HQ 0544845 - Internal Advice 26/91; components of jet aircraft engines; consignment; transaction value not applicable; formula; 19 U.S.C. 1401a(f) - United States International Trade Commision Rulings

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HQ 544845

November 9, 1993

VAL CO:R:C:V 544845 CRS

CATEGORY: VALUATION

Area Port Director
U.S. Customs Service
135 High Street, Room 350
Hartford, CT 06103

RE: Internal Advice 26/91; components of jet aircraft engines; consignment; transaction value not applicable; formula; 19 U.S.C. 1401a(f)

Dear Sir:

This is in reply to a request for internal advice filed by imported components for jet aircraft engines. *************** have subsequently been replaced as counsel by the firm of **************. Letters dated August 2, 1990, and June 19, 1992, were submitted by counsel in connection with this matter.

FACTS:

(the foreign suppliers) have established a joint company (Joint Co. - a foreign corporation) to develop, manufacture, sell and service a certain type of jet aircraft engine. In addition, Joint Co. also leases engines. Pursuant to the collaboration agreement (the "agreement") between the joint parties, Joint Co. directs the development and manufacture of the engines and is responsible for sales and after sales support. However, Joint Co. does not produce components or assemble the finished engines.

Instead, the agreement requires that each party contribute an allotted portion of the work necessary to design, build, test, sell and service the engines. Accordingly, the individual parties are responsible for providing parts or labor used to manufacture finished aircraft engines. The foreign suppliers ship components on consignment to the importer who assembles the finished engines. The suppliers retain title to their components until just before Joint Co. sells the finished engines. At this juncture Joint Co. actually purchases the imported components from the foreign assemblers.

Every month Joint Co. pays the individual parties an amount for the components and work performed based on a two-part formula, the terms of which are fixed under the agreement. The first part of the formula is designed to approximate the manufacturing or engineering cost of furnishing the components and related services, and is based on the projected sales price of the finished engines multiplied by an individual part value expressed as a percentage of the total components and services required to manufacture a finished engine. The second part of the formula returns to each party a proportionate share in the total revenue received by Joint Co. from the sale of finished engines made from the imported and domestic components, less an amount to cover Joint Co.'s expenses and profit. For example, assuming that a party supplied twenty percent of the inputs of a finished engine, it would receive twenty percent of the revenue from the sale of that engine.

Nevertheless, in any given month a party might not receive revenue under the first part of the formula, and yet still earn income under the second. Payments received under the second part of the formula are not allocated to specific components or services.

ISSUE:

The issues presented are: (1) whether aircraft components consigned to the importer under the payment formula set forth above can be appraised on the basis of transaction value; and (2) if not, what constitutes the appropriate basis of appraisement.

LAW AND ANALYSIS:

Merchandise imported into the United States is appraised 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 preferred method of appraisement is transaction value, which is defined as the "price actually paid or payable for merchandise when sold for exportation to the United States," plus certain statutorily enumerated additions. 19 U.S.C. 1401a(b)(1).

For Customs purposes, the word "sale" is generally defined as a transfer of ownership in property from one party to another for a price or other consideration. J.L. Wood v. United States, 62 CCPA 25, C.A.D. 1139 (1974); J.H. Cottman & Co. v. United States, 20 CCPA 344, T.D. 46114 (1932). In the instant case, the components provided by the foreign suppliers are consigned to the importer who combines them with domestically produced components to manufacture finished jet aircraft engines. Transaction value is inapplicable as a means of appraisement for merchandise imported on consignment. Although the components are consigned to the importer, there exists a price actually paid or payable for the components prior to the time of importation, namely the formula under which Joint Co. pays the foreign suppliers. However, the components are not actually sold by the suppliers to Joint Co. until just prior to the time Joint Co. sells the finished engines, either to a U.S. buyer, or for export. While there is eventually a transfer of title for a consideration, for an indeterminate period after importation the foreign suppliers retain title to the consigned merchandise. Consequently, as the components are sold after importation, there is no sale for the purposes of determining transaction value.

When imported merchandise cannot be appraised on the basis of transaction value, it is appraised in accordance with 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)).

The transaction value of identical or similar merchandise is based on sales at the same commercial level and in substantially the same quantity, of merchandise exported to the United States at or about the same time as that being appraised. 19 U.S.C. 1401a(c). Merchandise identical to the imported components exists in the form of spare parts. Nevertheless, counsel for the importer advises that to date there have been few sales of spare parts; furthermore, no further sales of spares are scheduled until 1994. In addition, many of the original equipment parts are not imported as spares. Finally, we are unaware of any sales of similar merchandise. Accordingly, based on the information that is currently available the components cannot be appraised on the basis of the transaction value of identical or similar merchandise.

Under the deductive value method, merchandise is appraised on the basis of the price at which it is sold in the U.S. in its condition as imported and in the greatest aggregate quantity either at or about the time of importation, or before the close of the ninetieth day after the date of importation. 19 U.S.C. 1401(d)(2)(A)(i)-(ii). This price is also subject to certain enumerated deductions. 19 U.S.C. 1401a(d)(3). In the instant situation the components are neither sold in their condition as imported, nor within the allowable time constraints.

