VAL OT:RR:CTF:VS H031244 GOB
Attn.: Import Specialist Vernie L. Parrott
U.S. Customs and Border Protection
11099 South La Cienaga Blvd.
Los Angeles, CA 90045
RE: 19 U.S.C. § 1401a(h); Assist; Valuation and Apportionment of Assist
Dear Port Director:
This ruling pertains to a request for internal advice which was originally submitted to your office by counsel on behalf of [ ] (hereinafter, the “U.S. Parent Company” or “USPC”). Counsel made additional submissions of November 25, 2008 and December 9, 2008 to this office. A case conference was held on November 25, 2008. Our ruling follows.
Please note that USPC has requested confidential treatment with respect to the information contained in the bracketed portion of this ruling. This information will be deleted in any published version of this ruling.
USPC purchases and imports wearing apparel manufactured by its wholly-owned African subsidiary, [ ] (hereinafter, the subsidiary), and/or by unrelated third party manufacturers in Asia. The imported merchandise is designed by the subsidiary with the assistance of two USPC employees who are domiciled in the U.S. USPC does not compensate the subsidiary for the design work undertaken by the subsidiary. The USPC states that the subsidiary “subcontracts the various stages of production of the garments.” It further states that the price that the subsidiary pays to the African producers is the same price that the subsidiary invoices the USPC for the goods. This price does not include any mark-up for design costs.
The garments sold in the U.S. by USPC are manufactured in Africa and Asia. The garments which are manufactured in Africa and sold in the U.S. by USPC are shipped and invoiced by the subsidiary. The subsidiary subcontracts to independent manufacturers the production of the garments. The subsidiary then sells the garments to USPC. Approximately 80% of the garments imported by USPC from Africa are entered duty-free under the African Growth and Opportunity Act.
The production of garments in Asia is coordinated from Africa by the subsidiary. All styles manufactured in Asia are manufactured by independent vendors. The Asian manufacturers receive artwork and technical specification packages from the subsidiary at no cost. The technical specification packages consist of: style number reference; sketch of the garment; measurement specifications; special instructions; order quantity with color and size breakdowns; bill of materials detailing thread, fabric, labels and trims required; reference pattern; reference sample; and full size artwork for prints, stripes, embroideries, and/or labels. Not all items are required for every style. USPC states that the reference pattern and reference sample are for the factory’s reference only and are not necessary for the production of the garments. The artwork and technical specifications packages sent to the Asian manufacturers are similar to artwork and technical specifications used by the subsidiary to manufacture the garments sold in Africa, with certain modifications for the U.S. market added by the U.S. members of the design team.
With respect to the work performed by its two employees, USPC states as follows:
. . . the two U.S. employees who are involved in the design work perform their activities while they are in the United States, with the exception of four seven-day trips to Africa per year. The contributions of the two U.S. employees are primarily directing and critiquing, from their offices in the United States, the work of the designers in Africa, not actually doing the designs themselves. The U.S. employees are involved more in merchandising, rather than actual design work. During the trips to Africa, the two U.S. employees examine finished goods and review the design work done in Africa.
The issues presented are: (1) whether certain design work undertaken in the U.S. by USPC constitutes an assist; (2) whether certain design work performed by the subsidiary constitutes an assist; and (3) to the extent that any of the work constitutes an assist, how the value of the assist should be determined and apportioned.
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. § 1401a). The preferred 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 certain enumerated additions, including “the value, apportioned as appropriate, of any assist.” 19 U.S.C. § 1401a(b)(1)(C). Transaction value is an acceptable method of appraisement only if, inter alia, the buyer and seller are not related, or if related, an examination of the circumstances of 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). While the fact that the buyer and seller are related is not in itself grounds for regarding transaction value as unacceptable, where Customs and Border Protection (“CBP”) has doubts about the acceptability of the price and is unable to accept transaction value without further inquiry, the parties will be given the opportunity to supply such further detailed information as may be necessary to support the use of transaction value pursuant to the methods outlined above. For the purpose of this ruling we assume that transaction value is the proper basis of appraisement.
19 U.S.C. § 1401a(h) provides in pertinent part as follows:
(1)(A) 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.
(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.
(B) No service or work to which subparagraph (A)(iv) applies shall be treated as an assist for purposes of this section if such service or work-
(i) is performed by an individual who is domiciled within the United States;
(ii) is performed by that individual while he is acting as an employee or agent of the buyer of the imported merchandise; and
(iii) is incidental to other engineering, development, artwork, design work, or plans or sketches that are undertaken within the United States.
[Emphasis supplied.] See also 19 CFR § 152.103.
As indicated above, an assist is simply a particular item or service that is 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 that merchandise. An assist includes 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 first issue presented is whether certain work undertaken in the U.S. by the buyer (i.e., USPC) constitutes an assist. USPC states that the design work is created by its subsidiary and that any contribution to the design work from the two employees of the requester is not an assist because it is performed by individuals domiciled in the U.S., who are employed by the buyer, and who perform the work incidental to other design work undertaken in the U.S. We note that a requirement of an assist under 19 U.S.C. § 1401a(h)(1)(A)(iv) is that the work is “undertaken elsewhere than in the United States.” We find that, inasmuch as the design work performed by these employees is undertaken in the U.S., it does not constitute an assist under 19 U.S.C. § 1401(a)(h)(1)(A).
The issue presented is whether certain design work performed by the subsidiary constitutes an assist. While USPC has presented this issue as one concerning the work provided to the manufacturers in Asia, we view this issue as pertaining to the design work performed by the subsidiary, which pertains to the goods manufactured in both Africa and Asia.
