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HQ 546801





November 5, 1998

VAL RR:IT:VA 546801 DWS

CATEGORY: VALUATION

Mr. Jeremy Ross Page
Sandler, Travis & Rosenberg
5200 Blue Lagoon Drive
Miami, FL 33126-2022

RE: Computed Value; General Expenses and Profit; Assists

Dear Mr. Page:

This is in response to your letter dated July 16, 1997, on behalf of Fun Tees, Inc., (Fun Tees) requesting a ruling with regard to the treatment of certain expenses based upon the application of the computed value valuation method of appraisement. We regret the delay of our response.

FACTS:

Fun Tees imports t-shirts into the U.S., which have been assembled for Fun Tees at its related contractor in El Salvador from U.S.-cut components and sundries provided by Fun Tees. You indicate that the imported merchandise will be appraised on the basis of computed value.

In furtherance to the t-shirt assembly operations, some of the non-production expenses incurred by the contractor are maintained on Fun Tees' books. These expenses are accounted for in two ways. Some non-production expenses, such as plant management salaries and fringe benefits, accounting audit fees, computer expenses, non-production equipment, and non-production depreciation, are completely paid for in the U.S. These costs are never reflected on the contractor's books. Other expenses, such as office supplies, medical and legal services, security, medicines, memberships, courier and bank charges, magazines, and other miscellaneous charges, are initially shown on the contractor's books but are transferred from the contractor's books to Fun Tees' books on a monthly basis.

You state that all the expenses above which are initially or subsequently recorded on Fun Tees' books do not in any way directly contribute to the production of the t-shirts. You further claim that any production-related expense is transferred to the contractor's books so that it may be included in the calculation of computed value.

You have included a signed statement dated July 15, 1997, from an El Salvadoran external auditor, stating that the accounting practices followed by the contractor are in accordance with generally accepted accounting principles (GAAP) as they are followed in El Salvador. The auditor claims that these practices include occurrences where non-production expenses are transferred from the contractor's books to Fun Tees' books.

ISSUE:

Whether the determination of computed value includes non-production expenses transferred from the contractor's books to the importer's books in accordance with the applicable GAAP.

Whether, for purposes of determining computed value, certain non-production sevices and equipment supplied by the importer to the contractor constitute assists.

LAW AND ANALYSIS:

Pursuant to Section 402(e) of Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. ?1401a), the computed value of imported merchandise is the sum of:

(A) the cost or value of materials and fabrication costs 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 the producers in the country of exportation for export to the United States;

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

(D) the packing costs.

With regard to profit and general expense figures under computed value, section 402(e)(2)(B) of the TAA states:

[t]he amount for profit and general expenses shall be based upon the producer's profits and expenses, unless the profits and expenses are inconsistent with those 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, in which case the amount shall be based on the usual profit and general expenses of such producers in such sales, as determined from sufficient information.

The Statement of Administrative Action ("SAA"), adopted by Congress with the passage of the TAA, explains that:

[t]he 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 upon 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 or kind as the imported merchandise, that are made by producers in the country of exportation for export to the United

[t]he amount for profit and general expenses will be taken as a whole ***. Where the producer's own figures for profit and general expenses are not consistent with those usually reflected in sales of goods of the same class or kind as the goods being valued, which are made in the country of exportation for export to the United States, the amount for profit and general expenses will be based upon reliable and quantifiable information other than that supplied by or on behalf of the producer of the goods. (Regulation).

You have provided a signed statement by an El Salvadoran external auditor stating that the contractor's accounting procedures conform with El Salvadoran GAAP. Assuming the contractor's books conform to El Salvadoran GAAP, the figure for profits and general expenses provided to Customs must nonetheless be consistent with 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.

Same class or kind merchandise is defined under Section 402(g)(2) of the TAA as merchandise (including, but not limited to, identical merchandise and similar merchandise) that is within a group or range of merchandise produced by a particular industry or industry sector. Sales for export to the United States of the narrowest group or range of imported merchandise, will be examined to determine usual profit and general expenses. For purposes of computed value, merchandise of the same class or kind must be from the same country as the merchandise being appraised. 19 C.F.R. ?152.106(e). Absent information on sales for export to the U.S. of El Salvadoran t-shirts of the same class or kind, the contractor's actual profit and general expenses as reflected on the contractor's books will be used as the "usual" profit and general expenses for purposes of determining a computed value. See HQ 543502, dated June 11, 1985; HQ 543268, dated December 14, 1984; HQ 542849, dated August 8, 1982; and HQ 543031, dated April 12, 1983.

