OT:RR:CTF:VS H281093 EE
Port Director
U.S. Customs and Border Protection
9777 Via De La Amistad
San Diego, CA 92154
RE: Internal Advice; Application for Further Review of Protest No. 2506-16-100022; Deductive Value; 19 U.S.C. § 1401a(d); Automobiles
Dear Port Director:
We are providing internal advice with regard to Protest No. 2506-16-100022, and the Application for Further Review (“AFR”), timely filed on May 9, 2016, on behalf of [X] (hereinafter, the “protestant”), concerning the appraisement of certain automobiles purchased from its parent corporation, [X] (the “seller”).
The issues raised by this protest were the subject of a request for internal advice, dated December 30, 2014, which was withdrawn by the protestant on December 31, 2015. The protestant states that in view of [X] in the related party prices on automobiles imported from the seller, the protestant determined to flag its consumption entries filed during its 2011 fiscal year (from April 1, 2010 through March 31, 2011) for value reconciliation. After determining that the related party prices for these imports could not be shown to provide “acceptable” transaction values based on the “all costs plus profit” test, the protestant calculated deductive value amounts for the imports and utilized these calculations in the original reconciliation entry filings. Based on discussions with U.S. Customs and Border Protection (“CBP”) in advance of the liquidation of the reconciliation entries, the protestant requested that CBP reject the original reconciliation entry filings and permit the refiling of reconciliation entries based upon the original entered values, with the understanding that it would utilize the protest procedure to resolve the issues of (1) whether the reconciliation entry filings should instead be valued based upon deductive value calculations, and (2) if so, the appropriate deductive value methodology based upon the protestant’s business records. Accordingly, the protestant filed the protest at issue. A meeting was held with the protestant on January 24, 2018. We have taken into consideration the discussion and arguments presented during that meeting as well as the annotations to the original May 6, 2016 protest memorandum which were presented during the meeting in reaching our decision set forth below.
The protestant has asked that certain information submitted in connection with this request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets in your request will not be released to the public and will be withheld from published versions of this ruling.
FACTS:
The protestant, a wholly owned subsidiary of the seller, is the exclusive United States distributor of [X] motor vehicles, related parts and accessories. The seller is a manufacturer of automobiles and other automotive products and sells products to distributors located throughout the world, most of which are its affiliates.
The seller sells automobiles to the protestant based upon sales quotations issued generally on a quarterly basis (reflecting quarterly exchange rate changes). Based upon information from the protestant, the seller issues a production order plan specifying the quantity of vehicles that the seller intends to produce, by month and model code, over a six month rolling period. Subsequently, the protestant issues purchase contract inquiries to the seller specifying the automobile models and quantities to be shipped by the seller in a particular month. In connection with the seller’s shipment of the automobiles, the seller issues commercial invoices and related documents such as packing lists and bills of lading to the protestant. The protestant states that the price between the seller and the protestant are affected by a variety of commercial and other considerations, including compliance with a proposed Advanced Pricing Agreement (“APA”) with the U.S. Internal Revenue Service (“IRS”) and the foreign tax authority.
The protestant sells automobiles purchased from the seller to unrelated independent dealers in the United States and to an unrelated independent sub-distributor in [X]. The protestant’s sales to independent U.S. dealers of automobiles purchased from the seller involve the following basic processes and documentation:
Dealer Pricing Guide: The protestant issues to its dealers on a model year basis a Dealer Pricing Guide listing prices for the automobiles offered for sale for a particular model year. The Dealer Pricing Guide references the vehicles by “model code” and “model description” (such as the [X] model code referring to the 2010 model [X]). This Dealer Pricing Guide lists both the “dealer invoice price,” that is, the basic price charged to the dealer, and the manufacturer’s suggested retail price (“MSRP”) to the dealer’s customers. This Dealer Pricing Guide also references related credits and charges.
[X] Pricing and Allowance Schedule: The protestant also issues to its dealers a [X] Pricing and Allowance Schedule. This Schedule references specific model codes and model descriptions and includes (in addition to dealer invoice price and MSRP data) information on various allowances or discounts provided to the dealers.
The protestant/dealer invoice: Based on dealer orders, the protestant issues invoices to dealers reflecting the protestant’s sales of specific model codes to the dealers. These invoices identify not only the basic dealer invoice price for the model but also certain charges, credits and discounts.
Sales Program Proposal Sheets and Related Dealer Bulletin Information: The protestant develops sales incentives programs, reflected in internal Sales Program Proposal Sheets, and the various incentive programs are communicated to the dealers through Bulletins provided to the dealers over the protestant’s [X] that is accessible by the dealers.
The protestant’s [X] Schedules: The protestant provides to its [X] dealers an allowance for the dealer’s marketing efforts, referred to as the [X]. The [X] amounts by model code are specified in the Pricing and Allowance Schedules provided to the dealers.
