HQ 0544884 - IA 46/91; transaction value; dutiability of post production testing costs - United States International Trade Commision Rulings

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HQ 544884

April 15, 1992

VAL CO:R:C:V 544884 GG

CATEGORY: VALUATION

John V. Linde
District Director
U.S. Customs Service
10 Causeway Street
Boston, Massachusetts 02222-1059

RE: IA 46/91; transaction value; dutiability of post production testing costs

Dear Mr. Linde:

This is in response to the internal advice request referenced above, which was initiated on behalf of xxx xxxxx xxxxxxx, Inc.

FACTS:
xxx xxxxx xxxxxxx xx of xxxxxx produced thyristor valves for the New England-Hydro Quebec Project ("NEHQ"). Various electricity substations have been established in the United States and Canada under this project. The valves in question were purchased and imported by xxx xxxxx xxxxxxx, Inc. for the Sandy Point substation in the United States.

Thyristor valves are multi-storey structures comprised of the following components: thyristor modules, reactors, light guides, special electrical shielding and protection equipment, and other electrical components. These components are mounted in a specially designed frame and are connected in a manner specific to the particular substation. Thyristor valves are an integral part of xxx xxxxx xxxxxxx, Inc.'s high voltage-direct current system, which converts alternating current to direct current at the generating substation, and direct current to alternating current at the distribution substation.

During the production process in xxxxxx, xxx xxxxx xxxxxxx xx routinely tested all thyristor modules and their components, value reactors, and other valve components for the NEHQ project to ensure that they met specifications. The value of this testing was included in the invoice price of the thyristor valves.

In addition to the normal production testing, xxx xxxxx xxxxxxx xx also performed special "type tests" on the valves after all of the components had been manufactured. The purpose of these tests was to check the design specifications of the valves; type tests did not determine whether the valves' various components met specifications. Production of the components of the remaining valves for a particular substation commenced only after the type test was successfully completed. Type tests had no bearing on the production of the individual components of a valve or on the valve's assembly. However, if a valve structure failed the type test, the components for the remaining valves of that substation were not produced until the design was modified and the modified valve passed the type test.

One-fourth of a valve structure for the Sandy Point substation was type tested; it passed the type tests. xxx xxxxx xxxxxxx Inc. will pay xxx xxxxx xxxxxxx xx $736,744 for the type tests for this substation. The payments to be made to the seller for the type tests were not included on the invoices for the imported merchandise, but were invoiced separately after importation.

ISSUE:

Whether amounts paid by the buyer to the seller for "type" tests performed on the imported merchandise are dutiable?

LAW AND ANALYSIS:

For purposes of this ruling request, we are assuming that transaction value pursuant to 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)), is applicable in appraising the merchandise, given the fact that it appears that the parties may be related within the meaning of section 402(g) TAA.

Transaction value is defined in section 402(b) of the TAA as "the price actually paid or payable for the merchandise when sold for exportation to the United States," plus amounts for the items enumerated in section 402(b)(1), TAA. The price actually paid or payable is defined in section 402(b)(4)(A) as: "The total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States . . .) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller."

A permissible construction of the term "for imported merchandise" does not restrict which components of the total payment may be included in transaction value. See Generra Sportswear Co. v. United States, 905 F.2d 377, 380 (Fed. Cir. 1990). Customs has held that where the buyer makes payments to the seller for tests performed by the seller on the merchandise before it is imported, such payments are part of the price actually paid or payable. See TAA No. 11, dated November 7, 1980 (HRL 542187); HRL 544035, dated November 23, 1987. The importer, citing Customs Service Decision 89-127 and HRL 544508 dated June 19, 1990, argues that Customs has limited this result to cases where the testing costs are directly related to the production of the imported merchandise. In its view, the type tests are post production tests and therefore are not dutiable. However, the importer's argument is a misinterpretation of Customs' position, which is that to constitute a dutiable assist under the TAA, testing equipment provided free or at reduced charge by the buyer to the seller must be used in the production of the imported merchandise. The "used in production" restriction is a statutory requirement, found in 19 U.S.C 1401a(h)(1)(A)(ii), that goes only to the question of whether something is an assist. Since payments made by the buyer to the seller for testing costs are not assists (TAA No. 11), but are simply payments that are part of the price actually paid or payable, then the testing for which the payments are made is not subject to the same restriction and therefore does not have to be directly connected to the merchandise's production.

The $736,744 payment xxx xxxxx xxxxxxx Inc. will make to xxx xxxxx xxxxxxx xx for the "type" tests, is part of the total payment to be made by the buyer to the seller for imported merchandise and is includable in the transaction value of the imported thyristor valves.

HOLDING:

Amounts paid by the buyer to the seller for "type" tests performed by the seller on the imported merchandise are part of the price actually paid or payable and are includable in the transaction value of the merchandise.

Sincerely,

John Durant
Director, Commercial

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