I.A. Request 23/97; ELPAC Electronics; currency fluctuations, computed value.

HQ 546882 April 9, 1999 RR:IT:VA 546882 MWM Ms. Joyce Henderson Port Director - Otay Mesa United States Customs Service 9777 Via De La Amistad San Diego, California 92714-5612 Re: I.A. Request 23/97; ELPAC Electronics; currency fluctuations, computed value. Dear Madam: This is in response to your memorandum (CLA-1:OM:CO NHL) dated July 18, 1997 and a memorandum from the Chief, Metals & Machinery Branch, National Commodity Specialist Division (CLA-2-85 :RR:NC:MM: 109-IA 23/97) dated October 6, 1997, requesting internal advice on transactions involving ELPAC ELECTRONICS (Elpac) with regard to whether gains or losses due to currency fluctuations should be taken into account when determining profit under computed value. Elpac initiated this I.A. request through its customs broker, Norman Krieger, Inc. We regret the delay in responding. FACTS: Elpac presented cost submissions for the periods of January 1 to June 30, 1996, January 1 to June 30, 1995 and July 1 to December 31, 1995. These submissions include an amount for Profit (actual) that is taken from the Operating Profit (Loss) item on the producer's income statement. This item does not take into account any of the Financial Expenses (including the currency exchange gain (loss). The Financial Expenses is a separate item on the income statement, listed separately from: Income, Cost of Sales, Production Expenses and Administrative Expenses. The financial expenses do not appear to be directly related to the Mexican assembly process. Customs and Elpac agree that computed value is the proper appraisement method. This ruling response presumes that no additional payments beyond the invoice price are made to the producer. The Port Director seeks confirmation that the gains or losses related to currency conversions and reported on the producers financial statements as income or other expenses should not be added or deducted, respectively to operating income. The Port distinguishes this case from Headquarters Ruling Letter (HQ) 543276, dated May 15, 1984. In that case, it was determined that the currency losses could not be used for computed value purposes because "... the loss on currency translations had no direct relationship to the assembly process. It [the loss] does not result from operations and is used only to balance the general ledger when the accounts are converted from pesos to dollars." In a conversation on January 28, 1999, the National Import Specialist explained that he thought HQ 543276 was different from the question presented because that ruling dealt with losses only. In addition, he explained that in the past, when there has been a gain, Customs has used the gain as part of computed value. However, when there was a loss, Customs only allowed the loss to be included in computed value as zero. He seemed to think that this was not correct, and therefore requests Internal Advice on what is proper. The National Commodity Specialist Division (NCSD) believes that, if the expenses are not related to the assembly process, than, in accordance with HQ 543276, neither the currency exchange loss nor gain would be included in the computed value. The NCSD is concerned with the lack of background information in regard to the financial expenses. ISSUE: Whether gains or losses due to currency fluctuations should be taken into account when determining the amount for profit under computed value. LAW & ANALYSIS: Section 402(e) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. §1401) provides that computed value consists of the sum of: (A) the cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise; (B) 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 the producers in the country of exportation for export to the United States; (C) any assist, flits value is not included under subparagraph (A) or (B); and (D) the packing costs The Statement of Administrative Action, which was adopted by Congress, provides that [t]he 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 on 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 of merchandise of the same class or kind as the imported merchandise, that are made by the producers in the country of exportation for export to the United States. 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. In this case we do not have any information with regard to expenses other than what is shown on the income statement. From the income statement, it is noted that the currency translations are listed under Financial Expenses, which are listed separately from: Income, Costs of Sales, Production Expenses, and Administrative Expenses. Therefore, they do not appear to be directly related to the Mexican assembly process. If so, pursuant to HQ 543276, then the currency gains or losses would not be included in the computed value appraisement. Section 402(e) specifically lists what is included in computed value. It does not list items that are not related to the assembly of the product. Therefore, we do not have the authority to include gains or losses in computed value, unless they are somehow related to assembly. HOLDING: Based on the evidence presented, gains or losses due to currency fluctuations should not be taken into account when determining the amount for profit under computed value, as long as they have no direct relationship to the assembly process. This ruling presumes that no additional payments beyond the invoice price are made to the producer. 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, the Office of Regulations and Rulings will make the decision available to Customs 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, Thomas L. Lobred Chief, Value Branch