Dutiability of Engineering Costs Associated With the Purchase of Color Picture Tube Manufacturing Equipment

HQ 544693 September 10, 1991 CLA-2 CO:R:C:V 544693 CATEGORY: Valuation W.G. Carroll, Inc. 2 Whitaker Street Suite 201 Savannah, Ga 31402 RE: Dutiability of Engineering Costs Associated With the Purchase of Color Picture Tube Manufacturing Equipment Dear Ms. Caldwell: This is in response to your letter dated April 1, 1991, requesting a ruling on the dutiability of certain engineering costs associated with the purchase of color picture tube manufacturing equipment from ------------., Japan. FACTS: You have submitted a sales contract between ------- -----------------s (USA), Inc., (hereinafter referred to as the "buyer"), and a Japanese company, ------- Ltd., (hereinafter referred to as the "seller"), outlining the terms and conditions of the transaction as well as the list of equipment. According to clause 2-1 of the contract, the buyer's issuance to the seller of purchase order sheets for equipment and the seller's return acknowledgement of the purchase order sheets to the buyer will be the actual execution of the contract. Clause 3-1 of the contract states that the price for the "equipment" shall be $----------- on CIF ----------, S.C., buyer's plant site basis, with an additional $---------. for dispatch of "engineers", as defined in clause 8. Clause 3-2 provides that payments from the buyer to the seller shall be made in U.S. dollars by telegraphic transfer to the seller's account in -----, Japan. Clause 5-3 states that title to "equipment" and risk of damage to or loss of "equipment" shall pass to the buyer when the "equipment" is delivered on board of vessels at Japanese ports in accordance with the provisions of Incoterms 1980. Clause 7-2 provides for engineers to be sent from the seller to the buyer after the installation and adjustment of the "equipment" for inspecting the mechanical, electrical, and systematic functions of the equipment for compliance with specifications. Clause 8 of the contract states that the seller shall dispatch approximately --- engineers for a period of ----0 man- days to the buyer's plant to supervise the buyer's installation and adjustment, tests of the equipment and to give guidance to the buyer for the handling, operation and maintenance of both the "equipment" of this contract and the equipment to be supplied under another contract (not present in the file). The seller shall bear the air fare expenses for the engineers, while the buyer will incur the costs for hotel accommodations. ISSUE: Whether engineering costs associated with post-importation services are part of transaction value. LAW AND ANALYSIS: The buyer and seller are related parties as that term is defined in section 402(g) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(g)). For the purposes of this prospective ruling request, we are assuming, without deciding, that transaction value, the preferred method of appraisement, will be the applicable basis of appraisement given the relationship of the parties. The transaction value of imported merchandise is defined in section 402(b) of the TAA as "the price actually paid or payable for the merchandise when sold for exportation to the United States," plus certain enumerated additions. The "price actually paid or payable" is more specifically defined in section 402(b)(4)(A) 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. Section 402(b)(3) of the TAA provides: (3) The transaction value of imported merchandise does not include any of the following, if identified separately from the price actually paid or payable and from any cost or other item referred to in paragraph (1): (A) Any reasonable cost or charge that is incurred for- (i) The construction, erection, assembly, or maintenance of, or technical assistance provided with respect to, the merchandise after its importation into the United States;... According to clauses 7 & 8 in the submitted contract, the engineering services to be provided by the seller to the buyer are services to supervise the installation, adjustment, to perform tests, and give guidance for the handling, operation and maintenance of the equipment, and are of the type provided for in section 402(b)(3)(A)(i) above. Therefore, we are of the opinion that payments for these services, if separately identified from the price of the merchandise, would be deductible from transaction value. Please note, the reasonableness of any cost or charge incurred is a decision that will be made by the appraising officer at the port of entry. HOLDING: Engineering costs associated with the purchase of equipment from a related seller, if identified separately on the sales invoice or on the purchase order sheets (which according to clause 2-1 serve as the actual execution of the contract), are not included in the transaction value of the imported merchandise. These costs are considered as 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." Sincerely, John Durant, Director Commercial Rulings Division