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HQ W563428

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April 11, 2007

OT:RR:IT:VA 563428 GG

CATEGORY: VALUATION

U.S. Customs and Border Protection
Field Director, Regulatory Audit Division 555 Battery Street, Room 314
San Francisco, CA 94111

RE: Request for Internal Advice; Valuation; Maxim Integrated Products, Inc.; Dallas Semiconductor Corporation; Assembly Operations; Sale for Exportation.

Dear Madam:

This is in response to your internal advice request dated December 15, 2005, concerning the valuation of products imported by Maxim Integrated Products, Inc. (Maxim) and by its wholly owned subsidiary, Dallas Semiconductor Corporation (Dallas Semiconductor). Previously, this office replied to an earlier internal advice request from your office on the same issue, dated April 8, 2004, but then withdrew our response after it became evident that the facts were still developing. We base our response to this most recent internal advice request on information contained in both requests, in letters from Maxim dated February 17, 2004, and March 21, 2005, and in a May 18, 2004, letter from Maxim’s representative in this matter, PricewaterhouseCoopers LLP. The letters appear to represent the interests of Dallas Semiconductor as well as those of Maxim.

FACTS:

Maxim and Dallas Semiconductor manufacture integrated circuits (“IC’s”) using a “front-end” manufacturing process undertaken in the United States, and a “back-end” manufacturing process undertaken outside of the United States. The front-end production process involves the fabrication of components known as “wafers.” The wafers are then sent to unrelated subcontractors in the Philippines, Malaysia, Thailand, and South Korea for assembly into integrated circuits

The assemblers also produce “modules” for Dallas Semiconductor.. Maxim retains ownership of the components, and of the finished products, throughout the entire process. The foreign subcontractors separate the wafers into individual IC’s and assemble them into a variety of packages. Thereafter, the majority of finished IC’s are sent to Maxim’s related parties in the Philippines and Thailand for testing and packaging (some finished IC’s are tested by Maxim in the United States). Together, the assembly and test procedures are known as “back-end” manufacturing. After testing, the finished products are placed in inventory at Maxim’s foreign distributor, Maxim Philippines Corporation (“MPAC”).

Before sending its wafers to the assemblers, Maxim receives purchase orders (via email, fax, or EDI) from its customers for approximately 76% of the products that will be assembled. These purchase orders indicate the customer’s identity, the ship-to location of the customer, the product to be manufactured, the quantity ordered, and the expected ship date. According to Maxim, the requirement of a valid purchase order is Maxim’s primary control mechanism to prevent the assembly of product for which there is no present customer. For products where there is sufficient inventory at MPAC, orders are filled from MPAC’s inventory rather than waiting for new batches to be assembled.

For an approximate additional 10% of the product to be assembled overseas, Maxim places a reservation order that is based on a materials resources planning (“MRP”) analysis provided by a customer and allows shipment to assemblers prior to the receipt of the customer’s purchase order. If a purchase order is not received within six weeks of the reservation being placed, the reservation will typically be cancelled.

With regard to the remaining approximate 14% of production, Maxim manufactures 1% for buffer, 6% for customer forecast, and 7% for excess. Buffer assembly orders flow into the inventory buffer, which is inventory held to meet unexpected demand. Customer forecast orders are based on Maxim’s internal forecasts of future demand. If that future demand materializes, the order may flow directly to the customer. However, if the future demand does not materialize, the merchandise will be held in inventory.

The excess category is described as a “catch-all” category for assembly orders that do not meet the other categories. Excess includes lot rounding and the assembly of new products. Lot rounding occurs when Maxim receives an order for a quantity that does not evenly match up to the number of devices that can be manufactured from a wafer. For example, if a wafer produces 10,000 devices, and a customer wants only 8,000 devices, Maxim will process the full wafer and 2,000 of the 10,000 devices will flow into excess. In addition, when Maxim introduces a new product it must build a small inventory of the new items to provide to customers for testing and design use. These new products will flow into excess. A portion of this 14% will be sent to the United States for inventory. All of Maxim’s finished products are assembled overseas. The percentage tested overseas and passing through MPAC’s inventory has increased over time, from about 70% to 75% in July 2000, 80% in April 2002, and 96% to 97% around June 2004. The remainder was tested in the United States. Prior to June 2004, products tested in the United States were shipped directly from the assembler to the United States. After that, some products were shipped from the assembler through MPAC before being sent to the United States for testing.

After testing, all of the finished products tested overseas are shipped directly to MPAC and entered into MPAC’s inventory. Products for which there are existing customer orders are then shipped directly to those customers around the world, and sales invoices are sent to those customers to complete the sales. Approximately 77% or 78% of the products are shipped to non-U.S. customers. In some cases, products intended for one customer upon leaving the assembler are reassigned to another customer before shipping from MPAC.

