Design services; assists; 19 U.S.C. § 1401a(b)(1)(C)

HQ W548576 October 27, 2004 RR:IT:VA W548576 CC CATEGORY: Valuation Robert L. Eisen, Esq. Coudert Brothers LLP 1114 Avenue of the Americas New York, NY 10036-7703 RE: Design services; assists; 19 U.S.C. § 1401a(b)(1)(C) Dear Mr. Eisen: This is in response to your letter of July 28, 2004, on behalf of [xxxxxxxxxxxxxx] (hereinafter the "Design Services Agent") requesting a valuation ruling arising from a proposed-design services agreement. In addition, you submitted a short supplemental letter dated October 5, 2004. You requested confidentiality pursuant to 19 CFR § 177.2(b)(7), for the parties and for certain commercial information. We agree with your confidentiality request, and the subject information is bracketed in this ruling and will not be disclosed in copies of this ruling made available to the public. FACTS: According to your submission, the Design Services Agent designs, manufactures, and imports footwear on its own account. The Design Services Agent is interested in allowing its customers to purchase the use of its designs to make footwear for importation into the United States. Under the terms of a draft agreement, a copy of which you have submitted, the Design Services Agent would develop and present footwear design proposals to customers (hereinafter "buyers") interested in purchasing goods made with the Design Services Agent's designs. You state that the Design Services Agent will be unrelated to any prospective buyer. Under the Agreement, once a buyer accepts a design proposal, the Design Services Agent would prepare and submit a design kit to the buyer. The design kit would consist of a set of artistic and technical elements including materials, specifications, colors, fabrications, sample hardware trim, artwork, swatches, prototypes, designs, sketches, and/or three-dimensional constructions. The design kits would be prepared entirely in the United States by U.S. designers. The Agreement permits the buyer to use the designs in connection with the manufacture, importation, distribution, and sale of footwear in the United States. Under the terms of the Agreement, the buyer is allowed to choose the manufacturer it wishes to produce the designs purchased. The designs would remain the property of the Design Services Agent, and it would retain the right to permit others to use the designs, as well as to make products similar or identical to those depicted in the designs for its own use. In addition, at the buyer's request, the Design Services Agent would assist the buyer in locating materials or vendors to produce the designs. If the buyer decides to use a vendor recommended by the Design Services Agent, the Design Services Agent may assist the buyer in placing orders and reviewing production samples. Where goods made with designs purchased under the Agreement are imported, the buyer will act as importer of record. Historically, some potential buyers have placed orders with [xxxxxx xxxxxxxxxxxxxxxx] (hereinafter the "Related Seller") which is related to the Design Services Agent. The Related Seller, based overseas, then subcontracts with unrelated factories for the manufacture of finished goods. The Design Services Agent anticipates some orders under the Agreement will be made through unrelated companies. The Design Services Agent does not anticipate that there will be any formal sales agreement between the buyer and the Related Seller, but instead foresees purchases will be on an order-by-order basis. The Design Services Agent will not obtain any remuneration from sales between the buyer and the Related Seller. The buyer will not be required to purchase products using designs from the Related Seller or any other vendor related to the Design Services Agent. The Related Seller will not be a party to the Agreement, nor will any obligations or benefits inuring to the Related Seller arise under the Agreement. The buyer agrees to pay the Design Services Agent a negotiated design fee, which the Design Services Agent anticipates will be in the range of [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxx] of the articles produced using the designs. Invoicing for the design kits will be from the Design Services Agent, while invoices for goods ultimately purchased will come from the sellers, including the Related Seller. The Design Services Agent will not accept payment for goods owing to its Related Seller, nor will the Related Seller accept payment for design kits owing to the Design Services Agent under the Agreement. ISSUE: Whether payments made for services performed under a design services agreement are dutiable as assists. 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 valuation, which is defined as the "price actually paid or payable for merchandise when sold for exportation to the United States," plus five statutorily enumerated additions . 19 U.S.C. § 1401a(b)(1). Those enumerated additions are the following: the packing costs incurred by the buyer with respect to the imported merchandise; any selling commission incurred by the buyer with respect to the imported merchandise; the value, apportioned as appropriate, of any assist; any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States; and the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly , to the seller . Section 402(h)(1)(A) of the TAA, 19 U.S.C. § 1401a(h)(1)(A), provides, in pertinent part, the following : 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: Materials, components, parts, and similar items incorporated in the imported merchandise. Tools, dies, molds, and similar items used in the production of the imported merchandise. Merchandise consumed in the production of the imported merchandise. 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. Design work undertaken within the U.S. is not dutiable as an assist pursuant to 19 U.S.C. § 1401a(h)(1)(A)(iv). Consistent with that statute, we have ruled that design work undertaken within the U.S. does not constitute an assist. Headquarters Ruling Letter (HRL) 546720, dated July 21, 1999. You state that the design kits are developed entirely within the United States. In addition, you state that the facts in this request are the same in all material respects to those of HRL 547880, dated August 21, 2002, in which we ruled that any design work done in the U.S. to produce the design kits would not be added to the price actually paid or payable pursuant to 19 U.S.C. § 1401a(h)(1)(A)(iv). We have reviewed HRL 547880 and concur that the facts of that ruling are the same in all material respects to the facts of this request. Consequently, pursuant to 19 U.S.C. § 1401a(h)(1)(A)(iv), any design work done in the U.S.to produce the design kits would not be added to the price actually paid or payable. HOLDING: Pursuant to 19 U.S.C. § 1401a(h)(1)(A)(iv), payments made for services performed under a design services agreement are not dutiable as assists since they are performed entirely within the U.S. This analysis is based solely on your description and the sample agreement that was submitted. Any determination whether the design services constitute dutiable assists will depend on the totality of the evidence for the particular transaction. The actual determination will be made by the appraising officer at the applicable port of entry based upon the totality of the evidence, including the entry documentation submitted. Sincerely, Virginia L. Brown Chief, Value Branch