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HQ 545907




October 11, 1996

VAL RR:IT:V 545907 LR

CATEGORY: VALUATION

Port Director
U.S. Customs Service
Detroit, Michigan

RE: Request for reconsideration of Internal Advice ("I.A.") 29/93; HRL 545278; prototypes; subsequently imported merchandise; design and development; price actually paid or payable

Dear Director:

This is in response to the letter dated February 9, 1995, submitted by counsel on behalf of Ford Motor Company (Ford) requesting reconsideration of the above internal advice. Additional submissions were made on March 16, 1995 and September 27, 1996. We regret the delay in responding.

FACTS:

Ford negotiated an agreement with Yamaha Motor Company (Yamaha) to modify and adapt an automobile engine. The agreement provided that Ford would pay Yamaha a fee for the design and development of the modified engine. In addition, the agreement provided that any prototypes of the modified engines would be purchased under separate purchase orders. The agreement provided that if the modifications prove successful, the parties would enter into a contract for the purchase and supply of production engines.

Yamaha produced 178 prototypes which were purchased by Ford. According to counsel, Ford imported 156 prototypes and paid duty based on the price it paid to Yamaha. The appraised value of the prototypes was based on the invoice price and did not include the fees Ford paid Yamaha for the design and development of the modified engines. Counsel indicates that Ford imported the prototypes for testing purposes and that the prototypes remained in the U.S. The balance of the prototypes were retained by Yamaha and were never imported. The modifications were successful and production engines have been and continue to be imported.

In I.A. 29/93, Headquarters Ruling Letter ("HRL") 545278, April 7, 1994, we considered whether payments from Ford to Yamaha for design and development of the engines and payments for the prototypes were part of the transaction value of the imported production engines. Customs determined that payments for the design and development were part of the price actually paid or payable for the subsequently imported production engines. In addition, Customs found that payments for all 178 of the prototypes manufactured by Yamaha also constituted part of the price actually paid or payable for the subsequently imported production engines. This was based on the finding that the cost of the prototypes is inextricably linked to the design and development process [of the production engines]. Therefore, Customs determined that this cost is appropriately included in the transaction value of the imported production engines.

In the request for reconsideration, Ford does not dispute our finding that the payments for design and development of the engines are part of transaction value of the imported engines. Nor does it dispute the finding that duties should be paid on the cost of the prototype engines. However, Ford maintains that our ruling erroneously assesses duty on the prototype engines twice - first on the importation of the prototype engines themselves, and second, on the subsequently imported production engines by treating the cost of the prototypes as part of the price actually paid or payable for the production engines.

ISSUE:

Is it proper to include the payments for the prototype engines as part of the price actually paid or payable of the imported production engines notwithstanding the fact that many of the prototypes were subject to duties upon their importation into the United States?

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the United States is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 1401a. Section 402(b)(1) of the TAA provides in pertinent part, that the transaction value of imported merchandise is the "price actually paid or payable for the merchandise when sold for exportation to the United States" plus enumerated statutory additions. 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, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise...) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller." Section 402(b)(1) TAA. Generally, all amounts paid to the seller by the importer are included in the price actually paid or payable for the imported merchandise. See e.g. Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990); HRL 544640, April 26, 1991. Thus, Customs has ruled that the price actually paid or payable for the imported merchandise includes payments by the buyer to the seller for tooling, research and development, testing as well as payments for samples and prototypes. See HRL's 545320; February 28, 1995 (and the rulings cited therein); 544381, November 25, 1991.

Payments relating to the development and production of samples or prototypes are usually considered to be part of the price actually paid or payable for the subsequently imported production merchandise. See HRL 544516, January 9, 1991, modified by HRL 544642, June 24, 1991; HRL 545110, March 11, 1994. This stems from the fact that their production is considered a necessary step in the design and development of subsequently imported merchandise. However, Customs has also held that research and development costs incurred in the production of prototypes from which no subsequent merchandise is ever manufactured, can be included in the appraised value of the imported prototypes. See HRL 545320, supra.

The finding in HRL 545278 that payments from Ford to Yamaha for engine prototypes are part of the price actually paid or payable of the imported production engines is consistent with Customs' position on prototypes.

