Request for Reconsideration of Internal Advice (HQ 548368); Design Payments; Assists.

HQ W548490 AUG 18 2004 RR:IT:VA W548490er CATEGORY: Valuation Robert A. Calandra Attorney at Law 4 Henning Drive Fairfield, NJ 07004 RE: Request for Reconsideration of Internal Advice (HQ 548368); Design Payments; Assists. Dear Mr. Calandra: This is in response to your submission dated January 26, 2004, received by this office on February 17, 2004, in which you request reconsideration of HQ 548368 (December 24, 2003) on behalf of your client, Presidio International, Inc. ('Pr'). In HQ 548368, this office made the determination that certain design work used in the production of the imported merchandise constituted an assist under 19 U.S.C. 1401a(b)(1)(C)., The dutiable portion of the assist was determined to be the amount of certain payments made, pursuant to a Design and Consulting Agreement, by PI to A/X Armani Exchange. FACTS: PI is a retailer of Giorgio Armani wearing apparel and accessories. PI purchases wearing apparel and accessories from a variety of unrelated overseas and domestic suppliers. G.A. International Diffusion B.V. ("Armani ") is the licensor for the "A/X Armani Exchange" trademark and the provider of design and consultation services to PI. The parties entered into a Design and Consulting Agreement, a copy of which was provided to us in conjunction with the initial request for internal advice and with the subject reconsideration request. In HRL 548368 the Design and Consulting Agreement is described as follows: The Design and Consulting Agreement defines "designs" as the creations, designs, styles and models generated in connection with the agreement and created or approved by Armani. The agreement states that Armani B.V. is providing assistance and consulting services in connection with the development of a Collection of Products to be created, designed or approved by Armani B.V. and developed, produced, marketed, distributed and sold by P1. Armani B.V.'s assistance and consulting services takes [sic] place in Milan and consists [sic] of research and/or selection and/or approval of raw materials, fabrics and other textiles, the creation or approval of styles and designs of the products and of the collection and research and consulting in connection therewith, 2. review and approval, including approval of all changes, modifications or alterations, if necessary of the textiles, raw materials and styles submitted by PI for approval by Armani B.V.; and 3. review and approval or disapproval of samples of the products and the collection which shall be developed and produced, marketed, distributed and sold by PI in the territory. The agreement also provides that the selection of Products to be designed and created and included in the Collection for each selling season is made jointly by the parties. PI is obligated to set up a team comprised of its employees, dedicated exclusively to creating proposed Designs of the Products and the Collections and developing the Product Designs provided or approved by Armani. PI must develop and produce the Products based exclusively on the textiles and other materials approved by Armani and the Designs provided or approved by Armani. In the request for reconsideration, counsel acknowledges, and we agree, that the above described design work that is provided by PI to the manufacturers constitutes "development, artwork, design work, and plans and sketches that are necessary for the production of the imported merchandise." (See page 10 of counsel's January 26, 2004 request for reconsideration). ISSUE: Is the design work provided by PI to the manufacturers an assist? If so, how should the assist be valued? 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). Transaction value, the preferred method of appraisement, is defined in section 402(b) of the TAA as the "price actually paid or payable for the merchandise when sold for exportation to the United States," plus certain enumerated additions. One of the additions. includes the value, apportioned as appropriate, of any assists. 19 U.S.C. 1401a(b)(1)(C). The term "assist" refers to a statutorily enumerated good or service that is supplied directly or indirectly by the buyer free of charge or at a reduced cost, for use in connection with the production or sale for export of the imported merchandise. The type of assist at issue in this case is "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 U. S. C. 1401a(h)(1)(A)(iv). Counsel argues that Armani's contribution to the design work that is ultimately provided to the manufacturers is merely "conceptual" and "inspirational" and, accordingly, is not an assist. We disagree that Armani's contribution is merely "conceptual" and "inspirational". Moreover, as explained in HRL 548097 (February 3, 2003) ("Hallmark II), this office ruled that it is "incorrect ... to subject each stage of the assist's production process to a separate assist analysis, as though each stage of production results in the creation of a separate assist.... [T]he issue with which we need to be concerned is 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 production was performed, such