Internal Advice; Dutiability of Certain Tooling Costs for Automobile Components; Transaction Value; Total Payment

HQ H134595 July 31, 2012 VAL OT:RR:CTF:VS H134595 HkP CATEGORY: Valuation Port Director Port of Port Huron U.S. Customs and Border Protection 526 Water Street, Room 301 Port Huron, MI 48060 Attn: SIS Stephanie Pake RE: Internal Advice; Dutiability of Certain Tooling Costs for Automobile Components; Transaction Value; Total Payment Dear Port Director: This is in response to your memorandum, dated November 10, 2010, forwarding a Request for Internal Advice submitted by counsel on behalf of Eberspaecher North America (“ENA”) on September 13, 2010. In reaching our decision we have taken into account additional information, dated September 27, 2011, and May 2, 2012, provided by ENA to this office. FACTS: ENA designs, manufactures, and sells customized finished exhaust systems, such as muffler assemblies, to unrelated U.S. automobile manufacturers. The exhaust systems are built at two plants in the United States from components procured in one of three ways: (1) produced in-house at ENA’s U.S. facilities; (2) purchased from U.S. vendors; or (3) purchased from foreign vendors and imported. The systems often require components that are custom-designed and manufactured using specially designed tooling. Only the components produced by foreign manufacturers using customized tooling and imported into the U.S. are the subject of this Request for Internal Advice. ENA’s contract with a U.S. automobile manufacturer, for example [xxxxxx], sets out the terms and conditions under which ENA will sell a muffler assembly to [the automobile manufacturer]. Under the [automobile manufacturer’s] contract, the total price of the assembly is made up of a base price, any material costs, component costs and any applicable taxes. Tooling costs are detailed in the contract notes. [The automobile manufacturer] is required to reimburse ENA either the amount for tooling specified in the contract or ENA’s actual costs for purchased materials and services (including purchased tooling or portions thereof), whichever is less, plus ENA’s actual direct cost for labor and overhead typically associated with tool construction. Procedures for the presentation of separate invoices for parts and tooling by ENA to [the automobile manufacturer] are described in the contract. Invoices for tooling may only be submitted to [the automobile manufacturer] by ENA after full production sample approval has been received from [the automobile manufacturer], and all tooling invoices must be accompanied by specified documents. The contract provides that all supplies, materials, tools and other items furnished by [the automobile manufacturer], either directly or indirectly, to ENA, or items for which [the automobile manufacturer] reimburses ENA, are the property of [the automobile manufacturer] and are held by ENA on a bailment basis. A copy of the [automobile manufacturer’s] contract was submitted for our review. ENA does not manufacture tooling. In the case of the [the automobile manufacturer’s] contract, the overseas manufacturer that fabricates the imported components made with tooling also makes the tooling. The overseas manufacturer is not a party to the [the automobile manufacturer’s] contract and is not related to [the automobile manufacturer] or ENA. The imported components are used by ENA in the manufacture of the muffler assembly that is the subject of the [automobile manufacturer’s] contract. When ENA places an order for components with the overseas manufacturer, ENA receives invoices from the manufacturer for both the components and the tooling and is responsible for paying both. Copies of both types of invoices were provided. ENA issues its own invoice to [the automobile manufacturer] for the tooling. A copy was not provided. The invoice accompanying the sample Entry Summary describes the goods it covers as “mechanical components for cars (brackets for automotive exhaust systems)”. The total amount invoiced is [xxxxx], of which [xxxxx] is for parts and [xxxx] is a steel surcharge. The Entry Summary lists a declared value of [xxxxx], the same amount as the invoice. The tooling invoices issued to ENA by the overseas manufacturer name and describe the tooling covered and state, “The tooling are your property but are located in [xxx] to allow the manufacture of your products in [xxxxx].” No tooling invoices were included in the Entry package. Information concerning payment by ENA of both the component and tooling invoices was provided. The port questions whether the foreign tooling costs may be considered a part of the price actually paid or payable of the imported components. The question of whether these costs are an assist is not at issue because the tooling is not supplied by ENA but, rather, is made by an overseas manufacturer. ISSUE: Whether the payments made by the importer, ENA, to foreign vendors for tooling are part of the price actually paid or payable for the imported components. 