HQ 0544972 - Dutiability of research and development costs paid by importer - United States International Trade Commision Rulings

United States International Trade Commision Rulings And Harmonized Tariff Schedule

faqs.org Rulings By Number Rulings By Category Tariff Numbers

faqs.org > Rulings and Tariffs Home > Rulings By Number > 1994 HQ Rulings > HQ 0544662 - HQ 0545490 > HQ 0544972

HQ 544972
October 20, 1993
VAL CO:R:C:V 544972 ILK

CATEGORY: VALUATION

RE: Dutiability of research and development costs paid by importer

This is in response to your letter of April 2, 1992 (hereinafter referred to as the "request"). On behalf of your "importer") you request a ruling regarding the dutiability of research and development (R&D) costs paid by the importer to a related foreign manufacturer (hereinafter referred to as the "seller"). Your request, and a letter dated September 3, 1992 ask that certain information supplied with the request be kept privileged and confidential. Based on your identification of information to be kept privileged and confidential, and the reasons given therefore in your letter dated September 3, 1992, we will treat the subject information as confidential and privileged. We regret the delay in responding.

FACTS:

The importer, a U.S. corporation is importing [product]-- - equipment components and parts which are made in [Europe] by the seller. In a telephone conversation with a member of my staff, on July 17, 1992, you stated that the seller may actually be any one of a number of related companies in Europe. The importer anticipates that importations will be made through various U.S. ports in 1992.

You state that the seller makes equipment for sale in markets around the world, and as the importer buys only for the U.S. market, the importer is purchasing only a fraction of the machines built by the seller. According to you the 1990 Annual Report of the importer shows that the total value of sales by the importer in the U.S. was $2,764,000.00 in 1989 and $4,409,000.00 in 1990, and the total value of sales worldwide by the seller was $20,560,000.00 in 1989 and $26,688,000.00 in 1990. You calculate that the percentage relation of the importer's sales to worldwide sales averaged 15% over the two years. You believe that the 15% figure is typical of the U.S. portion of worldwide sales. You state that sub-units of the importer participate in U.S. sales at different percentages. For example the power plant unit sells only 15% of the goods sold in the U.S. market, thus selling only .0225 of the worldwide sales (15% of 15%). This is also reflected in the Annual Report.

You request a ruling on whether the --- charge is dutiable. the importer otherwise would be paying duty on R&D expended on goods not exported to the U.S. You further state that a -------

ISSUE:

Whether the charge paid by the importer for ------ R&D expenses is included in the price actually paid or payable for the imported merchandise.

LAW AND ANALYSIS:

Transaction value is the preferred method of appraisement, and is defined in section 402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(b); TAA) as the "price actually paid or payable for the merchandise" plus five enumerated statutory additions. The term "price actually paid or payable" is defined in section 402(b)(4)(A) of the TAA as the "total payment...made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller."

We are assuming for purposes of this ruling that transaction value is the proper method of appraisement for the imported merchandise, although we note that the importer and the seller are related parties under section 402(g) of the TAA. Therefore, the transfer price between the importer and the seller is acceptable for transaction value purposes only if it meets one of the tests set out in section 402(b)(2)(B). We do not have enough information to determine whether one of the tests has been met.

It is the position of the Customs Service that all monies paid to the foreign seller, or a party related to the seller, are part of the price actually paid or payable for the merchandise under transaction value. See e.g. Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed Cir. 1990); HRL 544640 dated April 26, 1991. R&D is one of several general expenses that a seller must recoup. The seller may choose a number of methods to recoup the expense. In this case the seller chose to add a fixed percentage to each purchase. Clearly, this results in the R&D becoming part of the importer's total payment to the seller. The R&D is directly tied to the invoice purchase price for the specific merchandise purchased by the importer. If the R&D expenses were not included in the transfer price between the related importer and seller, the transfer price would not be adequate to ensure the recovery of all costs. Therefore, it is impossible to separate the price paid for the merchandise from the R&D charges. Based on the foregoing, we find that the R&D payments made by the importer to the seller are part of the price actually paid or payable for the imported merchandise.

As we have determined that the R&D charges are included in the price actually paid or payable for the imported merchandise, we do not reach the apportionment issues raised by the importer.

HOLDING:

The R&D costs are included in the price actually paid or payable for the imported merchandise.

Sincerely,

John Durant, Director,
Commercial Rulings Division

Previous Ruling Next Ruling