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HQ 544863



September 26, 1994

VAL CO:R:C:V 544863 ILK

CATEGORY: VALUATION

District Director
Laredo, Texas

RE: Application for Further Review of Protest No. 2304-90- 000281; appraisement method between related parties; profits and general expenses under TAA ?402(e)(1)(B) and ?402(e)(2)(B)

Dear Sir:

This subject protest and application for further review concerns the proper appraisement method in transactions between xxxx xxxxxxxx xxxxxxxxxxx (hereinafter referred to as the "importer") and xxxx xxxxxxxxx xx xxxxx xxxxxx (hereinafter referred to as the "producer"), and the dutiability of certain costs of the producer. This ruling follows a May 16, 1994 telephone conference between counsel for the importer and members of my staff in the Value Branch. We regret the delay in responding.

FACTS:

The importations at issue consist of assorted footwear items which were assembled from U.S. components in Mexico by the producer. The importer and producer are related parties within the meaning of ?402(g)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA, 19 U.S.C. 1401a(c)). This protest pertains to seventy-one entries made from July 12, 1988 to August 28, 1989. Appraisement was made on the basis of computed value. The footwear was entered with allowances in accordance with item 807.00, Tariff Schedule of the United States (TSUS) and subheading 9802.00.8050 of the Harmonized Tariff Schedule of the United States (HTS).

In response to a request by Customs, the importer filed a cost submission dated February 7, 1990, for its fiscal year ending June 30, 1989 based upon the format of Customs Form 247. The cost submission included July and August of 1989 due to the producer's suspension of operations in Mexico resulting from destruction of the producer's facility by fire on August 24, 1989. The cost submission (containing schedules) included pre-production (training) expenses (schedule III), U.S. related costs (schedule IV), non-production costs (schedule V), fire loss (schedule VI) and labor inefficiency (excess start-up) costs (schedule VII).

It is the importer's position that the imported merchandise should have been appraised under any one of the methods preceding computed value instead of computed value. No evidence has been submitted supporting this contention. It is also the importer's position that even if computed value is the appropriate method of appraisement, Customs incorrectly included certain expenses on the producer's books which the importer claims are nondutiable.

The importer asserts that the labor inefficiency costs and pre-production costs are amortizable under Generally Accepted Accounting Principles (GAAP) in Mexico. The importer has provided a letter dated July 6, 1990, from Delfino Gonzalez Y CIA. S.C. ("Gonzalez"), who claims to have audited the producer's books. The letter states that under Mexican GAAP these costs are amortizable over a period of up to, but not exceeding five years. According to counsel for the importer, these costs were not originally amortized by the producer. The amortization was done in conjunction with the protest. In a June 7, 1994 submission, the importer states that the producer's facility was destroyed as a result of the August, 1989 fire, and the operations were never resumed in Mexico. After the fire, these costs were written off by the producer. The producer was not compensated by insurance for these costs.

The importer takes the position that the U.S. related costs and non-production costs are not usually carried on the books of Mexican assembly plants. This is also stated in the letter of Gonzalez. The non-production costs consist of administrative expenses. According to the importer's Schedule V, the administrative expenses include compensation of employees who worked in non-production administrative capacities, computer training in the U.S. for administrative employees, and administrative related telephone, office supplies and expenses, postage, and professional fees. The letter of Gonzalez states that these costs "are not properly characterized as general expenses under Mexican GAAP in that they are not even remotely related to the company's production operations."

With respect to the U.S. related costs, the importer claims that the expenditures were recorded on the producer's books although they were incurred by the importer's Texas operation (hereinafter referred to as the "Texas operation"). According to Schedule IV, the producer's books include amounts for auto depreciation for a car purchased by the Texas operation for use by its manager in Texas, U.S. travel and entertainment and U.S. legal fees. The letter of Gonzalez states that the U.S. costs were improperly recorded on the books of the producer. A July 10, 1990 letter from Coopers & Lybrand states that costs such as the U.S. costs "should be charged to an intercompany exchange account and be reimbursed by the American parent to the Mexican subsidiary." Then, according to Coopers and Lybrand, under GAAP these U.S. related costs would not enter into costs reflected on the Mexican subsidiary's financial statements.

Schedule IV includes rent allocated to a 20% portion of the producer's facilities which remained idle during the period in question, and had never been used.

The producer's books contain freight charges for shipment of materials from the U.S. facility to Laredo, the port of exportation. At the time of the telephone conference, the importer took the position that these costs should have been deducted from the appraised value of the imported assembled merchandise.

