VAL CO:R:C:V 544323 VLB
John M. Peterson, Esquire
Neville, Peterson & Williams
39 Broadway
New York, New York 10006
RE: -------------, Inc.: Request for Ruling Concerning
Dutiability of Payments Made By the Importer
Dear Sir:
This is in response to your letter dated March 27, 1989,
requesting a ruling on behalf of your client, -------------
(hereinafter referred to as the "importer"). You state that the
importer is currently entering imported merchandise, but is
seeking a prospective ruling on whether items that are now
declared as "assists" are in reality assists under the Tariff Act
of 1930, as amended by the Trade Agreements Act of 1979 (19
U.S.C. section 1401a; TAA).
FACTS:
The importer is purchasing merchandise that is manufactured
in the Philippines by API, a related party. You state in your
letter that API functions as a "labor contractor" for the
importer. The importer purchases materials and supplies (e.g.,
fabric, yarn, thread, leather, etc.) from unrelated suppliers.
The importer arranges for the materials and supplies to be
shipped to API's factory in the Philippines, where API uses them
to produce imported merchandise.
You state that at all times, the importer retains title to
the materials and supplies which it purchases. The price between
the parties is API's actual costs of labor, fabrication and
processing, plus an agreed-upon addition to general overhead and
profit.
When the goods are imported, the value of the material and
supplies is added to the "price actually paid or payable". The
value of the material and supplies is the importer's cost of
acquiring the materials, plus all costs incidental to
transporting them to API's factory in Manila. Finally, the
quantity and the value of materials and supplies used in the
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production of each imported product and calculated periodically
according to API's inventory and manufacturing records, in
accordance with generally accepted accounting principles.
The importer also provides several services to, or on behalf
of, API. These services are: 1) Paying salaries and benefits
for management, supervisory and quality control personnel; 2)
Purchasing and packing the material and supply assists; 3)
Warehousing the materials and supplies; 4) Hiring independent
auditors in the Philippines to conduct regular physical
inventories of the importer's material and supplies that are
stored at API's Philippine warehouse and to provide accounting
services to API; 5) Providing API with equipment and machinery
that you state is not used in the production of the imported
merchandise.
ISSUE:
Whether the five items listed above constitute assists
under section 402(h) of the TAA.
LAW AND ANALYSIS:
As you know, transaction value, the preferred method of
appraisement is defined in section 402(b)(1) of the Tariff act of
1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C.
1401a(b); TAA) as the "price actually paid or payable for the
merchandise" plus five enumerated statutory additions.
One of the statutory additions is "the value, apportioned as
appropriate, of any assist. . . ." The term "assist" is defined
in section 402(h) of the TAA as follows:
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:
(i) Materials, components, parts, and similar
items incorporated in the imported
merchandise.
(ii) Tools, dies, molds, and similar items
used in the production of the imported
merchandise.
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(iii) Merchandise consumed in the production
of the imported 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.
Finally, section 402(h)(1)(B) states:
No service or work to which subparagraph (A)(iv)
applies shall be treated as an assist for purposes of
this section if such service or work--
(i) Is performed by an individual who is
domiciled within the United States;
(ii) Is performed by that individual while he
is acting as an employee or agent of the
buyer of the imported merchandise; and
(iii) Is incidental to other engineering,
development, art work, design work, or plans
or sketches that are undertaken within the
United States.
You state that "Customs officials have previously reviewed
the relationship between [the importer] and API and determined
that the relationship does not affect the `price actually paid or
payable' for the merchandise." Therefore, for purposes of this
ruling, we are assuming that transaction value is the proper
appraisement method.
For ease of discussion, we will address each of the five
possible assists separately.
1. Salaries and Benefits for Management and Supervisory Personnel
In your submission on pages 8 through 10, you list the
position/title and duties/responsibilities of several people that
the importer employs, but who are assigned to work at API's
Philippine plant. These positions include President, Vice
President, Vice President, Industrial Engineering/Technical
Development, Technicians for Leather Operations, Technician for
Fabric Operations, Technician for Knit Operations, Technician for
Knitted Hats and Scarves, Technician for Outdoor Shoe Operations,
and Technician for Machine Maintenance.
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In your supplemental submission dated February 8, 1990, you
state that the "technicians" are "engaged exclusively in
supervisory and managerial functions, rather than directly in
production of the goods." The technicians have broad supervisory
responsibility for arranging the shipment, receipt and inspection
of materials, planning and monitoring various facets of
manufacturing, and reporting to the importer concerning these
activities.
