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HQ 544655


June 13, 1991

VAL CO:R:C:V 544655 ML

CATEGORY: VALUATION

Rudy A. Pina
R.A. Pina & Associates, Inc.
P.O. Box 2496
Nogales, Arizona 85628

RE: Request for a Ruling on the Elements of Computed Value and The Dutiability of Certain Articles Provided Free of Charge

Dear Mr. Pina:

This is in response to your letter dated February 8, 1991, requesting a ruling on whether a cost submission report submitted to Customs adequately shows the elements of computed value under section 402(e) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a) and whether certain articles provided free of charge to the foreign seller will be considered dutiable assists within the meaning of section 402(h)(1)(A) of the TAA.

FACTS:

According to your letter, Growers Distributing International Corporation, (hereinafter referred to as the "consignee" or the "importer"), has entered into agreements with farmers in Mexico to distribute their cantaloupes and honeydew melons in the United States. The consignee acts as the importer of record and the merchandise is consigned to it in Nogales, Arizona.

At the time of entry summary, the consignee will request that the imported merchandise be appraised according to computed value, as the merchandise has not been sold for export to the United States and as provided for in section 402(a)(2) of the TAA and section 152.101(c), Customs Regulations (19 CFR 152.101(c)).

The importer plans to report the elements of computed value to Customs by using an Actual Cost Submission Report, CF-247. The importer may send, to the Mexican farmers, at no charge, seed, pesticides, herbicides, insecticides, and farm equipment such as a truck and tractor.

ISSUES:

(1) Whether the actual cost submission report satisfies the elements of computed value.

(2) Whether certain articles provided by the importer to growers free of charge constitute assists.

LAW AND ANALYSIS:

The imported merchandise is to be appraised pursuant to computed value, under section 402(e) of the TAA. We have assumed that the importer will meet the requirements of section 152.101(c) of the TAA.

Section 402(e)(1) of the TAA provides that computed value consists of the sum of:

(A) the cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise;

(B) an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind as the imported merchandise that are made by the producers in the country of exportation for export to the United States;

(C) any assist, if its value is not included under subparagraph (A) or (B); and

(D) the packing costs.

As regards the first issue presented, you assert that the cost submission report includes all of the elements of computed value. Without knowing all the produce costs, we are unable to conclude that this is a complete list of costs that necessarily compose computed value as defined in 402(e)(1)(A) through (D) of the TAA. However, we can tell you that from our perspective, the information submitted is consistent with computed value requirements.

The second issue to be addressed is whether or not the seeds, pesticides, herbicides, insecticides, and equipment, such as a truck and tractor, provided free of charge, constitute an assist. Section 402(e)(1)(C) of the TAA provides that the computed value of imported merchandise will include a sum for any assist, if its value is not included under subparagraph (A)

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 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.

You contend that the articles to be sent to Mexican growers free of charge are not covered by name in any of the four categories of assists, and therefore, should not be considered as dutiable under section 402(h)(1)(A) of the TAA. To the extent that the articles supplied free of charge are not otherwise included in section 402(e)(1)(A) or (B), these articles may fall within category (i), (ii) or (iii) of section 402(h)(1)(A) of the TAA. Clearly, the articles do not fall within category (iv).

Section 402(h)(1)(A)(iii) of the TAA addresses merchandise consumed in the production of imported merchandise. In Headquarters Ruling Letter (HRL) 543943, dated December 8, 1987, Customs found that a microorganism furnished to the seller, by the buyer, to produce a certain product was "consumed in the production of the imported merchandise. The microorganism was treated as an assist under section 402(h)(1)(A)(iii) of the TAA.

With regard to seeds, pesticides, herbicides, we find these items to have been "consumed" in the production of the melons. These items, supplied free of charge by the consignee to the Mexican farmers constitute assists within the meaning of 402(h)(1)(A)(iii) and to the extent not otherwise included in subparagraph (A) or (B) of section 402(e) of the TAA, will be included in a computed value appraisement.

