VAL RR:IT:VA 546000 LR
Port Director
U.S. Customs Service
Cleveland, Ohio
RE: Application for Further Review of Protest No.4116-94-100004; Engineering Costs; Price Actually Paid or
Payable; Transaction Value
Dear Director:
This is a decision on the application for further review
(AFR) of the above-referenced protest concerning the
appraisement of certain imported components for a three-stand
aluminum cold rolling mill. The entry was liquidated on
September 16, 1994 and the protest and AFR was filed by counsel
on behalf of SMS Engineering Inc. ("protestant") on December 13,
1994. Counsel made two additional submissions in March, 1996 and
a third in June, 1996. The information counsel labeled as
confidential in its June 14, 1996 submission is set forth below
in brackets and will not be included in the public version of
this ruling.
FACTS:
In June 1990, protestant agreed to supply Logan Aluminum
Company in Russelville, Kentucky ("Logan") with a three-stand
cold mill for the manufacture of aluminum sheets. A copy of the
contract was submitted. In order to meet its contractual
obligations with Logan, in August 1990, protestant placed two
contracts with its parent company in Germany, SMS AG ("foreign
seller") to supply certain components for the three-stand
aluminum cold rolling mill and to provide various engineering
services. P.O. 1943 ("supply contract") pertains to the supply
of the mill components. P.O. 1942 ("engineering contract")
pertains to engineering services to be provided by the foreign
seller. The imported mill components, along with other
components, were incorporated into the Logan mill.
The imported merchandise which is the subject of the
instant protest consists of the equipment the foreign seller
provided to protestant pursuant to the supply contract. Counsel
states in its March 21, 1996 submission that the imported
equipment consisted of
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx].
Based on the submitted contracts, the price protestant paid for
the imported merchandise comprised a [xxxxxxxxxxxxxxxxxxxxxxxx].
The merchandise was appraised based on transaction value
pursuant to section 402(b) of the Tariff Act of 1930, as amended
by the Trade Agreements Acts of 1979 (TAA), codified at 19 U.S.C.
1401a. In determining the transaction value, Customs included
all the charges covered by the supply contract and the
engineering contract. The only dispute concerns the engineering
charges provided for in the engineering contract. According to
the engineering contract, the foreign seller was to provide three
types of engineering services, "basic equipment supply", "general
engineering" and "mill modeling". "Basic equipment supply" was
for engineering services directly relating to the production of
the imported merchandise and counsel agrees with your
determination that these costs are part of the total payment for
the imported merchandise and are part of the transaction value of
the imported merchandise.
However, counsel disagrees with your determination regarding
the "general engineering" and "mill modeling" charges. Counsel's
position is that these charges related not to the imported mill
components, but to the construction and operation as a whole of
the a U.S. mill. Therefore, it claims that the charges incurred
by protestant for these services are not part of the price
actually paid or payable for the imported merchandise. Counsel
further contends that if Customs determines that the charges in
question were incurred with respect to the imported merchandise,
they were incurred only for technical assistance regarding the
operation and use of the equipment after its importation -- after
its subsequent incorporation into the mill as a whole.
Therefore, counsel claims that such charges are not included in
transaction value pursuant to 19 U.S.C. 1401a(b)(3)(A)(i)
pertaining to post-importation technical assistance.
Although it does not appear that your office disputes
counsel's claims regarding the nature of the engineering services
provided by the foreign supply pursuant to the engineering
contract, you disagree with counsel's conclusion that such
charges are not part of the transaction value of the imported
mill components. With regard to mill modeling, you contend that
this was an integral part of the engineering process and was
accomplished prior to importation as an aid in determining the
most effective design for the mill. You consider it to be a
necessary step in the production process. You indicate that the
computer generated models closely resemble research and
development and prototypes which Customs has considered to be
dutiable. With regard to the other engineering services, you
state that they involve research and development and other types
of engineering services relating to the design of a mill to be
built in the U.S. partially from imported components. You
disagree with counsel's arguments that the charges at issue are
non-dutiable post importation charges pursuant to 19 U.S.C.
1401a(b)(3)(A)(i), because the submitted documents do not show
what the charges actually encompass and because the charges are
not for post-importation technical assistance.
ISSUE:
Whether the charges protestant paid the foreign supplier for
general engineering and mill modeling are properly included in
the transaction value of the imported mill components.
