HQ 0545112 - Ruling request pertaining to appraisement of leased imported merchandise - United States International Trade Commision Rulings

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HQ 545112
June 7, 1993
VAL CO:R:C:V 545112 ILK

CATEGORY: VALUATION

RE: Ruling request pertaining to appraisement of leased imported merchandise

This is in response to your letter of October 2, 1992 (hereinafter referred to as the "request"). On behalf of your ------, Inc. (hereinafter referred to as the "importer"), a United States corporation, you request a ruling on the appraisement of leased imported merchandise. The request was followed by a March 24, 1993 meeting between you and members of my staff in the Value and Marking Branch.

FACTS:

The importer has entered equipment leased from a related referred to as the "lessor"), a company of the United Kingdom. At the time the request was submitted for consideration importation of the merchandise was scheduled to commence in January, 1993. Customs personnel at the Port of Baltimore are postponing liquidation of the entry pending this ruling.

The importer is in the business of selling imported metal boxes for cookies, candies, etc., but now intends to begin manufacturing some boxes in the U.S. In order to produce the metal boxes the importer will rent from the lessor the die heads and forming jigs, and ancillary elements such as feed plates, bed plates, hardware, etc., (hereinafter collectively referred to as "equipment"), which are needed to manufacture the metal boxes. Each piece of equipment makes one kind of box, and the lessor has an inventory of thousands of pieces of equipment, to make thousands of different kinds of metal boxes. The equipment is all in used condition, and the median life of the equipment is ten years. The Equipment Lease Agreement ("agreement") between the importer and lessor allows the importer to rent a particular piece of equipment for the period of time it takes the importer to manufacture the agreed upon quantity of boxes +/-10%, after which time the equipment will be returned to the lessor. The agreement provides for the execution of a new lease in the event the importer wishes to produce an additional quantity of boxes. The agreement requires that any new lease be filed with U.S. Customs and that any additional duty be deposited with Customs or as Customs directs. The agreement also provides that it shall be in force for one year and shall automatically be extended from year to year thereafter until one of the parties gives notice of termination. The agreement itself does not specify the specific equipment to be leased, and does not identify the number of boxes to be produced by the importer. At the March 24 meeting, you described the agreement as a "background lease" and stated that the details of each lease transaction, such as the number of units expected to be manufactured, would be contained in a separate purchase order.

The agreement provides that the rent for each and every item of equipment will be calculated according to a formula. All of the equipment, during its lifetime, is expected to produce a total of 20,000,000 pieces or more, therefore the figure of 20,000,000 is agreed to as the standard quantity of pieces the equipment can produce in its lifetime. The formula for calculating the rent is as follows:

(A) The cost of materials, labor, overhead and profit incurred by Lessor in making the Equipment shall be called the Original Value of the Equipment.

(B) The Original Value must be depreciated to reflect the fact that it is used Equipment. The Equipment is depreciated to its cost of maintenance. To reflect depreciation the Original Value shall be multiplied by a factor of .25. This shall result in a value to be called the Current Value. The Current Value represents the continuing maintenance cost invested each year to keep the Equipment usable.

(C) The Current Value must be adjusted to reflect the fact that only a portion of the productive lifetime of the Equipment is being leased. Therefore the Current Value shall be multiplied by a fraction to be called the Production Fraction, which represents the actual percentage of use of the Equipment during the term of the Lease. The Production Fraction is derived as follows:

Lessee's intended quantity of production using Equipment 20,000,000 pieces

(D) When the Current Value is multiplied by the Production Fraction, a figure is obtained that is called the Lease Value. The Lease Value represents the value of the intended percentage of use of the Equipment during the Lease. The Lease Value therefore is the rent chargeable to Lessee to use the Equipment to make the pieces intended.

The entire formula to reach the Lease Value is:

(Original Value x .25) x intended production quantity in U.S. 20,000,000

The agreement provides that the importer shall pay for all assembly and disassembly costs, all normal equipment maintenance costs for set-up, lubrication, cleaning, etc. incurred during the term of the lease, the costs of all transport, insurance and delivery from the U.K. to the importer, and the costs of all duties, taxes and charges on importation.

