I/A 4/98; Dutiability of Administrative Costs; Computed Value; HQ 543576, HQ 545088

HQ 547094 June 3, 1999 RR:IT:VA 547094 EK CATEGORY: Valuation Mr. John J. Deegan Port Director, U.S. Customs Service 700 Doug David Drive Atlanta, Georgia 30354 RE: I/A 4/98; Dutiability of Administrative Costs; Computed Value; HQ 543576, HQ 545088 Dear Sir: This is in response to your request for Internal Advice initiated by counsel on behalf of Zeeman Manufacturing Inc. (hereinafter referred to as Zeeman), regarding the dutiability of administrative costs maintained on the books of the importer of a cost center pertaining to a related factory in Costa Rica. An additional submission dated April 30, 1999, and information obtained at a meeting with counsel on March 22, 1999, were taken into consideration in reaching a conclusion. We regret the delay in responding. In their submission, Zeeman requested confidentiality with regard to certain business information. However, pursuant to a conversation on January 11, 1999, with a member of my staff, that request has been withdrawn. FACTS: Zeeman is an importer and retailer of men’s wearing apparel with its corporate headquarters located in Atlanta, Georgia. Zeeman has a related factory in Costa Rica (Horizontes del Caribe, S.A.) that is the sole source of the wearing apparel sold in its retail outlets in the United States. The related party factory is a registered corporation in Costa Rica which is treated as an operating division by Zeeman for U.S. tax purposes. All costs associated with operating the Costa Rican facility have been maintained in a cost center (account number 99) found on Zeeman’s books. Separate books are not maintained by the Costa Rican factory, and Zeeman files a consolidated tax return for all of its operating division, including the Costa Rican factory and the U.S. retail outlets. Counsel claims that Zeeman has maintained account 99 strictly for management purposes. Counsel further indicates that the company does not “produce an individual income statement and balance sheet for each location that is assigned a separate sub number on Zeeman’s general ledger, as well as a consolidated income statement and balance sheet for the corporation as a whole.” According to counsel, in preparing the cost reconciliations for fiscal years 1994 and 1995, Zeeman reviewed all costs booked in account 99 and other administrative accounts on the U.S. books in order to determine if any costs that would be deemed assists to the Costa Rican factory were booked to those accounts. Counsel claims that all costs that pertain to the operation of the factory were included in the amount reported as total foreign operating costs for the related factory for the respective periods. In order to determine the total appraised value, Zeeman identified certain administrative costs that were not directly related to the production of the imported merchandise that “have been ruled by Customs to be administrative in nature . . . or for which a strong argument can be made that such costs are administrative in nature although they may not have been addressed in a prior customs ruling.” Counsel has met with Customs officials from the port and Regulatory Audit to determine the proper valuation method for the imported merchandise. It was agreed to by both parties that neither transaction value nor deductive value is applicable in the appraisement of the imported merchandise. No sale occurs between the producer and importer, thereby eliminating the use of transaction value. Zeeman indicates that the proper valuation method ifs a “modified or reasonably adjusted computed value to be determined under the provisions of section 402(f) of the TAA.” However, both the port and Regulatory audit indicate that all costs in the cost center should be included in the determination of computed value pursuant to section 402(e) of the TAA. For fiscal year 1995, the port and Regulatory Audit in Atlanta agreed that customs duties and northbound freight charges erroneously booked to account 99 will not be sought. Counsel states that account 99 has simply been used as a management tool, and therefore, should not be deemed the commercial account of the assembler. The port and Regulatory Audit indicate that account 99 is the commercial account of the assembler and that all costs booked in the cost center should be taken into account in determining the producer’s actual general expenses for purposes appraisement pursuant to computed value. ISSUE: Whether the expenses at issue are properly included in appraising the imported merchandise pursuant to computed value. LAW AND ANALYSIS: As indicated above, neither transaction value nor deductive value, sections 402(b) and 402(d) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), respectively, are applicable in appraising the merchandise. In addition, no information regarding the transaction value of identical or similar merchandise pursuant to section 402(c) of the TAA has been submitted. Computed value, pursuant to section 402(e)(1)(A) - (D) of the TAA, consists of the following: (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 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, if its value is not included under subparagraph (A) or (B); and (D) the packing costs. The Statement of Administrative Action, adopted by Congress with the passage of the TAA, provides that with respect to computed value: . . . [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 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, 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. See, Customs publication “Customs Valuation under the Trade Agreements Act of 1979” at p. 61, October 1981.  Where a foreign producer’s account records are maintained by a related U.S. company, those records should be considered the “commercial accounts” of the producer. Therefore, those records are the basis for calculating the “cost or value of the materials and fabrication” and the amount for profit and general expenses pursuant to computed value, as long as the producer’s accounts are maintained in a separate cost center from the U.S. company’s accounts and are consistent with generally accepted accounting principles (GAAP) applied in the country of production. See, HQ 543576 dated March 3, 1986. Counsel claims that account 99 is merely a management tool and a separate legal entity and that the accounts should be not be relied upon to determine a value. In addition counsel claims that because the factory is not a separate legal entity, Costa Rican GAAP are irrelevant because U.S. GAAP are followed. It is Customs’ position that companies are free to keep their books in the manner that best suits their need, as long as they are maintained in accordance with GAAP. Customs is not in a position to dictate what should be kept in companies’ books. Since the Costa Rican factory’s account records, as maintained by Zeeman, are used as the basis of calculating computed value, then all general expenses recorded in account 99 are included in the “amount for profit and general expenses” under section 402(e)(1)(B) of the TAA. HOLDING: Based upon the information provided, all costs reflect in account 99 of the general ledger are properly included in the determination of computed value. The account is the commercial account of the producer and is used as the basis of calculating the “cost or value of the materials and fabrication” and the “amount for profit and general expenses” as provided for in section 402(e) of the TAA. Please provide counsel a copy of this decision. The Office of Regulations and Rulings will take steps to make a version of this decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act, and other public access channels 60 days from the date of this decision. Sincerely, Thomas L. Lobred, Chief Valuation Branch