Internal Advice Request; Transaction Value; Related-Party Transactions

HQ H287710 August 12, 2020 OT:RR:CTF:VS H287710 RMC CATEGORY: Valuation Center Director Machinery Center of Excellence and Expertise U.S. Customs & Border Protection 109 Shiloh Dr., Suite 300 Laredo, TX 78045 Re: Internal Advice Request; Transaction Value; Related-Party Transactions Dear Center Director: This is in response to your correspondence dated May 4, 2017, requesting internal advice on whether [ ] (“the Buyer”) may use transaction value as the method of appraisement for merchandise purchased from a related entity, [ ] (“the Seller”). A meeting was held in our offices on November 8, 2018, during which counsel provided additional information about the transactions and the entities involved. Several follow-up submissions were also provided. The Buyer has asked that certain information submitted in connection with this internal advice request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this decision. FACTS: The Seller, a French entity, and the Buyer, a U.S. entity, are subsidiaries of the same parent company. The Seller manufactures bottle molding and filling equipment for use in the beverage bottling industry. The Buyer acts as a distributor of finished goods and as a technical service center for the North American market. As part of this role, the Buyer purchases spare parts and rebuild components from the Seller. The Buyer resells spare parts to U.S. and other North American customers. The Buyer uses rebuild components to rebuild worn pieces of equipment for its customers. The Buyer uses the transaction value method to appraise spare parts and rebuild components that it purchases from the Seller, claiming the sales price between the related parties as the customs value. The information provided states that prices in the related-party transactions between the Buyer and the Seller are established depending on the intended use of the goods as either spare parts or rebuild components. Spare parts, which are intended for resale to U.S. customers in their condition as imported, are priced according to a pricing procedure called TPP Finished Goods. Under this pricing procedure, prices are established based on a recommended selling price (“RSP”) in the country of importation and a discount rate. The RSP is established on a yearly basis by the product management team considering local competition, inflation, input costs, and risk analysis. The TPP Finished Goods pricing procedures state that the discount rate is periodically adjusted to allow the Buyer to “cover operating expenses and earn an appropriate operating profit in light of functions and risks assumed.” Rebuild components, which are not sold in their condition as imported but are used to rebuild components or pieces of equipment for U.S. customers, are priced using a procedure called TPP Components. Under this methodology, prices are established according to a “cost basis,” described as the “sum of direct, indirect and allocated structure costs” multiplied by [ ], which reflects the Seller’s mark-up of [ ]%. The TPP Components pricing procedures states that this methodology aims to “remunerate the parties appropriate for functions performed, assets employed and risks assessed.” Spreadsheets generated by the Seller’s SAP enterprise resource planning software demonstrate that the goods at issue in the entry were priced in accordance with these transfer pricing policies. The Buyer claims that its relationship with the Seller did not affect the prices it paid for spare parts or rebuild components. In support of these claims, it relies on the totality of the circumstances as described in a transfer pricing study (“TPS”), financial statements of the Buyer and the Seller, and evidence of arm’s-length price negotiations between the Buyer and the Seller. Transfer Pricing Study The Buyer first argues that a TPS conducted for tax purposes for the fiscal year ended December 31, 2015, demonstrates that the prices it paid to the Seller were at arm’s-length. The TPS was conducted in compliance with Section 482 of the Internal Revenue Code (26 U.S.C. § 482), which requires that the arm’s-length result of a controlled transaction be determined under the method that, given the facts and circumstances, provides the most reliable measure of an arm’s length result. The application of the best method establishes an arm’s-length range of prices or financial returns with which to test controlled transactions. The TPS concludes that a transaction-based analysis of the related-party transactions (i.e., comparable uncontrolled price method, cost plus method, or resale price method) would be less accurate and reliable than a profit-based method that focuses on the overall profitability of the Buyer. Accordingly, the TPS applies the comparable profit method (“CPM”), which examines whether the amount charged in a controlled transaction is an arm’s-length price by comparing the profitability of the tested party to that of comparable companies. The TPS identifies the profit level indicator as the operating margin, defined as “operating profit divided by net sales.” The TPS