At the March 24 meeting you stated that it may be more appropriate to adjust the production fraction to reflect that each piece of equipment is estimated to produce 1,000,000 pieces annually. Accordingly the formula to reach lease value would be:

(Original Value x .25) x intended production quantity in U.S. 1,000,000
You also stated at the meeting that the current value of the merchandise is the inventory value of the goods.

The request states that the importer and lessor maintain an arms length relationship. In support of the importer's position, at the meeting you stated that the two companies have independent profit centers, and arrived at the lease value by means of a formula.

The importer takes the position that the imported merchandise cannot be appraised under 402(b)-(e) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA, 19 U.S.C. 1401a(b)-(e)). In its request, the importer states that there is no sale of merchandise identical or similar to the leased merchandise, deductive value cannot be used because the merchandise is not sold in the U.S., and computed value cannot be used because the merchandise consists of used goods and individual records do not exist for the production of the merchandise. It is the importer's position that therefore the merchandise should be appraised under 402(f) of the TAA, and that the rental charge paid to the lessor pursuant to the lease should be accepted as the adjusted transaction value of the imported merchandise. It is the importer's position that it would be inequitable to assess duty based upon the full value of the imported equipment, as the importer has no right to keep the equipment beyond the period of time it takes to manufacture the intended quantity of pieces, and because the importer may find it necessary to import the same equipment again after returning it to the lessor.

ISSUE:

1. Whether 402(f) is the appropriate method of appraisement for the leased imported merchandise.

2. What is the appropriate method of appraisement of leased imported merchandise under 402(f).

LAW AND ANALYSIS:

Transaction value, the preferred basis of appraisement under the TAA, is defined in 402(b) as "the price actually paid or payable for the merchandise when sold for exportation to the United States." In this case, as the merchandise is leased, it cannot be considered to be "sold for exportation to the United States" as required under 402(b) of the TAA. See C.S.D. 83-58. Therefore, transaction value would be eliminated as the basis of appraisement.

The second appraisement method in order of statutory preference is transaction value of identical and similar merchandise under 402(c) of the TAA. According to the importer, no identical or similar merchandise is imported into the U.S. If the imported merchandise cannot be appraised under this method the merchandise will be appraised on the basis of either deductive value under 402(d) or computed value under 402(e) of the TAA. According to the facts, the imported merchandise is not sold in the U.S., and records are not available to determine computed value. Therefore, based on the information provided in the request, it appears that none of the above methods of appraisement can be used with respect to the imported merchandise.

Section 402(f) of the TAA provides that if the value of imported merchandise cannot be determined under subsections (b) through (e):

...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.

Pursuant to this authority, we believe that the transaction value method of appraisement can be reasonably adjusted to permit the rental value of the equipment over its full economic life to represent the value of the merchandise. 19 U.S.C. 1500(a) requires Customs to "appraise merchandise by ascertaining or estimating the value thereof." Accordingly, Customs is to appraise the value of the merchandise as opposed to the value of the merchandise to the importer. With respect to transactions between related parties, 402(b) is only applicable to transactions where the relationship between the parties does not affect the price actually paid or payable. In this case, there is no information to establish whether or not the relationship affects the lease price. However, it is assumed that the current value, or inventory value of the equipment is determined in accordance with generally accepted accounting principles.

The current value of the equipment is provided for in the formula contained in the agreement:

Original Value X .25 = Current Value

As the rent for the equipment is determined by adjusting the current value of the equipment based upon the amount of use of the equipment in proportion to the productive lifetime of the equipment, the current value reflects the rental value of the equipment over its productive lifetime. Therefore, the basis of appraisement of the imported merchandise is its current value, as calculated by the above formula. This method of appraisement is consistent with Customs' ruling in C.S.D. 83-58, in which leased imported merchandise was appraised based on the purchase price given in the option to purchase, as opposed to the lease price. The actual appraisement of the imported merchandise is however the responsibility of the appraising officer.

HOLDING:

1. Based upon the facts presented with regard to the subject imported leased merchandise, as appraisement of the merchandise is not possible under 402(b)-(e), appraisement under 402(f) of the TAA is appropriate.

2. In appraisement of the imported leased merchandise under 402(f) of the TAA, the transaction value method can be reasonably adjusted to permit the rental value of the equipment over its full economic life to represent the value of the imported merchandise.

Sincerely,

John Durant, Director

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