions, have structures and other facets similar to Agrium, but the transfer pricing study does not analyze producers of fertilizer products such as those Agrium imports into the United States. Furthermore, the transfer price is applied across the board to all products without regard to the particular class or kind of merchandise, i.e. whether the fertilizer product is nitrogen, phosphate or potash.

For Internal Transfers, the internal pricing is determined by the following method: Products are shipped by Agrium in Canada to a U.S. located third party warehouse in the U.S. Agrium bills Agrium US at a Moving Average Inventory Value of the product at the shipping points. The Moving Average Inventory Value is an average value of the product at a production facility. It is a compilation of the average cost of procuring the current inventory at that facility plus the freight cost to the storage location and any in- bound warehousing costs incurred at that storage facility. Products remain in inventory at the warehouse location for up to several months. During the interim period, the producing warehouse incurs additional costs of warehousing and handling the products. Products are sold by Agrium US in the United States at a market price. At the end of each month, Agrium invoices Agrium US for the difference between the Moving Average Inventory Value of the product sold and the selling price less a sales charge of $4.81 per short ton for the product sold by Agrium US. The $4.81 charge reflects an agreed upon payment to Agrium to reflect the services rendered.

Under the accounting/billing system that Agrium US uses, there is no final transaction value at the time the products are imported in the U.S. In addition, there is no indication that the prices Agrium charges Agrium US for the imported products reflect an arm’s length transaction.

For Direct Sales to the United States, the internal pricing is determined by the following method:

Products are sold by Agrium US Products are shipped directly to the U.S. customer by Agrium. Agrium bills Agrium US at the Moving Average Inventory Value of the shipped product at the shipping point. Agrium US invoices the U.S. customer at the selling price. At the end of each month, Agrium invoices Agrium US for the difference between the Moving Average Value of the Inventory sold and the U.S. customer invoiced selling price less a sales charge of $4.81 per short ton for the product sold by Agrium US. This charge reflects an agreed upon payment to Agrium US to reflect services rendered.

It is Agrium US’s position that since the fertilizer products it imports cannot be appraised under transaction value or by any of the other methods specified in 19 U.S.C. § 1401a(c)-(e), the fallback valuation method under 19 U.S.C. § 1401a(f) should be used to appraise the imported merchandise. More specifically, Agrium US proposes to use a fallback method of valuation using a modified computed value reasonably adjusted to arrive at a value that reflects the transaction value of identical merchandise in sales to unrelated buyers.

ISSUE:

Can the above described fertilizer products imported from Canada and sold between related parties under a transfer pricing policy be appraised based on 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 basis of appraisement is transaction value. Transaction value is the price actually paid or payable for the merchandise when sold for export to the United States, plus certain enumerated additions. 19 U.S.C. 1401a(b)(1). The term 'price actually paid or payable' means the 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. 19 U.S.C. §1401a(b)(4)(A).

In determining transaction value, the price actually paid or payable is considered without regard to its method of derivation. Pursuant to section 402(b)(2)(A)(iv), the transaction value of imported merchandise shall be acceptable only if the buyer and the seller are not related, or if the buyer and the seller are related, the transaction value is acceptable under section 402(b)(2)(B). (Emphasis added.)

In this case, Agrium US, the importer of record, is a wholly owned subsidiary of Agrium, the producer/exporter of the imported merchandise. The information you presented indicates that the relationship between Agrium US and Agrium influences the price paid or payable for the imported merchandise. More specifically, the price paid or payable for the imported merchandise is based on a transfer price that does not provide sufficient information of an arm’s length

transaction of the same class or kind of merchandise as the imported fertilizer products for purposes of valuation under 19 U.S.C. § 1401a. In addition, you advise that the final price paid or payable for the imported fertilizer product is not determined at the time of importation. Consequently, in this instance, we conclude that transaction value is an unacceptable basis of valuation. When imported merchandise cannot be appraised on the basis of transaction value, it is to be appraised in accordance with the remaining methods of valuation, applied in sequential order. The alternative methods 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). You have advised us that Agrium is unaware of any merchandise that would be considered "identical" or "similar" to the merchandise being appraised pursuant to section 402(c) of the TAA. Consequently, neither the transaction value of identical merchandise, nor the transaction value of similar merchandise, is an acceptable basis of appraisement. However, we want to make clear that if the port is able to find values of either identical or similar merchandise that satisfy the requirements of 19 U.S.C. § 1401a(c), those values should be used as the basis of appraisement for the imported merchandise.

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 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. Section 402(d)(2)(B) of the TAA.

