Dutiability of Payments Under Technical Assistance Agreement

HQ H047284 June 22, 2009 VAL OT:RR:CTF:VS H047284 EE CATEGORY: Valuation John Donohue Thorp, Reed & Armstrong, LLP 400 Market Street, Suite 200 Philadelphia, PA 19106-2535 RE: Dutiability of Payments Under Technical Assistance Agreement Dear Mr. Donohue: This is in reply to your letter, dated December 9, 2008, on behalf of Subaru of America (“SOA”), concerning the dutiability of certain payments made by SOA to its parent company, Fuji Heavy Industries (“FHI”) pursuant to a Technical Assistance Agreement. The request for ruling arose in connection with a focused assessment audit conducted by the Boston office of the Regulatory Audit Division in 2004. FACTS: SOA, headquartered in Cherry Hill, New Jersey, is an importer of automobiles, replacement and service parts, and automotive accessories. FHI, located in Tokyo, Japan, is SOA’s parent company. You state that certain automotive accessories for use in Subaru automobiles which are offered for sale in the U.S. are both developed and produced in the U.S. In some instances, certain accessories are developed for the account of SOA and are imported by SOA from Canada, and may, in the future, be imported from other countries. In 2006, SOA and FHI entered into two agreements related to the development and production principally in the U.S. of certain automotive accessories for use in Subaru automobiles which are offered for sale in the U.S. You have submitted a copy of the two agreements. The first of these is a “Memorandum for Accessory Development.” The second is a “Technical Assistance Agreement.” You also submitted copies of purchase agreements between SOA and its Canadian manufacturers with your letter dated April 1, 2009. The Memorandum for Accessory Development provides that FHI “shall provide the technical support to SOA’s design and development of Accessories in the accordance with the terms and conditions of the Technical Assistance Agreement.” Memorandum for Accessory Development, Art. 1.3. Unless otherwise agreed, SOA has full responsibilities for all related costs of the development of accessories. Memorandum for Accessory Development, Art. 1.4. The Technical Assistance Agreement provides that FHI will perform certain technical assistance concerning the development of accessories. The Technical Assistance Agreement is only applicable to those articles not purchased from FHI or Subaru Europe. Technical Assistance Agreement, Art. 1.2. Pursuant to Article 2.2 of the Technical Assistance Agreement, FHI will provide the technical assistance within the following scope: Quality evaluation and technical instruction for the Accessories classified in quality control rank (“QC Rank”) A (Accessories which will affect safety standard), B (Accessories which will affect Motor Vehicle’s function, Motor Vehicle performance and/or Motor Vehicle itself) and C (Accessories which will affect Motor Vehicle’s appearance and design), including, but not limited to evaluation on QC Rank, pre-arrangement and serviceability in the drawing phase, evaluation on trial products in 1st prototype phase, evaluation on products in 3rd prototype phase and final evaluation with customer’s viewpoint in CAP vehicle phase. QC Rank D (Accessories which will not affect Motor Vehicle itself) evaluation on installation with 3rd prototype vehicle phase. Evaluating each Accessory itself and conditions as it is installed on the Motor Vehicles, including total vehicle performance evaluation serviceability to functional Accessories ranked as A, B and C in 3rd prototype vehicle. Submitting to SOA preliminary reports within three (3) weeks and final reports within a reasonable time frame (six weeks) in the form of a written report in English for each Accessory evaluated. All the reports must be received by SOA before FHI requests the payment as set forth in Article 4. Providing SOA with technical improvement instruction in 3rd prototype vehicle by both preliminary and final reports. Providing SOA with the Proprietary Information indispensable to the development of the Accessories, which is possible for FHI to provide in accordance with Article 5 and 6. Fabricating Motor Vehicles, their components or cut models of Motor Vehicles. Per Article 7.2, “SOA may communicate the Proprietary Information provided by (FHI) to its employees, officers, subcontractors and suppliers to the extent necessary for the Development; provided, however, that each person to whom such Proprietary Information is communicated shall have agreed in writing to be bound by the same obligations as defined in this Article.” Technical Assistance Agreement, Art. 