HQ 545679 - Computed value; payroll expenses; makeup pay; overtime; time work pay; cost of fabrication; profit and general expenses - United States International Trade Commision Rulings

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HQ 545679

June 23, 1995

VAL R:C:V 545679 LR

CATEGORY: VALUATION

District Director of Customs
Nogales, Arizona

RE: Computed value; payroll expenses; makeup pay; overtime; time work pay; cost of fabrication; profit and general expenses

Dear Sir:

By letter dated June 2, 1994, counsel for West Coast Industries ("importer") requested a ruling regarding the dutiability of certain payroll expenses in the import transaction between West Coast Industries and Manufacturers Industriales de Nogales, S.A. ("foreign assembler"). In view of the fact that the ruling request relates to current transactions, we are treating it as a request for internal advice. Your comments regarding this matter are contained in a letter to the importer dated October 15, 1993. We regret the delay in responding.

FACTS:

According to counsel, the importer and the foreign assembler are related companies involved in the assembly of wearing apparel in Mexico from U.S. components. Customs is currently appraising the import transactions under computed value. A question has arisen regarding the dutiability of three categories of payroll expenses under this method of appraisement. The importer describes them as follows:

Make-up Pay - This is where the employee of the foreign assembler is paid for more than he has produced to arrive at the minimum pay as required by the Mexican Government.

Time Work Pay - This is where the foreign assembler is required to pay employees even when the factory is temporarily out of work. The Mexican Labor Law states that employees cannot be temporarily laid off.

Overtime Premium - This is where the foreign assembler is required to pay its employees a premium for those hours worked beyond their normal workday. Overtime is required when the foreign assembler finds itself in an unfavorable situation as related to contracted delivery dates.

The concerned import specialist advised that the importer's controller reported that these expenses are considered labor related costs and are grouped with direct labor, indirect labor, and fringe benefits on the general ledger of the Mexican assembler. The controller further advised that the Mexican assembler considers labor a production cost and that these costs are included in the cost of goods sold on the company's Profit and Loss statement.

ISSUE:

Whether makeup pay, time work pay and the overtime premium, as described above, are dutiable under computed value.

LAW AND ANALYSIS:

Section 402(e) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(e); TAA) provides

(1) The computed value of imported merchandise is the sum of

(A) the cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise;

(B) an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind as the imported merchandise that are made by producers in the country of exportation for export to the United States

(C) any assist, if its value is not included under subparagraph (A) or (B); and

(D) the packing costs.

It is counsel's position that the expenses described above are neither part of the cost or value of the materials nor a processing or fabrication expense employed in the production of the imported merchandise under 402(e)(1)(A). It claims that both the makeup pay and the time work pay are indirect costs of doing business in Mexico rather than costs of merchandise produced. This is because makeup pay is paid to the employee not for the amount of units he has produced, but in accordance with minimum pay guidelines articulated by the Mexican government. Similarly, time work pay is required by Mexican law to be paid to employees even when the factory is temporarily out of work. Therefore, the importer argues that during these periods, there is no processing or manufacturing going on of any kind, and this expense is not related to the cost of merchandise produced.

Counsel also argues that these payroll expenses should not be included as an amount for profit or general expenses usually reflected in the sales of this type of merchandise under 402(e)(1)(B). This conclusion is based on the observation that the costs associated with these types of payroll expenses are not ordinary, but rather, extremely unpredictable. This unpredictability negates the concept that these types of expenses are "usual" expenses reflected in the sale of the merchandise.

It is the opinion of your office that the expenses in question are expenses actually incurred by the foreign assembler to produce the merchandise and therefore are included in the dutiable value of the merchandise.

As discussed below, we find that the payroll expenses are dutiable under the computed value method of appraisement either as part of the cost of fabrication under 402(e)(1)(A) or as part of profit and general expenses under 402(e)(1)(B).

Make-up Pay and Overtime Premium

While the phrase "cost of fabrication and other processing of any kind employed in the production of the imported merchandise" used in 402(e)(1)(A) is not defined, based on the clear meaning of such phrase, we conclude that all actual labor costs paid to the assembler's employees involved in the assembly operations are part of the cost of fabrication. A similar phrase "direct costs of processing operations" (which appears in the regulations pertaining to General System of Preferences) is defined as "those costs either directly incurred in, or which can be reasonably allocated to, the growth, production, manufacture, or assembly of the specific merchandise under consideration. This includes "all actual labor costs involved in the growth, production, manufacture, or assembly of the specific merchandise, including fringe benefits, on-the-job training, and the cost of engineering, supervisory, quality control, and similar personnel." (emphasis added). Section 10.178, Customs Regulations (19 CFR 10.178). The language in section 402(e)(1)(A) is even broader, in that it includes the cost of fabrication...of any kind employed in the production of the imported merchandise (emphasis added).

