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HQ W563531





October 27, 2006

VAL RR:CTF:VS W563531 HEF

CATEGORY: VALUATION

Field Director
Regulatory Audit Division
U.S. Bureau of Customs and Border Protection 10 Causeway Street, Room 801
Boston, MA 02222-1059

RE: Internal Advice Request; Price Actually Paid or Payable; Allocation of Tooling Payments

Dear Sir:

This letter is in response to a request for internal advice that you forwarded to this office on June 19, 2006, memorandum (AUD-5:RA DD). The request for internal advice arises from a Focused Assessment Pre-Assessment Survey and concerns the issue of whether certain payments for “under-amortized tooling costs” paid by the importer, Reebok International, Ltd. (“Reebok”), to the foreign manufacturer are dutiable as part of the price actually paid or payable for imported merchandise. Your request includes a submission by counsel for Reebok dated May 31, 2005, which includes attached exhibits. In this submission, counsel requests confidential treatment of the attached exhibits indicating that they represent proprietary financial and business information. Counsel states that the request for confidentiality does not extend to the description of the exhibits in the body of counsel’s letter. We grant counsel’s request and have not included any of the information identified as confidential in our response. In preparing this letter, consideration was given to counsel’s supplemental submission dated August 7, 2006.

FACTS

Reebok imports sports, fitness, and casual footwear from various foreign vendors. Reebok’s foreign vendors must purchase tooling and molds exclusive to the production of Reebok footwear. Generally, Reebok negotiates footwear prices on a model basis. The purchase price includes a charge for certain tooling and molds that is amortized over the estimated production quantity. The amortization quantity varies from model to model based on market forecasts and discussions with retailers. Reebok’s basic manufacturing agreement with its foreign vendors stipulates that prior to the issuance of any applicable purchase orders, the two parties shall agree in writing to the price for any new product and the period of time that such price will remain fixed. During the period in question, fiscal year 2003, Reebok calculated the tooling charge to be added to the purchase price by allocating the total tooling costs over a forecasted quantity that Reebok expected to be ordered within 15 months of the initial order. Consequently, the total cost of the tooling would be fully amortized and fully declared on entries provided Reebok purchased the forecasted quantities. When the production quantity was less than estimated, Reebok reimbursed the vendors for their tooling costs by creating an “under-amortized” factory ledger to pay for any tooling costs still due to the vendor. Conversely, if the production quantity was greater than forecasted, Reebok created an “over-amortized” factory ledger claim to recover the overpayment for tooling. In either instance, the tooling was used in the production of Reebok’s footwear, and the factory ledger adjustment ensured that the tooling cost was allocated over the actual production quantity.

Reebok notes that its current practice varies slightly in that the negotiated prices for its footwear include the cost of certain tooling and molds amortized over 80 percent of the quantity that Reebok anticipates purchasing during the initial six months of production. If Reebok does not purchase the anticipated quantity within 15 months of the initial production order, the company agrees to complete the amortization by making a payment to the vendor from the appropriate factory ledger. These practices are outlined in Reebok’s Production Tooling Amortization Policy and its Manufacturing Agreement.

This ruling applies to the fiscal year 2003.

ISSUE:

Whether Reebok has properly determined the price actually paid or payable for the imported merchandise, or whether it must be increased to reflect the amounts referred to as “under-amortized tooling costs.”

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 primary method of appraisement under the TAA is transaction value, defined in section 1401a(b)(1), as the price actually paid or payable for the merchandise when sold for exportation to the United States, plus amounts for enumerated statutory additions.

The term “price actually paid or payable” is defined in 19 U.S.C. § 1401a(b)(4)(A) as:

[t]he 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.

There is a rebuttable presumption that all payments made by a buyer to a seller, or a party related to a seller, are part of the price actually paid or payable. See Headquarters Ruling Letter (“HRL”) 545663, dated July 14, 1995. This position is based on the meaning of the term “price actually paid or payable” as addressed in Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990). In Generra, the court considered whether quota charges paid to the seller on behalf of the buyer were part of the price actually paid or payable for the imported goods. In reversing the decision of the lower court, the appellate court held that the term “total payment” is all-inclusive and that “as long as the quota payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods.” Id. at 379. The court also explained that Congress did not intend for Customs to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, were for the merchandise or something else. Id.

In Chrysler Corp. v. United States, 17 Ct. Int’l Trade 1049 (1993), the court applied the Generra standard and determined that although tooling expenses incurred for the production of the merchandise were part of the price actually paid or payable for the imported merchandise, certain shortfall and special application fees which the buyer paid to the seller were not a component of the price actually paid or payable. With regard to the latter fees, the court found that the evidence established that the fees were independent and unrelated costs assessed because the buyer, Chrysler, failed to purchase other products from the seller. Id. at 1056. As such, the fees were not a component of the price of the imported engines. Id. Therefore, the presumption that all payments made by the buyer to a seller are part of the price actually paid or payable may be rebutted by evidence, which clearly establishes that the payments, like the shortfall charges in Chrysler, are completely unrelated to the imported merchandise.

Reebok chiefly asserts that no adjustment to the price actually paid or payable is required, because the “under-amortized tooling payments” are not for imported merchandise. Rather, the payments are like the shortfall and special application fees that the buyer paid to the seller in Chrysler. Reebok cites the statement by the court in Chrysler that testimony at the trial showed that the purpose of the shortfall and special application fees was for the manufacturer to recover certain fixed costs in the event the buyer refused to purchase the contracted for number of engines. See id. at 1055. In finding that the shortfall and special application fees were not part of the price actually paid or payable, the court in Chrysler found most importantly that the contract between the parties provided that a specified amount was due from the buyer to the seller for each engine not purchased by a specified date. See id. at 1054. The court noted: “By the terms of the Agreements, then, shortfall fees were in the nature of a contractual ‘penalty,’ since they accrued each time plaintiff failed to buy an engine.” In a similar vein, the special application provisions required the buyer to pay a set fee should it decline to purchase 70,000 engines by a specified date. Id. In deciding that the shortfall and special application fees were not part of the price actually paid or payable for the imported merchandise, the court also noted that Chrysler treated the fees separately from the cost for the subject merchandise. Id. at 1056.

