HQ 544760: Proper Value for Imported Merchandise; Item XXX, TSUS; Application for Further Review of Protest No. XXX, dated August 5, 1988

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                                   HQ 544760

                                   May 4, 1992

VAL CO:R:C:V  544760 ML

CATEGORY:  Valuation

District Director
San Diego, California

RE:  Proper Value for Imported Merchandise; Item XXX, TSUS;
     Application for Further Review of Protest No. XXX, dated
     August 5, 1988

Dear Sir:

     The protest was filed against your decision in the
liquidation of various entries made by AVM Light Metals, Inc., a
california corporation, (hereinafter referred to as the
"importer").  The imported merchandise was aluminum castings
(wheels and rims) produced using U.S. origin aluminum alloy.  The
merchandise was valued pursuant to section 402(f) of the Tariff
Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA;
19 U.S.C. 1401a(f)).

FACTS:

     The facts, as presented by the importer are that Western
Wheel Corporation, (hereinafter referred to as "WWC"), issued a
Purchase Order to the importer to procure semifinished cast
aluminum wheels.  WWC agreed to supply at no cost to the importer
the material aluminum alloy (ingots) of U.S. origin for the
importer's use in the production of cast aluminum wheels at the
importer's Mexican wheel manufacturing plant, (hereinafter
referred to as the "Maquiladora"), to be purchased by WWC.  The
importer shipped the ingots to its Maquila.  The Maquila then
processed the ingots to WWC's specifications which included
melting, casting, trimming, deflashing, machining, and heat
treatments.

     WWC also supplied at no cost to AVM the necessary casting
tooling consisting of Static and Centrifugal casting machines,
molds, and core boxes for exclusive use in the production of the
cast aluminum wheels, and some technical assistance.  AVM in turn
provided the items (molds, etc.) free of charge to the Maquila.

     The semifinished wheels from the Maquila were sold to the
importer, who in turn sold them to WWC for further processing. 
WWC received the merchandise directly from the Maquila.  The
importer invoiced WWC based on the purchase order.

     In a letter to Customs, dated April 8, 1988, from E.K.
Venugopal, president of the importer, it was stated that the
machinery and equipment used by the Maquila were recorded on the
importer's books.  The importer also supplied the Maquila with
money to cover the operating expenses of the Maquila and all of
these expenses were recorded on the Maquila's books.  The
importer certified that the sales prices between it and the
Maquila were the total labor cost plus administrative and
overhead costs, as well as a profit margin.

     The import specialist valued the merchandise on the basis of
 402(f) of the TAA, using a computed value approach.  Counsel for
the importer asserts classification under XXXX and that duty
should have been assessed only on the value of the processing
performed on the qualifying metal product in Mexico.    Counsel
asserts the value of the molds and machinery provided by the
importer to the Mexican company should not have been included in
the value of processing.

     The valuation of the merchandise was based on the cost of
material, labor and fringes, GEA, plus a proportionate share of
the assists (machinery purchased in Mexico, plus rent), packing
costs.

ISSUE:

     Under a 402(f) valuation, what costs are includable in the
dutiable value of imported merchandise.

LAW AND ANALYSIS:

     The merchandise was valued using  402(f) of the TAA, value
if other values cannot be determined or used.  The use of  402(f)
was appropriate pursuant to former item XXX, Tariff Schedules of
the United States (TSUS).  Headnote 2(a), subpart B, part 1,
Schedule 8, provided:

     Articles repaired, altered, processed, or otherwise changed
     in condition abroad.--The following provisions apply only to
     items 806.20 and 806.30:

          (a)  The value or repairs, alterations, processing or
          other change in condition outside the United States
          shall be--

               (i)  the cost to the importer of such change; or

               (ii)  if no change is made, the value of such
               change

     as set out in the invoice and entry papers; except that, if
     the appraiser concludes that the amount so set out does not
     represent a reasonable cost or value, then the value of the
     change shall be determined in accordance with section 402 or
     402(a), Tariff Act of 1930, as amended.

In the instant case, the appraising officer concluded that the
amount set out in the invoice and entry papers did not represent
a reasonable cost or value, and therefore, determined the cost or
value in accordance with the provisions of section 402.

     The parties do not take issue with the method of valuation,
but rather the elements of cost includable in valuing the
imported merchandise.  Under  402(f)(1) of the TAA:

          ...the merchandise shall be appraised for the purposes
          of this Act on the basis of a value that is derived
          from the methods set forth in such subsections, with
          such methods being reasonably adjusted to the extent
          necessary to arrive at a value.

     Under section 402(f) of the TAA, merchandise is valued on
the basis of a value that is derived from section 402(b)-(e) with
reasonable necessary adjustments.  Section 152.107(a)-(c),
Customs regulations (19 CFR 152.107(a)), sets forth examples of
acceptable appraisement using section 402(f) of the TAA.

     Section 402(e) of the TAA provides that computed value
consists of 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 is sales of 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.

     Counsel for the importer states that duty should have been
assessed only on the value of the processing performed on the
qualifying metal product (under 806.30/692.32 TSUS) in Mexico. 
Subpart B in 806.30, headnote 2 deals with a change to the
merchandise and counsel believes it was improper of the import
specialist to have assessed duty on the U.S. aluminum.  Counsel
concedes that the cost studies were not presented in a timely
fashion to Customs, yet states that its tardiness does not permit
Customs to make no adjustments for qualifying metal.

