Valuation of amplifiers imported under consignment

HQ H264876 September 17, 2015 OT:RR:CTF:VS H264876 AJR CATEGORY: Valuation Adrienne Braumiller, Esq. Braumiller Law 5220 Spring Valley Rd., Suite 200 Dallas, TX 75254 RE: Valuation of amplifiers imported under consignment Dear Ms. Braumiller: This is in response to the ruling request, dated May 5, 2015, sent to the National Commodity Specialist Division of U.S. Customs and Border Protection (“CBP”) on behalf of your client, [XXXX] (the “Importer”), regarding the proper appraisement of certain amplifiers that will be imported under a consignment agreement from an unrelated supplier. The request was forwarded to this office. Inasmuch as your request conforms to the requirements of 19 CFR § 177.2(b)(7) that certain information (parties involved and their locations, product brand names and their prices, and all exhibits) in your submission be treated as confidential, we will excise the bracketed confidential information from public versions of this decision. FACTS: The Importer is a company based in the United States, proposing to import amplifier gain blocks and semi-finished amplifiers (hereinafter “amplifiers”) from a foreign and unrelated supplier (the “Supplier”) for use in the production of its networking platform product. The Importer and the Supplier will contract under a Master Purchase and Supply Agreement (“MPA”), which covers the proposed amplifier importations, along with other transactions. The MPA establishes a Consignment Inventory Management program (“CIM”), which will cover the amplifier transactions. Under CIM, the Importer will request an amplifier by placing a purchase order with the Supplier. Upon delivery to the Importer, the amplifier will become “Consignment Inventory,” which means that the Supplier retains ownership of and title to the amplifiers until they are purchased by the Importer according to CIM. However, the risk of loss or damages, as well as the responsibility to ensure suitable storage for the amplifiers, will be transferred to the Importer upon physical delivery of the amplifiers to the Importer’s facility. According to CIM, a “Consignment Purchase” takes place when the Importer withdraws an amplifier from Consignment Inventory, when an adjustment is needed to resolve an inventory discrepancy, or when an amplifier becomes non-returnable due to some sort of damage after delivery. The Importer will withdraw an amplifier from Consignment Inventory for: a work order to produce its product; use as scrap; or, transfer to its stock. The Importer will only withdraw, and thus purchase, the amplifiers for its own use, and will not otherwise transfer or dispose of the amplifiers without the Supplier’s prior consent. Counsel for the Importer states that the Importer must withdraw the amplifiers, except for [XXXX] (“Product B”), from Consignment Inventory within 45 days of the delivery date, or else the amplifiers will be considered automatically withdrawn on the 46th day. Product B has an extended 90-day time period from which they must be withdrawn before being considered automatically withdrawn on the 91st day. Counsel states that an amplifier will be deemed purchased, and title to it transferred, on the withdrawal date. The MPA notes that in the event the Importer “fails to ‘pull’ such Consignment Products from the Consignment Inventory or otherwise take ownership of such Consignment Products within the applicable time period, [the Importer] will be deemed to have purchased such Consignment Products upon expiration of the applicable time period and Supplier may invoice [the Importer] for such Consignment Products.” The MPA indicates that the amplifiers must be purchased and paid for within 45 days of delivery and references the 90-day time period for Product B. Counsel explains that the amplifier prices are set pursuant to quarterly agreements between the parties in accordance with the MPA. During these quarterly meetings, the parties will review the prices and negotiate any alterations in price due to product commercialization status, market conditions, the cost reduction program outlined in the MPA, and other relevant factors. If a price adjustment is necessary, the parties will execute an appropriate amendment that will set the price for amplifiers purchased in that quarter. Counsel states that the prices set per the quarterly agreement will be the prices used on the purchase orders and invoices for the amplifiers upon entry. Counsel states that this value upon entry may differ from the price actually paid when purchased because there are scenarios when an amplifier is imported during a previous quarter (using the previous quarter price at entry) but not purchased until the next quarter (paying such quarter price when withdrawn). Based on this information, the Importer proposes to appraise its consignment amplifiers by reasonably adjusting the transaction value under the fallback method, using the commercial invoice price as the value for the merchandise at the time of entry. The Importer argues that the quarterly price agreements allow for a potential change in price when the amplifiers are withdrawn; that the prices are relatively stable as they are usually withdrawn in a relatively short time; that based on their industry experience and the historical sale prices of consignment items, if there is any price change, it will be a decrease; and, that the unit price of the amplifiers in the initial invoice issued at the time of exportation is the same being paid for identical goods withdrawn from consignment inventory around the same timeframe. ISSUE: What is the proper method of appraisement for the consignment amplifiers at issue? 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. 19 U.S.C. § 1401a(b)(1). In order for transaction value to be applicable for appraisement purposes, there must be a bona fide sale of merchandise for export to the United States. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit found that the term “sold” for purposes of 19 U.S.C. § 1401a(b)(1) means a transfer of property from one party to another for consideration, citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974). Though several factors may indicate whether a bona fide sale has occurred, no single factor is decisive. CBP makes each determination on a case-by-case basis and will consider such factors as whether the purported buyer assumed the risk of loss and acquired title to the imported merchandise. In addition, CBP may examine whether the potential buyer paid for the goods and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. See Headquarters Ruling Letter (“HQ”) H012659, dated November 14, 2007. In HQ H012659, CBP distinguished a sale for exportation to the United States from consignment sales where no sale for exportation occurred. CBP noted that the consignment sales were not sales for exportation because: the buyers were not obligated to purchase the imported merchandise or pay within a specified time period; the prices for the imported merchandise were not agreed to until the merchandise was withdrawn from the warehouse and did not necessarily conform to the prices from the invoices upon entry; and, the risk of loss did not transfer to the buyer until the merchandise was withdrawn. In contrast, CBP held that the other sale was not a “true consignment” and constituted a sale for exportation to the United States because: the buyer was obligated to purchase the imported merchandise and pay for it within a specified time period; the price paid for the merchandise conformed to the price from the invoices upon entry; and, though title did not transfer until after exportation, risk of loss transferred at the point of shipment. See also HQ H131663, dated April 14, 2011(holding that a sale was not a sale for exportation to the United States because, although the buyer assumed risk of loss for the imported merchandise, the sales price was not fixed until sometime after importation, and the buyer did not assume title until that point). In this case, though there is a specified timeframe, there are some scenarios where the Importer will not be obligated to purchase the consignment amplifiers. For instance, the MPA includes a product rejection time period for the Importer, and the CIM indicates that the amplifiers may be returned to the Supplier. Moreover, because the prices on the purchase orders and invoices are set per the quarterly agreements, any amplifier that is withdrawn in a different quarter may be subject to a price change from the negotiations that occur between the parties. Thus, the purchase order and invoice price upon importation will not necessarily conform to the price actually paid for the amplifiers when they are removed from inventory. Additionally, although the Importer assumes risk of loss from the time the amplifiers arrive at its facility, the Importer does not assume title to the merchandise nor is the sales price of the merchandise fixed until sometime after importation. Moreover, CBP has maintained the position that the use of transaction value is precluded in instances where goods are shipped on consignment, as these transactions do not constitute bona fide sales. See HQ 548574, dated March 17, 2005; HQ 546602, dated January 29, 1997; HQ 545755, dated May 18, 1995; HQ 543128, dated June 4, 1984; and, HQ 542765, dated April 20, 1982. Here, the amplifiers at issue will be shipped and entered into the United States under the “Consignment Inventory Management” program without having been bought or sold for export at the time of entry due to the understanding that they will be bought at a later time as a “Consignment Purchase.” Therefore, we agree with the Importer that the amplifiers would not be sold for export to the United States at the time of entry, but rather entered under consignment, precluding appraisement based on transaction value.  When transaction value is not available as an appraisement method, the remaining methods of appraisement set forth in 19 U.S.C. § 1401a must be applied in sequential order. The alternative methods of appraisement, in order of precedence, are: the transaction value of identical or similar merchandise (19 U.S.C. § 1401a(c)); deductive value (19 U.S.C. § 1401a(d)); computed value (19 U.S.C. § 1401a(e)); and, the “fallback” method (19 U.S.C. § 1401a(f)). The Importer argues that the amplifiers cannot be appraised based on the transaction value of identical or similar merchandise because there are no identical or similar amplifiers that enter the United States at or about the same time of exportation, particularly since the Supplier’s amplifiers only enter the Importer’s consignment inventory and the Supplier does not sell these products to other companies in the United States. We note, as stated by Counsel, that the declared price of an amplifier upon entry may be verified against the price paid for an identical or similar amplifier withdrawn during that same quarter. Such similar or identical amplifier would have been exported from the same country and may have been exported at or about the same time, since it would have been exported from the Supplier within at most 91 days of the other. However, the price of a similar or identical amplifier must be a previously accepted value, and to the extent such a price has not been verified, the transaction value of identical or similar merchandise is not applicable to this case. With regard to deductive value, the value of imported merchandise is based on the unit price at which it is sold in the greatest aggregate quantity in its condition as imported at or about the time of importation, or within 90 days of the date of importation, less certain deductions set forth in the statute. The Importer argues that since the merchandise is not sold at a commercial level in the United States, being that the Importer withdraws the merchandise for its own use, the deductive value method does not apply to this transaction. Though deductive value is the method of appraisement most often used in cases of goods imported on consignment to be sold after importation, the deductive value statute, per 19 U.S.C. § 1401a(d)(2)(B), states in relevant part that: . . . the unit price at which merchandise is sold in the greatest aggregate quantity is the unit price at which such merchandise is sold to unrelated persons, at the first commercial level after importation . . . at which such sales take place, in a total volume that is (i) greater than the total volume sold at any other unit price, and (ii) sufficient to establish the unit price. While the amplifiers at issue are sold after importation and are considered consignment merchandise, we find that deductive value is not applicable in this case because the amplifiers are the subject of an incomplete sales transaction due to the Importer serving both as the importer at entry and the buyer after importation at a price that is generally known (but not locked) when imported. See HQ H131663. Particularly, the Importer imports the amplifiers for the purpose of eventually buying them to use in manufacturing its product. Because the Importer is using the