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HQ H003845


August 17, 2007

VAL OT:RR:CTF:VS H003845 DCC

CATEGORY: VALUATION

Port Director
U.S. Customs and Border Protection
198 West Service Road
Champlain, NY 12919

RE: Application for Further Review of Protest No. 0712-06-100125; Transaction Value; Related Parties; NAFTA

Dear Port Director:

This is in response to Protest 0712-06-100125 filed by Lindsay B. Meyer, counsel to the foreign producer, hereinafter, the “Seller,” and received by Customs and Border Protection (“CBP”) on July 17, 2006. Counsel filed this Protest and Application for Further Review (“AFR”) to contest the port’s denial of the Seller’s claim that the imported merchandise may be appraised under the transaction value method of appraisement and that the merchandise qualified for a duty exemption under the North America Free Trade Agreement (“NAFTA”). The Application for Further Review of this protest was forwarded to us by your office in a memorandum dated November 16, 2006. In addition to the materials you provided, we also received additional information from the Seller in a submission dated January 12, 2007.

FACTS:

The Seller manufactures coloring products, in Canada for sale in the United States. On June 10, 2005, the Seller imported the two coloring products that are the subject of this protest. As shown on the invoice, dated May 31, 2005, the subject transaction involved the sale of 40,118 pounds of coloring products to an affiliated purchaser, the “Buyer.” The importer classified the coloring products under subheading 3206.49.20, Harmonized Tariff Schedule of the United States (“HTSUS”). The declared value of the merchandise was based on the transfer price between Seller and Buyer of $0.57 per pound, for a total entered value of $22,867.26.

At the time of entry, iron oxide coloring products classified under subheading 3206.49.20, HTSUS, were subject to a 6.5% ad valorem rate of duty. In addition, the Seller claimed NAFTA originating status for the coloring products and entered the merchandise duty free. The Seller provided a copy of the blanket NAFTA certificate of origin that covered the period April 15, 2005 through April 15, 2006. According to this certificate, the Seller claimed that imported product satisfied NAFTA Preference Criterion B, which indicates that the imported merchandise was produced entirely in the territory of one or more of the NAFTA countries and satisfied the specific rule of origin that applies to coloring products. The certificate also states “NO” in the Net Cost column, which indicates that the producer did not rely on the net cost method to satisfy the regional value content criterion.

On December 2, 2005, CBP issued a proposed Notice of Action (CBP Form 29) regarding the Seller’s importation of coloring products in Entry No. 105xxxx-2. According to that notice, on August 26, 2005, the port initiated an origin verification of the coloring products for purposes of determining whether the goods were eligible for NAFTA preferential tariff treatment. The notice also indicates that the NAFTA claim was based on a Certificate of Origin dated April 15, 2005. The notice advised the Seller that the port intended to deny the NAFTA claim because the merchandise did not satisfy the regional value content (“RVC”) criteria. The notice allowed the Seller 30 days to provide additional information to support the claim, and indicated that the claim would be denied if the Seller did not provide additional information.

In response to the proposed Notice of Action, the Seller submitted cost information for raw materials used in the production of the subject merchandise.

On December 30, 2005, CBP issued a second proposed Notice of Action that amended the first proposed Notice of Action dated December 2, 2005. The second notice indicates that the assigned import specialist had conferred with the staff of the Regulatory Audit Division and determined that the Transaction Value method was unacceptable for purposes of determining the RVC and NAFTA eligibility pursuant to 19 C.F.R. 181. The notice further states that subject merchandise failed to meet the RVC criteria under the alternative Net Cost method, and consequently, the merchandise was not eligible for NAFTA preferential treatment.

The Seller subsequently submitted a letter, dated February 1, 2006, to the CBP office in Champlain, New York. In that letter, the Seller claims based on preliminary calculations, that the imported coloring products satisfied the RVC criteria under Net Cost method for December 2005. For that month, the Seller calculated the RVC based on the total cost of raw materials. In addition, the Seller provided other production cost information, including energy; plant and production wages; other manufacturing costs; and general and administrative expenses. Based on this cost information, the Seller calculated a RVC of 51% for its yellow coloring product under the Net Cost method.

On February 9, 2006, CBP issued a Notice of Action taken that informed the Seller that the proper basis of appraisement was the transaction value of identical or similar merchandise pursuant to 19 C.F.R. 152.104, and that the subject merchandise should be appraised on the basis of the lowest price per pound paid by the Buyer’s largest U.S. customer. The Notice further states that the port had conducted a origin verification and determined that the subject merchandise did not qualify for NAFTA. In addition, the notice states that the port determined that the related party transaction was unacceptable as a basis of appraisement and the merchandise would be appraised according to transaction value of identical merchandise under 19 C.F.R. 152.104. To find the transaction value of identical merchandise, the port used the sale between the importer and the importer’s U.S. customer.

On February 24, 2006, CBP liquidated Entry No. 105xxxx-2 in accordance with the February 9, 2006, Notice of Action, and issued a bill to the Seller for additional duties, fees, and interest totaling $1,692.49.

The Seller claims that the merchandise should be appraised under the transaction value method based on the transaction between the Seller and the Buyer. The Seller also claims that subject merchandise is a NAFTA originating good and therefore qualifies for preferential tariff treatment under that program.

ISSUES:

Whether the transfer price between the Seller and the Buyer is an acceptable basis of appraisement under the transaction value method.

Whether the subject merchandise qualifies for a tariff preference under NAFTA.

LAW AND ANALYSIS:

Method of Appraisement

The preferred method of appraising merchandise imported into the United States is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”; codified at 19 U.S.C. § 1401a). Section 402(b)(1) provides, in pertinent part, that the transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus enumerated statutory additions.

When an importer purchaser is related to the foreign exporter seller, the valuation statute stipulates that the “appraised value of imported merchandise shall be determined under the Transaction Value method only if . . . the transaction value is acceptable under the Customs Valuation Statute.” 19 U.S.C. 1401a(b)(2)(A)(iv). However, the mere “fact that the buyer and seller are related is not in itself grounds for regarding the transaction value as unacceptable.” Statement of Administrative Action (“SAA”), H.R. Doc. No. 103-316, 103rd Cong., 2d Sess. (1994), reprinted in Customs Valuation under the Trade Agreements Act of 1979 at 54; Section 152.103(j)(2), Customs Regulations (19 C.F.R. 152.103(j)(2)).

Pursuant to 19 U.S.C. 1401a(b)(2)(B), there are two tests under which the transaction value between related parties may be used as a basis of appraisement: the Circumstances of Sale Method or the Test Values Method. Under the Test Values Method, related party transaction values may be accepted if the subject transaction value closely approximates certain test values set forth in section 1401a(b)(2)(B). Factors considered in determining whether the transaction value closely approximates the test values include the nature of the imported merchandise, the nature of the industry itself, the season in which the goods are imported, whether the difference in value is commercially significant, and whether the difference in value is attributable to internal transport costs in the country of exportation. See 19 C.F.R. 152.103(l)(2).

Under the Circumstances of Sale Method, related party prices may be acceptable if the price was not affected by the relationship between the parties. The SAA provides examples that apply the circumstances of sale test. Under the first example, the Circumstances of Sale test may be satisfied if the pricing between the related parties is consistent with normal industry pricing practices, or with the way the seller deals with unrelated buyers. To make this determination, CBP examines the manner in which the buyer and seller organize their commercial relations and the manner in which the sales price was derived. See 19 C.F.R. 152.103(l)(1)(i).

According to the second example, the related party transactions may be acceptable if an examination of the sale demonstrates that the transfer price is adequate to ensure recovery of all costs plus a profit that is equivalent to the exporter’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind. See HRL 546449, dated January 6, 1998; and 19 C.F.R. 152.103(l)(1)(iii).

In support of its claim, the Importer states that it previously sold coloring products similar to the subject merchandise to unrelated parties in the United States. The Seller submitted invoices for two sales of coloring products to unrelated U.S. buyers. Based on these transactions, the Seller claims that its prices charged to the related Buyer are “comparable and consistent” with the Seller’s prices in sales to unrelated U.S. buyers. The first invoice, dated May 12, 2004, indicates the sale of 42,336 pounds of red coloring product at the price of $0.59 per pound. The second invoice, dated April 28, 2004, indicates the sale of 4,410 pounds of orange coloring product at the price of $0.65 per pound; and 1,323 pounds of black coloring product at the price of $1.10 per pound.

In addition, in its July 14, 2006 submission, the Seller argued that the related party transaction satisfied the conditions of the circumstances of sale test. In particular, the Seller states that the price in the subject transaction was “adequate to ensure the recovery of [ the Seller’s ] costs (approximately $0.49/lb) plus a reasonable profit to enable [ the Buyer ] to recoup its acquisition costs and earn a profit on sales to unrelated U.S. customers.”

We find, based on the information provided, that the Seller failed to demonstrate the acceptability of the related party transaction under the all costs plus profit analysis. The Seller provided information regarding the sale of three types of coloring product for only two sales to unrelated parties in the United States. Because we only have information concerning a limited number of unrelated party transactions, rather than the Seller’s overall profit, we are unable to determine the Seller’s overall profit on sales to unrelated parties.

Furthermore, the profit in the related party transaction must be evaluated on the basis of the Seller’s overall profit earned during a “representative period of time.” Because the sales to unrelated U.S. buyers occurred more than one year before the subject transaction in May 2005, we find that the Seller’s profit in the unrelated sales was not earned during a time period that was representative of the period of the subject transaction.

Finally, we note that the sales to the unrelated buyers involved sales of coloring products of different colors than those sold to the related party, and that the difference in price is significant for the related and unrelated party sales. We received no information, however, to explain why coloring products of different colors should be considered comparable for purposes of evaluating the consistency of the Seller’s pricing practices with related and unrelated buyers. Indeed, according to the Seller’s net cost calculation for its yellow coloring product, the colorant represents 48.7% of the Seller’s total cost of production. Moreover, there was significant variance in the price of some of the coloring products. For example, the price of the black coloring product, which was sold to an unrelated buyer, was 93% higher than the price of the coloring products in the subject transaction. Based on this significant price difference, we find that the coloring products in the related and unrelated party transactions are not comparable.

Because there is insufficient information to evaluate the Seller’s profitability on sales of the subject merchandise we find that the imported coloring products may not be appraised under the transaction value method. 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. 1401a(f)). We also note that merchandise may not be appraised on the basis of the Buyer’s resale price to customers in the United States.

NAFTA Preference Eligibility

To be eligible for tariff preferences under NAFTA, goods must be “originating goods” within the rules of origin set forth in General Note (“GN”) 12(b), HTSUS, and the NAFTA Rules of Origin Regulations, Appendix to Part 181, Customs Regulation (19 C.F.R. Appendix to Part 181) (the “Rules of Origin”). For coloring products classified under 3206.49, HTSUS, General Note 12(t)/32.8 require either a change in tariff classification, or a change in tariff classification plus a certain RVC, as follows:

A change to subheadings 3206.11 through 3206.50 from any other chapter, except from chapter 28 through 38; or

A change to subheadings 3206.11 through 3206.50 from any other subheading within chapter 28 through 38, including another subheading within that group, whether or not there is also a change from any other chapter, provided there is a regional value content of not less than:

60 percent where the transaction value method is used; or

50 percent where the net cost method is used.

The coloring products were produced in Canada with a non-originating material that is classified under subheading 2821.10, HTSUS, accordingly the imported merchandise does not satisfy the change in tariff classification requirement of GN 12(t)/32.8(A). Consequently, the imported coloring product must also satisfy the regional value content requirement in GN 12(t)/32.8(B) in order to be originating. According to the Seller, the non-originating material constitutes 32.4% of “total batch value” of the first coloring product and 33.3% of the second coloring product. Based on these calculations, the Seller claims that “both products are comprised of well over the 60% RVC requirement with both products containing greater than 68% and 67% originating material, respectively.”

General Note 12(c), HTSUS, provides the methods of calculating RVC for purposes of NAFTA. The net cost method is set forth in General Note 12(c)(ii), HTSUS. General Note 12(c)(ii), HTSUS, provides:

The regional value content of a good may be calculated on the basis of the following net cost method:

RVC = (NC - VNM) / NC x 100.
where

RVC is the regional value content, expressed as a percentage;

NC is the net cost of the good; and

VNM is the value of the non-originating materials used by the producer in the production of the good.

As described in 19 C.F.R. Part 181, Appendix, Part III, Sec. 6, the calculation of the RVC under the net cost method requires the proper calculation of the total cost and excluded costs. Subsection (12) of section 6 addresses “total cost” and states that “[t]otal cost . . . consists of the costs referred to in section 2(6), and is calculated in accordance with that subsection.”

In this case, the Seller provided certain cost data related to the cost of production. Attachment 1 of the Seller’s July 14, 2006 submission included information regarding the cost of raw materials and other costs related to the production of its yellow coloring product for December 2005.

According to the cost data reported in Attachment 1, the total costs for the yellow coloring product were $294,201.90. The Seller does not explain how these cost data relate to the price of the imported merchandise in the related party transaction given the fact that the total cost data are more than ten times greater than the value of the merchandise in the related party transaction and in light of the fact that the subject merchandise was imported six months before the summation of costs data reported in Attachment 1. The Seller also does not explain whether any of the Net Costs adjustments were made for “excluded costs,” “product costs,” “period costs,” and “other costs” as prescribed in section 2(6) of the Appendix to the Rules of Origin Regulations. We therefore find the information provided in the July 14, 2006 submission insufficient for purposes of determining whether the imported merchandise satisfies the RVC requirement under the net cost method.

The Seller also provided cost data in Exhibit 5 of its January 12, 2007 submission. The calculations in that exhibit allegedly show that the value of the non-originating material is 32.4% for the first product and 33.3% for the second product. Based on these calculations, the Seller claims that the 60% minimum RVC requirement is satisfied.

We find that the information in Exhibit 5 does not demonstrate that the RVC requirement is met. For both coloring products, the Seller simply calculates the value of the non-originating material as a percentage of the sales price for the finished product. As described above, however, the net cost method of calculating the RVC is based on the net costs of the good rather than the transaction value. Furthermore, the net cost method requires a determination of the total cost as described in the Rules of Origin Regulations. It is not sufficient to simply assert that the value of the non-originating material is less than a certain percentage of the transaction value of the good.

Based on the data provided we find that there is insufficient information to demonstrate that the imported coloring products satisfy the RVC requirement under the net cost method.

HOLDING:

The protest should be DENIED with regard to the use of transaction value for purposes of appraisement. The protest should also be DENIED with regard to the claim NAFTA preferential tariff treatment.

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

Sincerely,

Myles B. Harmon, Director

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