HQ 546000 - Application for Further Review of Protest No.4116-94-100004; Engineering Costs; Price Actually Paid or Payable; Transaction Value - United States International Trade Commision Rulings

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HQ 546000

September 6, 1996

VAL RR:IT:VA 546000 LR

CATEGORY: VALUATION

Port Director
U.S. Customs Service
Cleveland, Ohio

RE: Application for Further Review of Protest No.4116-94-100004; Engineering Costs; Price Actually Paid or Payable; Transaction Value

Dear Director:

This is a decision on the application for further review (AFR) of the above-referenced protest concerning the appraisement of certain imported components for a three-stand aluminum cold rolling mill. The entry was liquidated on September 16, 1994 and the protest and AFR was filed by counsel on behalf of SMS Engineering Inc. ("protestant") on December 13, 1994. Counsel made two additional submissions in March, 1996 and a third in June, 1996. The information counsel labeled as confidential in its June 14, 1996 submission is set forth below in brackets and will not be included in the public version of this ruling.

FACTS:

In June 1990, protestant agreed to supply Logan Aluminum Company in Russelville, Kentucky ("Logan") with a three-stand cold mill for the manufacture of aluminum sheets. A copy of the contract was submitted. In order to meet its contractual obligations with Logan, in August 1990, protestant placed two contracts with its parent company in Germany, SMS AG ("foreign seller") to supply certain components for the three-stand aluminum cold rolling mill and to provide various engineering services. P.O. 1943 ("supply contract") pertains to the supply of the mill components. P.O. 1942 ("engineering contract") pertains to engineering services to be provided by the foreign seller. The imported mill components, along with other components, were incorporated into the Logan mill.

The imported merchandise which is the subject of the instant protest consists of the equipment the foreign seller provided to protestant pursuant to the supply contract. Counsel states in its March 21, 1996 submission that the imported equipment consisted of
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx]. Based on the submitted contracts, the price protestant paid for the imported merchandise comprised a [xxxxxxxxxxxxxxxxxxxxxxxx].

The merchandise was appraised based on transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Acts of 1979 (TAA), codified at 19 U.S.C. 1401a. In determining the transaction value, Customs included all the charges covered by the supply contract and the engineering contract. The only dispute concerns the engineering charges provided for in the engineering contract. According to the engineering contract, the foreign seller was to provide three types of engineering services, "basic equipment supply", "general engineering" and "mill modeling". "Basic equipment supply" was for engineering services directly relating to the production of the imported merchandise and counsel agrees with your determination that these costs are part of the total payment for the imported merchandise and are part of the transaction value of the imported merchandise.

However, counsel disagrees with your determination regarding the "general engineering" and "mill modeling" charges. Counsel's position is that these charges related not to the imported mill components, but to the construction and operation as a whole of the a U.S. mill. Therefore, it claims that the charges incurred by protestant for these services are not part of the price actually paid or payable for the imported merchandise. Counsel further contends that if Customs determines that the charges in question were incurred with respect to the imported merchandise, they were incurred only for technical assistance regarding the operation and use of the equipment after its importation -- after its subsequent incorporation into the mill as a whole. Therefore, counsel claims that such charges are not included in transaction value pursuant to 19 U.S.C. 1401a(b)(3)(A)(i) pertaining to post-importation technical assistance.

Although it does not appear that your office disputes counsel's claims regarding the nature of the engineering services provided by the foreign supply pursuant to the engineering contract, you disagree with counsel's conclusion that such charges are not part of the transaction value of the imported mill components. With regard to mill modeling, you contend that this was an integral part of the engineering process and was accomplished prior to importation as an aid in determining the most effective design for the mill. You consider it to be a necessary step in the production process. You indicate that the computer generated models closely resemble research and development and prototypes which Customs has considered to be dutiable. With regard to the other engineering services, you state that they involve research and development and other types of engineering services relating to the design of a mill to be built in the U.S. partially from imported components. You disagree with counsel's arguments that the charges at issue are non-dutiable post importation charges pursuant to 19 U.S.C. 1401a(b)(3)(A)(i), because the submitted documents do not show what the charges actually encompass and because the charges are not for post-importation technical assistance.

