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HQ 548540

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July 28, 2004

RR:IT:VA 548540 RFC

CATEGORY: VALUATION

Mr. Robert J. Pisani
Katten, Muchin, Zavis & Rosenman
1025 Thomas Jefferson Street, N.W.
East Lobby, Suite 700
Washington, D.C. 20007-5201

RE: Assists; Services; Fringe Benefits

Dear Mr. Pisani:

This letter is in reference to your April 26, 2004, letter requesting an advance ruling from the Bureau of Customs and Border Protection (CBP) on whether certain costs constitute assists under the applicable law. Specifically, you request a ruling on whether certain services rendered during the production of certain garments constitute assists. If those services performed by employees of the buyer of the merchandise are found to constitute assists, you also request a ruling on whether certain fringe benefits paid to or received by the employees are included in the value of the assists. Finally, if the services are found to constitute assists, you request a ruling on the proper or appropriate method of apportionment of the value of the assists to the imported merchandise.

FACTS:

Faconnable, S.A.S. is a wholly owned subsidiary of Nordstrom, Inc. You indicate that Faconnable provides designs for use on products that will be imported by Nordstrom. All design work for Faconnable products for Nordstrom is done in Nice, France. The designs are provided to Nordstrom’s foreign suppliers at no charge and the design fees are a part of a royalty payment made by Nordstrom quarterly. You further indicate that there are three positions at Faconnable that are being filled by U.S. nationals whose costs are not covered by the royalty agreement and are not included in the transfer price of the finished garments provided by the foreign suppliers. Additionally, as part of the process, you indicate that certain “secondary testing” may occur in addition to “standard testing.”

The positions and testing are described in the request and subsequent communications with this office as follows:

Technical Designer

The position of technical designer is described in a job announcement submitted with the request as follows:

Responsible for creation of product specifications and fit execution from concepts through production that accurately reflect design intent and achieve correct construction and fit. Work closely with Design and Sourcing to develop products that are reproducible and meet wholesale/retail goals. In conjunction with Design, Sourcing and QA to ensure compliance to Faconnable standards. Collaborate with Design and Pattern Engineering to establish blocks, standards grades and tolerance. Work with minimal supervision. Support Faconnable initiatives.

In the request, the position is further described as follows:

Technical Designer: Responsible for creation of product specifications and fit execution from design completion through production that accurately reflect design intent and fit. Work closely with Design and Brand Team to ensure products are reproducible. Work in conjunction with Brand Team and QA to ensure compliance to Faconnable/Nordstrom standards. Collaborate with Brand Teams in U.S. and France and Pattern Engineering in France to establish blocks, standard grades and tolerances.
o o o

This individual is responsible for reviewing the manufacturer’s pattern and confirming the product specifications from concept through production. The technical designer is a U.S. citizen and a Nordstrom, Inc. employee who also receives other benefits aside from his/her salary including French lessons, cell phones, relocation costs, school for his/her children, veterinarian costs for his/her cat, and public storage. The technical designer does not create the design. This is done by the creative designers who are employees of Faconnable and are covered by the royalty agreement. The technical designer becomes involved once an order has been placed. After the pattern has been created, the technical designer looks at the pre-production pattern to test fit and conducts points of measurement to determine if it meets all design specifications. The technical designer may need to regrade if the fit is incorrect. In addition, there are different specifications depending on whether the product is intended for the U.S. market or the European market.

In a subsequent communication with this office, you indicate that the person who occupies this position is a Nordstrom employee, is on the payroll of Nordstrom, works onsite at Faconnable in France during the entire time while performing his or her duties, and the services that he or she provides are not included in the cost of the design. The fringe benefits received by this individual are paid by Nordstrom.

Technical Design Manager

The position of technical design manager is described in a job announcement submitted with the request as follows:

Manage a team of Technical Designers in fit development and execution from concepts through production that accurately reflect and achieve correct fit for Brand and Product Group. Plan, establish and monitor workflow to ensure timely delivery of product specifications, fit approvals and communications. Create product specifications. Work closely with the Planner to deliver products that are reproducible and meet wholesale/retail goals. Work in conjunction with Design, Planning and QA to ensure compliance to NGP standards. Collaborate with Design and Pattern Engineering to establish blocks, standards, grades and tolerances.