You state that the listed employees are citizens of several
nations, including the U.S., West Germany, and Jamaica. API pays
1) a portion of each person's salary, consistent with prevailing
Philippine salary rates; 2) fringe benefits and social benefits
mandated by Philippine law; and 3) Philippine income taxes for
each employee. These charges are carried on API's books, and are
billed to the importer as part of API's overhead incurred in the
manufacture of imported products.
You indicate that the importer pays the balance of the
salaries for these employees. The importer pays the employees
directly through checks drawn on the importer's U.S. bank
account.
You contend that "to the extent salaries and other expenses
for these "expatriate" employees are paid by Aris New York, they
are not dutiable "assists", and should not be added to the
transaction value of imported merchandise produced by API." You
cite several Headquarters Letter Rulings (HRL) that you contend
support your position. Generally, the holding in the rulings is
that management services are not considered assists. See c.f.,
HRL 543992, dated September 10, 1987, and HLR 543820, dated
December 22, 1986.
The services that the importer's employees are providing to
API are analogous to the services described in the above-
referenced rulings. Based on those rulings, we hold that the
salaries and benefits for the importer's management and
supervisory personnel are not assists within the meaning of
section 402(h)(1)(A) of the TAA.
You also request a ruling concerning whether any part of the
management services would be considered an assist if the
transaction is restructured. Specifically, you propose that API
would establish a separate bank account in the Philippines,
designated "U.S. Employee Philippines Salary Account". The
account would be considered neither an asset nor a cost of doing
business for API, but would be restricted to the salaries, taxes
and benefits for the "expatriate" employees of the importer.
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The importer would periodically advance funds to the
account, which would in turn be disbursed to pay the salaries,
benefits and Philippine taxes of the "expatriate" employees.
This would include the costs currently borne directly by API.
You cite HRL 542696 (TAA #46) dated February 22, 1982, to
support you contention that the management services would not
constitute assists under the restructured organization. In TAA
#46 involving an assembly operation, the importer's U.S. resident
employees worked in a related assembler's Mexican facility. The
importer proposed having a portion of the employees' salaries
paid through the Mexican subsidiary.
The importer proposed that on a periodic basis, not more
than once a month, but perhaps on a 60 or 90 day basis, the
importer would advance money to an account in a Mexican bank in
the name of the related assembly firm. The assembler would then
draw against the account to transmit the Mexican portion of the
salaries and taxes, to the U.S. domiciled employees as well as to
the Mexican government. The advance account was identified on
the assembler's books as "U.S. Employee Mexico Salary Account."
The account was not considered to be an asset nor a cost of doing
business for the assembly firm.
In TAA #46, Customs held that the fact that a portion of the
employees' salaries was paid through a conduit, the assembler,
was not relevant, because the record established that payment was
made by the importer who legally retained the status of employer.
In addition, the services that the personnel were performing did
not fall within an assist category. Therefore, the salaries were
not dutiable as an assist.
The proposed reorganization that you propose is analogous to
the situation presented in TAA #46. Based on TAA #46, we hold
that the salaries under the proposed reorganization would not be
considered dutiable assists.
2. Purchasing and Shipping Department Costs
You state that the importer has several employees in its New
York based Purchasing Department that are responsible for
selecting and purchasing the materials and supplies that are
consigned to API. In addition, the importer has a New York based
Shipping Department that arranges for the warehousing, packing,
and transportation of the materials to API's factory.
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Presently, the importer includes as an assist, a portion of
the costs for the New York based Purchasing and Shipping
Departments, proportionate to the time and effort expended by
those departments in purchasing, and arranging shipment of, the
materials. However, you contend that these costs are not
assists. You cite HRL 543003 (TAA #58), dated February 25,
1983, to support your position. However, that ruling was
reversed by HRL 543096 (TAA #63), dated June 21, 1983.
In TAA #63, Customs held that the importer had provided the
assembler with material that constituted an assist. Customs
further held that the value of the assist included the
transportation costs to the place of production. Customs stated
that the cost of freight and related transportation charges when
paid by a seller were normally charged by it to the buyer as part
of the overall price of the merchandise. As a result, in TAA
#63, Customs explained that because the assembler did not pay the
freight charges, it received the material "at a reduced cost",
within the definition of assists in section 402(h)(1)(A) of the
TAA. Therefore, the amount of the actual cost of freight and
related transportation charges were added to the price actually
paid or payable for the imported merchandise.
Congress addressed the valuation of materials, components,
parts, and similar items in the Statement of Administrative
Action. Specifically, if the assist was acquired by the
importer from an unrelated seller, as in the present case, the
value of the assist is the cost of acquiring it. In addition,
the value shall include transportation costs to the place of
production. See, Customs publication "Customs Valuation under
the Trade Agreements Act of 1979" at p. 50, October 1981.
