OT:RR:CTF:VS H253767 GaK
Port Director
Port of Champlain
237 West Service Road
Champlain, NY 12919
RE: Application for Further Review of Protest No. 0712-14-100084; Valuation; Wearing Apparel; Design Work; Management Fees
Dear Port Director:
This is in response to your correspondence, dated May 13, 2014, forwarding the Application for Further Review (“AFR”) of Protest 0712-14-100084, timely filed by Kelley Drye, & Warren LLP, on behalf of [******] (“Protestant”), concerning the valuation of wearing apparel. We also considered the supplemental materials submitted by Protestant on January 21, 2015 and information provided via phone on February 6, 2015.
Per Protestant’s letter dated April 10, 2014, we have reviewed their request for confidentiality pursuant to 19 C.F.R. § 177.2(b)(7) with respect to the information submitted. As that information constitutes privileged or confidential matters, it has been bracketed and will be deleted from any published versions.
FACTS:
Protestant is a U.S. subsidiary of [******], incorporated in Germany. Protestant imports men’s and women’s apparel. The lead entry under this protest was entered on May 14, 2012 and liquidated on February 14, 2014. This protest covers an additional 205 entries entered from May 2012 to December 2012, all of which were subsequently liquidated on April 4, 2014. The parent company issues purchase orders to unrelated manufacturers for the entire company and Protestant’s orders from U.S. customers account for 8%, on average, of the parent company’s total orders.
On May 30, 2012, Customs and Border Protection (“CBP”) issued a Request for Information (CF 28) on the entry of May 14, 2012, seeking documentation supporting the transaction for the purchase of the goods, details of any design work, plans, or sketches undertaken elsewhere than in the U.S. and whether they were necessary for the production of the goods. On June 14, 2012, Protestant supplied CBP with the purchase order issued by the parent company to the manufacturer, dated March 5, 2012. The purchase order indicates that delivery and the bill will be sent to Protestant. Protestant also stated that “[d]esign work, plans and/or sketches are not applicable” without any supporting evidence.
On July 16, 2012, CBP issued a second CF 28 as a follow up to the Protestant’s June 14, 2012 response. CBP requested an explanation as to why design work, plans and/or sketches were not dutiable. CBP also asked a series of questions relating to the designer, each party’s role in the transaction, breakdown of materials and actual costs for each, and detailed explanation of the fee structure with regard to designs, materials, and other services that the parent company provided to Protestant at a cost. Protestant responded that a designer in the parent company’s design department provided the sketches and that the sample department occasionally produced samples. The parent company also purchased and supplied the manufacturers with material and trims, which were declared as assists. Protestant stated that after production, the goods were sent to an unrelated warehouse in Germany, and Protestant paid the manufacturer directly. In addition, Protestant was responsible for paying the parent company for the cost of material and trim, and quality control services performed at the warehouse.
On November 5, 2012, CBP issued a Notice of Proposed Action (CF 29) finding that the design work performed in Germany, management fees, and freight costs (charge for shipping material and trim from the parent company to the manufacturer) were dutiable. On December 6, 2012, Protestant filed a prior disclosure with regard to their mistake of not including the freight costs of delivering fabric to the manufacturer.
Specifically, with regard to the design work, on December 7, 2012, Protestant responded to the CF 29 and stated that the designs provided to the manufacturer are not dutiable because they are specifications advising the manufacturer what to make, not how to make the garments. Protestant also stated that the trousers imported in the lead entry were mainly a variation on earlier styles updated from previous seasons, and that their “look” remains consistent every year. Furthermore, Protestant states that manufacturers produce samples with the provided sketches and send the samples to the parent company as evidence of their ability to manufacture the goods without detailed manufacturing instructions. On December 19, 2012, CBP issued a second Notice of Proposed Action (CF 29), concluding that the design work was dutiable and stated that it intended to value advance the entry with regard to the design work based on the average annual salary for a design director divided by the number of shipments in 2012 (206 entries). On January 24, 2013, Protestant responded and emphasized that the designs were nothing more than specifications that advised the manufacturer “what to make,” but not “how to make” the garments. Protestant also stated that many of its styles repeat from year to year as follows: Sport – 14% repetitive, Fire – 30% repetitive, and Woman – 15% repetitive. CBP issued a Notice of Action Taken (CF 29) on January 31, 2014, stating that since the value of the design work was not provided, the entry would be value advanced as stated in the December 19, 2012 CF 29. On April 10, 2014, Protestant timely protested CBP’s actions and maintained that design work is not dutiable. Protestant provided examples of design work typically sent to manufacturers, which consists of sketches, style descriptions, color, size, and fabric specifications. Protestant also argued that in the event CBP determines that design work is dutiable, the cost allocation approach should be used to determine its value. While stating that German law does not allow the parent company to reveal employee salaries, Protestant provided a typical salary for a European design director. Protestant argued that since Protestant’s orders only account for 8% of the parent company’s orders, the design work should be valued at the same percentage of the design director’s salary, and not 10%. Protestant provided previous orders placed by the parent company and the Protestant’s portion from 2009 to 2013, which shows that Protestant’s portion ranges from 7.3% to 8.7% of the parent company’s total orders.