ISSUE:

Whether the charges protestant paid the foreign supplier for general engineering and mill modeling are properly included in the transaction value of the imported mill components.

LAW AND ANALYSIS:

Merchandise imported into the United States is appraised in accordance with section 402 of the TAA. 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 enumerated additions. Section 402(b)(1) of the TAA. The "price actually paid or payable" is defined in section 402(b)(4)(A) of the TAA as "the total payment (whether direct or indirect . . . ) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller."

The focus of this case is whether the charges at issue are part of the "price actually paid or payable" for the imported mill components and thus part of transaction value. Two court cases have addressed the meaning of the term "price actually paid or payable." In Generra Sportswear Co. v. United States, 8 CAFC 132, 905 F.2d 377 (1990), the court considered whether quota charges paid to the seller on behalf of the buyer were part of the price actually paid or payable for the imported goods. In reversing the decision of the lower court, the appellate court held that the term "total payment" is all-inclusive and that "as long as the quota payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods." The court also explained that it did not intend that Customs engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, were for the merchandise or something else.

In Chrysler Corporation v. United States, Slip Op. 93-186; 17 C.I.T. 1049 (Ct. Int'l Trade, decided September 22, 1993), the Court of International Trade applied the Generra standard and determined that although tooling expenses incurred for the production of the merchandise were part of the price actually paid or payable for the imported merchandise, certain shortfall and special application fees which the buyer paid to the seller were not a component of the price actually paid or payable. With regard to the latter fees, the court found that the evidence established that the fees were independent and unrelated costs assessed because the buyer failed to purchase other products from the seller and not a component of the price actually paid or payable for the imported engines.

Customs position based on Generra is that there is a presumption that all payments made by a buyer to a seller are part of the price actually paid or payable for the imported merchandise. However, this presumption may be rebutted by evidence which clearly establishes that the payments, like those in Chrysler, are completely unrelated to the imported merchandise. See HRL's 545663, July 14, 1995; 545500, March 24, 1995.
.
Customs has previously ruled that payments to the seller for expenses incurred for design and development of the imported merchandise, including the development of prototypes and other development costs, are part of the price actually paid or payable for the imported merchandise. For example, in HRL 545278, April 7, 1994, we found that payments from the buyer to the seller for engine prototypes were inextricably linked to the design and development of the subsequently imported production engines and thus part of the price actually paid or payable of the production engines. Such costs were found to be a necessary step in the design and development of subsequently imported merchandise. See also HRL 545320, February 28, 1995 (research and development costs incurred in the production of prototypes are included in the appraised value of the imported prototypes).

In HRL 544694, February 14, 1995, Customs considered whether certain design and development costs associated with the production of automobiles in a foreign-trade subzone were dutiable. Both foreign and domestic components were used in the production of the automobiles. The importer's position was that such costs were not dutiable as part of the appraised value of the imported components because they related to the domestic production of automobiles. Customs disagreed and concluded that a portion of the design and development costs were dutiable, i.e., that portion which was attributable to the foreign components. Customs apportioned the design payments between the imported non-privileged foreign components and the domestic components.

You contend that the mill model was an integral part of the engineering process and was accomplished prior to importation as an aid in determining the most effective design for the mill. You consider it to be a necessary step in the production process of the mill, similar to research and development and prototypes which Customs has considered to be dutiable. Based on Generra and the above decisions, we agree that mill modeling and engineering costs would be part of the price actually paid or payable for the imported components so long as they relate to research and development of those products. In HRL's 545278 and 545320, supra, in which Customs determined that the costs of prototypes were dutiable as part of the price actually paid or payable of the imported components or of the imported prototypes, the costs clearly related to the production of the imported merchandise. And in HRL 544694, Customs recognized that only a portion of the design and development costs at issue related to the imported automobile components.

In this case, counsel's contention is that the payments do not relate to any research or development of the imported merchandise but are for something else. Therefore, the question that must be addressed is whether the evidence submitted establishes that these payments are unrelated to the imported merchandise and not in exchange for merchandise sold for export to the United States and thus not part of the price actually paid or payable. The fact that the mill model was accomplished prior to importation is not determinative. As noted in HRL 545917, August 1, 1996, "as long as the . . . payment was made to the seller in exchange for merchandise sold for export to the United States" such amounts are part of the total payment for the imported merchandise regardless as to when they were incurred . .