The rules for deducting profit and general expenses are set forth in 19 CFR 152.105(e). The deduction made for profits and general expenses shall be based upon the importer’s profits and general expenses, unless such profits and general expenses are inconsistent with those reflected in sales in the United States of imported merchandise of the same class or kind, in which case the deduction shall be based on the usual profit and general expenses reflected in such sales, as determined from sufficient information; and Section 152.105(e)(1), CBP Regulations (19 CFR 152.105(e)(1). In this case, the profits of Agrium US are determined in accordance with a transfer pricing policy study that is based on similarly structured companies that do not sell imported merchandise of the same class or kind. You explain that Agrium US does not have adequate documentation or sufficient evidence to determine if its profits and general expenses are consistent with the usual profit and general expenses reflected in sales in the United States of imported merchandise of the same class or kind. As a result, the deductive value method of appraisement would be inapplicable under the circumstances of the instant case.

The next method of appraisement is the computed value method, set forth in section 402(e) of the TAA. Computed value is defined as the sum of, inter alia: the cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise; and an amount for profit and general expenses equal to that usually reflected in sales for export to the U.S., by producers in the country of exportation, of merchandise of the same class or kind. 19 U.S.C. § 1401a(e)(1). In this instance, the computed value method cannot be used because all of the cost and profit/general expense information necessary to compute is not available prior to importation. Again because necessary information is not available, the computed value cannot be used to determine the value of the imported fertilizer products.

When the value of imported merchandise cannot be determined under 19 U.S.C. § 1401a(b) through § 1401a(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 U.S., minimum values, or arbitrary or fictitious values. 19 U.S.C. § 1401a(f); 19 CFR § 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 CFR § 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 have the imported fertilizer valued under the fallback method of 19 U.S.C. § 1401a(f) by using a method derived from computed value. In other words, the value of imported bulk fertilizer products can be computed as the sum of the cost or value of materials and an amount for profit and general expenses.

Computed Value Generally

Section 402(e) of the Tariff Act of 1930 as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(e); TAA) provides:

(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. 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. First, you point out that the fertilizer products are frequently produced in different production facilities and at different times. The products produced at the different production facilities are often commingled when they are stored in a warehouse. Because the costs of the product produced at the different production facilities can often vary, you propose to compute the production costs using a method that Agrium uses to capture costs, known as “Moving Average Inventory Value”. Under this Moving Average Inventory Value method, the varying costs of the different production facilities are averaged together. This means for identical products produced in different facilities at different times that are eventually commingled, costs of the inventory in the warehouse will be determined by averaging the costs to make the products. We find the use of the Moving Average Inventory Value to be an acceptable method of determining the cost of the fertilizer products that are commingled provided Agrium can substantiate that the products shipped from various warehouses are, in fact, commingled before being imported and that they can substantiate the actual costs of producing the products in the different production facilities.

You indicate that in order to smooth out the extreme variations in the costs of materials used in producing fertilizer, Agrium wants to apply the use of average costs in determining the modified computed value. The Statement of Administrative Action indicates that the cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise will be determined on the basis of information supplied by or on behalf of the producer and will be based upon the commercial accounts of the producer, if such accounts are consistent with generally accepted accounting principles applied in the country where the goods are produced.

CBP has considered the use of averaging in determining the costs of imported goods. In HQ W548164 dated September 20, 2002, CBP approved the appraisement of pharmaceutical products pursuant to section 402(f), under a modified computed value method using a weighted average value as opposed to actual computed value.  In HQ H019722 dated March 21, 2008, an aircraft carrier used a commercially available inventory management system (IMS) for tracking and costing its inventory. The IMS had various information fields that included stock number quantities and the most recent average cost. The IMS calculated the cost basis for each stock or line item by using a rolling weighted average. The IMS averaged the new cost paid with the previous average cost for each stock number, thus maintaining an average transaction cost based on past and current purchases. The importer proposed valuing the imported equipment using the fallback method and a rolling weighted-average method as a basis of appraisement. CBP ruled that the proposed method of valuation was acceptable because it was based on a fair market value assessment which considered a number of factors, and it was consistent with other customs rulings which accounted for an adjustment for depreciation and for the cost of repairs.

In HQ H125103 dated December 28, 2010, CBP considered the use of a modified computed value methodology for imported Active Pharmaceutical Ingredients (API) based on an average annual manufacturing cost per kilogram of the API by site. The importer proposed to add the average annual direct and indirect manufacturing cost per kilogram of APIs (together equaling the average annual manufacturing cost per kilogram of API) and forecasted research and development cost per kilogram per campaign to equal the campaign-specific API cost per kilogram. The importer provided a detailed description on how they proposed to arrive at the value, and it used annual data as the importer was unable to attribute data to the particular material upon importation. CBP held that this method was in accordance with previous cases and was an appropriate formula for appraisement under a modified value method.

Thus, in this case we find that it would be acceptable to use the average costs in determining the modified computed value of the imported fertilizers provided that in the normal course of its business Agrium use averages in its commercial accounts to keep track of its material costs and processing expenses, and its accounting procedures are consistent with the generally accepted accounting principles of Canada.

Profit Figure

You indicate that the producer’s profit will be determined by taking into account the amount that Agrium invoices Agrium US for the difference between the Moving Inventory Value and the U.S. invoice selling price less the sales charge amount that Agrium US invoices Agrium services rendered per short ton of product sold into the U.S. for a particular month.

