OT:RR:CTF:VS W563467 YAG
Port Director
U.S. Customs and Border Protection
Service Port-New York/Newark
1100 Raymond Boulevard Newark, NJ 07102
Re: Internal Advice Request; Applicability of Transaction Value; Value Adjustments on Reconciliation Entries
Dear Port Director:
This is in response to your request for internal advice, regarding the value adjustments on Reconciliation Entry No. ***, filed by Livingston International, Inc., on behalf of *** (the “Importer”), on July 7, 2005. We regret the delay in responding. The reconciliation entry covers fifty seven (57) underlying entries of automobiles imported from the United Kingdom. The total original import value is ***. Total deposited duties and fees are ***. Total reconciled duties are ***. The Importer has requested a refund in the amount of ***.
You have asked that certain information submitted in connection with this internal advice be treated as confidential. Inasmuch as your request conforms to the requirements of 19 CFR §177.2(b)(7), your 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.
FACTS:
*** is the parent company and factory. *** is the seller/exporter that supplies the automobiles to ***, Importer/distributor. The imported automobiles are distributed to unrelated U.S. *** dealers through the Importer. At the time of the filing of this internal advice request, *** was a wholly-owned subsidiary of ***.
It is stated that the Importer uses a transfer pricing method governed by *** corporate transfer pricing policy. *** transfer pricing policy uses the Berry ratio to determine a profit margin on the cost of functions and services provided by the Importer as the distributor. The Berry ratio expresses the distributor’s profit as a percentage of the specified costs. At the time of the entry, provisional transfer prices are based on sales forecasts, and the final prices, subject to reconciliation, are “market driven” and determined at the end of the period based on actual results. The percentage of profit that the Importer receives for acting as the distributor falls within a set range that is based on how well automobiles are selling. If sales are good, the distributor will take a higher profit from the upper end of the set range. If sales are poor, the distributor’s profit is at the lower end of the range. Credits and/or debits are used to finalize the transfer prices actually paid from the Importer to its parent company/factory. At the beginning of the year, the Importer attempts to forecast the revenue its vehicle sales will earn in the coming year and then establish budgets for the dealers, distributors, and the Exporter/Seller. Such forecasting combines historical experience, sales targets, and objectives set by the Importer’s management for the coming year, and corporate transfer pricing policies and requirements.
In support of its position the Importer submitted an explanation of its apportionment of post-importation adjustments, along with the following documents explaining the decrease in the entered value in 2004: 1) April 2004 Debit Note for $9.41 million from the Importer; 2) September 2004 Credit Note for $186.46 million to the Importer; 3) February 2005 Debit Note for $4.61 million from the Importer; 4) Comparison of Forecast/Actual Values; 5) The Importer’s trial balance sheet showing debits and credits; 6) Journal entry for April 2004 Debit Note; 7) Journal Entry for September 2004 Credit Note; 8) Journal entry for February 2005 Debit Note; 9) the Importer’s 2004 model identification table; 10) the Importer’s 2004 model identification by part number; 11) the Importer’s 2004 entered value by line; 12) 2004 Adjustment by model and factor; and, 13) 2004 Reconciliation Apportionment for 3rd Quarter 2004. However, although the Importer claims to have described its transfer pricing study in sufficient detail, no transfer pricing study was provided to CBP for consideration. Further, the Importer did not provide any sales or distribution agreements (or any other information) that might be relevant in this matter.
Further, the Importer claims that if CBP considers the intercompany pricing program to be a formula, then transaction value must apply and the final prices in the reconciliation will be the dutiable value. On the other hand, it is the Port’s position that at the time of the importation, the price of the merchandise was not fixed and that the subject merchandise should be appraised on the basis of a modified transaction value under Section 402(f) of the TAA.
ISSUE:
The issues presented are: (1) whether transaction value is an acceptable basis of appraisement; (2) if transaction value is not an acceptable basis of appraisement, what is the correct method of appraisement of automobiles in this case; and, (3) whether post-importation adjustments (upward and downward) taken after the importation should be taken into account in calculating the price actually paid or payable for the 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). 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 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. Headquarters Ruling Letter (“HRL”) 543568, dated May 30, 1986. In this instance, however, there are no previously accepted test values. Consequently, the circumstances of the sale approach must be used in order to determine the acceptability of transaction value.