In regard to the management fees, in its December 7, 2012 response, Protestant also stated that the management fees paid to the parent company include marketing, financing, and IT services. Protestant argued that the management fees are not dutiable as assists because the payments were not made to the seller of the merchandise. In the December 19, 2012 CF 29, CBP concluded that the management fees were dutiable and stated that it intended to value advance the entry by 10%. In its January 24, 2013 response, Protestant maintained that management fees are not dutiable and added that the fees also include production planning, production management, quality control, and purchasing of raw materials. Protestant emphasized that the parent company does not perform any “hands-on services” since it is not integrally involved in the production (including monitoring workflow and fit approvals) and evaluating and recommending machinery to be used for production. Protestant argued that the services performed by the parent company for Protestant were similar to that of a buying agent. Protestant further argued that if the management fees are dutiable, then it should be 8% of the parent company’s order, which Protestant paid to the parent company. In the January 31, 2014 CF 29, CBP stated that since the values for the management fees were not provided, the entry would be value advanced as stated in the December 19, 2012 CF 29.
In its April 10, 2014 protest, Protestant states that it pays the parent company a monthly management fee based on its portion of the parent company’s orders. The parent company provides the following services: marketing, financing, IT, which combines the orders for both companies into their ERP system, production planning, production management, quality control, and purchasing of raw materials. Protestant further states that the parent company has a long-term relationship with sourcing agents who determine acceptable manufacturers. Protestant provided an e-mail from the parent company’s controller, dated October 23, 2012, which states that the amount it charges Protestant is its proportion of purchase and procurement of raw materials, production planning, production management and quality control, which is “usually around 8%.” Protestant also provided a letter from the parent company’s Head of Accounting, dated February 4, 2014, outlining its management functions. The letter identified the specific services and stated that the services are performed by the Material Management Team, Production Planning Team and the Product Management Team. The Material Management Team plans raw material purchases with the materials and garment manufacturers to make an appropriate decision based on their production needs. After the materials and garments are chosen, the Material Management Team communicates with the raw material vendors on overall quantities based on Protestant’s orders and determines which manufacturers will order from the material vendors. The Production Planning Team places the production orders with the manufacturers for the styles and quantities of the different divisions, based on all of the subsidiaries’ orders, and also communicates order confirmations and other production timing and shipping issues between the manufacturer and subsidiaries. Lastly, the Production Management Team is responsible for quality control, which consists of periodic spot checks at the factory, and ensures timely delivery. The letter reiterates that the Production Management Team does not send a technical design manager to monitor production and is not involved in manufacturing, design, and development.
ISSUE:
Whether the design work and management fees should be included in the price paid or payable.
LAW AND ANALYSIS:
Merchandise imported into the U.S. is appraised in accordance with section 402 of the Tariff Act of 1930, as amended, by the Trade Agreement Act of 1979 (“TAA”; 19 U.S.C. § 1401a). The preferred method of appraisement under the TAA is transaction value defined as the “price actually paid or payable for the merchandise when sold for exportation to the U.S.” plus certain enumerated additions, including assists.
In this case, your office does not question whether there is a bona fide sale between Protestant and the manufacturers, and since the Protestant and the parent company are not related to the manufacturers, we find that the transaction value method of appraisement is appropriate.
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.
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 U.S. and are necessary for the production of the imported merchandise.
Design Work
The first issue presented is whether certain design work undertaken in Germany constitutes an assist. Section 402 of the TAA provides that the term “assist” includes “plans and sketches that are undertaken elsewhere than in the U.S. and are necessary for the production of the imported merchandise.” 19 U.S.C. § 1401a(h)(1)(A)(iv).
