Assists; software conversion

HQ H205579 August 2, 2012 OT:RR:CTF:VS H205579 KSG Mr. M. Jason Cunningham Sonnenberg & Anderson 125 South Wacker Drive Suite 1825 Chicago, IL 60606 RE: Assists; software conversion Dear Mr. Cunningham: This is in response to your request for a binding ruling dated October 28, 2011, submitted on behalf of Liberty Hardware, Inc. asking if certain payments constitute assists which must be added to the price actually paid or payable for the valuation of certain imported bath, kitchen and household hardware, parts or accessories. FACTS: Liberty Inc. is a supplier of bath, kitchen and household hardware materials, parts, or accessories primarily imported from China. Liberty recently underwent a Focused Assessment at the Port of Charlotte. Liberty has a domestic engineering and design team within the U.S. where the company’s products are designed and created. Liberty uses foreign services for certain work that it describes as finishing services. These finishing services convert pre-existing drawings into a new format, such as updating its engineering software from Auto-CAD software to Pro/Engineer software. You state that Pro/Engineer software is used for printing traditional technical drawings and 3-dimensional drawings, also called 3D models. Liberty makes payments to an unrelated third party for these services performed outside the U.S. Under the company’s plan to switch software, all drawings for all products with the company’s design files will be converted, whether or not the products will be imported in the future. Liberty’s engineering department differentiates between payments made for “portfolio” and “imported articles.” “Portfolio” conversions are for products that have not yet been purchased by a client, so they may or may not be imported in the future. Four scenarios are presented. The first scenario is the legacy data conversion. A Star Knob is a zinc die cast cabinet knob that was created in 2003 by U.S. engineers. In 2011, a foreign engineering firm converted the technical drawings from the Auto-CAD software to Pro/Engineering software’s drawings. The new drawings are based upon the original U.S. design and engineering data that was input into Auto-CAD. The work done by the foreign engineering firm consists of selecting the Pro/Engineer software items that allow it to electronically import the Auto-CAD data into Pro/Engineer; selecting the Pro/Engineer menu items that instruct the new software to generate its own technical drawing and 3D model; and deleting many of the default labels and specifications that are generated by Pro/Engineer upon the drawings so that the resulting technical drawing and 3D model are not cluttered with too much data. You state that no changes or alterations are made to the Star Knob as a result of the software conversion. You submitted a copy of the Star Knob AutoCAD drawing and the Pro/Engineer star Knob drawing for our review. The newly formatted drawings may or may not be used by a foreign producer of star knobs. The second scenario is described as final engineering drawings printed from U.S. engineering work. For example, U.S. engineers design a mailbox and mailbox mounting system. U.S. designers and engineers input all data and measurements needed by the Pro/Engineer to print 3D models and technical drawings, generate eleven Pro/Engineer data files for the various components, print 3D drawings generated from the data files, and request that the foreign engineering firm use Pro/Engineer to print technical drawings that display only a portion of the data input by the U.S. engineering and design team. The foreign firm deletes much of the data input by the U.S. team from the drawings, ensures that measurements are reported in the units requested by Liberty (for example, in millimeters instead of inches), and ensures neat, legible page formatting. No further engineering specifications or design specifications are created and there is no input by the foreign firm. You submitted a sample engineering drawing as prepared by the foreign firm. Essentially, the foreign engineering firm deletes data from the printout so that U.S. or foreign quality control clerks may view specifications relevant to quality control. The third scenario is described as the output of final engineering drawings from software that combines core multiple U.S. engineering works. For example, in the production of robe hooks, the dimensions and specifications are sent by Liberty to a foreign firm to implement the Pro/Engineer software’s menu items to apply the U.S. designed and engineered mounting systems to the hooks. The design data is created by U.S. engineers. The data files and printouts are transmitted to the foreign firm. (Printouts were provided with this ruling request as a reference and for purposes of illustration.) The foreign firm’s job in this scenario is to (1) load the provided data files for the new hooks; (2) load the data files for Liberty’s standard mounting systems; (3) select the Pro/Engineer menu items for the software to combine each robe hook with one or more of Liberty’s hood mounting designs; and (4) remove voluminous, superfluous specifications from the final 3D models and technical drawings generated by Pro/Engineer so the printouts show only the information desired by Liberty’s quality control, sales, and engineering groups. The Pro/Engineer data files are returned to Liberty with the new printouts. The fourth scenario involves design modification performed by a foreign engineer. For example, a train rack that was originally designed and engineered within the U.S. is modified by a foreign engineer so that it could be collapsed for shipment into a more space efficient package. Production of the train rack is then modified by adding C-clips. You assert that scenario four would be a dutiable assist but that scenarios one, two and three would not be dutiable assists. ISSUES: Whether the four scenarios describe dutiable assists which would be added to the price actually paid or payable for the imported merchandise? Whether payments made to foreign firms for the portfolio or legacy products are dutiable? LAW AND ANALYSIS: We assume for the purposes of this discussion that the imported goods are being appraised using transaction value. Transaction value is the price actually paid or payable for the merchandise when sold for exportation to the United States, plus amounts for packing costs, selling commissions incurred by the buyer, the value of any assist, royalty and license fees, and proceeds of a subsequent resale or use that accrue to the seller. 19 U.S.C. 1401a(b). An “assist” means any of the following if supplied directly or indirectly and free of charge or at a reduced cost, by the buyer of imported merchandise for use in connection with the production or sale for export to the United States of the merchandise: Materials, components, parts, and similar items incorporated in the imported merchandise; Tools, dies, molds, and similar items used in the production of the imported merchandise; Merchandise consumed in the production of the imported merchandise; 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. 19 CFR 152.102(a)(1) No work will be treated as an assist if the work: (i) is performed by an individual domiciled within the U.S.; (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 U.S. 19 CFR 152.102(a)(2). In HQ 546720, dated July 21, 1999, a computer aided device (CAD) was used to communicate color specifications to overseas manufacturers of apparel. A non-technical employee, such as a secretary, would enter color information into the CAD system in Hong Kong to produce a color print of a garment in various color combinations. Neither the employee in Hong Kong nor the CAD created new designs or color tones. CBP held that the work performed by the secretary, who was not an artist or a designer, was clerical in nature and was not necessary for the production of the imported merchandise. The CAD sketches were merely a means of conveying the buyer’s color choices, and the color choices could have been conveyed by less sophisticated methods such as by facsimile or oral instruction. In HQ 547808, dated December 19, 2001, the dutiability of payments made to a foreign artist and a foreign company was addressed. First, the foreign artist created original artwork pursuant to a licensing agreement and a foreign company scanned the artwork, and created a digital library and catalogue of the artist’s work. Then, the U.S. company cut pieces from the artwork in the catalog and pasted them into product designs which were sent back to the foreign company. The foreign company combined the culled images, resized and repositioned them, and placed them into a four color separation file and proof. The file and proof were sent back to the U.S. company who finalized the pictorial design of the product. The importer claimed that the adjusted color separation was not a new item but simply a modification of the original digital color separation and not a dutiable assist. CBP initially held that (1) any design work undertaken in the U.S. was not considered an assist; (2) the foreign company’s scanning of the artistic work, creation of the digital library and catalogue of the artist’s work was not an assist because the company did not participate in the creative process; and (3) the foreign company’s resizing, repositioning, and placing the designs into a four color separation file and proof was not an assist because it was not design work. CBP stated that the foreign company did not perform any work in the development, engineering, planning or sketching of the product to be manufactured and had no discretion in choosing the images or color. However, HQ 548097, dated January 28, 2003, modified HQ 547808, and held that the payments made by the importer to the foreign company were a dutiable assist. In HQ 548097, CBP clarified that the transparencies and films were design work and imparted the essence of the product design to the imported merchandise without which the manufacturers could not produce the imported merchandise. Further, CBP clarified that the issue should be whether the work performed by each party is part of the production process of the assist, and if so, where each stage of the assist product was performed. The foreign company’s contribution was a middle step in the production of the assist and occurred outside the U.S.; therefore, it was ruled to be a dutiable assist. It is our opinion that all four scenarios are distinguishable from HQ 546720 because the work performed in all four scenarios is performed by trained engineers in an engineering firm, is not clerical in nature, and is not merely the conveyance of the same information in another format. The decision to delete or retain information made by an engineer exercising their professional discretion is not analogous to data entry. This case is similar to HQ 548097 in that the work performed by the foreign company is a middle step in the production of an assist performed in a foreign country. The operations performed in all four scenarios involve design work that is necessary for the production of Liberty’s goods utilizing Pro/Engineer software that are imported into the U.S. Accordingly, we find that the engineering work aids in the development of the imported merchandise and is necessary for the production of imported merchandise within the meaning of 19 U.S.C. 1401a(h)(1)(A) for all four scenarios. To the extent that this work is performed outside the U.S., we find that it meets the definition of an assist and should be added to the price actually paid or payable. Since 19 U.S.C. 1401a(h)(1)(A) states that an assist is related to imported merchandise in connection with the production or sale for export to the U.S., if there is no merchandise imported for a particular good, there would be no assist. Liberty would have to track their payments made for portfolio goods that are not imported into the U.S. to sufficiently satisfy CBP that a particular payment applied only to such goods. HOLDING: The payments described in the four scenarios constitute dutiable assists, which should be added to the price actually paid or payable for the imported goods. 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 of this ruling, it should be brought to the attention of the CBP officer handling the transaction. Sincerely, Monika R. Brenner, Chief Valuation & Special Programs Branch