United States International Trade Commision Rulings And Harmonized Tariff Schedule
faqs.org  Rulings By Number  Rulings By Category  Tariff Numbers
faqs.org > Rulings and Tariffs Home > Rulings By Number > 2004 HQ Rulings > HQ 548211 - HQ 562821 > HQ 548566

Previous Ruling Next Ruling
HQ 548566




October 19, 2004

RR:IT:VA 548566 RFC

CATEGORY: VALUATION

Mr. Stephen M. Zelman
888 Seventh Avenue, Suite 4500
New York, New York 10106

RE: Transaction Value; Assists; Design Work; Patterns for Garments

Dear Mr. Zelman:

This letter is in reference to your July 19, 2004, letter on behalf of Tahari, Ltd., requesting an advance ruling from the Bureau of Customs and Border Protection (CBP). The request concerns (1) the proper method of appraisement for certain sample or prototype garments and (2) whether the patterns created for certain sample or prototype garments constitute an assist under the applicable law when sent to a foreign manufacturer to produce garments that are subsequently imported into the United States.

In your letter, you also request an advance ruling on whether certain prototypes for garments imported from Italy are properly classified as such under subheading 9817.85.01, HTSUS. That request is being handled separately by the Special Classification Branch of this office.

In addition to the importer’s July 19, 2004, request and submission, a telephone conference was conducted between the importer’s representatives and this office on October 18, 2004.

Tahari requested confidential treatment for certain information submitted in connection with its request for an advance ruling. As it conforms to the requirements of 19 CFR § 177.2(b)(7), the request is approved with the exception of providing confidential treatment to the name of the importer (as discussed during the October 18, 2004, telephone conference, the importer’s name will not receive confidential treatment). The information determined to be confidential will be contained within brackets in this advance ruling, and it will be redacted from published versions of the ruling.

FACTS:

In the letter of request, the facts are presented as follows:

Tahari is an internationally known wearing apparel designer, importer and distributor of ladies’ higher quality wearing apparel. The clothing that it sells is at the cutting edge of fashion. The company is well known for its meticulous attention to fit, styling and detail.
o o o

Tahari is contemplating entering into a contract with an unrelated Italian company, [ ], for the production of prototype garments by the latter. A draft of the contract is attached as Exhibit (A). Under its terms, Tahari will forward [ ] sketches of new styles which are designed by company designers at its New York offices, and detailed specifications as to fabric construction, fiber content, and color, which are also developed by Tahari staffers in New York. (The specifications are written in Italian by a Tahari staffer who is fluent in that language.) Tahari will also forward illustrations of garments so as to better instruct [ ] of the look and feel it seeks. A copy of these materials relating to a representative style is attached as Exhibit (B).
o o o

[ ] will make one size 6 garment by hand cutting the fabric and hand sewing each prototype garment. (Size 6 is the traditional size of wearing apparel models and is generally used in this country for evaluating fit of high-end wearing apparel.) When the prototype is sent to Tahari in New York, it will be evaluated and Tahari may decide it is unsuitable for its line, or may adopt it for commercial production, or may instruct [ ] to make specific modification(s). The latter process continues until Tahari decides whether to include the style in its line. The prototype is only used for such evaluation purposes and is never sold.

If the design is finally accepted for Tahari’s line, [ ] provides Tahari with the paper patterns it used in making the prototype. The paper patterns, used in connection with the single hand-made prototype, are modified by Tahari in New York to the extent necessary to convey specifications to be used in commercial production. (Tahari has a full staff of pattern makers in New York.) The patterns and other detailed specifications are supplied to factories in the Far East chosen for commercial production. These factories are unrelated to [ ] and [ ] has no involvement with their commercial production. All of the factories chosen to produce the styles in commercial quantities have considerable experience in garment production. All have the technical expertise to make the garments from a sketch and written and numerical specifications only. They all have pattern-making facilities and have the capability to make and grade patterns themselves. Exhibit (C) consists of the specifications and their modifications pertaining to a representative style, as prepared by Tahari’s New York staff and forwarded to the factory.