CBP addressed the issue of whether certain patterns, designs, pattern tracings, photographs and prototype garments furnished to a foreign manufacturer to produce skiwear and other sports apparel were considered assists in C.S.D. 82-149, dated July 28, 1982. CBP stated that the “actual function of these items to the manufacturer, and their essentiality to the manufacturing process,” were the primary questions, the answers to which will determine their dutiability. CBP examined the capability of the foreign manufacturer to produce the desired garments without the necessity of using the sketches, patterns, photographs etc. and whether the sketches, patterns, photographs merely facilitated the oral or narrative description as to what the importer wanted to produce. CBP held that the designs, samples, prototypes etc. furnished to the manufacturer were not dutiable assists, “but rather specifications reflecting instructions to the manufacturer as to what to produce, but not how to produce, the particular garment.”
In Headquarters Ruling Letter (“HQ”) 563369, dated January 11, 2006, CBP held that a roughly-drawn sketch by a foreign designer was determined to be merely inspirational and therefore, not a dutiable assist. CBP considered whether the sketch was essential to the manufacturing process and whether the manufacturer could have produced the goods with a narrative alone. CBP found that the sketches merely facilitated the oral and narrative descriptions of the design and that the rough sketches were not unique.
In contrast, CBP ruled in HQ 548566, dated October 19, 2004, that certain patterns created for sample garments and provided free of charge from the buyer to the foreign manufacturer were considered assists. CBP stressed in this ruling the importance of whether the manufacturer could produce the article without the drawings or patterns. CBP stated that "if a foreign garment manufacturer cannot produce or manufacture merchandise without an importer's designs, samples, patterns, etc. that are made abroad, such designs, samples, patterns, etc. should be included in the dutiable value of the imported merchandise.” In HQ 548566, CBP determined that the record did not contain sufficient information and documentation to establish that foreign manufacturers could make the garments without the use of patterns. Further, the pattern was unique and not a minor modification of an existing style. Therefore, the pattern was determined to be necessary for the production of the imported garments and therefore, dutiable as an assist.
In this case, we find that the design work is not an assist. The sketches and specifications are general in nature and do not show the exact pattern that the manufacture must follow. The sketches are not essential to the production of the apparel but merely facilitate the oral and narrative descriptions of what the importer would like the foreign manufacturer to produce. Furthermore, we take note of the Protestant’s statement that the parent company approves the samples produced by the manufacturers using the sketches and specifications and we find that the manufacturer is able to produce the article without instructions on how to produce the particular garment.
Management Fees
The second issue presented is whether certain fees for management services constitute an assist. Appraising merchandise pursuant to the transaction value method involves determining, among other matters, the “price actually paid or payable.” 19 U.S.C. § 1401a(b)(1). Paragraph (b)(4)(a) of section 1401a states that the “price actually paid or payable” means the total payment made or to be made by the buyer to or for the benefit of the seller for imported merchandise, whether the payment is made directly or indirectly, with certain enumerated exclusions.
CBP has held that managerial and supervisory services performed abroad that relate to the direction and management of plant operations do not constitute assists because such services are not necessary or integral to the production of the imported merchandise. See HQ 548540, dated July 28, 2004. In addition, quality control service does not constitute an assist, unless it involves production related design and intimate involvement in the nature of the goods produced. In such situations, quality control service may be dutiable as part of the price actually paid or payable or as an assist. Id.; see also HQ 547006, dated April 28, 1998. In HQ H148196, dated March, 28, 2011, CBP considered whether services performed by a buying agent were dutiable. In HQ H148196, the buying agent performed services such as compiling market information, translating, placing orders and negotiating with suppliers, quality control, obtaining samples, assisting with financial arrangements, shipping, and inspecting merchandise. CBP found that the parties had a bona fide principal and agency relationship and concluded that the services were typical of services performed by a buying agent, and any commissions paid to the agent were bona fide buying commissions and were not dutiable.
In this case, we find that the services provided by the parent company are similar to services generally provided by a buying agent. The following services included in the management fee paid to the parent company are not dutiable: marketing, financing, IT services, quality control, purchasing raw material, placing orders and negotiating with vendors, production planning, production management, and shipping arrangements. Therefore, the management fees paid by Protestant to the parent company need not be included in the price actually paid or payable to determine the transaction value of the imported merchandise.
HOLDING:
The design work is not dutiable as an assist. The management fees paid by Protestant to the parent company need not be included in the price actually paid or payable to determine the transaction value of the imported merchandise. The protest should be granted. In accordance with the Protest/Petition Processing Handbook (CIS HB, December 2007), you are to mail the decision together with the Customs Form 19 to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to the mailing of the decision. Sixty days from the date of the decision the Office of International Trade, Regulations and Rulings, will make the decision available to CBP personnel and to the public at www.cbp.gov by means of the Freedom of Information Act and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division