Mill Modeling

Counsel indicates that "mill modeling" charges related to a mill model created by the foreign seller. The mill model is a computer simulation of the operation of the Logan mill. A complete description of the mill modeling process is set forth in a report entitled "Use of Computers in the Design of Cold Rolling Mills" ("Mill Modeling Report') submitted by protestant. This modeling enables various "what if" situations to be tested without the expense of trial and error runs.

Counsel indicates that the very purpose of a sophisticated computer model such as this as distinguished from a prototype is to illustrate the ways in which aluminum mill processes relate and affect, one another. Thus, counsel contends that the mill computer-modeling in question was performed for the development of the Logan mill as a whole and not for the production by the foreign supplier of imported mill components. Counsel also notes that the mill modeling services provided by the foreign supplier were separately set forth in the commercial documentation.

The Mill Modeling Report supports counsel's contention that the computer simulation relates to the ways in which aluminum mill processes relate and affect one another and relates primarily to the Logan mill as a whole once constructed. However, according to the Mill Modeling Report summary, "the use of electronic data processing in the design and layout of rolling mills permits [sic] to minimize load and power demands, to optimize product quality and to safely rate and select mill components. The novel mill modeling technology is being adopted to an ever growing extent as by simulation of mill components it enables the dynamic properties and control behavior to be optimized as early as in the layout stage already. (emphasis added)" Use of computers in the design of cold rolling mills, p.1. While the mill is used to optimize performance once the Logan mill is constructed, the report indicates that it also provides information regarding the selection and rating of the mill components to be used. The computer simulation enables the foreign supplier to make any necessary changes in the selection and production of the mill components to be imported. Thus, it appears that the computer mill model pertained to the performance of the mill components as well as to the operation of the mill itself. However, as explained below, the information provided establishes that only a very small portion [xxxxxxxxx] of the mill modeling work related to the performance of the imported components.

Counsel's March 21, 1996 submission included a copy of the index to the final report prepared by the foreign seller concerning the mill modeling services which were to be provided to Logan in connection with the three-stand cold mill. A copy of the final report was included in counsel's June 14, submission. According to counsel, this report was prepared at the completion of the development phases of the project and before actual construction of the mill, in order to confirm for the customer that the mill (following construction) and its contemplated manufacturing processes would work as planned. Counsel indicates that it is evident from the index and the report that with one small exception, none of the items discussed in the report deals with design or detail engineering for the equipment that was imported from the foreign selling in connection with the mill, but rather with the complete mill operations as a whole, including the rolling process, hydraulic response times, hydraulic systems, pass schedules and computer simulations of such operations.

Counsel also submitted an extract from the protestant's proposal to Logan for the Logan mill which relates to the mill modeling that was to be included in the sale. The extract covers 20 described services to be provided. According to counsel, only one of the described services relates to the imported merchandise. Although neither of the submitted documents breaks down the various services to be provided by cost, counsel states that [xxxxxxxxxxxxxxxxxxxxxx] of the mill modeling charges relates to the imported components. Counsel explains that this calculation was done by protestant's chief engineer responsible for the Logan project based on the nature and extent of the activities in question, their [xxxxxxxxxx] relation to the overall general engineering and mill modeling services performed and the fact that the final mill modeling report devoted [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx].

Based on the evidence, we agree that the mill modeling charge is essentially a research and development cost associated with the operation of the Logan mill and that only a [xxxxx] amount has any relationship to the imported mill components. Thus, we do not consider the majority of the mill modeling charges to be comparable to dutiable prototype costs associated with the design and development of imported products. Accordingly, based on the evidence, we find that only that portion of the charges [xx] identified by counsel which relates to the imported mill components is part of the price actually paid or payable for such components. Contrary to counsel's claim, we do not consider this portion of the modeling charge to constitute non-dutiable charges incurred "for the construction, erection, assembly, or maintenance of, or the technical assistance provided with respect to, the merchandise after its importation into the United States" (emphasis added) within the meaning of 19 U.S.C. 1401a(b)(3)(A)(i). Rather, such charges are for engineering associated with the manufacture of the imported merchandise.