     The import specialist's position is that in this related
party transaction the importer failed to provide actual
processing costs, and therefore, the unit value was unreasonable
in that various usual expenses incurred by a producer were
deficient.  "The invoiced unit values reflected labor and
fringes, yet the machinery for the Maquila operation was
purchased in Mexico, in fact, the plant was a former Mexican-
owned aluminum wheels producing site with some operation
equipment therein."  The import specialist also stated that
additional values usually reflected in the same general class or
kind of merchandise such as rent (an inherent cost of
fabrication), the providing of molds not reflected in the Service
Agreement between WWC and the importer, transfers of money to
cover operating expenses of the Maquila, and loss, which should
be considered yet under the importer's claim are not a part of
the processing fee.

     In TAA #44, 542658 TLL, dated January 12, 1982, we responded
to an internal advice request regarding the dutiability of
certain general expenses when the basis of appraisement was
computed value.  The expenses were paid by and maintained on the
parent company/producer's books in the United States and did not
fall within the definition of an assist, as stated in
 402(h)(1)(A) of the TAA.  The position of the District Director
was that building depreciation expense, rent expense, and
accounting expenses are normally reflected on the books of the
Mexican assemblers in the 807.00 program and therefore, the
general expenses of the companies was inconsistent with the usual
profit and general expenses of other assemblers.

     In TAA #44, we found first, that accounting services carried
on a parent's books could not be treated as either general
expenses or costs of fabrication of the producer under computed
value.  Second, insofar as plant rental and building depreciation
were concerned, we found that the portion of these two items
which related to the assembly (or manufacturing) operation were
inherently a cost of fabrication unless demonstrated otherwise
under generally accepted accounting principles (GAAP).

     We also stated in TAA #44 and Supplement No. 1 to TAA #44,
dated July 20, 1982, 542873 IWS, that whether the producer's
profit and general expenses are consistent with the profit and
general expenses usually reflected by producers in the country of
exportation in sales of merchandise of the same class or kind is
a question of fact and our authority for rejecting figures
relating to the producer's general expenses was limited under
 402(e)(2)(B) of the TAA to those usually reflected in sales of
merchandise of the same class or kind.  However, we found that
certain expenses that heretofore may have been general expenses
under the old law, would be dutiable under 402(e)(1)(B) of the
TAA if "usually reflected, ..."  For example, that portion of
plant rental relating to the selling of merchandise of the same
class or kind for exportation to the U.S. may properly be treated
as being dutiable as "an amount" for profit and general expense
if included in the producer's profit and general expenses. 
However, if an expense of the type described above is absent from
the producer's general expenses and results in the producer's
profit and general expenses being "inconsistent with those
usually reflected in sales of merchandise of the same general
class or kind, " the actual profit and general expenses of that
producer should be rejected and the usual profit and general
expenses substituted.

     In the instant case, the import specialist determined that
certain expenses of the type described above were not present in
the producer's profit and general expenses, resulting in profit
and general expenses which were inconsistent with those usually
reflected in sales of merchandise of the same general class or
kind.  Consequently, the import specialist rejected the
producer's "actual" and instead used the usual profit and general
expenses as directed in TAA #44 and its supplement.  In this
regard, we agree with the import specialist.

     As regards the mold costs, counsel states since the molds
were produced in the United States and their costs were incurred
in the United States, the cost or value of the molds are not
included in the value of processing the semifinished wheels.  As
authority for this proposition, counsel cited section 10.9(l),
Customs Regulations (19 CFR  10.9), providing in pertinent part:

     The cost or fair market value, as the case may be, of the
     processing outside the United States which is set forth in
     the invoice and entry papers as the basis for the assessment
     of duty under item 806.30, shall be limited to the cost or
     value of the processing actually performed abroad (including
     all domestic and foreign articles used in the processing,
     but does not include the exported United States metal
     article) and shall not include any of the expenses incurred
     in this country, whether by way of engineering costs,
     preparation of plans or specifications, and the furnishing
     of tools or equipment for doing the processing abroad, or
     otherwise.

     If the molds were produced in the United States and their
costs incurred in the United States, the cost or value of the
molds are not included in the value of the processing the
semifinished wheels and we agree with counsel that these costs
are not part of dutiable value.

     As regards machinery purchased by the importer in Mexico and
carried on the importer's books, we find that the portion of this
equipment, prorated, and attributable to the imported merchandise
should properly be a part of the cost of fabrication.

     Based on the information submitted, we are unable to
determine if any value was added for the U.S. aluminum ingots. 
To the extent the U.S. produced aluminum ingots were included in
the value of 806.30, TSUS, it should be taken out, because the
value of qualifying metal products are not properly a part of
dutiable value.

HOLDING:
     
     The merchandise was classifiable under 806.30 and valued
under a 402(f) valuation, derived from  402(e), with necessary
adjustments.  Certain of the producer's profits and general
expenses were inconsistent with the usual profit and general
expenses usually reflected in sales of the same general class or
kind of merchandise.  The import specialists rejection of the
producer's actual expenses and substitution with the usual profit
and general expenses was consistent with TAA #44.

     Additionally, equipment purchased by the importer and
carried on its books, in accordance with GAAP, may be included in
the value of the processing in Mexico as a cost of fabrication.

     Finally, U.S. origin ingots which qualify for 806.30
treatment are not a part of dutiable value.

     Accordingly, you are directed to deny the protest in part
and to grant the protest in part if the value U.S. ingots were
included in dutiable value.  A copy of this decision should be
attached to the Customs Form 19 and mailed to the protestant as
part of the notice of action on the protest.

                                   Sincerely,


                                   John Durant, Director