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in
accordance with section 402 of the TAA. 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 enumerated
additions. Section 402(b)(1) of the TAA. The "price actually
paid or payable" is defined in section 402(b)(4)(A) of the TAA as
"the total payment (whether direct or indirect . . . ) made, or
to be made, for the imported merchandise by the buyer to, or for
the benefit of, the seller."
The focus of this case is whether the charges at issue are
part of the "price actually paid or payable" for the imported
mill components and thus part of transaction value. Two court
cases have addressed the meaning of the term "price actually paid
or payable." In Generra Sportswear Co. v. United States, 8 CAFC
132, 905 F.2d 377 (1990), the court considered whether quota
charges paid to the seller on behalf of the buyer were part of
the price actually paid or payable for the imported goods. In
reversing the decision of the lower court, the appellate court
held that the term "total payment" is all-inclusive and that "as
long as the quota 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." The court also explained that it did not intend that
Customs engage in extensive fact-finding to determine whether
separate charges, all resulting in payments to the seller in
connection with the purchase of imported merchandise, were for
the merchandise or something else.
In Chrysler Corporation v. United States, Slip Op. 93-186;
17 C.I.T. 1049 (Ct. Int'l Trade, decided September 22, 1993), the
Court of International Trade applied the Generra standard and
determined that although tooling expenses incurred for the
production of the merchandise were part of the price actually
paid or payable for the imported merchandise, certain shortfall
and special application fees which the buyer paid to the seller
were not a component of the price actually paid or payable. With
regard to the latter fees, the court found that the evidence
established that the fees were independent and unrelated costs
assessed because the buyer failed to purchase other products from
the seller and not a component of the price actually paid or
payable for the imported engines.
Customs position based on Generra is that there is a
presumption that all payments made by a buyer to a seller are
part of the price actually paid or payable for the imported
merchandise. However, this presumption may be rebutted by
evidence which clearly establishes that the payments, like those
in Chrysler, are completely unrelated to the imported
merchandise. See HRL's 545663, July 14, 1995; 545500, March 24,
1995.
.
Customs has previously ruled that payments to the seller for
expenses incurred for design and development of the imported
merchandise, including the development of prototypes and other
development costs, are part of the price actually paid or payable
for the imported merchandise. For example, in HRL 545278, April
7, 1994, we found that payments from the buyer to the seller for
engine prototypes were inextricably linked to the design and
development of the subsequently imported production engines and
thus part of the price actually paid or payable of the production
engines. Such costs were found to be a necessary step in the
design and development of subsequently imported merchandise. See
also HRL 545320, February 28, 1995 (research and development
costs incurred in the production of prototypes are included in
the appraised value of the imported prototypes).
In HRL 544694, February 14, 1995, Customs considered whether
certain design and development costs associated with the
production of automobiles in a foreign-trade subzone were
dutiable. Both foreign and domestic components were used in the
production of the automobiles. The importer's position was that
such costs were not dutiable as part of the appraised value of
the imported components because they related to the domestic
production of automobiles. Customs disagreed and concluded that
a portion of the design and development costs were dutiable,
i.e., that portion which was attributable to the foreign
components. Customs apportioned the design payments between the
imported non-privileged foreign components and the domestic
components.
You contend that the mill model was an integral part of the
engineering process and was accomplished prior to importation as
an aid in determining the most effective design for the mill.
You consider it to be a necessary step in the production process
of the mill, similar to research and development and prototypes
which Customs has considered to be dutiable. Based on Generra
and the above decisions, we agree that mill modeling and
engineering costs would be part of the price actually paid or
payable for the imported components so long as they relate to
research and development of those products. In HRL's 545278 and
545320, supra, in which Customs determined that the costs of
prototypes were dutiable as part of the price actually paid or
payable of the imported components or of the imported prototypes,
the costs clearly related to the production of the imported
merchandise. And in HRL 544694, Customs recognized that only a
portion of the design and development costs at issue related to
the imported automobile components.
In this case, counsel's contention is that the payments do
not relate to any research or development of the imported
merchandise but are for something else. Therefore, the question
that must be addressed is whether the evidence submitted
establishes that these payments are unrelated to the imported
merchandise and not in exchange for merchandise sold for export
to the United States and thus not part of the price actually paid
or payable. The fact that the mill model was accomplished prior
to importation is not determinative. As noted in HRL 545917,
August 1, 1996, "as long as the . . . payment was made to the
seller in exchange for merchandise sold for export to the United
States" such amounts are part of the total payment for the
imported merchandise regardless as to when they were incurred . .
."
Mill Modeling
Counsel indicates that "mill modeling" charges related to a
mill model created by the foreign seller. The mill model is a
computer simulation of the operation of the Logan mill. A
complete description of the mill modeling process is set forth in
a report entitled "Use of Computers in the Design of Cold Rolling
Mills" ("Mill Modeling Report') submitted by protestant. This
modeling enables various "what if" situations to be tested
without the expense of trial and error runs.
Counsel indicates that the very purpose of a sophisticated
computer model such as this as distinguished from a prototype is
to illustrate the ways in which aluminum mill processes relate
and affect, one another. Thus, counsel contends that the mill
computer-modeling in question was performed for the development
of the Logan mill as a whole and not for the production by the
foreign supplier of imported mill components. Counsel also notes
that the mill modeling services provided by the foreign supplier
were separately set forth in the commercial documentation.
The Mill Modeling Report supports counsel's contention that
the computer simulation relates to the ways in which aluminum
mill processes relate and affect one another and relates
primarily to the Logan mill as a whole once constructed.
However, according to the Mill Modeling Report summary, "the use
of electronic data processing in the design and layout of rolling
mills permits [sic] to minimize load and power demands, to
optimize product quality and to safely rate and select mill
components. The novel mill modeling technology is being adopted
to an ever growing extent as by simulation of mill components it
enables the dynamic properties and control behavior to be
optimized as early as in the layout stage already. (emphasis
added)" Use of computers in the design of cold rolling mills,
p.1. While the mill is used to optimize performance once the
Logan mill is constructed, the report indicates that it also
provides information regarding the selection and rating of the
mill components to be used. The computer simulation enables the
foreign supplier to make any necessary changes in the selection
and production of the mill components to be imported. Thus, it
appears that the computer mill model pertained to the performance
of the mill components as well as to the operation of the mill
itself. However, as explained below, the information provided
establishes that only a very small portion [xxxxxxxxx] of the
mill modeling work related to the performance of the imported
components.
Counsel's March 21, 1996 submission included a copy of the
index to the final report prepared by the foreign seller
concerning the mill modeling services which were to be provided
to Logan in connection with the three-stand cold mill. A copy of
the final report was included in counsel's June 14, submission.
According to counsel, this report was prepared at the completion
of the development phases of the project and before actual
construction of the mill, in order to confirm for the customer
that the mill (following construction) and its contemplated
manufacturing processes would work as planned. Counsel indicates
that it is evident from the index and the report that with one
small exception, none of the items discussed in the report deals
with design or detail engineering for the equipment that was
imported from the foreign selling in connection with the mill,
but rather with the complete mill operations as a whole,
including the rolling process, hydraulic response times,
hydraulic systems, pass schedules and computer simulations of
such operations.
Counsel also submitted an extract from the protestant's
proposal to Logan for the Logan mill which relates to the mill
modeling that was to be included in the sale. The extract covers
20 described services to be provided. According to counsel, only
one of the described services relates to the imported
merchandise. Although neither of the submitted documents breaks
down the various services to be provided by cost, counsel states
that [xxxxxxxxxxxxxxxxxxxxxx] of the mill modeling charges
relates to the imported components. Counsel explains that this
calculation was done by protestant's chief engineer responsible
for the Logan project based on the nature and extent of the
activities in question, their [xxxxxxxxxx] relation to the
overall general engineering and mill modeling services performed
and the fact that the final mill modeling report devoted
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx].
Based on the evidence, we agree that the mill modeling
charge is essentially a research and development cost associated
with the operation of the Logan mill and that only a [xxxxx]
amount has any relationship to the imported mill components.
Thus, we do not consider the majority of the mill modeling
charges to be comparable to dutiable prototype costs associated
with the design and development of imported products.
Accordingly, based on the evidence, we find that only that
portion of the charges [xx] identified by counsel which relates
to the imported mill components is part of the price actually
paid or payable for such components. Contrary to counsel's
claim, we do not consider this portion of the modeling charge to
constitute non-dutiable charges incurred "for the construction,
erection, assembly, or maintenance of, or the technical
assistance provided with respect to, the merchandise after its
importation into the United States" (emphasis added) within the
meaning of 19 U.S.C. 1401a(b)(3)(A)(i). Rather, such charges are
for engineering associated with the manufacture of the imported
merchandise.
