Clarification of HQ 548490 (August 18, 2004) regarding Dutiability of Design Payments and Allocation of Assists.

HQ W548626 April 18, 2005 RR:IT:VA W548626 CATEGORY: Valuation Robert A. Calandra Attorney at Law 4 Henning Drive Fairfield, NJ 07004 RE: Clarification of HQ 548490 (August 18, 2004) regarding Dutiability of Design Payments and Allocation of Assists. Dear Mr. Calandra: This is in response to your submission dated December 1, 2004, in which you submit a clarification of the facts provided in connection with HQ 548490 (August 18, 2004), a decision upon reconsideration of HQ 548368 (December 24, 2003). In 548490 this office ruled that certain designs provided free of charge to the manufacturer of the imported merchandise are assists. The payments for the designs were determined to constitute the value of the assist to be added to the price actually paid or payable for the imported merchandise. 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 "N X Armani Exchange" trademark and the provider of design and consultation services to PI. It is established that the designs services provided by Armani constitute assists within the meaning of 19 U.S.C. 1401a(h)(l )(A)(iv). ____________________________________________________________ 1 19 U.S.C. 1401a(h)(l)(A)(iv) The term "assist" means any of the following if supplied directly, 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. ISSUE: Whether the value of the assist may be limited to the portion of the payment attributable to Armani 's design services, thereby excluding the portions attributable to advertising, marketing and promotion activities? Whether the payment for the design services may be allocated in such a way so as to exclude from the value of the assist the value of those designs not used in connection with the imported merchandise? 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. 140la(b)(l)(C). In the subject submission, counsel clarifies that Armani 's role includes design services as well as advertising, marketing and promotion activities, the latter three of which are not considered dutiable as assists. Counsel requests that the dutiable value of the assist be restricted to the portion of the payment to Armani that pertains solely to the design services. This request is granted so long as verification of the cost of acquisition of the design services is provided to the port's satisfaction. This burden of proof is squarely the responsibility of the importer. Accordingly, the importer must be able to prove that the cost of acquisition of the design services is represented by only a portion of the payment to Armani. The verification must clearly delineate between the amounts attributable to the dutiable design services and the non-dutiable services. As to the second issue, this office finds that the value of the designs not used may not be excluded from the dutiable value of the assist. This situation is analogous to that discussed in the General Notice regarding the Modification and Revocation of Customs Ruling Letters Relating to Assists, published in Customs Bulletin, Vol. 2, No. 51 on December 20, 1995. The General Notice provides 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 the imported merchandise. Although the General Notice specifically addresses assists that fall under the categories described in 19 U.S.C. 1401a(h)(1)(A)(I))(ii)(iii), i.e., materials components and the like incorporated or consumed in the imported merchandise, the three part analysis discussed therein is equally applicable to the instant situation involving design assists that fall under 19 U.S.C. 1401a(h)(1)(A)(iv). The three part analysis is described in the General Notice, as follows: First, the material or components must fit the definition of an assist; second, it must appropriately be valued as an assist; and third, the value of the assist must be apportioned to the imported merchandise. Secondly, the payments for the design work represent the value of the assist. Third the value of the design work must be apportioned to the imported merchandise. In the instant situation, it is agreed that the design work constitutes an assist under 19 U.S.C. 140la(h)( l)(A)(iv). It is also agreed that the payments for the designs represent the dutiable value of the assist. What is at issue is how to apportion the design payments. The General Notice provides that assists: "use[d] in connection with the production or the sale for export to the United States of the merchandise" constitute 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... 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. In the instant situation the payments for the designs are made in lump sums regardless of whether all of the designs are used to manufacture the imported merchandise. In this sense, the situation is analogous to that in the General Notice where the assist is "consumed" in the production of the imported merchandise. Accordingly, the fact that some of the designs are not actually used in the production of the imported merchandise does not negate the fact that the total payment for all the designs, whether used or not, constitutes the value of the design assists. This view is consistent with that expressed by our Office of Regulatory Audit. Below are the comments provided by that office regarding why Presidio's proposed apportionment is unacceptable. The CPA [for Presidio] is correct in stating that the research and development is considered a period expense and not an inventoriable cost. The nature of R&D is that it is often incurred during periods prior to when production of resulting product occurs. It would not be permissible under GAAP to avoid reporting the expense and it has no current relation to inventory so, GAAP provides that it should be expensed during the period when incurred (paid). While the CPA is correct in the GAAP interpretation, we believe that the dutiability of the expense may not be based on his interpretation that it should be allocated to all designs whether used or scrapped. The payment is made to Armani in a lump sum for design work. The full amount is owed whether usable or non-usable. As a result, the business must charge a sufficient sales price to recover the full amount paid to Armani in order to adequately recover costs. This office concurs with Regulatory audit's conclusion that given the statutory definition of "Engineering , development , artwork, design work ... are necessary for the production of the imported merchandise'', the total payment is necessary for the production of the imported merchandise, rather than only the payment amount after allocation between usable and non­ usable designs. The regulatory auditor points out that the Statement of Administrative Action ("SAA"), H.R. Doc. No 153, (96 Cong., 1st Sess., pt. 2 (1979) reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act ("TAA"" of '1979 at 46, (October 198I), also supports the position that the total payment (equal to total design center cost) should be apportioned to the imported merchandise. Specifically he quotes the following language: "in another case, a firm may carry the cost of its design center outside the United States as a general overhead expense without allocation to specific products. In this instance, an addition to the price for design assist could be made with respect to the imported merchandise by apportioning the total design center cost on a unit basis to the imported merchandise.” In summary, the collective development of the designs was necessary for the production of the imported merchandise. The payment for the designs was for all of the designs, not just for those used in the manufacture of the imported merchandise. Accordingly, the total design payment is the value of the assist. HOLDING: Upon reconsideration of the new facts presented, HQ 548490 is modified in part and upheld in part as described below. The value of the assist for the design and consultation services may be limited to that portion attributable to the design services and not to those services pertaining to advertising, marketing and promotion activities. The importer, however, must present, to the port’s satisfaction, sufficient documentation distinguishing the design service payments from the other services provided. The total payment for the design services is dutiable and may not be apportioned in such a way so as to exclude from the value of the assist those amounts attributable to the designs not used in connection with the imported merchandise.  Sincerely, Virginia L. Brown, Chief Value Branch