HQ 545341 - Application For Further Review of Protest No. 5501-92-100453, concerning the Appraisement of Women's Lingerie; Assists. - United States International Trade Commision Rulings

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HQ 545341

August 3, 1994

VAL CO:R:C:V 545341 er

CATEGORY: VALUATION

District Director
Dallas/Fort Worth

RE: Application For Further Review of Protest No. 5501-92-100453, concerning the Appraisement of Women's Lingerie; Assists.

Dear Sir:

This protest was filed by counsel on behalf of their client, Escante, Inc., against your appraisement decision in the above-referenced protest. The merchandise was manufactured in Mexico. We regret the delay in responding.

FACTS:

The importer, Escante, Inc. ("Escante"), is a Texas corporation which is in the business of distributing ladies lingerie to customers in the United States. Escante and the foreign manufacturer, Bony Lingerie ("Bony") are "related" parties, within the meaning of section 402(g) of the Trade Agreements Act of 1930, as amended (TAA; 19 U.S.C. 1401a(g)).

Escante contracts with an unrelated third party, Les Etoiles, Inc. ("Etoiles"), of the Grand Cayman Islands, for services related to the production and marketing of the garments, including design work. Etoiles contracts with a designer domiciled in the United States, to create the designs used in connection with the production of the imported merchandise.

By contract, Etoiles agreed to provide Escante with research on current patterns and custom designs most in demand in the lingerie market; marketing studies in selected geographic areas in the United States; and information on regulations, tariffs, duties, etc. Compensation was set at 8 percent of Escante's gross sales, allocated as follows: 5 percent for design and pattern work; 2 percent for research and development; and 1 percent for marketing. In connection with the designs and drawings to be provided by Etoiles to the manufacturer of the imported merchandise, Etoiles agreed to obtain all assistance necessary from designers and third parties. Escante agreed to be responsible for the payments of all costs incurred in connection with travel from the United States to any country outside the United States and for all communications between the parties.

By contract, Etoiles and the designer agreed that she would supply Etoiles with all designs of women's lingerie made by her; travel expenses incurred in connection with assisting Etoiles' clients would be paid for or reimbursed to her; designs would be deemed transferred to Etoiles upon delivery to Etoiles; and all rights of ownership would be deemed transferred to Etoiles upon acceptance of delivery of the designs. Protestant characterizes these designs as "basic concept drawings". Copies of some of the designs were provided with this protest which depict different styles of lingerie, including the identification of what kinds of fabric to use on the different parts of the lingerie.

The designer also travels to the factory in Mexico to help apply the "finishing touches" to the designs she developed earlier. On the average, these trips occur twice a year for a duration of two to three weeks per visit. Once the final refinements are made to the designs, patterns are made by employees at the factory from which the various lingerie garments are cut and fabricated.

You state that the relationship between the buyer and seller did not appear to affect the price actually paid or payable and that transaction value is the correct method of appraisement. You additionally determined that the research and development and marketing provided by Etoiles and paid for by Escante at the rate of 3 percent of gross sales did not accrue to the seller and were determined to be non-dutiable. However, it is your position that the designs provided by Etoiles, paid for by Escante and supplied to the manufacturer, presumably free of charge, are dutiable as assists.

Protestant submits that inasmuch as the design work provided by Etoiles to the manufacturer, and paid for by Escante, is undertaken and produced in the United States, the design work is not a dutiable assist.

ISSUE:

Whether the value of the design work should be added to the price actually paid or payable.

LAW AND ANALYSIS:

There is no dispute that transaction value, pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), is applicable. Transaction value is defined by TAA section 402(b)(1) as "the price actually paid or
payable for the merchandise when sold for exportation to the United States . . . " plus certain additions specified in 402(b)(1)(A) through (E), one of which is the value, apportioned as appropriate, of any assist.

Section 402(h)(1)(A)(iv) provides that the term "assist" includes "[e]ngineering, 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" 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."

Customs has not had occasion to issue any decisions pertaining to the meaning to the term "undertaken" as set forth in section 402(h)(1)(A)(iv), quoted above. However, as you know, the United States valuation system is based on the Agreement to Implement Article VII of the General Agreement on Tariffs and Trade ("the GATT Valuation Agreement"). The provisions of the GATT Valuation Agreement were incorporated into United States law through the TAA (19 U.S.C. 1401a). Article 8.1(b)(iv) of the GATT Valuation Agreement parallels section 402(h)(1)(A)(iv) of the TAA, including the use of the term "undertaken". The GATT Committee on Customs Valuation agreed that in the context of Article 8.1(b)(iv) the English word "undertaken" is to be understood as meaning "carried out". See, General Agreement on Tariffs and Trade ("GATT") Committee on Customs Valuation, Decision 2.1 (March 3, 1983).

Section 402(h)(1)(B) provides that "[n]o service or work to which subparagraph (A)(iv) applies shall be treated as an assist for purposes of this section if such service or work -- (i) is performed by an individual who is domiciled within the United States; (ii) is performed by that individual while he is acting as an employee or agent of the buyer of the imported merchandise; and (iii) is incidental to other engineering, development, artwork, design work, or plans or sketches that are undertaken within the United States."

It is your position that in view of section 402(h)(1)(B)(ii), design work undertaken within the United States is dutiable as an assist because the designer was not acting as an employee or agent of Escante while creating the designs. In this regard it should be noted that section 402(h)(1)(B), quoted above, applies only to those services described in section 402(h)(1)(A)(iv) which are undertaken elsewhere than in the United States. Hence, if it were correct that the design work is "undertaken" in the United States, section 402(h)(1)(B) would not be triggered and, accordingly, whether the designer acts as an employee or agent of the buyer, or not, at the time she performs the work in the United States is irrelevant. Such design work, undertaken in the United States and supplied indirectly by the buyer to the manufacturer through the third party, would remain non-dutiable.

The facts reveal that some portions of the design work were performed in the United States and other portions performed in Mexico. What is not clear from the facts is the significance to be attributed to the design work performed in the United States versus that performed in Mexico. Protestant characterizes the design work performed in the United States as "basic concept drawings", something less than what the designs are after the designer travels to Mexico where she performs "final changes". With regard to the design work prepared by the designer in the United States, it is not dutiable. However, without a more detailed breakdown of the activities performed in each country, number of hours spent and cost attributable to the activities, we cannot determine what portion of the payment (5 percent of Escante's gross sales) is attributable to the work performed in Mexico. Providing protestant is able to submit such a breakdown to you, then the only dutiable portion of the payment would be that amount representative of the work performed in Mexico, plus amounts representing costs associated with the designer's per diem and travel. Without such a breakdown, we must necessarily find the total payment dutiable. (See, HRL 544609.)

Regarding section 402(h)(1)(B), because the designer was under contract with Etoiles at the time she performed the work at the manufacturer's plant, and not an employee or agent of the buyer, subparagraph (ii) of that section is not satisfied and, accordingly, the work performed in Mexico is dutiable.

HOLDING:

Protest has proved that part of the design work was performed in the United States. The other part of the design work was performed in Mexico. The portion of the work performed in the United States will be non-dutiable so long as protestant is able to provide a cost breakdown of the design work performed in each country. Accordingly, the only dutiable portion of the assist will be the amount of the payment attributable to the work performed in Mexico, plus amounts representing costs associated with the designer's per diem and travel. If protestant is unable to provide such a breakdown, the total payment, representing 5 percent of Escante's gross sales, is dutiable. Subject to these conditions, this protest is granted in part.

In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office 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 of 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, Lexis, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director
Commercial Rulings Division

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