In this case the costs incurred by the importer's Purchasing
Department are costs incurred for activities prior to the
acquisition of the material. These expenses are not part of the
price that the importer will pay the unrelated seller for the
merchandise. Therefore, these expenditures are not includable in
the value of the material assists.
However, the activities undertaken by the employees in the
importer's Shipping Department are incidental to the
transportation of the materials. In addition, it is our
understanding that salaries of this type are generally included
as part of the overall shipping cost that would be capitalized as
a material cost of the items. Therefore, the Shipping Department
costs related to arranging the shipment of the materials,
supplies and machinery are includable in the value of the
assists.
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3. Warehousing and Export Packing Costs
You explain in your submission that the importer, after
purchasing the materials and supplies, frequently arranges for
temporary warehousing of the items at U.S. facilities that are
owned or leased by the importer. In addition, the importer
purchases packing materials, and the importer's employees pack
the materials for exportation to API. Moreover, once the
materials arrive at API's Philippine plant, the importer arranges
for them to be warehoused, at its own expense, prior to their use
in manufacture.
You state in your supplemental submission that, on the
average, the materials are warehoused for approximately 30 days.
The warehousing in both the U.S. and the Philippines is
undertaken for inventory purposes. Finally, you state that
warehousing generally does not occur for brief, in-transit
periods.
You cite HRL 542412 (TAA #20), dated March 27, 1981, to
support your contention that the warehousing costs and the
packing material are not assists. In TAA #20, Customs stated
that "procurement assists" such as purchasing, receiving,
inspection, and warehousing components were not part of the
transaction value of the imported merchandise.
Upon review of this ruling, Customs has determined that the
term "procurement assist" is not a term defined in the TAA. The
TAA simply defines what materials or services are considered
assists. As a result, we will address whether the warehousing
and packing activities are considered to be assists or part of
the value of an assist within the definition in section
402(h)(1)(A) of the TAA.
Your description of the warehousing activities indicates
that the materials are stored for inventory purposes and are not
stored for brief periods of time while in transit. Based on this
description we conclude that the warehousing activities are not
incidental to the transportation of the goods to API's plant.
Therefore, the warehousing costs are not included in the value of
the materials under the TAA.
On other hand, the packing activities are directly related
to the exportation and transportation of the materials. Thus,
the cost of the packing activities is includable in the value of
the material assists.
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4. Foreign Warehousing and Accounting Costs
As stated previously, the importer retains title to all
materials, supplies and machinery that are furnished to API. As
previously discussed, these items may be stored in a warehouse at
API's Manila facility. As a result, the importer retains an
independent accounting firm in the Philippines to undertake
periodic physical inventories and accounting reports concerning
the merchandise stored in the Philippines. In addition, the
accounting firm reviews API's financial records.
You cite HRL 542122 (TAA #4), dated September 4, 1980, to
support your argument that the accounting costs are not dutiable
assists under the TAA. We agree that the accounting activities
that you describe do not fall within the four categories of
assists under section 402(h) of the TAA.
In addition, we agree with your assertion that the cost of
warehousing the materials after they have arrived at the
manufacturer's plant is not included in the value of the assists.
The warehousing occurs after the transportation to the API's
Philippine facility has been completed. Therefore, the
warehousing is not incidental to the transportation of the
materials.
5. Non-Production Equipment Costs
On pages 18 through 21 you list and discuss several pieces
of equipment and machinery that the importer supplies to API free
of charge. You contend that all of the equipment is not directly
employed in the manufacture or production of imported
merchandise; therefore, the equipment should not be considered an
assist.
As you have stated, the importer is currently contesting the
dutiability of certain machinery assists in a case (Court No. 83-
06-00866) pending before the U.S. Court of International Trade.
It is our understanding that Judge Aquilano must still rule on
various unresolved factual issues in the case.
In light of the fact that the court proceeding involves a
determination of what equipment is considered an assist and the
value of the assist, we believe that it is inconsistent with the
sound administration of the Customs laws to rule on the issue of
equipment dutiability at this time. Once a final opinion has
been issued in the court case, we will be pleased to consider
this matter, if requested.
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HOLDING:
The salaries and benefits for management and supervisory
personnel, the Purchasing Department costs, the warehousing
costs, and the foreign warehouse and accounting costs are not
assists under the TAA. However, the importer's Shipping
Department activities and the export packing costs are incidental
to the transportation of the material assists. Therefore, the
cost of these two operations are includable in the value of the
material assists.
Due to the pending court case involving equipment assists,
we are unable to rule on the dutiability of the machinery and the
equipment at this time.
Sincerely,
John Durant, Director
Commercial Rulings Division