Contrary to the importer's assertion, we find that makeup pay and the overtime premium paid to the foreign assembler's employees are directly related to the cost of producing the imported merchandise and constitute part of the dutiable value. They are both actual labor costs involved in the assembly of the merchandise. Makeup pay is comparable to a minimum wage. The overtime premium is another direct labor cost. To the extent that they are paid to employees involved directly or indirectly in the assembly of the imported merchandise, these expenses are part of the cost of production. This is true whether or not such expenses can be related to a specific piece of merchandise. Therefore, we consider the makeup pay and the overtime premium to be part of the producer's cost of fabrication.

Time-Work Pay

The Statement of Administrative Action adopted by Congress when the TAA was enacted provides that with respect to computed value, the "amount for profit and general expenses will be determined on the basis of information supplied by, or on behalf of, the producer and will be based on the commercial accounts of the producer, provided that such accounts are consistent with the generally accepted accounting principles applied in the country where the goods are produced and unless the figures provided are inconsistent with those usually reflected in sales, of merchandise of the same class of kind as the imported merchandise, that are made by producers in the country of exportation for export to the United States." See, Customs publication "Customs Valuation under the Trade Agreements Act of 1979" at p. 62 , October 1981

In addition, section 152.106(c), Customs Regulations (19 CFR 152.106(c)), provides that the amount for profit and general expenses will be taken as a whole. If the producer's profit figure is low and general expenses high, those figures taken together nevertheless may be consistent with those usually reflected in sales of merchandise of the same class or kind.

In Headquarters Ruling Letter ("HRL") 544862, January 3, 1994, Customs considered the dutiability of certain expenses incurred by the foreign manufacturer under the computed value method of appraisement. Some of the identified expenses included salaries, salaries-overtime, freight, office supplies, and office equipment. The importer argued that these expenses are not dutiable because the expenses apply mostly to export activities which the importer claims occur after the goods are packed and ready for shipment to the U.S. Customs determined that such expenses were to be included in the amount for profit and general expenses.

The ruling states that regardless of what type of general expenses the foreign assembler/manufacturer has, they need to be viewed with the profit as a whole, in order to determine whether they are inconsistent with those usually reflected in sales of merchandise of the same class or kind. Thus, all of the foreign assembler/manufacturer's general expenses are to be included in calculating the amount for profit and general expenses, unless the amount for profit and general expenses is found to be inconsistent with the amount for profit and general expenses usually reflected in sales of merchandise of the same class or kind. See also Campbell Soup Company, Inc. v. United States, Slip Op. 94-80 (Ct. Int'l Trade, decided May 16, 1994), Appeal No. 94-1435 pending (expenses directly related to transporting the finished product from the loading dock of the Mexican plant to the U.S. border and carried on producer's books as general expenses are included in the computed value of the imported merchandise.)

In HRL 544616, April 15, 1991, Customs determined that severance payments made to discharged employees should be included in the computed value of the imported merchandise as part of the general expenses and profit. The importer argued that such payments should not be included because they are "extraordinary" and not recurring. Customs indicated that the amount for profit and general expenses under 402(e)(1)(B) is based upon the producer's profits and expenses, unless the producer's profits and expenses are inconsistent with those usually reflected in sales of merchandise of the same class of kind as the imported merchandise. The decision notes that the several payments were made as a direct consequence of termination of employment and that when the foreign assembler chooses to discharge those employees it becomes legally bound to make the severance payments. On the basis of the information provided, Customs determined that the severance payments were within the category of general expenses usually reflected in sales of merchandise of the same class or kind and thus dutiable.

Time work pay described above is similar to severance pay and should be treated in a similar manner. According to the importer the employees must be paid (time-work pay) even when the factory is temporarily out of work because the Mexican Labor Law states that employees cannot be temporarily laid off. Like severance pay, the Mexican producer is legally bound to pay its employees even though no processing or manufacturing is actually going on. Such payments are part of the producer's general expenses and profit related to the production of the imported merchandise. Since other Mexican assemblers will presumably incur similar expenses when their factory is temporarily out of work, this type of expense is usual and not extraordinary.

If, however, the foreign assembler carries the time work pay on its books as a cost of production rather than part of profit and general expenses, these costs would be dutiable as a cost of fabrication under section 402(e)(1)(A) TAA.

HOLDING:

All three categories of payroll expenses are dutiable under computed value. Whether they are dutiable as a cost of fabrication or as part of profit and general expenses depends in part on how they are treated by the foreign assembler on its books. Based on the information submitted, it appears that the make-up pay and the overtime premium are part of the producer's cost of fabrication under 402(e)(1)(A) TAA and that time-work pay is part of the producer's general expenses and profit under 402(e)(1)(B) TAA.

Please provide counsel with a copy of this decision. The Office of Regulations and Rulings will take steps to make this decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels 60 days from the date of this decision.

Sincerely,

John Durant, Director Commercial Rulings Division

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