Appraisement of certain hardware products

U.S. Department of Homeland Security Washington, DC 20229 U.S. Customs and Border Protection HQ H303281 December 30, 2019 OT:RR:CTF:VS H303281 EE CATEGORY: Valuation Suzanne Kane Akin Gump Strauss Hauer & Feld LLP 1333 New Hampshire Avenue NW Washington DC, 20036 Re: Appraisement of certain hardware products Dear Ms. Kane: This is in response to your letter, dated March 22, 2019, on behalf of your client, National Instruments Corporation (“NIC”), in which you request a ruling concerning the appraisement of certain hardware products imported into the United States. FACTS: NIC, headquartered in Austin, Texas, and its subsidiaries (“NI”) design, manufacture, and sell computer-based software defined systems to engineers and scientists for use in a wide range of industries. NI products are used across many industries in a variety of applications including research and development, simulation and modeling, product design, prototype and validation, production testing and industrial control, field and factory service and repair. NI products serve the following industries and applications worldwide: advanced research, automated test equipment, automotive, commercial aerospace, computers and electronics, consumer electronics, continuous process manufacturing, education, government/defense, medical research/pharmaceutical, power/energy, semiconductors, telecommunications, and others. You state that NIC imports its hardware products only from its foreign related manufacturers, National Instruments Hungary (“NIH”) and National Instruments Malaysia (“NIM”) and resells those products to its customers. You state that substantially all of NI’s products that are imported into the United States are imported and sold by NIC. NI manufactures a substantial majority of its hardware products at NIH. In 2018, NIM produced approximately 30%, while NIH produced approximately 70% of NI’s global hardware production. You state that NIH and NIM manufacture more than 3,600 different hardware products. With a new hardware product being released every day on average, NIH and NIM’s manufacturing process involves a very high volume of products with low volume production runs. You state that it is not unusual for NIH or NIM to run a production job of only ten units. NIH and NIM are able to change their production schedule within as few as three hours in order to meet NI’s customer demand. Manufacturing operations at NIH and NIM can be divided into three areas: electronic circuit card assembly, module assembly, and chassis assembly. To support their manufacturing operations, NIH and NIM obtain large volumes of high-quality components and subassemblies from third parties. The majority of NI’s hardware products require cables and connectivity accessories to allow its customers to make connections between NI’s products and the customer’s product. Substantially all of these products are produced by unrelated third parties and either packaged for sale as standalone items or packaged with manufactured items. You state that NIC imports hardware products from NIH and NIM in the following four categories: • Hardware products manufactured by NIH and sold directly to NIC for consumption by NIC or for resale to NIC’s customers; • Hardware products manufactured by NIM and sold directly to NIC for consumption by NIC or for resale to NIC’s customers; • Hardware products purchased by NIH from NIM or unrelated third parties and sold to NIC for consumption by NIC or for resale to NIC’s customers; and • Hardware products purchased by NIM from NIH or unrelated third parties and sold to NIC for consumption by NIC or for resale to NIC’s customers. NIC differentiates the categories above in NI’s Enterprise Resource Planning System (“ERP”) based on a custom implementation of Oracle Corporation’s enterprise software products and services. This allows NIC to report sales, expenses, and profits and manage all shipping and invoicing functions of each product category globally from a single system. Therefore, NIC is able to track the sales, expenses, and profits associated with each of the four product categories. You submitted the following documents: NI Hungary Kft. Transfer Pricing Benchmarking Study – Distribution activity – Hungarian search for Fiscal Year Ended December 31, 2017 prepared by PwC; NI Hungary Kft. Transfer Pricing Benchmarking Study – Manufacturing activity – Hungarian and EU search for Fiscal Year Ended December 31, 2017 prepared by PwC; NI Hungary Kft Transfer Pricing Documentation for Fiscal Year Ended December 31, 2017 prepared by PwC; NI Malaysia Sdn Bhd, Transfer Pricing Documentation Update for the Fiscal Year ended December 31, 2017, Transactional Module (Trading business segment) prepared by Ernst & Young; and NI Malaysia Sdn Bhd, Transfer Pricing Documentation Update for the Fiscal Year ended December 31, 2017, Transactional Module (Manufacturing business segment) prepared by Ernst & Young. 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 your request will not be released to the public and will be withheld from published versions of this ruling. ISSUE: What is the correct method of appraisement of the hardware products imported into the United States? 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). If, for any reason, sufficient information is not available with respect to the additions to the price actually paid or payable, the transaction value of the imported merchandise is treated as one that cannot be determined. 