Internal Advice concerning foreign engineering expenses; Computed Value; Assists; Sections 402(e) and (h) of the TAA; HRLs 545117, 544421; Texas Apparel

HQ W545626 February 28, 1996 VAL RR:IT:VA W545626 LPF CATEGORY: Valuation Port Director U.S. Customs Service 610 W. Ash St. San Diego, CA 92188 RE: Internal Advice concerning foreign engineering expenses; Computed Value; Assists; Sections 402(e) and (h) of the TAA; HRLs 545117, 544421; Texas Apparel Dear Sir: This is in response to a letter from the former district director, dated April 21, 1994, requesting internal advice on behalf of Stein Shostak Shostak and & O'Hara and their client, Sony, regarding the dutiability of Sony's foreign engineering expenses. We met with counsel concerning the matter on November 8, 1995. This inquiry emanates from an audit conducted by the Regulatory Audit Division (RAD) concerning Sony's importations of television sets and other electronic products. FACTS: Sony Electronic, Inc. (Sony), formerly Sony Corporation of America, is a subsidiary of Sony Corporation, Japan who imports television sets and other electronic products from its related manufacturing division (maquiladora), Video Tee de Mexico, S.A. de C.V. (VTM), formerly Sony de Mexico. VTM obtained, via Sony, Japanese engineers from Sony Tokyo to increase auto insertion quantity, improve parts flow process in auto insertion, and introduce the CPD monitor production process for the subject importations. Such engineers generally reside in the U.S. for approximately one to three months, yet their services are performed in Mexico. The payments for their services are made on a monthly and/or annual basis by Sony to the Japanese employer, Sony Tokyo. The parties are related pursuant to section 402(b)(2) and (g)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 1401a. We understand that, in part, because no sale was found to exist between Sony and VTM, the merchandise has been appraised based on computed value pursuant to section 402(e) of the TAA. -2- During their audit, RAD explains that they found an account on Sony's books titled "Japanese Engineering Expenses," which was charged to the Mexican operation. In other words, although such amounts were paid by Sony, they were recorded as an expense attributable to the Mexican operation. In addition, RAD states that Sony's Chart of Accounts describes the expenses as "payments made to Sony Tokyo employees for engineering assistance." In response to RAD's inquiry concerning the functions of the Japanese engineers, Sony stated that some of the payments were for training services, while others were for work on the production floor. Counsel explains in their November 7, 1995, submission that "most of the activity of the engineers is associated with training activities which they perform. This training includes: 1) imparting the principles of Total Industrial Engineering (TIE) which focuses on line and productivity improvement, 2) improving solder technique and quality, 3) providing management training, and 4) providing training. . to eliminate waste and superfluous actions at all levels of production." Counsel adds that "the engineers provide assistance in the installation, set-up, and de-bugging of new production and test equipment, and training local personnel in the use of the equipment. . . [and that they] provide advice and assistance to VTM in connection with the production of new products to insure that they are produced in the most efficient and economical manner possible." Counsel provides that a substantial portion of the total costs associated with the visits of the Japanese engineers to VTM relates to travel and subsistence, as opposed to actual salary. Counsel asserts that to find such payments dutiable as assists, or costs of fabrication under computed value, contravenes numerous Customs decisions holding that salaries and benefits paid for an importer's management and supervisory personnel do not constitute assists. ISSUE: Whether the costs borne by Sony for the engineering services undertaken in Mexico are included in the computed value of the imported merchandise as assists. LAW AND ANALYSIS: As you are aware, the preferred method of appraisement 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. However, insofar as it is our understanding that the concerned parties agree that no sale exists between the related parties, Sony and VTM, and that the merchandise appropriately is appraised pursuant to computed value (§402(e)) this ruling will address the appraisement of the instant merchandise in accordance with §402(e). Section 402(e) provides that the computed value of imported merchandise is the sum of: (A) the cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise; -3- (B) an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind as the imported merchandise that are made by the producers in the country of exportation for export to the United States; (C) any assist, if its value is not included under subparagraph (A) or (B); and (D) the packing costs. In the event the value of the engineering payments is not included under subparagraph (A) as costs of materials, fabrication, or processing, nor subparagraph (B) as amounts for profit and general expenses, it is our position that the engineering payments would constitute assists to be included as part of the computed value under subparagraph (C). Section 402(h)(1)(A) of the TAA provides, in pertinent part, that: 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. (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 Headquarters Ruling Letters (HRLs) 545117, issued October 30, 1992, and HRL 544421, issued April 3, 1990, Customs recognized that, generally, payments made by an importer to its U.S. employees working abroad in managerial or supervisory capacities did not constitute assists. However, Customs recognized that such expenses would constitute assists when the nature of the work performed abroad involved engineering, development, artwork, and plans or sketches that were necessary for the production of the imported merchandise. See HRL 545117, supra. In accordance with these and other decisions, counsel opines that the subject expenses do not constitute assists since they represent "production" as opposed to "product" engineering and embody teaching and supervising rather than the creative, design process. However, insofar as the submitted evidence indicates that an unspecified portion of the subject expenses likewise pertain to the installation, set-up and de­bugging of the equipment, we do not find the payments in this case to be representative, as a whole, of "non-creative, production engineering." Moreover, we recognize that the relevant portion of the assist provision covers not only amounts for engineering, design work and the like, but also for "development," which we similarly find descriptive of the expenses at issue. Finally, because it is evident the subject -4- expenses are not incidental to other engineering undertaken within the U.S., but instead pertain to engineering or development undertaken in Mexico in its own right, we cannot find it to represent the type of service or work excepted from treatment as assists, in accordance with section 402(h)(1)(B). As the court in Texas Apparel Co. v. United States, 12 CIT 1002, 698 F. Supp. 932 (1988), deferred to Customs interpretation of section 402(h)(1)(A)(ii) distinguishing air-conditioning and power generators from sewing machines, finding the latter to have been used directly in the production of the imported merchandise and, hence, to constitute assists, so too must Customs draw a distinction in the context of section 402(h)(1)(A)(iv) between services which distinctly are supervisory and managerial in nature and those where the managerial aspects are linked to "hands-on” installation and set-up, necessary for the production of the imported merchandise. HOLDING: Based on the submitted evidence, the costs for the engineering services undertaken in Mexico constitute assists to be included as part of the computed value of the subject merchandise. You should advise the interested parties of this decision and forward them a copy. Sixty days from the date of this letter the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act, and other public access channels. Sincerely, Thomas L. Lobred Acting Director, International Trade Compliance Division