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HQ 544480


September 21, 1990

VAL-2 CO:R:C:V 544480 pmh

CATEGORY: VALUATION

Regional Director, Regulatory Audit Division Chicago, IL

RE: Request for Internal Advice; Dutiability of Certain Depreciation Costs

Dear Sir:

This is in response to your memorandum dated March 13, 1990 (MAN-1-CO:RA:C), regarding a request for internal advice on the dutiability of depreciation costs associated with certain equipment. This equipment is provided free of charge by the importer to the foreign manufacturer.

According to the March 7, 1990 request for internal advice submitted by the importer, Outboard Marine Corporation (OMC), to the Southeast Region, OMC imports merchandise from its Mexican subsidiary (OMEX). The imported merchandise consists of small outboard motors and other small electrical and fuel assemblies to be used in boats. OMC supplies certain equipment to OMEX free of charge and this equipment remains on OMC's depreciation schedule. The merchandise imported by OMC is subject to special duty status under subheading 9802.00.80 of the Harmonized Tariff Schedule of the United States. A regulatory audit was performed to verify the value of the U.S. origin components deducted from the value of the imported merchandise. During this audit it was discovered that an amount reflecting the depreciation costs of the equipment OMC supplies to OMEX was not reflected in the total amount of U.S. assist costs. It is the opinion of the concerned auditors that the equipment constitutes assists and should be factored into the appraised value of the imported merchandise.

The importer has enclosed a list of the equipment it has supplied to OMEX. OMC has divided these items into six categories. These categories are: General Plant and Office Equipment (GPO), Maintenance Tools and Equipment (Main), Materials Handling Equipment (MHE), Painting Equipment (Paint), Packaging Equipment (PKG) and Testing Equipment (Test). The total list includes 171 items. We have numbered the items for easier reference and enclose a copy of the numbered list with this ruling. We note that without a precise description of each piece of equipment, many of our comments have to be advisory in nature.

The imported merchandise in this case has been appraised pursuant to transaction value, section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(b)).

The question presented is whether the equipment that OMC supplies free of charge to OMEX constitutes an assist within the meaning of section 402(h)(1)(A) of the TAA. In this regard, we note that section 402(h)(1)(A) of the TAA provides as follows:

The term assist means any of the following if supplied directly, 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 in- 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, art work, design work, plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise.

The equipment and machinery in this case do not fall within category (i) or (iii) of section 402(h)(1)(A) as it is neither incorporated into the imported merchandise nor consumed in the production of the imported merchandise. Nor does the equipment fall within category (iv), which addresses engineering, artwork and design work. Therefore, the question presented is whether the equipment and machinery provided by OMC to OMEX constitute "tools, dies, molds and similar items used in the production of the imported merchandise" within the meaning of section

In TAA #4, dated September 4, 1980, Customs held that general purpose equipment, such as sewing machines, ovens, drill presses, etc., which was actually used in the production of the merchandise was dutiable as an assist under section 402(h)(1)(A)(ii) of the TAA. In TAA #18, dated February 27, 1981, Customs contrasted this equipment with general purpose equipment such as emergency power generators, telephone switching equipment, and air conditioning equipment, which was not used in the actual production of the imported merchandise and was,
therefore, not considered to be an assist within the meaning of section 402(h)(1)(A)(ii) of the TAA. In HQ 542762, dated January 14, 1983, we noted that the distinction is often based on whether or not the equipment "works a change" on the merchandise during production.

As noted above, we are basing our determination as to whether or not each of the items constitutes an assist, on the brief description that has been provided for the item. In some instances the description is too brief to indicate whether or not the item is actually used in the production of the merchandise within the meaning of section 402(h)(1)(A)(ii) of the TAA. In those instances, we will be unable to make a determination as to whether the item is an assist.

With regard to the first category, GPO, items one through 25 are general office equipment and not of the type to be used in the actual production of merchandise. This equipment is used to maintain air quality, and as part of the plumbing and electrical systems in the office and plant. In addition, these items include equipment used to maintain the floors and docks, a timeclock and a door. Items 36 through 44 consist of equipment used in the waste and water treatment systems of the plant and office. None of this equipment is used in the actual production of the imported merchandise within the meaning of section 402(h)(1)(A)(ii) of the TAA or the above-cited rulings.