USPC has cited a number of rulings in support of its claim that the design work created by the subsidiary and provided to the unrelated Asian manufacturers is not an assist. USPC claims that the reference pattern and reference sample are for the factory’s reference only and are not necessary for the production of the document. We have considered this claim in light of the rulings cited by USPC and in light of the administrative record. We do not agree that the reference pattern and reference sample are not necessary for the production of the garment. It is our view that the reference pattern and reference sample are integral to process of creating the garments. The information provided via the designs is more than a mere concept. Therefore, we determine that the design work created by the subsidiary and used in the manufacture of the goods produced in Africa and Asia and imported by USPC is an assist within the meaning of 19 U.S.C. § 1401a(h)(1)(A)(iv) in that it is supplied directly or indirectly and free of charge or at reduced cost by the buyer of the imported merchandise (i.e., USPC) for use in connection with the production or the sale for export to the U.S. of the subject merchandise. In this regard, see HQ 547487, dated June 23, 2000, where CBP held that elements of a technical package were necessary for the production of shoes and were an assist. See also HQ 548368, dated December 24, 2003, where CBP held that certain design services were necessary for the production of imported apparel and were an assist.
We note that our determination with respect to the goods manufactured in Africa assumes that transaction value applies with respect to the importation of those goods into the United States. The fact that there is no mark-up for the design costs with respect to these goods manufactured in Africa calls into question whether transaction value is the appropriate basis of valuation.
Valuation of the Assist
Based upon our determination that there is an assist in Issue Two, the issues presented here are the method of valuation and apportionment of such assist.
Concerning the value of the assist, USPC states as follows. If CBP determines that the design work created by the subsidiary is an assist, it would be considered a self-produced assist because the requester/importer does not pay the subsidiary for the design work. Pursuant to 19 CFR § 152.103(d)(2), the value of a self-produced assist is the cost of producing it, supported by the company’s business records, plus the cost of transporting the assist to the place of production. The subsidiary does not maintain records of design work created for any particular style of garment imported by the requester, but the subsidiary has records of the salaries paid to its employees who are engaged in the creation of the design work. USPC proposes to value the assist by allocating the total annual salaries paid to its employees engaged in design work to all relevant products produced during a calendar year. It states that the salaries and wages of the following employees might be considered part of the value of an assist because they produce the design work: computer-aided designers; graphic designers; technical designers; and technical design assistants. USPC would add the courier charges for transporting the artwork and technical specification packages to Asian producers to determine the total value of any assist.
Further with respect to the value of the assist, we would add the following example. If the total of the salaries of the individuals involved in the designs, plus the applicable transportation cost, is $100,000 and fifty percent of the subject garments are imported into the U.S., the cost of the assist would be $50,000. This example is purely illustrative in nature.
We determine that the method of valuing the assist, as described above, is reasonable and we so approve, provided the method of valuation is in accordance with generally accepted accounting principles. We note that, in accordance with our determination in Issue Two, the valuation of the assist pertains to the design work used in connection with importations by the requester from Africa and Asia.
Apportionment of the Assist
Concerning the apportionment of the assist, 19 CFR § 152.103(e)(1) provides as follows:
(e) Apportionment. (1) The apportionment of the value of assists to imported merchandise will be made in a reasonable manner appropriate to the circumstances and in accordance with generally accepted accounting principles. The method of apportionment actually accepted by Customs will depend upon the documentation submitted by the importer. If the entire anticipated production using the assist is for exportation to the United States, the total value may be apportioned over (i) the first shipment, if the importer wishes to pay duty on the entire value at once, (ii) the number of units produced up to the time of the first shipment, or (iii) the entire anticipated production. In addition to these three methods, the importer may request some other method of apportionment in accordance with generally accepted accounting principles. If the anticipated production is only partially for exportation to the United States, or if the assist is used in several countries, the method of apportionment will depend upon the documentation submitted by the importer. [Emphasis supplied.]
As provided above, the apportionment of assists must be made in a reasonable manner appropriate to the circumstances and in accordance with generally accepted accounting principles.
USPC proposes to allocate the entire anticipated value of any assist to the first duty-free entry during each calendar year. There is no authority under the TAA to apportion the value of the assist on the first duty-free entry. See HQ 542519 dated July 21, 1981; also published as TAA No. 35. Accordingly, this proposal is unacceptable.
Alternatively, because the value of imports are subject to various rates of duty, USPC proposes to divide the total value of the assists for each calendar year according to the percentage of the total value of the imported goods represented by the value of imported goods for each duty rate during that calendar year. For example, if the value of the assist for a year is determined to be $50,000, and the total value of imports for the year is $1,000,000, with $500,000 at a zero duty rate, $300,000 at a five percent duty rate, and $200,000 at a ten percent duty rate, USPC would allocate $25,000 of the assist’s value to the duty-free entries, $15,000 to the five percent duty entries, and $10,000 to the ten percent duty entries. This example is purely illustrative in nature.
Based upon the information submitted, the proposed method of apportionment is consistent with 19 CFR § 152.103(c). However, please note that the actual apportionment will depend on the documentation provided to the appraising officer.
1. The design work performed by USPC’s two employees in the U.S. does not constitute an assist under 19 U.S.C. § 1401(a)(h)(1).
2. The design work performed by the subsidiary is an assist within the meaning of 19 U.S.C. § 1401a(h)(1)(A)(iv).
3. The assist (Issue Two) may be valued as described above. The value of the assist may not be apportioned to the first duty-free entry during each calendar year. Otherwise, the assist may be apportioned as described above.
Please mail this decision to counsel for USPC promptly, but in no event later than 60 days from the date of this letter. Sixty days from the date of the decision the office of Regulations and Rulings will take steps to make this decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Monika R. Brenner
Valuation & Special Programs Branch