7.2. The term “Proprietary Information” means all information and knowledge owned or controlled by FHI, including, but not limited to, suggestions, instructions, drawings, photographs, specifications, reports, data sheets, memoranda, models, know-how, technical information, and/or trade secrets relating to the Technical Assistance and Results contemplated hereunder. Technical Assistance Agreement, Art. 1.8. Similarly, the purchase agreements between SOA and its Canadian manufacturers state that: Purchaser (SOA) has created and developed certain plans, drawings, specifications and requirements which incorporate various trade secrets as well as other improvements and modifications owned by Purchaser which make the Product Units particularly suitable for installation and use in Subaru vehicles. Seller further acknowledges that such trade secrets, improvements and modifications constitute Purchaser’s proprietary information and that they have been disclosed to the Seller on a confidential basis for the limited purpose of manufacturing Product Units conforming to Purchaser’s plans, specifications, and requirements. As compensation for FHI’s services, SOA will pay FHI a quarterly fee based on a percentage of the sales of SOA-developed accessories. Technical Assistance Agreement, Art. 4.1. The Technical Assistance Agreement is limited in duration to a one-year term with an automatic renewal on a yearly basis. Technical Assistance Agreement, Art. 9.1. Pursuant to 19 C.F.R. § 177, you seek a ruling on the dutiable status of payments remitted by SOA to FHI under the terms of the Technical Assistance Agreement. ISSUES: The issues presented are: (1) whether certain payments made by SOA to FHI under the Technical Assistance Agreement related to accessories produced in the U.S. are dutiable under 19 U.S.C. § 1401a(b); and (2) whether certain work performed by FHI under the Technical Assistance Agreement related to accessories imported by SOA from Canada or elsewhere constitutes an assist such that the value of the work is included in transaction value as an addition to the price actually paid or payable. LAW AND ANALYSIS: Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. § 1401a). The preferred method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. The additions include: the packing costs and any selling commissions incurred by the buyer with respect to the imported merchandise; the value, apportioned as appropriate, of any assist; 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 U.S.; and the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller. 19 U.S.C. § 1401a(b)(1)(A)-(E). If, for any reason, sufficient information is not available with respect to the additions to the price actually paid or payable, the transaction value of the imported merchandise is treated as one that cannot be determined. 19 U.S.C. § 1401a(b)(1). However, transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain “test values.” 19 U.S.C. § 1401a(b)(2)(B). You state that the buyer and the seller of the imported merchandise are unrelated. Therefore, we assume, for the purposes of this ruling, that transaction value is the appropriate basis of appraisement. Merchandise Produced in the U.S. In the instant case, certain accessories for automobiles sold in the U.S. market are developed and produced in the U.S. Since these accessories are produced in the U.S., they do not constitute imported merchandise. Accordingly, the payments made by SOA to FHI under the Technical Assistance Agreement related to accessories produced in the U.S. are not dutiable under 19 U.S.C. § 1401a(b). Merchandise Imported into the U.S. from Canada or Other Countries 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)(A). We presume that all payments made by the buyer to the seller, or a party related to the seller, are part of the price actually paid or payable. Generra Sportswear Co. v. United States, 905 F.2d 377, 380 (Ct. Int’l Trade 1990) (holding that so long as quota payments were made to the seller in exchange for merchandise sold for export to the U.S., they “properly may be included in transaction value, even if (they represent) something other than the per se value of the goods”)). However, this presumption may be rebutted by evidence which clearly establishes that the payments are completely unrelated to the imported merchandise. Chrysler Corporation v. United States, 17 Ct. Int’l Trade 1049, 1055-1056 (1993). In the instant case, the payments at issue are made by SOA in consideration for technical assistance provided by FHI. As previously noted, FHI and SOA are related, the former being SOA’s parent company. However, neither