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, including “the value, apportioned as appropriate, of any assist.” See 19 U.S.C. § 1401a(b)(1)(C). For the purpose of this ruling, we assume that transaction value is the proper basis of appraisement. 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 the imported merchandise by the buyer to, or for the benefit of, the seller. Normally, 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 ("HQ") 545663, dated July 14, 1995; HQ H088115, dated April 19, 2010. 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 analyzed Generra 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 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, Chrysler was able to show that the shortfall charges were completely unrelated to the imported merchandise. Counsel argues that the payments made to foreign manufacturers for tooling are not dutiable as part of the total payment because they do not relate directly to the imported merchandise which, he notes, consists of components made with the tooling. According to counsel, the tooling payments cannot be included in the price actually paid or payable because the payments are made by ENA’s domestic customers (such as [the automobile manufacturer]) to ENA, such that ENA is the seller of the tooling and its customers are the buyers. Moreover, as the overseas manufacturer is not a party to the ([automobile manufacturer] or other) contract, it receives no legal benefit under the contract. As an initial matter, we find that because the imported components are made with tooling, the payments of which are at issue, the payments relate directly to the imported merchandise. When ENA purchases components and tooling from overseas manufacturers, it does so on its own behalf and not as an agent for [the automobile manufacturer]. ENA takes title to the components and the tooling and is reimbursed by [the automobile manufacturer] for the tooling, while the cost of the components is included in the total price of the muffler assembly ENA sells to [the automobile manufacturer]. See [the automobile manufacturer] contract. In fact, the tooling invoices specifically state that the tooling is the property of ENA. Under [the automobile manufacturer] contract, the tooling only becomes the “buyer’s property” ([the automobile manufacturer’s]), when ENA has been reimbursed by [the automobile manufacturer] for the cost of the tooling. After being reimbursed by [the automobile manufacturer], ENA then holds the tooling on a bailment basis for [the automobile manufacturer]. See [the automobile manufacturer] contract, Purchase Contract Attachment, clause 19. There is nothing in the contract or other submitted documents that indicates that [the automobile manufacturer] could be considered the purchaser in the transaction with the overseas manufacturer of the tooling. Counsel himself emphasizes that there is no pass-through of payment and that the [the automobile manufacturer]/ENA transaction and the ENA/overseas manufacturer transaction are two separate transactions with their own invoices and payments. See ENA Letter dated Sept. 27, 2011. Consequently, we find that the buyer in the transactions with the overseas manufacturer is ENA, not [the automobile manufacturer]. As the tooling payments are made by the buyer (ENA) to the seller of the imported components, we find that these payments should be calculated as part of the total payment for the imported components for Customs valuation purposes. Counsel’s alternative argument is that the payments can only be considered indirectly related to the imported merchandise if the seller receives a benefit as a result of the payment. However, counsel argues that because the overseas manufacturer is not the seller of the tooling, it derives no legal benefit from ENA’s tooling contracts. We have previously found that the overseas manufacturer is the seller of the tooling and that ENA is the buyer. A direct relationship exists between the payments for the tooling and the imported merchandise such that the payments must be included in the calculation of the price actually paid or payable for the imported merchandise. HOLDING: The amounts paid by ENA to overseas manufacturers for tooling are directly related to the imported merchandise, are part of the price actually paid or payable, and are to be included in the transaction value of the imported merchandise. This decision should be mailed by your office to the party requesting Internal Advice no later than 60 days from the date of this letter. On that date, Regulations and Rulings, Office of International Trade, will make the decision available to CBP personnel and the public on the CBP Home Page at www.cbp.gov, by means of the Freedom of Information Act and other methods of public distribution. Sincerely, Monika R. Brenner, Chief Valuation & Special Programs Branch