CLA-2 CO:R:C:V 544344 DHS/DPS
District Director of Customs
El Paso, Texas
Re: Reconsideration of Headquarters Ruling Letter 543891;
Application for Further Review of Protest Nos.
2403-4-000002 and 2403-4-000003
Dear Sir:
This is in response to the application for
reconsideration of Headquarters Ruling Letter (HRL) 543891,
dated May 2, 1988, regarding our initial decision in the
above-cited protests. HRL 543891 addressed the issue of the
dutiability of the certificado de devolucion de impuestos
(CEDIS) from the Mexican government to the exporter, and the
inland freight charges incurred in shipping the merchandise
from the exporter's plant to the Mexican border.
This reconsideration was requested by customs officials
from your district at the request of the importer's counsel.
Your office has withheld the denial of these protests pending
the outcome of this reconsideration.
On February 17, 1984, March 2, 1984 and March 30, 1984
your office liquidated numerous entries made by Campbell Soup
Company, without allowance for CEDIS payments or inland
freight and handling charges.
FACTS:
CEDIS payments are authorized to Mexican exporting
companies that export products made in Mexico and contain a
certain percent of Mexican raw materials. The rate of return
is dependent on the percentage of Mexican integral costs.
CEDIS payments, when authorized, can be applied toward credit
for payment of any federally imposed taxes or the funds can
be obtained from the Bank of Mexico upon payment of a 10
percent commission.
We concluded in HRL 543891 that the CEDIS payments fell
within the provisions of subparagraph 402(e)(2)(B) of the
Tariff Act of 1930, as amended by the Trade Agreements Act of
1979 (TAA, 19 U.S.C. 1401a(e)(2)(B)). Accordingly, under
subparagraph 402(e)(2)(A) of the TAA the value of the tax was
not included in the computed value as part of the cost or
value of the materials; however, it was included as part of
the profit and general expenses under subparagraph
402(e)(2)(B), because it was treated in such a manner by the
producer on its books. We concluded that in the absence of
information showing that these figures are inconsistent with
what is usual, the producer's figures were to be used to
determine profit and general expenses.
This decision was based upon several factors.
Most significant were the facts provided that indicated
consideration was given to CEDIS payments in determining
sales prices, thereby becoming an element of the profit
computation on the producer's books. Furthermore, an audit
report, performed by the Southwest Region, dated August 1983,
(Regulatory Audit Report Number 6-83-871-012), stated that
profit was determined by Sinalopasta by negotiated sales to
Campbell Soup. This audit report further provided that
adjustments were made to increase foreign operating expenses
by the CEDIS amounts previously deducted, which in turn
increased the dutiable value. The effect of allowing an
offset to foreign operating expenses would be to negate a
portion of profit.
In an effort to show that the accounting practices
employed by Sinalopasta would place CEDIS payments outside
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 U.S., the protestant
has provided additional information. The protestant agrees
with the above referenced audit report but avers that it is a
mistake to conclude that Sinalopasta's sales price to
Campbell Soup Company included the CEDIS amounts. The CEDIS
payments from the government were not accounted for under the
accounts bearing upon the cost of product sold but were
reported in a separate account for "Miscellaneous Profit and
Loss." This account is separate from the accounts bearing
upon the cost of product sold, sales income, total general
expenses, and net income or loss on sales. The protestant
states that the rebates were placed in this account because
all funds flowing into a manufacturing company must be
accounted for upon receipt. These rebates were not treated
as forming any part of Sinalopasta's gross margin incurred on
sales. They were not included in the amount for profit and
general expenses added onto the manufacturing cost in
determining the exporter's sales price.
The protestant also states that CEDIS rebates are not
comprehended by the statutory addition for profit because it
is not part of the exporting company's mark-up. It is a
"bounty or grant" under the countervailing duty law. (19
U.S.C. 1303, 1671).
Also at issue is the inclusion of the transportation and
handling charges of the finished tomato paste from the
factory to the border.
In HRL 543891, we held that the prepaid transportation
costs incurred by the exporter for transporting the finished
merchandise from the exporters dock to the Mexican border
were considered part of the production costs since they were
treated as such on the company's records. Additionally,
there was no indication that such treatment was inconsistent
with generally accepted accounting principles.
The importer in an effort to prove that the amount which
relates to the outbound freight and handling of the finished
tomato paste was improperly included in the production costs
under GAAP in Mexico has provided additional information.
The importer avers that the amount was improperly included
under "Material Components Cost and Dutiable Cost-Freight"
on the Customs Form 247. The protestant further states that
this amount properly relates only to outbound freight and
handling of the finished tomato paste.
In order to substantiate their point of view, the
protestant contends that the outbound transportation and
handling costs are excludable from the cost of products sold.
In support of these contentions the protestant has provided
an affidavit from Mr. Bojorquez, the controller of
Sinalopasta. He asserts that under Generally Accepted
Accounting Principles of Mexico as provided in the "GAAP
Guide" by Martin A. Miller, that the basis of accounting for
inventories (that is, for cost of goods sold) is the cost of
the goods. This is defined as the price paid or
consideration given to acquire an asset. He states that the
Mexican accounting principles for valuing inventory provide
that such cost is the sum of the expenditures and charges,
direct and indirect, in bringing goods to their existing
condition and location. In his opinion this is interpreted
to mean the tomato paste packed ready for shipment at the
factory door. Outbound freight and handling charges are
generally considered to be selling expenses, which are not to
be treated as part of the cost of goods sold.
ISSUES:
(1) Whether CEDIS payments should be included in the
determination of the appraised value as part of the profit
and general expenses under subparagraph 402(e)(2)(B) of the
TAA.
(2) Whether prepaid transportation costs and expenses
directly related to transporting the finished product from
the loading dock of the Mexican plant to the U.S. border and
carried on the books of the producer are part of computed
value.
LAW AND ANALYSIS:
Protestant's counsel cites Fisher Scientific Co. v.
United States, Reap. Dec. 4083, 72 T.D. 1022 (1937), aff'd,
United States v. Fisher Scientific Co., Reap. Dec. 4219, 73
T.D. 1375 (1938) in support of its argument that inclusion of
bounty or grant monies as an element of dutiable appraised
value is erroneous. A close reading of the Fisher case in
the context of the value statute in effect at the time,
renders its application useless in light of the method of
appraisement applicable in the instant case. Although CEDIS
payments could be characterized as "bounties" or "grants,"
their treatment for duty purposes is to be assessed under the
current value law as it applies to the circumstances here,
specifically, the computed value method of appraisement of
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).
It is our position that the CEDIS payments fall within
the receipts category in determining profit since these
payments are directly related to the imported merchandise in
question, and were treated as such by the protestant. We,
therefore, continue to conclude that the CEDIS payments are
an element in the profit computation under 402(e)(1)(B) of
the TAA.
With respect to the outbound freight and handling
charges, we are in agreement with protestant's submission
that the these charges would not be included within section
402(e)(2)(A) as an element of the cost of materials.
However, based upon the evidence submitted by the protestant,
it is our position that the outbound freight and handling
charges are considered to be selling expenses; therefore,
they would fall within section 402(e)(2)(B) of the TAA as
part of the profit and general expenses.
HOLDING:
In view of the foregoing, you should deny the protest in
full. A copy of this decision should be attached to the Form
19, notice of action, to be sent to the protestant.
Sincerely,
Harvey B. Fox, Director