The factory first makes and ships Tahari a “counter sample,” made from limited sample yardage on hand or specifically purchased for this purpose. Tahari evaluates it for proportion, color and shading, balance and acceptability of the fabric. Based on this evaluation, Tahari often revises the garment’s specifications. Next, a “pre-production sample” is made by the factory. This sample incorporates all specification revisions and is made with the fabric that has been purchased in bulk in anticipation of commercial production. Again, the sample is evaluated in New York by Tahari and specifications may again be revised. Finally, a “reference sample” is made at the outset of commercial production. This is retained as the standard for the style.
o o o

[ ] is obligated under the contract to make a total of [ ] prototypes per year, of which [ ] are expected to be based on new Tahari styles and the balance will be modifications, per Tarhari’s instructions, of earlier prototypes. [ ] will be paid the sum of [ ] per year, in monthly installments, plus the cost of any fabric and trim it purchases for use in the prototypes. It is intended that the prototypes will be shipped under an invoice listing a cost of [ ] per piece plus the cost of the fabric.

In the draft agreement between Tahari and [ ] (entitled “Agreement for the Production and Purchase of Prototypes”), it states, in part, that:

Whereas, Tahari is engaged in the design, importation and sale of high fashion ladies’ wearing apparel (the “Merchandise”); and

Whereas, [ ] has the capacity and expertise to produce prototypes of garments reflective of designs for such high-end garments; and

Whereas, Tahari desires to engage [ ] to produced (sic) prototype garments in Italy based on Tahari’s designs and specifications;
o o o

1. [ ] shall, strictly on behalf of Tahari, produce high quality prototype garments by hand cutting fabric and hand sewing at its facility in Italy.
o o o

4. In the event Tahari decides to produce a particular style, [ ] shall provide Tahari with paper patterns of all panels that are sewn together to form the corresponding prototype. It is understood that such patterns are unfit for use as panels for the production of commercial quantities and [ ] makes no representation that they are fit for such use.
o o o

5. [ ] shall produce on average [ ] prototypes per month. [ ] shall produce one prototype of each style, and each prototyle shall be in a ladies’ US size 6 unless Tahari specifies otherwise. Of the [ ] prototypes, [ ] shall be garments based on new original designs and drawings furnished by Tahari and [ ] shall be modifications per Tahari’s instructions of previously produced prototypes. The modifications shall include but are not limited to changes in fabric use in or in the fit of the prototype.
o o o

7. For services rendered hereunder, it is agreed that Tahari shall pay to [ ] the sum of [ ] per year payable as follows: (a) monthly installments, .

8. All prototypes shall be invoiced to Tahari at a price of [ ] FOB Italy, i.e., equaling the contract amount payable divided by the number of prototypes to be supplied.

In a September 30, 2004, facsimile transmission to this office, you indicate the following:

The imported prototypes will not be re-exported to the manufacturer in the Far East that are chosen to make the style in commercial quantities. These prototypes are used only in this country strictly by Tahari for evaluation leading to a decision to include the style in the company line, modify it and then include it, or abandon the style.

There will have been an evolution in the manner patterns associated with the prototypes to be handled from that described in our submission. If and when a style is chosen for production, the patterns will be e-mailed by [ ] to Tahari. Tahari will download and print them in the U.S., and modify them if necessary. Modifications may be minor, having to do with changes to inch specifications, or may be more substantial, as where Tahari decides to use a different fabric, in which case where overall and relative dimensions of the panels may have to change (although the general nature and configuration of the patterns would be similar).

The patterns for styles chosen for commercial production would then be e-mailed to the manufacturers in the Far East, who download and print them. These patterns would not be used in commercial production but they would be used to make a counter sample, which is shipped to Tahari for evaluation and most usually modification. The modifications are forwarded by either in writing or in writing accompanied by a pattern which Tahari would have modified at its offices in the U.S. If a change in the pattern is necessary and this is not done by Tahari, it will be done by the Far Eastern manufacturers, who have their own pattern-making capability. When the counter sample is approved, a pre-production sample is made by the factory. That also may be modified by Tahari, with the procedures. When the pre-production sample is approved, a reference sample is made and commercial production commences.

Thus, the pattern from [ ], as modified by Tahari in New York, is not used in commercial production but rather several stages before that. For this reason it is our position that what is provided by [ ] it too far removed from the commercial production process to be considered an assist. It is not “used in the manufacture of the imported merchandise,” as required by statute in order to be deemed an assist. In response to your question as to whether the garments could be made without the [ ] patterns, the answer they are used by the buyer in its process of determining what its wishes to purchase. It is used by the seller in the manner written specifications issued by a buyer to a seller are needed. In order for a factory to produce a garment, it must know what the buyer wants to buy.