is related to any of the suppliers of those goods to which the Technical Assistance Agreement applies. Since the payments at issue are made to FHI which is neither a seller of the merchandise nor a party related to the seller, we find that they are not included in the price actually paid or payable for the imported merchandise in accordance with Generra. See, e.g., Headquarters Ruling Letter (“HQ”) H024980 dated July 22, 2008; HQ W548547 dated March 7, 2006. Despite having concluded that the payments at issue are not part of the price actually paid or payable, it still remains to be determined whether they should be added to the price actually paid or payable. One of the statutory additions to “the price actually paid or payable” is “the value, apportioned as appropriate, of any assist.” The term “assist” is defined in 19 U.S.C. § 1401a(h)(1)(A) as follows: 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: (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. In the instant case, FHI provides technical support to SOA’s design and development of accessories in accordance with the Technical Assistance Agreement. Memorandum for Accessory Development, Art. 1.3. This comprises evaluation of the accessories for quality, function and appearance through all phases of production from drawing through vehicle phase and reporting the findings to SOA. As previously noted, FHI provides SOA certain proprietary information which includes all information and knowledge owned or controlled by FHI including suggestions, instructions, drawings, photographs, specifications, reports, data sheets, memoranda, models, know-how, technical information, and/or trade secrets. This work falls within the scope of the elements described in section 1401a(h)(1)(A)(iv). The work in question is supplied indirectly by the buyer’s parent company (FHI), free of charge, and is undertaken outside the U.S. The only remaining issue to be resolved in this case is whether, as prescribed in 19 U.S.C. § 1401a(h)(1)(A)(iv), the work provided by FHI is necessary for the production of the imported merchandise. Here, the submissions clearly support the conclusion that the foreign manufacturers could not produce the accessories without the technical assistance provided by FHI. Article 2.2(e) of the Technical Assistance Agreement states that the proprietary information is “indispensable” to the development of the accessories. Similarly, the purchase agreements between SOA and its Canadian manufacturers state that SOA has created and developed certain plans, drawings, specifications and requirements which incorporate various trade secrets as well as other improvements and modifications which make the merchandise particularly suitable for installation and use in Subaru vehicles. Additionally, Article 7.2 of the Technical Assistance Agreement states that certain proprietary information provided by FHI may be communicated by SOA to its manufacturers to the extent necessary for the development of the accessories. The purchasing agreements similarly indicate that certain proprietary information is disclosed to the foreign manufacturers on a confidential basis for the purpose of manufacturing the accessories conforming to SOA’s plans, specifications, and requirements. Consequently, the work provided by FHI is integral and necessary for the production of the accessories that SOA ultimately purchases from the foreign manufacturers. Accordingly, based on the information submitted, we find that the work performed by FHI under the Technical Assistance Agreement related to accessories imported by SOA from Canada or elsewhere constitutes an assist within the meaning of 19 U.S.C. § 1401a(h)(1)(A)(iv). Please note that the value of an assist should be apportioned in a reasonable manner appropriate to the circumstances and in accordance with generally accepted accounting principles; however, the actual method of apportionment accepted by CBP will depend on the documentation submitted by the importer. 19 C.F.R. § 152.103(e)(1). HOLDING: Based on the information presented, the payments made by SOA to FHI under the Technical Assistance Agreement related to the accessories produced in the U.S. are not dutiable under 19 U.S.C. § 1401a(b). The work performed by FHI under the Technical Assistance Agreement related to the accessories imported by SOA from Canada or elsewhere constitutes an assist under 19 U.S.C. § 1401a(h)(1)(A)(iv). The value of the assist, as represented by the technical assistance fee, is included in transaction value as an addition to the price actually paid or payable. Sincerely, Monika R. Brenner Chief Valuation & Special Programs Branch