Items 26 through 35 in the GPO category comprise a stamp system that stamps the part number and date code on components of the imported merchandise. Although it is not clear from the description when and how the stamping equipment is used, if it is actually used in production to mark components of the imported merchandise, it would constitute an assist within the meaning of

With regard to the second category, MAIN, we find that it is not clear from the individual descriptions provided for most of the items how those items are used and if they are used in the production of the imported merchandise within the meaning of section 402(h)(1)(A)(ii) of the TAA. Section 402(h)(1)(A)(ii) of the TAA specifically addresses "tools...and similar items used in the production of the merchandise." In Texas Apparel v. United States, Slip-Op. 88-148 (1988), the court affirmed Customs' position that even general purpose equipment may be considered assists under section 402(h)(1)(A)(ii) of the TAA, if such equipment is used directly in the production of the imported merchandise. Items 46 through 53 and items 62 through 72 are
described as either tools or tool and machinery maintenance equipment. Given the nature of the imported merchandise, i.e., small outboard motors and electrical and fuel assemblies, it is possible the general purpose tools listed as items 46 through 53 and 62 through 72 would be used directly in the production of the imported merchandise. If so, those tools would constitute assists as the court defined that term in Texas Apparel. However, it is not clear from the given descriptions whether these items are used in the actual production of the imported merchandise or not.

Items 45, 54 through 56, 61 and 71 in the MAIN category are items related to the production and maintenance of the tools, themselves, rather than to the production of the imported merchandise. Items 57 through 60 are cabinets and constitute furniture. As such none of these items are considered assists within the meaning of section 402(h)(1)(A)(ii).

The third category, MHE, consists mainly of equipment used for moving and carrying material. Items 73 through 81 and item 84 are conveyor belts used for a carburetor assembly line. We note that in C.S.D. 88-20, dated August 16, 1988, we held that a conveyor system used to transport an article being produced from one point in the manufacturing process to another was not an assist because it was not "used in the production of the imported merchandise" within the meaning of section 402(h)(1)(A)(ii) of the TAA. However, we are in the process of re-examining our position with regards to this issue.

Items 82 through 107 and item 109 consist of forklifts and their parts, work tables, benches and loading bins. Customs held, in HQ 554993, dated May 19, 1988, that such items are not used in the actual production of imported merchandise and are, therefore, not assists within the meaning of section

Items 108 through 112 (with the exception of item 109) are equipment for counting and weighing equipment. This equipment is not similar to a tool, die, or mold in that it does not "work a change" on the article being produced. Nor has it been indicated that this equipment is used in the production of the imported
merchandise. We do no find this equipment to constitute assists within the meaning of section 402(h)(1)(A)(ii) of the TAA.

The entire category of PAINT has not been sufficiently desribed for us to make any determination as to whether those specific items constitute assists. If the paint systems consist of equipment that is actually used in production, to paint the imported merchandise or components thereof, then these items, like the stamping system, would be assists within the meaning of section 402(h)(1)(A)(ii) of the TAA.

Category PKG itemizes packaging equipment. This equipment would necessarily be used after production of the imported merchandise and as such, would not be assists within the meaning of any of the categories in section 402(h)(1)(A). In addition, please note that packing costs are addressed in section 402(b)(1)(A) of the TAA and that under authority of that section such costs are included in the transaction value of imported merchandise if not otherwise included in the price actually paid or payable.

The final category, TEST, lists various testing equipment. As noted in regard to each of the other categories, the descriptions provided for the items in this category are not sufficient for us to make a determination as to whether or not these items are assists. Generally, Customs has held that testing equipment does not constitute assists because most testing occurs after production, on the finished product. (See TAA #11, dated November 7, 1980; HQ 543587, dated January 28, 1986.) However, in HQ 544508, dated June 19, 1990 we held that testing equipment may constitute an assist within the meaning of 402(h)(1)(A)(ii) of the TAA if it can be shown that the equipment was used for testing performed during the production process and that such testing was essential to the production to the product. A copy of that decision has been provided for your reference.

Accordingly, we find that the equipment identified in items 45, 54 through 56, 61, 71, 82 through 112 do not constitute assists within the meaning of section 402(h)(1)(A). Items 130 through 140 do not constitute assists, but may be added to the transaction value of the imported merchandise, as packing costs, under section 402(b)(1)(A). We are not able to make a determination as to whether the remainder of the equipment
constitute assists because the descriptions provided are not sufficient to indicate what each of those items are and/or how they are used. Therefore, with regard to the remaining items, we suggest you obtain additional information as to whether they are used directly in the production process of the imported merchandise and utilize the guidelines we have provided above.

Sincerely,

John Durant

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