HQ 0544760 - Proper Value for Imported Merchandise; Item XXX, TSUS; Application for Further Review of Protest No. XXX, dated August 5, 1988 - United States International Trade Commision Rulings

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HQ 544760

May 4, 1992

VAL CO:R:C:V 544760 ML

CATEGORY: VALUATION

District Director
San Diego, California

RE: Proper Value for Imported Merchandise; Item XXX, TSUS; Application for Further Review of Protest No. XXX, dated August 5, 1988

Dear Sir:

The protest was filed against your decision in the liquidation of various entries made by AVM Light Metals, Inc., a california corporation, (hereinafter referred to as the "importer"). The imported merchandise was aluminum castings (wheels and rims) produced using U.S. origin aluminum alloy. The merchandise was valued pursuant to section 402(f) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(f)).

FACTS:

The facts, as presented by the importer are that Western Wheel Corporation, (hereinafter referred to as "WWC"), issued a Purchase Order to the importer to procure semifinished cast aluminum wheels. WWC agreed to supply at no cost to the importer the material aluminum alloy (ingots) of U.S. origin for the importer's use in the production of cast aluminum wheels at the importer's Mexican wheel manufacturing plant, (hereinafter referred to as the "Maquiladora"), to be purchased by WWC. The importer shipped the ingots to its Maquila. The Maquila then processed the ingots to WWC's specifications which included melting, casting, trimming, deflashing, machining, and heat treatments.

WWC also supplied at no cost to AVM the necessary casting tooling consisting of Static and Centrifugal casting machines, molds, and core boxes for exclusive use in the production of the cast aluminum wheels, and some technical assistance. AVM in turn provided the items (molds, etc.) free of charge to the Maquila.

The semifinished wheels from the Maquila were sold to the importer, who in turn sold them to WWC for further processing. WWC received the merchandise directly from the Maquila. The importer invoiced WWC based on the purchase order.

In a letter to Customs, dated April 8, 1988, from E.K. Venugopal, president of the importer, it was stated that the machinery and equipment used by the Maquila were recorded on the importer's books. The importer also supplied the Maquila with money to cover the operating expenses of the Maquila and all of these expenses were recorded on the Maquila's books. The importer certified that the sales prices between it and the Maquila were the total labor cost plus administrative and overhead costs, as well as a profit margin.

The import specialist valued the merchandise on the basis of 402(f) of the TAA, using a computed value approach. Counsel for the importer asserts classification under XXXX and that duty should have been assessed only on the value of the processing performed on the qualifying metal product in Mexico. Counsel asserts the value of the molds and machinery provided by the importer to the Mexican company should not have been included in the value of processing.

The valuation of the merchandise was based on the cost of material, labor and fringes, GEA, plus a proportionate share of the assists (machinery purchased in Mexico, plus rent), packing costs.

ISSUE:

Under a 402(f) valuation, what costs are includable in the dutiable value of imported merchandise.

LAW AND ANALYSIS:

The merchandise was valued using 402(f) of the TAA, value if other values cannot be determined or used. The use of 402(f) was appropriate pursuant to former item XXX, Tariff Schedules of the United States (TSUS). Headnote 2(a), subpart B, part 1, Schedule 8, provided:

Articles repaired, altered, processed, or otherwise changed in condition abroad.--The following provisions apply only to items 806.20 and 806.30:

(a) The value or repairs, alterations, processing or other change in condition outside the United States shall be--

(i) the cost to the importer of such change; or

(ii) if no change is made, the value of such change
as set out in the invoice and entry papers; except that, if the appraiser concludes that the amount so set out does not represent a reasonable cost or value, then the value of the change shall be determined in accordance with section 402 or 402(a), Tariff Act of 1930, as amended.

In the instant case, the appraising officer concluded that the amount set out in the invoice and entry papers did not represent a reasonable cost or value, and therefore, determined the cost or value in accordance with the provisions of section 402.

The parties do not take issue with the method of valuation, but rather the elements of cost includable in valuing the imported merchandise. Under 402(f)(1) of the TAA:

...the merchandise shall be appraised for the purposes of this Act on the basis of a value that is derived from the methods set forth in such subsections, with such methods being reasonably adjusted to the extent necessary to arrive at a value.

Under section 402(f) of the TAA, merchandise is valued on the basis of a value that is derived from section 402(b)-(e) with reasonable necessary adjustments. Section 152.107(a)-(c), Customs regulations (19 CFR 152.107(a)), sets forth examples of acceptable appraisement using section 402(f) of the TAA.

Section 402(e) of the TAA provides that computed value consists of the sum of:

(A) the cost or value of the materials and the 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 is sales of 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.

Counsel for the importer states that duty should have been assessed only on the value of the processing performed on the qualifying metal product (under 806.30/692.32 TSUS) in Mexico. Subpart B in 806.30, headnote 2 deals with a change to the merchandise and counsel believes it was improper of the import specialist to have assessed duty on the U.S. aluminum. Counsel concedes that the cost studies were not presented in a timely fashion to Customs, yet states that its tardiness does not permit Customs to make no adjustments for qualifying metal.