19 U.S.C. § 1401a(b)(1). The term “price actually paid or payable” is defined as: [T]he total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C. § 1401a(b)(4)(A). There are special rules that apply when the buyer and seller are related parties, as defined in 19 U.S.C. § 1401a(g). Specifically, transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, an examination of the circumstances of the sale indicates that the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain “test values.” 19 U.S.C. § 1401a(b)(2)(B); 19 C.F.R. § 152.103(l). 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, their relationship did not influence the price actually paid or payable. The U.S. Customs and Border Protection (“CBP”) Regulations specified in 19 C.F.R. Part 152 set forth illustrative examples of how to determine if the relationship between the buyer and the seller influences the price. See also HQ H029658, dated December 8, 2009; H037375, dated December 11, 2009; and, HQ H032883, dated March 31, 2010. 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, CBP 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 (e.g., on an annual basis), in sales of merchandise of the same class or kind. 19 C.F.R. § 152.103(l)(1)(iii). These are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well. In the instant case, you claim that NIC is unable to demonstrate that the transfer price paid to its related manufacturers for imported products meets either the circumstances of sale test or test values for every individual product that it purchases from NIH and NIM and imports into the United States. You state that since NIC’s products are unique to NIC, there is not sufficient information regarding the normal pricing practices of the industry that NIC can use as a benchmark to meet the normal pricing practices of the industry. You also state that because NIH and NIM do not sell the merchandise directly to any unrelated parties in the United States, NIC is unable to demonstrate that its purchases from NIH and NIM are settled in a manner consistent with how NIH and NIM determine prices to unrelated buyers. Further, you state that NIC cannot meet the all costs plus profit test because of the lack of sufficient information. Lastly, you state that NIC is unable to establish that its transfer price meets the test values set forth in section 1401a(b)(2)(B) because it does not have (i) any sales of similar merchandise to unrelated buyers in the United States; nor (ii) deductive or computed values that can serve as test values. Because neither the circumstances of the sale nor the test values method can be applied in this case, we agree that transaction value is not the appropriate method of appraisement. When imported merchandise cannot be appraised on the basis of transaction value, it is to be appraised in accordance with the remaining methods of valuation, applied in the following sequential order: 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 the “fallback method.” 19 U.S.C. § 1401a(f). NIC is not aware of any identical or similar merchandise sold for exportation to the United States. Therefore, to the extent that such information is not available, the imported hardware products cannot be appraised using transaction value of identical merchandise or similar merchandise. 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). Further, 19 U.S.C. § 1401a(d)(3)(A) provides that the unit price determined under paragraph (2) is reduced by an amount equal to: (i) any commission usually paid or agreed to be paid, or the addition usually made for profit and general expenses, in connection with sales in the United States of imported merchandise that is of the same class or kind, regardless of the country of exportation, as the merchandise concerned; (ii) the actual costs and associated costs of transportation and insurance incurred with respect to international shipments of the merchandise concerned from the country of exportation to the United States; (iii) the usual costs and associated costs of transportation and insurance incurred with respect to shipments of such merchandise from the place of importation to the place of delivery in the United States, if such costs are not included as a general expense under clause (i); (iv) the customs duties and other Federal taxes currently payable on the merchandise concerned by reason of its importation, and any Federal excise tax on, or measured by the value of, such merchandise for which vendors in the United States are ordinarily liable… 19 U.S.C. § 1401a(d)(3)(A). 19 U.S.C. § 1401a(d)(3)(B) provides that “[f]or purposes of applying paragraph (A)”: (i) the deduction made for profits and general expenses shall be based upon the importer’s profits and general expenses, unless such profits and general expenses are inconsistent with those reflected in sales in the United States of imported merchandise of the same class or kind, in which case the deduction shall be based on the usual profit and general expenses reflected in such sales, as determined from sufficient information; and (ii) any State or local tax imposed on the importer with respect to the sale of imported merchandise shall be treated as a general expense. You state that NIC does not have sufficient information to determine if its profits and general expenses for the products that it purchases from NIH and NIM and imports into the United States are consistent with the profit and general expenses reflected in sales in the United States of imported merchandise of the same class or kind. As such, the deductive value method of appraisement is inapplicable under the circumstances of the instant case. Under the computed value method, merchandise is appraised on the basis of the material and processing costs incurred in the production of the imported merchandise, plus an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind, and the value of any assists and packing costs. 