Those products for which there are no customer orders remain in storage at MPAC until customer orders are received, or the merchandise is shipped to Maxim for placement in inventory, which may be months or years later.

ISSUE:

What is the correct basis of appraisement for the imported merchandise.

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 five statutorily enumerated additions. 19 U.S.C. § 1401a(b)(1).

Maxim takes the position that its merchandise may be appraised under transaction value, using the amount for the assembly of the imported integrated circuits and modules in accordance with section 152.103(a)(3) of the Customs Regulations (19 CFR § 152.103(a)(3)). This regulation provides:

Assembled merchandise. The price actually paid or payable may represent an amount for the assembly of imported merchandise in which the seller has no interest other than as the assembler. The price actually paid or payable in that case will be calculated by the addition of the value of the components and required adjustments to form the basis for the transaction value.

Maxim claims that its imported merchandise should be appraised in accordance with this regulation because all of the merchandise undergoes assembly abroad. CBP Regulatory Audit is of the opinion that the assembly cost may not be used as the transaction value except in those cases where the finished products are shipped directly from the assembler to the United States. This opinion is based on Regulatory Audit questioning whether the assembled items are “sold for exportation.” Its doubts center around the fact that most of the assembled goods are placed into MPAC’s inventory, from where they may be shipped anywhere in the world. Regulatory Audit notes that approximately 77% to 78% of the finished products are sold to non-U.S. customers, and that even when assembly occurs as the result of the placement of an order by a U.S. customer, some or all of the assembled items may be diverted to fulfill other – possibly non-U.S. – orders elsewhere.

As support for its proposition that appraisement may be based on the assembly price, Maxim refers to the court case of E.C. McAfee Company v. United States, 842 F.2d 314 (Fed. Cir. 1988). In that case, the goods at issue were made-to-measure clothing for individual United States customers. The customers placed an order with a middleman, a Hong Kong distributor. On receipt of an order, the middleman contracted with tailors in Hong Kong to produce the clothing and ultimately arranged for its shipment to the customers in the United States. The court found that the clothing sold by the manufacturers to the middleman was for exportation to the United States. In reaching this conclusion the court stated:

Where clothing is made-to-measure for individual United States customers and ultimately sent to those customers, the reality of the transaction between the distributors and the tailors is that the goods, at the time of the transaction between the distributor and tailors, are "for exportation to the United States." Apart from this factor, there is no dispute that the merchandise was being made for export to the United States. 842 F.2d at 319.

The court also noted "if the transaction between the manufacturer and the middleman falls within the statutory provision for valuation, the manufacturer's price, rather than the price from the middleman to his customer, is used for appraisal." 842 F.2d at 318. In McAfee, the manufacturer’s price was an assembly price, which according to the court could be a viable transaction value in accordance with 19 CFR § 152.103(a)(3).

Citing to McAfee, Maxim argues that the fact of having pre-existing purchase orders from its U.S. customers prior to assembly proves that the integrated circuits and modules are sold for exportation to the United States. Consequently, it is Maxim’s assertion that it may use the assembly price between Maxim and the foreign assemblers.

We find Maxim’s reliance on McAfee to be misplaced. The court in that case cautioned:

A determination that goods are being sold or assembled for exportation to the United States is fact-specific and can only be made on a case-by-case basis. Thus, while the analysis here sets forth a general approach to the problem, we wish to make clear that all assembly transactions where the assembled goods eventually reached the United States do not ipso facto provide the basis for valuation under section 1401a. 842 F.2d at 319.

We think that a clear distinction can be drawn between the made-to-measure clothing in McAfee and the integrated circuits and modules that are the subject of this ruling. In McAfee, all of the suits were eventually shipped to the United States to the customers for whom they were tailored. In contrast, after assembly and testing most of the integrated circuits enter MPAC’s inventory, where they may remain for an indefinite period. From inventory, products originally intended for one of Maxim’s U.S. customers may be diverted to another customer anywhere in the world. For these reasons we find the McAfee decision to be distinguishable.

There is a presumption that merchandise shipped to an intermediate country is not sold for exportation to the United States. In this regard, 19 CFR § 152.23 provides:

§ 152.23 Merchandise imported from intermediate countries. Merchandise imported from one country, being the growth, production, or manufacture of another country, shall for value purposes (see sections 402, Tariff Act of 1930, as amended; 19 U.S.C. 1401a) be treated as an exportation of the country from which it is immediately imported. However, if it appears by the invoice, bill of lading, or other evidence that the merchandise was destined for the United States at the time of original shipment, it shall be treated as an exportation of the country from which it was originally imported . . .

