HQ 0544508 - Reconsideration of C.S.D. 89-127 - United States International Trade Commision Rulings

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HQ 544508

June 19, 1990

VAL-2 CO:R:C:V 544508 pmh

CATEGORY: VALUATION

District Director of Customs
Nogales, AZ

RE: Reconsideration of C.S.D. 89-127

Dear Sir:

This is in response to your request for a clarification of C.S.D. 89-127, dated May 21, 1990. Specifically, you inquire whether certain testing costs that are incurred during the manufacture and assembly of electronic products, are to be considered assists.

In C.S.D. 89-127 Customs held that test equipment provided by the U.S. importer, free of charge, to the foreign manufacturer and used for testing the integrity of finished instruments before such instruments were shipped to the U.S., did not constitute an assist within the meaning of section 402(h)(1)(A) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(b)). That decision was based on the fact that the testing equipment was used on the finished instruments and was not used in the production of the merchandise within the meaning of section 402(h)(1)(A)(ii), and did not fall within any of the other assist categories.

FACTS:

In your May 21, 1989 letter you describe a situation in which testing equipment is used in the manufacture of electronic products. You state that since such products require precise testing to ensure quality, testing usually starts prior to production, i.e. the individual components are tested. Thereafter, depending on the product, the testing equipment could be used a number of times throughout the assembly and manufacturing process. You further state that no product will be sold or shipped until it is thoroughly tested.

ISSUE:

Whether cost of the testing equipment as described, falls within the definition of an assist pursuant to section 402(h)(1)(A) of the TAA.

LAW AND ANALYSIS:

Section 402(h)(1)(A) 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- corporated 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.

In TAA No. 11, dated November 7, 1980 (HRL 542187), we held that testing costs incurred as a result of testing the design and structure of steel structures, were not assists within the meaning of section 402(h)(1)(A) of the TAA. In that case, the testing was neither part of the design and engineering work, nor necessary for the fabrication of the steel structures. Likewise, in C.S.D. 89-127, Customs used the same reasoning and determined that the costs incurred as a result of testing the integrity of the finished instruments did not constitute an assist within the meaning of 402(h)(1)(A)(ii) since these costs were incurred after production.

Since costs incurred for testing the quality, strength accuracy, etc. of a finished product, are necessarily incurred after production, Customs has continued to rely on the above reasoning in determining that most testing costs do not constitute assists. (See HRL 54762, dated January 14, 1983; HRL 543587, dated January 28, 1986.)

However, it is our opinion that the situation you describe in your letter is distinguishable from those we have addressed in the past. That is, the testing costs are incurred during production rather than after production. Furthermore, you indicate that the testing in this case constitutes more than mere monitering of production, that given the nature of the finished electronic product, no product will be shipped or sold without being thoroughly tested. Testing is required for some of the original components of the product and at various stages of the manufacturing and assembly process.

Under the circumstances you describe, where testing costs are incurred during the the manufacture and/or assembly of a product and where it can be shown that such testing is an essential factor in the fabrication process (i.e., the nature of the finished product is such that ascertaining the sensitivity, accuracy, etc. periodically throughout production is requisite to the finished product's marketability), the testing equipment provided free of charge to the foreign manufacturer by the U.S. importer, constitutes an assist within the meaning of category (ii) of 402(h)(1)(A) of the TAA. It is our opinion that the language "similar items used in the production of the imported merchandise," as that language is used in category (ii), was intended to include as assists production equipment that, like tools, dies and molds, directly contributes to the final product.

HOLDING:

Testing equipment provided free of charge to the foreign manufacturer by the U.S. importer may constitute an assist within the meaning of 402(h)(1)(A) of the TAA if it can be shown that the equipment was used for testing performed during the production process and that such testing, due to the nature of the finished product, was essential to production of the product.

Sincerely,

John Durant, Director,
Commercial Rulings Division

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