HQ 0545278 - Internal Advice Request 29/93; prototypes; subsequently imported merchandise; design and development; price actually paid or payable; assists; HRL 544642 cited - United States International Trade Commision Rulings

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HQ 545278

April 7, 1994

VAL CO:R:C:V 545278 CRS

CATEGORY: VALUATION

District Director
U.S. Customs Service
Patrick V. McNamara Building
477 Michigan Avenue
Detroit, MI 48226

RE: Internal Advice Request 29/93; prototypes; subsequently imported merchandise; design and development; price actually paid or payable; assists; HRL 544642 cited

Dear Sir:

This is in reply to your memorandum dated March 26, 1993, in which you requested internal advice in regard to the appraisement of certain modified engines developed for Ford Motor Company (the "buyer"). We regret the delay in responding.

FACTS:

The buyer negotiated an interim agreement (the "agreement") with Yamaha Motor Company, Ltd. (the "seller"), to modify and adapt an existing automobile engine (hereinafter referred to as the "modified engine") for use in certain automobiles equipped with automatic transmissions. The agreement provides that if the modifications prove successful, the parties would enter into a contract for the purchase and supply of production engines. The modifications were successful and production engines have been and continue to be imported.

Pursuant to the agreement, the seller is responsible for the design and development modifications, in return for which it will receive a fee, payable in installments. This amount constitutes the buyer's total financial obligation under the agreement for developing the modified engine. The agreement also provides, however, that any prototypes of the modified engines (the "prototype modified engines") required by the buyer during the term of the agreement will be purchased under separate purchase orders in accordance with the buyer's standard purchase order terms and conditions.

The buyer issued nine purchase orders covering a total of 178 prototype modified engines. Subsequently, amendments were issued reducing the number of engines to be imported to 156. Duty was paid on the 156 prototype modified engines which were imported for testing purposes. The balance of the prototype modified engines were retained by the seller and were never imported.

The buyer contends that the payments to the seller are an assist in that they were made for engineering, development and design work, undertaken elsewhere than in the U.S., that was necessary to manufacture the imported production engines. In addition, you advise that the buyer also contends that since it paid duty on the imported prototype modified engines, the value of these "assists" cannot be added to the price actually paid or payable of subsequently imported production engines. However, you maintain that the payments for the design modifications are not assists but part of the price actually paid or payable and therefore dutiable.

ISSUES:

The issues presented are: (1) how should the imported prototype modified engines be appraised; and (2) how should the imported production engines be appraised?

LAW AND ANALYSIS:

Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a). The preferred method of appraisement under the TAA is transaction value, defined as the price actually paid or payable for the merchandise when sold for exportation to the United States, plus certain statutory additions, including the value. apportioned as appropriate, of any assist. 19 U.S.C. 1401a(b)(1).

The term "price actually paid or payable" means the total payment (whether direct or indirect...) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C. 1401a(b)(3).

The agreement provides for two separate payments to the seller. One is for the modification of an existing engine model in order to adapt the engine for use in automobiles produced by the buyer. This amount constitutes the buyer's total financial obligation for the design and development work performed by the seller. A payment schedule for this amount is set forth in the agreement. Interim Agreement at 3, paragraph 4. In addition, the agreement provides that should the buyer require prototype modified engines for testing purposes, it could purchase them under separate purchase orders in accordance with the buyer's standard terms and conditions. Interim Agreement at 1. This second payment therefore relates to the purchase of prototype modified engines produced by the seller in the course of the design work. Of the 178 prototype modified engines produced by the seller pursuant to the buyer's purchase orders, only 156 were actually imported by the buyer.

The buyer contends that the payment to the seller for the prototype modified engines constitutes an assist, the value of which should be added to the price actually paid or payable of imported production engines. The term "assist" is defined as that which is supplied directly or indirectly, and free of charge or at a reduced cost, by the buyer for use in connection with the production or sale for export of merchandise, including, inter alia, engineering, development and design work, necessary for the production of the imported merchandise and undertaken elsewhere than in the United States. 19 U.S.C. 1401a(h)(1)(A)(iv). However, in this instance the development and design work was not provided by the buyer. It was performed by the seller, and paid for by the buyer in the amount, and according to the schedule, set forth in the agreement. Customs has held that payments for engineering development work, etc., are not assists but are part of the price actually paid or payable for the imported merchandise. E.g. Headquarters Ruling Letter (HRL) 544381 dated November 25, 1991; HRL 543376 dated November 13, 1984. See also, Chrysler Corporation v. United States, No.. 93-186, slip op. at 17 (Ct. Int'l Trade September 22, 1993). Accordingly, the value of the imported prototype modified engines does not constitute an assist.

The agreement provides that any prototype modified engines required by the buyer would be purchased under separate purchase orders, i.e., separate in that the payment for prototype modified engines would be in addition to the agreed upon compensation for the entire design and development process. Separate purchase orders were placed for 178 engines; subsequently, the order was amended and while the buyer paid for all 178, only 156 were imported. Assuming transaction value is indeed the appropriate basis of appraisement, the payment of the purchase order amounts constitutes the price actually paid or payable for the imported prototype modified engines. Since only 156 prototype modified engines were imported, however, the other twenty-two prototype engines originally ordered are not subject to duty. Duty on the 156 engines was paid upon importation.

Having paid duty on the 156 imported prototype modified engines the buyer also maintains that the cost of the design and development work for the modified engines should not be included in transaction value as part of the price actually paid or payable of the imported production engines. Again, the agreement provides for two payments to be made by the buyer as compensation for the work performed by the seller in regard to the engine modification program: one for the overall design and development; the other specifically for the prototype modified engines. As noted above, the latter payment represents the price actually paid or payable for the imported prototype modified engines.

In HRL 544516 dated January 9, 1991, certain prototypes were determined to be a necessary step in the design and development of the subsequently imported articles based on the prototypes. HRL 544516 at 4. In that case, as here, there were two payments: one for the imported prototype; the other for the design and development work. The prototype was later imported into the U.S., in consequence of which it was determined that since the value of the article had already been subject to duty once, it was not part of the price actually paid or payable for the subsequently imported merchandise. However, this position was modified by HRL 544642 dated June 24, 1991. This ruling held not only that the payment for the design and development process was part of the price actually paid or payable for the subsequently imported merchandise but in addition, that the cost of the prototype itself (which was later returned to the foreign manufacturer and thus became an assist), should also be added to the price actually paid or payable notwithstanding the fact that duty had already been paid on the prototype when it was imported.

In the instant case, the payment from the buyer for the design and development of the modified engines is part of the price actually paid or payable for the subsequently imported production engines. Furthermore, and again notwithstanding the fact that duty was paid on the prototypes when imported, we also find that the payment for the all 178 of the prototypes manufactured by the seller constitute part of the price actually paid or payable for the subsequently imported production engines. The cost of the prototypes is inextricably linked to the design and development process and therefore is appropriately included in the transaction value of the imported production engines.

HOLDING:

The prototype modified engines are not assists such that their value should be added to the price actually paid or payable for the imported production engines. However, the payment made by the buyer constitutes the price actually paid or payable for the imported prototypes.

The payment for the design and development of the prototype modified engines is a cost attributable to the production engines and should therefore be included in transaction value as part of the price actually paid or payable for the subsequently imported production engines.

This decision should be mailed by your office to the internal advice requester no later than sixty days from the date of this letter. On that date the Office of Regulations and Rulings will take steps to make this decision available to Customs personnel through the Customs Rulings Module in ACS, and the public through the Diskette Subscription Service, Lexis~, the Freedom of Information Act and other public access channels.

Sincerely,

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