Valuation of [XXXXXXX] under the fall back method

HQ H303077 April 16, 2019 OT:RR:CTF:VS H303077 JMV CATEGORY: Valuation Andy Bishop [XXXXXXXXX XXXXXX XXXXXX XXXXXX XXXXXX XXXXXX XXXXXXXXX] RE: Valuation of [XXXXXXX] under the fall back method Dear Mr. Bishop: This is in response to your letter dated February 20, 2019, on behalf of [XXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX] (“the Group” or “Importer”), in which you request a ruling, pursuant to 19 C.F.R. Part 177, regarding the acceptable basis of appraisement of [XXXXXXXXX] (the “Product”). You have asked that certain information submitted in connection with this 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 in this ruling or in the 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 ruling. FACTS: The Group’s principal activity is [XXXXXXXXXXX] (“process”); therefore, the Group is a service, not a product. The Group conducts this process for its customers at its European facilities to create the Product, which it then exports to the United States. The process involves taking [XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXX] (“input”) and performing a physical separation process to produce a [XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX], thereby creating the Product and a byproduct, which is [XXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXX]. The Product is valued based on the value of the Input plus the process labor. Within the industry, the process labor is measured in [XXXXXXXXXXXXX] (“Labor Units”). The Group typically produces the Product at its European facilities for its [XXXXXXX] customers on a toll basis, meaning, the customers provide the Input as an assist and the Group is compensated for the processing effort, measured in Labor Units, required to create the Product. The Group then imports the product to U.S. [XXXXX] consignee. At the consignee’s facilities, the consignee further processes the Product to produce [XXXXXXXXXX] (“Final Product”). In this process, the consignee may physically mingle the Product with fungible product produced by other [XXXXXXXXXXXX] companies. The consignee then delivers the final product to the customer for use in their facility [XXXXXXXXXXX]. In sum, the Group takes the Input provided by the customer as an assist and processes it to create the Product. Customer compensates that Group for the processing efforts and the Product is imported and delivered by the Group to the consignee’s facilities in the United States to create the Final Product. We note that the customer separately procures each stage of the final product development process. After the consignee receives the Product, the consignee will mix various [XXXX] (“qualities”) of the Product in order to meet the customer’s requirements. At each consignee facility, the total physical inventory of Product is pooled and treated as fungible stock for the Final Product that is delivered to customers. Thus, rather than having title to specific physical inventory at the consignee facility, market participants (including the Group and its customers) are allocated shares of the consignee’s total inventory, with their rights to material recorded in a “book account.” The consignee’s book account records this right to material into two separate constituent parts of the Product: Input credit and Labor Unit credit. Although the Group is part of a physical goods supply chain, the Group’s contractual deliveries to its customers typically occur by “book transfer” at the consignee’s facility in the United States. Under these arrangements, the customer receives an entitlement to a portion of the total inventory of fungible material currently held at the consignee’s facility. Presently, the Group declares a value equal to the spot market price of the Input, as published by [XXXXXX], plus the average value of the Labor Units from the previous year. CBP approved this method of valuation of the product in Headquarters’ Ruling Letter (“HQ”) 548111, dated August 23, 2002. However, you claim that this method is no longer the most accurate method of valuation for the Product. Supply Chain Disruptions You state the connection between the Group’s physical import of the Product and its book transfer delivery to customers has become extremely attenuated over the last 16 years, such that there is no longer any meaningful means of associating the Group’s physical imports of product and the contract remuneration the Group receives from its customers. You claim that the reasons for this change are various developments and events that caused volatility in the market. You state that increased demand was anticipated in the early 2000s, which led to the development of more efficient technology and an increase in supply. However, because of a global event, the [XXXXXX] incident, and responding policy changes, demand decreased as supply increased. The decrease in demand led to price volatility and an excess of inventory at each stage of the supply chain. Because of this surplus, consignees have been physically restricted or unable to accept new deliveries and want to use product they already have stored. In the past, the Group would physically import and deliver to consignee the same amount of Input and Labor Units as it was expecting to transfer to the customer by book transfer over a 12 month period. Additionally, the Group would ensure that the average