HQ 0544604 - Application for Further Review of Protest No. 4909-4- 000292; Appraisement of wrapper tobacco, constructed value, allowable profit - United States International Trade Commision Rulings

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HQ 544604

June 3, 1992

VAL CO:R:C:V 544604 DPS

CATEGORY: VALUATION

District Director
San Juan, Puerto Rico
La Puntilla #1
Old San Juan, PR 00903

RE: Application for Further Review of Protest No. 4909-4- 000292; Appraisement of wrapper tobacco, constructed value, allowable profit

Dear Madam:

The subject protest and application for further review, concerns the appraisement of multiple entries of U.S. grown wrapper tobacco, exported to [country of export ] for sorting and stemming, and thereafter returned to the U.S. at the port of San Juan, P.R. The subject entries were made during the period March 19, 1980, through April 29, 1984, and liquidated between September 28, 1984, and November 9, 1984. Similar issues concerning the same parties and identical merchandise are presently before Customs Headquarters on applications for further review of protests filed at the port of San Juan, P.R.

FACTS:

The protests listed above involve merchandise that was entered and liquidated under TSUS item 806.20, dutiable at the column 1 rate provided for in TSUS item 170.15 (stemmed wrapper tobacco). The stemming was performed in [country of export ] by xxxxxxxxxxxx xxxxxxx xxxxxxxxxxx which was a wholly-owned subsidiary ("foreign subsidiary") of the importer, xxxxxxxxxxxx xxxxx xxxxxxxxxxx. The stemmed wrappers and stems were returned to the United States at San Juan, Puerto Rico, where they were used in the manufacture of cigars by another wholly-owned subsidiary, xxxxxxxxxxxx xxxxxx ("domestic subsidiary"), although the parent was actually the importer of record of the returned wrappers and stems. [Foreign subsidiary] never bought nor sold the merchandise. Rather, the stemming was performed on a service contract basis.

The entered value (the value of the alterations) for entries of wrapper tobacco in 1975 and early 1976 was the cost of processing incurred by [foreign subsidiary] as set forth in the entry papers, plus a 5% profit factor. After consultation with Customs' tobacco import specialists in New York and Tampa, the Customs appraising officer advised the importer that the 5% profit factor was too low. After numerous meetings and exchanges of information between the importer, its representatives, and Customs officials, a 9% profit factor was accepted as reasonable by Customs officials at the port of entry.

Although the Customs Service originally was prepared to accept the amounts set forth in the entry papers as representing a reasonable value for purposes of 806.20, TSUS, a subsequent audit investigation disclosed that a monthly billing for all shipments of processed tobacco from the foreign subsidiary to the domestic subsidiary reflected a significantly greater profit percentage than 9%. These amounts were traced to the books of the foreign and domestic subsidiaries as well as to the books of the parent. As a result, Customs determined that the value set forth in the entry papers did not represent a reasonable value of the alterations, and that the value of the alterations should be determined in accordance with the constructed value method of appraisement, section 402(d) of the Tariff Act of 1930, as amended by the Customs Simplification Act of 1956, which figures are represented by the billing amounts set forth in the intercompany financial records.

It should be noted that the appraisement issues raised by the subject protest (as well as the other protests presently before Headquarters) have been reviewed and addressed by this division on six (6) previous occasions.

With regard to the protestant's continuing argument concerning the appraised value of the subject tobacco and counsel's insistence on the use of English market sales figures to determine the market value of the subject xxxxxxxxxxx xxxxx wrapper tobacco, it is apparent that no new information or arguments have been presented by this protest. The arguments presented in the protestant's submission are the same or similar to arguments advanced in the original internal advice decisions (I.A. No. 236/79, 061819, dated May 19, 1981, 542487, dated August 14, 1981, and 543793, dated April 20, 1987) and subsequent reconsideration requests and responses thereto. This office has given thorough consideration to these points in our previous decisions in this case and, as a result, we believe that no useful purpose would be served by addressing them further. We concluded previously, and maintain the position now, that it would be inappropriate to base the "estimated market value" of the subject tobacco on sales of wrapper tobacco to unrelated purchasers in England (see HQ 544643, issued contemporaneously herewith).

The only issue which continues to cause confusion relates specifically to the reasonableness of the profit figure to be added to the alteration costs, and whether cost or profit should be allocated to the stems resulting from the stemming operation.

ISSUE:

Whether the 9% profit figure to be utilized in the value computation is reasonable and appropriate under the circumstances.

LAW & ANALYSIS:

In determining the value of the alterations pursuant to 402 of the Tariff Act of 1930, inclusion of the appropriate profit figure is necessary in determining either the computed or constructed value. In considering the totality of the circumstances pertaining to the appraisement of the subject merchandise, the following discussion of facts concerning the profit figure is historically relevant:

In determining the appropriate dutiable value of the alterations performed abroad, it was initially agreed, in 1971, by Customs and the parent, that a profit factor of 50 percent as reflected on the company's books was to be used. Subsequently, in 1973, the parent proposed that the amount of profit should instead be 5 percent, a rate based on 1947- 1973 financial statistics compiled by the Cigar Association of America. After this figure was rejected by Customs, the parent proposed that a 9 percent profit should be utilized. This percentage was the actual profit allegedly made on the parent's overall tobacco operations.

In light of the history and circumstances surrounding this issue, and upon further review of all the arguments and information submitted previously with regard to the reasonableness of the 9 percent profit figure, it is Customs position that the information before us is legally sufficient to establish the reasonableness of the 9 percent profit figure.

HOLDING:

The 9 percent profit figure utilized by Customs in appraising the subject merchandise is reasonable. To the extent that profit figures other than 9 percent were used in appraising the subject protested entries, the protest is granted in part. Those entries should be reliquidated in conformance with the 9 percent profit figure. Accordingly, dutiable value is represented by the invoiced price for the sorting and the stemming plus 9 percent profit, less 3.1 percent, allocated to resultant stems, where appropriate.

Customs position with regard to the market value of the tobacco at issue has been set forth numerous times in previous rulings by this office, and no new significant information has been presented on this or any other issue mentioned in the protestant's submissions.

Therefore, the subject protest, Protest No. 4909-4- 000292 should be granted in part, with respect to the reasonableness of the 9 percent profit figure (less 3.1 percent allocated to resultant stems where applicable), and denied in all other respects. A copy of this decision should be attached to Form 19, Notice of Action, to be sent to the protestant.

Sincerely,

John Durant, Director

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