In an October 4, 2004, facsimile transmission to this office, you indicate, in part, that:

[B]efore commercial production can commence, “counter” and a “pre-production” samples are made. The patterns obtained from [ ] (modified if necessary by Tahari’s pattern makers in New York) are used in making the first counter sample. The making of the first counter sample is, however, several steps away from commercial production.

ISSUES:

1. Whether the merchandise under consideration may be appraised under transaction value.

2. Whether certain patterns for sample or prototype high-end garments are necessary for the production of the imported merchandise under consideration, and therefore constitute assists under 19 U.S.C. § 1401a(b)(1)(D).

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, codified at 19 U.S.C. §1401a. Section 402(b)(l) of the Trade Agreements Act of 1979 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.

With respect to the transaction value method of appraisement, the Trade Agreements Act of 1979 provides, in pertinent part, as follows:

(a) Generally

(1) Except as otherwise specifically provided for in this chapter, imported merchandise shall be appraised, for the purposes of this chapter, on the basis of the following: (A) The transaction value provided for under subsection (b) of this section.
o o o

(b) Transaction value of imported merchandise

(1) 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 equal to-- (A) the packing costs incurred by the buyer with respect to the imported merchandise; (B) any selling commission incurred by the buyer with respect to the imported merchandise; (C) the value, apportioned as appropriate, of any assist; (D) 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 (E) the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.

The price actually paid or payable for imported merchandise shall be increased by the amounts attributable to the items (and no others) described in subparagraphs (A) through (E) only to the extent that each such amount (i) is not otherwise included within the price actually paid or payable; and (ii) is based on sufficient information. If sufficient information is not available, for any reason, with respect to any amount referred to in the preceding sentence, the transaction value of the imported merchandise concerned shall be treated, for purposes of this section, as one that cannot be determined.

(2)(A) The transaction value of imported merchandise determined under paragraph (1) shall be the appraised value of that merchandise for the purposes of this chapter only if-- (i) there are no restrictions on the disposition or use of the imported merchandise by the buyer other than restrictions that-- (I) are imposed or required by law,
(II) limit the geographical area in which the merchandise may be resold, or (III) do not substantially affect the value of the merchandise; (ii) the sale of, or the price actually paid or payable for, the imported merchandise is not subject to any condition or consideration for which a value cannot be determined with respect to the imported merchandise; (iii) no part of the proceeds of any subsequent resale, disposal, or use of the imported merchandise by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment therefor can be made under paragraph (1)(E); and (iv) the buyer and seller are not related, or the buyer and seller are related but the transaction value is acceptable, for purposes of this subsection, under subparagraph (B).

19 U.S.C. § 1401a.

With respect to the transaction value method of appraisement, the Statement of Administrative Action to the Trade Agreements Act of 1979, provides, in pertinent part, that:

The primary method of customs valuation for imported merchandise shall be the transaction value. 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 items specifically enumerated in proposed Section 401(b)(1). The transaction value may be subject to special scrutiny and possible rejection in cases involving related parties and in cases where there are certain restrictions or other factors, as specified in proposed Section 402(b)(2)(A), which limit the acceptability of the transaction value. (Statute)

The price actually paid or payable shall be considered without regard to its method of derivation. It may be the result of discounts or increases, or may be arrived at through some formula, or may be the result of negotiations. The word “payable” refers to a situation in which the price has been agreed, but actual payment has not been made at the time of importation.
o o o

The price actually paid or payable is the total payment (exclusive of international freight, insurance, and other C.I.F. charges) made or to be made by the buyer to or for the benefit of the seller for the imported merchandise. (Statute) The payment may be made by way of letters of credit or negotiable instruments and may be made directly or indirectly.

Statement of Administrative Action, Trade Agreements Act of 1979, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 46-47.

The CBP regulations provide with respect to transaction value that:

In determining transaction value, the price actually paid or payable will be considered without regard to its method of derivation. It may be the result of discounts, increases, or negotiations, or may be arrived at by the application of a formula, such as the price in effect on the date of export in the London Commodity Market. The word ``payable'' refers to a situation in which the price has been agreed upon, but actual payment has not been made at the time of importation. Payment may be made by letters of credit or negotiable instruments and may be made directly or indirectly.