notes that “[a]ccording to U.S. transfer pricing regulations, if the Buyer’s profitability is similar to that of comparable companies, then it can be inferred that transfer pricing policies applied to its various controlled transactions were not used to shift the Buyer’s income to other jurisdictions.” According to the TPS, a search was conducted for companies that perform “similar distribution functions” to the Buyer. The search identified 17 companies, of which 14 were deemed “comparable” to the Buyer “in terms of its distribution functions.” However, the TPS recognizes that “[u]nder the CPM, comparability of the functions and risk between a tested party and uncontrolled companies is more important than exact product comparability.” Therefore, although the uncontrolled companies are deemed comparable in terms of distribution functions, they do not necessarily sell similar products. The 2015 TPS does not describe the products sold by the comparable companies, but an internet search indicated that the companies sell a variety of products including health products, pharmaceutical ingredients, electronics, industrial equipment, hardwood flooring, capacitors, semiconductors, and others. The Buyer states that the products offered by these distributors are “goods of the same class or kind” as the products in the entry at issue. The Buyer points out that many of the imported goods in the entry at issue are “commodity” goods such as rings, bearings, seals, springs, pulleys, shafts, resistors, sleeves, spacers, rollers, and other common machinery parts that “can reasonably be expected to have been imported or sold by most or all of the comparable companies” in the 2015 TPS. At the same time, the Buyer recognizes that the selected comparable companies are “engaged in the distribution and sale of goods that were not substantially the same as the spare parts and rebuilt pieces of equipment (incorporating rebuilt components) sold by the Buyer.” According to the Buyer, the nature of the business is more probative than the class or kind of goods in determining the arm’s length nature of the sales. In support, the Buyer cites the small interquartile ranges produced under the CPM method. During the three-year period for which data was available at the time of the study (2013-2015), the TPS calculated the range of operating margins for comparable companies as -[ ]% to [ ]%, with an interquartile range of [ ]% to [ ]%. The TPS states that under the CPM, the interquartile range identified by the comparable companies can be used as a benchmark to determine whether the Buyer’s transactions were conducted in a manner consistent with the arm’s length standard. Accordingly, because the Buyer’s profitability is within this range—specifically, [ ]%—the TPS concludes that the CPM analysis demonstrates that the transfer prices during 2013 to 2015 “did not cause the Buyer to underreport U.S. income.” The Buyer also notes that its transfer pricing policies have been reviewed and approved by the IRS. The information provided indicates that the Buyer was most recently audited by the IRS in 2006 and 2007. A transfer pricing report prepared for the Buyer in 2006 indicates that the Buyer and the Seller used the same transfer pricing procedures in 2006 and 2007 as it did at the time of the transactions under consideration. The result of the audit, as stated in a letter from the IRS, was an adjustment to income to account for a deduction for certain sales rebates in a later tax year. The IRS did not disallow or modify the transfer pricing policies in place at that time. Financial Statements of Buyer and Seller The Buyer also provided copies of the Buyer and the Seller’s 2016 financial statements. The financial statements indicate that in 2016, the Buyer earned a gross margin of [ ]% and an operating margin of [ ]%, while the Seller earned a gross margin of [ ]% and an operating margin of [ ]%. Evidence of Arm’s-Length Price Negotiations Between Buyer and Seller The Buyer also supplied documents that it claims are evidence of arm’s-length negotiations between the Buyer and the Seller. The first document is an affidavit signed by the Buyer’s U.S. finance manager. In the affidavit, the finance manager explains that she is responsible for managing all of the Buyer’s finance activities and for overseeing the finance department. Part of those duties include negotiating the prices at which the Buyer purchases spare parts, tooling, and rebuild components from the Seller. The finance manager further explains that it is her responsibility to ensure that the Buyer receives a fair price on the parts so that the Buyer can be profitable. She also notes that prices are negotiated with the Seller in response to changes in costs or to competition from other companies. Last, the affidavit includes three specific examples of times that the finance manager negotiated with the Seller. In the first example, which dates from 2013, the finance manager describes a situation in which she negotiated to get a discount on the price of rebuild components purchased from the Seller. The stated reason for the discount request was that the Buyer was