that the value of the finished assist is determined based on its production elsewhere than in the U.S." Accordingly, the assist: analysis to be applied in this case is not limited to Armani's role. Nonetheless, as set forth below, we have explained why we find that Armani's participation is more than "conceptual" and "inspirational". The agreement between the parties provides that Armani is actively involved throughout the development of the design work from its inception to its completion, i.e. "designs ... created or approved by Armani..." "Armani... [provides] assistance and consulting services in connection with the development of ... [p]roducts ...to be created, designed or approved by Armani..." As is more thoroughly set forth above in the facts, Armani's assistance and consulting services include: "research and/or selection and/or approval of raw materials, fabrics and other textiles, the creation or approval of styles and designs of the products and of the collection and research and consulting in connection therewith..." Given the description in the agreement of Armani's participation in the production of the design. work, we find that Armani's contribution amounts to something more than merely "conceptual" and "inspirational". Counsel also maintains that Armani's contribution to the creation of the design work "generally" precedes "the inception of the production of Presidio's line and ... [is] the result of Armani's (or other designers) own artistic endeavors, undertaken without knowledge of or regard for the fact that they may serve as an inspiration for Presidio." We disagree. The agreement specifically provides that the selection of Products to be designed and created and included in the Collection for each selling season is made jointly by the parties. PI is obligated to set up a team comprised of its employees, dedicated exclusively to creating proposed Designs of the Products and the Collections and developing the Product Designs provided or approved by Armani. PI must develop and produce the Products based exclusively on the textiles and other materials approved by Armani and the Designs provided or approved by Armani. Obviously, then, Armani's role in creating the design work is part of the production process of the assist and is not just the inspiration from which the design work is conceived. The completed assist provided to the manufacturers, is the result of the joint work of both Armani and PI. Counsel acknowledges that PI supplies design work, free of charge, to the seller of the merchandise for use in the production of the imported merchandise. Counsel also acknowledges that this design work is necessary for the production of the imported merchandise. The valuation statute provides that when such design work is undertaken elsewhere than in the United States and is necessary for the production of the imported merchandise,  it constitutes an assist and is a dutiable addition to transaction value. 19 U.S.C. 1401a(h)(1)(A)(iv). To the extent part of the production of the design work occurs in Milan, the design work is "undertaken elsewhere than in the United States." Accordingly, the design work meets the definition of an assist. The remaining question, therefore, is how to value the assist. As described above, the design work is produced in more than one country. Some of the design work is undertaken overseas by Armani and other parts of the design work are undertaken in the United States by P1. The valuation statute addresses valuing assists ;that are produced in the United States and elsewhere than in the United States. Specifically, for purposes of determining the value of assists described in 19 U.S.C. 1401a(h)(1)(A)(iv) the value statute provides: If the production of an assist occurred in the United States and one or more foreign countries, the value of the assist is the value thereof that is added outside the United States. 19 U.S.C. 1401a (1)( C)(ii) In the past, Customs has ruled that in such circumstances, only the portions of the design work undertaken outside the United States are dutiable. See HRLs 548097 dated January 2, 2003 and 545341 dated August 3, 1994. Accordingly, in HRL 548368, we did value the assist based on any portion of the design work undertaken in the United States, i.e. the work performed by PI. Instead, we only included the value of the work performed by Armani, as represented by the payments made by PI to Armani pursuant to their Design and Consulting Agreement. Upon reconsideration, we find that it was correct to value the assist based on the amounts of payments remitted by PI to Armani pursuant to the Design and Consulting Agreement. HOLDING: Upon reconsideration of HRL 548368, we find that the design services provided free of charge by PI to the manufacturers of the imported merchandise constitute an assist. The dutiable portion of the assist is represented by the payments made by PI to Armani in return for Armani’s contribution to the production of the assist, as described in the Design and Consulting Agreement. Accordingly, upon reconsideration, HRL 548368 is upheld. Sincerely, Virginia L. Brown, Chief Value Branch