Auto [X] databases: The [X] includes details on the dealer invoice prices (“dealer net” prices) at which individual automobile units (referenced by vehicle identification number (“VIN”) are sold to the dealers. The [X] sales data are input into the protestant’s [X] system database, a computer application that collects daily sales and financial information and is used for, among other purposes, the development of monthly and quarterly financial statements.
The protestant’s Gross Profit [X] Reports (“GP Reports”) for [X] Automobile and [X] Automobile: The protestant also maintains detailed GP Reports for the [X] Automobile Segment and for the [X] Automobile segment. These GP Reports provide various information broken down by the “source” of the automobiles (e.g., [X]) and the “model” of the automobiles (e.g., the [X]). The monthly and fiscal year GP Reports show the total protestant sales units and sales values as well as various expense items used to calculate the “gross profit” figures for each source/model designation, which figures linked to the [X] Reports.
Monthly [X] Logistics Expense Reports and [X] Auto Transportation Cost Summary Reports: The protestant maintains monthly “Logistics Expense” reports that reflect, among other items, inland transportation cost information for imported and other automobile models. The Logistics Expense reports include detail for “domestic outbound” transportation expense, that is, expenses relating to U.S. inland transportation away from either the port (for imported units) or the U.S. manufacturing plant (for domestically produced units). For [X] automobiles, the information in the Logistics Expense reports is broken out by the source of the automobiles, including the seller. The [X] Logistics Expense reports do not include such source breakouts, but source information is available from separate monthly Auto Transportation Cost Summary reports maintained by the [X].
[X] Reports and Related Source Documentation: The protestant maintains [X] reports, referenced as “[X]” reports, that provide sales and other financial information, including detail on selling expenses, general & administrative expenses, and non-operating expenses. These [X] reports are maintained by division, so that there are separate [X].
The [X] Database Maintained by the Protestant’s [X]: The protestant’s [X] maintains a [X] database that records information on the protestant’s imports. This [X] database includes detail on entered value amounts as well as on ocean freight and marine insurance on U.S. customs duties and fees.
[X] Reports and Related Source Documentation: During FY 2011, the protestant maintained a report entitled [X] referred to as the [X] report, that provided account level detail for the Selling Expenses and General & Admin Expenses listed in the [X] report. As with the [X] reports, separate reports were maintained for the [X] Automobile Division and the [X] Automobile Division.
The sales process and documentation for the protestant’s sales to its sub-distributor in [X] are significantly different than those involved in its sales to [X] dealers, largely resulting from the fact that the protestant does not provide [X] to the sub-distributor. The protestant’s [X] issues prices to its sub-distributor based on market conditions in [X]. If the new model year models are introduced in September, the protestant issues new prices [X]. The prices that the protestant charges to the sub-distributor are delivered, duty paid basis, so that the protestant is responsible for ocean freight, marine insurance and U.S. customs duties and fees. The sales process involves the following documentation:
Pricing Analysis Sheet: The protestant’s [X] prepares a Pricing Analysis Sheet by model year to reflect the sales prices to be charged to the sub-distributor.
[X] Reports: The protestant’s sales to the sub-distributor are included in the [X] Reports.
[X] Reports: The protestant maintains a [X] Report for the [X], which records the Selling, General & Administrative (SG&A) expenses for this division.
[X] Data Maintained by the protestant’s [X]: The [X] detail on ocean freight and marine insurance and U.S. customs duties and fees is also maintained for the [X] imports.
The protestant states that prior to its 2011 fiscal year, it had found that based on the all costs plus a profit test, the transaction values of the automobiles imported from the seller were acceptable. Specifically, the protestant had periodically confirmed that these transactions values were acceptable based on data from the seller confirming that the seller earned a profit on its export sales of automobiles to the protestant and that this profit was equivalent to the seller’s profit on its global automobile sales, consistent with the all costs plus a profit test.
However, during the 2011 fiscal year, the automobile prices between the seller and the protestant were significantly reduced. This circumstance occurred in light of the Great Recession of 2008-09, which dramatically affected many businesses, including the seller and the protestant. The protestant accordingly determined that it should flag its consumption entries of automobiles purchased from the seller in FY 2011 for value reconciliation, to permit it to assess whether the transaction values for these imports based on the seller/protestant invoice prices were “acceptable” for customs valuation purposes.
Following the close of its FY 2011, the protestant received information indicating that the seller/protestant automobile prices for the protestant’s imports during this fiscal year resulted in a loss on the seller’s sales of automobiles to the protestant, and thus could not be the basis of acceptable transaction values under the all costs plus a profit test. Instead, the protestant determined that these imports should be valued based upon deductive value calculations through the filing of appropriate reconciliation entries.