assembling kits and selling them at a discount to its customers. In the second example, which is from 2012, the finance manager states that she negotiated with the Seller to purchase parts in U.S. Dollars instead of in Euros. According to the finance manager, the fluctuations in the value of the Euro had become unpredictable and that the Buyer, as the customer, should be able to pay in its own currency and not be affected by changes in the exchange rate of the Seller’s currency. Finally, in the third example, the finance manager describes a time in 2008 where she negotiated with the Seller to get a 15% discount on the price of spare parts kits. The finance manager stated that this discount was necessary in order for the Buyer to remain competitive in the marketplace and still generate a profit on the sales. In addition to the affidavit containing these three examples, the Buyer provided a second set of documents containing three email chains from 2012, 2015, and 2016. The Buyer states that these three email chains demonstrate that it negotiates with the Seller as if it were an unrelated entity. In the 2012 email correspondence, which corresponds to the second example in the finance manager’s affidavit, the Buyer’s finance manager writes to the Corporate Tax Director about losses that the Buyer has incurred as a result in changes in the value of the Euro. The finance manager asks whether it would be possible to purchase spare parts and rebuild kits in U.S. dollars, rather than Euros, as was the practice for finished machines. The Corporate Tax director agrees to change the invoicing currency to U.S. dollars. The 2015 email correspondence consists of a message from the Corporate Tax Director entitled “Transfer pricing spare parts FY16.” Included as an attachment is an excerpt from the 2016 draft transfer pricing procedure proposing a decrease in the discount rate from [ ]% in 2015 to [ ]% in 2016. In the 2016 email chain, the Buyer’s finance manager emails the Corporate Tax Director expressing “concern about losing [ ]% on our spare parts margin.” The finance manager goes on to state that the revised discount rate is “cutting it pretty close.” In response, the Corporate Tax Director proposes a discount rate of [ ]%, which the Buyer’s finance manager accepted. In sum, the following documents were provided for our review: (1) U.S. Customs and Border Protection (“CBP”) Form 28, dated March 23, 2017, requesting information supporting the Buyer’s use of transaction value; (2) purchase order; (3) invoice; (4) air waybill; (5) pictures of the products; (6) 2016 transfer pricing procedures document for finished goods for resale; (7) 2016 transfer pricing procedures for semi-finished goods; (8) transfer pricing documentation report for the fiscal year ended December 31, 2014 prepared by Cherry Bekaert LLP; (8) transfer pricing report “master file” for 2007; (9) correspondence from the IRS concerning an audit of the Buyer for tax years 2006 and 2007; correspondence from the Buyer’s accountants, Ernst & Young LLP, including an amended tax return for tax year 2008; 2015 transfer pricing report for the fiscal year ended December 31, 2015, prepared by WTP Advisors; (10) printouts from Seller’s SAP system showing that the goods are actually priced in accordance with the transfer pricing policy; (11) supplemental submissions dated January 12, 2018 and November 8, 2018; (12) 2016 financial statements of Buyer; (13) 2016 financial statements of Seller; (14) an affidavit signed by the Buyer’s finance manager describing price negotiations with Seller; (15) emails between Buyer and Seller containing price negotiations; and (16) a PowerPoint presentation with additional information about the transactions and the entities involved. ISSUE: Whether transaction value is the proper method of appraisement for the transactions between the Buyer and the Seller. LAW AND ANALYSIS: Merchandise imported into the United States is appraised for customs purposes 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 primary method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. § 1401a(b)(1). When transaction value cannot be applied, the appraised value is determined based on the other valuation methods in the order specified in 19 U.S.C. § 1401a(a). Special rules apply when the buyer and seller are related parties, as defined in 19 U.S.C. § 1401a(g). Specifically, transaction value between a related buyer and seller is acceptable only if the transaction satisfies one of two tests: (1) test values or (2) circumstances of the sale. See 19 U.S.C. § 1401a(b)(2)(B). “Test values” refer to values previously determined pursuant to actual appraisements of imported merchandise. The Buyer did not submit evidence that would support the use of transaction value under the “test values” method. However, information regarding the circumstances of the sale was provided. Under the circumstances of the sale approach, the transaction value between a related buyer and seller is acceptable if an examination of the circumstances of the sale indicates that although related, the relationship between the buyer and the seller did not influence