Ford argues that a different result is warranted when the prototypes are imported and duties paid based on their purchase price. In such case, Ford maintains that it would be improper to include this cost in the transaction value of the subsequently imported production engines.
It argues that the price paid for the prototypes cannot also be considered part of the price paid for the production engines. Ford also argues that our ruling penalizes the company for testing the prototypes in the United States rather than Japan. It points to the fact that had they been tested in Japan there would have been no need to import the prototypes, and thus, they would have been subject to duties only upon importation of the production engines. Finally, Ford claims that HRL 544642, cited in our ruling, is distinguishable from the facts here.

In HRL 544642, the buyer paid the foreign manufacturer for development of a TV Image Processor. In addition, the buyer paid the foreign manufacturer for a prototype at a cost of $5,000. The prototype was purchased by the buyer, temporarily entered the United States under carnet obtained by the manufacturer, and then re-exported to England, where both the prototype and the production article were produced. Customs determined that the prototype became an assist when it was returned to the seller and was part of the transaction value of the subsequently imported merchandise. This ruling modified HRL 544516, January 9, 1991, which had held that the $5,000 payment was part of the price actually paid or payable for the subsequently imported articles. Counsel contends that HRL 544642 is not applicable here because Ford did not return the imported prototypes to Yamaha and thus, they are not assists.

We agree with counsel that the prototypes here are not assists since they were not returned to Yamaha. Therefore, we agree that HRL 544642 is not controlling. Nonetheless, we remain of the opinion that the payments for the prototypes are part of the price actually paid or payable for the imported production engines. HRL 545278 determined that the cost of the engine prototypes is inextricably intertwined with the design and development process of the production engines. Ford does not dispute this finding. Just because Ford does not return the prototypes to Yamaha does not change the fact that the they were a necessary step in the manufacture of the production engines and a proper element of the transaction value of the production engines. Neither does the fact that the prototypes are themselves imported and subject to duties.

The discussion in HRL 545320, supra, regarding the obligation to pay duties upon the importation of prototypes is instructive. In that case, the importer claimed that the imported prototypes were exempt from duties under several theories: that they were never intended to enter and never did enter the U.S. stream of commerce; that the prototypes were exempt from duties under HTSUS then General Note 4(c), on the grounds that the prototypes are "progress reports", and , that the prototypes are analogous to merchandise entered duty free under temporary importation bond (T.I.B.) under HTSUS 9813.00.30., or samples under HTSUS Chapter 9811.00.60. Like the instant situation, the prototypes were entered for consumption and were not returned to the manufacturer. Customs determined that the imported prototypes did not qualify as any of the products specified in General Note 4(c). Customs also determined that the importer's other arguments were without merit. The decision indicates that what is significant is how the merchandise was entered, not how it could have been entered. Customs determined that since the merchandise was entered for consumption and not under a temporary importation bond, the imported prototypes were considered articles of commerce imported into the United States and subject to duties under the pertinent provision of the HTSUS.

A similar analysis would apply here. The prototypes were imported and entered for consumption. As such, they were themselves articles of commerce imported into the United States and subject to duties. While Ford is correct in stating that the prototypes would not have been subject to duties as imported articles if they were tested in Japan and never imported, those are not the facts presented. Similarly, Ford may also have been able to avoid paying duties on the prototypes by entering them under a temporary importation bond, by manufacturing them in the United States, or by utilizing the drawback procedures. However, none of these options was chosen. As in HRL 545320, supra, the imported prototypes were articles of commerce subject to duties upon their importation and were not exempt therefrom under any of the various theories discussed therein. In addition, the fact that Ford subsequently imported the production engines does not exempt the prototypes from duties upon their importation.

Moreover, in determining the price actually paid or payable for the production engines, the fact that many of the prototypes were previously imported is not relevant. The price actually paid or payable for the production engines, i.e., the total payment, includes all payments for the imported merchandise. As indicated above, Customs' position is that payments for prototypes are part of the price actually paid or payable for the imported production articles because these payments relate to the design and development of the production articles. HRL 545278 determined that the cost of the Yamaha prototypes was "inextricably linked to the design and development process" and Ford does not contend otherwise. Thus, we find that the total payment for the imported production engines includes amounts attributable to the prototypes. The fact that many of the prototypes were themselves articles of commerce imported into the United States and thus subject to duties at that time does not change this result.

HOLDING:

Payments relating to the prototypes are part of the price actually paid or payable of the imported production engines notwithstanding the fact that many of the prototypes were subject to duties upon their importation into the United States. The determination in I.A. 29/93, HRL 545278, is affirmed.

Sincerely,

Stuart P. Seidel

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