General Engineering

As discussed above, the engineering contract covered three types of engineering services, basic equipment supply, mill modeling and general engineering. There is agreement that the charges for basic equipment supply are the engineering charges which directly relate to the production of the imported merchandise and are part of the transaction value of the imported merchandise. However, counsel's contention is that the general engineering charges do not relate to the production of the imported merchandise but rather to the installation, set-up and operation of the mill. During an importer's premises visit, general engineering was described as engineering which is done to pull all the various equipment together and map out how each piece fits into the whole, including construction instructions.

We agree with counsel that if the general engineering charges at issue relate solely to the installation, set-up and operation of the Logan mill that these charges are not properly part of the transaction value of the imported merchandise. In such case, we believe that the charges are unrelated to and not in exchange for the imported merchandise, and therefore not part of the price actually paid or payable for the imported merchandise. However, even if we were to find that charges relating to the installation, set-up and operation of the mill did relate in some way to the imported merchandise, these charges are the type of non-dutiable post-importation charges addressed in 19 U.S.C. 1401a(b)(3)(A)(i). Under this provision, transaction value of imported merchandise does not include any "reasonable cost or charge incurred for the construction, erection, assembly, or maintenance of, or the technical assistance provided with respect to, the merchandise after its importation into the United States" provided they are identified separately from the price actually paid or payable for the imported merchandise. The charges at issue were separately identified in the engineering contract as required by this provision. Thus, in determining whether the general engineering costs are part of the transaction value of the imported merchandise, the only question that must be decided is whether the evidence presented is sufficient to establish that they relate solely to the installation, set-up and operation of the mill.

The engineering contract between protestant and the foreign seller specifies that it covers general engineering, mill modeling and basic engineering supply. The contract provides no details regarding the general engineering services. However, a document entitled "Foreign Seller - Scope of Supply" contains a more detailed list of the general engineering to be supplied. Included on the list is project engineering; electrical engineering; operation and maintenance manuals; final as-build drawing; engineering time, traveling; trip, travel costs; foreign seller general assistance; travel, hotel, and living cost; spare part list; AG -Engineering; main prel. lay-outs; miss. costs, general engineering; and bolt and loading plans". According to counsel, this document was issued by the foreign seller to protestant. Although it is not apparent from the description provided in the document what these services relate to, counsel's submission provides further details regarding each of these services. Counsel describes each of the listed services and indicates that they each pertain to the operation of the Logan mill as a whole and not for the production of the imported merchandise.

Further evidence regarding the nature of the general engineering was provided in counsel's March 21, 1996 submission. Counsel submitted the section and chapter headings from the foreign seller's offer specifications concerning the general engineering which was to be done for the Logan mill. For example, some of the general engineering referred to includes the layout of equipment and foundation drawing for the mill, the arrangement of the electrical equipment, spare parts requirements, catalogues, technical reports, and drawings for erection and maintenance of equipment, and operating instructions for each machine. While the descriptions of the engineering services are brief, it does appear that they describe work that was to be performed after importation to operate the mill as a whole. Finally, counsel submitted a copy of the contract between Logan and protestant which makes reference to the engineering to be provided to Logan by protestant and the foreign seller. We note that the contract specifies a lump sum price for "installation, start up and commissioning based upon a specified number of man days". The contract specifies that some of the work is to be done by the foreign seller.

Based on the above, we conclude that sufficient evidence was presented to demonstrate that the general engineering charges were incurred with respect to the installation, set-up and operation of the Logan mill and not the design, development and operation of the imported components. In view of this determination, such charges are not properly included in the transaction value of the imported mill components. We do not consider these charges to be part of the price actually paid or payable for the imported components.

HOLDING:

Based on the evidence presented [xx] of the mill modeling charges and none of the general engineering charges are properly included in the transaction value of the imported components.

Consistent with the decision set forth above, you are directed to deny this protest in part and to grant this protest in part. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, August 4, 1993, Subject: Revised Protest Directive, this decision, together with the Customs Form 19, should be mailed by you office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the 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.

Sincerely,

Acting Director

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