ISSUES:

1. Whether the imported merchandise was properly appraised under computed value.

2. Whether the subject expenses on the producer's books were properly included in the computed value of the imported merchandise.

LAW AND ANALYSIS:

Transaction value, the preferred method of appraisement, is defined in ?402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(b); TAA) as the "price actually paid or payable for merchandise when sold for exportation to the United States...."

With respect to related parties, ?402(b)(2)(B) of the TAA provides:

The transaction value between a related buyer and seller is acceptable ... if an examination of the circumstances of the sale of the imported merchandise indicates that the relationship between such buyer and seller did not influence the price actually paid or payable; or if the transaction value of the imported merchandise closely approximates [one of the enumerated test values].

In this regard, your office has concluded that the price has been influenced by the relationship between the parties. Since the protestant has submitted no evidence rebutting this particular point or otherwise in support of the acceptability of transaction value, we have no basis for concluding that your determination regarding transaction value was inappropriate.

Under the TAA it is necessary to proceed sequentially through the remaining bases of appraisement to determine the appropriate valuation method. The next basis of appraisement, under ?402(c) of the TAA, requires a previously accepted transaction value of identical or similar merchandise which was exported at or about the same time as the merchandise being valued. It is the importer's position that identical or similar merchandise was imported from Mexico, through Laredo, by a competitor during the period in question. It is your position that there is no previously accepted transaction value of any identical or similar merchandise. According to the concerned import specialist, the merchandise claimed to be identical or similar by the importer was appraised on the basis of computed value, and was neither similar nor identical to the imported merchandise. Therefore the claimed transaction value of identical or similar merchandise does not exist.

The next basis of appraisement is deductive value determined under ?402(d) of the TAA. Deductive value involves appraising the merchandise on the basis of whichever of three prices, adjusted as provided in ?402(d)(3) of the TAA, is appropriate. The imported merchandise was not appraised under the deductive value method because no information was made available to Customs to utilize deductive value, and the importer had filed a cost submission under computed value. No additional evidence has been submitted by the importer.

The next basis of appraisement is computed value determined under ?402(e) of the TAA. The computed value of the imported merchandise is the sum of the cost or value of the materials and fabrication, an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind, any assists, and the packing costs. See, 19 CFR 152.106. Since the U.S. related costs, non-production costs and fire loss expenses are not assists, packing costs or costs of materials and fabrication, we must examine whether these items are included in "an amount for 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 United States."

The computed value statute directs Customs to base the amount for profit and general expenses upon the producer's records, unless the amounts in the records are inconsistent with those usually reflected in sales of merchandise of the same class or kind as the imported merchandise. TAA ?402(e)(2)(B). The Statement of Administrative Action ("SAA") provides that the amount for profit and general expenses will be based on the commercial accounts of the producer, provided that such accounts are consistent with the GAAP applied in the country where the goods are produced.

Gonzalez' statement that characterization of the subject non-production expenses as general expenses is not proper under Mexican GAAP, is qualified by the assertion that the expenses "are not even remotely related to the company's production operations." Computed value includes "an amount for general expenses equal to that usually reflected in sales of merchandise of the same class or kind as the imported merchandise...." No information has been provided to demonstrate that the inclusion of these non-production expenses is inconsistent with that which is usually reflected in sales of merchandise of the same class or kind as the imported merchandise.

Therefore, the so-called non-production expenses are included in the producers profit and general expenses, and are included in the computed value of the imported merchandise. This is consistent with prior Customs decisions. See e.g. TAA No. 18 (Headquarters Ruling Letter ("HRL")542302 dated February 27, 1981)(cost of equipment not used in the production of merchandise would be included in computed value if the cost is carried on the books of the producer); HRL 542848 dated August 6, 1982 (where loan interest expense incurred by assembler prior to commencement of production appeared on the assembler's books of account, it qualified as a general expense); HRL 543873 dated September 19, 1988 (managers salaries paid by the producer are included in computed value). Customs position has been recently affirmed by Campbell Soup Company, Inc. v. United States, No. 94-80, slip op. (Ct. Int'l Trade May 16, 1994), in which the Court held that "Customs correctly treated as general expenses the amount of freight costs that [the producer] incurred from its loading docks to the United States border," and held that the expense was included in the computed value of the imported merchandise. Id. at 24-25. The Campbell Soup Company case affirms the position taken by Customs in Headquarters Ruling Letter (HRL) 544344 dated November 14, 1990 (a reconsideration of HRL 543891 dated May 2, 1988). In HRL 544344 we ruled that the seller's prepaid transportation costs and expenses which directly related to transporting the finished product from the loading dock of the Mexican plant to the U.S. border and which were carried on the books of the producer are general expenses and as such they fall within ?402(e)(2)(B) of the TAA and are therefore included in the computed value of the imported merchandise.

