VAL RR:IT:VA 546234 LPF
Area Director
U.S. Customs Service
JFK International Airport - Building #77
Jamaica, NY 11430
RE: Internal Advice concerning fabric scrap/waste assists;
Section 402(h)(1)(A) of the TAA; HRLs 545909, 545910, 545914,
559570
Dear Director:
This responds to your letter dated October 23, 1995 and to
the January 11, 1996 letter from the Chief, Wearing Apparel
Branch, National Commodity Specialist Division, ORR, forwarding a
request for internal advice submitted by Sandler, Travis &
Rosenberg, P.A. (counsel) on behalf of their client, Van Mar,
Inc. The request concerns the dutiability of fabric scrap or
waste as assists. While Customs previously has ruled upon the
dutiability of Van Mar's quota charges, which likewise could
pertain to some of the entries effected by this ruling, the
instant decision only serves to address the particular matter
raised in the internal advice.
Furthermore, while we recognize that counsel has protested
a number of entries pertaining to this matter, we understand that
other Van Mar entries as well as those of additional importers
likewise will be effected by this decision. For this reason, and
because many of these entries currently are subject to review by
the Regulatory Audit Division, U.S. Customs (RAD), we proceed to
address the matter via this internal advice. In addition to a
June 25, 1997 meeting with Van Mar, its counsel and the cognizant
Customs officials, informal consultations further were held with
the concerned parties from Customs.
FACTS:
Van Mar purchases fabric from Korean textile vendors and
consigns the fabric to unrelated Hong Kong and Chinese
manufacturers to produce finished garments. Through its HK
buying agent, Van Mar issues purchase contracts to the garment
factories indicating the amount of fabric necessary to fulfill
orders. This amount includes the total fabric utilization
necessary to produce the ordered amount. Van Mar pays cut, make,
trim (CMT) costs through their agent.
Van Mar's buying agent prepared invoices reflecting the price
of the finished garments sold FOB, which included amounts for
labor, fabric and quota. In 1991 Van Mar entered its
importations using invoices purporting to show the value for the
finished goods. The following year Van Mar's invoices began to
show a CMT and fabric breakdown. Subsequently, in calculating
the amount of duty due, Van Mar included a fabric waste factor
for each entry based on a computerized cutting marker prepared
for each style of garment.
It is our understanding that the amounts provided for the
CMT, or labor, costs are not in dispute. However, with regard to
the appropriate value of the fabric assists to be included in the
transaction value of the imported garments pursuant to section
402(b)(1)(C) of the Tariff Act of 1930, as amended by the Trade
Agreements Act of 1979 (TAA), codified at 19 U.S.C. 1401a, no
"write off," or any such reflection is made in the importer's
accounting or financial books or records for damage or for scrap
generated during production. Moreover, no usage reports or
booked costs for the amount of scrapped fabric are available.
In this regard, Van Mar provides by way of a signed statement
dated July 9, 1997 from its cutting room manager, that not only
is it "common practice in the apparel industry to generate the
master marker which guides the fabric cutter by means of
machinery known as the Gerber System," but moreover that "this
system allows the maximum efficient utilization of the fabric by
generating the least amount of waste possible between the
interstices of the pattern components." Accordingly, Van Mar's
cutting room manager concludes that in his "professional opinion,
the markers which were generated . . . for Van Mar upon which
Van Mar calculated the value of its fabric assists are the most
efficient computation of the utilization of fabric possible."
As representative of its importations, Van Mar presented
copies of the computer layouts for its 100% women's charmeuse,
chiffon or jacquard woven polyester i) robes, ii) briefs or
panties, and iii) brassieres. To confirm Van Mar's
representations of its scrap/waste computations based on the
computer generated efficiencies, Customs submitted copies of the
three computer layouts to the Textile/Clothing Technology
Corporation (TCý) in Cary, NC. Specifically, Customs requested
an opinion from TCý as to the efficiency of the layout of the
pieces in each of the three examples.
An expert representative of TCý contacted the Office of
Strategic Trade, Customs, stating that the three patterns were as
tight as possible. He further explained that the curved or oddly
shaped pieces both on the panties and the brassieres made it
difficult to do much better than they had done. With regard to
the robe layout, he stated that the large pieces were as close as
they could be and that again the curves on the large pieces made
it difficult to do much better. The TCý representative also
provided that while there were spaces, Van Mar had done a good
job of putting pieces (i.e., the small pieces of the panties) to
take advantage by placing the small end next or opposite to the
large end of the next piece. Finally, the TCý representative
said that in many cases what appears to be extra room between
pieces cannot be used because the individual pieces cannot be
turned or positioned on an angle because it could put extra twist
for extra tension on the pieces or parts. This extra twist or
tension in the final product may effect the look or the fit.