The import specialist's position is that in this related party transaction the importer failed to provide actual processing costs, and therefore, the unit value was unreasonable in that various usual expenses incurred by a producer were deficient. "The invoiced unit values reflected labor and fringes, yet the machinery for the Maquila operation was purchased in Mexico, in fact, the plant was a former Mexican- owned aluminum wheels producing site with some operation equipment therein." The import specialist also stated that additional values usually reflected in the same general class or kind of merchandise such as rent (an inherent cost of fabrication), the providing of molds not reflected in the Service Agreement between WWC and the importer, transfers of money to cover operating expenses of the Maquila, and loss, which should be considered yet under the importer's claim are not a part of the processing fee.

In TAA #44, 542658 TLL, dated January 12, 1982, we responded to an internal advice request regarding the dutiability of certain general expenses when the basis of appraisement was computed value. The expenses were paid by and maintained on the parent company/producer's books in the United States and did not fall within the definition of an assist, as stated in 402(h)(1)(A) of the TAA. The position of the District Director was that building depreciation expense, rent expense, and accounting expenses are normally reflected on the books of the Mexican assemblers in the 807.00 program and therefore, the general expenses of the companies was inconsistent with the usual profit and general expenses of other assemblers.

In TAA #44, we found first, that accounting services carried on a parent's books could not be treated as either general expenses or costs of fabrication of the producer under computed value. Second, insofar as plant rental and building depreciation were concerned, we found that the portion of these two items which related to the assembly (or manufacturing) operation were inherently a cost of fabrication unless demonstrated otherwise under generally accepted accounting principles (GAAP).

We also stated in TAA #44 and Supplement No. 1 to TAA #44, dated July 20, 1982, 542873 IWS, that whether the producer's profit and general expenses are consistent with the profit and general expenses usually reflected by producers in the country of exportation in sales of merchandise of the same class or kind is a question of fact and our authority for rejecting figures relating to the producer's general expenses was limited under 402(e)(2)(B) of the TAA to those usually reflected in sales of merchandise of the same class or kind. However, we found that certain expenses that heretofore may have been general expenses under the old law, would be dutiable under 402(e)(1)(B) of the TAA if "usually reflected, ..." For example, that portion of plant rental relating to the selling of merchandise of the same class or kind for exportation to the U.S. may properly be treated as being dutiable as "an amount" for profit and general expense if included in the producer's profit and general expenses. However, if an expense of the type described above is absent from the producer's general expenses and results in the producer's profit and general expenses being "inconsistent with those usually reflected in sales of merchandise of the same general class or kind, " the actual profit and general expenses of that producer should be rejected and the usual profit and general expenses substituted.

In the instant case, the import specialist determined that certain expenses of the type described above were not present in the producer's profit and general expenses, resulting in profit and general expenses which were inconsistent with those usually reflected in sales of merchandise of the same general class or kind. Consequently, the import specialist rejected the producer's "actual" and instead used the usual profit and general expenses as directed in TAA #44 and its supplement. In this regard, we agree with the import specialist.

As regards the mold costs, counsel states since the molds were produced in the United States and their costs were incurred in the United States, the cost or value of the molds are not included in the value of processing the semifinished wheels. As authority for this proposition, counsel cited section 10.9(l), Customs Regulations (19 CFR 10.9), providing in pertinent part:

The cost or fair market value, as the case may be, of the processing outside the United States which is set forth in the invoice and entry papers as the basis for the assessment of duty under item 806.30, shall be limited to the cost or value of the processing actually performed abroad (including all domestic and foreign articles used in the processing, but does not include the exported United States metal article) and shall not include any of the expenses incurred in this country, whether by way of engineering costs, preparation of plans or specifications, and the furnishing of tools or equipment for doing the processing abroad, or otherwise.

If the molds were produced in the United States and their costs incurred in the United States, the cost or value of the molds are not included in the value of the processing the semifinished wheels and we agree with counsel that these costs are not part of dutiable value.

As regards machinery purchased by the importer in Mexico and carried on the importer's books, we find that the portion of this equipment, prorated, and attributable to the imported merchandise should properly be a part of the cost of fabrication.

Based on the information submitted, we are unable to determine if any value was added for the U.S. aluminum ingots. To the extent the U.S. produced aluminum ingots were included in the value of 806.30, TSUS, it should be taken out, because the value of qualifying metal products are not properly a part of dutiable value.

HOLDING:

The merchandise was classifiable under 806.30 and valued under a 402(f) valuation, derived from 402(e), with necessary adjustments. Certain of the producer's profits and general expenses were inconsistent with the usual profit and general expenses usually reflected in sales of the same general class or kind of merchandise. The import specialists rejection of the producer's actual expenses and substitution with the usual profit and general expenses was consistent with TAA #44.

Additionally, equipment purchased by the importer and carried on its books, in accordance with GAAP, may be included in the value of the processing in Mexico as a cost of fabrication.

Finally, U.S. origin ingots which qualify for 806.30 treatment are not a part of dutiable value.

Accordingly, you are directed to deny the protest in part and to grant the protest in part if the value U.S. ingots were included in dutiable value. A copy of this decision should be attached to the Customs Form 19 and mailed to the protestant as part of the notice of action on the protest.

Sincerely,

John Durant, Director

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