amplifiers to produce its product, the Importer is not selling the amplifiers to an unrelated party at a commercial level. Additionally, because the amplifiers may lose their identity as amplifiers when integrated into the final product, the superdeductive value provision would not be applicable. See 19 CFR § 152.105(i)(2). For these reasons, we find that deductive value is inapplicable to this case. With regard to computed value, the Importer states that there is currently no information available on which to base the calculation of computed value. Because the Importer does not have access to the necessary information to calculate the computed value of the amplifiers, computed value cannot serve as a basis of appraisement. When the value of imported merchandise cannot be determined under 19 U.S.C. §§ 1401a(b) through 1401a(e), it may be appraised under 19 U.S.C. § 1401a(f) on the basis of a value derived from one of those methods, reasonably adjusted to the extent necessary to arrive at a value. This is known as the “fallback” valuation method. Certain limitations exist under this method, however. For example, merchandise may not be appraised on the basis of the price in the domestic market of the country of export, the selling price in the United States of merchandise produced in the U.S., minimum values, or arbitrary or fictitious values. 19 U.S.C. § 1401a(f); 19 CFR § 152.108. Section 152.107 of the CBP regulations (19 CFR § 152.107) provides:(a) Reasonable adjustments. If the value of imported merchandise cannot be determined or otherwise used for the purposes of this subpart, the imported merchandise will be appraised on the basis of a value derived from the methods set forth in §§ 152.103 through 152.106, reasonably adjusted to the extent necessary to arrive at a value. Only information available in the United States will be used.(b) Identical merchandise or similar merchandise. The requirement that identical merchandise, or similar merchandise, should be exported at or about the same time of exportation as the merchandise being appraised may be interpreted flexibly. Identical merchandise in any country other than the country of exportation or production of the merchandise being appraised may be the basis for customs valuation. Customs values of identical merchandise, or similar merchandise, already determined on the basis of deductive value or computed value may be used. (c) Deductive value. The “90 days” requirement for the sale of merchandise referred to in § 152.105(c) may be administered flexibly. The Importer requests that the price on the invoice prepared at the time of exportation be treated as a reasonably adjusted transaction value under the fallback method. Cited in support of this request are HQ 548273 and HQ H131663. Both cases held that merchandise imported under consignment should be appraised as a reasonably adjusted transaction value based on the invoice presented at entry. In HQ 548273, it was noted that because the merchandise did not remain in inventory for a long period of time, it was likely that the invoice price upon entry would be the same price paid upon withdrawal, and due to the nature of the business, if there was a change, it would likely be a decrease. Additionally, because the invoice price upon entry should always be the same as the price paid upon withdrawal for identical merchandise, there was a way of auditing the importations to ensure a clear and definite relationship between the two prices. HQ H131663 noted these same reasons with regard to a consignment importation that involved a potential difference between the price at entry and the price when purchased after importation because the date of entry and date of purchase could be subject to different negotiation periods with different set prices. See also HQ 548236, dated March 27, 2003, and, HQ 548574, which present similarly held scenarios. As the situation presented herein is substantially similar to the transactions considered in HQ 548273, HQ H131663, HQ 548236 and HQ 548574, we find that the invoice of the amplifiers upon entry may be accepted as representing a reasonably adjusted transaction value under the fallback method, provided that any applicable additions enumerated in 19 U.S.C. § 1401a(b) are included in the invoice price upon entry. If the Importer is unable to calculate the value of additions to the invoice price, it may wish to consider the Reconciliation Program for purposes of flagging the value issue and reconciling it with CBP at such time when the Importer has the necessary information to include any additions. Additionally, note that 19 CFR § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a CBP office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.” Accordingly, this ruling is being issued based on the assumption that the unit price for the imported goods, as it appears on the invoice upon entry, is the same as the price actually being paid for identical goods withdrawn from the warehouse on the same day, and this can be verified by CBP. If the price paid on withdrawal from the warehouse increases from the price on the invoice upon entry, then this ruling may not be applicable in accordance with 19 CFR § 177.9(b)(1). Consequently, if the price paid on withdrawal increases from the price on the initially issued invoice, the Importer should notify CBP of this fact, so that CBP is able to verify that a price increase indeed is only occurring rarely and whether the ruling is still applicable. Finally, Counsel for the Importer explained that the prices are set pursuant to quarterly agreements in accordance with the MPA. Because the MPA was not submitted in its entirety, we could not review this pricing provision in the MPA. Thus, the applicability of this ruling is subject to review of such agreements by the ports to ensure that the terms of the agreements are consistent with the facts as presented in this ruling. HOLDING: Based on the information presented, the subject amplifiers may be appraised under the fallback method, 19 U.S.C. § 1401a(f). The invoice price presented upon entry may be accepted as representing a reasonably adjusted transaction value provided it includes any applicable statutory addition, and subject to any verification deemed necessary in accordance with 19 CFR § 177.9(b)(1). A copy of this ruling letter should be attached to the entry documents filed at the time the goods are entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.                           Sincerely, Monika R. Brenner, Chief Valuation and Special Programs Branch