Acceptability of Applying a Surcharge to the Price Actually Paid or Payable

HQ H302879 October 22, 2019 OT:RR:CTF:VS H302879 EGJ CATEGORY: Valuation Leslie Alan Glick, Esq. Butzel Long Suite 500 1909 K Street NW Washington, DC 20006 RE: Acceptability of Applying a Surcharge to the Price Actually Paid or Payable Dear Mr. Glick: This is in response to your ruling request dated December 6, 2018, filed on behalf of an importer, regarding whether the importer may apply a surcharge for the appraisement of imported automotive parts under transaction value. FACTS: This case involves the importation of one specific car part, an electromagnetic coil assembly for an automobile transfer case, pursuant to a multi-tiered transaction between three companies. The three companies are the part manufacturer, which is located in Asia, the importer, and the importer’s final customer located in the United States. The manufacturer and the importer are related parties. The Ordering Process To begin the ordering process, the final U.S. customer requests a quote on the car parts from the importer. In turn, the importer requests a quote from the manufacturer. After negotiations between the parties, a base price is set and the final customer issues a purchase order to the importer. After receipt of the final customer’s purchase order, the importer issues its own purchase order which sets forth the base price to its manufacturer. The parts are shipped as they are manufactured, and they spend approximately six weeks in transit to the importer’s storage facility in the United States. Flow of Goods The importer operates an inventory system at its storage facility under which the oldest parts in inventory are the next parts to be shipped to the final customer. The importer does this to avoid holding parts long term, which may result in exposure to damage from condensation and other environmental factors. Further, parts held too long may eventually become obsolete due to changes in specifications from the final customer. The importer tracks parts delivered to the final customer back through the importer’s records of deliveries from the manufacturer. The importer must be able to do this as part of its responsibility as a link in the automotive industry supply chain. If parts are identified as out of specification during final assembly or after sale to consumers, the importer is able to trace back parts to the manufacturing source of components to identify causes of non-conformities and assess potential liability for damages and recalls. As support for its ability to identify and track parts, the importer has provided a chart prepared from its records. The chart illustrates how the parts received from the manufacturer are tracked through to delivery to the final customer. The additional documents provided to support the chart include entry summaries provided by the broker, invoices and packing slips from the manufacturer to the importer and invoices, shippers and bills of lading from the importer to the final customer. These documents match, by quantities, the parts received by the importer and subsequently delivered by the importer to the final customer. Invoicing The base price paid by the final customer to the importer is always subject to a “surcharge” to adjust for changes in the cost of two constituent materials of the parts. Prior to 2018, the two materials were copper and steel. As a result of an engineering change in 2018, the two materials are now aluminum and steel. Pursuant to the final customer’s purchase order, the final customer calculates the surcharge using a fixed formula based upon the following commodity price indexes: the Platts, London Metal Exchange (“LME”) Grade A Cash for copper; the Platts, London Metal Exchange (“LME”) NA Cash for aluminum; and the Scrap Price Bulletin Chicago No. 1 Bundle for steel. The surcharge formula is as follows: The monthly base rate for the cost of copper or aluminum set forth in the final purchase order is subtracted from the monthly rate for the cost obtained from the commodity price index (monthly rate - purchase order base rate = difference); Next, the difference between the rates is multiplied by the weight and quantity of the parts sold to the final customer each month (difference x weight x quantities = surcharge); The same formula is used to calculate the steel surcharge; and Every quarter, three months of the surcharges for both copper or aluminum and steel are added together to calculate the net quarterly surcharge. After the end of the quarter, the importer will receive either a debit or credit from the final customer in the amount of the surcharge. The importer will then issue an invoice to the manufacturer in the same amount to reflect the debit or credit. The debit or credit arising from the surcharge will apply to the next invoice between the manufacturer and the importer. For support, the importer has provided the following documentation: An email exchange between the manufacturer and the importer where the surcharge formula is explained and accepted by both parties dated November 2016; The calculation of the 3rd quarter 2017 surcharge and the formula used to calculate the surcharge received from the final customer; A further clarification of how the surcharge formula is calculated, provided by the final customer in October 2017; A Master Agreement dated 8/7/2017 between the final customer and the importer and a release dated 8/6/2018, for the delivery of parts pursuant to the Master Agreement; An example of a purchase order