In appraising the imported automobiles on the basis of deductive value, the counsel for the protestant states that the starting price is the unit price at which it sold each model number in the greatest aggregate quantity at or about the importation date (i.e., within 90 days after import), based upon either the unit invoice prices at which the model numbers were sold to U.S. dealers or the unit invoice prices at which the model numbers were sold to the [X] sub-distributor. Next, in the case of the protestant’s sales to the dealers, adjustments were made to these prices for various additions to or deductions from the prices as reflected in the protestant’s relevant sales documents and records. The protestant states that there were no such adjustments for its sales to the [X] sub-distributor. Next, adjustments were made both for various transportation and related charges from the port of exportation to the point of delivery to the dealers or to the [X] sub-distributor, and for U.S. customs duties and fees. Finally, deductions were made as required for general expenses and profit based upon the protestant’s general expenses and profit relating to its imports of [X] automobiles from all foreign sources into [X] ports or into [X]. The protestant states that it relied upon its regular financial and other records, maintained in accordance with the generally accepted accounting principles (“GAAP”), to establish the amounts in the deductive value calculations.
The protestant provided a sample schedule of the deductive value calculations for its [X] imports of automobiles during its 2011 fiscal year. Specifically, such information was provided for the [X], a [X] 2010 year model that was the model that the protestant imported in the greatest aggregate quantity from the seller during the FY 2011 period.
ISSUE:
Whether the protestant’s proposed deductive valuation method is an acceptable method of appraisement for the imported automobiles.
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).
The term “price actually paid or payable” is defined 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.
19 U.S.C. § 1401a(b)(4)(A).
There are special rules that apply when the buyer and seller are related parties, as defined in 19 U.S.C. § 1401a(g). Specifically, 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 C.F.R. § 152.103(l).
Under the circumstances of the sale 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. The CBP Regulations specified in 19 C.F.R. Part 152 set forth illustrative examples of how to determine if the relationship between the buyer and the seller influences the price. See also Headquarters Ruling Letter (“HQ”) H029658, dated December 8, 2009; H037375, dated December 11, 2009; and, HQ H032883, dated March 31, 2010. 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 C.F.R. § 152.103(l)(1)(i)-(ii). In addition, CBP will consider the price not to have been influenced if the price was adequate to ensure recovery of all costs plus a profit 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. 19 C.F.R. § 152.103(l)(1)(iii). These are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well.
In this case, the counsel for the protestant states that following the close of the protestant’s FY 2011, the seller/protestant automobile prices for the protestant’s imports resulted in a loss on the seller’s sales of automobiles to the protestant and, therefore, the all costs plus a profit test could not be satisfied. Accordingly, the automobiles could not be appraised under the transaction value method set forth in 19 U.S.C. § 1401a(b). 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 the following sequential order: 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 the “fallback method.” 19 U.S.C. § 1401a(f). Counsel for the protestant states that there were no transaction values for identical merchandise. Further, there were no transaction values for similar merchandise since there is no such merchandise that “is like the merchandise being appraised in characteristics and component material” and that “is commercially interchangeable” with the merchandise being appraised. Therefore, to the extent that such information is not available, the imported automobiles cannot be appraised using transaction value of identical merchandise or similar merchandise. Pursuant to 19 U.S.C. § 1401a(a)(2), if the value cannot be determined on the basis of the transaction value of identical or similar merchandise, the merchandise shall be appraised on the basis of the computed value, rather than the deductive value, if the importer makes a request to that effect to the customs officer concerned. See also 19 C.F.R. § 152.101(c).
In the instant case, the protestant believes that the deductive value method is the proper basis of appraisal for the imported automobiles. Under the deductive value method, merchandise is appraised on the basis of the unit price at which it is sold in the United States 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) and (ii). 19 U.S.C. 1401a(d)(2)(B) provides, in relevant part:
. . . the unit price at which merchandise is sold in the greatest aggregate quantity is the unit price at which such merchandise is sold to unrelated persons, at the first commercial level after importation . . . at which such sales take place, in a total volume that is (i) greater than the total volume sold at any other unit price, and (ii) sufficient to establish the unit price.
Further, 19 U.S.C. 1401a(d)(3)(A) provides that the unit price determined under paragraph (2) is reduced by an amount equal to:
(i) any commission usually paid or agreed to be paid, or the addition usually made for profit and general expenses, in connection with sales in the United States of imported merchandise
that is of the same class or kind, regardless of the country of exportation, as the merchandise concerned;
(ii) the actual costs and associated costs of transportation and insurance incurred with respect to international shipments of the merchandise concerned from the country of exportation to the United States;
(iii) the usual costs and associated costs of transportation and insurance incurred with respect to shipments of such merchandise from the place of importation to the place of delivery in the United States, if such costs are not included as a general expense under clause (i);
(iv) the customs duties and other Federal taxes currently payable on the merchandise concerned by reason of its importation, and
any Federal excise tax on, or measured by the value of, such merchandise for which vendors in the United States are ordinarily liable…
19 U.S.C. § 1401a(d)(3)(A).
19 U.S.C. § 1401a(d)(3)(B) provides that “[f]or purposes of applying paragraph (A)”:
(i) 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
(ii) any State or local tax imposed on the importer with respect to the sale of imported merchandise shall be treated as a general expense.