the price actually paid or payable. Illustrative examples are set forth in 19 C.F.R. Part 152 showing how to determine whether the relationship between the buyer and the seller influenced the price. In this respect, CBP will examine the manner in which the buyer and seller organize their commercial relations and the way in which the price in question was derived in order to determine whether the relationship influenced the price. If it can be shown that the price was settled in a manner consistent with the normal pricing practices of the industry in question, or with the way in which the seller settles prices with unrelated buyers, this will demonstrate that the price has not been influenced by the relationship. See 19 C.F.R. § 152.103(l)(1)(i)-(ii). In addition, Customs will consider the price not to have been influenced if the price was adequate to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit realized over a representative period of time. See 19 C.F.R. § 152.103(l)(1)(iii). Nonetheless, these are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well. See 19 C.F.R. § 152.103(I); see also Headquarters Ruling (“HQ”) H037375, dated December 11, 2009; HQ H029658, dated December 8, 2009; HQ H032883, dated March 31, 2010; and, HQ H219515, dated October 11, 2012. In this case, the Buyer argues for a general approach that takes into account every aspect of the transactions to determine whether transaction value is acceptable. Most significantly, the Buyer emphasizes the importance of the transfer pricing study, which was conducted for tax purposes in accordance with Section 482 of the Internal Revenue Code (26 U.S.C. § 482). The Buyer recognizes that the existence of a transfer pricing study does not, by itself, obviate the need for CBP to examine the circumstances of the sale in order to determine whether a related party price is acceptable. See HQ 546979, dated August 30, 2000. Even so, information provided to CBP in a transfer pricing study may be relevant in examining circumstances of the sale, and such information will vary in probative value depending on the details set forth in the study. See, e.g., HQ 548482, dated July 23, 2004. For example, in examining a transfer pricing study for purposes of determining whether transaction value is appropriate between related entities, CBP considers the methodology applied. In CBP’s Informed Compliance Publication entitled “Determining the Acceptability of Transaction Value for Related Party Transactions” (April 2007), CBP explained that an Advanced Price Agreement (“APA”) or TPS based on the Comparable Uncontrolled Price (“CUP”) method has “the most relevance for customs valuation purposes and would be given much more weight than an APA that is based on CPM, which generally has the least relevance for customs valuation purposes.” CBP also considers whether the products sold by the comparable parties in a transfer pricing study are similar to the merchandise sold by the tested entity. The Informed Compliance Publication explains that “under the customs methods for determining the acceptability of transaction value, product similarity is required.” CPM, which compares the profitability of the related party to the profitability of companies that are functionally comparable (i.e., companies that undertake similar functions and risks), thus has little similarity to the customs methods in 19 C.F.R. § 152.103, which require product similarity. Here, as explained above, the Buyer’s transfer pricing procedures apply the CPM methodology, which generally has the least relevance for customs valuation purposes. As for product similarity, the TPS recognizes that “comparability of the functions and risks between a tested party and uncontrolled companies is more important than exact product comparability.” Despite the focus on functions and risks, however, the Buyer argues that the tested companies sell goods of the same class or kind as it does. According to the Buyer, many of the imported goods at issue are “commodity” goods such as rings, bearings, seals, springs, pulleys, shafts, resistors, sleeves, spacers, rollers, and other common machinery parts that “can reasonably be expected to have been imported or sold by most or all of the comparable companies” in the 2015 TPS. However, it appears that the tested companies specialize in the sale of a variety of products including, among others, pharmaceutical ingredients, health products, electronics, industrial equipment, hardwood flooring, capacitors, and semiconductors. These products are not similar to bottle molding and filling equipment. Furthermore, there is no evidence that the tested companies sell the “commodity” goods that the Buyer references. Based on the information available, the tested companies do not sell goods of the same class or kind as the Buyer. The Buyer points to two decisions where CBP has accepted transaction value on the basis of CPM methodology where no product similarity existed. In HQ H228298, dated June 3, 2014, we held that transaction value was acceptable between and importer and its parent company, a Japanese entity that produces machine tools and replacement