19 U.S.C. § 1401a(e)(1). Specifically, 19 U.S.C. § 1401a(e) provides that: (1) 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). The Statement of Administrative Action (“SAA”), adopted by Congress with the passage of the TAA, provides that with respect to computed value: The cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise will be determined on the basis of information supplied by, or on behalf of, the producer and will be based upon the commercial accounts of the producer, if such accounts are consistent with the generally accepted accounting principles applied in the country where the goods are produced. The “amount for profit and general expenses” will be determined on the basis of information supplied by, or on behalf of, the producer and will be based upon the commercial accounts of the producer, provided that such accounts are consistent with the generally accepted accounting principles applied in the country where the goods are produced and unless the figures provided 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. You state that NIC does not have sufficient information to ensure that the profits that NIH and NIM earn in each of their transactions with NIC are consistent with the profits usually reflected in sales of merchandise of the same class or kind by producers in the countries of exportation. Further, for the products that NIH and NIM purchase from unrelated third parties, NIC does not have access to sufficient information about the third party producer's profits and expenses. Finally, the cost, profit and general expense information necessary to compute is not available prior to importation. Since necessary information is not available, the computed value cannot be used to determine the value of the imported hardware products. When the value of imported merchandise cannot be determined under the methods set forth in 19 U.S.C. § 1401a(b)-(e), it may be appraised on the basis of a value derived from one of those methods, reasonably adjusted to the extent necessary to arrive at a value. However, there are certain prohibited bases of appraisement under 19 U.S.C. § 1401a(f). 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). Nevertheless, under section 500 of the Tariff Act of 1930, as amended, which sets forth 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, or other document to the contrary notwithstanding... 19 U.S.C. § 1500(a). In this regard, the SAA, which forms part of the legislative history of the TAA, provides in pertinent part: 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. In those transactions where no accurate invoice or other documentation is available, and the importer is unable, or refuses, to provide such information, then reasonable ways and means will be used to determine the appropriate value, using whatever evidence is available, again within the constraints of section 402. 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.(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. You propose to have the imported hardware valued under the fallback method of 19 U.S.C. § 1401a(f) by using a method derived from computed value. Specifically, you propose to calculate the modified computed value of the imported hardware by adding a profit margin to the “total cost of sales” of every imported product you claim can be supported by NIH and NIM’s production and accounting records. The total cost of sales will include the standard cost of each product plus an allocation of production costs and all other operating costs. The amount for profit will equal the seller’s (either NIH or NIM, depending on the import flow) profit on sales of the same product category to all of its customers. NIC will update these values annually, based on costs and profits for the preceding financial year. Total Cost of Sales The “total cost of sales” includes the standard cost for each imported product, plus costs that are associated with production but are not allocated to individual products (such as outbound logistics costs) and all other operating costs. Costs associated with production but not allocated to individual products are allocated to imported products based on the ratio of the total standard cost of products imported by NIC to the total standard costs of products sold by NIH or NIM to all of their customers. All other operating costs are allocated to imported products based on the ratio of the gross margin of products in the relevant category imported by NIC to the total gross margin of the products in that category sold by NIH or NIM to all of their customers. Standard cost is maintained for each product manufactured or purchased in NI’s ERP system. For products manufactured by NIH and NIM, standard cost, production costs, and all other costs are defined as follows: Standard cost = Material Cost + Material Overhead + Resource Cost • Material cost includes: (1) the cost of the raw materials needed to build the product; plus (2) any box, bag, and other packaging materials. This material cost varies based on factors such as the quantities that NI buys, the location of the materials, the vendors from which NI purchases, etc. • Material Overhead (“MOH”) accounts for management and warehousing of raw material. The primary MOH cost is inbound shipping and allocation for warehousing. • Resource Cost includes costs associated with building the product or converting the raw materials into shippable products. The Resource Cost includes the cost of production labor, the