HQ 546697 - Dutiability of payments for design work; foreign-trade zones; valuation; 19 C.F.R. § 146.65 - United States International Trade Commision Rulings

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HQ 546697

August 26, 1999

VAL RR:IT:VA 546697 CRS

CATEGORY: VALUATION

Raymond F. Sullivan, Esq.
Wilkie, Farr & Gallagher
Three Lafayette Center
1155 21st Street, N.W.
Washington, D.C. 20036-3384

RE: Dutiability of payments for design work; foreign-trade zones; valuation; 19 C.F.R. § 146.65

Dear Mr. Sullivan:

This is in reply to your letter of March 18, 1997, submitted on behalf of your client [********] (hereinafter the "Buyer"), in which you requested a ruling on the dutiability of payments made to a related company, [*****************] (hereinafter "the Seller"), in connection with the purchase of imported machinery and equipment. Following your meeting with me and a member of my staff at Customs headquarters on May 20, 1999, you made an additional submission under cover of a letter dated June 23, 1999. We regret the delay in responding.

In your submission you requested that certain information provided in connection with the ruling request be treated as confidential pursuant to section 177.2(b)(7), Customs Regulations (19 C.F.R. § 177.2(b)(7)). Since you have provided an appropriate justification for confidential treatment in accordance with the regulations your request is approved. Accordingly, information contained in brackets [] will be deleted from published versions of this decision.

FACTS:

The Buyer will purchase and import from the Seller and [*****] certain production machinery and equipment. The Buyer will use the imported merchandise together with domestically-sourced merchandise to produce parts and components for use in the assembly of the model [*********] vehicle at its factory and foreign-trade subzone (FTSZ) in [*********]. The imported merchandise consists, inter alia, of tools, dies, jigs, various machinery and equipment for the body assembly shop including the frame welding line, under body assembly line, body side assembly line, main body assembly line, and machinery and equipment for the trim and final assembly line such as the engine hood line, door subassembly line, tail gate line and parts for wheel alignment.

In connection with the planned assembly of vehicles at the FTSZ, the Buyer and Seller executed a Consultation and Service Agreement (the Agreement") which became effective May 1, 1993. The Agreement provides for the development of production technology and methods to be used at the Buyer’s plant in the manufacture of the model [****] vehicle, including the planning, procurement and installation of the imported and domestic machinery and equipment. In return for these services, the Agreement provides that the Buyer will make payments to the Seller totaling [*************].

The work undertaken pursuant to the Agreement consists generally of four phases, as follows: phase I - production concept planning and development; phase II - drafting specifications and detailed production planning; phase III - testing, fine tuning and pilot production; phase IV(I)-(ii) - installation. You note that the payments in respect of the consultation and services in phase I relate to work that is entirely conceptual in nature. This work concerns the decision to develop a new model vehicle, planning the location and methods of production and the examination of new production methods. In addition, you note that payments under phase IV relate to post importation installation and engineering work.

Phase I Activities

A more detailed description of the assistance to be furnished by the Seller is contained in Appendix D to the Agreement. As described therein, phase I includes the following assistance activities: (1) product development planning, i.e., an analysis of the machinery and equipment necessary to ensure cost competitive production; (2) production planning, i.e., studies relative to the most efficient type and capacity of production facility; (3) research on manufacturing technologies in relation to production machinery and equipment; (4) feasibility studies relative to new manufacturing technologies; (5) research into competitors’ technologies; (6) quality studies on current model vehicles to enable developmental improvements in production equipment; (7) studies of the effect of vehicle design on overall production cost, including investment for machinery and equipment; and (8) development of the general production concept, including the technologies, processes and layouts to be employed, and estimates as to manufacturing costs and manpower requirements.

Phase I and II Activities

Certain service, consultative and assistance activities provided for under the Agreement span both phases I and II of the vehicle program. These include developing a detailed production plan for individual assembly shop, manufacturing and production processes; evaluating parts production on the basis of engineering drawings; evaluating the prototype production process; and conducting an engineering study of the manufacturing operation with specific reference to the allocation of production machinery and equipment.

Phase II Activities

Activities relating solely to phase II consist of the following: studying the outline, layout, performance and other technical requirements of each item of machinery and equipment used in the production process; evaluating the use of existing machinery and equipment and the need for new machinery and equipment; defining quality targets for each stage of the manufacturing process; preparing technical specifications; and checking drawings and documents submitted by equipment suppliers.