quality of product physically imported and delivered to the consignee was equivalent to the average quality required by the customer, to allow the consignee to blend material as appropriate. Presently however, due to high inventory levels, consignees may already have on site many of the various qualities of product required for blending. Additionally, because of the uncertain market conditions in the industry as a whole, consignees are prioritizing receipt of Product based on factors such as the credit rating of the Group and other [XXXXX], rather than the party’s contractual deliveries to final customers. For example, one consignee has required the Group to make deliveries to its customers out of a negative book account, meaning the Group has been delivering Labor Units to its U.S. customers by book transfer without the need to import and deliver the Product to the consignee facility. As a result, the Group has a deficit of Labor Units on account with this particular consignee. This deficit represents Labor Units already delivered to final customers by book transfer, but for which the Group has not yet imported or delivered the material. The necessary imports of Product to repay this book deficit will happen at some unknown future dates. You state that the consignee allows these “negative book” arrangements in part to manage its delivery schedule for Product from other importers, and in part because the Group has the best credit rating amongst competitors and the consignee would prefer to accept material from other counterparties while allowing the Group to trade on credit. You assert that changes in shipping patterns have also widened the disconnect between imports and customer invoicing. Before 2015, the Group was able to use a range of container vessels to ship material to the United States, enabling regular deliveries of 4-12 cylinders of Product to be made every 1-2 weeks. However, because of concerns over the liabilities covered by shipping insurance, the majority of shipping companies have been unwilling to carry the Product. You claim that the timing difference between infrequent, large physical shipments and frequent, smaller book transactions for sales to final customers has caused the Group’s physical Product imports to become fundamentally divorced from the book delivery transactions to customers that were the basis for Labor Unit valuations in the HQ 548111. You state that the aforementioned developments in the supply chain have undermined the prior year contracting pricing method outlined in HQ 548111. You state that the timing differences between the Group’s import of Product and physical delivery to the consignee’s facility on the one hand and the book transfer of Labor Units to the final customer and the customer’s payment have both been extended and complicated by the slowdown in the supply chain. For example, at some consignee’s facilities, the Group’s imports and physical shipments are made to stock the Group’s accounts with the consignee in advance of future sales to the final customers. At other facilities, the Group’s sales to the final customers are made in advance of the Group’s imports so that later imports will be needed to reduce the book account liability created. Both circumstances render it unreasonable to value the Labor Unit service component of the Group’s imports based on the prior year sales prices as the Product material imported in the current year may relate to Labor Unit service sales over multiple years, past or future. Additionally, the Product material the Group imports will rarely, if ever, match the final customer’s quality requirements and will require blending at the consignee’s facility prior to use by final customers. Instead, the transaction between the consignee’s facility and the Group is driven by a combination of transport optimization, credit risk and production considerations, which determine the volume, quality and timing of the Group’s import shipments. These circumstances are fundamentally disconnected from Labor Unit sales made to customers by book transfer at the consignee’s facilities. Therefore, you assert that using the previous year’s sales prices is no longer an appropriate method of valuing the service component of the Product. You state that the Input is purchased by the customer for a price unknown to the Group upon import and therefore, as discussed in HQ548111, the Input spot value is the most reasonable “fallback” value for this assist. You state that prices for these commodities are publically available, with [XXXXXX] being the most widely used source. [XXXXXX] is a firm widely recognized for its comprehensive knowledge of the global [XXXXXXXXXX] industry and its expertise in compiling market based price indices upon which many [XXXXXXXXX] contracts are based. [XXXXXX] publishes Labor Unit and Input spot values on a monthy basis. These spot process are based on [XXXXXX]’s judgment of the price at which spot and near-term transactions for significant quantities of product and [XXXXXX] services could be conducted as of the last day of the month. You state that these indices are well established, and are derived from an analysis of actual offers, bids and transactions. Additionally, these indices are relied on by market participants for establishing contract prices and insurance valuation, and they have been accepted by the European Customs authorities for years as the basis of valuing the goods for export. You argue that the [XXXXXX] published Labor Unit spot price is now also the most reasonable fall back value for the Labor Unit component of the Product. Accordingly, you propose that CBP value imported Product by aggregating the Labor Unit and Input spot prices published by [XXXXXX] the month prior to export. ISSUE: Whether the proposed method of valuation is acceptable under 19 U.S.C. § 1401a. 