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HQ 543891


May 2, 1988

CLA-2 CO:R:CV:V 543891DH

CATEGORY: VALUATION

District Director of Customs
El Paso, Texas

RE: Application for Further Review of Protest Nos. 2403-4-000002 and 2403-4-000003

Dear Sir:

The above referenced protests and applications for further review concern the applicability of a government rebate (CEDIS), inland freight incurred in shipping the merchandise from the exporter`s plant to the Mexican border and insurance premiums in the computation of computed value.

FACTS:

The merchandise under consideration has been imported by a United States corporation from its Mexican subsidiary producer. This merchandise has been appraised on the basis of computed value.

CEDIS (certificado de devolucion de impuestos) is a refund of money authorized to Mexican exporting companies that export products made in Mexico which contain a certain percentage of Mexican raw materials.

CEDIS, 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. It is the view of the district that the CEDIS amounts are an element in the profit computation under Section 402(e)(1)(B) of the Tariff Act or 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(e)(1)(B)), since the Mexican corporation includes the CEDIS amounts in its sales price to the United States company and carried the payment on its books as "miscellaneous profit and loss". It is further contended that the cost submission submitted by the United States parent included the CEDIS in its profit, and then, the foreign operating expenses were reduced by this same amount. Finally, it is the contention of the exporter that the issuance of the certificates is dependent, not upon sales for export to the United States, but rather upon the actual fact of export. While information has not been submitted to Headquarters which establishes that these funds have been paid or transferred, verification of this information does exist in the Regulatory Audit Report.

The prepaid costs and expenses incurred in the handling of the product from the time the product was packed on the factory dock ready for shipment until the time the product reached the United States border were included in the computation of the computed value of the merchandise. This figure was reported in the cost submission to Customs under the heading of "Material Components Cost" and in the financial statements of the exporter as a "cost of production".

Finally, the insurance premiums to cover the risk of loss during the transportation of the finished tomato paste were prepaid by the exporter. It is the opinion of the district that these payments are dutiable as a cost of production since the payments were carried on the exporter`s financial statements as such.

ISSUES:

Is a tax rebate calculated on a percentage of Mexican integral costs which is given to Mexican firms who export products made in Mexico containing a certain percentage of Mexican raw materials part of computed value?

Are 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 part of computed value?

Are prepaid insurance premiums paid to cover the risk of transportation of the finished product from the plant to the border and carried on the books of the producer part of computed value?

LAW AND ANALYSIS:

Computed value is defined in section 402(e) of the TAA (19 U.S.C. 1401a(e)) as the sum of-

(A) the cost or value of the materials and fabrication and other processing of any kind employed in the production of the imported merchandise;

(B) an amount for 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 United States;

(C) any assist, if its value is not included under subparagraph (A) or (B); and

(D) the packing costs.

Section 402(e) continues:

(A) the cost or value of materials under paragraph (1)(A) shall not include the amount of any internal tax imposed by the country of exportation that is directly applicable to the materials or their disposition if the tax is remitted or refunded upon the exportation of the merchandise in the production of which the materials were used; and

(B) the amount for profit and general expenses under paragraph(1)(B) shall be based upon the producer`s profits and expenses, unless the producer`s profits and expenses are inconsistent with those usually reflected in sales of merchandise of the same class or kind as the imported merchandise that are made by producers in the country of exportation for export to the United States, in which case the amount under paragraph (1)(B) shall be based on the usual profit and general expenses of such producers in such sales, as determined from sufficient information.

The CEDIS payments fall within the provisions of 402(e)(2)(A), since the tax is refunded upon the exportation of the merchandise and the tax is directly applicable to the materials. Accordingly, under subparagraph 402(e)(2)(A) the value of the tax is not to be included in the computed value as part of the cost or value of the materials; however, it is to be included as part of the profit and general expenses under subparagraph 402(e)(2)(B), because it is treated in such a manner by the producer on its books. In the absence of information showing that these figures are inconsistent with what is usual, the producers figures will be used to determine profit and general expenses.

The second issue concerns prepaid transportation costs incurred by the exporter for transporting the finished merchandise from the exporters dock to the Mexican border.

The exporter has contended that the transportation costs and the insurance costs should not be dutiable since the transportation of the finished merchandise occurred after the merchandise was packed ready for exportation to the United States.

The district has contended that the prepaid cost of transportation is dutiable as a cost or value of materials under section 402(e)(A) since the costs were included in the exporter`s financial statements as "a cost of production" and the costs were recorded on the Customs submission as a "Material Components Cost".

While expenses that occur after production has been completed may not always be considered as part of the cost of materials or other processing employed in production, they have been treated as production costs on the company`s records. We have no indication that such treatment is inconsistent with generally accepted accounting principles.

It is true that a provision pertaining to transportation costs has not been specifically enumerated under computed value. Guidance however, with regard to these issues has been provided in the Statement of Administrative Action. The Statement of Administrative Action provides:

The cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise will be determined on the basis of information supplied by, or on behalf of, the producer and will be based upon the commercial accounts of the producer, if such accounts are consistent with the generally accepted accounting principles applied in the country where the goods are produced.

There has not been any evidence submitted to establish that the method of accounting applied by the exporter is contrary to the generally accepted accounting principles of Mexico. Therefore, the district was correct in relying upon the producer`s records and holding the inland freight and insurance expenses to be part of computed value.

HOLDING:

In view of the foregoing, you should grant that portion of the protest which concerns cost of production with respect to the CEDIS payments; however, the protest should be denied with
respect to all other issues. A copy of this decision should be attached to the Form 19, Notice of Action, to be sent to the protestant.

Sincerely,

John Durant

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