ISSUE:
From the information presented, whether the value of the
fabric assists appropriately is calculated based on the fabric
utilization and efficiencies reflected by the markers generated
for the importer.
LAW AND ANALYSIS:
As you are aware, the preferred method of appraising
merchandise imported into the United States is transaction value
pursuant to section 402(b) of the Tariff Act of 1930, as amended
by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C.
1401a. Section 402(b)(1) of the TAA provides, in pertinent part,
that the transaction value of imported merchandise is the "price
actually paid or payable for the merchandise when sold for
exportation to the United States" plus the enumerated statutory
additions including the value, apportioned as appropriate, of any
assist.
Section 402(h)(1)(A) of the TAA provides, in pertinent part,
as follows:
The term 'assist' means 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 .
. .
(iii) Merchandise consumed in the production of
the imported merchandise.
See also section 152.103(d)(1), Customs Regulations (19 CFR
152.103(d)(1)), setting forth the manner in which assists are to
be valued and section 152.103(e)(1), Customs Regulations (19 CFR
152.103(e)(1)), providing the manner in which the value of an
assist is to be apportioned to the imported merchandise.
In the General Notice of Modification and Revocation of
Customs Ruling Letters Relating to Assists (General Notice),
Customs Bulletin, Vol. 29, No. 51 (December 20, 1995), Customs
articulated its position concerning assists, to wit, that waste
or scrap which results from, or during, the production of
imported merchandise may constitute assists to be included in the
customs value of that imported merchandise. To this effect,
Customs modified and revoked five ruling letters and issued
Headquarters Ruling Letters (HRLs) 545909, 545910, 545911,
545913, and 545914 dated November 30, 1995.
Previously, it had been Customs position that, "components
which are destroyed, scrapped, or lost, and which are not
physically incorporated into the imported article are not assists
under the TAA." HRL 543093, issued April 30, 1984, modified by
HRL 545914, supra. In noting that rulings such as HRLs 545909
and 545910, supra, and several of the factual scenarios presented
in the General Notice concerned destroyed, scrapped and defective
fabric, we recognize that fabric scrap or waste generated during
production and not physically incorporated into the imported
merchandise, such as in the case currently at issue, would not be
considered to constitute assists for merchandise entered, or
withdrawn from warehouse, for consumption prior to February 20,
1996. See 19 USC 1625 (c) providing that the final ruling or
decision modifying or revoking a prior ruling or decision shall
become effective 60 days after the date of its publication in the
Customs Bulletin. All the merchandise at issue was entered prior
to this date.
Customs recognized in the General Notice and in these
decisions that determinations concerning the valuation of assists
are to be based on objective and quantifiable data including,
among other things, the accounting records of the supplier of the
assists made in conformity with generally accepted accounting
principles (GAAP). However, the fact that evidence of such
amounts is not available from any of the transacting parties'
accounting or financial books, records or otherwise does not
preclude Customs from considering other relevant information.
Along these lines, in HRL 559570, issued June 6, 1997, citing
to HRL 546336, issued September 19, 1996, Customs ruled upon a
situation regarding the determination, pursuant to 19 CFR 10.17,
of the appropriate cost or value of U.S. components to qualify
for duty exemption under subheading 9802.00.80, HTSUS.
Specifically, although the importer did not possess the FOB
price, U.S. export of the components, as provided in 19 CFR
10.17, nor had access to other information related to the
transactions, Customs recognized that the submitted documentation
provided the lowest actual price for the U.S. components when
last purchased, FOB U.S. port of export. Consequently, Customs
found such amounts to represent a reasonable cost or value for
the components.
In the instant matter, while the importer does not possess
the actual amounts of scrap or waste generated during the
production process, based on the importer's representations as
confirmed by an independently recognized industry authority, TCý,
that the submitted patterns were as "tight as possible" and that
"the curved or oddly shaped pieces . . . made it difficult to do
much better than they had done," we likewise, in this case, find
the scrap/waste calculations as presented by Van Mar and counsel
to represent a reasonable cost or value. In accepting Van Mar's
scrap/waste calculations, it is our understanding, however, that
the submitted patterns are in fact representative of the fabric
utilization and efficiency reflected by the markers generated for
all the imported merchandise at issue.
HOLDING:
From the information presented, the value of the fabric
assists may appropriately be calculated based on the fabric
utilization and efficiencies reflected by the markers generated
for the importer. You should advise the interested parties of
this decision and forward them a copy.
Sixty days from the date of this letter the Office of
Regulations and Rulings will take steps to make the decision
available to Customs personnel via the Customs Rulings Module in
ACS and the public via the Diskette Subscription Service, Freedom
of Information Act, and other public access channels.
Sincerely,
Acting Director,
International Trade Compliance
Division