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 primary method of appraisement is transaction value, defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States” plus the value of certain statutorily enumerated additions. 19 U.S.C. §1401a(b)(1). In order for transaction value to be used as a method of appraisement, there must have been a “sale” between the parties. 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 title from one party to another for consideration (citing J.L. Wood v. United States, 62 CCPA, 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). Without a sale for exportation to the United States, transaction value must be eliminated as a means of appraisement. In this case, you claim there is no “sale” for exportation since the physical delivery of Product to consignee in bulk does not relate to a specified customer contract and the Group cannot identify a “price actually paid or payable” when the product is imported. Further, because the consignee treat their inventories of Product as fungible, the Product delivered by the Group may be combined and/or blended with product of a different quality delivered by other companies or imported on other occasions to create the desired quality. Therefore, you state that it is not possible, even after importation, to link individual import shipments with contractual deliveries via book transfer to particular customers. Further, not even the identity of the buyer of the specific Product imported is known at the time of entry and customers do not report the value of their Input material, as it is commercially sensitive. Since the value of the Input is not known to the Group and is not included in the contract price, there is no bona fide sale and transaction value cannot be used as the basis of appraisement. 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. The alternative bases of appraisement, in order of precedence, are: the transaction value of identical merchandise; the transaction value of similar merchandise; deductive value; and computed value. If the value of imported merchandise cannot be determined under these methods, it is to be determined in accordance with section 402(f) of the TAA. 19 U.S.C. § 1401a(a)(1). The transaction value of identical or similar merchandise The first and second alternative bases of appraisement are the transaction value of identical merchandise and the transaction value of similar merchandise as determined in accordance with section 402(c) of the TAA. Appraised values of identical and similar merchandise are based on values that are acceptable as appraised values under section 402(b) of the TAA. 19 U.S.C. § 1401a(c)(1). The transaction value of identical or similar merchandise must be based on previously accepted 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). However, 19 USC §1401a (h)(l) and (h)(2) indicate that merchandise will only be considered to be “identical” or “similar” for these purposes when it “was produced in the same country . . . as the merchandise being appraised.” Since the Group is the only producer of Product in [XXXXXXXXXXXXXXXXXX XXXXXXX], no other similar or identical merchandise would fulfil this requirement. Deductive value Deductive value pursuant to section 402(d) of the TAA is the next applicable basis of appraisement and is based on the unit price at which the merchandise concerned is sold in the United States in the greatest aggregate quantity, generally in the condition as imported and at or about the time of importation of the merchandise being appraised. Provided the merchandise is not further processed, the unit price at which imported merchandise is sold in the greatest aggregate quantity means the unit price at which it is sold to unrelated persons at the first commercial level after importation. 19 U.S.C. § 1401a(d). Additionally, 19 USC §1401a (d)(3)(D) states that “for purposes of determining the deductive value of imported merchandise, any sale to a person who supplies any assist for use in connection with the production or sale for export of the merchandise concerned shall be disregarded.” Therefore, the deductive value cannot be used to value imported Product because the Group’s customers provide the Input as an assist. Computed value The next method of appraisement is the computed value method, set forth in section 402(e) of the TAA. Computed value is defined as the sum of, inter alia: the cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise; and an amount for profit and general expenses equal to that usually reflected in sales for export to the United States, by producers in the country of exportation, of merchandise of the same class or kind. 19 U.S.C. § 1401a(e)(1). Simply, computed value of the imported merchandise is based on the manufacturing cost of the imported merchandise and an amount for “profit and general expenses.” In this case, it is not possible to calculate a computed value because (1) the Input element is provided by the customer, so the Group has no means of calculating the Input’s manufacturing cost, and (2) since Product is fungible and co-mingled, and the Group’s European [XXXXXX] facilities do not process material for the U.S. market separately from that produced for other markets, it is not possible to identify the cost of producing the imported merchandise. Therefore, computed value cannot be determined. Value if other values cannot be determined or used (the “fallback method”) When the value of imported merchandise cannot be determined under 19 U.S.C. § 1401a(b-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 United States, minimum values, or arbitrary or fictitious values. 