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HQ 544323

March 8, 1990

VAL CO:R:C:V 544323 VLB

CATEGORY: VALUATION

John M. Peterson, Esquire
Neville, Peterson & Williams
39 Broadway
New York, New York 10006

RE: -------------, Inc.: Request for Ruling Concerning Dutiability of Payments Made By the Importer

Dear Sir:

This is in response to your letter dated March 27, 1989, requesting a ruling on behalf of your client, ------------- (hereinafter referred to as the "importer"). You state that the importer is currently entering imported merchandise, but is seeking a prospective ruling on whether items that are now declared as "assists" are in reality assists under the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. section 1401a; TAA).

FACTS:

The importer is purchasing merchandise that is manufactured in the Philippines by API, a related party. You state in your letter that API functions as a "labor contractor" for the importer. The importer purchases materials and supplies (e.g., fabric, yarn, thread, leather, etc.) from unrelated suppliers. The importer arranges for the materials and supplies to be shipped to API's factory in the Philippines, where API uses them to produce imported merchandise.

You state that at all times, the importer retains title to the materials and supplies which it purchases. The price between the parties is API's actual costs of labor, fabrication and processing, plus an agreed-upon addition to general overhead and profit.

When the goods are imported, the value of the material and supplies is added to the "price actually paid or payable". The value of the material and supplies is the importer's cost of acquiring the materials, plus all costs incidental to transporting them to API's factory in Manila. Finally, the quantity and the value of materials and supplies used in the
production of each imported product and calculated periodically according to API's inventory and manufacturing records, in accordance with generally accepted accounting principles.

The importer also provides several services to, or on behalf of, API. These services are: 1) Paying salaries and benefits for management, supervisory and quality control personnel; 2) Purchasing and packing the material and supply assists; 3) Warehousing the materials and supplies; 4) Hiring independent auditors in the Philippines to conduct regular physical inventories of the importer's material and supplies that are stored at API's Philippine warehouse and to provide accounting services to API; 5) Providing API with equipment and machinery that you state is not used in the production of the imported merchandise.

ISSUE:

Whether the five items listed above constitute assists under section 402(h) of the TAA.

LAW AND ANALYSIS:

As you know, 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.

One of the statutory additions 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.

Finally, section 402(h)(1)(B) states:

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, art work, design work, or plans or sketches that are undertaken within the United States.

You state that "Customs officials have previously reviewed the relationship between [the importer] and API and determined that the relationship does not affect the `price actually paid or payable' for the merchandise." Therefore, for purposes of this ruling, we are assuming that transaction value is the proper appraisement method.

For ease of discussion, we will address each of the five possible assists separately.

1. Salaries and Benefits for Management and Supervisory Personnel

In your submission on pages 8 through 10, you list the position/title and duties/responsibilities of several people that the importer employs, but who are assigned to work at API's Philippine plant. These positions include President, Vice President, Vice President, Industrial Engineering/Technical Development, Technicians for Leather Operations, Technician for Fabric Operations, Technician for Knit Operations, Technician for Knitted Hats and Scarves, Technician for Outdoor Shoe Operations, and Technician for Machine Maintenance.

In your supplemental submission dated February 8, 1990, you state that the "technicians" are "engaged exclusively in supervisory and managerial functions, rather than directly in production of the goods." The technicians have broad supervisory responsibility for arranging the shipment, receipt and inspection of materials, planning and monitoring various facets of manufacturing, and reporting to the importer concerning these activities.

You state that the listed employees are citizens of several nations, including the U.S., West Germany, and Jamaica. API pays 1) a portion of each person's salary, consistent with prevailing Philippine salary rates; 2) fringe benefits and social benefits mandated by Philippine law; and 3) Philippine income taxes for each employee. These charges are carried on API's books, and are billed to the importer as part of API's overhead incurred in the manufacture of imported products.

You indicate that the importer pays the balance of the salaries for these employees. The importer pays the employees directly through checks drawn on the importer's U.S. bank account.

