HQ 545110 - Payments by importer for samples used for soliciting orders; equipment used in the manufacture of samples; price actually paid or payable. - United States International Trade Commision Rulings

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HQ 545110

March 11, 1994

VAL CO:R:C:V 545110 CRS

CATEGORY: VALUATION

Alan G. Lebowitz, Esq.
Scott A. Cohn, Esq.
Grunfeld, Desiderio, Lebowitz & Silverman 12 East 49th Street
New York, NY 10017

RE: Payments by importer for samples used for soliciting orders; equipment used in the manufacture of samples; price actually paid or payable.

Dear Messrs. Lebowitz and Cohn:

This is in reply to your letter dated September 21, 1992, on behalf of Mamiye Brothers (the buyer), concerning the dutiability of certain payments made by your client for the procurement of samples. We regret the delay in responding.

FACTS:

The buyer, an importer of children's wearing apparel, procures garment samples from Sterling Products, Inc. (the seller), a related company in Hong Kong. The sample garments will be used to design wearing apparel and solicit sales orders and will be produced on the buyer's instructions.

The buyer will reimburse the seller for costs incurred in the design, development and production of the samples to include the following: the cost of fabric used to produce samples; the acquisition and development cost of rollers used in printing the fabric; the total cost of trim used in the production of the samples; the cost of labor involved in cutting, sewing, printing, embroidery, ornamentation; etc.; a percentage of the seller's overhead attributable to the cost of producing the samples; and a ten percent profit margin on the total of the costs identified above. The seller will send the buyer a debit note on a monthly or other periodic basis for the costs incurred in the design and production of the samples. In a conversation with a member of my staff you stated that payments of amounts due under the debit notes likely will be made after the samples are imported.

The rollers are dedicated to a particular type of fabric pattern. Should a sample produced by the seller be selected for full-scale production, you state that the buyer will not be charged for the cost of the roller or rollers used to print the fabric pattern of that particular garment. Instead, the cost of the rollers will be amortized, i.e., included, in the price of garments shipped pursuant to a purchase order for a full production run.

Most of the samples manufactured by the seller will be shipped to the United States; however, at least one sample of each style produced will be retained by the seller. The samples will be imported in a mutilated condition and the accompanying invoices will state that the samples have no commercial value.

In addition, you state that on occasion the buyer will provide the seller with U.S. design work, as well as fabric swatches or garment parts obtained from foreign store-bought garments, the purpose of which is to illustrate the U.S. design work. You do not consider the swatches and parts to be assists since in your view these items are not design work nor are they necessary for production.

ISSUES:

The issues presented are: (1) how should the imported garment samples for which the buyer makes periodic payments pursuant to debit notes issued by the seller be appraised? and (2) how should the subsequently imported production merchandise 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 is transaction value, which is defined as the "price actually paid or payable for the merchandise when sold for exportation to the United States," plus five enumerated additions. 19 U.S.C. ? 1401a(b)(1). The term "price actually paid or payable" is defined as "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)(4)(A). For the purposes of this ruling we have assumed that transaction value is the appropriate basis of appraisement.

However, we note that buyer and the seller are related parties. While we do not address this issue for the purposes of this ruling, should it be determined that the relationship between the parties affects the price actually paid or payable, transaction value may not be an acceptable basis of appraisement. In addition, this ruling does not reach the issue of whether the swatches and garment parts provided by the buyer to the seller constitute assists.

The seller will produce sample garments for the buyer and on a periodic basis issue debit notes for the design, development and production costs associated with the samples. Included in the total cost of the samples are the cost of fabric, the acquisition and development costs of rollers used to print the fabric, the cost of trim, labor, overhead and profit. Accordingly, you have asked how the imported samples should be appraised and whether the periodic payments for the costs associated with the production of the sample garments are part of the price actually paid or payable of the subsequently imported production merchandise.

You contend that the periodic payments for the mutilated samples are not separately dutiable, i.e., as part of the price actually paid or payable for the subsequently imported production merchandise. You note that when the samples are imported it is not known which styles will eventually be selected for production; indeed, most samples are not selected for full scale production. In the event that a sample is selected for full-scale production, however, the seller will not charge the buyer for the cost of the roller used to print the fabric. Instead, the cost of the roller will be amortized in the price of the subsequently imported merchandise.

The price actually paid or payable for imported merchandise includes all payments, whether direct or indirect, made by the buyer to, or for the benefit of, the seller. 19 U.S.C. ? 1401a(b)(4)(A). The buyer will make periodic disbursements to the seller as payment for the sample garments. Consequently, the periodic payments covering design, development and production costs are part of the price actually paid or payable for the imported samples, again assuming that the relationship between the parties has not influenced the price.

However, you have advised that if a sample is chosen for full-scale production the seller will amortize the cost of the rollers used to print the fabric in the price of the subsequently imported production merchandise. In HRL 544516 dated January 9, 1991, we held that the cost of producing prototypes that were a necessary step in the design and development of subsequently imported merchandise was part of the price actually paid or payable for that merchandise. See also HRL 544642 dated June 24, 1991. In the instant case, some rollers will be used to make production garments as well as samples; consequently, these rollers form a necessary step in the design and development of the subsequently imported production garments and must be reflected in the transaction value of that merchandise.

Although the seller will amortize the cost of rollers used to make production run garments in the price of the subsequently imported merchandise, the cost of the rollers represents only part of the design and development costs related to the subsequently imported production merchandise. It is Customs' position that all costs related directly to the development of samples or prototypes should be included in the transaction value of the subsequently imported production merchandise. For example, in HRL 544516 and HRL 544642, the buyer paid the seller to design a prototype vehicle. The design and development costs of the prototype vehicle included, inter alia, service/installation manuals, user manuals and parts lists. These costs were considered to be directly related to the subsequently imported merchandise. Accordingly, they were included in the price actually paid or payable for the imported production vehicles. Thus in the instant case, in addition to the cost of the rollers, all other costs associated with samples that are selected for full production, e.g., the cost of materials, trim, etc., should be amortized in the price of the production garments, or otherwise reflected in the transaction value of the subsequently imported merchandise.

Finally, while no evidence has been submitted in regard to the amortization of sample costs in the price actually paid or payable, we assume that, if required, documentation to substantiate this fact will be made available to Customs.

HOLDING:

The periodic payments for the imported sample garments constitutes the price actually paid or payable for that merchandise.

The transaction value of the subsequently imported merchandise should reflect all design and development costs associated with samples that result in production garments.

Sincerely,

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