In the request, the position is further described as follows:

Technical Design Manager—Manage a team of technical designers of which three are U.S. nationals and one is a French national, in fit development and execution from design completion through production that accurately reflect and achieve correct fit for Brand and Product Group. Plan, establish, and monitor workflow to ensure timely delivery of product specifications, fit approvals, and communications. Detail product specifications. Work closely with the Planner to deliver products that are reproducible. Work in conjunction with Brand Planning, and QA to ensure compliance. Collaborate with Brand Team and French Pattern Engineering to establish blocks, standards, grades, and tolerances.
o o o

This individual manages a team of technical designers. His/her job responsibilities include training, hiring, and reviewing the technical staff and formulating and planning workflow to ensure timely delivery of product specifications. The Technical Design Manager is a U.S. citizen and a Nordstrom, Inc. employee who also receives benefits aside from his/her salary including French lessons, cell phones, relocation costs, school for his/her children, and public storage.

In a subsequent communication with this office, you indicate that the person who occupies this position is a Nordstrom employee, is on the payroll of Nordstrom, works onsite at Faconnable in France during the entire time while performing his or her duties, and the services that he or she provides are not included in the cost of the design. The fringe benefits received by this individual are paid by Nordstrom.

Although the CBP is mindful of the management responsibilities of the technical design manager, this office concludes that the duties of this position are integrally involved in the production of the imported merchandise.

Quality Engineering/Quality Control Coordinator

The position of quality engineering/quality control coordinator is described in a job announcement submitted with the request as follows:

Monitor procedures already in operations to maintain the quality standards of existing products. Develop innovative programs to focus employees on improving product quality. Manage and coordinate efforts for Faconnable production to ensure Quality Control procedures and requirements are being met. Includes scheduling, organizing, monitoring and performing product inspections at production facilities. Ensure required activities are being met in an accurate and timely manner.

In the request, the position is further described as follows:

Quality Engineer—Has primary responsibility for implementing a quality program for products that will be sold in the European market. This includes developing methods to check the quality of new products and improving the quality of existing products. Receives test reports on the products and forwards them to the Production Planners in the U.S. for review.
o o o

This individual manages all aspects of quality programs in the manufacturing process and develops product standards. This includes determining what testing methodology to perform, keeping current on industry standards and practices, and traveling to factories to perform inspections. The quality engineer is a U.S. citizen and a Nordstrom, Inc. employee who also receives other benefits aside from his/here salary including French lessons, cell phones, relocation costs, school for his/her children, and public storage. It should be noted that the quality engineer does not actually conduct the tests but rather reviews test reports and forwards them to the production planner in the U.S. for final decision. The types of test that are forwarded by the quality engineer include stability of the garment and shrinkage, review of seam, zipper control, color fastness, light fastness, and the construction of the garment.

Currently, all of these tests relate to product imported into Europe and not product that is imported into the U.S. Therefore, these services are not dutiable as an assist. However, in the future, this quality engineer may become involved with tests that relate to product which will be imported into the U.S.

In a subsequent communication with this office, you indicate that the person who occupies this position is a Nordstrom employee, is on the payroll of Nordstrom, works onsite at Faconnable in France during the entire time while performing his or her duties, and the services that he or she provides are not included in the cost of the design. The fringe benefits received by this individual are paid by Nordstrom.

Although the description of the quality engineer/quality control coordinator in this ruling request states that the products subject to this individual’s responsibilities are currently imported into Europe and not into the United States, the CBP was specifically asked to address this issue should the manufacturer export goods to the United States in the future that come within the purview of this individual’s responsibilities.

As indicated above, the request also seeks a ruling on whether certain testing constitutes an assist.

Secondary Testing

In the request, the secondary testing is described as follows:

Nordstrom, Inc. may also request additional testing outside of the standard testing that is performed by the supplier on garments. This testing is in addition to the tests that the supplier is required to conduct which are already included in the purchase price. The additional testing is done at Nordstrom’s designated third party testing facility. When additional tests are requested outside of the normal testing, Nordstrom, Inc. pays the testing facility directly.

In subsequent communications with this office, you indicated the following:

“By secondary testing, we are referring to testing that Nordstrom would hire a third party to perform outside the manufacturing facility. The secondary testing is done solely for the benefit of Nordstrom and in most cases is done to support warranty claims such as waterproofing.”

The following occurs when a product fails this secondary testing because a problem with the product: “Depending on the problem, one of four things may occur: (a) it might be sent back to the manufacturer to be corrected and if the problems are corrected it is then shipped to Nordstrom. If the problem is not corrected, the shipment is rejected; (b) it might be shipped but not labeled as meeting certain requirements, e.g., water-resistance; (c) It might be rejected and never shipped; (d) it might still be accepted and shipped as it is.”