19 U.S.C. § 1401a(d)(3)(C) provides for increasing the price determined under 19 U.S.C. § 1401a(d)(2) by an amount equal to the packing costs incurred by the importer or the buyer, if not otherwise included.
In this case, the protestant proposed certain adjustments to the unit dealer invoice price of $[X] for the model [X], the price determined under deductive value (19 U.S.C. § 1401a(d)(2)(A)). First, the protestant proposed the addition of a “Destination and Handling Charge” for the delivery of the automobiles from the port to the dealer’s location. This is a fixed amount by make [X] charged to the dealers and is considered a revenue to the protestant. This Destination and Handling Charge is specified in the Dealer Pricing Guide, and is also stated on the invoice to the dealer. The protestant initially claimed that for [X] models sold during FY 2011, the Destination and Handling Charge was $[X]. However, in reviewing its financial and accounting records, the protestant determined that an average per-unit amount of $[X] is a more precise calculation of the protestant’s income from the Destination and Handling Charge during FY 2011.
The protestant proposed the following deductions from the unit dealer invoice price of $[X] resulting in $[X] for the [X] imports and $[X] for the [X] imports under deductive value.
Holdback:
The protestant pays a “holdback” amount to dealers as an effective deduction to the dealer invoice price. The protestant initially claimed that the holdback amount was calculated as a percentage ([X] percent) during FY 2011) of the MSRP of the automobile models sold to the dealers. According to the Dealer Pricing Guide effective during the FY 2011 period, the MSRP for the [X] model was $[X]. Accordingly, the holdback amount for this model was $[X]. However, in reviewing its financial and accounting records, the protestant determined that an average holdback amount of $[X] per unit is a more precise calculation of the cost of the holdback amount for FY 2011.
[X]:
During FY 2011, the protestant also provided a reduction in the dealer invoice price through a [X] except that the [X]. There are [X] programs pursuant to which the amounts are calculated as a percentage ([X] percent) during FY 2011) of the MSRP. During FY 2011 period the MSRP for the [X] model was $[X]. Accordingly, the [X] for this model was $[X]. However, the protestant found that a more precise calculation of the [X] cost during FY 2011 was available from its financial and accounting records resulting in an average per-unit [X] amount of $[X].
[X] Marketing Allowance:
The protestant provides a marketing allowance to the automobile dealers, referred to as the [X] models and the [X] models. The protestant initially claimed that in FY 2011, the [X] amount was $[X] per unit for the [X] model. However, the protestant claims that a more precise calculation of the actual cost of the [X] during FY 2011 was available from the company’s financial and accounting records resulting in a [X] amount of $[X]. Specifically, the protestant compared the total [X] amount paid to dealers for its sales of [X] automobiles during FY 2011 to the total calculated [X] amount based upon the standard per-unit [X] amounts and the protestant sales to dealers during this period to calculate an adjustment factor to be applied to these standard amounts.
Floor Plan Allowance:
The protestant provides a “Floor Plan Allowance” (“FPA”) to dealers to assist them in purchasing products, with this allowance operating as another effective discount to the dealer invoice price. The protestant claimed that initially, the FPA was calculated as ([X] percent of MSRP for [X] models and [X] percent of MSRP for [X] models for FY 2011). During the FY 2011 period, the MSRP for the [X] model number [X] was $[X]. For the [X] model [X], the FPA was $[X], approximately equal to [X] percent of the $[X]. However, the protestant claims that a more detailed calculation of the actual cost of the FPA during FY 2011 is available from its financial and accounting records resulting in an FPA amount of $[X].
Sales Discounts and Incentives:
The protestant offers a variety of sales discounts and incentives, that is, payments to dealers based upon the reporting of the dealer’s retail sales of eligible vehicles during a program period that are not reflected in the protestant’s invoices to the dealers. The protestant claims that these discounts and incentives are an expense to the protestant and therefore must be subtracted from the Starting Dealer Invoice Unit Price in the deductive value calculations. To calculate the per unit sales discounts and incentives amounts for the FY 2011 period, the relevant totals for sales incentives and discounts from the GP reports for this period were divided by the related unit sales in the GP Reports to calculate per-unit amounts. For the [X] model, the protestant initially claimed that the per unit sales discounts and incentives amount for the FY 2011 period was $[X]. However, the protestant now claims that based on more accurate calculations, this amount should be $[X].
