VAL-2 CO:R:C:V 544508 pmh
District Director of Customs
Nogales, AZ
RE: Reconsideration of C.S.D. 89-127
Dear Sir:
This is in response to your request for a clarification of
C.S.D. 89-127, dated May 21, 1990. Specifically, you inquire
whether certain testing costs that are incurred during the
manufacture and assembly of electronic products, are to be
considered assists.
In C.S.D. 89-127 Customs held that test equipment provided
by the U.S. importer, free of charge, to the foreign manufacturer
and used for testing the integrity of finished instruments before
such instruments were shipped to the U.S., did not constitute an
assist within the meaning of section 402(h)(1)(A) of the Tariff
Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA;
19 U.S.C. 1401a(b)). That decision was based on the fact that
the testing equipment was used on the finished instruments and
was not used in the production of the merchandise within the
meaning of section 402(h)(1)(A)(ii), and did not fall within any
of the other assist categories.
FACTS:
In your May 21, 1989 letter you describe a situation in
which testing equipment is used in the manufacture of electronic
products. You state that since such products require precise
testing to ensure quality, testing usually starts prior to
production, i.e. the individual components are tested.
Thereafter, depending on the product, the testing equipment could
be used a number of times throughout the assembly and
manufacturing process. You further state that no product will
be sold or shipped until it is thoroughly tested.
-2-
ISSUE:
Whether cost of the testing equipment as described, falls
within the definition of an assist pursuant to section
402(h)(1)(A) of the TAA.
LAW AND ANALYSIS:
Section 402(h)(1)(A) provides as follows:
The term assist means any of the following if supplied
directly, 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 in-
corporated in the imported merchandise.
(ii) Tools, dies, molds and similar items used in the
production of the imported merchandise.
(iii) Merchandise consumed in the production of the
imported merchandise.
(iv) Engineering, development, art work, design work,
plans and sketches that are undertaken elsewhere than
in the United States and are necessary for the
production of the imported merchandise.
In TAA No. 11, dated November 7, 1980 (HRL 542187), we held
that testing costs incurred as a result of testing the design and
structure of steel structures, were not assists within the
meaning of section 402(h)(1)(A) of the TAA. In that case, the
testing was neither part of the design and engineering work, nor
necessary for the fabrication of the steel structures. Likewise,
in C.S.D. 89-127, Customs used the same reasoning and determined
that the costs incurred as a result of testing the integrity of
the finished instruments did not constitute an assist within the
meaning of 402(h)(1)(A)(ii) since these costs were incurred after
production.
-3-
Since costs incurred for testing the quality, strength
accuracy, etc. of a finished product, are necessarily incurred
after production, Customs has continued to rely on the above
reasoning in determining that most testing costs do not
constitute assists. (See HRL 54762, dated January 14, 1983; HRL
543587, dated January 28, 1986.)
However, it is our opinion that the situation you describe
in your letter is distinguishable from those we have addressed in
the past. That is, the testing costs are incurred during
production rather than after production. Furthermore, you
indicate that the testing in this case constitutes more than mere
monitering of production, that given the nature of the finished
electronic product, no product will be shipped or sold without
being thoroughly tested. Testing is required for some of the
original components of the product and at various stages of the
manufacturing and assembly process.
Under the circumstances you describe, where testing costs
are incurred during the the manufacture and/or assembly of a
product and where it can be shown that such testing is an
essential factor in the fabrication process (i.e., the nature of
the finished product is such that ascertaining the sensitivity,
accuracy, etc. periodically throughout production is requisite
to the finished product's marketability), the testing equipment
provided free of charge to the foreign manufacturer by the U.S.
importer, constitutes an assist within the meaning of category
(ii) of 402(h)(1)(A) of the TAA. It is our opinion that the
language "similar items used in the production of the imported
merchandise," as that language is used in category (ii), was
intended to include as assists production equipment that, like
tools, dies and molds, directly contributes to the final product.
HOLDING:
Testing equipment provided free of charge to the foreign
manufacturer by the U.S. importer may constitute an assist within
the meaning of 402(h)(1)(A) of the TAA if it can be shown that
the equipment was used for testing performed during the
production process and that such testing, due to the nature of
the finished product, was essential to production of the product.
Sincerely,
John Durant, Director,
Commercial Rulings Division