Dutiability of Assists; Sublimation Paper

HQ H225296 July 27, 2012 OT:RR:CTF:VS H225296 YAG CATEGORY: Valuation Ms. Emilia Arroyo Jerry Leigh of California, Inc. 7860 Nelson Road Van Nuys, CA 91402 RE: Dutiability of Assists; Sublimation Paper Dear Ms. Arroyo: This is in response to your letter, dated June 20, 2012, in which you request a ruling concerning the dutiability of sublimation paper provided by Jerry Leigh of California, Inc. (the “Importer”) to unrelated manufacturers in Guatemala. The sublimation paper is used in the production of the imported merchandise. FACTS: The Importer purchases certain garments from its unrelated manufacturers in Guatemala. The terms of sale are either FOB or Ex-Works. The Importer’s related company, International Fast Production, S.A. acts as an agent and sources the manufacturers on behalf of the Importer. The Importer purchases the blank sublimation paper from a U.S. vendor. The sublimation paper is of U.S. origin. The Importer then creates and applies its own heart-shaped design on the sublimation paper in the warehouse in Van Nuys, California. The Importer supplies the finished sublimation paper to the manufacturers in Guatemala free of charge. In Guatemala, an assembled garment is stretched on the surface of a heat press, and the sublimation paper is placed on the garment. The paper is pressed against the garment, and the heat causes the image to permanently transfer into the garment. After this process is completed, the sublimation paper is discarded. The value of the finished sublimation paper provided by the Importer to the manufacturers in Guatemala is not included in the purchase price paid by the Importer to the manufacturers or in the customs value. However, the Importer pays for the cost of applying the finished sublimation paper to the fabric in Guatemala. The Importer declares this cost to U.S. Customs and Border Protection (“CBP”) and pays the necessary duties upon the importation of the finished garments into the United States. ISSUE: Whether the cost of the finished sublimation paper provided by the Importer for purposes of production of the imported merchandise constitutes an assist pursuant to 19 U.S.C. §1401a(h)(1)(A). 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 five enumerated additions. 19 U.S.C. §1401a(b)(1). The price actually paid or payable shall be increased by the amounts attributable to the five statutory additions enumerated in 19 U.S.C. §1401a(b)(1)(A) through (E) only to the extent that each such amount is not otherwise included within the price actually paid or payable. 19 U.S.C. §1401a(b)(1). One of the enumerated statutory additions to the price actually paid or payable is an “assist.” An “assist” is defined in 19 U.S.C. §1401a(h)(1) 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:(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. Furthermore, the TAA Statement of Administrative Action (“SAA”) and section 152.103(d)(1), Customs Regulations (19 CFR §152.103(d)(1)), set forth the manner in which assists are to be valued. In particular, section 152.103(d)(1) states that: If the assist consists of materials, components, parts, or similar items incorporated in the imported merchandise, or items consumed in the production of the imported merchandise, acquired by the buyer from an unrelated seller, the value of the assist is the cost of its acquisition. If the assist was produced by the buyer or a person related to the buyer, its value would be the cost of its production. In either case, the value of the assist would include transportation costs to the place of production. The regulations applicable to assists are set forth at 19 CFR §152.103(d) and (e). 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. For the purposes of this decision, we assume that transaction value is the proper basis of appraisement. Based on the statutory and regulatory language cited above, it remains CBP’s position that in regard to material or components which may constitute assists, a three part analysis must be employed. First, the material or components must fit the definition of an assist; second, it must appropriately be valued as an assist; and third, the value of the assist must be apportioned to the imported merchandise. See Headquarters Ruling Letter (“HRL”) 545909, dated November 30, 1995; Modification and Revocation of Customs Ruling Letters Relating to Assists, 29 Cust.B. & Dec. No. 51, dated November 30, 1995. In this case, we note the difference between the heart-shaped design imprinted on the blank sublimation paper in the United States and the actual sublimation paper, containing the design and provided by the Importer to the manufacturers. The design itself would not be considered an assist pursuant to 19 U.S.C. §1401a(h)(1)(A)(iv) because the design work was created by the Importer in the United States. Nevertheless, the Importer does not just provide the design or pattern for the manufacturer to use in the production of the imported merchandise. The Importer also provides the sublimation paper, which is hot pressed into the garment, with the heat causing the image to permanently transfer into the garment. We find that the finished sublimation paper would be considered an assist in accordance with 19 U.S.C. §1401a(h)(1)(A)(iii) as merchandise consumed in the production of the imported merchandise and supplied directly or indirectly, free of charge by the Importer to the manufacturers. CBP considers material to have been consumed in the production of the imported apparel in accordance with 19 U.S.C. §1401a(h)(1)(A)(iii) and, hence to constitute assists if such material either falls to the factory floor (or otherwise is accumulated when the fabric is cut or worked) or is found to be defective or not up to quality, and subsequently is discarded, scrapped, or otherwise destroyed during the manufacture of the imported merchandise. See HRL 545909. The sublimation paper is the actual material that is shipped to Guatemala. It is consumed in the production of the imported garment because after transferring the heart-shaped design onto the garment, it is accumulated when the fabric is worked and subsequently discarded. Therefore, the sublimation paper fits the definition of an assist.  Once it is determined that the sublimation paper meets the definition of an assist, the inquiry then concerns the cost of acquisition or production of that assist. In this case, the Importer purchases the blank sublimation paper from a U.S. vendor. However, by applying its own heart-shaped design to the sublimation paper, the Importer actually produces the finished sublimation paper supplied to the manufacturers in Guatemala. Therefore, the value of this finished assist would be the sum of the cost of its production (the cost of acquisition from a U.S. vendor plus the cost of applying the heart-shaped design on the acquired sublimation paper) and transportation costs to the place of production of the finished garment (Guatemala). As previously discussed, the cost of the heart-shaped design work itself that gets transferred to the blank sublimation paper in the United States would not be considered part of the cost of the finished sublimation paper supplied to the manufacturers because this design work was undertaken by the Importer in the United States, and, thus, would not be added to the price actually paid or payable as an assist. Finally, apportionment of the value of the assist subsequently comes into consideration. The SAA and 19 CFR §152.103(e)(1) provide the manner in which the value of an assist is to be apportioned to the imported merchandise. 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 CBP will depend upon the documentation submitted by the Importer. 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 appraisement will depend upon the documentation submitted by the importer. Thus, the apportionment of the value of assists is to be based on objective and quantifiable data, including, among other things, the accounting records of the supplier of the assist made in conformity with generally accepted accounting principles. See 19 CFR §152.103(e)(1).  HOLDING: Based on the information presented, the cost of finished sublimation paper provided by the Importer for purposes of production of the imported merchandise constitutes an assist pursuant to 19 U.S.C. §1401a(h)(1)(A). Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.” Sincerely, Monika R. Brenner, Chief Valuation & Special Programs Branch