VAL CO:R:C:V 544764 ILK
------------------------------
---------------------------------
--- --------- ------
--------- ---------
RE: Appraisement of Merchandise Assembled in Mexico Pursuant to a Shelter Operation
Contract
Dear ------------:
This is in response to your letter of July 24, 1991 and your July 31, 1992
supplemental submission (hereinafter referred to as the "request"). On behalf of your
client ------- ---- Company (hereinafter referred to as the "importer"), a United States
company, you request a ruling on several issues relating to the appraisement of lock
assemblies imported from Mexico, pursuant to a shelter operation contract. This response
follows a June 30, 1993 meeting between yourself and members of my staff from the
Value and Marking Branch, and an August 12, 1993 submission made on behalf of the
importer. We regret the delay in responding.
FACTS:
The importer of record is a manufacturer and distributor of lock assemblies.
Participating in what is commonly referred to as a "shelter operation", the importer has
contracted for the assembly of locks with ---------- -------, Inc. (hereinafter referred to as
the "shelter"), a U.S. company. The shelter is the U.S. parent of a Mexican assembler,
------S.A. de C.V. (hereinafter referred to as the "assembler"). The importer supplies the
assembler with components, and pays the shelter for the cost of services rendered in
Mexico. The importer is represented as being unrelated to the assembler and to the
shelter. A copy of the contract between the importer and the shelter has been provided
to us. The contract refers to the importer as the "purchaser" and the shelter as the
"seller." The contract provides that the shelter will provide space and labor in selected
locations in Mexico for the fabrication or assembly of the importer's products.
Costs incurred by the importer in manufacturing lock assemblies in Mexico include
material/component expenses, assists (including tools, dies and molds), foreign operating
expenses, profit and packing. The importer makes two types of payment to the shelter
for the assembler's services and expenses. One type of payment is direct compensation
for the assembly services, which is primarily based on billings for the labor-hour
expenditures plus a mark-up to cover various labor-associated costs, and profit. The
importer does not question that this direct compensation for the assembly services is part
of the price actually paid or payable, as it constitutes direct payment to the seller for the
merchandise. The second type of payment consists of "pass-through" payments, which
are the importer's "reimbursement" to the shelter for expenses that the assembler incurs
to third parties in Mexico. The assembler pays the Mexican entities and the shelter bills
the importer for the actual costs. The importer has categorized the third party pass-
through expenses as follows: rent, salaried and indirect personnel, fringe benefits, leasehold
improvements, equipment purchases, insurance, Mexican brokerage, professional services,
protective services, etc. The importer is contemplating paying these third party pass-
through expenses directly to the third parties, either by opening an account in a Mexican
bank in the name of a designated agent of the importer, which is incorporated in Mexico,
or by paying the third parties directly.
ISSUES:
1. Whether transaction value is the proper basis of appraisement for these
transactions.
2. Assuming transaction value is the proper basis of appraisement, whether pass-
through payments made by the importer to the shelter are part of transaction value.
3. Assuming transaction value is the proper basis of appraisement, whether
payments made by the importer to a third party who provides a service to a party related
to the seller is part of the price actually paid or payable, or whether such payment is
to be added to the price actually paid or payable for the imported merchandise as an
assist.
LAW AND ANALYSIS:
1. Basis of appraisement
Transaction value is the preferred basis of appraisement, and 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
when sold for exportation to the United States" plus five enumerated statutory additions.
The transaction between the importer and the shelter represents a sale for exportation to
the United States as those words are used in 402(b) of the TAA, and may, therefore
be the basis for transaction value.
In cases where the shelter is the importer of record and the assembler and the
shelter are related, even where 19 CFR 152.103(a)(3) is applicable, the transaction value
must be acceptable under section 402(b)(2)(B) of the TAA and 19 CFR 152.103(j)(2)(i).
T.D. 90-42. The transfer price between related parties in a shelter transaction will be
examined closely in accordance with Customs Notice on Transfer pricing, as published
in the January 27, 1993 Customs Bulletin.
