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HQ 557615

September 7, 1994

CLA-2 CO:R:C:S 557615 BLS


TARIFF NO.: 9802.00.80

John B. Rehm, Esq.
Dorsey & Whitney
1330 Connecticut Avenue, N.W.
Suite 200
Washington, D.C. 20036

RE: Value of U.S. components for purposes of determining duty allowance under subheading 9802.00.80, HTSUS; cost of components when last purchased; 19 CFR 10.17

Dear Mr. Rehm:

This is in reference to your letter dated October 5, 1993, and subsequent correspondence, on behalf of Toyota Motor Sales, U.S.A., Inc. (TMS), requesting a ruling that certain methods for determining the cost of U.S. fabricated components purchased by Toyota Motor Corporation (TMC), a related company, satisfy the requirements of section 10.17, Customs Regulations (19 CFR 10.17). If acceptable under section 10.17, these costs may be used to determine the duty allowance under subheading 9802.00.80, Harmonized Tariff Schedule of the United States (HTSUS), for eligible articles upon return from abroad.


The inquiry is presented in the form of two separate ruling requests, each of which incorporates certain basic methodologies for determining the cost of a given U.S. part, but which also differ in important respects. You have also orally advised this office that TMC will not employ the manual system for an interim period prior to implementation of the automated system, as originally indicated. However, as previously stated in the original request, the manual system will be implemented on a permanent basis for certain parts purchased from Japanese distributors, as more fully described, below.


You state that TMC purchases some 200 different U.S. parts from approximately 25 vendors which are exported to Japan at various ports to be assembled in vehicles returned to the U.S. Most of the parts are purchased from U.S. exporters, but certain
parts are purchased directly from the U.S. manufacturers' Japamese distributors.

The U.S parts purchased from U.S. exporters will be warehoused in Japan for varying lengths of time before shipment to the plant, depending on stock levels and production schedules. You state that under TMC's just-in-time delivery system, minimal inventory is maintained at the plant site.

For parts purchased from Japanese distributors, the U.S. manufacturer sells and ships the parts to its Japanese distributor which warehouses them until they are purchased by TMC for immediate delivery to the plant. Currently, these parts are predominantly tires, although a few other parts are also procured through Japanese distributors.

In lieu of determining a specific price for each of the numerous exported U.S. parts, TMS requests that Customs accept a price application methodology, based on a "standard turnaround time" (STT), for given parts. The STT will be applicable to both ruling request situations. The difference in the two systems will be in the method used to update price information. In support of the validity of its methodologies, TMS has conducted two studies, a "Price Stability Study", and a "Turnaround Time Study", which are more fully described, below.

Ruling Request # 1

Under the contemplated "Automated Purchasing System" ("APS"), prices for subheading 9802.00.80, HTSUS, claims will be updated electronically from the new purchasing system as frequently as the parts are purchased by TMC. Purchase data from the U.S. will be sent to TMC daily. Due to time zone differences, the APS will be updated the day following the day of purchase.

The determination of a price for a given part incorporated in an exported vehicle will depend on the STT for that part. The STT is considered to be the interval between the day a U.S. part is exported from the U.S. and the day a motor vehicle incorporating that part is exported from Japan. Under the Turnaround Time Study ("Time Study"), five components, or time intervals, were analyzed in order to determine a STT for various types of parts. These components are ocean freight (from port of export), import processing, warehouse and subassembly, final assembly, and export processing.

The study reflects differences in two of the five time components, i.e., ocean freight and warehouse and subassembly. The other three intervals remain the same. The difference in ocean
freight is determined by the port of export from the U.S., which in turn, is determined by the locations of the U.S. purchasing affiliate and the consolidation point in the U.S. The differences in the warehouse and subassembly interval are determined by the time in warehouse and the extent of subassembly of the particular part. According to the study, ocean transit may typically differ by one day, while the warehouse and subassembly time interval will normally range from 14 to 45 days.

Based on the study, TMC has determined three standard turnaround times, 43 , 51, and 74 days, to be applied in determining a cost for a part, depending on the type of part involved. In this regard, you state that the STT will be applied to each and every part based on the part number, which will be determined by manufacturer. You also state that TMC will be able to make a change in the system if a part undergoes a change in the STT.

Under this system, the price to be used for a given part will depend on the appropriate turnaround time for the part. You set forth the following example: Assume that the STT for a given part is 43 days. Thus, the price for purposes of 19 CFR 10.17 would be the price that was invoiced on the day which was 43 days before the day on which the motor vehicle incorporating that part was exported from Japan. If there was no invoice on the 43rd day, the invoice issued on the next earliest day, i.e., 44th day, 45th day, etc., would be used.

In support of the methodology used for determining these prices, you submit a "Price Stability Study", and "Price Change Schedule for U.S. Parts 1993/1994", which uses a sampling of 20 parts in order to show the extent of price fluctuation for the various types of parts. You state that for most parts, the time period studied is the most recent 12-month period for which vendor invoices were obtained for Customs auditors. For the remaining parts, the time period is either calendar year 1992 or mid-1991 to mid-1992. The prices were taken directly from vendor invoices. The study reflects that with the exception of catalysts, price changes are made either quarterly, semi-annually, or annually. Price adjustments for catalysts are made on a monthly basis.

In summary, TMC claims that the described methodology for determining "the cost of the components when last purchased" (19 CFR 10.17), should be acceptable to Customs because 1) it is based on a system of actual prices paid, not on "estimates" or "averages"; 2) it is based on a turnaround time for parts that are constant and rarely change; 3) a given part is sourced from only one supplier and the part number would therefore be assigned a single turnaround time; 4) prices for parts are stable and
fluctuate, for most parts, on a semi-annual basis; and 5) TMC will be able to make changes in the system if a part undergoes a change in turnaround time.