In the instant case, Reebok negotiates the price of its footwear on a model basis. The price includes the cost of tooling and molds amortized over an estimated production quantity. The amortization quantity varies from model to model based on market forecasts. During the period in question, Reebok derived the amount added to the purchase price by allocating the total tooling costs over a forecasted quantity that Reebok expected to be produced within 15 months of the initial order. Consequently, the total cost of the tooling used in production of the imported footwear would be fully amortized and fully declared on entries provided Reebok purchased the forecasted quantities. Unlike the situation in Chrysler, Reebok does not contract or promise to purchase the estimated production quantity. In fact, Reebok’s basic manufacturing agreement stipulates that the manufacturer (foreign vendor) shall only produce and ship the exact quantity of the products specified in purchase orders from Reebok or such other quantity as may be agreed in writing by Reebok and the manufacturer. Consequently, Reebok’s “under-amortized tooling payments” are distinguishable from the shortfall and special application fees in Chrysler.

Reebok also asserts that no adjustment to the price actually paid or payable is necessary, because the “under-amortized tooling payments” are cancellation payments that do not constitute part of the price actually paid or payable for the imported merchandise. Customs has held that a payment from the buyer to the seller for cancellation of a production order or contract does not constitute part of the price actually paid or payable for the merchandise already imported when it has been established that the payment is clearly a charge for termination, and merchandise is not imported into the United States as a result of the terminated contract. See HRL 543088, dated June 28, 1983; HRL 543770, dated February 10, 1987; and HRL 544121, dated June 24, 1988. In all of these cases, it was clearly established that the charges were for the termination of either a purchase order or contract. As noted above, however, Reebok does not contract or promise to purchase the estimated production quantity. There are no cancelled purchase orders correlating to the “under-amortized” factory ledger claims. Furthermore, Reebok’s Production Tooling Amortization Policy applies generally to molds that incorporate unique designs and company trademarks. As Reebok states, the payments are also for the right to recover the molds and similar intellectual property. Therefore, the tooling payments clearly are not a charge for the termination of a contract or purchase order, as contemplated in Chrysler.

Accordingly, we disagree with the arguments advanced by Reebok and conclude that the payments made by Reebok relating to tooling are considered part of the price actually paid or payable. However, the question that still needs to be addressed is whether Reebok properly apportioned the tooling payments in the purchase price of the imported articles. As indicated above, an amortized amount was included in the purchase price of each imported article based on the anticipated number of goods that were to be produced. If the method of apportionment is acceptable, then no adjustment to the price actually paid or payable is required based on the “under-amortized tooling costs.”

In Chrysler, the court also considered payments that the buyer made to the seller for tooling expenses. See 17 Ct. Int’l Trade at 1052. After determining that the tooling payments were not assists, but were instead part of the price actually paid or payable, the court found that it was necessary to determine which portion of the tooling expenses were directly or indirectly part of the price paid for the subject merchandise. Noting that the tooling expenses were incurred in anticipation of the production of 181,423 engines, the court determined that the tooling expenses should be apportioned over 181,423 engines, and not the actual number of engines imported. The court determined that once allocated in this manner, these expenses are properly considered part of the price actually paid or payable for the subject merchandise. Id. at 1059.

Subsequent to Chrysler, Customs has looked to the intent of the parties and the evidence presented and found the apportionment of such costs acceptable if it is reasonable, in accordance with Generally Accepted Accounting Principles, and not in violation of other provisions of the Customs laws. See HRL 548196, dated December 13, 2002; HRL 546771, dated March 27, 1998; and HRL 545500, dated March 24, 1995.

Similarly, based on the intent of the parties and the evidence presented, we find that the tooling payments in the instant case were properly apportioned over the total number of products that the parties anticipated to be produced. We note that Reebok’s purchase price from its foreign vendors includes a charge for certain tooling and molds that is amortized over the anticipated production quantity. The amortization quantity represents Reebok’s anticipated need based on market forecasts and discussion with retailers. Moreover, prior to the issuance of any applicable purchase orders, the purchase prices are agreed to in writing, and Reebok’s declared value to Customs for the imported merchandise includes the amortized amount. A review of Reebok’s factory ledgers and the other documentary evidence presented also demonstrates that Reebok had a reasonable expectation of purchasing the amortized quantities, as the projections as to purchases are fairly accurate.

Upon examination of the facts in this case and the documentary evidence submitted, we find Reebok’s method of allocation to be reasonable and consistent with the court’s decision in Chrysler and Customs rulings. Therefore, based on the total number of products anticipated to be produced, the price actually paid or payable already includes these allocated tooling payments, and no further adjustments are needed on the basis of the “under-amortized tooling costs.”

HOLDING:

With respect to the transactions at issue, Reebok has properly determined the price actually paid or payable for the imported merchandise consistent with the allocation method in Chrysler based on the total number of products the parties anticipated to be produced.

You are to mail this decision to counsel for the internal advice applicant no later than sixty days from the date of this letter. Sixty days from the date of this letter, the Office of Regulations and Rulings will take steps to make this decision available to Customs and Border Protection (“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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