VAL CO:R:C:V 544337 VLB

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Parts/Customs Manager
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RE: Dutiability of Research and Development Costs

Dear Mr. --------:

This is in response to your letter dated May 8, 1989, concerning the dutiability of research and development costs (R&D) incurred by your company. We regret the delay in responding.

FACTS:

The imported merchandise is firearms. You explain that when the merchandise is entered, the company "pays additional duty based on the allocated R&D costs."

You have attached a copy of the "-------- World Wide R&D Cost Sharing Agreement" (the "Agreement") which was executed on January 1, 1988, between --------, Inc. and --------, S.A., a Belgian corporation. The Preamble of the Agreement states the following:

[E]ffective as of January 1, 1988, the -------- group (of which both parties are members) was completely spun off from FABRIQUE NATIONALE HERSTAL S.A. to become a worldwide operationally autonomous group (except that such group remains financially controlled by FABRIQUE NATIONALE which owns the majority of the common stock of -------- S.A., the parent company of the -------- group);

[C]oincident and consistent with such reorganization, was creation, by -------- INC. and -------- S.A., of a BROWNING worldwide R&D organization for new models of firearms and improvements of existing models of firearms. . .

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Article 1, section 1.1 of the Agreement states that the research and development costs "include any cost for studies, tests, prototypes, and detailed and finalized drawings which will allow the manufacturer to industrialize the new model, or improvement."

Article 2 of the Agreement explains that each party to the Agreement will be responsible for paying a percentage of the R&D Firearms Common yearly Budget equal to the percentage that that party's yearly budget of net sales worldwide bears to the total budget of net sales worldwide of both parties.

Finally, Article 3 of the Agreement grants --------, Inc. the exclusive right to sell in the U.S. products incorporating any original ideas, models, concepts inventions, designs, know how and other intangible assets that were developed by either party within the framework of activities subject to the Agreement.

ISSUE:

Whether the R&D costs are includable in the appraised value of the merchandise.

LAW AND ANALYSIS:

Transaction value, the preferred method of appraisement is defined in section 402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(b);TAA) as the "price actually paid or payable for the merchandise" plus five enumerated statutory additions.

You do not state whether your company purchases from sellers that are related as defined in section 402(g) of the TAA. However, the Agreement does indicate that there may be sales between the parties to the Agreement as well as sales to subsidiaries of one of the parties. Therefore, it appears that there may be related party sales.

Section 402(b)(2)(B) of the TAA states the following:

The transaction value between a related buyer and seller is acceptable . . . if an examination of the circumstances of the sale of the imported merchandise indicates that the relationship between such buyer and seller did not influence the price actually paid or payable; or if the transaction value of the imported merchandise closely approximates [one of the enumerated test values].

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Your letter does not contain sufficient information for us to determine whether the relationship affects the price of the imported merchandise. However, for purposes of this ruling, we are assuming that transaction value is the applicable appraisement method for related party transactions as well as any unrelated party sales.

One of the statutory additions to the price actually paid or payable is "the value apportioned as appropriate, of any assist . . . ." The term "assist" is defined in section 402(h) of the TAA as follows:

any of the following if supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the United States of the merchandise:

(i) Materials, components, parts, and similar items incorporated in the imported merchandise.

(ii) Tools, dies, molds, and similar items used in the production of the imported merchandise.

(iii) Merchandise consumed in the production of the imported merchandise.

(iv) Engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise.

The information presented establishes that the activities covered by the Agreement fall within section 402(h)(1)(iv). In addition, it appears from the Agreement that these activities are not undertaken in the U.S. Therefore, the costs of these activities must be added to the price actually paid or payable for the merchandise.

If the development, plans, sketches, etc., are used in the production of merchandise that is only partially for export to the U.S., or if the assists are used in several countries, then the costs of these assists may be apportioned to the imported merchandise in accordance with generally accepted accounting principles. See, 19 CFR 152.103(e).

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HOLDING:

The activities covered by the Agreement are assists under section 402(h)(1)(iv) of the TAA. Therefore, the cost of the activities must be added to the price actually paid or payable for the imported merchandise.

Sincerely,

John Durant, Director,
Commercial Rulings Division