2. Dutiability of pass-through payments
The term "price actually paid or payable" is defined in 402(b)(4) of the TAA as
the "total payment (whether direct or indirect...) made, or to be made, for imported
merchandise by the buyer to, or for the benefit of, the seller." The payments made
to the shelter for direct compensation for the assembly services provided by the assembler
are part of the price actually paid or payable. However, with respect to the pass-
through payments, the importer contends that although they are "payments made to the
seller," they are for expenses which are unrelated to the merchandise and thus not
included in the price actually paid or payable for the merchandise.
It is the position of the Customs Service that all monies paid to the seller, or a
party related to the seller, are part of the price actually paid or payable for the
merchandise under transaction value. See e.g. Generra Sportswear Co. v. United States,
905 F.2d 377 (Fed. Cir. 1990); Headquarters Ruling Letter (HRL) 544640 dated April
26, 1991. The Court in Generra, specifically held that "a permissible construction of the
term 'for imported merchandise' does not restrict which components of the total payment
may be included in transaction value." Generra, 905 F.2d at 380.
The importer's request lists numerous pass-through expenses.
The importer assumes that the following pass-through expenses (list #1) would be part of
the price actually paid or payable under transaction value because they relate to the
imported merchandise:
production department expenses
quality control department expenses
Mexican customs brokerage (Southbound)
local freight and Mexican (Southbound) freight
equipment purchases, equipment repair/maintenance
tools, dies, molds, equipment (supplied by Mexican vendors)
equipment rental
It is the importer's position that the following pass-through expenses (list #2) paid
to the shelter bear no relationship to the imported merchandise and should not be part
of the price actually paid or payable under transaction value:
employee benefits and fringes for personnel working in
Mexico
employee education
"salaried" personnel
work permits
insurance
travel and entertainment
automobile expenses
meetings/seminars
membership/dues
contributions/donations
protective services
laundry and uniforms
newspaper subscriptions
personnel recruitment
employee medical expenses
project 88 (construction of new facilities)
professional services
rental expenses
utilities/telephone expenses
office equipment, maintenance, office supplies, data processing
employee loans
plant maintenance, plant facilitation, and maintenancesupplies
U.S. payroll
amortization of leasehold improvements
In your request, you cite TAA No.43 dated December 17, 1981, TAA No.45
dated January 26, 1982, TAA NO.52 dated September 21, 1982 and HRL 544353 dated
October 24, 1989, in support of your position that although the pass-through payments
are made to the seller, they are expenses unrelated to the merchandise, thus not included
in the price actually paid or payable. We find the facts in TAA Nos. 43 and 45
significantly distinguishable from the instant case. Further, none of the rulings are
applicable as they were decided prior to Generra. According to the Court's decision in
Generra, as long as a "payment was made to the seller in exchange for merchandise sold
for export to the United States, the payment properly may be included in transaction
value, even if the payment represents something other than the per se value of the
goods." 905 F.2d at 380. The Court further found that although $0.95 per unit of the
total payment made to the seller by the importer was for quota charges incurred by the
seller to a third party, "it was reasonable for Customs to conclude that the entire payment
was 'for imported merchandise' within the meaning of subsection 1401a(b)(4)(A). Thus,
to the extent that the pass-through payments are paid to the shelter, or a party related
to the shelter, even though the payments may represent something other than the per se
value of the assembled merchandise, all the payments to the shelter can reasonably be
concluded to be for imported merchandise and are part of the price actually paid or
payable.
3. Payments made directly to third parties
While the importer currently reimburses the shelter for the expenses in lists #1 and
#2 for payments made to third parties, it is contemplating paying the expenses directly
to the third parties, without paying them through the shelter. The importer seeks a
determination of whether the payments made to the third parties would be part of the
price actually paid or payable, or whether the payments can be categorized as assists.
As previously stated, the term "price actually paid or payable" is defined as "the
total payment (whether direct or indirect,...) made, or to be made, for imported
merchandise, by the buyer to, or for the benefit of, the seller." (Emphasis added).
