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HQ 559154




December 8, 1995

CLA-2: RR:TC:SM 559154 BLS

CATEGORY: CLASSIFICATION

TARIFF NO.: 9802.00.80

David R. Ostheimer, Esq.
Lamb & Lerch
233 Broadway
New York 10279

RE: Reconsideration of HRL 557841; use of a weighted-average method of accounting in determining the duty allowance under subheading 9802.00.80, HTSUS, for U.S.- origin tires; transaction value of similar merchandise; 19 U.S.C. 1401a(a)(1)(C); 19 U.S.C. 1401a(h)(4)(B); 19 CFR 10.17; 557615

Dear Mr. Ostheimer:

This is in reference to your letter dated April 11, 1995, on behalf of Mazda Motor of America, Inc. ("MMA"), requesting that we reconsider Headquarters Ruling Letter (HRL) 557841 dated December 22, 1994, which held that a weighted-average method of accounting could not be used to determine the duty allowance under subheading 9802.00.80, Harmonized Tariff Schedule of the United States (HTSUS). In the alternative, you ask that we find as the best evidence of the cost of the U.S.-fabricated tires when last purchased F.O.B., U.S. port of export, the transaction value of similar tires under section 402 of the Tariff Act of 1930, as amended (19 U.S.C. 1401a(a)(1)(C)). This ruling should be read in conjunction with, and is made a part of, HRL 557841.

FACTS:

The duty allowance to be applied under subheading 9802.00.80, HTSUS, relates to U.S.-fabricated tires used on the Miata MX-5s produced in Japan and imported into the U.S. by MMA. You state that the following scenario is illustrative of the factual situation involved:

During the initial 125 days of production of a Model Year, Mazda Motor Corporation ("MC") produces 10,000 Miata MX-5s for export to the U.S. MC uses 40,000 U.S.-fabricated tires in the production of these 10,000 Miatas. MC's records establish that the inventory of tires used in the production of these 10,000 Miatas consisted of 30,000 U.S.-fabricated tires produced by Bridgestone/Firestone (BFI) which are directly traceable
to BFI export invoices, retained by BFI Japan, having an actual f.o.b., U.S. port of export price of $32.00 and 10,000 U.S.- fabricated tires produced by Dunlop which are directly traceable to Dunlop export invoices retained by Dunlop Japan, having an actual f.o.b., U.S. port of export price (hypothetical) of $28.00.

During the next 70 days of production, MC produces 4,400 Miata MX-5s for export to the U.S. MC uses 17,600 U.S.-fabricated tires in the production of these 4,400 Miatas. MC's records establish that the inventory of tires used in the production of these 4,400 Miatas consisted of 13,200 U.S.-fabricated tires produced by BFI which are directly traceable to BFI export invoices retained by BFI Japan, having an actual f.ob., U.S. port of export price of $30.00 and 4,400 U.S.-fabricated tires produced by Dunlop which are directly traceable to Dunlop export invoices retained by Dunlop Japan, having an actual f.o.b., U.S. port of export price of $28.00.

During the final 170 days of production, MC produces 15,600 Miata MX-5s for export to the U.S. MC uses 62,400 U.S.-fabricated tires in the production of these 15,600 Miatas. MC's records establish that the inventory of tires used in the production of these 15,600 Miatas consisted of 46,800 U.S.-fabricated tires produced by BFI which are directly traceable to BFI export invoices retained by BFI Japan, having an actual f.o.b., U.S. port of export price of $31.00 and 15,600 U.S.-fabricated tires produced by Dunlop which are directly traceable to Dunlop export invoices retained by Dunlop Japan, having an actual f.o.b. U.S. port of export price of $28.00.

For the entire Model Year, MC produced 30,000 Miatas. MC's records establish that of the 120,000 U.S.-fabricated tires used in the production of these 30,000 Miatas, 90,000 were U.S.-fabricated tires produced by BFI whereas 30,000 were U.S.-fabricated tires produced by Dunlop. Utilizing the weighted-average method results in a price of $31.00 per tire for the initial 125 day production period (10,000 Miatas); a price of $29.50 per tire for the next 70 day production period (4,000 Miatas); and $30.25 per tire for the remaining 170 day production period (15,600 Miatas). (Calculation of the price per tire for the 170 day period, for example, is as follows: 46,800 BFI tires x actual invoice price of $31.00 = $1,450,800; 15,600 Dunlop tires x actual invoice price of $28.00 = $436,800; total price of 62,400 tires = $1,887,600, which results in a weighted average price, based on the actual quantity ratio, of $29.50 per tire.)

You argue that this weighted-average methodology provides an accurate and reliable system whereby the allocation of actual prices on a weighted-average basis can be used to establish an acceptable and verifiable value for determining the subheading 9802.00.80, HTSUS, allowance in accordance with existing law and regulations. In the alternative, you believe that the transaction value of similar merchandise (19 U.S.C. 1401a(a)(1)(C)), to calculate the subheading 9802.00.80, allowance is acceptable, pursuant to 19 CFR 10.17, as evidence of the cost of the U.S-fabricated BFI and Dunlop tires when last purchased, f.o.b. port of export.

ISSUES:

1) Whether the proposed weighted-average method of accounting may be used to calculate the duty allowance for the U.S.-fabricated tires under subheading 9802.00.80, HTSUS.

2) Whether, under the facts in this case, the transaction value of similar merchandise, 19 U.S.C. 1401a(a)(1)(C), may be used to calculate the subheading 9802.00.80, HTSUS, allowance, if the cost of the U.S-components when last purchased, f.o.b. U.S. port of exportation or point of border crossing, cannot be ascertained.

LAW AND ANALYSIS:

1) Weighted-Average Method of Accounting

In determining the duty allowance under subheading 9802.00.80, HTSUS, section 10.17, Customs Regulations (19 CFR 10.17), provides that "the value of fabricated components to be subtracted from the full value of the assembled article, if acquired by purchase, 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." However, if the appraising officer concludes that the cost or value of the fabricated components so ascertained does not represent a reasonable cost or value, then the value of the components shall be determined in accordance with section 402 or section 402a, Tariff Act of 1930, as amended (19 U.S.C. 1401a, 1402)." It is Customs opinion that the "cost of components when last purchased" refers to the price in effect at the date of exportation.

In HRL 557841, we rejected the weighted-average method of acounting proposed to be used in determining the cost of the U.S.-fabricated tires for purposes of subheading 9802.00.80, HTSUS. We distinguished this methodology from the system proposed in HRL 557615 dated September 7, 1994, which we accepted for purposes of determining the cost of components when
last purchased. In comparing the two methodologies, we stated the following:

We are of the opinion that the weighted average method of accounting which you propose to use to determine the cost of U.S.-fabricated tires for purposes of subheading 9802.00.80, HTSUS, is not an acceptable method. We believe that the methodology which you propose to use is distinguishable in several respects from the methodology used in HRL 557615. In HRL 557615, the methodology used for determining the cost of the components when last purchased was based on a system of actual prices paid, and not on estimates or averages, as in the instant case. The price for a particular part in HRL 557615 was based upon the appropriate turnaround time for the part [normal interval between the day a U.S. part is exported from the U.S. and the day a motor vehicle incorporating that part is exported from Japan], and thus, by using this methodology the actual cost of a part could be linked to a specific vendor invoice for that part on the day of exportation from the U.S. In the instant case, you propose to average the cost of the tires over an unspecified period of time.

Although all of the tires in the instant case are of U.S.-origin, MMA is not able to verify to the district director the actual cost of a particular tire as required under 19 CFR 10.17, since the methodology which you propose to use does not relate the tires to a particular invoice price that was paid for a particular tire at the time of export. No provision is made in the instant case for fluctuations in the price of the tires over the one year period during which you intend to use an average method of accounting. Moreover, the parts in HRL 557615 were sourced from only one supplier and the part number for a particular part was assigned to a single turnaround time. In the instant case, the parts are purchased from two different U.S. vendors and, based on Mazda Motor Corporation's record keeping system, the particular manufacturer of the tires cannot be identified from the invoice as the Dunlop tires and the BFI tires have been assigned the same part number.