With respect to the percentage of the products or goods is subject to the secondary testing: “This is a spot check and we estimate approximately 10-20%.”

“The secondary testing is always conducted by a third party who is independent from and unrelated to the seller or manufacturer of the product. Nordstrom always directly pays the third party who conducts the test.”

With respect to the apportionment of any assists, it states in the request that:

In the event that Customs determines that any of these positions are dutiable as an assist, we request that it consider the following: First, all three positions handle merchandise imported into the U.S. and Europe. Only a percentage of each job is dedicated to the U.S. imports. Therefore, only this part may be allocated as an assist. In addition, the Technical Design Manager has several duties, which can be broken down as comprising only a percentage of his/her job. Thus, only that portion of the job which Customs determines is an assist should be dutiable.

ISSUES:

Whether the services performed by the technical designer constitute an assist under 19 U.S.C. §1401a(h). Whether the services performed by the technical design manager constitute an assist under 19 U.S.C. §1401a(h). Whether the services performed by the quality engineering/quality control coordinator constitute an assist under 19 U.S.C. §1401a(h). Whether the secondary testing services constitute an assist under 19 U.S.C. §1401a(h)? Whether the fringe benefits paid to or received by the technical designer, technical design manager or quality engineering/quality control coordinator should be included in the value of the assists if the services that they perform are determined to constitute assists. How the value of any assists should be apportioned?

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. §1401a. Section 402(b)(l) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for the enumerated statutory additions. In order for imported merchandise to be appraised under the transaction value method it must be the subject of a bona fide sale between a buyer and seller, and it must be a sale for exportation to the United States.

One of the enumerated statutory additions is an “assist,” which is defined as follows:

(1)(A) 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 (emphasis added.):

(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 (emphasis added.) (B) No 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.
(C) For purposes of this section, the following apply in determining the value of assists described in subparagraph (i) The value of an assist that is available in the public domain is the cost of obtaining copies of the assist. (ii) If the production of an assist occurred in the United States and one or more foreign countries, the value of the assist is the value thereof that is added outside the United States.

19 U.S.C. §1401a(h).

The CBP regulations address assists:

(a) Assist. (1) ``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 (emphasis added.):

(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 (emphasis added.)
(2) No service or work to which paragraph (a)(1)(iv) of this section applies will be treated as an assist if the service or work: (i) Is performed by an individual domiciled within the United States;
(ii) Is performed by that individual while 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.
(3) The following apply in determining the value of assists described in paragraph (a)(1)(iv) of this section: (i) The value of an assist that is available in the public domain is the cost of obtaining copies of the assist. (ii) If the production of an assist occurred in the United States and one or more foreign countries, the value of the assist is the value added outside the United States. (iii) If the assist was purchased or leased by the buyer from an unrelated person, the value of the assist is the cost of the purchase or of the lease.
o o o

(e) Apportionment. (1) The apportionment of the value of assists to imported merchandise will be made in a reasonable manner appropriate to the circumstances and in accordance with generally accepted accounting principles. The method of apportionment actually accepted by Customs will depend upon the documentation submitted by the importer (emphasis added). If the entire anticipated production using the assist is for exportation to the United States, the total value may be apportioned over (i) the first shipment, if the importer wishes to pay duty on the entire value at once, (ii) the number of units produced up to the time of the first shipment, or (iii) the entire anticipated production. In addition to these three methods, the importer may request some other method of apportionment in accordance with generally accepted accounting principles. If the anticipated production is only partially for exportation to the United States, or if the assist is used in several countries, the method of apportionment will depend upon the documentation submitted by the importer (emphasis added).

19 CFR §§ 152.102(a), 103(e).

The legislative history to the Trade Agreements Act of 1979, as found in the Report of the House Committee on Ways and Means, states that an "assist" is:

[A] concept which, while taking on greater significance in customs valuation, has never before been defined by statute. The definition specifies those particular items or services which, when supplied directly or indirectly by the buyer of the imported merchandise, free of charge or at reduced cost, for use in connection with the production or the sale for export to the United States, are to be treated as an assist.

H.R. Rep. No. 317, 96th Cong., 1st Sess. 81 (1979).

As indicated above, an assist is an enumerated item or service that is 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 that merchandise. An assist includes 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.