The circumstances of the sale (“COS”) test is met when the analysis reveals that the relationship between the buyer and seller did not influence the prices paid, which can be demonstrated in three (3) different ways: (1) the related party prices are settled in a manner consistent with the normal pricing practices of the industry; (2) the related party prices are settled in a manner consistent with the way the seller settles prices for sales to unrelated buyers; or, (3) the related party price is adequate to ensure recovery of all costs plus a profit equal to the firm’s overall profit realized over a representative period of time, such as a year, in sales of merchandise of the same class or kind (“all costs plus profit” test). See 19 CFR §152.103(I).
Please be advised that we are not able to conclude that the COS test is satisfied in this case, and that transaction value is the appropriate valuation method. Apart from the description of the formula, which is stated in *** transfer pricing study (not provided), we have not been provided any documents (for example, sales or distribution agreements) supporting the COS test. Since the parties are related in this matter, the COS or test values tests must be satisfied in order for transaction value to be applicable. The Importer is not correct in its assertion that transaction value must apply if CBP considers the intercompany pricing program to be a formula, absent satisfaction of the COS test or test values tests. See HRL 546979, dated August 30, 2000 and HRL 543545, dated January 9, 2007. If the Importer believes that information in the transfer pricing study and/or in some other supporting documentation is relevant to the application of the COS test, the Importer should identify that information, explain why it is relevant, and submit the relevant documentation to CBP.
The Importer states that the pricing in the automobile industry is essentially “market driven,” meaning the consumer determines the actual price they will pay for a vehicle. Each person in the distribution and sales chain, beginning with the dealer, who sells the vehicle to the consumer, then deducts from their sales revenue their costs plus profit and remits the balance to the person who sold them the vehicle. Thus, the dealer collects the sales revenue from the consumer, deducts its costs and profit (the “dealer margin”), and remits the balance, which is the price of the vehicle to the distributor. The distributor (in this case, the Importer), collects the sales revenue from the dealers, deducts its costs, expenses, and profit, and remits the balance to the respective Exporter-Seller. This is the final price ultimately paid to the exporter/seller for the imported automobiles. Arguably, this “market driven” method could show that the related party prices are settled in a manner consistent with the normal pricing practices of the industry. However, we find that the Importer’s claims do not satisfy the COS test. The Importer must have objective evidence of the normal pricing practices of the industry in question and present evidence that the transfer price was settled in accordance with this industry’s pricing practices. See HRL 547672, dated May 21, 2002 and HRL 548482, dated July 23, 2004; HRL 542261, dated March 11, 1981 (TAA. No. 19) (stating that where the transfer price was defined with reference to prices published in a trade journal (the posted price) and the posted price was commonly used by other buyers and sellers as the basis of contract prices, the transfer price was acceptable). We do not consider the Importer’s self-serving statements describing the “market driven” pricing to be objective evidence of how the automobile industry sets its prices. Accordingly, it is our position that the information presented at this time in regard to the circumstances of the sale of the imported merchandise is insufficient to establish that the relationship did not influence the price actually paid or payable.
As the imported merchandise cannot be appraised under transaction value, it should be appraised in accordance with one of the remaining methods of valuation, applied in sequential order. 19 U.S.C. §1401a(a)(1). The alternative bases of appraisement, in order of precedence, are: the transaction value of identical or similar merchandise (19 U.S.C. §1401a(c)); deductive value (19 U.S.C. §1401a(d)); computed value (19 U.S.C. §1401a(e)); and the "fallback" method (19 U.S.C. §1401a(f)).
Based on the information available, there are no previously accepted and adjusted transaction values of identical or similar merchandise on which to base appraisement of the imported automobiles. Counsel for the Importer claims that transaction value for identical or similar goods does not generally apply to the automotive industry since no automotive producer makes sales of similar or identical vehicles. The record offers no support for the Importer’s position, however. As stated in 19 CFR §152.102(i), “similar merchandise means merchandise produced in the same country and by the same person as the merchandise being appraised, like the merchandise being appraised in characteristics and component material, and commercially interchangeable with the merchandise being appraised. If similar merchandise cannot be found, merchandise produced in the same country as, but not produced by the same person as the merchandise being appraised may be treated as similar merchandise.” See also 19 U.S.C. §1401a(h)(4); 19 CFR 152.104(c). However, we note that no information was provided for our review with respect to this issue.
Moreover, the Importer claims that it should be clear from the explanation concerning the “market driven” pricing method and the transfer pricing requirements that the Importer’s suggested value of the imported merchandise essentially applies all of the elements of deductive value, namely, the price to the unrelated dealer, less the distributor’s costs, expenses, and profits. Although, as discussed below, we are of the opinion that this statement is not entirely correct, we find that based on the information and representations made by the Importer’s counsel, it would appear that resort to the deductive value method of appraisement is appropriate (19 U.S.C. §1401a(d)).