General Engineering
As discussed above, the engineering contract covered three
types of engineering services, basic equipment supply, mill
modeling and general engineering. There is agreement that the
charges for basic equipment supply are the engineering charges
which directly relate to the production of the imported
merchandise and are part of the transaction value of the imported
merchandise. However, counsel's contention is that the general
engineering charges do not relate to the production of the
imported merchandise but rather to the installation, set-up and
operation of the mill. During an importer's premises visit,
general engineering was described as engineering which is done to
pull all the various equipment together and map out how each
piece fits into the whole, including construction instructions.
We agree with counsel that if the general engineering
charges at issue relate solely to the installation, set-up and
operation of the Logan mill that these charges are not properly
part of the transaction value of the imported merchandise. In
such case, we believe that the charges are unrelated to and not
in exchange for the imported merchandise, and therefore not part
of the price actually paid or payable for the imported
merchandise. However, even if we were to find that charges
relating to the installation, set-up and operation of the mill
did relate in some way to the imported merchandise, these charges
are the type of non-dutiable post-importation charges addressed
in 19 U.S.C. 1401a(b)(3)(A)(i). Under this provision,
transaction value of imported merchandise does not include any
"reasonable cost or charge incurred for the construction,
erection, assembly, or maintenance of, or the technical
assistance provided with respect to, the merchandise after its
importation into the United States" provided they are identified
separately from the price actually paid or payable for the
imported merchandise. The charges at issue were separately
identified in the engineering contract as required by this
provision. Thus, in determining whether the general engineering
costs are part of the transaction value of the imported
merchandise, the only question that must be decided is whether
the evidence presented is sufficient to establish that they
relate solely to the installation, set-up and operation of the
mill.
The engineering contract between protestant and the foreign
seller specifies that it covers general engineering, mill
modeling and basic engineering supply. The contract provides no
details regarding the general engineering services. However, a
document entitled "Foreign Seller - Scope of Supply" contains a
more detailed list of the general engineering to be supplied.
Included on the list is project engineering; electrical
engineering; operation and maintenance manuals; final as-build
drawing; engineering time, traveling; trip, travel costs; foreign
seller general assistance; travel, hotel, and living cost; spare
part list; AG -Engineering; main prel. lay-outs; miss. costs,
general engineering; and bolt and loading plans". According to
counsel, this document was issued by the foreign seller to
protestant. Although it is not apparent from the description
provided in the document what these services relate to, counsel's
submission provides further details regarding each of these
services. Counsel describes each of the listed services and
indicates that they each pertain to the operation of the Logan
mill as a whole and not for the production of the imported
merchandise.
Further evidence regarding the nature of the general
engineering was provided in counsel's March 21, 1996 submission.
Counsel submitted the section and chapter headings from the
foreign seller's offer specifications concerning the general
engineering which was to be done for the Logan mill. For
example, some of the general engineering referred to includes the
layout of equipment and foundation drawing for the mill, the
arrangement of the electrical equipment, spare parts
requirements, catalogues, technical reports, and drawings for
erection and maintenance of equipment, and operating instructions
for each machine. While the descriptions of the engineering
services are brief, it does appear that they describe work that
was to be performed after importation to operate the mill as a
whole. Finally, counsel submitted a copy of the contract between
Logan and protestant which makes reference to the engineering to
be provided to Logan by protestant and the foreign seller. We
note that the contract specifies a lump sum price for
"installation, start up and commissioning based upon a specified
number of man days". The contract specifies that some of the
work is to be done by the foreign seller.
Based on the above, we conclude that sufficient evidence was
presented to demonstrate that the general engineering charges
were incurred with respect to the installation, set-up and
operation of the Logan mill and not the design, development and
operation of the imported components. In view of this
determination, such charges are not properly included in the
transaction value of the imported mill components. We do not
consider these charges to be part of the price actually paid or
payable for the imported components.
HOLDING:
Based on the evidence presented [xx] of the mill modeling
charges and none of the general engineering charges are properly
included in the transaction value of the imported components.
Consistent with the decision set forth above, you are
directed to deny this protest in part and to grant this protest
in part. In accordance with Section 3A(11)(b) of Customs
Directive 099 3550-065, August 4, 1993, Subject: Revised Protest
Directive, this decision, together with the Customs Form 19,
should be mailed by you office to the protestant no later than 60
days from the date of this letter. Any reliquidation of the
entry in accordance with the decision must be accomplished prior
to mailing the decision. Sixty days from the date of the
decision the Office of Regulations and Rulings will take steps to
make the decision available to customs personnel via the Customs
Rulings Module in ACS and the public via the Diskette
Subscription Service, Freedom of Information Act and other public
access channels.
Sincerely,
Acting Director
International Trade Compliance Division