Inclusion of scrapped or defective fabric and components as assists; Section 402(h)(l )(A) of the TAA, 19 CFR (d)(1) and (e)( 1)

HQ W545598 October 21, 1996 VAL RR:IT:VA W545598 LPF CATEGORY: Valuation Margaret R. Polito, Esq. Neville, Peterson & Williams 80 Broad Street - Suite 3400 New York, NY I0004 ... RE: Inclusion of scrapped or defective fabric and components as assists; Section 402(h)(l )(A) of the TAA, 19 CFR (d)(1) and (e)( 1) Dear Ms. Polito : This is in response to your letter of March 21, 1994, submitted on behalf of Fieldston Clothes, Inc., (Fieldston) concerning the valuation of assists incorporated into garments produced on a cut-make-trim (CMT) basis. Your request for confidentiality has been granted in accordance with your letter of October 26, 1994. We regret the delay in responding. FACTS: Fieldston, an importer of outerwear, supplies foreign vendors with fabric, polyfill and trim necessary to produce garments and pays the vendors their cost of constructing the garments from these materials. Counsel submitted a sample "bill of materials report" (report) from which Fieldston bases its declared value for the merchandise . The report identifies, among other things, the various components incorporated into the finished garment and a waste factor reflective of the amount of scrapped or defective fabric. Fieldston includes a "waste factor" in its calculations for the following reasons: a percentage of fabric is lost when it is looped back and forth over a cutting table in order that one cutting operation can produce a number of components; a certain percentage of components are lost or rendered unsuitable during the production process; snaps fall to the factory floor; boxes of hang tags become water damaged ; and cut fabric components may be rendered unfit for use in production of finished garments after the components have been cut, or may be rejected due to defects in the fabric itself Fieldston proposes to no longer include the waste factor in the value declared at the time of entry. ISSUE: Whether the scrapped or defective fabric and components constitute assists and, if so, in what manner they are to be valued and apportioned to the imported merchandise.  LAW AND ANALYSIS : The preferred method of appraising merchandise imported into the United States is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 1401a. Section 402(b)(l) of the TAA 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 the enumerated statutory additions including the value, apportioned as appropriate, of any assist. The "price actually paid or payable" is defined in section 402(b)(4)(A) of the TAA as the "total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise...) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller." Section 402(h)(l )(A) of the TAA provides, in pertinent part, 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 : . . . (iii) Merchandise consumed in the production of the imported merchandise . See also section 152.103(d)(l), Customs Regulations (19 CFR l 52.103(d)(1)), setting forth the manner in which assists are to be valued and section 152.103(e)(l), Customs Regulations (19 CFR 152. 103(e)(I)), providing the manner in which the value of an assist is to be apportioned to the imported merchandise . In the General Notice of Modification and Revocation of Customs Ruling Letters Relating to Assists (General Notice), Customs Bulletin, Vol. 29, No. 51 (December 20, 1995), Customs articulated its position concerning assists, to wit, that waste or scrap which results from, or during, the production of imported merchandise may constitute assists to be included in the customs value of that imported merchandise. To this effect, Customs modified and revoked five ruling letters and issued Headquarters Ruling Letters (HRLs) 545909, 545910, 54591 1, 545913, and 545914 dated November 30, 1995. In HRLs 545909 and 545910 concerning destroyed, scrapped and defective fabric Customs explained that : in situations where scrap or waste results from, or during, the production process, limiting the analysis only to consider whether the material or components were physically incorporated into the completed imported merchandise is inconsistent with the language provided in the TAA. Rather, we stress that the TAA provides that material or components "use[d] in connection with the production or the sale for export to the United States of the merchandise" constitutes an assist not only when "incorporated in the imported merchandise," but also when "consumed in the production of the imported merchandise (emphasis added)." The fact that waste or scrap (of a material such as a bolt of fabric) which results from, or during, the production of the imported merchandise is not physically incorporated in that merchandise does not negate the fact that such material or components still may be consumed in the production of the merchandise and constitute assists. The definition of an assist is not inextricably tied to the value or apportionment of an assist. Once it is determined that material or components meet the definition of an assist, the inquiry then concerns the cost of acquisition or production of that assist. Apportionment of the value of the assist subsequently comes into consideration. Accordingly, once it is determined that material or components meet the definition of an assist in accordance with the above, then Customs will consider, among other things, the accounting records of the supplier of the assists to determine the value of the assist. Customs would consider such information in cases including those where scrap or waste results from, or during, the production of the imported merchandise . In the instant situation, Customs now.· considers material to have been consumed in the production of the imported apparel in accordance with section 402(h)(I )(A)(iii) of the TAA and, hence, to constitute assists if such material : during the manufacture of the imported merchandise; either falls to the factory floor (or otherwise is accumulated when the fabric is cut or worked), is found to be defective or not up to quality, or is mishandled and rendered disfunctional; and subsequently is discarded, scrapped or otherwise destroyed.   Customs' position as set forth in the General Notice is applicable to the instant case. In particular, we find HR.Ls 545909 and 545910 concerning fabric scrap or waste and defective fabric instructive in this matter regarding the dutiability of the subject fabric and component waste. Furthermore, in those decisions Customs recognized that determinations concerning the valuation of assists are to be based on objective and quantifiable data including, among other things, the accounting records of the supplier of the assists made in conformity with generally accepted accounting principles (GAAP). As Fieldston bases the value of its assists and, hence, its declared value for the imported garments on such bill of materials reports, we note that such figures only would be appropriate insofar as they do, in fact, reflect the actual costs of acquisition or production for the assists, based on objective and quantifiable data conforming to GAAP. HOLDING: Based on the facts presented, the scrapped or defective fabric and components constitute assists because, in accordance with the foregoing, they are consumed in the producti·o" n of the imported garments pursuant to section 402(h)(I)(A)(iii) of the TAA. Hence, based on these facts Fieldston's "waste factor," appropriately calculated as provided above, is to remain a part of the value declared at the time of entry. Sincerely, Acting Director, International Trade Compliance Division