HQ H218916
OT:RR:CTF:VS H218916 YAG
Port Director
Chicago Service Port
U.S. Customs and Border Protection
5600 Pearl Street
Rosemont, IL 60018
RE: ABB Inc.; Consignment; Inventory Management; fallback method
Dear Port Director:
This internal advice is issued in response to the request of counsel, in a letter dated October 4, 2011, for a binding ruling on behalf of ABB Inc.-Robotics (“ABB”), regarding the proper valuation of certain sales of certain industrial robots. Counsel for ABB also requested that U.S. Customs and Border Protection (“CBP”) convert the ruling request to an internal advice request if issued after the end of 2011. Counsel’s additional submissions dated May 16, 2012, August 21, 2012, and April 11, 2014 were considered as part of this file.
FACTS:
ABB is an importer of industrial robots. ABB Robotics in Sweden (“ABB Sweden”), a related party, launched a Global Inventory Management System (“GIM”) to better organize the distribution of ABB parts located around the world and was scheduled to start using the GIM in the latter part of 2011. ABB Sweden stocks parts inventory in several locations around the world, including one at a warehouse in Groveport, Ohio which is operated by a third party logistics company.
Under the GIM, after importation into the U.S., the inventory in the Groveport warehouse is still owned by ABB Sweden. The inventory is carried on the books of ABB Sweden at cost. ABB states that the U.S. customers place orders with ABB, who in turn place an order with ABB Sweden to be fulfilled from the Groveport warehouse. ABB states that the products are shipped by ABB Sweden to the U.S. warehouse on a consignment basis, with no sale at the time of shipment to the United States. ABB Sweden owns the goods in inventory at the U.S. warehouse. ABB clears the goods through CBP using a pro forma invoice. For the pro forma invoice, the goods are valued based on the ABB transfer price at the time of shipment between ABB Sweden and ABB. ABB pays all of the duties owed at the time of importation.
All sales to the U.S. end customers are made by ABB, and there are no direct sales from ABB Sweden to U.S. end customers. There are no obligations on ABB to purchase and some parts may ultimately be exported to other countries.
Once a U.S. customer order is received, the eventual sales price between ABB Sweden and ABB is based on the transfer list price at the time of sale. This sales price is claimed to be at arm’s length based upon fair market value and is sufficient to cover all costs plus a profit. The sales price is usually the same as the transfer list price declared at the time of entry as per the pro forma invoice, unless there is a change in price between the import date and the sale date. Changes to the transfer list price, if any, are generally made at most only once annually. On rare occasion, there could be a “random” pricing change on a specific item. Some prices on some merchandise remain constant for a number of years. The obligation by ABB to pay for the goods arises at the time of sale to the U.S. consumer.
Title to the goods transfers from ABB Sweden to ABB at the time of shipment from the Groveport warehouse. Title and risk of loss then transfer from ABB to the end customer when the goods are delivered to the customer. ABB invoices the customer and arranges for the transportation to such customer.
Occasionally, ABB makes sales to U.S. customers that do not transit through the Groveport warehouse if the part in question is not sitting in inventory at the Groveport warehouse at the time the demand for such part arose. On these sales that bypass the Groveport warehouse, ABB purchases such merchandise from ABB Sweden under FCA (port of export) terms of sale with title transferring to ABB at the time of the sale for exportation to the United States from Europe. An arm’s length transfer price is used in these ABB Sweden-ABB sales and there are no price changes on these orders. Title then transfers to the U.S. customer at final delivery or when payment is received (if post-delivery), and risk of loss transfers at the same time. ABB respectfully submits that these non-warehouse shipments would correctly be appraised under transaction value based on the prices in the sales for exportation to the United States. Accordingly, such sales are not the subject of the original ruling request or this internal advice issuance.
Upon request from this office, ABB provided the following documentation in its May 16, 2012 submission: a copy of the GIM Agreement between ABB-Sweden and ABB, an “Overview” of the GIM project which included screen shots of the order process in the SAP system, a copy of the Warehouse Agreement between ABB and the third party logistics company operating the warehouse, and copies of the entry documents including the entry summary and the pro forma invoices for six entries that have been entered in the GIM system.
Upon further request from this office, ABB provided the following documentation in its August 21, 2012 submission to illustrate that the global pricing of the ABB parts is applied consistently worldwide: a sales invoice from ABB Sweden to its Chinese affiliate, ABB Engineering (Shanghai) Ltd. (“ABB Shanghai”) for a GTPU Programming Unit showing a sales price of a specific sum and a sales invoice between ABB Sweden and ABB for the same item with the same sales price, and documentation illustrating a transaction between ABB and ABB Sweden, including a screen shot of the purchase order for an item, the shipping notification, the Customs invoice, the DHL airbill and documentation, the Customs Form (“CF”) 3461, the CF 7501, a screen shot of the posting of the receipt of the goods into the GIM inventory, and a payment record report showing settlement of payment to ABB Sweden.
