HQ 544406: Application for Further Review of Protest No. 4909-4- 000227; Appraisement of wrapper tobacco, constructed value, allowable profit

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 544406

                          June 3, 1991


VAL CO:R:C:V  544406 DPS

CATEGORY:  Valuation

District Director 
San Juan, Puerto Rico
La Puntilla #1
Old San Juan, PR 00903

RE:  Application for Further Review of Protest No. 4909-4-
     000227; Appraisement of wrapper tobacco, constructed
     value, allowable profit

Dear Madam:

     The subject protest and application for further review
concerns the appraisement of multiple entries of U.S. grown
wrapper tobacco, exported to [country of export   ] for
alteration (i.e., sorting and stemming), and thereafter
returned to the U.S. at San Juan, P.R.  The subject entries
were made during the period April 25, 1975, through November
14, 1983.  Similar issues concerning the same parties and
identical merchandise are presently before Customs
Headquarters on applications for further review of protests
originally filed at the port of San Juan, P.R.

FACTS:

     The subject protest involves merchandise that was
entered and liquidated under TSUS item 806.20, dutiable at
the column 1 rate provided for in TSUS item 170.15 (stemmed
wrapper tobacco).  The stemming was performed in [country   
of export] by xxxxxxxxxxxx xxxxxxx xxxxxxxxxxx which was a
wholly-owned subsidiary ("foreign subsidiary") of the
importer, xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.  The stemmed
wrappers and stems were returned to the United States at San
Juan, Puerto Rico, where they were used in the manufacture of
cigars by another wholly-owned subsidiary, xxxxxxxxxxxx
xxxxxx ("domestic subsidiary"), although the parent was
actually the importer of record of the returned wrappers and
stems.  [Foreign subsidiary] never bought nor sold the
merchandise.  Rather, the stemming was performed on a service
contract basis.



     The entered value (the value of the alterations) for
entries of wrapper tobacco in 1975 and early 1976 was the
cost of processing incurred by [foreign subsidiary] as set
forth in the entry papers, plus a 5% profit factor.  After
consultation with Customs' tobacco import specialists in New
York and Tampa, the Customs appraising officer advised the
importer that the 5% profit factor was too low.  After
numerous meetings and exchanges of information between the
importer, its representatives, and Customs officials, a 9%
profit factor was accepted as reasonable by Customs officials
at the port of entry.  

     Although the Customs Service originally was prepared to
accept the amounts set forth in the entry papers as
representing a reasonable value for purposes of 806.20, TSUS,
a subsequent audit investigation disclosed that a monthly
billing for all shipments of processed tobacco from the
foreign subsidiary to the domestic subsidiary reflected a
significantly greater profit percentage than 9%.  These
amounts were traced to the books of the foreign and domestic
subsidiaries as well as to the books of the parent.  As a
result, Customs determined that the value set forth in the
entry papers did not represent a reasonable value of the
alterations, and that the value of the alterations should be
determined in accordance with the constructed value method of
appraisement, section 402(d) of the Tariff Act of 1930, as
amended by the Customs Simplification Act of 1956, which
figures are represented by the billing amounts set forth in
the intercompany financial records.

     It should also be noted that the appraisement issues
raised by the subject protest (as well as the other protests
presently before Headquarters) have been reviewed and
addressed by this division on six (6) previous occasions.  

     With regard to the protestant's continuing argument
concerning the appraised value of the subject tobacco and
counsel's insistence on the use of English market sales
figures to determine the market value of the subject
xxxxxxxxxxx xxxxx wrapper tobacco, it is apparent that no new
information or arguments have been presented by this protest. 
The arguments presented in the protestant's submission are
the same or similar to arguments advanced in the original
internal advice decisions (I.A. No. 236/79, 061819, dated May
1981, 542487, dated August 14, 1981 and 543793 dated April
20, 1987) and subsequent reconsideration requests and
responses thereto.  This office has given thorough
consideration to these points in our previous decisions in
this case and, as a result, we believe that no useful purpose
would be served by addressing them further.  We concluded
previously, and maintain the position now, that it would be
inappropriate to base the "estimated market value" of the
subject tobacco on sales of wrapper tobacco to unrelated
purchasers in England (see HQ 544643, issued
contemporaneously herewith).

     The only issue which continues to cause confusion
relates specifically to the reasonableness of the profit
figure to be added to the alteration costs, and whether cost
or profit should be allocated to the stems resulting from the
stemming operation.    

ISSUE:

     Whether the 9% profit figure to be utilized in the value
computation is reasonable and appropriate under the
circumstances.


LAW & ANALYSIS:


     In determining  the value of the alterations pursuant to
  402 of the Tariff Act of 1930, inclusion of the appropriate
profit figure is necessary in determining either the computed
or constructed value.  In considering the totality of the
circumstances pertaining to the appraisement of the subject
merchandise, the following discussion of facts concerning the
profit figure is historically relevant:

          In determining the appropriate dutiable value
          of the alterations performed abroad, it was
          initially agreed, in 1971, by Customs and the
          parent, that a profit factor of 50 percent as
          reflected on the company's books was to be
          used.  Subsequently, in 1973, the parent
          proposed that the amount of profit should
          instead be 5 percent, a rate based on 1947-
          1973 financial statistics compiled by the
          Cigar Association of America.  After this
          figure was rejected by Customs, the parent
          proposed that a 9 percent profit should be
          utilized.  This percentage was the actual
          profit allegedly made on the parent's overall
          tobacco operations.


     In light of the history and circumstances surrounding
this issue, and upon further review of all the arguments and
information submitted previously with regard to the
reasonableness of the 9 percent profit figure, it is Customs
position that the information before us is legally sufficient
to establish that the 9 percent profit figure is reasonable. 

     With regard to an allocation for stems, we continue to
adhere to the position we set forth in 543554, dated December
26, 1985.  There, Census information relating to the
appraised value of stemmed wrapper revealed that the
appraised value of stems imported from all sources during
1975 and 1976 represented 3.1 percent of the total appraised
value of stems, stemmed wrapper, and unstemmed wrapper
imported during that period.  Applying that information to
the facts involved here resulted in the allocation of 3.1
percent of the value of the alterations performed in [country
of export   ] to the stems and 96.9 percent of that value to
the stemmed wrapper.  Our position remains unchanged.


HOLDING:

     The 9 percent profit figure utilized by Customs in
appraising the subject merchandise is reasonable.  To the
extent that profit figures other than 9 percent were used in
appraising the subject protested entries, the protest is
granted in part.  Those entries should be reliquidated in
conformance with the 9 percent profit figure.  Accordingly,
dutiable value is represented by the invoiced price for the
sorting and the stemming plus 9 percent profit, less 3.1
percent, allocated to resultant stems, where appropriate. 

     Customs position with regard to the market value of the
tobacco at issue has been set forth numerous times in
previous rulings by this office,  and no new significant
information has been presented on this or any other issue
mentioned in the protestant's submissions.  

     Therefore, the subject protest, Protest No. 4909-4-
000227 should be granted in part, with respect to the
reasonableness of the 9 percent profit figure (less 3.1
percent allocated to resultant stems where applicable), and
denied in all other respects.  A copy of this decision should
be attached to Form 19, Notice of Action, to be sent to the
protestant.

     


                              Sincerely,



                              John Durant, Director
                              Commercial Rulings Division