Ruling request; transaction value; payments made pursuant to service agreement; indirect payments; assists

HQ W545848 September 1, 1995 VAL R:C:V W545848 IOR CATEGORY: Valuation Sandra Liss Friedman, Esq. Barnes, Richardson & Colburn 475 Park Avenue South New York, NY 10016 RE: Ruling request; transaction value; payments made pursuant to service agreement; indirect payments; assists Dear Ms. Friedman: We are in receipt of your ruling request dated November 18, 1994 and supplemental submission dated May 25, 1995, made on behalf of your client Toshiba America Consumer Products, Inc. (“TACP”), a U.S. corporation. This response follows an April 27, 1995 meeting between you and members of my staff in the Value Branch. We regret the delay in responding. FACTS: TACP is an importer of consumer electric products including color televisions (“CTVs”) and chassis used in the manufacture of CTVs, as well as a domestic manufacturer of CTVs. TACP has entered into a “Design and Other Services Agreement” (“agreement”) dated March 31, 1994, with its parent company, Toshiba Corporation (“TC”), a Japanese corporation. Under the terms of the agreement, TC agrees to perform for TACP certain functions affecting TACP’s production of CTVs. Generally, TC agrees to 1) provide design work and assistance in product planning; 2) supply manufacturing related data; 3) create and provide support for information services; and 4) provide other related services (consisting of data and support for assistance in marketing, purchasing components and providing repair and maintenance). The agreement allows TACP the option to receive consulting and/or training services from TC to enable TACP’s employees to understand certain technical information provided by TC, and to receive assistance in the production of the CTVs. Article 9 of the agreement provides that TACP may direct that the information or services provided for under Articles 4 and 8 of the agreement, be provided by TC directly to Toshiba Singapore Pte., Ltd. (“TSP”), from which TACP imports completed CTVs. These services consist of providing the following: a mid-term and long-term capital investment plan; manufacturing data and materials in accordance with models of contract products; data and materials for instruction manual relating to procedures and precautions required of workers; proposals relating to improvement of the manufacturing operation and tools and jigs; inspection and evaluation of each process or first mass-production of a new model; examination of the efficiency and productivity of the manufacturing system of the products with comments, proposals and instruction to improve efficiency; consulting and/or training service to assist understanding of technical information and other data and information, and accumulating experience in manufacture, repair and maintenance service of the products. TACP will also share with TSP designs developed by TC for chassis modifications. Although not specifically provided for in the agreement, TACP also directs that some of the information or services be provided by TC to Toshiba Electromex, S.A. De C.V. (“TMX”), from which TACP imports chassis for use in the domestic manufacture of CTVs. These services consist of providing information used by TMX in the manufacture of the chassis subsequently imported by TACP. TACP agrees to reimburse to TC any costs and expenses incurred by TC in rendering the described services, including those provided to TSP and TMX. In TACP’s books and records, TACP’s expenses incurred on behalf of TSP and TMX are classified as allocated overhead together with other indirect expenses related to the manufacture of the CTV’s, such as quality control, transportation and warehousing, utilities depreciation and the like. You state that this classification of expenses is in accordance with Generally Accepted Accounting Principles and accepted accounting practices. You request a ruling on whether the amounts paid to TC are dutiable. At this time, TACP is paying duty on the amounts paid for services to TMX. TACP agrees that expenses it incurs for designs from TC which TACP furnishes to TSP for the production of chassis would be dutiable as an assist. With respect to the amounts paid for TC’s services provided to TMX, you disclose these charges as assists in the “cost statement” on Customs Form 247, which is filed annually, and want to confirm that this is the appropriate manner in which to declare those amounts paid as part of the value of the imported chassis. ISSUE: Whether the amounts paid by TACP to TC are included in the transaction value of the imported merchandise. LAW AND ANALYSIS: Based on the facts provided, the only imported merchandise at issue consists of the CTVs imported from TSP, and the chassis imported from TMX. Therefore we must determine whether the amounts paid by TACP to TC are included in the appraised value of the merchandise imported from TSP and TMX. Transaction value is the preferred method of appraisement and is defined by §402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. §1401a(b)) as "the price actually paid or payable for the merchandise when sold for exportation to the United States..." plus certain additions specified in §402(b)(1)(A) through (E). The term "price actually paid or payable" is defined in TAA §402(b)(4)(A) 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 from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. We are assuming for purposes of this ruling that transaction value is the proper method of appraisement for the imported merchandise, although we note that the importer and the sellers are related parties under §402(g) of the TAA. We