parts such as CNC lathes, grinding machines, accessories, vertical and multi-axis machine centers, and Advanced Programming Production Systems. A supporting APA applying the CPM method contained comparable companies that distributed a range of goods that were not in the machine tools industry. Nonetheless, based on the totality of the information considered, CBP held that transaction value was the proper method of appraisement. Similarly, in HQ H029658, dated December 8, 2009, CBP held that transaction value was acceptable in sales between the importer, a distributor of motor vehicles, and its parent company. Among other evidence, a paper produced by Ernst & Young entitled “Pricing Practices in the Automotive Industry” and a supporting APA was provided. CBP noted that the comparable companies selected in the APA, which applied the CPM method, “sell a variety of products from air conditioners and heating equipment to tires to roofing materials.” Although the comparable companies did not sell goods of the same class or kind as the importer, CBP considered the information in the APA together with all other relevant aspects of the transaction and held that transaction value was the appropriate method of appraisement. With respect to transfer pricing methodologies, this case is distinguishable from HQ H228298 and HQ H029658 because, unlike in those cases, the transfer prices here were not determined in accordance with an IRS-approved APA. An APA is a prospective agreement between a taxpayer and the IRS (and possibly other tax authorities) regarding the correct transfer pricing methodologies under tax law to be applied to transactions between related parties. CBP has consistently noted the importance of an APA in the context of customs valuation and transfer pricing. See, e.g., HQ 546979, dated August 30, 2000. While Buyer emphasizes that its transfer pricing policies were subject to an IRS audit in 2006 and 2007, we find that such audits, which are retroactive, are not equivalent to an APA, which is a prospective agreement. As a result, we find that the TPS is, by itself, insufficient to establish that transaction value is the proper method of appraisement for transactions between the Buyer and the Seller. Although not independently sufficient to establish that transaction value is the proper method of appraisement, the TPS does contain relevant information in examining the circumstances of the sale and must be considered alongside the other information provided. In this regard, the Buyer highlights the importance of the Buyer and the Seller’s financial statements and the evidence of arm’s-length price negotiations between itself and the Seller. As for the financial statements, the Buyer points out that the operating margins of the Buyer and the Seller are similar. According to the information provided, in 2016, the Buyer’s operating margin was [ ]% and the Seller’s operating margin was [ ]%. The Buyer argues that these operating margins constitute evidence of arm’s-length pricing and evidence that the Seller recovers “all of its costs plus a profit that is equivalent to its overall profit.” As explained above, the all-costs-plus-profit test examines whether the price allows the seller to recover all of its costs plus a profit equivalent the firm’s overall profit realized over a representative period of time (e.g., on an annual basis) in goods of the same class or kind. See 19 C.F.R. § 152.103(l)(1)(iii). In applying the all-costs-plus profit test, CBP normally considers the “firm’s” overall profit to be the profit of the parent company. Therefore, if the seller of the imported goods is a subsidiary of the parent company, the price must be adequate to ensure recovery of all the seller’s costs plus a profit that is equivalent to the parent company’s profit in goods of the same class or kind. See, e.g., HQ H206715, dated January 29, 2015. “Merchandise of the same class or kind” means merchandise (including, but not limited to, identical merchandise and similar merchandise) within a group or range of merchandise produced by a particular industry or industry sector. See 19 C.F.R. § 152.102. Here, the Buyer has provided excerpts of financial statements showing that its 2016 operating margin was within one percentage point of the Seller’s. However, the Buyer has not provided information on the Seller’s costs. Therefore, we are unable to determine whether the price allowed the Seller to recover all of its costs. Moreover, as the Buyer and Seller are both subsidiaries of the same parent company, the relevant comparison is between the Seller’s profit and the parent company’s overall profit realized over a representative period of time (e.g., on an annual basis) in goods of the same class or kind. Based on the information provided, the Buyer therefore has not demonstrated that the all-costs-plus profit test is satisfied in this case. Turning to the evidence of negotiations between the Buyer and the Seller, in certain contexts, such evidence can be a relevant consideration in determining whether the parties’ relationship influenced the price. For example, in HQ H029658, CBP took note of “rigorous