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HQ 546234




October 7, 1997

VAL RR:IT:VA 546234 LPF

CATEGORY: VALUATION

Area Director
U.S. Customs Service
JFK International Airport - Building #77
Jamaica, NY 11430

RE: Internal Advice concerning fabric scrap/waste assists; Section 402(h)(1)(A) of the TAA; HRLs 545909, 545910, 545914, 559570

Dear Director:

This responds to your letter dated October 23, 1995 and to the January 11, 1996 letter from the Chief, Wearing Apparel Branch, National Commodity Specialist Division, ORR, forwarding a request for internal advice submitted by Sandler, Travis & Rosenberg, P.A. (counsel) on behalf of their client, Van Mar, Inc. The request concerns the dutiability of fabric scrap or waste as assists. While Customs previously has ruled upon the dutiability of Van Mar's quota charges, which likewise could pertain to some of the entries effected by this ruling, the instant decision only serves to address the particular matter raised in the internal advice.

Furthermore, while we recognize that counsel has protested a number of entries pertaining to this matter, we understand that other Van Mar entries as well as those of additional importers likewise will be effected by this decision. For this reason, and because many of these entries currently are subject to review by the Regulatory Audit Division, U.S. Customs (RAD), we proceed to address the matter via this internal advice. In addition to a June 25, 1997 meeting with Van Mar, its counsel and the cognizant Customs officials, informal consultations further were held with the concerned parties from Customs.

FACTS:

Van Mar purchases fabric from Korean textile vendors and consigns the fabric to unrelated Hong Kong and Chinese manufacturers to produce finished garments. Through its HK buying agent, Van Mar issues purchase contracts to the garment factories indicating the amount of fabric necessary to fulfill orders. This amount includes the total fabric utilization necessary to produce the ordered amount. Van Mar pays cut, make, trim (CMT) costs through their agent.

Van Mar's buying agent prepared invoices reflecting the price of the finished garments sold FOB, which included amounts for labor, fabric and quota. In 1991 Van Mar entered its importations using invoices purporting to show the value for the finished goods. The following year Van Mar's invoices began to show a CMT and fabric breakdown. Subsequently, in calculating the amount of duty due, Van Mar included a fabric waste factor for each entry based on a computerized cutting marker prepared for each style of garment.

It is our understanding that the amounts provided for the CMT, or labor, costs are not in dispute. However, with regard to the appropriate value of the fabric assists to be included in the transaction value of the imported garments pursuant to section 402(b)(1)(C) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 1401a, no "write off," or any such reflection is made in the importer's accounting or financial books or records for damage or for scrap generated during production. Moreover, no usage reports or booked costs for the amount of scrapped fabric are available.

In this regard, Van Mar provides by way of a signed statement dated July 9, 1997 from its cutting room manager, that not only is it "common practice in the apparel industry to generate the master marker which guides the fabric cutter by means of machinery known as the Gerber System," but moreover that "this system allows the maximum efficient utilization of the fabric by generating the least amount of waste possible between the interstices of the pattern components." Accordingly, Van Mar's cutting room manager concludes that in his "professional opinion, the markers which were generated . . . for Van Mar upon which Van Mar calculated the value of its fabric assists are the most efficient computation of the utilization of fabric possible."

As representative of its importations, Van Mar presented copies of the computer layouts for its 100% women's charmeuse, chiffon or jacquard woven polyester i) robes, ii) briefs or panties, and iii) brassieres. To confirm Van Mar's representations of its scrap/waste computations based on the computer generated efficiencies, Customs submitted copies of the three computer layouts to the Textile/Clothing Technology Corporation (TCý) in Cary, NC. Specifically, Customs requested an opinion from TCý as to the efficiency of the layout of the pieces in each of the three examples.

An expert representative of TCý contacted the Office of Strategic Trade, Customs, stating that the three patterns were as tight as possible. He further explained that the curved or oddly shaped pieces both on the panties and the brassieres made it difficult to do much better than they had done. With regard to the robe layout, he stated that the large pieces were as close as they could be and that again the curves on the large pieces made it difficult to do much better. The TCý representative also provided that while there were spaces, Van Mar had done a good job of putting pieces (i.e., the small pieces of the panties) to take advantage by placing the small end next or opposite to the large end of the next piece. Finally, the TCý representative said that in many cases what appears to be extra room between pieces cannot be used because the individual pieces cannot be turned or positioned on an angle because it could put extra twist for extra tension on the pieces or parts. This extra twist or tension in the final product may effect the look or the fit.

