Request for Ruling concerning the Appraisement of U.S. Automobile parts; Subheading 9802.00.80, HTSUS; 19 CFR I0.17; Reasonable Cost or Value.

HQ W546336 September 19, 1996 RR:IT:VA W546336 er CATEGORY: Valuation John B. Rehm, Esq. Dorsey & Whitney LLP Suite 200 1330 Connecticut Avenue, NW Washington, DC 20036 RE: Request for Ruling concerning the Appraisement of U.S. Automobile parts; Subheading 9802.00.80, HTSUS; 19 CFR I0.17; Reasonable Cost or Value. Dear Mr. Rehm: This is in response to your submissions dated April 2 and August 19, 1996, on behalf of your client, Toyota Motor Sales, U.S.A., Inc. ("TMS"), in which you request a ruling concerning the value to be applied to certain U.S. components which will be used abroad in the assembly of articles subsequently imported into the U.S. Additionally, this office met with counsel and representatives from TMS on July 16, 1996. FACTS: The subject of this ruling request concerns the value, within the meaning of section 10.17, Customs Regulations (19 CFR 10.17), of fabricated components to be subtracted from the full value of assembled articles which are entitled to a duty exemption under subheading 9802.00.80, Harmonized Tariff Schedule of the United States ("HTSUS"). Specifically at issue is the means of determining the value of the U.S. components as represented by the cost of the U.S. components when last purchased, f.o.b. U.S. port of export. According to counsel, Toyota Motor Corporation ("TMC"), the Japanese parent of TMS, purchases U.S. components for assembly into automobiles manufactured in Japan for export to the U.S. TMC purchases the U.S. components through agents of the U.S. manufacturers who are located in Japan. Because, typically, the U.S. manufacturers grant these agents exclusive sales rights, TMC cannot purchase the components directly from the U.S. manufacturer or directly from any other U.S. exporter. Then TMC purchases components through the Japanese agents, TMC does not have access to information regarding the cost, f.o.b. U.S. port of export, because TMC is not a party to the transaction between the U.S. manufacturer of the components and the Japanese agents. Nor does TMC have access to other information related to these transactions, such as shipping and receiving records and exported quantities. In order to enable TMS to claim subheading 9802.00.80, HTSUS, on the imported articles, the U.S. manufacturers concerned have agreed to provideTMS with proprietary information regarding the price of U.S. components sold to the Japanese agents on the strict condition that TMS does not disclose this proprietary information to TMC. TMS submitted a description of how it proposes to obtain and administer the value of the components, as represented by the cost when last purchased, U.S. port of export. Specifically, the description sets forth how TMS would: (1) obtain and maintain current price information, and (2) apply current price information to entries. In order to obtain and maintain current the price information for the U.S. components, TMS would: (1) obtain price certifications from the U.S. manufacturers each year prior to the initial importations of new model year vehicles; (2) request that the U.S. manufacturers certify any subsequent price changes; and (3) itself, periodically monitor prices. Regarding the certifications, TMS would obtain three certifications each model year: (1) an initial model year price certification requested in mid-July, prior to new model year introduction; (2) a mid-model year up-date certification requested on February 1 each year; and (3) a third price certification up-date for scheduled price revisions which would be requested one month prior to the date indicated as "effective through" on the August 1 or February 1 certifications. In order to apply current price information to entries for which subheading 9802.00.80, HTSUS, claims are made, TMS would obtain the lowest price that could apply to any given U.S. component within a given model year. The following procedures would be followed to obtain the lowest price: (1) the price certified for a given component as of August 1 of any given year would apply to all claims for that component made on entries on or after September 1 of that year; (2) for the 12 month period following September 1,TMS would apply another price only if the price certified on August 1 was lowered, as advised by the U.S. manufacturers; and (3) if TMS found that the price for a given component decreased without their prior knowledge, subheading 9802.00.80, HTSUS, claims made for that component at a higher price after the effective date of the price decrease, if any, would be modified to apply the lower price. Counsel submitted draft copies of three sequential letters and certifications that TMS would send to each U.S. manufacturer to obtain the price or prices in effect during a given model year. These letters would enclose the certifications to be completed by the U.S. manufacturers and returned to TMS for the purpose of certifying the prevailing prices. The certifications also provide that the U.S. manufacturer would advise TMS of any unscheduled revisions to the prices. In addition to certifying the prices, the U.S. manufacturer would attach a copy of the first invoice reflecting a price change covering the component part number, whether that price change was an increase or a decrease. Or, if not attached, the U.S. manufacturer would provide such invoice directly to U.S. Customs upon request. Where, however, the representative invoice had privileged information regarding competitors, then all invoice details with the exception of the privileged information would be provided to TMS on a separate paper. TMS proposes to maintain the invoices at its premises in such a manner that when requested by Customs, copies of the invoices would be readily available for verification purposes. ISSUE: Whether the proposed means of determining the value of the U.S. components, as represented by the cost when last purchased, U.S. port of export, is acceptable within the meaning of 19 CFR 10.17? LAW AND ANALYSIS: Subheading 9802.00.80, HTSUS, provides a partial duty exemption for: Articles assembled abroad in whole or in part of fabricated components, the product of the United States, which (a) were exported in condition ready for assembly without further fabrication, (b) have not lost their physical identity in such articles by change in form, shape, or otherwise, and (c) have not been advanced in value or improved in condition abroad except by being assembled and except by operations incidental to the assembly process, such as cleaning, lubricating and painting. For purposes of this ruling, we will assume that all three requirements of subheading 9802.00.80, HTSUS, are satisfied and that the U.S. components may be eligible for a duty allowance, providing the requirements with regard to determining the value of the U.S. components are met, as is explained below. An article entered under subheading 9802.00.80, HTSUS, is subject to duty upon the full value of the imported assembled