Ruling Request #2

Under this system, applicable only to parts purchased from Japanese distributors, the STT methodology described in Ruling Request # 1 will also be employed. However, a manual rather than automated system will be utilized to collect manufacturer's price information, since TMC will not have access to those commercial invoices. Rather, you state that TMS will manually collect price data at certain intervals, based on the most recent invoice issued by the exporter. Most of the parts purchased in this manner will be tires, for which prices will be updated monthly. Other parts acquired from Japanese distributors will be updated at either quarterly or monthly intervals, at fixed times, depending on the type of part. The dates for collection of price changes would be established at a time following the date by which price negotiations are normally concluded.

You state that this methodology should also prove to be reliable, since actual price changes for most parts, as reflected on the submitted "Price Change Schedule for U.S. Parts 1993/1994", occur on an annual basis, and for selected parts, on a quarterly or monthly basis. As described, the system will allow for monthly and quarterly price updates. In further support of the reliability of this system, you have submitted a "Price Stability Study", which compares the duty exemption under subheading 9802.00.80, HTSUS, for a sampling of 20 parts during a 12-month period based on a direct identification method of parts, versus the exemption determined by using a monthly and quarterly update of prices, as proposed. Under this Study, the percentage difference for all parts, comparing the two systems for this period, amounts to 0.06%.


Whether the methodologies described under Ruling Requests # 1 and Ruling Request # 2, may be used in determining the cost of U.S. fabricated components when last purchased, for purposes of determining the duty allowance under subheading 9802.00.80, HTSUS.


Section 10.17, Customs Regulations (19 CFR 10.17), provides in pertinent part that the value of fabricated components to be subtracted from the full value of the assembled article, if acquired by purchase, 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. 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 opinion that the "cost of the components when last purchased", refers to the price in effect at date of exportation.

Customs has long recognized the difficulty under certain circumstances in tracking specific U.S. parts acquired from various sources and returned to the U.S. in an entry of merchandise claimed to be subject to the exemption under subheading 9802.00.80, HTSUS. Section 10.24(d), Customs Regulations (19 CFR 10.24(d)), provides that where large quantities of U.S. components are purchased from various sources and exported at various ports and dates on a continuing basis, so that it is impractical to identify the exact source, port and date for each particular component, the district director may waive these details and applicable documentation if convinced that the importer and assembler have established reliable controls to insure that all components for which the exemption is claimed are in fact products of the U.S.

In Headquarters Ruling Letter (HRL) 556960, dated April 1, 1993, involving the documentation required under 19 CFR 10.24 in connection with a claimed subheading 9802.00.80, HTSUS, exemption, we stated that if the importer was able to document the U.S.- origin of the imported components on an entry-by-entry basis, or establish to the district director's satisfaction that the required controls were maintained to strictly segregate U.S.-origin and foreign components, the imported articles would be eligible for the subheading 9802.00.80, HTSUS, exemption, provided all other documentary requirements were satisfied. We also noted that the assistance of Regulatory Audit or other Customs office might be required to verify the required controls, and to ensure compliance with record requirements.

Similarly, Customs also recognizes the administrative 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, based on recognition of these tracking difficulties, under certain circumstances Customs will accept as the "cost of the components when last purchased" under 19 CFR 10.17, a value determined through a methodology which establishes, to Customs satisfaction, that it is the best evidence available of the actual price of the components, at date of exportation, in lieu of a method of direct identification of the cost of the specific U.S. component. Such system must be based on actual prices, and any subheading

9802.00.80 claim which is based on a method involving averages or estimates, or other accounting procedures, such as LIFO, or FIFO, will not be acceptable.

Customs believes that the facts in the instant case warrant substitution of an acceptable method of determining the "cost of the components when last purchased", in lieu of identifying the specific cost for each component. We also find that the methods proposed in both Ruling Requests # 1 and #2 are acceptable methods for determining the cost of the U.S. components under 19 CFR 10.17. Our acceptance is necessarily based on the maintenance of reliable controls so that the system operates as intended, and that invoices, prices, and changes in turnaround time are updated in a timely fashion. In this regard, the Office of Regulatory Audit, or other Customs office, may be required to verify the required controls, and to ensure compliance with record-keeping requirements. It is further noted that our decision in this matter involves only a determination of the cost of U.S. components for subheading 9802.00.80, HTSUS, purposes. Any other issues which may arise under HTSUS subheading 9802.00.80, such as commingling of U.S. and foreign components, which may cause denial of a claim under subheading 9802.00.80, is beyond the scope of this ruling. In this regard, eligibility for the exemption is also dependent upon the submission of the required documentation, in accordance with 19 CFR 10.24.


Where large quantities of U.S. components purchased from various sources are exported from various ports on a continuous basis, so that it is impractical to determine the specific price for each particular component, Customs may accept, for purposes of determining "the cost of the components when last purchased" under 19 CFR 10.17, a price application methodology which uses 1) an automated system based on the manufacturer's payment invoices and an average turnaround time for the particular part; or 2) a manual system based on the manufacturer's actual prices updated monthly or quarterly, and an average turnaround time, depending on the type of component involved.

The systems to be employed will be subject to verification by the Office of Regulatory Audit, or other Customs office, to ensure that actual prices are being utilized, that such prices are being updated in a timely manner, and that turnaround times are appropriate for specific components. It is further noted that any claim under subheading 9802.00.80, HTSUS, in addition to satisfying the eligibility requirements of the statute, must also satisfy the
documentary requirements of 19 CFR 10.24, before a determination is made as to cost or value under 19 CFR 10.17.


John Durant, Director

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