do not have enough information to determine whether the transfer prices between the importer and related sellers are acceptable. In order for the transfer price to be acceptable it must meet one of the tests set forth in TAA §402(b)(2)(B). Two court cases have addressed the meaning of the term “price actually paid or payable.” In Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990), the issue before the court was whether quota charges paid to the seller on behalf of the buyer were part of the price actually paid or payable for the imported goods. In reversing the decision of the lower court, the appeals court held that the term “total payment” is all-inclusive and that “as long as the quota payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods.” The court also stated: Congress did not intend for the Customs Service to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, are for the merchandise or something else. As we said in Moss Mfg. Co. v. United States, 896 F.2d 535, 539 (Fed Cir. 1990), the “straightforward approach [of section 1401a(b)] is no doubt intended to enhance the efficiency of Customs’ appraisal procedure; it would be frustrated were we to parse the statutory language in the manner, and require Customs to engage in the formidable fact-finding task, envisioned by [appellant]. Id. At 380. In Chrysler Corp. v. United States, Slip Op. 93-186 (Ct. Int’l Trade September 22, 1993), the Court of International Trade applied the standard in Generra and determined that certain shortfall and Special Application fees which the buyer paid to the seller were not a component of the price actually paid or payable for the imported merchandise. The court found the evidence established that the fees were independent and unrelated costs assessed because the buyer failed to purchase other products from the seller and not a component of the price of the imported engines. Based on Generra, there is a presumption that all payments made by the buyer to a seller are part of the price actually paid or payable for the imported merchandise. However, this presumption may be rebutted by evidence which clearly establishes that the payments, like those in Chrysler, are totally unrelated to the imported merchandise. We are assuming, for the purposes of this ruling, that transaction value is the appropriate basis of appraisement for the imported merchandise. In reviewing the evidence submitted in connection with the subject ruling request, we have concluded that of the payments made by TACP to TC for services provided under the agreement, the payments reimbursing TC for costs and expenses incurred for services provided to TSP and TMX, are clearly part of transaction value. The payments are indirect payments to the seller and are part of the price actually paid or payable for the imported merchandise purchased from TSP and TMX. In your submission of May 25, 1995, you cite TAA #4 (HRL 542122) dated September 4, 1980 and TAA #2 (HRL 542106) dated May 15, 1980 in support of your position that the services provided to TSP are not dutiable assists. However, in this case we do not reach the issue of whether the payments for services are assists, because we find that they are indirect payments which are part of the price actually paid or payable for the imported merchandise. With respect to the merchandise purchased from TMX, counsel has agreed that the payments made by TACP to TC to reimburse TC for costs and expenses incurred on behalf of TMX are dutiable as assists. We agree that the payments are part of transaction value but it is our opinion that they could just as easily be treated as part of the price actually paid or payable as determined above. However if the payments are not included as part of the price actually paid or payable then they are to be included in the transaction value as assists. One of the five statutory additions to be added to the price actually paid or payable is "the value, apportioned as appropriate, of any assist." TAA §402(b)(1)(C). An assist is defined in TAA §402(h) as: ...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. The designs provided to TSP by TACP, which were developed and obtained from TC are an assist under TAA §402(b)(1)(C)(iv). From the facts provided we find that the designs were undertaken elsewhere than in the U.S., they were provided free of charge by TACP to TSP and are necessary for the production of the imported merchandise. The cost of production of the designs is to be added to the price actually paid or payable and included in the transaction value of the imported merchandise. Customs Regulations 152.103(d) (19 CFR 152.103(d)). Based on the information provided, the remaining payments made by TACP to TC, for services provided under the agreement, appear to be totally unrelated to any imported merchandise. Therefore, they are not included in the transaction value. Reporting of the above charges by including them on Customs Form 247 is operationally acceptable, provided the existence of additional payments is indicated on CF 7501. However, any method of declaration should be confirmed with the appropriate Customs District. HOLDING: The payments made by TAPC to TC for services provided to TSP and TMX are part of the price actually paid or payable for merchandise imported from TSP and TMX, respectively. The value of the designs acquired from TC and provided to TSP by TACP, are included in the transaction value of the merchandise imported from TSP as assists. The remaining amounts paid by TACP to TC are not included in the transaction value of merchandise imported from TSP or TMX. Sincerely, John Durant, Director Commercial Rulings Division