Reconsideration of HRLs 544845 and 545313; Internal Advice 26/91 and 66/91; Jet aircraft engines manufactured from foreign components; 19 U .S.C. § 1401a(f)

HQ W545840 August 11, 1995 VAL R:C :V W545840 LPF CATEGORY: Valuation Area Director U.S. Customs Service New York Seaport 6 World Trade Center New York, NY 10048   RE: Reconsideration of HRLs 544845 and 545313; Internal Advice 26/91 and 66/91; Jet aircraft engines manufactured from foreign components; 19 U .S.C. § 1401a(f) Dear Director: This decision concerns a request, made by Phelan & Mitri on behalf of the Pratt & Whitney Manufacturing Division of United Technologies (Pratt & Whitney) , for reconsideration of Headquarters Ruling Letters (HRLs) 544845, issued November 9, 1993, and 545313, issued January 31, 1995, as internal advice requests 26/91 and 66/91, respectively. In these decisions it was determined that the merchandise was to be appraised in accordance with the fallback method as set forth in section 402(f) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA) , codified at 19 U.S.C . 140la. A modified transaction value method was used, based on the parties ' negotiated pricing arrangement which included an amount for each party's share of the total revenue from the sale of engines and spare parts . Since the issuance of these decisions , counsel has submitted additional information in this regard . We have reviewed these decisions in light of the newly submitted information , and the proper appraisement is as follows. Mr . Phelan stated in his letter of June 23, 1995, that no requests for confidential treatment are made for the information submitted in connection with the present matter . FACTS: Both HRLs 544845 and 545313 concern the appraisement of aircraft engine components imported on consignment pursuant to collaboration agreements . Under these agreements , Pratt & Whitney and the named foreign manufacturers agreed to provide parts , components , and services for the development , production, sale, and service of aircraft engines . Each contracting party is  responsible for providing components and/or services in exchange for a percentage "program share ." The foreign manufacturers ship parts and components to Pratt & Whitney on consignment for assembly into finished engines. All parties share in the revenue generated by the sale and lease of engines and sale of spare parts in accordance with their respective program shares. Generally , no payments are made for each shipment of imported merchandise. As far as the joint venture is concerned , Pratt & Whitney calculated the value of the components of the jet engine as 50% of the selling price of that engine. Whereas Pratt & Whitney previously purchased subsystems from various vendors at arms length, they now calculated a component cost factor, based on the percentage each part represented of the overall cost, and determined a transfer price . This transfer price then was discussed with each member of the venture to see whether they could provide the part at that price. The total of each participant 's parts was determined and the partner was offered an equivalent share in the selling price of the engine , but only after the engine had been sold . It was quite certain that each member would at least recoup their basic transfer cost (or Part A of the formula), but uncertain as to how much profit and general expense would be recovered on the engine sale (or Part B of the formula). The principal difference between the collaboration agreements at issue is that in HRL 544845 a separate corporation has been formed which is responsible for the development , production , and sale of engines and engine parts . Pratt & Whitney and various contract parties are shareholders in the separate corporation. In the other engine programs , Pratt & Whitney has contracted directly with foreign manufacturers for the program share arrangements previously discussed. In HRLs 544845 and 545313 Customs determined that the merchandise was to be appraised based on the price determined under the pricing arrangement negotiated between the parties which included the Part B amount , that is, the revenue returned to the foreign parties after the sale of the merchandise in the U .S . It is counsel 's position that such decisions are inconsistent with the requirements of 19 U .S.C . 1401a insofar as the appraisement of the imported components is based on the prices of finished engines sold in the U .S. and elsewhere and, hence , includes all costs and expenses incurred after exportation , such as international transportation, duties, assembly, sales and administrative expenses and profit earned on engine sales .  Based on a memorandum , dated March 20, 1995, from the National Import Specialist (NIS) Staff, we understand that while the NIS' do not support Pratt & Whitney 's original claim that duty only should be calculated on the Part A prices , neither do the NIS' believe that the full Part B amount should be used. The NIS ' have articulated their concern that the Part A prices only reflect the estimated costs of production , with no allowance made for reasonable and customary profit and general expense . However , Pratt & Whitney now has provided several printouts showing what are referred to as "settlement costs," or funds that they would pay to a vendor as compensation for a terminated contract . This evidence indicates that an average profit paid was 7.4% with general expenses at 11.22% . We understand that these markups are consistent with the average general expenses and profit found in normal, arms length transactions in the aircraft industry . Both counsel and the cognizant NIS ' submit that the merchandise entered pursuant to the joint venture agreement should be appraised under section 402(f) based upon the calculated Part A price , increased to reflect a profit margin of % and an addition for general expenses of 11%. ISSUE: Whether the aircraft components are appropriately appraised under a fallback method of valuation as set forth in section 402(f) of the TAA and, if so, on what figure should the value of the merchandise be based. LAW AND ANALYSIS: Sections 402(a) through 402(f) of the TAA provide the hierarchy of methods used when appraising imported merchandise. The concerned parties agree that the appropriate method of appraisement, in this case, is a fallback method of appraisement pursuant to 402(f). For the reasons set forth in our previous decisions, we agree. However, we now are asked to reexamine the figure on which the value of the merchandise should be based. Specifically, section 402(f) provides: If the value of imported merchandise cannot be determined, or otherwise used for the purposes of this Act, under subsections (b) through (e), 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. Based on the information submitted at the time, it was appropriate for Customs to appraise the merchandise at issue in HRLs 544845 and 545313 from the "transaction value" of the merchandise, adjusted in accordance with section 402(f). However, counsel now has proffered additional information, specifically figures reflecting a profit margin of 7.5% and an addition for general expenses of 11%. When added to the Part A price for the merchandise, counsel and the concerned NIS' agree this amount appropriately reflects a modified "transaction value" for the merchandise . In our opinion, such a figure reasonably approximates the amounts for the manufacturer's profit and General expenses, which normally would be considered by the parties in establishing their price for the imported merchandise, while excluding the non-dutiable costs and expenses incurred after importation as well as those for international shipment and the payment of duties . Accordingly, the merchandise is appropriately appraised based on these figures. HOLDING: Based on the additional information submitted concerning the parties' profit and general expenses, the merchandise is appropriately appraised under a fallback method of valuation as set forth in section 402(f) of the TAA, based upon the calculated Part A price, increased to reflect a profit margin of 7.5% and an addition for general expenses of 11% . Because it was appropriate to appraise the merchandise, based on the information available at that time, as determined in HRLs 544845 and 545313 and the decision herein is based on additional information which was not previously available for Customs' consideration, modification or revocation of the prior decisions, pursuant to section 625, Tariff Act of 1930 (19 U.S.C. 1625), as amended by section 623 of Title VI (Customs Modernization) of the North American Free Trade Agreement Implementation Act, Pub. L. 103-182, 107 Stat. 2057, 2186 (1993), is not warranted. However, for entries on which liquidation has not become final, as well as for future entries, appraisement is to be fixed in accordance with the foregoing. The appraising officer may require Pratt & Whitney to provide a listing of their calculated appraised values and to update these prices each year  to reflect changes in currency exchange and price escalations , as appropriate . Sincerely , John Durant, Director Commercial Rulings Division