19 CFR §152.103(a)(1).

The legislative history to the Trade Agreements Act of 1979, as found in the Report of the House Committee on Ways and Means, states the following with respect to limitations on the use of transaction value:

New Section 402(b)(9) indicates those preconditions which must be met before transaction value is acceptable. These limitations pertain to certain restrictions on the disposition or use of the imported merchandise, conditions or considerations attaching to the sale or price of the imported merchandise for which a value cannot be determined with respect to the imported merchandise, proceeds from subsequent resale, disposal, or use of the merchandise which accrue to the seller, and the relationship between the buyer and seller. The Committee understands that the purpose of these limitations is to insure that a particular transaction is bona fide and “at arm’s length” before the transaction value standard will apply.

H.R. Rep. No. 317, 96th Cong., 1st Sess. 82 (1979).

One of the enumerated statutory additions is an “assist.” An assist 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:
o o o

(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)(1).

The CBP regulations define an assist as follows:

(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:
o o o

(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.

19 CFR § 152.102(a).

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).

Method of Appraisement

In the instant case, the initial question concerns whether the transaction value method is the proper method of appraisement for the prototypes. In order to determine whether transaction value method is the proper method of appraisement for the merchandise under consideration, the first question to be considered is whether there will be, in fact, bona fide sales between Tahari and [ ] as envisioned under the prospective transactions. As indicated above, under 19 U.S.C. § 1401a(b)(1), transaction value is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States.” See also 19 CFR § 152.103(b). For Customs purposes, a “sale” generally is defined as a transfer of ownership in property from one party to another for a consideration. See J.L. Wood v. U.S., 62 CCPA 25, 33; C.A.D. 1139 (1974); J.H. Cottman & Co. v. United States, 20 CCPA 344, T.D. 46114 (1932). See also H.R. Rep. No. 317, 96th Cong., 1st Sess. 82 (1979) (The limitations imposed on the use of the transaction value method of appraisement “is to insure that a particular transaction is bona fide and ‘at arm’s length’ before the transaction value standard will apply.”).

In determining whether a bona fide sale has taken place between a potential buyer and seller of imported merchandise, no single factor is determinative. Rather, the relationship is to be ascertained by an overall view of the entire situation, with the result in each case governed by the facts and circumstances of the particular case itself. See Dorf International, Inc. v. U.S., 61 Cust. Ct. 604, A.R.D. 245 (1968). Several factors may indicate whether a bona fide sale exists between a potential seller and buyer. In determining whether property or ownership has been transferred, the CBP considers whether the alleged buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, Customs may examine whether the alleged buyer paid for the goods, whether such payments are linked to specific importations of merchandise, and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HQ 545705 (January 27, 1995). Accordingly, in the instant case, as long as there is a bona fide sale between Tahari and [ ], transaction value is the proper method of appraisement for the imported prototypes and patterns.

As indicated above, in order for transaction value to be applicable, there must be a price paid or payable when the imported merchandise is sold for exportation to the United States. See 19 U.S.C. §1401a(b)(1). With respect to the price paid or payable, the CBP regulations and legislative history to the Trade Agreements Act of 1979, state as indicated above, in part, that it shall be considered without regard to its method of derivation. Moreover, the price paid or payable may be arrived at, among others, through negotiations, and the actual payment need not be made at the time of importation. See 19 CFR §152.103(a)(1) and Statement of Administrative Action, Trade Agreements Act of 1979, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 46-47.

In light of the above, as long as there exists a definite price actually paid or payable when the imported merchandise is sold for exportation to the United States, a transaction value can be determined. See 19 U.S.C. §1401a(b)(1); See also, e.g., HQ 547493 (March 14, 2002). In the instant case, not only does the draft agreement identify a specific amount of money that is to be paid on an annual basis (but made in monthly installments) for a specific number of prototypes that must be produced on a monthly basis (see paragraphs 5 and 7 of the draft agreement) but, as indicated above, paragraph 8 of the draft agreement explicitly states and requires that all prototypes shall be invoiced to Tahari at a price of [ ]:

All prototypes shall be invoiced to Tahari at a price of [ ] FOB Italy, i.e., equaling the contract amount payable divided by the number of prototypes to be supplied.

Accordingly, in the instant case, there exists a definite price actually paid or payable when the imported merchandise is sold for exportation to the United States. Therefore, transaction value is the proper method of appraisement for the prototypes produced and imported pursuant to the above-mentioned draft agreement.

