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HQ 544344


November 14, 1990

CLA-2 CO:R:C:V 544344 DHS/DPS

CATEGORY: VALUATION

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

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