Customs has consistently ruled that payments made by a buyer to a third party for
services to benefit the seller may constitute an indirect payment to the seller includable
in transaction value, and payments by a buyer for services not performed for the benefit
of the seller do not form part of transaction value. See e.g. TAA No.60 dated march
9, 1983. In TAA No.60, payments to a third party were made for services provided
to the assembler consisting of conferring with U.S. importers, setting up assembly
programs, checking markets in the U.S., looking for used machinery and attending trade
shows. Customs ruled that the services provided were for the benefit of the assembler
which would ordinarily be performed by the assembler and payment for these services was
an indirect payment to the assembler and as such was part of the price actually paid
or payable for the merchandise.
You cite several rulings to support the importer~s contention that the items in lists
#1 and #2 are not part of the price actually paid or payable if they are paid for by the
importer directly to the third party. In the rulings cited by you, we did not find that
the services provided by the third party, for which payments were made directly to the
third party, were for the benefit of the seller. The services in the cases cited were for
product testing (HRL 542946 dated January 27, 1983), inspection of quality of
merchandise prior to importation (HRL 543837 dated February 18, 1987), locating sources
of quota (HRL 544143 dated July 5, 1988), a quasi governmental agencys' advice on the
sourcing of goods from the People's Republic of China (HRL 544264 dated February 24,
1989), management and negotiating services for terminating an agreement between the
importer and supplier (HRL 544276 dated October 24, 1989), the purchase of quota (HRL
544472 dated July 30, 1990) and foreign warehousing costs (HRL 543569 dated July 16,
1985 and HRL 544758 dated February 21, 1992). We do not find any of the above
cases dispositive of the issue presented in this case. The services described in lists #1
and #2 do not include any of the services described in the cases cited by the importer,
and we find the services described in lists #1 and #2 to be performed for the benefit of
the assembler, which would ordinarily be provided by the assembler.
In HRL 542984 dated April 8, 1983, we ruled that payments for product liability
insurance made by the buyer to a third party insurer were part of the price actually paid
or payable for the imported merchandise as indirect payments, where a condition of the
sale required the seller to obtain suitable insurance and bear the cost thereof. Title II
of the Statement of Administrative Action of the TAA provides that one example of an
indirect payment to a seller would be "the settlement by the buyer, whether in whole or
in part, of a debt owed by the seller." We have stated that payments made to a seller
or a party related to a seller are part of the price actually paid or payable. See TAA
No.6. In this regard where the payments are for the settlement of a debt of a party
related to the seller, such payments are also part of the price actually paid or payable
for the imported merchandise. Thus, a payment made directly to the third party supplier
by the importer for an expense incurred by the assembler is the settlement by the
importer of a debt owed by the assembler, and is included in the price actually paid or
payable for the imported merchandise.
Likewise a payment made directly to a third party supplier for services provided
by the third party, which services are for the benefit of the assembler, are part of the
price actually paid or payable for the imported merchandise. Such payment is for the
benefit of a party related to the shelter, and is thus included in the price actually paid
or payable for the imported merchandise. It is not material whether the importer pays
the third party from a Mexican bank through an agent incorporated in Mexico, or pays
the third party directly. As we find that the pass-through payments are included in the
price actually paid or payable for the imported merchandise, we do not reach the issue
of whether they are assists.
HOLDING:
1. Transaction value is the proper method of appraisement for these
transactions.
2. Pass-through payments made to the assembler or the shelter by the importer
are part of the price actually paid or payable for the imported merchandise.
3. Payments made by the importer to a third party who provides the services
in lists #1 and #2 to the assembler related to the shelter, are for the benefit of the
assembler, and payments for expenses incurred by the assembler are indirect payments to
the assembler and are included in the price actually paid or payable for the imported
merchandise.
Sincerely,
John Durant, Director
Commercial Rulings Division
cc: Helene C. Wolf, Senior Import Specialist
San Ysidro, CA
Frederick D. Lawrence, District Director