negotiations between the buyer and seller to determine an FOB price that permits the Importer’s operating profit to fall within the interquartile range established by a reference to unrelated comparable companies.” Crucially, however, the importer in that case also provided other evidence to show that the prices were at arm’s length including: (1) a detailed description of its sales process; (2) a bilateral APA that was approved by the IRS (the importer was a tested party under the APA, with CPM chosen as the best method to evaluate inter-company transactions); and, (3) a paper, prepared by the importer’s accountants, which provided details with respect to the pricing practices in the automotive industry. While the evidence did not strictly fall within a single illustrative example specified in 19 C.F.R. § 152.103(l)(1)(i)-(iii), CBP considered the totality of the circumstances and concluded that the parties’ relationship did not influence the price. In this case, the Buyer did not provide a paper outlining the pricing practices in the industry in question. Without the context provided by such a document, evidence of negotiations between a related buyer and seller cannot show that prices were determined in an arm’s-length manner. Moreover, unlike in HQ H029658, this case does not involve an APA. In sum, the Buyer provided a TPS applying the CPM methodology, which “generally has the least relevance for customs valuation purposes.” See CBP’s Compliance Publication “Determining the Acceptability of Transaction Value for Related Party Transactions” (April 2007). Although the TPS shows that the Buyer earns a profit that is within the interquartile range of other companies that perform similar functions, the similar companies do not sell goods of the same class or kind. Although CBP has, in certain circumstances, accepted transaction value based on a study applying CPM where no product similarity existed, the transfer prices in those cases were determined in accordance with an IRS-approved APA. In this case, the Buyer provided evidence of a retroactive IRS audit, which is not equivalent to a prospective APA. While the Buyer provided profitability figures for itself and for the Seller, it did not provide information about the parent company’s profitability or the Seller’s costs, which are both critical in determining whether the “all costs plus profit” test is satisfied under 19 C.F.R. § 152.103(l)(1)(iii). Lastly, due to the lack of any information about the pricing practices of the industry in question, evidence of negotiations between the Buyer and the Seller do not constitute evidence of arm’s-length pricing practices. Based on our review of the information provided and all relevant aspects of the transaction, including the way that the Buyer and related Seller organize their commercial relations and the way in which the price in question was arrived at, we find that the Buyer has not satisfied the circumstances of the sale test. Accordingly, transaction value is not an acceptable method of appraisement for the sales between the Seller and the Buyer. When imported merchandise cannot be appraised on the basis of transaction value, it is appraised in accordance with the remaining methods of valuation, applied in sequential order. 19 U.S.C. § 1401a(a)(1). The alternative bases 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 transaction value of identical merchandise or similar merchandise is based on sales, at the same commercial level and in substantially the same quantity, of merchandise exported to the United States at or about the same time as the merchandise being appraised. See 19 U.S.C. § 1401a(c). Since we have not been provided any information concerning the transaction value of identical or similar merchandise, we are not able to value the imported merchandise under this method of appraisement. Nevertheless, if information with respect to the transaction value of identical or similar merchandise is available, the imported merchandise must be appraised under this method of appraisement. Under the deductive value method, imported merchandise is appraised on the basis of the price at which it or identical or similar merchandise is sold in the United States in its condition as imported and in the greatest aggregate quantity either at or about the time of importation, or before the close of the 90th day after the date of importation. 19 U.S.C. § 1401a(d)(2)(A)(i)-(ii). This price is subject to certain enumerated deductions. 19 U.S.C. § 1401a(d)(3). Pursuant to 19 U.S.C. § 1401a(a)(2), if the value cannot be determined on the basis of the transaction value of identical or similar merchandise, the merchandise shall be appraised on the basis of the computed value, rather than the deductive value, if the importer makes a request to that effect to the customs officer concerned. See also 19 C.F.R. § 152.102(c). Here, provided the required information is available and the technical requirements have been satisfied, the deductive value method is an appropriate method of valuing the spare parts. We note that the deductive value method is broadly similar to the transfer pricing procedure “TPP Finished Goods” that the Buyer has applied to spare parts, which relies on the recommended selling price of the parts in the United States and a “discount rate” for the Buyer’s profit and operating expenses. Therefore, provided that the spare parts are sold in the United States within 90 days of importation and the other technical requirements are met, the deductive value method should be used to appraise the spare parts. However, as the rebuild components are not resold in their condition as imported, it is unlikely that the deductive value method could be applied to those parts. The next appraisement method is computed value. 