article, less the cost or value, within the meaning of 19 CFR 10.17, of the U.S. components assembled therein. With regard to the determination of the cost or value of the U.S. components, 19 CFR 10.17 provides the following: The value of fabricated components to be subtracted from the full value of the assembled article is the cost of the components when last purchased, f.o.b. United States port of exportation or point of border crossing as set out in the invoice and entry papers, or, if no purchase was made, the value of the components at the time of their shipment for exportation, f.o.b. United States port of exportation or point of border crossing, as set out in the invoice and entry papers. However, if the appraising officer concludes that the cost or value of the fabricated components so ascertained does not represent a reasonable cost or value, then the value of the components shall be determined in accordance with section 402 or section 402a, Tariff Act of 1930, as amended (19 U.S.C. 1401a 1402). It is Customs position that the "cost of components when last purchased", refers to the price in effect at the date of exportation. See HRLs 557615 dated September 7, 1994; 557841 dated December 22, 1994 and reconsideration HRL 559154 dated December 8, 1995. However, as stated in HRL 557841: Customs ... recognizes the difficulty in tracking the cost of a specific U.S. part sent abroad to be incorporated in a returned article, when numerous parts are sent abroad and returned on a continuing basis. As a result, and as a logical extension of Customs position, under certain circumstances related to the difficulty in tracking the cost of a specific U.S. part, Customs may accept as evidence of the "cost of the components when last purchased" under 19 CFR 10.17, a cost determined through an appropriate methodology in lieu of a method of direct identification of the cost of the specific U.S. component. In HRL 557615, Customs accepted a methodology for determining U.S. component prices based on a standard turn around time for the components. The standard turnaround time is the interval between the day a U.S. component is exported from the U.S. and the day the finished product incorporating the component is exported from Japan. For instance, assuming the standard turnaround time for a given component is 43 days, for purposes of 19 CFR 10.17, the price of the U.S. component would be the price that was invoiced on the day which was 43 days before the day on which the finished product incorporating the U.S. component was exported from Japan. However, with regard to the U.S. components which are purchased by TMC through agents of the U.S. manufacturers located in Japan, and which are the subject of this ruling request, Counsel has stated that because TMC is not a party to the transaction between the U.S. manufacturer and the Japanese agents, it does not have access to the f.o.b. price, U.S. port of export, nor does it have access to other information related to these transactions, such as shipping and receiving records and exported quantities, which would be necessary to administer price application by the standard tum around time method described in HRL 557615. Counsel’s first submission proceeded under the premise that because TMC did not have sufficient information to determine the value of the U.S. components under the standard turn around time methodology, any other proposed methodology would fall outside the scope of the first sentence in I 9 CFR 10.17 and, hence, as provided in the second sentence in 19 CFR 10.17, the methodology for determining the value of the components would have to be one which adheres to the principles of appraisement under section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a). Under 19 CFR 10.17, resort to section 402 principles occurs when the appraising officer concludes that the cost or value of the components does not represent a reasonable cost or value. Upon reflection, however, and as discussed in the meeting between this office and counsel and as pointed out in counsel's supplemental submission, the second sentence in 19 CFR 10.17 may be fairly interpreted to imply an affirmative authority on the part of the appraising officer to determine that a cost or value for the U.S. components is reasonable. Because the appraising officer has the explicit negative authority to conclude that a cost or value is unreasonable, it is proper to conclude that the officer has the implicit affirmative authority to conclude that a cost or value is reasonable. The second sentence of 19 CFR 10.17 should therefore be read to give the appraising officer the latitude to conclude that a cost or value that does not conform to the requirements of the first sentence, or previously accepted methodology, may nevertheless be reasonable, thereby avoiding the need to invoke section 402. Counsel accordingly, has proposed a methodology and has asked us to determine whether that methodology results in a reasonable cost or value within the meaning of 19 CFR 10.17. We find the proposed methodology to determine the cost of the components when last purchased, f.o.b. U.S. port of exportation, described above in the facts, to be reasonable within the meaning of 19 CFR 10.17. By obtaining price certifications from the U.S. manufacturers and being notified of price changes in the manner described in the facts, it is apparent TMS will be able to obtain the lowest price that could apply to any given component within a given model year and use that price as the value of the U.S. component for purposes of 19 CFR 10.17. As pointed out by Counsel, the lowest price is reasonable for at least three reasons. First, the lowest price is an actual price and not an estimate or average. For each U.S. part to be claimed on any given entry, it is the lowest export price that the manufacturer has charged to date, within any given model year, for that component intended for resale to TMC. Second, it is the price, f.o.b. U.S. port of exportation or U.S. factory. Third, it fully protects the revenue, since the lower the price the lesser the deduction from the full value. Moreover, the proposed internal controls are such that TMC is assured of the accuracy of the information used in its value determination. Because TMS is required to keep copies of the invoices reflecting the prices and price changes, whether increase or decrease, for each component part number, and to provide these invoices to Customs, if requested, Customs is able to verify the claimed cost or value of the components at any given time. Accordingly, we find that the proposed means of determining the value of the U.S. components is acceptable for purposes of determining a reasonable cost or value within the meaning of 19 CFR 10.17. HOLDING: Based on the description of the means of determining the value of the U.S. components and the internal controls for insuring the accuracy and verifiability of the value, we find that the proposed methodology is reasonable within the meaning of 19 CFR 10.17. Sincerely, Acting Director International Trade Compliance Division