It should be noted that the transaction value method of appraisement will not apply in the instant case if the sale of, or the price actually paid or payable for the imported merchandise, is subject to any condition or consideration for which a value cannot be determined for the merchandise. See 19 U.S.C. § 1401a(b)(2)(A) and 19 CFR 152.103(j). See also HQ 544317; Statement of Administrative Action, Trade Agreements Act of 1979, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981) at 46-47; and H.R. Rep. No. 317, 96th Cong., 1st Sess. 82 (1979).

Assist

As indicated above, an assist is an enumerated good 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.

With respect to garment patterns, the CBP has considered the dutiability of such patterns made outside the United States for use in making garments abroad that were later imported into the United States. These rulings provide guidance for use in interpreting the phases “used in connection with the production” and “necessary for the production of the imported merchandise,” as found in the Trade Agreements Act of 1979 and related regulations, with respect to whether such garment patterns constitute an assist. See 19 U.S.C. §1401a(h)(1) and 19 CFR § 152.102(a).

In HQ 542591 (September 18, 1981), an importer of women’s wearing apparel supplied foreign manufacturers with samples. In the ruling, it states, in pertinent part, that:

In conformity with[certain court decisions], we have ruled that if a manufacturer possessed the requisite technical expertise to produce the article and treated drawings as it would any narrative specifications, then the drawings would not be treated as assists (Case No. 61085, copy attached). On the other hand, where drawings or patterns were actually used to produce the imported articles, we have considered them to be assists. (Emphasis added.)

The same reasoning can be applied to the supplying of actual samples. If they convey technical information without which an article could be made, they were dutiable as assists. However, If the manufacturer is capable of producing the article without the samples and in fact, did not use them to manufacture the article, we would consider the samples to be analogous to narrative specifications and not an assist. (Emphasis added.)

In HQ 542830 (July 28, 1982), also published as C.S.D. 182-149, after a sample garment had been selected (working with a foreign manufacturer), the pattern for the sample was sent to a computer grading service to prepare graded patterns for submission to the foreign manufacturers. The importer submitted statements from the various foreign manufacturers attesting to their ability to grade patterns for the importer, if desired, and that they do grade patterns for other companies. In the ruling, it states, in pertinent part, that:

The record shows that the garments imported into the United States generally reflect style changes and/or modifications of existing garments or designs that are readily available to the public or to the industry for acquisition or duplication. Thus, the modified designs, etc., are in the nature of specifications.

Furthermore, the record also shows that the manufacturers in this instance have the capability to produce the desired garments without the necessity of using the photographs, sketches, designs, prototypes and patterns furnished by the importer. While these specifications reflecting the desired styling could have been conveyed orally to the manufacturers, it is apparent that the process of communication is facilitated by the use of photographs, designs, samples and patterns, which ensure that the garment will be produced to the importer's exact specifications.

Under these circumstances, we hold that the designs, samples, prototypes, etc., furnished to the manufacturers are not dutiable assists, but rather are specifications reflecting instructions to the manufacturer as to what to produce, but not how to produce, the particular garment.

We do not hold that all patterns, designs, samples, etc., furnished to a foreign manufacturer for the production of apparel are non-dutiable. In instances where the pattern or design is unique, and not a minor modification of an existing style, and where the manufacturer cannot produce the merchandise without the pattern, design, etc., dutiable consequences will result. (Emphasis added.)

In HQ 543064 (June 1, 1983), which is cited in your request, a paper pattern and narrative description were provided to a foreign manufacturer of garments. The narrative description was apparently made in the United States whereas the paper pattern was made outside the United States with the assistance of the importer’s employees in the United States. The importer contended that the foreign manufacturer had extensive experience in the production of wearing apparel and the technical expertise to make the garments in question from a sketch or a narrative description only. Signed statements were submitted from the prospective manufacturers stating that they employ one or more pattern makers and are qualified to make and grade patterns. The importer then further contended that the patterns and related pattern-making activities undertaken outside the United States were not necessary for the production of the garments. In the ruling, which relied on the decision in HQ 542830, it states, in part, that:

The following steps [are] involved in the design and pattern-making process. The importer’s designer conceptualizes the style of the garment, selects the fabrics and colors to be used and prepares a sketch of the desired garment. The styles produced are not highly original or avant-garde, but reflect popular tastes and the company’s understanding of what consumers will purchase.

