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HQ 545313

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January 31, 1995

VAL CO:R:C:V 545313 CRS

CATEGORY: VALUATION

Area Director
New York Seaport
U.S. Customs Service
6 World Trade Center
New York, NY 10048

RE: Internal Advice 66/91; jet aircraft engines; components; transaction value inapplicable; 19 U.S.C. ? 1401a(f); HRL 544845

Dear Madam:

This is in reply to a request for internal advice (I/A), dated March 18, 1991, submitted by Donohue & Donohue, on behalf of ********************* concerning the appraised value of imported jet aircraft engine components. The I/A was forwarded to Headquarters on January 2, 1992. Comments from the National Import Specialist Division were received on October 22, 1992. Donohue & Donohue was subsequently replaced as counsel by Phelan & Mitri. Counsel has requested that certain information supplied in connection with the I/A be treated as confidential pursuant to section 177.2(b)(7), Customs Regulations (19 C.F.R. ? 177.2(b)(3)). Any such information that appears in this decision has been bracketed and will be deleted from any published versions. A similar issue was addressed in Headquarters Ruling Letter (HRL) 544845 dated November 9, 1993. We regret the delay in responding.

FACTS:

*************** (the "importer") has contracted with certain foreign companies to design, manufacture and sell several types of jet aircraft engines (the "engine program"), specifically, the parties, the importer assembles finished aircraft engines from its own components as well as those supplied by the foreign companies. In addition, the importer is responsible for directing all other aspects of the engine program including marketing, pricing and sales of finished engines as well as spare parts. The parties to the agreement are unrelated.

Each party participates in the engine program based on a fixed percentage ("program share") which reflects its supply of components to the engine program relative to the total input of components by all the parties. The importer annually forecasts its component requirements for the next three years, including spare parts. Based on the forecast, each party is expected to supply the production volume necessary to meet its program share. Upon the receipt of a purchase order, a party supplies the specified quantity of the referenced components to the importer on consignment. The importer makes entry and is responsible for any duties and fees.

Since the imported components are supplied on consignment, the importer does not pay for them on receipt. Instead, the agreement provides for the component suppliers to share in the total revenues generated by the engine program for a particular period. Every month the importer pays the individual parties an amount for the components and work performed based on a two-part pricing arrangement the terms of which are fixed under the agreement. The first part of the pricing arrangement 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 pricing arrangement returns to each party a proportionate share in the total revenue received by the importer from the sale of finished engines made from the imported and domestic components, less an amount to cover the importer'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 and yet still earn income under the second. Payments received under the second part of the arrangement are not allocated to specific components or services.

The importer has also agreed to purchase any overproduction of parts in the event that the parties supply components in excess of their program shares. The method by which the importer pays for these parts is set forth in the agreement, but varies slightly for each type of engine.

ISSUE:

The issue presented is what constitutes the appropriate basis of appraisement for the imported jet engine components.

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). In the instant case the imported components are not sold. Instead, the components are consigned to the importer who subsequently combines them with domestically produced components to manufacture finished jet aircraft engines. Since the components are not sold to the importer, they cannot be appraised on the basis of transaction value. E.g., HRL 544845.

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.

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 overproduction parts; but counsel for the importer has advised that only some of the consigned components are purchased as overproduction parts. Thus it is not possible to appraise on the basis of the transaction value of identical merchandise. Moreover, we understand that there is no merchandise similar to the imported components. Accordingly, the components cannot be appraised on the basis of the transaction value of 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. Merchandise that is neither sold in its condition as imported, nor before the close of the ninetieth day can still be appraised under deductive value, however, 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 C.F.R. ? 152.105(i)(2)). As a result, the imported 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). The imported aircraft parts are manufactured by a number of different manufacturers, many of which are not party to the agreement. Counsel has advised that information concerning costs is not provided to the importer. Since there is no information on which to base computed value, this method of appraisement is also inapplicable.

When 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 set forth in 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).

The imported components are ultimately sold to the importer on the basis of the pricing arrangement negotiated between the parties. Under the pricing arrangement, set forth in Appendix L of the agreement, the foreign suppliers 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 asserts that only the first part of the price determined pursuant to this arrangement should serve as the basis of appraised value since any amounts returned under the second part are unrelated to the components. These amounts, according to counsel, 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. However, in the instant case costs and charges for assembly are recovered by each party under the second part of the pricing arrangement, specifically, through each party's work share percentage. Since the second part of the pricing arrangement returns to each party its proportionate share of the work program, using the parties' own pricing arrangement as the basis of appraisement does not result in any costs and charges for assembly incurred by the importer in the U.S. being included in the appraised value of the merchandise. For example, the distribution under the second part would return 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 price determined under the pricing arrangement, there is no need to adjust for them under section 402(b)(3). As a result, amounts returned to the sellers (the foreign suppliers) under the second part of the arrangement should be included in the modified transaction value of the merchandise determined in accordance with section 402(f) of the TAA.

HOLDING:

The imported merchandise should be appraised in accordance with section 402(f) of the TAA, pursuant to which the imported components should be appraised under a modified transaction value method based on the price determined under the pricing arrangement negotiated between the parties as set forth in Appendix L of the agreement.

This decision should be mailed by your office to the internal advice requester no later than sixty days from the date of this latter. On that date 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 to the public via the Diskette Subscription Service, the Freedom of Information Act and other public access channels.

Sincerely,


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