OT:RR:CTF:VS H021399 KSG
David G. Forgue, Esq.
Barnes, Richardson & Colburn
303 East Wacker Drive
Suite 1100
Chicago IL 60601
Re: Consignment; Supplier Managed Inventory method; fallback method
Dear Mr. Forgue:
This is in response to your letter dated October 10, 2007, requesting
a binding ruling on behalf of Brake Parts, Inc., regarding the proper valuation
of certain sales of imported steel blanks. Your submission dated July 30, 2010, was considered as part of this file. We regret the delay in responding to your request.
FACTS:
Brake Parts Inc. (“BP”) is the importer of record of steel blanks that you state are acquired on consignment. A consignment agreement between BP and the supplier was submitted for our review. The consignment agreement covers several brake products that are components used by BP in a manufacturing process to produce finished goods. The consignee agrees to purchase against this agreement, using the supplier as the preferred supplier which provides for shipping, risk of loss, security, replenishment levels, an annual audit, and payment terms. The consignee can make a spot buy from a third party if necessary in accordance with the terms of the agreement.
The goods are acquired based on a supplier managed inventory model (“SMI”). Based on the SMI model, the transaction is undertaken with the intent that the manufacturer minimize its inventory and the manufacturer ensures replenishment on a timely basis. The purpose of the SMI model is the certainty of supply. The sales price is negotiated on a long-term basis and generally known to the parties at the time of importation. The imported goods are not available for sale to third parties. The importer and the supplier are not related.
The good are stored in a warehouse operated by BP. Title to the imported goods does not transfer until the goods are withdrawn from the warehouse. The supplier agrees in the Supply Agreement to acquire insurance for the imported goods until they are withdrawn from the warehouse. You state that the goods are withdrawn from the warehouse in a relatively short period of time from entry.
The supplier ships the product to the warehouse with a commercial invoice, package slip and bill of lading. A lot number is automatically created for shipment at this point. The lots are then entered into general warehouse inventory. When the goods are withdrawn from the warehouse, which is done on an as-needed basis, BP creates weekly vendor reports. The vendor reports generate future shipment requests and a receipt is issued for all the withdrawn products. The receipt is sent to the supplier, who generates a “Payment Invoice.” The Payment Invoice is sent to BP for payment. The imported steel blanks are then used by BP to produce brake pads in the U.S. BP does not generally record the “Commercial Invoice” that corresponds to the blanks when it withdraws blanks for use.
You state that the price paid for the imported steel blanks has remained stable since July 1, 2005. The company does not expect significant variation in the price in the foreseeable future.
ISSUE:
What is the proper method of appraisement for certain imported steel
blanks purchased as described above?
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the United
States is the transaction value method as set forth in section 402(b) of the Tariff
Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”), codified
at 19 U.S.C. 1401a. Transaction value of imported merchandise is the “price
actually paid or payable for the merchandise when sold for exportation to the
United States” plus amounts for five enumerated statutory additions. 19 U.S.C. 1401a(b). Where transaction value cannot be used for the valuation of the merchandise, the other methods of valuation must be considered, in the order they appear in 19 U.S.C. 1401a(c)-(f): transaction value of identical or similar merchandise; deductive value; computed value; and other reasonable values (“the fallback method”).
In order for transaction value to be used as a method of appraisement, there must be a “sale” between the parties. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the
Federal Circuit found that the term “sale” for purposes of 19 U.S.C. 1401a(b)
means a transfer of title from one party to another for consideration (citing J.L.
Woods v. United States, 62 CCPA 25, 33 C.A.D. 1139, 505 f.2d 1400, 1406
(1974). Without a sale for exportation to the United States, transaction value
must be eliminated as a means of appraisement. The Federal Circuit Court of Appeals stated that transaction value uses as a primary basis for customs valuation, the price which the buyer and seller agreed to in their transaction. CBP ruled in Headquarters Ruling Letter (“HRL”) H012659, dated November 14, 2007, that several factors may indicate whether a bona fide sale occurs between a potential buyer and seller of imported merchandise. CBP considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, CBP may examine whether the potential buyer paid for the goods and whether, in general, the roles of the parties and the circumstances of the transaction indicate that the parties are functioning as buyer and seller.
You state that in all cases, title and risk of loss do not pass to BP until the goods are withdrawn from the warehouse in the U.S. Consideration is also not paid until that point.
Concerning whether the pro forma invoice price represents the price actually paid or payable, 19 C.F.R. § 152.103(a)(1) provides the following:
In determining transaction value, the price actually paid or payable will be considered without regard to its method of derivation. It may be the result of discounts, increases, or negotiations, or may be arrived at by the application of a formula, such as the price in effect on the date of export in the London Commodity Market. The word “payable” refers to a situation in which the price has been agreed upon, but actual payment has not been made at the time of importation. . . . (emphasis added).
