Reconsideration and modification of HRL 557574 concerning the value of foreign processing under subheading9802.00.60, HTSUS

HQ 557867 December 25, 1994 CLA-2: CO:R:C:S BLS CATEGORY: Classification TARIFF NO.: 9802.00.60 Mr. Matthew Chang ITOCHU International Inc. 335 Madison Avenue New York, New York 10017 RE: Reconsideration and modification of HRL 557574 concerning the value of foreign processing under subheading 9802.00.60, HTSUS Dear Sir: This is in reference to your letter dated March 29, 1994, requesting reconsideration of Headquarters Ruling Letter (HRL) 557574 dated February 15, 1994, concerning the value of foreign processing of aluminum ingots, for purposes of the partial duty exemption under subheading 9802.00.60, Harmonized Tariff Schedule of the United States (HTSUS). FACTS: ITOCHU International Inc. ("International") will purchase aluminum ingots of U.S origin. These ingots will then be sold to ITOCHU Corporation ("ITOCHU"), parent of International, which will take title and risk of the ingots on a C.I.F. (Nagoya, Japan) basis. ITOCHU will then arrange for inland transportation of the ingots to the plant of the actual processor, Furukawa Electric Co., Ltd. ("Furukawa"), an unrelated company. The ingots will be processed by melting and then rolling the molten aluminum to form sheet in cords. Upon completion of the processing, ITOCHU will take possession of the sheets, issue the appropriate documentation (invoice, bill of lading, and insurance policy) and will be responsible for transportation to the U.S. (re-sale to International is on a CIF, U.S. port basis). Once documentation is prepared (including the Declaration of the Foreign Processor, which is prepared by Furukawa), the goods are loaded aboard a vessel for export to the U.S. In HRL 557574, we held that for purposes of determining the partial duty exemption under subheading 9802.00.60, HTSUS, the value of foreign processing shall include, in addition to the direct processing charges, the general expenses and profit attributable to such processing. We found that "Item F", the "ITOCHU Corp. commission", as described on the original submission, - 2 - which you state to be ITOCHU's general expenses and profit, was includible as part of the value of the foreign processing. We also held that the cost of the U.S.-origin aluminum ingots exported to Japan, the costs relating to inland transportation of the ingots in Japan, and charges in connection with the ocean freight and marine insurance for the processed article shipped to the U.S., were not includible as part of the value of the foreign processing. However, you believe we erred in including ITOCHU's general expenses and profit as part of the value of the foreign processing since ITOCHU is not the foreign processor, and that the ruling should be modified accordingly. In this regard, you state that as the processor of the exported ingots, Furukawa included overhead and profit in its price invoiced to ITOCHU. ISSUE: Whether the value of processing performed abroad shall include ITOCHU's overhead and profit, for purposes of the partial duty exemption under subheading 9802.00.60, HTSUS. LAW AND ANALYSIS: Subheading 9802.00.60, HTSUS, provides a partial duty exemption for: [a]ny article of metal (as defined in U.S. note 3(d) of this subchapter) manufactured in the United States or subjected to a process of manufacture in the United States, if exported for further processing, and if the exported article as processed outside the United States, or the article which results from the processing outside the United States, is returned to the United States for further processing. This tariff provision imposes a dual "further processing" requirement on eligible articles of metal--one foreign, and when returned, one domestic. Metal articles satisfying these statutory requirements may be classified under subheading 9802.00.60, HTSUS, with duty payable only on the value of such processing performed outside the U.S., provided there is compliance with the documentary requirements of section 10.9, Customs Regulations (19 CFR 10.9). U.S. Note 3(a) to Subchapter II, Chapter 98, HTSUS ("Note 3(a)"), applicable to subheadings 9802.00.40 through 9802.00.60, HTSUS, provides in pertinent part that-- (a) The value of repairs, alterations, processing or other change in condition outside the United States shall be: - 3 - (i) The cost to the importer of such change; or (ii) If no charge is made, the value of such change, as set out in the invoice and entry papers; except that, if the appraiser concludes that the amount so set out does not represent a reasonable cost or value, then the value of the change shall be determined in accordance with section 402 of the Tariff Act of 1930, as amended. Section 10.9(j), Customs Regulations (19 CFR 10.9(j)), provides in part that in connection with the basis for assessment of duty under subheading 9802.00.60, HTSUS, the cost or fair market value of the foreign processing "shall be limited to the cost or value of the processing actually performed abroad (including all domestic and foreign articles used in the processing, but does not include the exported metal article) and shall not include any of the expenses incurred in the U.S., whether by way of engineering costs, preparation of plans or specifications, and the furnishing of tools or equipment for doing the processing abroad, or otherwise". In United States v. Douglas Aircraft Co., 510 F.2d 1387 (1974), 62 CCPA 53, the appellate court overturned the Customs Court and held that the cost of Canadian tooling was properly includible in the value of foreign processing for purposes of TSUS item 806.30 (predecessor to subheading 9802.00.60, HTSUS), although such value was not included in the price charged by the foreign processor. In the course of its opinion, the court pointed out that the term "cost" or "reasonable cost" as set forth in the statute should be interpreted according to sound business practice. Thus, the court stated that the cost of processing would include both direct and indirect costs, which include factory overhead. In addition, the court noted that in accordance with the exception provided under Headnote 2, Subpart 1, Schedule 8, (predecessor to "Note 3(a)"), the appraising officer had the discretion (to be exercised in a reasonable manner) to disregard the amount set out on the invoice and entry papers if it did not represent a reasonable cost or value, and determine the value of the processing under the appraisement statute. Accordingly, under the authority of Douglas, we held, in HRL 557574, that factory overhead (general expenses) is includible as part of the cost of processing. We also found, under the Douglas rationale, that profit would be considered a cost of processing, as a normal mark-up is in accordance with "sound business practice", and that the appraising officer could reasonably conclude that - 4 - without this element of value, the amount set out in the invoice and entry papers would not represent a reasonable cost or value. As a result of our determination with regard to the value of foreign processing, we held that the ITOCHU "commission", representing ITOCHU's overhead and profit, must be included in the value of the foreign processing for purposes of determining the amount subject to duty under subheading 9802.00.60, HTSUS. Since ITOCHU is not the actual processor of the aluminum ingots, and its overhead and profit are not attributable to the processing performed abroad, these costs are not includible as part of the value of the foreign processing for purposes of the partial duty exemption under subheading 9802.00.60, HTSUS. However, the value of the foreign processing subject to duty shall include the general expenses and profit attributable to such processing, incurred by Furukawa, the actual processor of the ingots. HOLDING: For purposes of the partial duty exemption under subheading 9802.00.60, HTSUS, the value of foreign processing subject to duty shall include the general expenses and profit attributable to the foreign processing. Since ITOCHU's general expenses and profit are not related to the foreign processing, these costs are not includible as part of the value of the foreign processing. HRL 557574 is modified accordingly. Sincerely, John Durant, Director Commercial Rulings Division