You contend that "to the extent salaries and other expenses for these "expatriate" employees are paid by Aris New York, they are not dutiable "assists", and should not be added to the transaction value of imported merchandise produced by API." You cite several Headquarters Letter Rulings (HRL) that you contend support your position. Generally, the holding in the rulings is that management services are not considered assists. See c.f., HRL 543992, dated September 10, 1987, and HLR 543820, dated December 22, 1986.

The services that the importer's employees are providing to API are analogous to the services described in the above- referenced rulings. Based on those rulings, we hold that the salaries and benefits for the importer's management and supervisory personnel are not assists within the meaning of section 402(h)(1)(A) of the TAA.

You also request a ruling concerning whether any part of the management services would be considered an assist if the transaction is restructured. Specifically, you propose that API would establish a separate bank account in the Philippines, designated "U.S. Employee Philippines Salary Account". The account would be considered neither an asset nor a cost of doing business for API, but would be restricted to the salaries, taxes and benefits for the "expatriate" employees of the importer.

The importer would periodically advance funds to the account, which would in turn be disbursed to pay the salaries, benefits and Philippine taxes of the "expatriate" employees. This would include the costs currently borne directly by API.

You cite HRL 542696 (TAA #46) dated February 22, 1982, to support you contention that the management services would not constitute assists under the restructured organization. In TAA #46 involving an assembly operation, the importer's U.S. resident employees worked in a related assembler's Mexican facility. The importer proposed having a portion of the employees' salaries paid through the Mexican subsidiary.

The importer proposed that on a periodic basis, not more than once a month, but perhaps on a 60 or 90 day basis, the importer would advance money to an account in a Mexican bank in the name of the related assembly firm. The assembler would then draw against the account to transmit the Mexican portion of the salaries and taxes, to the U.S. domiciled employees as well as to the Mexican government. The advance account was identified on the assembler's books as "U.S. Employee Mexico Salary Account." The account was not considered to be an asset nor a cost of doing business for the assembly firm.

In TAA #46, Customs held that the fact that a portion of the employees' salaries was paid through a conduit, the assembler, was not relevant, because the record established that payment was made by the importer who legally retained the status of employer. In addition, the services that the personnel were performing did not fall within an assist category. Therefore, the salaries were not dutiable as an assist.

The proposed reorganization that you propose is analogous to the situation presented in TAA #46. Based on TAA #46, we hold that the salaries under the proposed reorganization would not be considered dutiable assists.

2. Purchasing and Shipping Department Costs

You state that the importer has several employees in its New York based Purchasing Department that are responsible for selecting and purchasing the materials and supplies that are consigned to API. In addition, the importer has a New York based Shipping Department that arranges for the warehousing, packing, and transportation of the materials to API's factory.

Presently, the importer includes as an assist, a portion of the costs for the New York based Purchasing and Shipping Departments, proportionate to the time and effort expended by those departments in purchasing, and arranging shipment of, the materials. However, you contend that these costs are not assists. You cite HRL 543003 (TAA #58), dated February 25, 1983, to support your position. However, that ruling was reversed by HRL 543096 (TAA #63), dated June 21, 1983.

In TAA #63, Customs held that the importer had provided the assembler with material that constituted an assist. Customs further held that the value of the assist included the transportation costs to the place of production. Customs stated that the cost of freight and related transportation charges when paid by a seller were normally charged by it to the buyer as part of the overall price of the merchandise. As a result, in TAA #63, Customs explained that because the assembler did not pay the freight charges, it received the material "at a reduced cost", within the definition of assists in section 402(h)(1)(A) of the TAA. Therefore, the amount of the actual cost of freight and related transportation charges were added to the price actually paid or payable for the imported merchandise.

Congress addressed the valuation of materials, components, parts, and similar items in the Statement of Administrative Action. Specifically, if the assist was acquired by the importer from an unrelated seller, as in the present case, the value of the assist is the cost of acquiring it. In addition, the value shall include transportation costs to the place of production. See, Customs publication "Customs Valuation under the Trade Agreements Act of 1979" at p. 50, October 1981.

In this case the costs incurred by the importer's Purchasing Department are costs incurred for activities prior to the acquisition of the material. These expenses are not part of the price that the importer will pay the unrelated seller for the merchandise. Therefore, these expenditures are not includable in the value of the material assists.