Phase II and III Activities

Work spanning these stages consists principally of evaluating machinery and equipment during the production of pilot vehicles. Included are evaluations of the handling, productivity and durability of machinery and equipment, and the quality of the product produced during the pilot production process.

Phase II, III and IV Activities

Engineering changes, or changes in vehicle design, may affect the production concept, production targets and/or the investment budget. These changes may occur throughout phases II-IV. Necessary alterations or modifications due to engineering changes are made as required.

Phase III and IV Activities

The assistance furnished by the Seller in phases III and IV consists of consultation and advice relative to testing and pilot production of the machinery and equipment, and the planning and execution of the installation process. Modifications and/or adjustments to the machinery and equipment are made as necessary. These activities are carried out after importation.

Phase I - IV Activities

The assistance furnished by the Seller in phases I - IV consists of personnel planning, e.g., estimating the personnel required to perform the required engineering for the machinery and equipment, and overall schedule planning relative to the production machinery and equipment for the model [****] vehicle.

Payments to the Seller

In consideration for this assistance, the Buyer agreed to pay the Seller the sum of [*******] in five installments in accordance with the schedule set forth in paragraph 5.1 of the Agreement. Of this amount, [¥547,550,00] will be due after the completion of phase I; [******] after the completion of phase II; [******] after the completion of phase III; [********] upon the completion of phase IV(I); and [*****] after the completion of phase IV(ii). You contend that the work undertaken in phase I is conceptual, while that undertaken in phase IV concerns post importation activities, and that, accordingly, payments related to these phases are not dutiable. Furthermore, you assert that in respect of phases II and III, payments made pursuant to the Agreement are dutiable only to the extent that they relate to the imported merchandise.

Included in your submission is a letter, dated November 11, 1996, from the Seller to the Buyer, concerning the payments made by the Buyer pursuant to the Agreement, that suggests a possible apportionment of those payments to the imported merchandise. Attachment A to the letter sets forth the estimated values for the machinery and equipment relative to which consultation services are provided, allocated to the stages of the Buyer’s assembly line (stamping, body assembly, paint, and trim and final). The estimated values are further segregated by the source of the machinery and equipment (either the U.S. or Japan). Based on this information, an allocation factor based on the ratio of the value of imported merchandise to the total value of the machinery and equipment for which services are provided, is derived.

In Attachment B to the letter, the allocation factor derived in Attachment A is applied to the payments made pursuant to the terms of the Agreement in order to obtain an estimate of the amounts that are allocable to the imported machinery and equipment. Thus the total payment for, e.g., phase II, is apportioned to the four stages of the assembly line in accordance with the allocation factor. Given your contention that the payments made under phases I and IV are not dutiable, no portion of these payments is allocated to machinery and equipment imported from Japan. In addition, because all the machinery and equipment for the paint shop is sourced in the U.S., you submit that none of the payments allocable to this activity are dutiable.

ISSUE:

The issue presented is whether the payments in question are part of the price actually paid or payable for the imported merchandise.

LAW AND ANALYSIS:

Section 3(a) of the ForeignTrade Zones Act, as amended (19 U.S.C. § 81c), provides that articles sent into the customs territory after having been produced or manufactured in a FTZ are subject to the laws and regulations affecting imported merchandise. The appraisement of merchandise imported into the United States appraised is governed by section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. § 1401a; the "TAA"). See also, 19 U.S.C. § 1500. The primary 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 amounts in respect of certain statutorily enumerated additions to the price actually paid or payable.

However, transaction value is an appropriate method of appraisement only if, inter alia, the buyer and seller are not related, or if related, the relationship does not influence the price actually paid or payable for the imported merchandise. In the instant case, the parties to the Agreement are related; however, for purposes of this decision we have assumed that transaction value is the appropriate basis of appraisement.

In accordance with section 146.65(b)(2), Customs Regulations (19 C.F.R. § 146.65(b)(2)), the dutiable value of privileged and nonprivileged foreign merchandise sent into the customs territory from a foreigntrade zone is the price actually paid or payable for the merchandise in the transaction that caused it to be admitted to the zone plus, to the extent not otherwise included in the price actually paid or payable, the statutory additions to the price actually paid or payable enumerated in section 402(b)(1)(A)(E) of the TAA.