Full Tank of Fuel Credit:
The full tank of fuel (“FTF”) credit is a fixed amount that the protestant pays to the dealers to provide retail purchasers with a full tank of fuel upon their purchase of a vehicle. The protestant claims that since this amount is a cost to the protestant, the FTF credit must be deducted from the Starting Dealer Invoice Unit Price. The protestant initially claimed that during the FY 2011 period, the FTF amounts paid by the protestant to dealers was $[X] per unit for [X] models and $[X] per unit for [X] models. However, the protestant now provides that a more detailed calculation of the cost of the FTF during FY 2011 is available from its financial records resulting in the average FTF amount of $[X].
Pre-Delivery Inspection Credit:
The protestant reimburses dealers for their pre-delivery inspection (“PDI”) services before a new vehicle [X] is delivered to the retail purchasers. The Dealer Pricing Guides thus refer to a “pre-delivery payment” that is “credited to the dealer’s open account when specified Pre-Delivery Service is completed and the protestant receives notification.” Unlike the FTF amounts, these PDI amounts are not fixed by dollar amount. Instead, the Dealer Pricing Guides explain that the credit [X], resulting in $[X] for the [X] model [X] in FY 2011.
Ocean Freight and Marine Insurance:
The protestant calculated the amounts for ocean freight and marine insurance as further deductions from the price. The ocean freight charges are based on the volume (cubic meters) included in each shipment of vehicles. The protestant has information on the volume in cubic meters of each model code imported from the seller. This information was used (1) to allocate the ocean freight amounts for individual shipments from the seller among the various model codes included in the shipments, and (2) to calculate weighted average freight amounts by model code for imports into [X] ports or [X] ports. For [X] ports, the ocean freight charge for the [X] model for the FY 2011 period was $[X] and for [X] the charge was $[X].
The marine insurance charges reflected are based upon the value of the shipment. Accordingly, the marine insurance amounts in the individual shipments covered by the FY 2011 period were allocated to individual models based upon their proportionate value, and weighted average marine insurance amounts by model number were calculated from this data. The calculated amount for the [X] model for the year FY 2011 period was $[X] for the [X] shipments and $[X] for the [X] shipments.
U.S. Duty, HMF and MPF:
The amounts for the [X] models imported from the seller include U.S. customs duty, the harbor maintenance fee (HMF), and the merchandise processing fee (MPF). Accordingly, the protestant calculated the amount for duty, HMF and MPF amounts by model code for the imports from the seller for the FY 2011 period. Specifically, these amounts were calculated by totaling these amounts for imports of each model code from the seller during the period and dividing by the units imported to arrive at a per-unit amount. For the [X] model number [X] for the FY 2011 period, this amount was calculated as $[X].
U.S. Inland Freight:
The protestant calculated the costs related to transportation of the vehicles imported from the seller from the U.S. port to the dealer for the FY 2011 period. These calculations were based upon the monthly Logistics Expense reports [X] reports. For the [X] model during the FY 2011 period, the U.S. inland freight was calculated as a per-unit amount of $[X] by dividing the total of the amounts for the 12 months by the protestant’s total imports of [X] automobiles from the seller $[X].
General Expenses and Profit: Advertising
The protestant calculated results for various categories of general expenses and profit on a fiscal year basis. The first of these is the advertising amount. The protestant has advertising expenses relating to specific [X] automobile models, as well as general advertising that is not specific to a particular [X] model. Accordingly, the advertising expenses recorded in the protestant’s accounting records can be divided into model-specific and non-specific advertising expenses, using product codes associated with the advertising expenditures. This information was used to calculate both (1) per unit model-specific advertising expense for each model imported from the seller, and (2) per unit non-specific advertising expense applicable to certain models generally (such as [X] models). The total advertising expense for each model was calculated as the sum of these two amounts. The calculated advertising expense for the [X] model for the FY 2011 period was $[X].
General Expenses and Profit: Selling, General & Administrative Expense
The protestant incurs other SG&A expenses on its sale of imported and other automobiles, including costs for sales operations, business operations, and service and technology. Accordingly, after adjusting for the advertising expenses and other non-allocable SG&A expenses not applicable to imports from the seller, the protestant calculated the other SG&A expenses based upon the account detail reflected in the [X] reports. The resulting amounts [X] were allocated among individual [X] models based on relative sales values, and per-unit amounts were calculated from the sales units. The amount calculated for SG&A expenses for the [X] model for the FY 2011 period was $[X].