With respect to the U.S. related costs, neither the letter of Gonzalez, nor the letter from Coopers and Lybrand state that the records of the producer are inconsistent with Mexican GAAP. The letter from Coopers and Lybrand states that if the U.S. related expenses were reimbursed by the American parent to the Mexican subsidiary, then the costs would not be general expenses of the producer. However, there is no evidence in this case that these costs were reimbursed to the producer by the importer, and that the costs are not reflected on the producer's books. There is no indication that the accounts of the producer are inconsistent with GAAP. We further find that the letter of Gonzalez is insufficient to demonstrate that the producer's accounts are inconsistent with what is usual. The U.S. related costs are included in the producers profit and general expenses, and as such are included in the computed value of the imported merchandise.

The importer's cost submission includes fire loss expenses. The fire loss expenses are considered to be extraordinary expenses under GAAP and are not included in a producer's general expenses. Therefore, the fire loss expenses are not reflected in profit and loss (from operations). We have recently taken a similar position in HRL 545529 dated May 6, 1994 (a reconsideration of 545384 dated November 23, 1993), regarding uncollectible receivables which were written off by the producer. In HRL 545529, we confirmed that an unusual and non-recurring expense for losses suffered by the producer may not be used to calculate the amount for profit and general expenses for computed value purposes.

The importer's cost submission includes rent for a portion of the assembly facility that had never been utilized. Rent for space in the assembly facility, that had never been utilized, constitutes an overhead cost, which is included in the cost of fabrication and other processing employed in the production of the imported merchandise. This position is consistent with our prior ruling in TAA #44, dated January 12, 1982.

With respect to the excess start-up and pre-production costs, the importer does not dispute that they are included in the appraised value of the imported merchandise. The issue presented is whether those costs can be amortized over a period of five years. According to the letter of Gonzalez, these costs are amortizable over a period of up to five years. These costs are carried on the books of the producer. Letter of Gonzalez. If the excess start-up and pre-production costs are carried on the producer's books as amortized costs, then, whether they are a cost or value of the materials and the fabrication and other processing, or general expenses, the merchandise is to be appraised based upon those costs and general expenses as amortized. If the subject costs are not amortized in the producer's books, then the appraised value of the merchandise is to be determined based upon the non-amortized costs, as reflected in the producer's books.

With respect to freight charges for transporting U.S. components from the U.S. facility to the port of exportation, a question has arisen regarding a Customs Regulations 19 C.F.R 10.17 adjustment. Customs Regulations 19 C.F.R 10.17 provides for the amount to be subtracted from the full value of the assembled article:

The value of fabricated components to be subtracted from the full value of the assembled article is the cost of the components when last purchased, f.o.b. United States port of exportation or point of border crossing as set out in the invoice and entry papers, or, if no purchase was made, the value of the components at the time of their shipment for exportation, f.o.b. United States port of exportation or point of border crossing, as set out in the invoice and entry papers.

Assuming that the importer can verify that the freight costs claimed to have been incurred for transporting U.S. components from the U.S. facility to the port of exportation, these costs may be included as part of the cost or value of the U.S. components to be deducted from the full value of the imported merchandise pursuant to item 807.00, TSUS, and subheading 9802.00.80, HTS. See TAA No.53.

HOLDINGS:

1. Under the facts presented, computed value is the proper method of appraisement for the imported merchandise.

2. In this case, the subject U.S. related costs and non-production costs are general expenses of the producer and are included in the computed value of the imported merchandise. The fire loss expenses are extraordinary expenses under GAAP and are not included in the computed value of the imported merchandise. The rent expense for the 20% portion of unused space is a cost of fabrication or other processing and is included in the computed value of the imported merchandise. The excess start-up and pre-production costs are included in the computed value of the imported merchandise. Whether or not those costs are amortized, depends upon their treatment in the producer's books. Verified freight charges for transporting U.S. components from the U.S. facility to the port of exportation are part of the cost or value of the U.S. components to be deducted from the full value of the imported merchandise entered under 807.00 TSUS and 9802.00.80 HTS.

Accordingly, you are directed to grant this protest in part and to deny this protest in part. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to
make the decision available to customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director
Commercial Rulings Division

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