ISSUE:
What is the correct method of valuation for industrial robotics imported under the inventory management system?
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 value, 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. See 19 U.S.C. § 1401a(b)(1). However, in order for transaction value to be applicable, there must be a “sale” for exportation to the United States. In this case, there is no “sale” of merchandise. Rather, the merchandise is entered into the United States pursuant to a consignment agreement. Transaction value is not applicable with respect to merchandise imported on consignment.
ABB states that in all cases, it does not acquire title until the goods are shipped from the warehouse in the U.S. Title and risk of loss would then transfer from ABB to the end customer at the moment when the goods are delivered to the customer. Since there is no obligation on the part of ABB at the time of importation to pay for the goods or promise to pay for the goods, there is no sale for Customs purposes. Since a sale for exportation does not occur, the subject merchandise cannot be appraised on the basis of transaction value, pursuant to 19 U.S.C. § 1401a(b). 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 hierarchical 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. § 1401(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 the merchandise being appraised. See 19 U.S.C. § 1401a(c).
ABB indicates that there are no sales of similar or identical robotic parts in which transaction value has been applied. Therefore, no information regarding transaction value of sales of similar or identical merchandise exists, and transaction value of identical or similar merchandise would not be the appropriate basis of appraisement.
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 importation. 19 U.S.C. § 1401a(d)(2)(A)(i)-(ii). In this case, ABB states that the imported goods are resold in their condition as imported, but are often not sold within 90 days and remain in the warehouse for an average of five months. ABB indicates in their May 16, 2012 letter that the average GIM inventory turnover is roughly 2.5 times per year. Nevertheless, in its submission, dated October 4, 2011, ABB states that based on past experience, the inventory in the Groveport warehouse will turn over about four times per year, with some items turning over more frequently and others more slowly. Therefore, according to ABB, a given part is expected, on average, to remain in the Groveport warehouse inventory for three months. These contradictory statements indicate that the frequency of the inventory turnover depends on the customer demand for the goods stored in the warehouse, and that at the time of this internal advice request, ABB cannot determine which parts may or may not be sold within the 90-day period. Accordingly, if the merchandise usually remains unsold for longer than 90 days, the majority of the merchandise cannot be appraised under the deductive value method. However, articles sold in the U.S. within 90 days of importation should be appraised under the deductive value appraisement method. See HRL 546422, dated March 23, 1999. We encourage your client to flag its entries for reconciliation and adjust the entered value if the item is sold within 90 days of entry. See HRL H085036, dated December 18, 2009.
Those items not sold within 90 days of importation must be appraised under the next available appraisement 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 costs. 19 U.S.C. § 1401a(e)(1). In your August 21, 2012 submission, you state:
The ABB GIM merchandise consists of highly sophisticated robotics utilizing the latest developments in robotics technology. ABB robots and parts are delivered with unique sets of software options so that even with the same model or part number, two different ABB items could have drastically different cost structures. Frankly, ABB is unaware of anyone in the robotics industry that uses computed value, and gathering the complicated material and processing cost data simply could not be accomplished in a timely enough manner to allow for computed value appraisement which we understand is generally limited in application to otherwise eligible merchandise subject to fairly simple manufacturing processes. Also, given the wide variety of ABB robot configurations and parts, profit and general expenses data for the same class or kind of merchandise would be difficult, if not impossible, to determine. Therefore, the computed value method is simply not feasible here.
For the reasons stated by ABB above in their August 21, 2012 submission, we find that the computed value method is unavailable as an appraisement method.
When the value of imported merchandise cannot be determined under the methods set forth in 19 U.S.C. § 1401a(b)-(e), it may be appraised 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. See 19 U.S.C. 1401a(f); CBP Regulations, Part 152, Section 152.108 (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:
[F]ix 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.
In those transactions where no accurate invoice or other documentation is available, and the importer is unable, or refuses, to provide such information, then reasonable ways and means will be used to determine the appropriate value, using whatever evidence is available, again within the constraints of section 402.
Statement of Administrative Acton, H.R. Doc. No. 153, 96 Cong., 1st Sess. Pt 2, reprinted in Department of Treasury, Customs Valuation under the Trade Agreements Act of 1979 (Oct. 1981), at 67.
Section 152.107 of the CBP Regulations (19 C.F.R. §152.107) provides:
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.
Identical merchandise or similar merchandise. The requirement that identical merchandise, or similar merchandise, should be exported at or about the same time of exportation as the merchandise being appraised may be interpreted flexibly. Identical merchandise in any country other than the country of exportation or production of the merchandise being appraised may be the basis for customs valuation. Customs valuation of identical merchandise, or similar merchandise, already determined on the basis of deductive value or computed value may be used.
