OT:RR:CTF:VS H238990 RSD
Area Port Director
U.S. Customs and Border Protection
10 Causeway Street
Boston, Massachusetts 02222
RE: Internal Advice Request; Applicability of Transaction Value; Related Party
Transactions; Circumstances of Sale; All Costs plus Profit; [ ];
Dear Acting Area Port Director:
This is in response to your memorandum dated January 29, 2013, forwarding the internal advice request, initiated by two related companies H.C. Starck, Inc. and H.C. Starck North American Trading LLC. The internal advice request was filed by counsel, on January, 4, 2013, regarding the proper method of valuation of merchandise imported into the U.S. by the two Starck Companies.
Counsel for the Starck Companies has asked that certain information submitted in connection with this internal advice be treated as confidential. Inasmuch as the request conforms to the requirements of 19 CFR §177.2(b)(7), the companies’ request for confidentiality is approved. The information contained within brackets and all attachments to the internal advice request, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling.
The H.C. Starck group of companies (“Group”), based in Germany produces a variety of different products including [refractory] metals, such as [ ] and advanced [ ]. This internal advice request concerns the appropriate method of valuation of two products, [ ] and [ ], imported into the United States. Two U.S. subsidiaries of H.C. Starck GmbH headquartered in Munich, Germany import the products into the United States. One company, H.C. Starck Inc., imports intermediate products into the United States for further processing before sale to unrelated U.S. customers. The other company, H.C. Starck North American Trading, LLC imports finished goods for sale in the United States. Both of these companies (hereinafter collectively referred to as “Starck Companies”) are based in Newton, Massachusetts. Both companies purchase the products from other related suppliers within the Group.
The prices paid for the imported products in transactions between related parties are set using either a “market minus” or a “cost plus” formula. The market minus formula is determined by sales to unrelated customers. As a result, it reflects prices that are allegedly not influenced by the relationship between the Starck Companies and their affiliates. Market information is gathered based on sales to unrelated customers in a sales forecast. For example, the Starck Companies have annual supply agreements with their largest customers and the pricing is updated on a quarterly basis to account for fluctuations in raw material costs. These quarterly adjustments are included in the sales forecasts which are used as the starting point by H.C. Starck North American Trading LLC for a “market minus” calculation. The prices using the “cost plus” approach used by H.C. Starck Inc. are based on its costs of production plus a profit.
The Starck Companies have selected two representative transactions from its two largest related suppliers from the Group to demonstrate that the methodology it applies in valuing the products would satisfy the “circumstances of the sale” test. The Starck Companies specifically selected a transaction involving [ ] purchased from a related company located in Thailand, H.C. Starck Company Limited, Thailand, and [ ] purchased from the parent company, H.C. Starck GmbH in Germany.
The first exhibit provides documentation from a Customs entry of September 27, 2012, for 3,000 kilograms of [ ] with an entered value of $[xxxxxxxxx]. The documentation submitted contains a purchase order from July 23, 2012, for three shipments of [ ]. Included in the exhibit are a summary of the production costs compiled from H.C. Starck’s SAP accounting system for the product. The cost records show the raw material, labor, and overhead incurred in producing the subject product. For purposes of this analysis, H.C. Starck Inc. converted the production costs to U.S. dollars based on the September 21, 2012, exchange rate for the Thai Baht to the U.S. dollar. The U.S. dollar cost of production for the [ ] was computed at $[xxxxxx] per kilogram. H.C. Starck Inc. also furnished an invoice from its related Thai supplier that corresponds to the above referenced purchase order. The invoice shows the purchase price paid for the [ ] on a per kilogram basis. The exhibit also contains an air waybill, the CBP Entry (CBP Form 3461) and the entry summary (CBP 7501). Additionally, evidence of proof of payment to the Thai supplier was presented made through a H.C. Starck Group intercompany clearance account.
According to counsel, in the transaction under review, the Thai seller earned a profit rate of [xxxx] percent on its sale of the [ ] to H.C. Starck, Inc. The Starck Group corporate parent prepared a consolidated profit and loss statement for the companies within the Group based on the product line. Counsel notes, although the internal profit and loss statements are not audited, they rely on the financial information obtained in H.C. Starck’s SAP system that is used to prepare the audited consolidated financial statements. The 2012 Profit & Loss Statement included in Starck Companies’ January 4, 2013, request was based on actual data for all of 2011 and January–October 2012 and included financial results forecasted for November and December 2012. A revised Profit and Loss statement based on the actual financial data for all of 2011 and 2012 was submitted on July 19, 2013. The overall profit rate for Starck Group’s Corporate parent [ ] business line as shown in a Consolidated earnings statement for 2012 was revised from [xx] percent to [xx] percent.