With regard to profit and general expense figures under computed value, 402(e)(2)(B) states:

(B) the amount for profit and general expenses under paragraph (1)(B) shall be based upon the producer's profits and expenses, unless the producer's profits and expenses are inconsistent with those usually reflected in sales of merchandise of the same class or kind as the imported merchandise that are made by producers in the country of exportation for export to the United States, in which case the amount under paragraph (1)(B) shall be based on the usual profit and general expenses of such producers in such sales as determined from sufficient information.

Section 152.106(c) of the CBP Regulations, provides that:

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 imported merchandise of the same class or kind. The question of whether the producer's profit and general expenses are consistent with the profit and general expenses usually reflected by producers in the country of exportation in sales of merchandise of the same class or kind is a question of fact which will vary depending on the particular point in issue.

Our authority for rejecting figures relating to the producer's profits and general expenses is limited under 402(e)(2)(B) of the TAA to those situations where such figures "are inconsistent with those usually reflected in sales of merchandise of the same class or kind..." .

You indicate that the profits that Agrium earns in the transactions with Agrium US are consistent with the profits usually reflected in sales of merchandise of the same of kind by producers of the product in Canada, the country of exportation. You further state that this statement of profit is reflected on the companies’ records in accordance with the generally accepted accounting principles used in Canada. It is further explained that the statement of profits is reflected in a transfer pricing study for internal transfers. The transfer pricing study is based on a “Comparable Profits Methodology” and is currently under review by the U.S. Internal Revenue Service (“IRS”) and the Canada Revenue Agency (CRA) for tax purposes under the Canada/U.S. Bilateral Advance Pricing Arrangement. It is also noted that the accounting records indicating that the calculation of profits have been publicly reported by Agrium, Inc., Agrium and Agrium US’s publicly traded parent under the regulatory public disclosure requirements of the United States and Canada. In essence, you claim that the profit level Agrium will use for determining the proposed modified computed value under Section 402(f) is in accordance with the generally accepted accounting principles of Canada and will be consistent with a transfer pricing study currently under review by the IRS and CRA for tax reporting purposes. In view of the transfer pricing study submitted to the IRS and CRA, under the circumstance presented, we are in agreement that there is no basis to conclude Agrium’s profits and general expenses are inconsistent with those usually reflected in sales of imported merchandise of the same class or kind imported from Canada. Thus, we find that the calculations of Agrium’s profits and general expenses are acceptable in determining a modified computed value under section 402(f).

In addition, in order to determine if the general expenses and profits are consistent with profits and general expenses usually reflected by producers in Canada in sales of merchandise of the same class or kind, you also propose to use three basic types of fertilizer products that Agrium US imports into the United States. The specific fertilizer products that Agrium US wants to use to determine if the general expenses and profits are consistent with other producers in Canada are nitrogen, phosphate and potash fertilizer products. It is our understanding that these are basic types of fertilizer groups, and thus they can be used as identical and similar merchandise for determining a computed value, under the fallback method of appraisement.

We recognize that in the situation you have described, the cost of the commodities used to make the fertilizer products varies often, such that accurate information on the cost to produce the fertilizer may not be available at the time the merchandise is imported into the United States. You indicate that for convenience of CBP and Agrium US, the modified computed value for the three classes and kind of merchandise can be recalculated and declared to CBP once a year, one month after the year end data is available. Although it may be convenient for Agrium, there is no authority to report valuation information solely on an annual basis. Under CBP regulations the importer must report a value for merchandise to CBP with the entry when it is imported into the United States. See 19 C.F.R. 141.90(c). In this regard, however, we would suggest that when importing shipments of the fertilizer products, it may be appropriate for Agrium US to use the Reconciliation procedure. Reconciliation is a process that allows an importer to identify undeterminable information (other than that affecting admissibility) to CBP, and provide the outstanding information at a later date. Modification and Clarification of Procedures of the National Customs Automation Program Test Regarding Reconciliation, 67 Fed. Reg. 61,200, 61,201 (Sept. 27, 2002). Importers notify CBP that an entry summary is subject to Reconciliation by flagging the entry summary for Reconciliation. The flagged entry summary is liquidated for all aspects of the entry except those issues that were flagged. The means of providing the outstanding information at a later date relative to the flagged issues is through the filing of a Reconciliation entry. We suggest that Agrium US consult with CBP officials at the port of entry on the proper procedures for using Reconciliation entries.

HOLDING: If there are no importations of identical or similar merchandise on which to base appraisement, the fertilizer products imported from Canada 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 Moving Average Inventory Value method described above to determine the costs for computing the modified computed value of the fertilizer products that are commingled in a warehouse. If the necessary information to determine a value is not available at the time of importation, we suggest that the importer consider using the Reconciliation procedures to enter the merchandise.

A copy of this ruling letter should be attached to the entry documents filed at the time the merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP official handling the transaction.
Sincerely,


Monika R. Brenner, Chief
Valuation and Special Programs Branch