The adjustments made for Non-Allocable Expenses include: (1) the $[X] in Advertising expenses that was already reflected in the calculation of the Advertising expense, (2) the Royalty Expense that relates to automobile production in [X] and not to imports from the seller, (3) certain Non-Allocable Cost Centers such as those for [X] that are not subject to the deductive value calculations, (4) Depreciation on Leased Property, (5) Depreciation on Leased Cars, and (6) SG&A Attributable to [X]. There are also additions for Revenue Programs that offset SG&A expenses.
General Expenses and Profit: Non-Operating Income/Expense
The protestant’s operations include a variety of non-operating items associated with revenues or expenses to the company. Non-operating income and expense items for FY 2011 were analyzed to determine which categories were allocable to imports of automobiles from the seller. The resulting amounts [X] were allocated among individual [X] models based on relative sales, and unit sales were used to calculate per-unit amounts. For the [X] models including the [X] model for the FY 2011 period the allocated amount was $[X].
General Expenses and Profit: Profit (Loss)
In order to calculate the amount for profit, the protestant used the [X] report for the [X] for the [X] models and the [X] report for the [X] for the [X] models to develop basic data on unit sales, gross sales, etc. However, the protestant provides that since the statute requires the amount to be calculated for all imported merchandise of the same class or kind “regardless of the country of exportation,” information from the GP Reports was used to calculate information on Gross Sales, Discounts and Allowances, Net Sales, Cost of Sales, and Gross Profit for all imports of [X] automobiles.
The [X] reports include the following expense categories used to derive the Pre-Tax Profit from the Gross Profit: Direct Charges, Selling Expenses, General & Admin Expenses, Research & Development, and Non-Operating Items. Accordingly, the protestant made the following adjustments from the Gross Profit calculations from the GP Report analyses to calculate the Net Profit amounts:
For the Direct Charges, the percentage that the Direct Charges was to the Net Sales in the [X] Report was applied to the adjusted Net Sales from the GP Report analysis to calculate the Direct Charges amount in the profit calculation.
For the Selling Expenses, a calculation was made of such advertising expenses applicable to all imports.
For the other SG&A Expenses, a calculation was made of such expenses allocable to all imports, and the percentage that this amount was to the Net Sales in the [X] report was applied to the adjusted Net Sales from the GP Report analysis to calculate the total General & Admin amount in the profit calculation.
For the Total Non-Operating amount, the percentage that the Total Non-Operating amount was to the Net Sales in the [X] Report was applied to the adjusted Net Sales from the GP Report analysis to calculate the amount for Total Non-Operating in the profit calculation.
Based upon the above, calculations were made of the resulting Pre-tax Profit percentages of Net Sales for the [X] automobile imports. For the [X] models for the FY 2011 period, the protestant initially claimed that the result was a calculated [X] approximately [X] percent of the Net Sales value, equal to $[X] when applied to the Net Dealer Invoice Price of the [X]. However, the protestant now claims that applying this percentage to the revised Net Dealer Invoice Price of $[X] results in a [X].
To calculate the Total General Expenses and Profit amount, the protestant added the amounts for Advertising, SG&A Expense and Non-Operating Income/Expense [X]. The protestant states that since for its sales during the FY 2011 period, the [X], the “deduction made for profit and general expenses” was [X].
The protestant initially claimed that in accordance with the above calculations, the deductive value for the [X] for the FY 2011 period was $[X] for the [X] imports and $[X] imports. However, based upon the protestant’s revisions, the deductive value for the [X] imports are $[X] and $[X] for the [X] imports.
Deductive Value Calculations for the Protestant’s [X] imports
As previously noted, in addition to its sales to U.S. dealers, the protestant also makes sales to an unrelated sub-distributor [X]. These sales are made by the protestant’s [X], and essentially involve the protestant’s purchase from the seller and its [X] sale of the purchased vehicles to the sub-distributor on a delivered, duty paid basis. (That is, the protestant does not separately import and then re-export these vehicles; they are shipped directly from the seller to the sub-distributor, with the protestant responsible for customs clearance [X].) Since the protestant’s sales to the sub-distributor are made on a very different basis than its sales to U.S. dealers, separate deductive value calculations were made.
A sample of the deductive value calculations applicable to the protestant’s sales to the sub-distributor was provided covering the calculations for the [X] for the FY 2011 period. The Starting Invoice Unit Price is the invoice price charged to the sub-distributor during the period. These prices are listed in a “pricing analysis sheet” that the protestant prepares on a model year basis, based on market conditions in [X]. As a matter of policy and given the very limited sales volume involved, the protestant states that it does not [X] to the sub-distributor during the model year. The fact that the sales prices did not change during the FY 2011 period was confirmed through [X] sales data for this period. The price at which the units were sold to the sub-distributor during the FY 2011 period was $[X]. The protestant does not charge a separate destination and handling charge to the sub-distributor and does not adjust the starting price [X].