When utilizing deductive value, the subject merchandise is appraised based on the price at which the merchandise concerned is sold in the U.S in its condition as imported, in the greatest aggregate quantity at or about the date of importation of the merchandise being appraised. 19 U.S.C. §1401a(d)(2)(A)(i). If the merchandise concerned is sold in the U.S. in its condition as imported, but not sold at or about the date of importation, the price at which the merchandise is sold in the greatest aggregate quantity after the date of importation, but before ninety days after such importation, is utilized. 19 U.S.C. §1401a(d)(2)(A)(ii). The unit price at which merchandise is sold in the greatest aggregate quantity means the unit price at which it is sold to unrelated persons at the first commercial level after importation. 19 U.S.C. §1401a(d)(2)(B).
Furthermore, the price determined under 19 U.S.C. §1401a(d) is to be reduced by an amount equal to the following:
(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 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).
The Importer furnished data regarding its costs, profits, and deductions in reselling the merchandise in the United States, showing how the Importer achieves its Berry Ratio Target. According to the Importer’s submission, the Importer books the following deductions from its sales revenue: post-importation marketing & selling costs and expenses, such as budgeted incentives and promotions spent on dealers to encourage and support their sales efforts, losses incurred in vehicles lost or damaged in transit to dealers, costs and adjustments related to the Importer’s delivery and dealer support functions, fleet marketing expenses (cash and other monetary incentives, related to fleet sales of the Importer’s vehicles), and variable marketing expenses. The Importer also books the following distributor costs, expenses, and profits: local warranty costs, local outbound freight costs (freight costs incurred for delivering vehicles from the port of entry to the dealers), local duty and import taxes (Customs duties and other import related taxes and fees, Customs Broker fees, paid by the Importer on the imported vehicles), local selling expenses, local marketing expenses (budgeted costs for advertising in the United States and other related marketing costs), and other sundry expenses. We find that this data adequately explains how the Importer books and apportions its post-importation adjustments.
However, at this time, the information submitted does not explain (document) whether the adjustments and deductions are proper, as specified in 19 U.S.C. §1401a(d). For example, there is no information explaining other “sundry expenses” and whether such expenses are indeed part of the profit and general expenses that can be deducted. Further, it is not clear whether the imported merchandise satisfies the timeframe requirement specified in 19 U.S.C. §1401a(d)(2)(A)(i)-(ii). In other words, in order to apply deductive value, we must determine whether the merchandise concerned was resold within the allowable time constraints. Additionally, 19 CFR §§152.105(e)-(i) supplement the statutory provisions in 19 U.S.C. §1401a(d)(2)(A)(i)-(ii) and state the following:
(e) Profit and general expenses; special rules. (1) 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.
(2) 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.
Thus, we must determine what profit and general expenses can be deducted and whether the claimed deductions are appropriate to deduct from the price of the merchandise. In HRL 546120, dated March 26, 1996, CBP stated that if an expense is incurred after the merchandise is released from CBP, it is likely to be a general expense. Further, in HRL 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. Thus, your office should obtain further information from the Importer in order to determine if the technical requirements are satisfied to appraise the merchandise under the deductive value as specified in 19 U.S.C. §1401a(d), and verify whether the final accounting of all pertinent revenue and expenses figures are maintained in accordance with generally accepted accounting principles (“GAAP”). If the technical requirements stated in 19 U.S.C. §1401a(d) cannot be met, and there is no information regarding computed value, then an adjusted form of deductive value under 19 U.S.C. §1401a(f) should be used to appraise the merchandise. However, an attempt should be made to appraise the merchandise under deductive value, with the adjustments taken into account in determining the value of the merchandise, as long as the sale required by 19 U.S.C. §1401a(d)(2)(A)(i)-(ii) is determined within the applicable time period and the adjustments are made within the timeframe of the reconciliation program.
HOLDING:
The acceptability of transaction value based on the related party sale between the Importer and Manufacturer/Seller has not been demonstrated. Accordingly, an alternative basis of appraisement must be used. The imported merchandise should be appraised using deductive value under 19 U.S.C. §1401a(d), provided the technical requirements for appraising the merchandise under 19 U.S.C. §1401a(d) are met.
Please do not hesitate to contact us at (202) 325-0042 if you have any questions or concerns.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch