VAL CO:R:C:V 545278 CRS
District Director
U.S. Customs Service
Patrick V. McNamara Building
477 Michigan Avenue
Detroit, MI 48226
RE: Internal Advice Request 29/93; prototypes; subsequently
imported merchandise; design and development; price actually paid
or payable; assists; HRL 544642 cited
Dear Sir:
This is in reply to your memorandum dated March 26, 1993, in
which you requested internal advice in regard to the appraisement
of certain modified engines developed for Ford Motor Company (the
"buyer"). We regret the delay in responding.
FACTS:
The buyer negotiated an interim agreement (the "agreement")
with Yamaha Motor Company, Ltd. (the "seller"), to modify and
adapt an existing automobile engine (hereinafter referred to as
the "modified engine") for use in certain automobiles equipped
with automatic transmissions. The agreement provides that if the
modifications prove successful, the parties would enter into a
contract for the purchase and supply of production engines. The
modifications were successful and production engines have been
and continue to be imported.
Pursuant to the agreement, the seller is responsible for the
design and development modifications, in return for which it will
receive a fee, payable in installments. This amount constitutes
the buyer's total financial obligation under the agreement for
developing the modified engine. The agreement also provides,
however, that any prototypes of the modified engines (the
"prototype modified engines") required by the buyer during the
term of the agreement will be purchased under separate purchase
orders in accordance with the buyer's standard purchase order
terms and conditions.
The buyer issued nine purchase orders covering a total of
178 prototype modified engines. Subsequently, amendments were
issued reducing the number of engines to be imported to 156.
Duty was paid on the 156 prototype modified engines which were
imported for testing purposes. The balance of the prototype
modified engines were retained by the seller and were never
imported.
The buyer contends that the payments to the seller are an
assist in that they were made for engineering, development and
design work, undertaken elsewhere than in the U.S., that was
necessary to manufacture the imported production engines. In
addition, you advise that the buyer also contends that since it
paid duty on the imported prototype modified engines, the value
of these "assists" cannot be added to the price actually paid or
payable of subsequently imported production engines. However,
you maintain that the payments for the design modifications are
not assists but part of the price actually paid or payable and
therefore dutiable.
ISSUES:
The issues presented are: (1) how should the imported
prototype modified engines be appraised; and (2) how should the
imported production engines be appraised?
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 under the TAA is transaction
value, defined as the price actually paid or payable for the
merchandise when sold for exportation to the United States, plus
certain statutory additions, including the value. apportioned as
appropriate, of any assist. 19 U.S.C. 1401a(b)(1).
The term "price actually paid or payable" means 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. 19 U.S.C. 1401a(b)(3).
The agreement provides for two separate payments to the
seller. One is for the modification of an existing engine model
in order to adapt the engine for use in automobiles produced by
the buyer. This amount constitutes the buyer's total financial
obligation for the design and development work performed by the
seller. A payment schedule for this amount is set forth in the
agreement. Interim Agreement at 3, paragraph 4. In addition,
the agreement provides that should the buyer require prototype
modified engines for testing purposes, it could purchase them
under separate purchase orders in accordance with the buyer's
standard terms and conditions. Interim Agreement at 1. This
second payment therefore relates to the purchase of prototype
modified engines produced by the seller in the course of the
design work. Of the 178 prototype modified engines produced by
the seller pursuant to the buyer's purchase orders, only 156 were
actually imported by the buyer.
The buyer contends that the payment to the seller for the
prototype modified engines constitutes an assist, the value of
which should be added to the price actually paid or payable of
imported production engines. The term "assist" is defined as
that which is supplied directly or indirectly, and free of charge
or at a reduced cost, by the buyer for use in connection with the
production or sale for export of merchandise, including, inter
alia, engineering, development and design work, necessary for the
production of the imported merchandise and undertaken elsewhere
than in the United States. 19 U.S.C. 1401a(h)(1)(A)(iv).
However, in this instance the development and design work was not
provided by the buyer. It was performed by the seller, and paid
for by the buyer in the amount, and according to the schedule,
set forth in the agreement. Customs has held that payments for
engineering development work, etc., are not assists but are part
of the price actually paid or payable for the imported
merchandise. E.g. Headquarters Ruling Letter (HRL) 544381 dated
November 25, 1991; HRL 543376 dated November 13, 1984. See also,
Chrysler Corporation v. United States, No.. 93-186, slip op. at
17 (Ct. Int'l Trade September 22, 1993). Accordingly, the value
of the imported prototype modified engines does not constitute an
assist.
The agreement provides that any prototype modified engines
required by the buyer would be purchased under separate purchase
orders, i.e., separate in that the payment for prototype modified
engines would be in addition to the agreed upon compensation for
the entire design and development process. Separate purchase
orders were placed for 178 engines; subsequently, the order was
amended and while the buyer paid for all 178, only 156 were
imported. Assuming transaction value is indeed the appropriate
basis of appraisement, the payment of the purchase order amounts
constitutes the price actually paid or payable for the imported
prototype modified engines. Since only 156 prototype modified
engines were imported, however, the other twenty-two prototype
engines originally ordered are not subject to duty. Duty on the
156 engines was paid upon importation.
Having paid duty on the 156 imported prototype modified
engines the buyer also maintains that the cost of the design and
development work for the modified engines should not be included
in transaction value as part of the price actually paid or
payable of the imported production engines. Again, the agreement
provides for two payments to be made by the buyer as compensation
for the work performed by the seller in regard to the engine
modification program: one for the overall design and
development; the other specifically for the prototype modified
engines. As noted above, the latter payment represents the price
actually paid or payable for the imported prototype modified
engines.
In HRL 544516 dated January 9, 1991, certain prototypes were
determined to be a necessary step in the design and development
of the subsequently imported articles based on the prototypes.
HRL 544516 at 4. In that case, as here, there were two payments:
one for the imported prototype; the other for the design and
development work. The prototype was later imported into the
U.S., in consequence of which it was determined that since the
value of the article had already been subject to duty once, it
was not part of the price actually paid or payable for the
subsequently imported merchandise. However, this position was
modified by HRL 544642 dated June 24, 1991. This ruling held not
only that the payment for the design and development process was
part of the price actually paid or payable for the subsequently
imported merchandise but in addition, that the cost of the
prototype itself (which was later returned to the foreign
manufacturer and thus became an assist), should also be added to
the price actually paid or payable notwithstanding the fact that
duty had already been paid on the prototype when it was imported.
In the instant case, the payment from the buyer for the
design and development of the modified engines is part of the
price actually paid or payable for the subsequently imported
production engines. Furthermore, and again notwithstanding the
fact that duty was paid on the prototypes when imported, we also
find that the payment for the all 178 of the prototypes
manufactured by the seller constitute part of the price actually
paid or payable for the subsequently imported production engines.
The cost of the prototypes is inextricably linked to the design
and development process and therefore is appropriately included
in the transaction value of the imported production engines.
HOLDING:
The prototype modified engines are not assists such that
their value should be added to the price actually paid or payable
for the imported production engines. However, the payment made
by the buyer constitutes the price actually paid or payable for
the imported prototypes.
The payment for the design and development of the prototype
modified engines is a cost attributable to the production engines
and should therefore be included in transaction value as part of
the price actually paid or payable for the subsequently imported
production engines.
This decision should be mailed by your office to the
internal advice requester no later than sixty days from the date
of this letter. On that date the Office of Regulations and
Rulings will take steps to make this decision available to
Customs personnel through the Customs Rulings Module in ACS, and
the public through the Diskette Subscription Service, Lexis~, the
Freedom of Information Act and other public access channels.
Sincerely,
John Durant, Director