In HQ 545088, dated February 14, 1995, we dealt with a similar scenario. The relevant facts and decision on those facts in that ruling are explained as follows:

[b]uffalo [importer of unfinished ceramic tableware] explains that it purchases services by using Ceramica [related Mexican subsidiary and producer of tableware] as its agent. At month end each line item is transferred to Buffalo through an inter company account. Ceramica credits line by line contra accounts, resulting in the line items not being reflected as costs of the Mexican operation or shown on Ceramica's books, but rather appearing as costs of Buffalo. According to Buffalo, contra accounts are used so there is a trail which the Mexican government can audit to verify that all currency transactions are legitimate.

According to counsel for Buffalo, Ceramica's Mexican accountants *** have stated that the accounting procedures discussed above conform to generally accepted accounting principles in

*** in the absence of any evidence that the amount for general expenses and profit of the producer is not recorded in a manner consistent with the generally accepted accounting principles in Mexico or that the amount is inconsistent with the amount for general expenses and profit usually reflected in sales of merchandise of the same class or kind, there is no authority to include in the computed value the amount reflected on the importer's accounts for general expenses and profit. See HQ 545045, dated February 1, 1994; and TAA 44 and supplement HQ 543872, dated July 20, 1982.

Similar to the relationship between Buffalo and Ceramica in HQ 545088, non- production expenses are either shown initially on Fun Tees books or are transferred from the contractor's books to Fun Tees books on a monthly basis. Any production-related expense paid by Fun Tees is transferred to the contractor's books. As previously stated, you have provided a signed statement by an El Salvadoran external auditor stating that these accounting procedures (especially the transfer of expenses) conform with El Salvadoran GAAP. Therefore, in keeping with the holding in HQ 545088, and as there is no evidence that the amount is inconsistent with the amount for general expenses and profit usually reflected in sales merchandise of the same class or kind, the amount for general expenses and profit reflected on Fun Tees' books should not be included in determining the computed value of the imported merchandise.

You also claim that the various non-production services and equipment supplied by Fun Tees to the contractor may not be deemed assists, and therefore cannot be included in the determination of the computed value of the t-shirts imported into the U.S. As stated above, these services and equipment include plant management salaries and fringe benefits, computer expenses, non-production equipment, office supplies, medical and legal services, security, medicines, memberships, payment of courier and bank charges, and the provision of magazines.

The term "assist" is defined in section 402(h) of the TAA as follows:
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.

(ii) Tools, dies, molds, and similar items used in the production of the imported merchandise.

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

(iv) Engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise.

In HQ 544421, dated April 3, 1990. we dealt with the issue of whether certain services and equipment provided by an importer to a manufacturer constitute assists. In that ruling, we stated that:

[g]enerally, Customs has held that management services are not considered to be assists. See, HRL 543992, dated September 10, 1987 and HRL 543820, dated December 22, 1986. The services that the importer's employees are providing to the manufacturers are analogous to the services described in these rulings. Based on those rulings, we hold that the salaries for the importer's described management and supervisory personnel are not assists within the meaning of section 402(h)(1)(A) of the TAA.

Finally, you state that the importer will be providing additional enumerated services to the manufacturers as well as specified supplies and equipment.

Customs held in HRL 542122 (TAA #4) that accounting services and legal services are not assists under section 402(h)(1)(A) of the TAA. As a result, in the present case, these services will not be includable in the transaction value of the imported merchandise. Moreover, the cooking and medical services also do not fall under one of the four categories of assists. Thus, these services are also not includable in the transaction value of the imported merchandise.

Further, you cite HRL 542302 (TAA #18), dated February 27, 1981, to support your contention that the enumerated equipment does not constitute an assist. In TAA #18, Customs held that telephone switching equipment, emergency generators, air conditioning equipment, and power transformers were not used in the production of the imported merchandise. Therefore, the equipment was not considered to be an assist.

The equipment that you have described appears to be the same type of non-production equipment discussed in TAA #18. Based on TAA #18, we hold that the non-production equipment that you delineated is not included within the definition of an assist; and the value of the equipment should not be included in the transaction value of the imported merchandise.

As the subject services and equipment Fun Tees provides to the contractor appear to be the same type of non-production services and equipment cited in HQ 544421 and other rulings, we find that they are not included in the definition of an assist. Therefore, the value of these services and equipment are not included in the determination of the computed value of the merchandise.

Please note that the decisions made herein are factually specific. The actual determination of the issues discussed will be made by the appraising officer at the port of entry upon the presentation of the proper documentation.

HOLDING:

The determination of computed value does not include non-production expenses transferred from the contractor's books to Fun Tees' books in accordance with the applicable GAAP.

The enumerated services and equipment supplied by Fun Tees to the contractor are not included in the definition of an assist. Therefore, the value of these services and equipment are not included in the determination of the computed value of the merchandise.

Sincerely,

Thomas L. Lobred
Chief, Value Branch

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