Pursuant to the facts, farm equipment will also be provided to the Mexican farmers free of charge. Equipment provided free of charge to the Mexican farmers by the U.S. consignee may constitute an assist within the meaning of 402(h)(1)(A) of the TAA if the equipment was used during the production process and that the equipment was essential to production of the product.

Again, it should be noted that if the imported merchandise is appraised under computed value the costs of the equipment may be included as the "cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise" or "an amount for profit and general expenses... made by the producers in the country of exportation for export to the United States." (See, section

402(e)(1)(A) and (B) of the TAA) If, in accordance with generally accepted accounting principles of the country of production or exportation, the costs of the equipment should be reflected in the books of the foreign assembler as processing costs, then it may be that the costs are to be included in determining the computed value of the final imported product. See C.S.D. 89-127, dated May 21, 1990, HRL 544083, dated August 16, 1988 and HRL 542139, dated October 15, 1980 (TAA #9).

In HRL 542122, dated September 4, 1980 (TAA #4), 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 HRL 542302, dated February 27, 1981 (TAA #18), 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 and not includable as any of the elements in determining computed value. In HQ 542762, dated January 14, 1983, Customs noted that the distinction is often based on whether or not the equipment "works a change" on the merchandise during production.

In HRL 542139, dated October 15, 1980 (TAA #9), Customs stated that general purpose equipment is treated as an assist. 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. Customs, in determining the appraised value on the basis of computed value, had included an addition for the cost of sewing machines as an assist. The plaintiff had claimed that the inclusion of the cost of the sewing machines was an error because the machines were not "tools dies, molds, and similar items used in the production of the imported merchandise" as provided for in the statute. The court found that including the value of the sewing machine, which was essential to the fabrication of the apparel, fairly and accurately reflected the cost of producing the imported merchandise."

In applying the court's decision to this case, we must determine whether the various pieces of equipment provided by the consignee are considered to be production or non-production equipment. 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 importd merchandise" within the meaning of section 402(h)(1)(A)(ii) of the TAA. While we are in the process of re-examining our position with regards to this issue (as stated in HRL 544480, dated September 21, 1990), we do not find that a truck, which arguably may move and carry material from one point in the production process to another, is "used in the production of the imported merchandise. Therefore, under the facts provided, we do not find this piece of equipment to be an assist within the meaning of section 402(h)(1)(A)(ii) of the TAA.

The last piece of equipment to be supplied at no cost is a tractor. Unlike the furnishing of the truck, a tractor is used during production and not after production. In HRL 544508, dated June 19, 1990, Customs distinguished equipment used during the production process and essential to production from equipment used after the production process. It is our opinion that a tractor which is used during the production process and is essential to the growth of the melons, is a "similar item" to that of a tool, die and mold used in the production of the imported merchandise under section 402(h)(1)(A)(ii) of the TAA. We find that this piece of general purpose equipment is of the type which may be considered an assist, consistent with the court's finding in Texas Apparel and consistent with a similar approach towards "tools" taken by the court in Aris Isotoner Gloves v. United States, Slip Op. 90-103 (1990). In Texas Apparel, the court stressed that although a tool may be defined as a manual instrument, a tool may also be defined more broadly as "an implement or object used in performing an operation or carrying on work on any kind..." See Websters Third New International Dictionary 2408 (1981). Since this equipment is used during the production process and is essential to the production of the melons it is falls within section

HOLDING:

Under the circumstances presented, we are unable to determine if the actual cost submission report includes all of the costs that necessarily compose computed value as defined in 402(e)(1)(A) through (D) of the TAA.

Additionally, to the extent not otherwise included under subparagraph (a) or (B) of section 402(e)(1) of the TAA, the consignee's supplying of seeds, pesticides, herbicides and a tractor, at no charge, to the Mexican farmers would constitute assists within the meaning of section 402(h)(1)(A) of the TAA. The furnishing of a truck, free of charge, would not constitute an assist within the meaning of 402(h)(1)(A) of the TAA and would not, therefore, be part of a computed value appraisement under section 402(e)(1)(C) of the TAA.

Sincerely,

John Durant, Director
Commercial Rulings Division

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