From the sketch, a draper makes a muslin prototype garment which the designer reviews. A sewer translates the muslin prototype into a sample garment in the actual fabric to be used. The sample garment is then fitted on a human model, and the designer marks corrections, adjustments, and styling refinements to the garment with pins and paper notations. Lastly, the production manager prepares a narrative description which will accompany the garment.

All this work is accomplished by the importer’s employees in the United States. The importer intends to have some of the remaining pattern-making functions performed in Hong Kong. The sample garment (with corrections and notations attached) and the narrative description will be sent to the importer’s Hong Kong agent who will supervise the remaining pattern-making activities. A pattern maker will disassemble the garment, make a paper pattern, and cut a new garment from the paper pattern. A sewer will assemble the garment, which will then be sent to the United States for the designer’s review. It will be fitted on an American model, and any final corrections will be noted on pieces of paper attached to the garment. These changes will be reflected in the final narrative description prepared by the production manger.

The garment and narrative description will be returned to the pattern-maker in Hong Kong, who will make the corresponding corrections and refinements to the paper pattern. The paper pattern and the narrative description will then be provided to the manufacturer as an aid in the production of the garment.

The importer provides only one pattern in a single standard size, and the manufacturer must grade the pattern for multiple sizes. Each manufacturer has extensive experience in the production of a wearing apparel and has the technical expertise to make the garments from a sketch or narrative description only. You submit signed statements from the prospective manufacturers stating that they employ one or more pattern makers and are qualified to make and grade patterns.

You contend that the patterns and related pattern-making activities to be undertaken in Hong Kong are not dutiable as assists since they are not necessary for the production of the garments in question. Rather, the importer provides the pattern to the manufacturer in order to ensure that the final garment corresponds to the designer’s fashion concept and the company’s understanding of what will sell in the American market. The pattern is a specification which communicates to the manufacturer the dimensions, design effects, and styling details of the garment to be produced.
o o o

[T]he garment design and production process[in the instant case]are very similar to those described in C.S.D. 82-149. In that case, we decided that certain patterns, sketches, and prototype garments were not assists because they instructed the manufacturer what to produce rather than how to produce it. We find that the same reasoning obtains in this case. Each of the prospective manufacturers is capable of making and grading patterns. We therefore conclude that the pattern and the pattern-making functions to be performed in Hong Kong are not necessary for the production of the imported merchandise and therefore, under the stated facts, will not be dutiable as assists.

After reviewing the above-mentioned rulings, we believe that the rule articulated in HQ 542830 (published as C.S.D. 182-149) offers the correct and most complete interpretation of the law pertaining to assists with respect to goods made abroad that are supplied free of charge or at a reduced cost by an importer to a foreign garment manufacturer. That is, if a foreign garment manufacturer cannot produce or manufacturer merchandise without an importer’s designs, samples, patterns, etc. that are made abroad, such designs, samples, patterns, etc. should be included in the dutiable value of the imported merchandise.

Upon review, we conclude that the record in the instant case does not contain sufficient information and documentation to establish that the foreign manufacturer could make the garments without the use of the patterns (i.e., the use of the patterns are necessary for the production of the imported merchandise). As indicated above, the patterns are, in fact, used to make the first or initial sample (“counter sample”) from which the final sample is made:

The patterns obtained from [ ] (modified if necessary by Tahari’s pattern makers in New York) are used in making the first counter sample.

There is nothing in the record to establish that the imported merchandise could actually be made without the patterns. Additionally, any modifications made to the patterns by Tahari prior to sending them to the foreign manufacturers appear to be minor rather than material in nature.