19 U.S.C. § 1401a(f); 19 C.F.R. § 152.108. Under section 500 of the Tariff Act of 1930, as amended, which constitutes CBP’s general appraisement authority, the appraising officer may: fix the final appraisement of merchandise by ascertaining or estimating the value thereof, under section 1401a of this title, by all reasonable ways and means in his power, any statement of cost or costs of production in any invoice, affidavit, declaration, other document to the contrary notwithstanding… 19 U.S.C. § 1500(a). In this regard, the Statement of Administrative Action (SAA), which forms part of the legislative history of the TAA, provides in pertinent part: Section 500 is the general authority for Customs to appraise merchandise. It is not a separate basis of appraisement and cannot be used as such. Section 500 allows Customs to consider the best evidence available in appraising merchandise. It allows Customs to consider the contract between the buyer and seller, if available, when the information contained in the invoice is either deficient or is known to contain inaccurate figures or calculations. . . . Section 500 authorize [sic] the appraising officer to weigh the nature of the evidence before him in appraising the imported merchandise. This could be the invoice, the contract between the parties, or even the recordkeeping of either of the parties to the contract. Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 67. Section 152.107 of the CBP regulations (19 C.F.R. § 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. Here you propose that the appraisement of the imported Product be based on the spot prices of both the Input and the Labor Units, as both are commodities actively traded in liquid markets. Specifically, you suggest CBP use the published spot values available from [XXXXXX] at the time of export for both the Input and Labor Unit element of Product. You state that since these indices are both derived from actual contemporaneous market offers and sales, and are often used to determine the actual contract price for [XXXXX] sales, they provide the most reliable estimate of the value of the goods at the time of export to the United States. CBP has previously accepted values under the “fallback method” that are based on a commodities market price. In HQ H055410, dated January 11, 2010, CBP considered the valuation of silver nitrate crystal in a solid block form in the shape of the container in which it was held. The consistency of the product was claimed to render it damaged with no market in the United States without further processing. The merchandise was processed for the recovery of silver, which would eventually be used to produce silver oxide. We ruled that since the value of the imported silver nitrate could not be determined on the basis of the intrinsic silver value, the value should be determined in accordance with the New York Spot price of silver, plus the cost of production of silver nitrate in the United Kingdom. However, since silver nitrate was imported in a defective form, we further held that the cost of recovery of silver in the United States could be deducted from the value of the merchandise. See also HQ 230108, dated May 4, 2006 (finding that spot prices listed on the American IC Exchange was an appropriate value under the “fallback method”), and HQ H2961690, dated January 18, 2018 (finding that “London Fix” price on the date of export for silver and gold was an appropriate value under the “fallback method”). In this instance, we find it acceptable to value the product based on the spot market value of Input and the processing costs, as expressed by the spot market price of Labor Units, published by [XXXXXX] the month before export. This proposed valuation method is also consistent with HQ 548111 as the method of valuing the Input component of the Product will continue to be based on the [XXXXXX] published spot price. While HQ 548111 provided that the value of the Labor Units should be based on the average of the Group’s prior year actual sales of [XXXXXX] services delivered at U.S. consignee facilities, that method is no longer accurate, for the reasons outlined above. Therefore, the Labor Unit component should also be valued based on the [XXXXXX] published spot price. HOLDING: As set forth above, the subject merchandise may be appraised under the “fallback” method based on the spot prices of both the Input, [XXXXXXXXXX] and Labor Units, [XXXXXXXXXXXXXX] published by [XXXXXX] the month before export. Please note that 19 C.F.R. § 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 field 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.” 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