ABB has asked us to confirm whether it may value the merchandise under the fallback method and use the pro forma invoice price as the declared value. ABB states that it believes the pro forma invoice price would most appropriately be used, as it would most often be the same as the price paid to ABB Sweden upon withdrawal from the warehouse.
In similar circumstances, we have permitted the use of the reasonably adjusted transaction value under the fallback method. In HRL 548273 (citing HRL 546953, dated May 5, 1999), the importer developed an inventory system in which merchandise was shipped to third party warehouses and withdrawn when it was needed. Goods were entered at the time of import at the pro forma invoice price at the time the goods were withdrawn from the warehouse, and title and risk of loss passed from the seller to the importer when the goods were withdrawn from the warehouse. CBP found that ownership of the merchandise rested with the sellers until withdrawn from the warehouse, and held that because the goods did not remain in the inventory for long periods of time (typically less than 60 days) and the price on the pro forma invoice would most likely remain the same as the price actually paid, there was a clear relationship between the price actually paid and the pro forma invoice price. Therefore, CBP permitted the use of the pro forma invoice price under the fallback method, especially since it would most often mirror the price paid upon withdrawal from the warehouse. However, CBP stated that if the price were to increase from the pro forma invoice price, the company must alert CBP to this fact so that it could be verified that price increases were indeed rare and whether the ruling was still applicable.
Similarly, in HRL H125115, dated April 6, 2011, CBP allowed the use of the invoice price for the same reasons. Due to the short period of time the goods would remain in inventory (typically less than 60-90 days), the price was not likely to change from the one given on the invoice, and if it did change, it would most likely decrease. HRL H125115 also stated that the pricing was based on a negotiated quarterly price. See also, HRL H131663, dated April 14, 2011 and HRL 548574, dated March 17, 2005.
As the situation here is substantially similar to the transactions considered in the above cited rulings, we find that the pro forma invoice price is acceptable under a fallback transaction value method of appraisement. Even though the consigned merchandise could be withdrawn from the respective warehouse within five months or less, the price on the commercial invoice would be the same as the price paid upon withdrawal from warehouse. However, as with transaction value, any additions to value must be added to the pro forma invoice price. These additions are listed in 19 U.S.C. § 1401a(b)(1) and include (A) packing costs incurred by the buyer, (B) any selling commission incurred by the buyer, (C) any assists, (D) any royalty or license fee related as described in subparagraph (D), and (E) any proceeds that accrue to the seller.
We note that we do not have sufficient information or documentation to establish that the transfer price is arm’s length and not affected by the relationship between the parties. No transfer pricing study was presented and no documentation was presented relating to the comparison of the prices set in the relevant industry and the price between ABB and ABB Sweden. At this time, the Port has not questioned the transfer price, but ABB should be prepared to substantiate its values by maintaining and providing accounting records from its books and/or financial statements if requested by the Port. Further, if requested by the Port, your client should be prepared to specify how the transfer price and adjustments are determined with respect to all imported products, which may require presentation of financial records. See, e.g., H246651, dated February 5, 2014.
In addition, on April 11, 2014, counsel for ABB provided supplemental information to our office in response to our request for additional documentation establishing that the unit prices indicated on the pro forma invoices for the goods imported on consignment into ABB’s warehouse match the prices actually paid when the goods were sold from that warehouse to ABB, with respect to ABB’s entries, dated March 31, 2014, January 2, 2014, and December 31, 2013. Upon review of this documentation, we find that the documents provided establish for each of the products covered by the three (3) entries that the per unit values declared to CBP on the pro forma invoices are the same as prices paid when such products were sold from the warehouse to ABB. However, we note that in prior submissions, counsel for ABB also stated that if the price changes, it would notify CBP and pay the additional duties. Therefore, if/when the price paid on withdrawal from the warehouse increases from the price on the pro forma invoice, ABB should notify CBP of this fact, so that CBP may verify that price changes, indeed, only rarely occur and decide whether this decision may remain applicable.
HOLDING:
The subject merchandise cannot be appraised using the transaction value method. A fallback transaction value method of appraisement should be used. The pro forma invoice price represents a reasonably adjusted transaction value under the fallback method, with the addition of all applicable additions to value listed in 19 U.S.C. § 1401a(b)(1).
This decision should be mailed by your office to the party requesting Internal Advice no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to CPB personnel, and to the public on the CPB 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.
Please do not hesitate to contact us at (202) 325-0042 if you have any questions or concerns.
Sincerely,
Monika Brenner, Chief
Valuation and Special Programs Branch