The pro forma invoice price is not the agreed upon price. The agreed price will not be known until the merchandise is withdrawn from the warehouse, and payment will be based on the price at the time of withdrawal. The definition given in 19 C.F.R. § 152.103(a)(1) indicates that the price payable and the price ultimately paid are the same. Therefore, the pro forma invoice price cannot be considered the price payable because it does not always equal the price paid. We have found that under certain circumstances a pre determined formula agreed to by the parties prior to importation may be used to arrive at transaction value. However, neither the price paid for the goods when withdrawn from the warehouse, nor the pro forma invoice price is based on a predetermined formula.
In HRL 548273, dated April 17, 2003, the importer did not take title or become obligated to pay for the goods housed in a third-party warehouse until the goods were withdrawn from the warehouse. The risk of loss also did not pass to the importer until that point, and the importer was under no obligation to purchase the goods stored. The goods were entered under a pro forma invoice; however the price actually paid was the quarterly price agreed to at the time of withdrawal from the warehouse. CBP held that there was no sale for exportation. Similarly, in HRL 548236, dated March 27, 2003, the importer did not take title to the merchandise or become obligated to pay until the merchandise was withdrawn from a third party storage center. The importer was not required to withdraw the merchandise from storage. As in HRL 548273, the goods were entered at the contract price in effect at the date of exportation, but the importer actually paid the price that was in effect at the time of withdrawal. CBP held that the goods were not sold for exportation. Also, in HRL 548574, dated March 17, 2005, an importer received supplies into both a third party warehouse and a facility run by the importer. In both cases the importer was under no obligation to purchase the supplies, and did not pay for the supplies until they were withdrawn from the warehouse. This was also held to not constitute a sale for exportation.
The facts of this case, are similar to those of HRL 548273, HRL 548236, and HRL 548574. BP is under no obligation to purchase the goods, neither title nor risk of loss pass to the company until the goods are withdrawn from the warehouse, and consideration is not paid until the goods leave the warehouse. The consideration paid upon withdrawal of the goods from the warehouse is based on the price at the time of withdrawal. Therefore, there is no sale for exportation.
As 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 basis 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. § 1401a(f)).
Since no sales of identical or similar merchandise exist, then 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, the imported goods are not resold in their condition as imported. If not sold in the condition as imported, the importer may elect to use a deductive method for the good sold after further processing. See 19 U.S.C. § 1401a(d)(2)(A)(iii). You have not made this election; therefore, the merchandise cannot be appraised under the deductive value 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). As the goods in this case will be purchased from unrelated suppliers, this information will not be available. Therefore, the merchandise cannot be appraised under the computed value method.
When merchandise cannot be appraised under the methods set forth in 19 U.S.C. § 1401a(b)-(e), its value is to be determined in accordance with the “fallback” method, set forth in 19 U.S.C. § 1401a(f). The fallback method provides that merchandise should be appraised on the basis of a value derived from one of the prior methods reasonably adjusted to the extent necessary to arrive at a value. 19 U.S.C. § 1401a(f)(1).
You suggest that the goods should be appraised under the fallback method using the pro forma invoice price as a reasonably adjusted transaction value. You state that normally the price actually paid will be the same as the price on the pro forma invoice because goods will normally be consumed within a relatively short period of time after entry.
In similar circumstances, we have permitted the use of this reasonably adjusted transaction value under the fallback method. In HRL 548273 (citing HRL 546953, dated May 5, 1999), CBP 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. 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 548236, 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 10-30 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. It was also stated that there would be a method for auditing the importations because the invoice price should be the same as the price for any merchandise being withdrawn from the warehouse that same day because both were based on the current contract price.
As in the above cases, the goods here are not expected to remain in inventory for long periods of time. Also, the price actually paid is likely to remain the same as the price on the pro forma invoice or decrease. Consequently, we find the pro forma invoice price acceptable under a fallback transaction value method of appraisement. However, as in 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.
In addition, as in HRL 548273 and HRL 548236, this ruling is being issued based on the assumption that the unit price for the imported goods, as it appears on the pro forma invoice, is the same as the price actually being paid for identical goods withdrawn from the warehouse on the same day, and this can be verified by CBP.
If the price paid on withdrawal from the warehouse increases from the price on the pro forma invoice, then this ruling will not be applicable in accordance with 19 C.F.R. § 177.9(b)(1). Consequently, when the price paid on withdrawal from the warehouse increases from the price on the pro forma invoice, BP should notify CBP of this fact, so that the proper adjustments may be made. In the alternative, BP may wish to use the Automated Commercial System Reconciliation prototype test which allows an importer, at the time an entry summary is filed, to identify undeterminable information (other than that affecting admissibility) to CBP and to provide that outstanding information at a later date. See 63 Fed. Reg. 6257, dated February 6, 1998, 63 Fed. Reg. 1998, dated August 18, 1998, and 67 Fed. Reg. 68238, dated November 8, 2002, which set forth the proper processing of entry summaries under this prototype.
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).
A copy of this ruling letter should be attached to the entry documents filed at the time the goods are entered. If the documents have
been filed without a copy of this ruling, it should be brought to the attention of the CBP officer handling the transaction.
Sincerely,
Monika R. Brenner, Chief, Valuation & Special Programs Branch