However, the activities undertaken by the employees in the importer's Shipping Department are incidental to the transportation of the materials. In addition, it is our understanding that salaries of this type are generally included as part of the overall shipping cost that would be capitalized as a material cost of the items. Therefore, the Shipping Department costs related to arranging the shipment of the materials, supplies and machinery are includable in the value of the assists.

3. Warehousing and Export Packing Costs

You explain in your submission that the importer, after purchasing the materials and supplies, frequently arranges for temporary warehousing of the items at U.S. facilities that are owned or leased by the importer. In addition, the importer purchases packing materials, and the importer's employees pack the materials for exportation to API. Moreover, once the materials arrive at API's Philippine plant, the importer arranges for them to be warehoused, at its own expense, prior to their use in manufacture.

You state in your supplemental submission that, on the average, the materials are warehoused for approximately 30 days. The warehousing in both the U.S. and the Philippines is undertaken for inventory purposes. Finally, you state that warehousing generally does not occur for brief, in-transit periods.

You cite HRL 542412 (TAA #20), dated March 27, 1981, to support your contention that the warehousing costs and the packing material are not assists. In TAA #20, Customs stated that "procurement assists" such as purchasing, receiving, inspection, and warehousing components were not part of the transaction value of the imported merchandise.

Upon review of this ruling, Customs has determined that the term "procurement assist" is not a term defined in the TAA. The TAA simply defines what materials or services are considered assists. As a result, we will address whether the warehousing and packing activities are considered to be assists or part of the value of an assist within the definition in section 402(h)(1)(A) of the TAA.

Your description of the warehousing activities indicates that the materials are stored for inventory purposes and are not stored for brief periods of time while in transit. Based on this description we conclude that the warehousing activities are not incidental to the transportation of the goods to API's plant. Therefore, the warehousing costs are not included in the value of the materials under the TAA.

On other hand, the packing activities are directly related to the exportation and transportation of the materials. Thus, the cost of the packing activities is includable in the value of the material assists.

4. Foreign Warehousing and Accounting Costs

As stated previously, the importer retains title to all materials, supplies and machinery that are furnished to API. As previously discussed, these items may be stored in a warehouse at API's Manila facility. As a result, the importer retains an independent accounting firm in the Philippines to undertake periodic physical inventories and accounting reports concerning the merchandise stored in the Philippines. In addition, the accounting firm reviews API's financial records.

You cite HRL 542122 (TAA #4), dated September 4, 1980, to support your argument that the accounting costs are not dutiable assists under the TAA. We agree that the accounting activities that you describe do not fall within the four categories of assists under section 402(h) of the TAA.

In addition, we agree with your assertion that the cost of warehousing the materials after they have arrived at the manufacturer's plant is not included in the value of the assists. The warehousing occurs after the transportation to the API's Philippine facility has been completed. Therefore, the warehousing is not incidental to the transportation of the materials.

5. Non-Production Equipment Costs

On pages 18 through 21 you list and discuss several pieces of equipment and machinery that the importer supplies to API free of charge. You contend that all of the equipment is not directly employed in the manufacture or production of imported merchandise; therefore, the equipment should not be considered an assist.

As you have stated, the importer is currently contesting the dutiability of certain machinery assists in a case (Court No. 83- 06-00866) pending before the U.S. Court of International Trade. It is our understanding that Judge Aquilano must still rule on various unresolved factual issues in the case.

In light of the fact that the court proceeding involves a determination of what equipment is considered an assist and the value of the assist, we believe that it is inconsistent with the sound administration of the Customs laws to rule on the issue of equipment dutiability at this time. Once a final opinion has been issued in the court case, we will be pleased to consider this matter, if requested.

HOLDING:

The salaries and benefits for management and supervisory personnel, the Purchasing Department costs, the warehousing costs, and the foreign warehouse and accounting costs are not assists under the TAA. However, the importer's Shipping Department activities and the export packing costs are incidental to the transportation of the material assists. Therefore, the cost of these two operations are includable in the value of the material assists.

Due to the pending court case involving equipment assists, we are unable to rule on the dutiability of the machinery and the equipment at this time.

Sincerely,

John Durant, Director
Commercial Rulings Division

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