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HQ 547880

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August 21, 2002

RR:IT:VA 547880 CC

CATEGORY: VALUATION

Robert L. Eisen, Esq.
Christopher E. Pey, Esq.
Coudert Brothers LLP
1114 Avenue of the Americas
New York, NY 10036-7703

RE: Design services; assists; 19 U.S.C. § 1401a(b)(1)(C)

Dear Messrs. Eisen and Pey:

This is in response to your letter of December 8, 2000, on behalf of [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx], requesting a valuation ruling arising from a proposed design services agreement. We also met with you and the General Counsel of your client concerning this matter on August 6, 2002. Following this meeting, you submitted a supplemental letter dated August 16, 2002, with an amended agreement. We apologize for the delay in responding to your request.

You requested confidentiality pursuant to 19 CFR § 177.2(b)(7), stating that your letter and the proposed design services agreement contained commercial information, if disclosed, would cause harm to your client. In response, we requested that you identify what information you considered confidential. You responded with a letter bracketing information you deemed confidential. We reviewed this letter and determined that most of the information bracketed does not warrant confidential treatment. We informed you of this and offered you the opportunity to withdraw your request. You declined. Consequently, we are bracketing the information which we informed you would be treated as confidential, which after consultation with your client you have agreed is acceptable, and this information will not be disclosed.

FACTS:

According to your submission, [xxx] designs, manufactures, and imports footwear, handbags, and some accessories on its own account. [xxx] is interested in allowing its customers to purchase and use [xxx] designs in making footwear for importation into the United States. Under the terms of a draft agreement, a copy of which you have submitted, [xxx] would develop and present footwear design proposals to customers (hereinafter “buyers”) interested in purchasing goods made with [xxx] designs. You state that [xxx] will be unrelated to any prospective buyer.

Under the Agreement, once a buyer accepts a design proposal, [xxx] would prepare and submit a design kit to the buyer. The design kit would consist of a set of artistic and technical elements including materials, specifications, colors, fabrications, sample hardware trim, artwork, swatches, prototypes, designs, sketches, and/or three-dimensional constructions. The design kits would be prepared entirely in the United States by U.S. designers.

The Agreement permits the buyer to use the designs in connection with the manufacture, importation, distribution, and sale of footwear in the United States. Under the terms of the Agreement, the buyer is allowed to choose the manufacturer it wishes to produce the designs purchased. The designs would remain the property of [xxx], and [xxx] would retain the right to permit others to use the designs, as well as to make products similar or identical to those depicted in the designs for its own use under the Agreement. In addition, at the buyer’s request, [xxx] would assist the buyer in locating materials or vendors to produce the designs. If the buyer decides to use a vendor recommended by [xxx], [xxx] may assist the buyer in placing orders and reviewing production samples. Where goods made with designs purchased under the Agreement are imported, the buyer will act as importer of record.

Historically, some potential buyers have placed orders with [xxxxx] a wholly–owned subsidiary of [xxx]. The subsidiary, based overseas, then subcontracts with unrelated factories for the manufacture of finished goods. [xxx] anticipates some orders under the Agreement will be made through unrelated companies. [xxx] does not anticipate that there will be any formal sales agreement between the buyer and the subsidiary, but instead foresees such purchases will be on an order-by-order basis. [xxx] will not obtain any remuneration from sales between the buyer and the subsidiary. The buyer will not be required to purchase products using designs from the subsidiary or any other vendor related to [xxx]. The subsidiary will not be a party to the Agreement, nor will any obligations or benefits inuring to the subsidiary arise under the Agreement.

The buyer agrees to pay [xxx] a negotiated design fee, which [xxx] anticipates will be in the range of [xxxxx] based upon the invoice value (FOB points of origin) of the articles produced using the designs. Invoicing for the design kits will be from [xxx], while invoices for goods ultimately purchased will come from the sellers, including the subsidiary. [xxx] will not accept payment for goods owing to its subsidiary, nor will the subsidiary accept payment for design kits owing to [xxx] under the Agreement.

ISSUE:

Whether payments made for services performed under a design services agreement are dutiable as assists.

LAW AND ANALYSIS:

Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA: 19 U.S.C. § 1401a). The preferred method of appraisement is transaction valuation, which is defined as the “price actually paid or payable for merchandise when sold for exportation to the United States,” plus five statutorily enumerated additions. 19 U.S.C. § 1401a(b)(1). Those enumerated additions are the following:
the packing costs incurred by the buyer with respect to the imported merchandise;
any selling commission incurred by the buyer with respect to the imported merchandise;
the value, apportioned as appropriate, of any assist;
any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States; and
the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.

Section 402(h)(1)(A) of the TAA, 19 U.S.C. § 1401a(h)(1)(A), provides, in pertinent part, the following:

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:

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

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

Merchandise consumed in the production of the imported merchandise.

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.

Design work undertaken within the U.S. is not dutiable as an assist pursuant to 19 U.S.C. § 1401a(h)(1)(A)(iv). Consistent with that statute, we have ruled that design work undertaken within the U.S. does not constitute an assist. Headquarters Ruling Letter (HRL) 546720, dated July 21, 1999. You state that the design kits are developed entirely within the United States. Consequently, pursuant to 19 U.S.C. § 1401a(h)(1)(A)(iv), any design work done in the U.S. to produce the design kits would not be added to the price actually paid or payable.

HOLDING:

Pursuant to 19 U.S.C. § 1401a(h)(1)(A)(iv), payments made for services performed under a design services agreement are not dutiable as assists since they are performed entirely within the U.S.

This analysis is based solely on your description and a sample agreement attached to the August 16, 2002 submission. Any determination whether the design services constitute dutiable assists will depend on the totality of the evidence for the particular transaction. The actual determination will be made by the appraising officer at the
applicable port of entry based upon the totality of the evidence, including the entry documentation submitted.

Sincerely,

Virginia L. Brown

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