The term "price actually paid or payable" is defined as "the total payment (whether direct or indirect...) made, or to be made, for imported merchandise, by the buyer to, or for the benefit of, the seller." 19 U.S.C. § 1401a(b)(4). In Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990), the issue before the court was whether quota charges paid to the seller on behalf of the buyer were part of the price actually paid or payable for the imported goods. In reversing the decision of the lower court, the appeals court held that the term “total payment” is all-inclusive and that "as long as the quota payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods." The court also stated:

Congress did not intend for the Customs Service to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, are for the merchandise or for something else. As we said in Moss Mfg. Co. v. United States, 896 F.2d 535, 539 (Fed. Cir.1990), the “straightforward approach [of section 1401a(b)] is no doubt intended to enhance the efficiency of Customs’ appraisal procedure; it would be frustrated were we to parse the statutory language in the manner, and require Customs to engage in the formidable fact-finding task, envisioned by [appellant].

Id. At 380 (brackets in original). In accordance with Generra, it is Customs’ position that all payments made by the buyer to, or for the benefit of, the seller, or a party related to the seller, are part of the price actually paid or payable for imported merchandise. Customs has consistently held that payments by the buyer to the seller for design and development work are part of the price actually paid or payable for imported merchandise. See, e.g., HRL 544694 dated February 14, 1995, HRL 545278 dated April 7, 1994, HRL 544381 dated November 25, 1991, HRL 544516 dated January 9, 1990, and HRL 543324 dated August 8, 1984.

In Chrysler Corporation v. United States, 17 CIT 1049 (1993), the Court of International Trade applied the standard in Generra and determined that certain shortfall and Special Application fees which the buyer paid to the seller were not a component of the price actually paid or payable for the imported merchandise. The court found that the evidence established that these fees were independent and unrelated costs assessed because the buyer failed to purchase other products from the seller and not a component of the price of the imported engines. Under Generra, there is a presumption that all payments made by a buyer to a seller are part of the price actually paid or payable for the imported merchandise; however, this presumption may be rebutted by evidence which clearly establishes that the payments, like those in Chrysler, are totally unrelated to the imported merchandise.

The payments at issue are made by the Buyer to the Seller; accordingly, based on Generra, Customs presumes they are dutiable. Nevertheless, as noted above, this presumption may be rebutted by evidence which clearly establishes that the payments, like those in Chrysler, are totally unrelated to the imported merchandise.

You contend that the payments in respect of activities undertaken in phases I and IV are not dutiable, the former because the work was entirely conceptual in nature, the latter because the work was undertaken after importation. As for payments made under phase II and III of the Agreement, you acknowledge that some portion of these payments are dutiable, but only to the extent that the payments relate to the imported production equipment. In regard to the phase I payments made by the Buyer to the Seller, you contend that they are not dutiable in that they relate to work which is entirely conceptual in nature, namely, work related to the decision to develop a new vehicle model, and planning associated with location and methods of vehicle production. However, in keeping with Chrysler, in order for the phase I payment not to be included in transaction value, it would have to be shown that it represented independent and unrelated costs, unrelated to the price actually paid or payable for the imported merchandise.

Pursuant to the Agreement, the Seller provides certain assistance in connection with configuring its facilities for “manufacturing the [****] such as the planning, procurement and installation of the Machinery and Equipment.” Consultation and Service Agreement, at 2. The term “machinery and equipment” is defined in the Agreement as meaning “machinery, equipment, dies, jigs, tools and other things required by the Buyer for the manufacture of the model [***] vehicle. Id. at 2. The phase I assistance, a detailed description of which is set forth in Appendix D of the Agreement, consists of the following:

· design planning in respect of the new vehicle, including planning relative to the necessary production machinery and equipment and the appropriate manufacturing process to enable cost competitive production of the model [****] vehicle;

· production location planning with respect to the model ****] vehicle;

· general research into new manufacturing technologies in relation to production machinery and equipment available for the new vehicle;

· feasibility studies into the development and utilization of new manufacturing technologies for the new vehicle to increase productivity and quality;

· research into competitors’ manufacturing technologies including the disassembly of competitors’ vehicles to determine the design and manufacturing technology employed;

· analyzing current model quality using COVE (Customer Oriented Vehicle Evaluation), CAMIP (Continuous Automotive Market Information Program) and similar programs to identify the problems and enable developmental improvements in production equipment and manufacturing process in future vehicle models;

· cost and investment planning, including studies of how estimated investment in production machinery and equipment, and overall production cost, are affected by the design of the model [****] vehicle;

· presentation to the Buyer of the general production concept, including technologies to be employed, processes and layouts to be used, target manufacturing costs, quality levels and estimates of manpower and skills required in the production of the model [145] vehicle;

· cost benefit studies relative to sourcing of vehicle parts and components.