With respect to the above-mentioned decision, we note the following in support of that decision: First, as indicated in the draft agreement and request, the merchandise is “high fashion ladies’ wearing apparel.” [ ], an Italian company, has particular expertise in producing prototypes of such garments; and, as indicated in Tahari’s request, has “special expertise in making prototype garments by hand.” By the terms of the draft agreement, “[ ] shall, strictly on behalf of Tahari, produce high quality prototype garments by hand cutting fabric and hand sewing at its facility in [ ].” The prototypes from which the patterns are made are not minor modifications of existing styles but are prototypes of new styles and modifications of previously produced prototypes (which themselves are presumably new styles). See paragraph 5 to the draft agreement (Some of the prototypes “shall be based on new original designs and drawings furnished by Tahari” whereas others shall be based on “modifications per Tahari’s instructions of previously produced prototypes.”). Moreover, as indicated in your submission, the clothing Tahari “sells is at the cutting edge of fashion” and “[t]he company is well known for its meticulous attention to fit, styling and detail.” Accordingly, the first rule articulated in HQ 542830 for determining when patterns constitute a dutiable assist has been satisfied: The pattern is unique and not a minor modification of an existing style. Moreover, in contrast, the goods in both HQ 542830 and HQ 543064 are not stated to be new or unique styles. In HQ 542830, the goods are described as follows:

The record shows that the garments imported into the United States generally reflect style changes and/or modifications of existing garments or designs that are readily available to the public or to the industry for acquisition or duplication.

In HQ 543064, the goods are described as follows:

The styles produced are not highly original or avant-garde, but reflect popular tastes and the company’s understanding of what consumers will purchase.

Second, in HQ 542830 and HQ 543064, evidence was submitted with respect to the ability of the foreign manufacturers to make and grade patterns. In HQ 542830, the importer submitted evidence in the form of statements from the various foreign manufacturers attesting to their ability to grade patterns for the importer if desired (the article that was made abroad and supplied to the foreign manufacture to make the imported garments under consideration). In HQ 543064, the importer submitted evidence in the form signed statements from the prospective foreign manufactures stating that they employ pattern makers that are qualified to make and grade patterns. In the instant case, no such evidence was submitted in support of the assertion by the importer that the foreign manufacturers “all have pattern-making facilities and have the capability to make and grade patterns themselves.” In light of the expertise of [ ], it would appear unlikely that the foreign manufacturers who will produce the garments have the necessary expertise to produce “high-quality prototype garments” and patterns thereof of the same nature and quality as [ ]. We conclude that [ ] was, in fact, retained by Tahari because of its expertise in making prototype garments and patterns thereof.

In the instant case, you contend that the patterns made by [ ] are not assists because they are not necessary for the production of the imported merchandise insofar as “sample” garments are made from the patterns before a final sample is made for use as the standard of the style. We disagree with this contention. As indicated above, under the Trade Agreements Act of 1979, an assist is an enumerated good 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. See 19 U.S.C. §1401a(h)(1). In addition, with respect to development, artwork, design work and plans and sketches, an assist will be dutiable if undertaken outside the United States and necessary for the production of the imported merchandise. Id. Therefore, any enumerated good or service that is used in connection with and is necessary for the production of the imported merchandise would constitute a dutiable assist if undertaken outside the United States and supplied by directly or indirectly and free of charge or at a reduced cost by the buyer of the imported merchandise to the foreign manufacturer.

In light of the above, in the instant case, the only requirements for finding the pattern to be a dutiable assist are that it be used in connection with and be necessary for the production of the imported merchandise (as the patterns were undertaken outside of the United States and supplied free of charge to the foreign manufacturers). Clearly, if the patterns must be used by the foreign manufacturer to make samples that are then used to make the final product that is imported into the United States, the patterns are used in connection with and are necessary for the production of the imported merchandise. There is no limitation or restriction on when in the production process a good or service must be used before it is considered to be an assist. It does not matter what intervening activities occur between a foreign manufacturer and an importer from the time the pattern is used to make the first sample garment to the time the final garments are made that will be imported into the United States, as this is all part and parcel of the “production” of the imported merchandise. As long as the merchandise that is imported into the United States could not be made without the use of the pattern, the pattern is logically necessary for the production of the imported merchandise.

In conclusion, the record does not contain sufficient information and documentation to establish that the imported garments could be made by the foreign manufacturer without the patterns of the prototypes. Therefore, the patterns are necessary for the production of the imported garments. Accordingly, the patterns of the prototypes constitute dutiable assists under 19 U.S.C. § 1401a(b)(1)(D) as they are necessary for the production of the garments that are subsequently imported into the United States.

HOLDING:

1. Transaction value is the proper method of appraising the prototypes sold by [ ] to Tahari.

2. The above-mentioned patterns of the prototypes constitute dutiable assists under 19 U.S.C. § 1401a(b)(1)(D) as they are necessary for the production of the garments that are subsequently imported into the United States.

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

Previous Ruling Next Ruling

See also: