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HQ 548149

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August 21, 2002

RR:IT:VA 548149er
CATEGORY: VALUATION

Port Director
Laredo, Texas

RE: Request for Internal Advice; Computed Value; Pass and Destroy materials; Field Disasters.

Dear Port Director:

This is in response to your request for internal advice dated May 22, 2002, concerning Pillsbury Company (“Pillsbury”) and its wholly owned subsidiary in Mexico, Gigante Verde (“GV”).

You inform us that General Mills Corporation has now acquired Pillsbury. The change in ownership does not affect the outcome of this decision.

FACTS:

GV contracts with farmers in Mexico to grow vegetables. GV processes the vegetables at its plant for retail sale in the United States. The vegetables are exclusively for Pillsbury, who imports them into the United States. As computed value is used as the basis of appraisement for the imported merchandise, Pillsbury provides you with cost submissions on an annual basis.

In your memorandum you describe that in a meeting in June 2000 between representatives from your office and counsel and accountants for Pillsbury, certain information was provided regarding computed value costs submissions made to Customs for 1997 and 1998. Specifically, the cost submissions contain exclusions for “pass and destroy” materials and costs incurred with respect to field disasters. You included a copy of Pillsbury’s cost submission with your request.

Pillsbury defines “pass and destroy” materials as vegetables which are removed from the fields in which they are planted and taken to the GV plant for processing, but are rejected for quality control purposes and are destroyed. Pillsbury contends that because the rejected vegetables are not used in the production process to prepare the vegetables for retail sale, the costs incurred in growing them and transporting them to the plant are not components of computed value.

Similarly, in 1997 Pillsbury made an exclusion for a freeze, which completely destroyed certain fields of vegetables that were being grown for the GV plant. Pillsbury reasoned that because none of the vegetables in the affected fields could be used in production, then the costs associated for growing the vegetables are not components of computed value.

You indicate that in the June 2000 meeting, Pillsbury’s counsel stated that the firm would be submitting a request for internal advice to Laredo on the subject issues in the near future, and would additionally provide the Pharr office with copies of all correspondence pertaining to the request. You also indicate that on September 27, 2000, the Pharr office received a letter from counsel stating that the firm would shortly forward the request for internal advice. Lastly, you indicate that on April 21, 2001, the Pharr office contacted Pillsbury to ask if counsel had filed the request for internal advice. Pillsbury contacted their counsel who replied that they were preparing something on this matter and would contact Pillsbury about it at a later date. The Pharr office contacted Pillsbury and requested copies of the request should Pillsbury receive the request before the Pharr office. To date, the Pharr office has not received any correspondence pertaining to the internal advice request.

Finally, in a telephone conversation between this office and a member of your staff, it was confirmed that Pillsbury had not submitted any records of the producer’s commercial accounts to reflect how the producer records the expenses at issue.

ISSUE:

Whether the items identified in the submitted cost submission as “pass and destroy” materials and costs incurred with respect to field disasters may be excluded from the computed value calculation for purposes of appraising the imported merchandise?

LAW AND ANALYSIS:

Section 402(e) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(e); TAA) provides:

The computed value of imported merchandise is the sum of the cost of value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise; 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 producers in the country of exportation for export to the United States any assist, if its value is not included under subparagraph (A) or (B); and the packing costs.

The Statement of Administrative Action (“SAA”), adopted by Congress with the passage of the TAA, provides that with respect to computed value:

The cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise will be determined on the basis of information supplied by, or on behalf of, the producer and will be based upon the commercial accounts of the producer, if such accounts are consistent with the generally accepted accounting principles applied in the country where the goods are produced.

The ‘amount for profit and general expenses’ will be determined on the basis of information supplied by, or on behalf of, the producer and will be based upon the commercial accounts of the producer, provided that such accounts are consistent with the generally accepted accounting principles applied in the country where the goods are produced and unless the figures provided are inconsistent with those usually reflected in sales, or merchandise of the same class or kind as the imported merchandise, that are made by producers in the country of exportation for export to the United States.

Statement of Administrative Action, H.R. Doc. No. 153, Pt. II, 96th Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (1981).

Senate Report 96-249 to Public Law 96-39 adds that “determination of an acceptable computed value generally would require the producer to supply all the necessary cost information[t]he bill also would provide for the use of the producer’s own general expenses and profit unless such amount is inconsistent etc” Thus, the legislative history of the TAA stresses reliance on the producer’s books to obtain figures from which a computed value can be calculated.

As explained above, the importer requests exclusions from the computed value of the merchandise for certain amounts identified on their cost submissions as “pass and destroy” materials and costs incurred with respect to field disasters. No information, however, was submitted reflecting how the producer maintains its accounts with regard to these costs, nor has the importer demonstrated that such costs are inconsistent with expenses that are usually reflected in sales of merchandise of the same class or kind as the imported merchandise. See, e.g. HRL 545384 dated November 23, 1993. The only information submitted is a copy of the cost submission provided to you by the importer which reflects that the field disasters are identified as costs for “raw product”. Likewise the cost submission reflects that the “pass and destroy” materials are identified under their own heading. The information presented to you by the importer is inadequate to allow for exclusions from the computed value calculation for the identified costs. Accordingly, the amounts identified as “pass and destroy” materials and field disasters should be included in the computed value calculation for the imported merchandise.

Even if the importer presents you with additional information regarding the producer’s commercial accounts, we believe that the “pass and destroy” materials are analogous to quality control expenses which constitute usual and recurring expenses. Such expenses are components of computed value and may not be excluded from the calculation. (See, e.g.HRL 543239 dated January 24, 1984 where Customs ruled that a sculpture which was imported several times during its development for review was appraised under computed value. The sculpture’s computed value is progressively higher on each importation to account for all of the costs to produce it.) Whether these expenses are dutiable under either 19 U.S.C. 1401a(1)(A) or (B) as a cost of fabrication or as part of profit and general expenses depends in part on how they are treated in the producer’s commercial accounts.

However, as regards the field disaster, assuming you are presented with the producer’s commercial accounts, we believe that expenses associated with such are analogous to fire loss expenses. Such expenses may be construed as extraordinary expenses under generally accepted accounting principles and are not included in computed value, so long as they are not recorded in the producer’s commercial accounts as either general expenses or as fabrications costs. See, e.g. 544863 dated September 29, 1994.

HOLDING:

Given the absence of information on how the producer maintains its commercial accounts with respect to the costs at issue, the amounts identified for “pass and destroy” materials and field disasters should be included in the computed value calculation for the imported merchandise. If, however, the importer does provide you with copies of the producer’s records, and the costs at issue are recorded in a satisfactory manner, as described above, then the amounts associated with "pass and destroy” materials would be included in the computed value but the amounts associated with the field disaster could be excluded.

You are to mail this decision to the affected party no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page of the World Wide Wed at www.customs.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Virginia L. Brown, Chief
Value Branch

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