19 U.S.C. § 1401a(e) defines computed value as the following: The computed value of imported merchandise is 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, if its value is not included under subparagraph (A) or (B); and, (D) the packing costs. (2) For purposes of paragraph (1): (A) the cost or value of materials under paragraph (1)(A) shall not include the amount of any internal tax imposed by the country of exportation that is directly applicable to the materials or their disposition if the tax is remitted or refunded upon the exportation of the merchandise in the production of which the materials were used; and, (B) the amount for profit and general expenses under paragraph (1)(B) shall be based upon the producer’s profits and expenses, unless the producer’s profits and expenses 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, in which case the amount under paragraph (1)(B) shall be based on the usual profit and general expenses of such producers in such sales, as determined from sufficient information. 19 U.S.C. § 1401a(e)(h)(5) defines “sufficient information” as the following: the term sufficient information . . . (iii) added under subsection (e)(2) as profit or general expense; . . . means information that establishes the accuracy of such amount, difference, or adjustment. Furthermore, 19 U.S.C. §1401a(g)(2) states that “for purposes of this section, merchandise (including, but not limited to, identical and similar merchandise) shall be treated as being of the same class or kind as other merchandise if it is within a group or range of merchandise produced by a particular industry or industry sector. Based on the information presented, and provided that the required information is available and the technical requirements have been satisfied, the computed value method is an appropriate method of valuing the rebuild components. We note that the computed value method is broadly similar to the transfer pricing procedure “TPP Components” that the Buyer has applied to rebuild components, which is based on the “sum of direct, indirect and allocated structure costs” multiplied by [ ], which reflects the Seller’s mark-up of [ ]%. However, the Center must obtain the necessary information from the Buyer in order to ensure that the technical requirements are satisfied to appraise the merchandise under the computed value method as specified in 19 U.S.C. §1401a(d), and verify whether the final accounting of all pertinent revenue and expenses figures are maintained in accordance with generally accepted accounting principles (“GAAP”). Finally, if the customs value of the spare parts and the rebuild components cannot be determined under the methods set forth in 19 U.S.C. § 1401a(b)-(e), it may be determined on the basis of the “fallback” method in 19 U.S.C. § 1401a(f). This method provides for appraisal on the basis of a value derived from one of the previous methods, reasonably adjusted to the extent necessary to arrive at a value. For example, if the spare parts are not sold in the United States within 90 days of importation, “the ‘90 days’ requirement for the sale of merchandise referred to in 19 C.F.R. § 152.105(c) may be administered flexibly.” See 19 C.F.R. § 152.107(c). Similarly, if the Buyer is unable to meet the technical requirements in 19 C.F.R. § 152.106 for the appraisement of the rebuild components under the computed value method, those requirements may be reasonably adjusted to the extent necessary to arrive at a value. We note, however, that certain limitations exist under the fallback method. 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 United States, minimum values, or arbitrary or fictitious values. See 19 U.S.C. § 1401a(f); 19 C.F.R. § 152.108. HOLDING: Transaction value is not an acceptable method of appraisement for the sales between the Seller and the Buyer. The spare parts should be appraised based on the deductive value method, or, if all the requirements in 19 C.F.R. § 152.105 are not met, the fallback method. The rebuild components should be appraised based on the computed value method, or, if the requirements 19 C.F.R. § 152.106 are not met, the fallback method. Sixty days from the date of this decision, the Office of Trade, Regulations and Rulings, will make this decision available for CBP personnel, and to the public on the CBP Home Page at http://www.cbp.gov by means of the Freedom of Information Act, and other methods of publication. Sincerely, Monika Brenner, Chief Valuation and Special Programs Branch