Ocean Freight and Marine Insurance
The protestant claims that since the prices that it pays the seller are on a CIF basis and it charges the sub-distributor on a delivered, duty paid basis, it is also necessary to make adjustments for ocean freight and marine insurance in the deductive value calculations. These amounts were calculated in a manner similar to that used to calculate the ocean freight and marine insurance amounts for the protestant’s sales to dealers. One difference is that the amounts for the sales to the sub-distributor were based upon the records for imports in [X] rather than in [X] ports. For the [X] model during the FY 2011 period, the ocean freight was $[X] and the marine insurance was $[X].
U.S. Duty, HMF and MPF
The protestant claims that since its sales to the sub-distributor are on a delivered, duty paid basis, adjustment must be made in the deductive value calculations for the U.S. duty, HMF and MPF amounts paid by the protestant. Calculation of these amounts was developed in a manner similar to the protestant’s sales to the dealers, except that the calculations were based on [X]. For the FY 2011 period, the amount for the [X] model was $[X]. There was no U.S. inland freight expense related to these sales.
General Expenses and Profit: Advertising
The protestant states that the sales to the sub-distributor were made by its [X]. The FY 2010 [X] reports for the [X] show advertising expenses, and an analysis was done to calculate the expenses allocable to the protestant’s sales to the sub-distributor. This allocable amount was applied to the protestant’s total sales of the seller-sourced automobiles sold to the sub-distributor during the period to calculate a percentage. This percentage was then applied to the protestant/sub-distributor invoice prices for the individual models to calculate the per-unit advertising amounts. For the [X] model for the FY 2011 period, the allocated advertising amount was $[X].
General Expense and Profit: Selling, General & Administrative Expenses
The sales to the sub-distributor are made by the protestant’s [X], which records SG&A expenses in the [X] reports for this division. The [X] information was analyzed to determine the SG&A expenses (other than advertising expenses) allocable to the sales to the sub-distributor, comparable to the protestant’s dealer sales. The total amount allocable was used to calculate the percentage that this amount was to the protestant’s total sales to the sub-distributor during the period. This percentage was then used to calculate the per-unit amounts for the different model numbers. The protestant claims that the SG&A expense amount for the [X] model during the FY 2011 period was $[X].
General Expenses and Profit: Profit
The protestant states that its profit calculation for its sales to the sub-distributor was comparable to that developed for its sales to dealers, except that the calculation was based upon the [X] reports and GP Reports for the [X]. The result was [X] percent for the FY 2011 period. [X] percentage was multiplied by the Starting Invoice Unit Price amount to calculate the dollar profit amount. A [X] was calculated for the [X] for the FY 2011 period.
Total General Expenses and Profit
The protestant states that for its sales to the sub-distributor during the FY 2011 period, the [X]. Accordingly, the “deduction made for profit and general expenses” was [X]. The protestant claims that the deductive value amount was $[X] for the [X] for the FY 2011 period.
Based on our review, we find that the adjustments to the unit dealer price for the [X] imports and for the [X] imports under deductive value including the addition of the destination and handling charge and the deduction of various discounts, incentives, and allowances to the dealers including holdback, [X], [X], [X], FPA, discounts and incentives, FTF credit, and PDI credit are acceptable.
19 C.F.R. § 152.105(d)(2), provides that the “actual costs and associated costs of transportation and insurance incurred with respect to international shipments of the merchandise concerned from the country of exportation to the United States,” may be deducted. 19 C.F.R. § 152.105(d)(3) provides that the “usual costs and associated costs of transportation and insurance incurred with respect to shipments of the merchandise concerned from the place of importation to the place of delivery in the United States, if those costs are not included as a general expense under paragraph (d)(1) of this section” may be deducted. In this case, we find that ocean freight and marine insurance costs for the protestant’s the [X], [X] and [X] imports are proper deductions under deductive value provided the protestant is able to furnish CBP with proof of actual costs which constitute those amounts ultimately paid to the international carrier, freight forwarder, insurance company or other appropriate provider of such services. Commercial documents to and from the service provider such as an invoice or written contract separately listing freight/insurance costs, a freight/insurance bill, a through bill of lading or proof of payment of the freight/insurance charges (i.e., letters of credit, checks, bank statements) are examples of some documents which typically serve as proof of such actual costs. Other types of evidence may be acceptable. We find that U.S inland freight costs claimed for the protestant’s the [X] and [X] imports are proper deductions under deductive value. See HQ H258738, dated February 20, 2015.