The Starck Companies’ counsel also presented documentation from a second representative transaction concerning [ ] imported by H.C. Starck North American Trading, LLC. In this case, the customer was [ ] who issued a purchase order on March 27, 2012 for [ ] at a purchase price of $[xxxxx] per pound. This was followed up by a confirmation note dated March 29, 2012, for the purchase of [ ] sent to the U.S. customer.
Counsel further presented a cost of production sheet indicating the various costs involved in producing the [ ]. The costs include the raw materials, labor and overhead costs obtained again from H.C. Starck’s SAP accounting system. The costs were computed in Euros per pound, which were converted to U.S. dollars based on the exchange rate on April 21, 2012.
An intercompany invoice between the seller, H.C. Starck GmbH, and the buyer, H.C. Starck North American Trading, LLC indicates that the price charged for the product was $[xxxxx] per kilogram. Counsel also submitted copies of the Customs entry and entry summary from the representative transaction concerning the
[ ]. The entry can be tied to the inter-company invoice based on the delivery that appears on the invoice and on the entry summary. The invoice to the unrelated U.S. customer was also submitted to show the resale price.
The information presented indicates that the cost of production for the [ ] was $[xxxxx] per kilogram and that the declared transaction value was $[xxxxx] per kilogram. The resulting profit that the seller (H.C. Starck GmbH) made was $[xxxxx] or [xx] percent. The profit and loss statement for the corporate parent, shown in a statement for the H.C. Starck Consolidated Group, for the [ ] business line indicates that it earned a profit of [x] percent in 2011 and [xx] percent for 2012. According to counsel, [ ] sales comprise approximately 50 percent of the sales total of that division of its operations. The remaining products included in that sales total are also made from [ ].
Counsel states that in order to ensure that future related party transactions comply with the circumstances of the sale test, the Starck Companies will annually review randomly selected entries during the first quarter of the year (after the period for the preceding accounting year is closed). The Starck Companies will identify the top two HTSUS classifications by volume. For both of these classifications, the Starck Companies will select the highest–volume imported material purchased from a related party. The Starck Companies will then select two sample entries from each month in which those materials were imported. For each selected entry, the Starck Companies will review the same documentation provided to determine whether the transfer price is sufficient for the seller to recover all their costs plus a profit that was equivalent to the Group’s overall profit over a representative period of time for sale of merchandise of the same class or kind. In the event the reviewed entries do not satisfy the circumstance of the sale test, the Starck Companies will review two additional contemporaneous entries. If these additional entries also fail to meet the circumstance of the sale test, the Starck Companies will contact the Port of Boston to determine the appropriate course of action to take.
Whether transaction value is the appropriate basis of appraisement of the imported merchandise?
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised for customs purposes 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 is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. §1401a(b)(1). In this case, based on the transaction documents, we are satisfied that the there is a bona fide sale for exportation between the related parties.
Transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, an examination of the circumstances of the sale indicates that the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain “test values.” 19 U.S.C. §1401a(b)(2)(B); 19 CFR §152.103(l). While the fact that the buyer and seller are related is not in itself grounds for regarding transaction value as unacceptable, where Customs and Border Protection (CBP) has doubts about the acceptability of the price and is unable to accept transaction value without further inquiry, the parties will be given the opportunity to supply such further detailed information as may be necessary to support the use of transaction value pursuant to the methods outlined above.
“Test values” refer to values previously determined pursuant to actual appraisements of imported merchandise. Thus, for example, a deductive value calculation can only serve as a test value if it represents an actual appraisement of merchandise under section 402(d) of the TAA. See Headquarters Ruling Letter (“HQ”) 543568, dated May 30, 1986. In this case, no information regarding test values has been submitted or is available. Consequently, the circumstances of the sale approach must be used in order to determine the acceptability of transaction value.
Under this approach, the transaction value between a related buyer and seller is acceptable if an examination of the circumstances of the sale indicates that although related, their relationship did not influence the price actually paid or payable. CBP Regulations specified in 19 CFR Part 152 set forth illustrative examples of how to determine if the relationship between the buyer and the seller influences the price. In this respect, CBP will examine the manner in which the buyer and seller organize their commercial relations and the way in which the price in question was derived in order to determine whether the relationship influenced the price. If it can be shown that the price was settled in a manner consistent with the normal pricing practices of the industry in question, or with the way in which the seller settles prices with unrelated buyers, this will demonstrate that the price has not been influenced by the relationship. See 19 CFR §152.103(l)(1)(i)-(ii). These are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well. See 19 CFR §152.103(I).
