HQ 545987 - Assists; design and development undertaken in the U.S.; software - United States International Trade Commision Rulings

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HQ 545987

August 28, 1995

VAL R:C:V 545987 CRS

CATEGORY: VALUATION

Susan Kohn Ross, Esq.
Ross & Associates
5777 West Century Blvd.
Suite 250
Los Angeles, CA 90045-5659

RE: Assists; design and development undertaken in the U.S.; software

Dear Ms. Ross:

This is in reply to your letter, dated February 6, 1995, to our New York office, on behalf of your client, Inter-Tel, Inc. (the "buyer"), in which you requested a ruling regarding the dutiability of software supplied by the buyer for use in connection with the manufacture of imported telephones.

FACTS:

The buyer purchases and imports telephones from various manufacturers (the "seller(s)") in Asia. In connection with these imports, the buyer supplies the seller, free of charge, with software used to produce the telephones. Three different types of software are supplied to the seller: systems software; manufacturing data software; and system test software. All three types of software were developed by the buyer in the United States and are necessary for the production of the imported telephones.

Systems software is installed in the imported telephones and controls the functioning of the features that are present on a particular style of telephone. The buyer supplies the software to the seller in the form of a "master." The seller copies the software from the master onto an integrated circuit - either an Electrically Programmable Read Only Memory (EPROM) chip, or a Programmable Array Logic (PAL) chip. The seller then duplicates the data on the EPROM or PAL for installation on the imported telephones. The master software is not incorporated, or consumed, in the production of the telephones. It is simply a means of transferring data, or instructions, to the seller.

Manufacturing data software is used in the manufacture of printed circuit boards. In this case, the software is furnished to the seller in the form of photographic film or diskettes. The software contains the specifications used to manufacture the printed circuit boards which are installed in the imported telephones. However, the software is used only as a means of transferring the data to the seller. It is not incorporated in, or consumed in, the production of the telephones.

System test software is supplied to, and used by, the seller for the purpose of testing finished telephones and ensuring that they conform to specification. The system test software, like the systems software and manufacturing data software described above, is neither incorporated, nor consumed, in the production of the imported telephones.

ISSUE:

The issue presented is whether the software supplied free of charge by the buyer to the sellers for use in connection with the production of imported telephones, constitutes an assist such that its value should be included in transaction value.

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 under the TAA is transaction value, defined as "the price actually paid or payable for the merchandise when sold for exportation to the United States," plus certain enumerated additions thereto, including the value, apportioned as appropriate, of any assist. 19 U.S.C. § 1401a(b)(1). For purposes of this ruling we have assumed that transaction value is the appropriate basis of appraisement.

The term "assist" is defined by section 402(h)(1)(A) of the TAA as being something that is "supplied directly or indirectly, and free of charge or at a reduced cost, by the buyer of imported merchandise for use in connection with the production or sale for export to the United States" of imported merchandise. Assists include: tools, dies, molds and similar items used in the production of the imported merchandise; and engineering, development, artwork, design work, and plans and sketches, undertaken elsewhere than in the U.S., that are necessary for the production of the imported merchandise. 19 U.S.C. § 1401a(h)(1)(A). In the instant case the buyer supplied the seller, free of charge, with software that is used in the manufacture of the imported telephones.

In HRL 545256, dated January 10, 1995, design information contained on a master EPROM was provided free of charge by the buyer to the seller of imported merchandise. In that case, the design information, or software, contained on the master EPROM could have been transferred using other types of media, e.g., disk, or hardcopy dump and re-key in the country of production. Alternatively, the software could have been transferred by modem or hard circuit. On the basis of the information presented, we determined that the actual method of transfer was immaterial. For Customs' purposes, however, what was found to be important was that the buyer supplied U.S. design work, in the form of software and free of charge, for use in the production of the imported merchandise.

The facts in the instant case are similar to those at issue in HRL 545256. U.S. design work in the form of software is supplied by the buyer, free of charge, to the seller. The software was used in connection with, and was necessary for, the production of the telephones. However, it was neither incorporated nor consumed in the production process. Thus, it is also our position in the instant case that the software is not an assist and that, consequently, its value does not constitute an addition to the price actually paid or payable for the imported telephones under section 402(b)(1)(B) of the TAA.

HOLDING:

The software supplied by the buyer to the seller(s) in connection with the production of the imported telephones does not constitute an assist within the meaning of section 402(h)(1)(A) of the TAA since it represents engineering and design work undertaken in the U.S. The value of the software should not be included in the transaction value of the imported telephones.

Sincerely,

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