Services Constituting Assists

When considering whether services provided by a buyer to a manufacturer located abroad constitute an assist, one must distinguish between those services that are completely unrelated to the production of the imported merchandise and those services necessary for the production of the imported merchandise. See 546782 (December 2, 1999). Generally, managerial and supervisory services performed abroad that relate to the direction and management of overall plant operations are not considered to constitute assists when paid for by a buyer of the merchandise because such services are not a necessary or integral to the production of the imported merchandise. On the other hand, services performed abroad that involve engineering, development, artwork, and plans and sketches that are necessary for the production of the imported merchandise are considered to be assists when paid for by the buyer of the merchandise. See HQ 545117 (October 30, 1992) (The cost of work performed by employees residing abroad considered a dutiable assist if the nature of their work involves engineering, development, artwork, and plans and sketches that are necessary for the production of the imported merchandise.)

The CBP has addressed the issue of whether services performed abroad are necessary for the production of imported merchandise in several rulings. They include the following rulings.

In HQ 546054 (October 23, 1996), the services performed by the parent company of the importer, as identified in a services agreement and in expense reports, were held to be part of the development of the imported merchandise and necessary for the production of the imported merchandise by overseas third-party manufacturers. Services identified in the agreement included: review technical development issues and technical problems that the manufacturers may have in complying with design and development requests of the importer; confirm the specifications agreed to between the importer and the manufacturers; evaluate trial samples at each stage of trial production, and work with the manufacturers and the importer when necessary; evaluate the final sample of the merchandise to be produced by the manufacturers; coordinate parent company’s service part composition list and furnish to the importer and the manufacturers a list of stock numbers; and attend the manufacturers’ trial mass production run to determine if the goods were made in conformity with the agreed upon design. Services identified in the expense reports included: evaluation tests and reliability tests which preceded the decision to proceed further with the production process; confirmation of specifications, review of approved parts and identification of problems to be resolved before taking the next step in the production process; review of drawings for certain operations, preparation of drawings of certain designs and approval of drawings of the merchandise; and inspection of shipments and identification of the problems in instances where the products failed inspection.

In HQ 546511 (April 15, 1999), it was held that the fact that payments were made for footwear design, creation, development and production supported a finding that the design work in question formed part of a design process necessary for and leading to the production and importation of those goods.

In HQ 547643 (February 13, 2002), it was held that designing, developing fashion trends and color palettes, arranging for the production of samples, providing specifications regarding fabric, style, flat sketches and sizing, and determining the best manufacturer for production are product development services that are necessary for the production of the merchandise (but were not assists in this instance because they were not performed outside the United States).

In HQ 548368 (December 24, 2003), it was held that various design-related services provided were necessary for the production of the imported apparel: activities that concern research, selection or approval of the imported goods' component materials; creation or design of styles and designs of the imported products, review and approval of any changes to be made to the products and review and approval or disapproval of samples of the imported products. These actions all offered significant assistance to the overall production of the garment.

Clearly, in light of the above, services performed abroad that involve engineering, development, artwork, and plans and sketches and that are necessary for the production of the imported merchandise are considered to be assists when paid for by the buyer of the merchandise.

With respect to quality control services, they generally do not constitute an assist within the meaning the value law as set forth in 19 U.S.C. § 402(h). See 546511 (April 15, 1999). Quality control that involves production-related design and intimate involvement in the nature of the goods produced, however, may be dutiable either as part of the price actually paid or payable or as an assist. See HQ 547006 (April 28, 1998).

Testing Services

With respect to testing, testing may constitute one of the enumerated assists if the testing (1) is supplied directly or indirectly, free of charge or at a reduced cost, by the buyer of the imported merchandise for use in connection with the production or the sale for export to the United States of that merchandise and (2) is essential to the production of that merchandise. See 19 U.S. C. 1401a(h)(1)(A) and see generally HQ 544508 (June 19, 1990); HQ 545170 (October 27, 1994); and HQ 545500 (March 24, 1995).

Fringe Benefits

With respect to fringe benefits for employees whose services constitute assists, in addition to the wages paid to or received by those employees, the cost of the fringe benefits paid to or received by the employees would also be included in the value of the assists. This is because the fringe benefits, just like the wages, are part of the compensation paid to the employees for their services. Therefore, they are part of the cost of the assists to the buyer when the assists are furnished by the buyer to the manufacturer abroad.