19 C.F.R. § 152.105(d)(4) provides that “customs duties and other Federal taxes currently payable on the merchandise concerned by reason of its importation, and any Federal excise tax on, or measured by the value of, the merchandise for which vendors in the United States ordinarily are liable” are deductible amounts under deductive value. We find that in this case, costs for U.S. Duty, HMF and MPF are proper deductions under deductive value for the protestant’s the [X], [X] and [X] imports. See H007667, dated May 25, 2007 (CBP found that customs duties, harbor taxes or merchandise processing fees paid by the United States vendor as deductible amounts pursuant to 19 C.F.R. § 152.105(d)(4)); see also HQ H258738.
19 C.F.R. § 152.105(d)(1), allows for a deduction for any commission usually paid or agreed to be paid or the addition usually made for profit and general expenses in connection with sales in the United States of imported merchandise that is of the same class or kind; regardless of the country of exportation, as the merchandise concerned. The rules for deducting profit and general expenses are set forth in 19 C.F.R. § 152.105(e) which provides that:
The deduction made for profit and general expenses (taken as a whole) will be based upon the importer's profit and general expenses, unless the profit and general expenses are inconsistent with those reflected in sales in the United States of imported merchandise of the same class or kind from all countries, in which case the deduction will be based on the usual profit and general expenses reflected in those sales, as determined from sufficient information. Any State or local tax imposed on the importer with respect to the sale of imported merchandise will be treated as a general expense.
In determining deductions for commissions and usual profit and general expenses, sales in the United States of the narrowest group or range of imported merchandise of the same class or kind, including the merchandise being appraised, for which sufficient information can be provided, will be examined.
The Statement of Administrative Action (“SAA”), adopted by Congress with the passage of the TAA, explains that the determination of usual profit and general expenses under the provisions of deductive value would be carried out utilizing information prepared in a manner consistent with GAAP in the United States. In HQ 546120, dated March 26, 1996, CBP stated that if an expense is incurred by the importer after the merchandise is released from CBP, it is likely to be a general expense.
In HQ H007667, the costs and expenses for marketing and distribution of the product, the overhead charges that included both actual costs of overhead and profit, the costs of loading and unloading the imported merchandise at the port of destination in the United States, and the actual shipping and landing inspection costs of the imported merchandise were included as deductible profit and general expenses. HQ H007667 explains that the reason these amounts can be included as deductible profit and general expenses is because the expenses were incurred after the merchandise was released from Customs custody and because they were incurred in connection with sales in the United States.
In HQ 545187, dated February 14, 1995, CBP reviewed “operating expenses” designated on an income statement, such as salaries and wages, rent, taxes, travel, advertising, automotive expense, and contract services, and determined that the designated expenses were deductible as "general expenses" from the unit price at which the merchandise is sold to the unrelated U.S. purchasers. HQ H019749 dated July 22, 2008, considered a company’s general and administrative expenses, which included the company’s per facility operating expenses, division sales expenses, field sales expenses, and allocation for cost of executive staff expenses, as deductible profit and general expenses.
In this case, we find that the general expenses and profit claimed by the protestant for the protestant’s the [X], [X] and [X] imports are deductible provided that the profit charged is the normal and usual profit in the industry. As noted in the SAA, the expenses categorized as deductible profit and general expenses in HQ H258738, H007667, HQ 545187, and HQ H019749 should qualify as profit and general expenses under GAAP in the United States. That is, if an expense cannot be categorized as a profit and general expense under GAAP in the United States, it should not be considered a profit and general expense for deductive value purposes. Under GAAP in the United States, such expenses typically relate to the day-to-day operations of a business, pertaining to operations expenses, rather than to expenses that can be directly related to the production of any goods and or services. These expenses may be listed on an importer’s income statement, and may be noted as “general and administrative expenses,” “SG&A expenses,” “operating expenses,” or a similar variation depending on the particular accounting practices of the company and its industry. Aside from the expenses noted in HQ H007667, HQ 545187, and HQ H019749, expenses for insurance, consulting expenses, depreciation, legal expenses, utilities, subscriptions and office supplies are other expenses that may be found in this category. See also HQ H258738. We find that deductive value is the most appropriate method of valuing the imported merchandise; however, the Office of Regulatory Audit is able to verify whether the final accounting of all pertinent revenue and expenses figures are maintained in accordance with GAAP.
HOLDING:
Based on the analysis set forth above, the imported merchandise should be appraised using deductive value, provided the technical requirements for appraising the merchandise under 19 U.S.C. § 1401a(d) and 19 C.F.R. § 152.105 are met and that the Office of Regulatory Audit is able to verify whether the final accounting of all pertinent revenue and expenses figures are maintained in accordance with GAAP. Protest No. 2506-16-100022 is referred back to your port for appropriate action.
Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and to the public on the Customs Rulings Online Search System (CROSS) at https://rulings.cbp.gov/ which can be found on the U.S. Customs and Border Protection website at http://www.cbp.gov and other methods of public distribution.
Sincerely,
Monika R. Brenner, Chief
Valuation & Special Programs Branch