capitalized cost of equipment, and the cost of assembly, handling and testing. Production Costs: Other costs that are associated with overall production of NIH and NIM products but are not allocated to individual products include: • Scrap; • Building costs; and • Transportation costs for outbound shipping of the finished goods. Operating Costs: Other costs that are associated with the business at NIH or NIM, including sales and marketing, research and development, general and administrative, and royalties for the right to manufacture the products. For products purchased by NIH and NIM from unrelated third parties, NI proposes to use the purchase price as the standard cost, and then include amounts for NI’s production costs and operating costs in the same manner as described above. Profit Margin Under its proposed modified computed value, in addition to the total cost of sales, NIC will include an amount for profit in each of the four product categories that reflects NIH or NIM’s average annual profit margin on all of its sales in that product category. At the time of entry, NIC will calculate the profit margin based on the annual profit for each product category from the previous fiscal year. NIC submitted the following explanation and support for the profit margins that NIC has calculated based on its fiscal data for 2018 and its most recent complete transfer pricing studies for each of the four product categories. Items manufactured by NIH and sold directly to NIC for consumption by NIC or for resale to NIC’s customers. For 2018, NIH earned an overall profit equal to a markup of X% over total costs on sales of NIH-manufactured products to all of its customers. Accordingly, in order to determine a customs value for the NIH-manufactured products that NIC purchases from NIH and imports in 2019, NIC proposes to add to the total cost of sales of each imported product an amount for profit of X% of total costs. This markup is within the 2012-2016 weighted average inter­quartile range of full cost markup over total costs of X% to X% (and above the median of X%) for X comparable independent EU companies that was established in a study of NIH’s 2017 transfer pricing practices conducted by PwC. Items manufactured by NIM and sold directly to NIC for consumption by NIC or for resale to NIC’s customers. For 2018, NIM earned an overall profit equal to a markup of X% over total costs on sales of NIM-manufactured products to all of its customers. Accordingly, in order to determine a customs value for the NIM-manufactured products that NIC purchases from NIM and imports in 2019, NIC proposes to add to the total cost of sales of each imported product an amount for profit of X% of total costs. This markup is within the 2016 inter-quartile range of full cost markup over total costs of X% to X% (and above the median of X%) for X comparable independent Malaysian manufacturers that was established in a study of NIM’s 2017 transfer pricing practices conducted by Ernst & Young. Hardware products purchased by NIH from NIM or unrelated third parties and sold to NIC for consumption by NIC or for resale to NIC’s customers. For 2018, NIH earned an overall operating margin on distribution of hardware products purchased from NIM and unrelated third parties of X% to all of its customers. Accordingly, in order to determine a customs value for the products that NIH purchases from NIM and unrelated third parties and sells to NIC for consumption by NIC or for resale to NIC’s customers, NIC proposes to add an amount for the operating margin of X%. This markup is within the 2012-2016 weighted average inter-quartile range of operating margins of X% to X% (and above the median of X%) for X comparable independent Hungarian distributors that was established in a study of NIH's 2017 transfer pricing practices conducted by PwC. Hardware products purchased by NIM from NIH or unrelated third parties and sold to NIC for consumption by NIC or for resale to NIC’s customers. In 2018, NIM earned an overall profit on distribution of hardware products purchased from NIH and unrelated third parties equal to a markup of X% over total costs. This markup is above the 2016 inter-quartile range of X% to X% for X comparable independent Malaysian distributors that was established in a study of NIM’s 2017 transfer pricing practices conducted by Ernst & Young. However, as in this case, when NIM’s calculated profit margin exceeds the upper end of the interquartile range of the profit margin, NIC proposes to add to the total cost of sales of each imported product an amount that yields a profit of the upper end of the interquartile range in its transfer pricing study, which in this case amounts to X%. In this case, we find that the imported hardware may be appraised using a modified version of computed value under the fallback method set forth in 19 U.S.C. § 1401a(f) based on NIC’s proposal, provided NIC is prepared to present CBP with documentation based on its commercial accounts of the NIH and NIM, in accordance with the generally accepted accounting principles applied in Hungary and Malaysia. HOLDING: Based on the information provided, the imported hardware may be appraised under the fallback method pursuant to 19 U.S.C. § 1401a(f) based on modified computed value, provided NIC is prepared to present CBP with documentation to support appraisement under this method. The documentation is also subject to any verification deemed necessary in accordance with 19 C.F.R. § 141.88 and 19 C.F.R. § 177.9(b)(1). 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 Customs Service 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