However, merchandise that is not sold in its condition as imported, nor before the close of the ninetieth day can still be appraised under deductive value, provided the importer so elects. 19 U.S.C. 1401a(d)(2)(A)(iii). In this case the importer has not elected this method. Furthermore, the method is not normally applicable when as the result of further processing, imported merchandise loses its identity unless the value added by the processing can be determined accurately without unreasonable burden on the importer or Customs. Section 152.105(i)(2), Customs Regulations (19 CFR 152.105(i)(2)). Counsel for the importer also maintains, and we concur, that appraisement on this basis would impose an unreasonable burden. Finally, the imported components are assembled into engines that are sold by Joint Co. to foreign purchasers as well as to U.S. buyers. As a result, the imported original equipment components cannot be appraised on the basis of deductive value method.

Under the computed value method, merchandise is appraised on the basis of the material and processing costs incurred in the production of imported merchandise, plus an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind, and the value of any assists and packing costs. 19 U.S.C. 1401a(e)(1). In this regard the Customs Regulations state that it will be presumed a computed value cannot be determined if the importer is unable to provide the required information within a reasonable time, and/or the foreign producer refuses to provide, or is legally prevented from providing the information. The imported aircraft parts are manufactured by a number of different manufacturers, many of which are not party to the joint agreement. Counsel has advised that computed value information is not provided to the importer. This information is confidential and would not likely be disclosed. Since there is no information on which to base computed value, this method of appraisement is also inapplicable.

Where merchandise cannot be appraised under the methods set forth in 19 U.S.C. 1401a(b)-(e), its value is to be determined in accordance with the "fallback" method of section 402(f) of the TAA. The fallback method provides that merchandise should be appraised on the basis of a value derived from one of the prior methods reasonably adjusted to the extent necessary to arrive at a value. 19 U.S.C. 1401a(f)(1).

Transaction value was originally eliminated as a basis of appraisement due to the fact that the components are imported on consignment. However, under section 402(f), the components may be appraised based on a reasonably adjusted transaction value.

Transaction value is defined as the price actually paid or payable for the merchandise when sold for exportation to the United States. The term price actually paid or payable" means:

The total payment (whether direct or indirect, and exclusive of any costs, charges or expenses incurred for transportation, insurance and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.

19 U.S.C. 1401a(b)(4).

Here, the imported components are ultimately sold to Joint Co. under the formula negotiated between the parties; however, Customs has the authority to appraise on the basis of a formula. 19 CFR 152.103(a)(1). The formula is set forth in Appendix L of the agreement and is fixed prior to exportation; however, elements thereof may be reviewed and adjusted periodically.

Under the formula the parties contract to sell parts in exchange for a consideration based on the estimated engineering or manufacturing cost of the parts plus a share of the profits from the sale of the finished engines assembled from the components. Counsel contends that only the first part of the formula should serve as the basis of appraised value since any amounts returned under the second part are unrelated to the components. Counsel maintains that these amounts include costs, expenses and profits incurred by the importer that are expressly excluded from the appraised value of imported merchandise under section 402(b)(3), which provides in pertinent part:

The transaction value of imported merchandise does not include any of the following, if identified separately from the price actually paid or payable...

(A) Any reasonable cost or charge that is incurred for

(i) the construction, erection, assembly, or maintenance of, or the technical assistance provided with respect to, the merchandise after its importation into the United
States...

19 U.S.C. 1401a(b)(3). Accordingly, counsel maintains that all costs associated with the assembly of finished engines should be excluded from transaction value.

Section 402(b)(3) governs various costs and charges incurred by the seller of imported merchandise after importation into the U.S. In the instant case costs and charges for assembly are recovered by each party under the second part of the formula, specifically, through each party's work share percentage. Given that the second part of the formula returns to each party its proportionate share of the work program, the use of the formula as the basis of appraisement does not result in any assembly costs incurred by the importer in the U.S. being captured by the formula. For example, the distribution under the second part returns to the importer its costs and charges for assembly. These amounts, reflecting domestically produced components and labor would not be dutiable. Since these amounts are not included in the formula, there is no need to adjust for them under section 402(b)(3). As a result, amounts returned under the second part of the formula should be included in transaction value as part of the price actually paid or payable for the components.

Nevertheless, it should be noted that the parties to the agreement are related through their joint ownership of Joint Co. Section 402(b) provides that merchandise can be appraised under transaction value only if, inter alia, the buyer and the seller are not related, or the buyer and seller are related but the transaction is acceptable on other grounds. 19 U.S.C. 1401a(b)(2)(B). One method for validating a transaction value is to examine the circumstances of the sale. If they indicate that the relationship did not influence the price actually paid or payable, the transaction value will be acceptable.

The "sale" of parts from the joint parties to Joint Co. is based on the sale of finished engines. The higher the price of the latter, the more the joint parties will benefit from the sale of parts. Conversely, the lower the price obtained for finished engines, the lower the return to the joint parties. The instant transaction is therefore structured so that the parties share in both the risk and the return of the deal. The circumstances of sale therefore indicate that price actually paid or payable has not been influenced in such a way as to render transaction value unacceptable. Consequently, transaction value applied pursuant to section 402(f) is the appropriate basis of appraisement.

HOLDING:

The imported merchandise should be appraised in accordance with the fallback method as provided for in 19 U.S.C. 1401a(f).

Under the fallback method, the imported components should be appraised under the transaction value established by the formula negotiated between the parties as set forth in Appendix L of the agreement.

Sincerely,

John Durant, Director

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