In the illustrative scenario presented, MC's records establish the prices of both the BFI and Dunlop tires for the specific period in question, traceable to export invoices, and the quantity of tires purchased from each source during this period. You state that the prices for the Dunlop and BFI tires to be used under this methodology are ascertainable and verifiable. However, while the "weighted-average" system proposed is based on actual prices, it is, after all, an averaging methodology which uses a value for a particular tire not traceable to a specific vendor
invoice. As we stated in HRL 557841, "...MMA is not able to verify to the district director the actual cost of a particular tire as required under 19 CFR 10.17, since the methodology...does not relate the tires to a particular invoice price that was paid for a particular tire at the time of export." We further noted that "...the parts are purchased from two different U.S. vendors and, based on Mazda Motor Corporation's record keeping system, the particular manufacturer of the tires cannot be identified from the invoice [for the vehicle] as the Dunlop tires and the BFI tires have been assigned the same part number." Under the circumstances, we affirm our holding in HRL 557841 and find that the proposed weighted-average methodology for determining the cost or value of the U.S. components for purposes of calculating the allowance under subheading 9802.00.80, HTSUS, is not acceptable.

2) Transaction Value of Similar Merchandise

Pursuant to section 10.17 of the Customs Regulations (19 CFR 10.17), if the appraising officer concludes that the cost or value of fabricated components to be subtracted from the full value of the assembled article does not represent a reasonable cost or value, the value of the components shall instead be determined in accordance with section 402 of the Tariff Act of 1930, as amended. Since the proposed weighted-average method of accounting does not represent an acceptable means of determining the value of the subject tires, their value must instead be determined under section 402.

Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a), enumerates a hierarchy of methods for the valuation of imported merchandise. The preferred basis of valuation is transaction value, defined as the price actually paid or payable for the merchandise. However, if the value of the merchandise cannot be determined on this basis, it must be valued in accordance with the first applicable method arived at through a sequential application of the statutorily enumerated methods

In the instant case, Mazda's record keeping system does not enable it to identify the U.S. manufacturer and price of the tires on a vehicle-by-vehicle basis since they are assigned the same part number. Accordingly, the price actually paid or payable for the tires cannot be determined and the use of transaction value is inapplicable. The next potential basis of valuation is the transaction value of identical merchandise; however, this method is also inapplicable because there is no merchandise that is identical in all respects to the brands of tires used on the imported automobiles.

The next method provided for under the TAA is the transaction value of similar merchandise. The term "similar merchandise" is defined in the alternative as being merchandise that: (i) was produced in the same country as, but not by the same person, as the merchandise being valued; (ii) is like the merchandise being valued in characteristics and component material; and (iii) is
commercially interchangeable with the merchandise being valued. 19 U.S.C. 1401a(h)(4)(B). Although no specific information has been presented concerning the characteristics of the subject tires, assuming the cognizant import specialist is able to identify other U.S. produced tires that are comparable with the Dunlop and BFI tires in terms of characteristics and components and are commercially interchangeable therewith, it is our position that the transaction value of similar merchandise represents an acceptable method for determining the value of the tires for purposes of 19 CFR 10.17.

HOLDING:

1) The use of a weighted-average method of accounting for purposes of calculating the allowance under subheading 9802.00.80, HTSUS, is not acceptable as evidence of "the cost of the components when last purchased, f.o.b. U.S. port of exportation," under 19 CFR 10.17.

2) Assuming the concerned customs officer is able to identify other U.S.-produced tires that are comparable with the Dunlop and BFI tires in terms of characteristics and components and are commercially interchangeable with such tires, the transaction value of similar merchandise will represent an acceptable method for determining the value of the U.S.-fabricated tires for purposes of 19 CFR 10.17 at the time of export.

A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction. Sincerely,

John Durant, Director

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