Internal Advice; Transaction Value; Related Party Transaction

H303662 January 29, 2021 OT:RR:CTF:VSP H303662 JMV CATEGORY: Valuation Director Juan Porras Machinery Center of Excellence and Expertise U.S. Customs and Border Protection 109 Shiloh Drive, Suite 300 Laredo, TX 78045 RE: Internal Advice; Transaction Value; Related Party Transaction Dear Director, This is in response to the request for internal advice dated April 23, 2019 regarding whether the importer is properly deducting freight and insurance from the declared value. FACTS: DENSO Manufacturing Tennessee, Inc., (“DMTN”), is a subsidiary of DENSO International America, Inc. (“DIAM”), both of which may act as importers for intercompany sales. DMTN has four manufacturing plants in Maryville, Tennessee producing motor vehicle parts including starters, alternators, instrument clusters, electronics (includes engine, safety, and device products), and body electronics (focus on remote keyless entry, auto air conditioning control units, tire pressure monitoring systems and body control modules). This internal advice request involves transactions between the ultimate parent company, DENSO Corporation of Japan (“DNJP”) and the U.S. affiliates DMTN and DIAM (collectively, “DENSO”). DMTN filed a prior disclosure related to customs value on February 2, 2017 and a supplement on June 1, 2017. The disclosure covered certain value-related adjustments (i.e. debit notes between DMTN and DNJP) that were omitted from the company’s reconciliation filings over the past 5 years. In response to the first disclosure, CBP completed a Focused Assessment (“FA”) Pre-Assessment Survey (“PAS”) of the importing processes of DMTN. This FA-PAS led to this request for internal advice, in which your office indicated that the importer is deducting expenses related to international freight and insurance from the cost of the goods and deducting the same costs again at the time of entry. Your office therefore claims that DENSO is improperly reducing the value of the goods and duty owed to CBP. According to DNJP’s submission in response to the internal advice request, there are three different “flows” by which merchandise is sold by DNJP (or any other foreign DENSO affiliate) to a related DENSO entity in the United States. The first two flows are identified as “pass-through” transactions. The third flow relates to knockdown parts, which are sold to DMTN for DMTN’s use in further internal production in the United States. The products produced by DMTN from the knockdown parts will thereafter be sold either directly to an Original Equipment Manufacturer (“OEM”) customer or to DIAM for resale to an OEM customer. Pass-through transactions In the first type of “pass-through transaction,” finished goods may be sold from a foreign DENSO affiliate either to DMTN or to DIAM for direct resale to an unrelated OEM customer. In the second type of “pass-through transaction,” finished goods may be sold from a foreign DENSO affiliate to DMTN, which will resell the item domestically to DIAM before it is sold again to an unrelated OEM customer. DENSO states that in both instances, DENSO establishes a “target sale price” at which it aims to sell its products to unrelated OEMs. The target sale price is calculated by DNJP to ensure that the price covers all of DIAM’s/DMTN’s costs (sales, general and administrative or “SG&A” expenses), a profit set at 2.0% for DIAM/DMTN; all inland and international freight, insurance and associated charges/fees; and all of DNJP’s costs plus a profit as measured at the product group or division level. This target sales price is used in negotiations with OEM customers. Before a final sales price is agreed to with the OEM, DENSO backs out all of DMTN’s/DIAM’s cost and profit, then validates that figure against what would be DNJP’s internal costs to ensure that the final value ensures DNJP recovers costs plus a representative profit. Based on that final resale price, DENSO then establishes the intercompany transfer price from DNJP to DIAM/DMTN. More specifically, DNJP deducts all DENSO-related U.S. expenses and profit (whether DIAM or DMTN), as well as all freight, insurance and associated transportation costs to approximate the value used by DIAM or DMTN at the time of entry. Those deductions are based on the historical costs incurred by DENSO over time and include DIAM- and DMTN-specific SG&A plus a 2.0% profit, a calculation of actual container space used, an allocation for insurance, a deduction for duty as assessed at the part/commodity level and other associated expenses involved in the international movement of DENSO product to the United States. Knockdown transactions The final transaction structure involves knockdown parts, which are sold to DMTN for DMTN’s use in further internal production in the United States, which are then sold directly to an OEM customer or to DIAM for resale to an OEM customer. In establishing the knockdown value, DNJP builds up the final piece price through a summation of all direct costs; all overhead costs; product packaging for export shipment; SG&A