H340157

 HQ H340157 October 14, 2024 OT:RR:CTF:VS H340157 EE CATEGORY: Valuation Center Director U.S. Customs and Border Protection Machinery Center of Excellence and Expertise 1901 Crossbeam Drive Charlotte, North Carolina 28217 RE: Internal Advice; Protest No. 1601-24-107165; Transaction Value; Related Party Transactions; Post-Importation Adjustments Dear Center Director: We are providing internal advice with regard to Protest No. 1601-24-107165 filed on May 22, 2024 by Damon V. Pike, customs advisor at BDO USA, PC on behalf of the importer, Schaeffler Group USA Inc. (hereinafter, the “protestant”), concerning the treatment of certain post-importation adjustments. The protestant asked that certain information submitted in connection with this internal advice request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this internal advice request, forwarded to our office, will not be released to the public and will be withheld from published versions of this decision. FACTS: The Schaeffler Group is a global automotive and industrial supplier which manufactures high-precision components and systems for engine, transmission, and chassis applications. It also produces rolling and plain bearing solutions for a wide range of industrial applications, including automotive and commercial vehicle original equipment and replacement parts markets. The protestant serves as the regional headquarters for the Schaeffler Group in the Americas and is a subsidiary of Schaeffler Technologies AG & Co. KG (“Schaeffler AG”), the parent company based in Germany. The protest at issue concerns refunds due to a decrease in the reported customs values resulting from the protestant’s year-end transfer pricing adjustments in fiscal year 2022. The protestant claims that the adjustments took place in accordance with the intercompany pricing formula set forth in the P 174756 Corporate Directive Transfer Pricing (“TP Directive”) document. The protestant states that the vast majority of the adjustments (covering Type -01 entries) were reported via the filing of reconciliation entries. However, because the customs broker erred in not flagging all eligible entries and because reconciliation does not cover all entry types, e.g., Type -03 entries, protests were filed for entries in 2022 that were not eligible to be flagged for reconciliation. The protestant claims that based on the market environment and its corporate structure, the Schaeffler Group established an intercompany pricing formula that demonstrates prices are at arm’s length. This formula is based on a Process Contribution Analysis (“PCA”), which determines the allocation of functions and risks, including those of the protestant and its related sellers. In performing the PCA, the objective is to quantify the contribution made by defined functional units. Accordingly, function and risk profiles of the Schaeffler Group companies are determined and value-added contributions are assigned for each business division. Each division’s operating business processes are evaluated separately given the different value drivers, process weightings, and entity contributions to the Schaeffler Group as a whole. As a result of the PCA, the value-added contributions of the respective functional units or Group companies are converted into mark-ups on costs for unfinished goods and mark-downs on resale prices for finished goods. These mark-ups and mark-downs play a key role in the setting of transfer prices contained in the operational systems for goods and tangible assets. The mark-ups and mark-downs are calculated pursuant to the PCA formula under the Cost-Plus transfer pricing method (for sales of unfinished goods used as components in manufacturing further finished articles) or under the Re-Sale Minus transfer pricing method (used for re-sales of finished goods to unrelated customers in the United States). All mark-ups and mark-downs for both finished and unfinished goods resulting from the PCA formula and budget-setting process are compiled in an annual Appendix to the TP Directive for each Group company and apply to all imports beginning May 1st of each year. The protestant states that the PCA intercompany pricing formula is in place for all sales of merchandise (and subsequent imports) by related sellers to the protestant during the coming year. Once the transfer prices are set at the beginning of May, periodic reviews during the fiscal year take place to gauge whether the targeted profit margins are still within the percentages mandated by the TP Directive. This review covers budget values, target values for average resale prices, production costs, and currency conversions. At the end of the fiscal year, if the operating margin is outside of the range mandated by the formula, i.e., too little profit or too much profit, debit or credit notes to the cost of goods sold (“COGS”) account are issued to bring the margins back into the mandated range of operating margins that are acceptable to the Internal Revenue Service (“IRS”). Finished Goods The protestant states that the starting point of the market-driven intercompany pricing formula for imports of finished goods is retail prices to its unrelated end customers in the United States. This retail sales price then impacts the transfer price (intercompany price) because the protestant must earn a certain profit margin after application of the mark-down percentage under the Re-Sale Minus method. The protestant claims that the resulting price is arm’s length because it is negotiated between unrelated parties based on several factors. A typical commercial pricing negotiation involves the protestant quoting a unit price for a particular customer. That price is informed, in large part, by: • historical purchases, e.g., how well the unit sold during the previous year and all prior years; • whether a particular customer has ordered a large volume of parts and thus had received discounts in the past; • how many years remain for the life of the unit (based on the original sales cycle plan of the application for the finished good, e.g., how many years remain in the life cycle of the motor vehicle in which the part will be used); • how much the final sales prices were over or above the original quote; • changes in manufacturing and distribution costs, e.g., utilities, cost of raw materials, labor costs, freight and transportation expenses; and • market conditions such as shortages. Unfinished Goods The protestant states that similar to finished goods, market-driven pricing plays a key role in establishing the intercompany price for imports of components that will be used in further manufacturing. The budget planning process each year starts with an “assessment basis” on which the mark-up using the Cost-Plus method is applied. The assessment basis includes the cost of raw materials purchased from outside vendors, the utility costs in running the factory, labor costs, and various other direct production costs for each individual material in the company’s SAP ERP system. Most of these costs are driven by market conditions and outside pricing of raw materials, especially in the volatile market for steel and aluminum that make up a large percentage of raw material purchases. Other production-related costs and other operating expenses are also calculated during the budget-setting process, such as research and development, and SG&A (selling, general, and administrative) costs. The PCA formula applies the Cost-Plus method to the assessment basis to arrive at a net margin target for the business division at issue (the manufacturing plant producing the component). The PCA formula factors in advance intercompany purchases of materials needed to make the unfinished good to arrive at an aggregated total mark-up. To further support its claim that the related p

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). In order to use transaction value, there must be a bona fide sale for exportation to the United States. The bona fide sale for exportation is not at issue in this internal advice request; accordingly, we limit this decision to the examination of the related party price and the treatment of post-importation adjustments.There are special rules that apply when the buyer and seller are related parties, as defined in 19 U.S.C. § 1401a(g). Specifically, transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, an examination of the circumstances of the sale indicates that the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain “test values.” 19 U.S.C. § 1401a(b)(2)(B); 19 C.F.R. § 152.103(l). Do the circumstances of the sale establish that the price actually paid or payable by the protestant to the seller is not influenced by the relationship of the parties and is acceptable for purposes of transaction value?Under this approach, the transaction value between a related buyer and seller is acceptable if an examination of the circumstances of the sale indicates that although related, their relationship did not influence the price actually paid or payable. The Customs Regulations specified in 19 C.F.R. Part 152 set forth illustrative examples of how to determine if the relat