ISSUE:

From the information presented, whether the value of the fabric assists appropriately is calculated based on the fabric utilization and efficiencies reflected by the markers generated for the importer.

LAW AND ANALYSIS:

As you are aware, 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 the enumerated statutory additions including the value, apportioned as appropriate, of any assist.

Section 402(h)(1)(A) of the TAA provides, in pertinent part, as follows:

The term 'assist' means any of the following if supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the United States of the merchandise: . . .

(i) Materials, components, parts, and similar items incorporated in the imported merchandise . . .

(iii) Merchandise consumed in the production of the imported merchandise.

See also section 152.103(d)(1), Customs Regulations (19 CFR 152.103(d)(1)), setting forth the manner in which assists are to be valued and section 152.103(e)(1), Customs Regulations (19 CFR 152.103(e)(1)), providing the manner in which the value of an assist is to be apportioned to the imported merchandise.

In the General Notice of Modification and Revocation of Customs Ruling Letters Relating to Assists (General Notice), Customs Bulletin, Vol. 29, No. 51 (December 20, 1995), Customs articulated its position concerning assists, to wit, that waste or scrap which results from, or during, the production of imported merchandise may constitute assists to be included in the customs value of that imported merchandise. To this effect, Customs modified and revoked five ruling letters and issued Headquarters Ruling Letters (HRLs) 545909, 545910, 545911, 545913, and 545914 dated November 30, 1995.

Previously, it had been Customs position that, "components which are destroyed, scrapped, or lost, and which are not physically incorporated into the imported article are not assists under the TAA." HRL 543093, issued April 30, 1984, modified by HRL 545914, supra. In noting that rulings such as HRLs 545909 and 545910, supra, and several of the factual scenarios presented in the General Notice concerned destroyed, scrapped and defective fabric, we recognize that fabric scrap or waste generated during production and not physically incorporated into the imported merchandise, such as in the case currently at issue, would not be considered to constitute assists for merchandise entered, or withdrawn from warehouse, for consumption prior to February 20, 1996. See 19 USC ?1625 (c) providing that the final ruling or decision modifying or revoking a prior ruling or decision shall become effective 60 days after the date of its publication in the Customs Bulletin. All the merchandise at issue was entered prior to this date.

Customs recognized in the General Notice and in these decisions that determinations concerning the valuation of assists are to be based on objective and quantifiable data including, among other things, the accounting records of the supplier of the assists made in conformity with generally accepted accounting principles (GAAP). However, the fact that evidence of such amounts is not available from any of the transacting parties' accounting or financial books, records or otherwise does not preclude Customs from considering other relevant information.

Along these lines, in HRL 559570, issued June 6, 1997, citing to HRL 546336, issued September 19, 1996, Customs ruled upon a situation regarding the determination, pursuant to 19 CFR ?10.17, of the appropriate cost or value of U.S. components to qualify for duty exemption under subheading 9802.00.80, HTSUS. Specifically, although the importer did not possess the FOB price, U.S. export of the components, as provided in 19 CFR transactions, Customs recognized that the submitted documentation provided the lowest actual price for the U.S. components when last purchased, FOB U.S. port of export. Consequently, Customs found such amounts to represent a reasonable cost or value for the components.

In the instant matter, while the importer does not possess the actual amounts of scrap or waste generated during the production process, based on the importer's representations as confirmed by an independently recognized industry authority, TCý, that the submitted patterns were as "tight as possible" and that "the curved or oddly shaped pieces . . . made it difficult to do much better than they had done," we likewise, in this case, find the scrap/waste calculations as presented by Van Mar and counsel to represent a reasonable cost or value. In accepting Van Mar's scrap/waste calculations, it is our understanding, however, that the submitted patterns are in fact representative of the fabric utilization and efficiency reflected by the markers generated for all the imported merchandise at issue.

HOLDING:

From the information presented, the value of the fabric assists may appropriately be calculated based on the fabric utilization and efficiencies reflected by the markers generated for the importer. You should advise the interested parties of this decision and forward them a copy.

Sixty days from the date of this letter 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,
International Trade Compliance
Division

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