Apportionment of Assists

With respect to the apportionment of the cost of a service found to constitute an assist, any apportionment must be made in accordance with the regulations set forth in the Customs Regulations (19 CFR § 152). Those regulations provide, among other things, that if the anticipated production is only partially for exportation to the United States, the method of apportionment will depend upon the documentation submitted by the importer. Therefore, in a case where only a part of a service constituting as assist is related or dedicated to the merchandise exported to the United States, in order to apportion the assist on that basis, the importer will need to provide documentation to the port to show or establish satisfactorily (1) those amounts or percentages of the services related or dedicated to merchandise exported to the United States and (2) those amounts or percentages of the services related or dedicated to merchandise exported to other than the United States. See 19 CFR § 152.103(e). See also HQ 545500 (March 24, 1995).

Conclusions with Respect to the Issues Presented

1. Technical Designer

In the instant case, upon review of the information submitted, it is clear that the various and numerous duties performed by the technical designer are part of the development of the merchandise and are necessary for the production of that merchandise (e.g., responsible for creation of product specifications and fit execution from concepts through production that accurately reflect design intent and achieve correct construction and fit). See, e.g., HQ 546054 (October 23, 1996). Therefore, these services constitute an assist.

2. Technical Design Manager

In the instant case, upon review of the information submitted, it is clear that the various and numerous duties performed by the technical design manager are part of the development of the merchandise and are necessary for the production of that merchandise (e.g., manage a team of technical designers in fit development and execution from concepts through production that accurately reflect and achieve correct fit for Brand and Product Group; plan, establish and monitor workflow to ensure timely delivery of product specifications, fit approvals and communications; create product specifications; work closely with the Planner to deliver products that are reproducible and meet wholesale/retail goals). See, e.g., HQ 546054 (October 23, 1996). Therefore, these services constitute an assist.

3. Quality Engineer/Quality Control Coordinator

In the instant case, based on the information submitted, it would appear that the quality engineer/quality control coordinator involves duties that are not necessary for the production of the imported merchandise. Accordingly, these services do not constitute an assist.

4. Secondary Testing

In the instant case, in view of the fact that the secondary testing is only conducted subsequent to production at a third-party testing facility on a small percentage of the products and only a portion of those product found to be faulty or defective after being tested are sent back to the manufacturer to be corrected, we conclude that this testing is not necessary for the production of the imported merchandise. Therefore, the secondary testing does not constitute an assist.

5. Fringe Benefits

In the instant case, as indicated above, with respect to fringe benefits for employees whose services constitute assists, in addition to the wages paid to or received by those employees, the cost of the fringe benefits provided to the employees would also be included in the value of the assists. This is because the fringe benefits, just like the wages, are part of the compensation paid to the employees for their services. Therefore, they are part of the cost of the assist to Nordstrom when the assist is furnished by Nordstrom to Faconnable.

6. Apportionment of Assists

With respect to the apportionment of the cost of the services found to constitute an assist in the instant case, any apportionment must be made in accordance with the regulations set forth in the Customs Regulations (19 CFR § 152). As indicated above, in order to apportion these assists on the basis of those services related or dedicated to the production of merchandise exported to the United States, the importer will need to provide documentation to the port to show or establish satisfactorily (1) those amounts or percentages of the services related or dedicated to merchandise exported to the United States and (2) those amounts or percentages of the services related or dedicated to merchandise exported to other than the United States. See 19 CFR § 152.103(e). See also HQ 545500 (March 24, 1995).

Please note that for purposes of this ruling we have assumed that transaction value is the proper basis of appraisement. In view of the fact that Faconnable, S.A.S. is a wholly owned subsidiary of Nordstrom, Inc., they are related parties under 19 U.S.C. 1401a(g). Therefore, the transfer price between the two parties is acceptable for transaction value purposes if it meets one of the tests set out in 19 U.S.C. 1401a(b)(2)(B). We do not have enough information in the file to determine whether one of the tests has been met.

HOLDING:

1. Technical Designer: The services performed by the technical designer constitute assists.

2. Technical Designer Manager: The services performed by the technical designer manager constitute assists.

3. Quality Engineering/Quality Control Coordinator: The services performed by the quality engineering/quality control coordinator do not constitute assists.

4. Secondary Testing: The secondary testing does not constitute an assist.

5. Fringe Benefits: The fringe benefits paid to or received by the technical designer and the technical design manager are included in the value of the assists.

6. Apportionment of the Assists: The assists can be apportioned on the basis of the percentage or amount of the services related or dedicated to the specific merchandise exported to the United States if done in accordance with the requirements set forth in 19 CFR § 152.103(e), and provided the documentation discussed above is provided to the port.

A copy of this ruling letter should be attached to the entry documents filed at the time the goods are entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.

Sincerely,

Virginia Brown, Chief
Value Branch

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