expenses; and profit at a product group or division level as recorded and associated on DNJP’s books and records. These prices are based on DNJP’s cost of production as derived from the Company’s historical accounting/financial records and external purchasing costs. For DNJP, establishment of a transfer price commences with identifying and associating DNJP’s costs in procuring and/or producing the underlying part or component. From a financial and accounting perspective, DNJP’s costs are derived from the historical actual costs incurred by DNJP in sourcing/producing finished goods, which the Company internally calls its “standard cost.” DENSO states that the “standard cost” is established consistent with Generally Accepted Accounting Principles. That piece price is recalibrated annually to reflect changes in DNJP’s internal costs of production, external sourcing and other influences such as variances in production volume or increased production efficiency. CBP Regulatory Audit and Agency Advisory Services provided this office with documents related to a single walkthrough transaction that included: CBP-7501, Commercial Invoice from DNJP to DMTN, with CIF terms of sale, Sea waybill, Email correspondence between the auditor and DNJP regarding freight and insurance, An Agreement for the Price in Sales for Knockdown Parts between DNJP and DMTN, An Agreement for the Price in Sales for Finished Products between DNJP and DMTN, Account detail from DMTN and DNJP, and Internal payment notice. Additionally, counsel for DENSO provided this office with a test run of both pass-through and knockdown parts and DNJP’s Fiscal 2016 annual report. The invoice demonstrates that DNJP invoiced DMTN for $11,138,439.32, which represents the value of the goods, international freight, and insurance. The invoice and sea waybill shows that the cost of insurance was $6,248.50, the cost of freight was $147,890.45, and the cost of the imported goods was $10,984,300.37. ISSUE: Whether the importer is properly deducting freight and insurance from the declared value. 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). In order to use transaction value, there must be a bona fide sale for exportation to the United States. Additionally, imported merchandise will be appraised under transaction value only 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). Because the request for internal advice only questions deductions from transaction value, for the purposes of this decision, we will assume that the transaction at issue is a bona fide sale for export to the United States and that the relationship of the parties is not at issue. The term “price actually paid or payable” is more specifically defined in section 402(b)(4)(A) as: the total payment (whether direct or indirect, and exclusive of any charges, costs, 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. See 19 U.S.C. §1401a(b)(4), see also 19 C.F.R. §152.102(f). Emphasis added. Therefore, DENSO may deduct charges related to international shipping and insurance if not already included in the transfer price. Here, for the transactions involving knockdown parts, establishment of a transaction value involves adding up DNJP’s costs in procuring and/or producing the underlying part or component, but does not include costs for international freight and insurance. In the case of “pass through” products, development of the transfer price starts with the resale price in the United States to unrelated OEMs. From that sale price, DENSO deducts an amount for profit and historical costs for freight and insurance to arrive at a transfer price for the imported goods. In the documents provided for the walkthrough example, the price for the goods listed on the invoice from DNJP to DMTN was $10,984,300.37. However, the total invoice price was for $11,138,439.32, as the terms of sale were CIF (Cost, Insurance and Freight). The invoice listed separate charges for insurance ($6,248.50) and freight ($147,890.45). This freight charge matches the charge listed on the freight bill issued to DNJP. Further, the invoice price with CIF terms matches the account details from DMTN and DNJP. Therefore, even though DNJP is deducting profit and costs, including the historical costs of freight and insurance to arrive at a transfer price, actual charges for freight and insurance are included on the invoice to DMTN and paid by DMTN. Therefore, charges for freight and insurance may be deducted from the invoice price of $11,138,439.32 and DENSO may declare a value of $10,984,300.37. If, however, there were an instance where the invoice did not include charges for freight and insurance, and the invoice only reflected an intercompany transfer price arrived at through the methods described above, DENSO could not deduct costs related to price and insurance from the transaction value. HOLDING: Based upon the information provided, we find that the importer is not improperly deducting expenses related to freight and insurance. 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 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