issued by the importer to the manufacturer for the part, dated May 11, 2016; An example of an invoice issued by the manufacturer to the importer for the part, dated August 5, 2018; and An example of a surcharge invoice issued by the importer to the manufacturer dated June 12, 2019. ACE Reconciliation As the importer’s systems and records track parts for recall and specification purposes, the importer can also link the debits/credits arising from the surcharge calculation to specific entries of parts. The final customer’s calculations of the surcharge references invoices which the importer can tie back to its shipment of parts for those invoices and to the initial import of such parts. The importer is utilizing the ACE Reconciliation Program and plans to allocate the surcharges to prior entries through the ACE Reconciliation Program, using the amount of surcharges computed as described above to adjust the transaction value on prior entries. The importer is seeking the confirmation of our office that the method proposed to allocate the surcharges to the prior entries on the basis of transaction value is correct. ISSUE: Whether the importer may apply the surcharge to its prior entries on the basis of transaction value. 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 additions for packing costs, selling commissions incurred by the buyer, assists, royalties or license fees, and proceeds of any subsequent resale that accrue to the seller. 19 U.S.C. § 1401a(b)(1). Transaction value is only acceptable, however, if the buyer and seller are not related, or if related, the circumstances of sale indicate that the relationship did not influence the price actually paid or payable, or the transaction value approximates certain test values. 19 U.S.C. § 1401a(b)(2)(A)-(B). In this case, you state that transaction value is acceptable under the circumstances, and we focus our analysis on the question of whether the post-importation price adjustments are included as part of the transaction value for the imported merchandise. Section 402(b)(4)(B) of the TAA provides that any rebate of, or other decrease in, the price actually paid or payable made or otherwise effected between the buyer and seller after the date of importation of the merchandise will be disregarded in determining transaction value. See also 19 C.F.R. § 152.103(a)(4). However, we have ruled that if the decrease in price is pursuant to a formula which was in existence prior to the date of exportation, such decrease will not be disregarded. See Headquarters Ruling Letter ("HQ") 544944, May 26, 1992. Under 19 C.F.R. § 152.103(a)(1), the price actually paid or payable will be considered without regard to its method of derivation. It may be the result of discounts, increases, or negotiations, or may be arrived at by the application of a formula, such as the price in effect on the date of export in the London Commodity Market. U.S. Customs and Border Protection (CBP) has issued several rulings on the subject stating that only the methodology must be fixed at the time of importation; the actual amount can be calculated at a later date. As noted in HQ H023813, dated December 1, 2008, if the final sales price of imported merchandise is not ascertainable at the time of importation, the phrase “price in effect on the date of export” may be interpreted to mean the price actually paid or payable by application of a formula. A formula in a contract may be acceptable under transaction value if the formula is based on a future event over which neither the seller nor the buyer has any control. See HQ 546736, dated March 31, 1998. The formula must be based on an objective standard not under the control of the buyer or seller, such as the price in effect on the date of export in the London Commodity Market, the example provided in 19 CFR 152.103(a)(1) of an acceptable formula used to determine the price actually paid or payable. If the parties have any control over the adjusted price, the adjusted prices will not be accepted by CBP. In HQ 546231, dated February 10, 1997, we found that because the parties exercised control over whether and to what degree the price would be adjusted in response to changing market conditions, the pricing methodology could not be considered a “formula” within the meaning of 19 CFR 152.103(a)(1) and transaction value was eliminated as a basis of appraisement. In the instant case, the formula is based on an objective standard over which neither the importer nor the manufacturer have any control, specifically, the three commodity indexes published by a third party. In addition, the importer is able to link the specific price adjustment to the relevant entry as a result of its strict recordkeeping procedures in its role as a distributor of car parts. Accordingly, we find that the surcharge pricing formula constitutes an acceptable mechanism to determine the price actually paid or payable for the imported merchandise. Further, we find that the ACE Reconciliation Program is a proper method for adjusting the final value of the imported car parts. HOLDING: If transaction value is the appropriate basis of appraisement between the related parties, then the subject merchandise may be appraised using the formula set forth in the written agreement between the importer and the manufacturer. Further, the ACE Reconciliation Program is a proper method for adjusting the final value of the imported car parts. A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is 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