Although Maxim did not cite to this particular regulation, in its letter of March 21, 2005, it did present an argument that, if accepted by CBP, would serve to rebut the presumption. Maxim points out that over 85% of its wafers are sent to overseas assemblers pursuant to a purchase order or a customer MRP analysis which identifies the customer and ship-to address before the integrated circuits and modules leave the assemblers’ premises. Thus, its argument presumably would be that there is sufficient evidence to show that the merchandise was destined for the United States at the time of original shipment from the various assemblers.

Several rulings are instructive on this point. In HRL 542310, dated May 22, 1981, a U.S. company purchased drill bits from its related subsidiary in Italy. Occasionally, the Italian subsidiary would produce drill bits that it then sent to its marketing facility in France for temporary storage. This temporary transfer was reflected on the books of the U.S. importer as a sale from the Italian producer, although the books also reflected that the drill bits were physically located in France. The importer made full payment to its Italian subsidiary for all drill bits sent from Italy to the marketing facility in France. If the drill bits sent to France were ultimately sold in Europe, the French marketing facility paid the U.S. importer for the drill bits. CBP determined that transaction value did not apply because it was apparent that the drill bits may or may not be destined for the United States at the time of the sale between the U.S. purchaser and Italian supplier.

In a more recent ruling, HRL 563551, dated October 12, 2006, children’s merchandise was produced in Sri Lanka and shipped to a warehouse in Canada, where it was packaged for shipment to the United States to fill existing U.S. orders, or stored until resold to customers in the United States. CBP determined that there was no sale for exportation to the United States at the time the merchandise was shipped from Sri Lanka. In reaching this conclusion, CBP considered the fact that the Canadian importer sold the same products in Canada and the United States, thus creating an unacceptable contingency of diversion. CBP also noted that clearly there was no sale for exportation to the United States from Sri Lanka in those instances when Sri Lankan merchandise was entered into the Canadian company’s inventory pending the placement of an order from a U.S. customer.

Applying 19 CFR §152.23 and these rulings to Maxim’s situation, it is evident that the integrated circuits and modules, which are assembled in the Philippines, Malaysia, Thailand or South Korea before being placed into MPAC’s inventory in the Philippines, are not sold for exportation to the United States from their respective countries of assembly. (In the case of products assembled in the Philippines, there is still an unacceptable risk of diversion once they are entered into MPAC’s inventory). Maxim may not, therefore, base its appraisement on the assembly price under transaction value.

The question still remains, however, as to the correct manner of appraising the imported integrated circuits and modules, including those that, after leaving MPAC, are shipped directly to Maxim’s customers and those that are shipped from MPAC to Maxim to be placed in its own inventory. It has been suggested that appraisement may be based on the price paid to Maxim by its U.S. customers under transaction value. However, the same impediment to the use of transaction value – i.e., no sale for exportation – exists for those 76% of products for which purchase orders have already been placed prior to assembly, unless possibly an order is filled from existing inventory (see discussion below). The merchandise must instead be appraised in accordance with the next available appraisement method, which would be the transaction value of identical or similar merchandise, deductive value, computed value, or a “fallback method.” As you know, these appraisement methods must be applied in sequential order. We do not have any information with which to advise you as to which of these methods might apply.

The use of transaction value would be appropriate in instances when a customer of Maxim places an order after the merchandise has already been assembled and placed into MPAC’s inventory. Since the integrated circuits and modules are shipped directly to the U.S. customers upon withdrawal from MPAC’s inventory, the requirement of a sale for exportation to the United States will have been satisfied. Provided all the other requirements of transaction value have been met, merchandise ordered from MPAC’s existing inventory may be appraised under transaction value using the price paid by the customer to Maxim.

With respect to integrated circuits and modules that are shipped from MPAC to Maxim for placement into Maxim’s inventory, transaction value is eliminated because there has been no sale. As with the 76% of integrated circuits and modules for which customer orders already exist, these particular items must be appraised using the next available appraisement method.

Finally, it would be appropriate to appraise any integrated circuits and modules that are shipped directly from the assemblers to Maxim in the United States under transaction value, using the assembly price in accordance with 19 CFR § 152.103(a)(3). (Items sent directly from the testing facilities would also qualify.) Transaction value based on the assembly price is acceptable under this scenario because the concern about diversion that exists when products enter MPAC’s inventory would not apply.

HOLDING:

The integrated circuits and modules may be appraised under transaction value when they are sent directly from the assemblers (or testing facilities) to Maxim, or when they are ordered directly from MPAC’s existing inventory. In the former circumstance, the transaction value may be based on the assembly cost in accordance with 19 CFR § 152.103(a)(3). In the latter instance, the price paid by the U.S. customer to Maxim will form the basis of transaction value. All other merchandise must be appraised using the next available appraisement method.

Please mail this decision to Maxim 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 CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Monika R. Brenner
Chief

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