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HQ 544654


December 23, 1991

VAL CO:R:C:V 544654 ML

CATEGORY: VALUATION

Area Director
JFK Airport Area
Jamaica, New York 11430

RE: Dutiability of Trial Weaving Charges as Part of the Price Actually Paid or Payable for the Imported Merchandise; Application for Further Review of Protest No. XXXX

Dear Sir:

This protest was filed against your appraisement decision in the liquidation of an entry made by Phillips-Van Heusen Corp., (hereinafter referred to as the "importer") of poly/cotton fabric woven in Japan by Toyo Menka Kaisha, Ltd., (hereinafter referred to as the "manufacturer").

FACTS:

According to the submission, the importer is a domestic manufacturer and distributor of apparel, as well as, an importer of fabric and apparel. The imported merchandise consisted of 236 square yards of fabric woven in Japan. The merchandise was appraised pursuant to transaction value. Prior to this importation, the importer purchased samples and swatches of fabric from the manufacturer for a book used to illustrate available fabrics and patterns. In order to create this new fabric design, the manufacturer stops the loom and prepares a warp beam. The preparation of a warp beam can take as little as a day or as much as several weeks and no goods can be produced while the conversion takes place. According to counsel for the importer, the manufacturer agreed to weave the pattern if it recovered the costs associated with stopping a loom and setting up a new warp beam. The newly woven fabrics were purchased in small quantities, often with the manufacturer requiring the importer to pay a trial weaving charge. This charge was a substantial sum, far in excess of the price of the fabric. When the subsequently ordered fabric price and the trial weaving charge are on a single invoice, as was the case here, the trial weaving charge is identified separately.

ISSUE:

Whether the importer's payment to the manufacturer for trial weaving costs was part of the "price actually paid or payable" for the imported merchandise.

LAW AND ANALYSIS:

Transaction value, the preferred method of appraisement, is defined in 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)), as the "price actually paid or payable for the merchandise when sold for exportation to the United States" plus certain enumerated additions not relevant here. This is more specifically defined in section 402(b)(4)(A) of the TAA, as the following:

The term "price actually paid or payable" means the total payment... made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. (emphasis added)

Counsel for the importer analogized the situation in the instant case to that of Headquarters Ruling Letter (HRL) 542666, dated January 26, 1982, (TAA #45). The issue in that case was whether cash payments by the importer to the exporter were part of the "total payment... for the imported merchandise...." The cash payments were made to acquire facilities and equipment. The agreement also provided that the exporter would pay the importer back. Customs likened this payment to a loan, and stated that the advance was not tied to the payment for the imported merchandise. Customs concluded that payments relating to the imported merchandise would be part of the "price actually paid or payable" while payments unrelated to the imported merchandise would not be part of the "price actually paid or payable." In that case, Customs also held that whether a financial arrangement between the buyer and seller is part of the "price actually paid or payable" is a question of fact which must be determined on the basis of evidence available with regard to that particular transaction.

Based on the evidence in this case, we do not believe the payment made for designing swatches of fabric can be likened to a loan and therefore, is unrelated to payments for subsequently imported merchandise.

Customs has held that additional payments made by the buyer to the seller to produce or buy items such as tools and molds necessary to produce the subject merchandise, constitutes part of the price actually paid or payable for the imported merchandise. (See HRL 542 812, dated July 19, 1982; HRL 543983, dated December 2,1987) Likewise, Customs has held that payments made to the seller for expenses incurred for design and development are part of the price actually paid or payable for the imported merchandise. In HRL 543324, dated August 8, 1984, Customs rendered advice concerning the valuation of two product groups. One issue addressed involved the performance of foreign research and development (R&D) paid for by the importer. Part of the R&D payments were attributable to specific products which were never produced. Additionally, not all of the products developed were imported into the United States. Customs stated that following C.S.D. 83-3, the R&D payments were part of the price actually paid or payable rather than assists. We noted that transaction value is defined as the "price actually paid or payable for merchandise when sold for exportation to the United States" and therefore, the dutiable amount of the R&D was limited, based on the underscored language, to that paid for products exported to the United States. (See also, HRL 543983, dated December 2, 1987)

In Internal Advice (I/A) 17/90, 544516, dated January 9, 1991, Customs considered three factual situations involving payments from the importer to the manufacturer. One situation dealt with a payment made by the importer to the manufacturer for the design and development of a prototype. Customs found that the prototype in that case was a necessary step in the design and development of the subsequently imported articles based on that prototype. We held that the cost of the prototype was the cost necessary to produce the subsequently imported merchandise, and should be included in the price actually paid or payable for that imported merchandise.

In Generra Sportswear Co. v. United States, Slip Op. 89- 1652, dated May 22, 1990, the U.S. Court of Appeals for the Federal Circuit affirmed the Customs position regarding the term "for the imported merchandise" by stating:

A permissible construction of the term "for the imported merchandise" does not restrict which components of the total payment may be included in transaction value. Congress did not intend for the Customs Service to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, are for merchandise or for something else.

The court went on to say that even if a payment was for something other than the per se value of the goods, it may properly be included in the transaction value. The court took a broad view of the term "for the merchandise".

Based on the evidence available in this transaction and consistent with HRL 543324, I/A 17/90 and the Generra Sportswear case, we find that the trial weaving charges are part of the "price actually paid or payable" for the imported merchandise.

HOLDING:

The payment made by the importer to the manufacturer for trial weaving charges was part of the price actually paid or payable for the subsequently imported merchandise, and therefore, dutiable.

Accordingly, you are hereby directed to deny the protest in full. A copy of this decision should be attached to the Customs Form 19 and mailed to the protestant as part of the notice of action on the protest.

Sincerely,

John Durant, Director
Commercial Rulings Division


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