Id., App. D, at1-2.

Based on the information presented, we find that the payments for phase I consultations and services, like those for phases II and III, were made for the imported merchandise. This conclusion follows from the language of Appendix D which provides that the work in phase I was undertaken, e.g.: “from the viewpoint of production machinery and equipment necessary...to enable cost competitive production;” “in relation to production machinery and equipment available;” “to enable developmental improvements in production equipment;” and “to study how estimated investment for production machinery and equipment and overall cost are affected by the design of the new vehicle.” This suggests that the assistance provided by the Seller in phase I, notwithstanding that it may have been conceptual in nature, was related to the imported merchandise.

In order to find that the payments were not dutiable, it would be necessary to show, in accordance with the court’s decision in Chrysler, that the phase I payments were “totally unrelated” to the imported merchandise. However, to the contrary, as indicated in Appendix D to the Agreement, there is a clear nexus between the payments and the imported merchandise in that the consultation and assistance furnished by the Seller in phases I-III was part of the overall process of planning and procuring the imported merchandise. Accordingly, since the phase I payments were made by the Buyer to the Seller, they are properly included in transaction value as part of the price actually paid or payable in accordance with the court’s decision in Generra. 905 F.2d 377 (Fed. Cir. 1990).

Nevertheless, the imported merchandise forms only part of the machinery and equipment used in the [****] FTSZ; domestically sourced machinery and equipment is also used. Thus, the assistance provided under the Agreement relates both to the imported machinery and equipment and to the machinery and equipment sourced domestically. It is our position that only that portion of the payments which relates to the imported merchandise, i.e., merchandise purchased from the Seller and from [******], is included in transaction value. The Court of International Trade has held that payments can be allocated. Chrysler, 17 Ct. Int'l Trade 1049 (1993). Therefore, as a general matter, the payments at issue should be allocated in a reasonable manner appropriate to the circumstances of the case. See, e.g., 19 C.F.R. § 152.103(e)(1), regarding the apportionment of assists.

You have proposed a method - the details of which are described above, for allocating the value of the payments made by the Buyer pursuant to the terms of the Agreement to the value of the imported merchandise. In the unique circumstances of this foreign-trade zone case we find that, as a general matter, the proposed apportionment method is acceptable for determining the portion of the phase I payments that is related to the imported machinery and equipment. However, since the calculation submitted with the ruling request was based on the estimated value of the machinery and equipment, a revised allocation factor should be determined employing the same methodology but using actual values for purposes of computing the amount of the payments at issue that is properly included in the transaction value of the imported goods.

We concur with your assessment of payments made under phases II and III, i.e., that they are included in transaction value as part of the price actually paid or payable, but only to the extent that they relate to the imported merchandise.

In contrast with payments under phases I-III, the payments for work performed in phase IV relates entirely to post importation activities, e.g., the testing and installation of the machinery and equipment. Section 402(b)(3) of the TAA provides that the transaction value of imported merchandise does not include any reasonable cost or charge incurred for “the construction, erection, assembly or maintenance of, or the technical assistance provided with respect to, the merchandise after its importation into the United States,” provided the cost is identified separately from the price actually paid or payable and the enumerated additions thereto. 19 U.S.C. § 1401a(b)(3)(A)(i). Given that the payments made in connection with phase IV relate to post importation activities, we find that in accordance with section 402(b)(3)(A)(i) of the TAA these amounts relate to the “construction, erection, assembly or maintenance of, or the technical assistance provided with respect to, the imported merchandise,” such that none of the phase IV payments are included in transaction value as part of the price actually paid or payable for the imported merchandise.

HOLDING:

In conformity with the foregoing, payments made for consultation and advice under phases I-III of the Agreement are included in transaction value as part of the price actually paid or payable to the extent that they relate to the imported merchandise. The payments should be apportioned to the value of the imported machinery and equipment in accordance with the method proposed by the Buyer, subject to the calculation of a revised allocation factor.

Payments made by the Buyer pursuant to the terms of the Agreement in respect of phase IV activities are not included in transaction value as an addition to the price actually paid or payable for the imported merchandise.

Sincerely,

Thomas L. Lobred
Chief, Value Branch

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