All costs plus a profit
In support of its claim that the imported merchandise can be appraised using transaction value based on the sales transactions between the related parties, the Starck Companies contend that they have satisfied the “all costs plus a profit” methodology to show that the prices it pays for the two commodities under consideration are not influenced by its relationship with the seller. 19 CFR §152.103(l)(1)(iii) states that “if it is shown that the price is adequate to ensure recovery of all costs plus a profit which is equivalent to the firm’s overall profit realized over a representative period of time (e.g., on an annual basis), in sales of merchandise of the same class or kind, this would demonstrate that the price has not been influenced.” See HQ H037375, dated December 11, 2009; and HQ H032883, dated March 31, 2010. In other words, the “all costs plus a profit” methodology examines whether a related party price compensates the seller for all its costs plus a specified amount of profit.
A very important consideration in the all costs plus a profit example is the “firm’s” overall profit. In applying the all costs plus a profit test, CBP normally considers the “firm’s” overall profit to be the profit of the parent company. Thus, if the seller of the imported goods is a subsidiary of the parent company, the price must be adequate to ensure recovery of all the seller’s costs plus a profit that is equivalent to the parent company’s overall profit. See HQ 546998, dated January 19, 2000. The CBP regulations do not give us the definition of “equivalent” profit; however, if the profit of the seller is equal to or higher on the U.S. imports than the firm’s overall profit, the purchase price would not be artificially low for Custom’s purposes. See HQ H106603, dated July 25, 2011; HQ H065015, dated April 14, 2011; and, HQ H065024, dated July 28, 2011. Finally, CBP Regulations do not define what profit we are to consider – gross profit or operating profit. However, CBP is of the view that the operating profit margin is a more accurate measure of a company’s real profitability because it reveals what the company actually earns on its sales once all associated expenses have been paid. Nevertheless, in certain circumstances, gross profit can be considered. See HQ H037375, dated December 11, 2009.
In this case, the Starck Companies’ counsel presented the statements designated as the earnings for the H.C. Starck Consolidated Group, for two years in sales of products either identical or similar to [ ] and [ ]. According to counsel, this financial statement for the H.C. Starck Consolidated Group reflects the combined earnings of all the affiliated companies in the H.C. Starck Group, meaning that it shows the earnings of the parent company. For the [ ] , the Thai related seller earned a profit rate of about [xxx] percent in the representative transactions. The information shown on the profit and loss statements for the years 2011 and 2012 indicates that the parent company, had [xxx] percent profit for 2011 and a [xx] percent profit for 2012 in sales of [ ] and [ ]. Therefore, the information presented indicates that in the transaction involving [ ], the seller, Starck’s affiliated company in Thailand, made a greater profit in its sales of imported [ ] to Starck’s related company in the U.S. than the parent company made in sales of goods of the same class or kind during the applicable years in which those sales occurred.
With respect to the [ ], we note that while H.C. Starck GmbH is considered the head office of the H.C. Starck Group, it is also the seller of the products in this transaction. The submitted documents indicate that the related seller, H.C. Starck GmbH, made a profit of [xx] percent in the sample transaction. Counsel also submitted a consolidated earnings statement for the H.C. Starck Group, which again reflects the combine earnings of all the affiliated companies in the H.C. Starck Group, and thus it shows the earnings of parent company of the H.C. Starck Group. The consolidated statement indicates that the H.C. Starck Group made a profit of [x] percent for 2011 and [xx] percent in 2012 in its sales of tungsten. According to counsel about [xx] percent of the H.C. Starck Consolidated’s [ ] sales specifically consist of
[ ] sales and all of the other products included in these sales figures were also made from [ ]. Thus, we are satisfied that this demonstrates that the seller H.C. Starck GmbH earned a greater profit in its sales of [ ] to the U.S. than H.C. Starck Group parent earned in sales of the same class or kind of merchandise over a course of several years in which the sales took place.
Because the sellers’ operating profits were higher than the profits of the parent company, we find that the Starck Companies have satisfied the circumstances of the sale test. Accordingly, transaction value is an acceptable method of appraisement in the instant case. As alluded to previously, future importations of the applicable articles should be monitored periodically to ensure that the Starck companies continue to earn a profit which is equivalent or greater than the profit earned by the parent company in sales of merchandise of same class or kind during a representative period of time.
Since the all costs plus a profit test has been satisfied in the representative transactions, we find that the Starck Companies’ have submitted sufficient information to establish that the "circumstances of the sale" test has been met in both instances. Therefore, based on the information given, the imported products should be appraised based on transaction value. Please note that this decision is issued on the assumption that all of the information furnished in connection with the consideration of this matter, including the internal advice request, is accurate and complete in every material respect. Further, the application of this decision is subject to verification by the Office of Regulatory Audit should an audit be conducted.
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 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.
Monika R. Brenner, Chief
Valuation and Special Programs Branch