RR:IT:VA 546054 er
Sandra Liss Friedman, Esq.
Barnes, Richardson & Colburn
475 Park Avenue South
New York, NY 10016
RE: Request for Ruling; Dutiability of Service payments; Assists; Development.
Dear Ms. Friedman:
This is in response to your submissions dated June 28, 1995, April 16 and May 1, 1996, in which you request a ruling on whether certain payments made by your client, Toshiba America Consumer Products, Inc.(“TACP”), are dutiable. Additionally, this office met with you and representatives from TACP on April 17, 1996. Except for the information appearing in this ruling, your request for confidentiality with regard to the monthly expense reports and the various agreements between the parties has been granted. We regret the delay in responding.
FACTS:
TACP imports various consumer products including car stereos and telephone products. TACP and its parent company, Toshiba Corporation (“TC”) of Japan, entered into a Services Agreement on April 1, 1994, a copy of which was provided with this ruling request. Under the terms of the Agreement, TC agrees to perform certain services “affecting the production” of the imported merchandise which is produced overseas by third-party manufacturers.
Under the Agreement, the services which TC agrees to provide are described as follows: 1) review technical development issues and technical problems that the manufacturers may have in complying with design and development requests of TACP; 2) confirm the specifications agreed to between TACP and the manufacturers; 3) evaluate trial samples at each stage of trial production, and work with the manufacturers and TACP when necessary; 4) evaluate the final sample of the merchandise to be produced by the manufacturers; 5) coordinate TC’s service part composition list and furnish to TACP and the manufacturers a list of stock numbers; 6) attend the manufacturers’ trial mass production run to determine if the goods were made in conformity with the agreed upon design; and, 7) provide other service and assistance upon the request of TACP.
In consideration for these services, TACP reimburses TC for those costs and expenses incurred by TC in rendering the services. The Agreement provides for estimated payments on a quarterly basis to be made by TACP to TC, based on a sum agreed to between the two parties. The parties agree to adjust semiannually differences between the estimated amounts paid and the actual costs and expenses owed to TC.
You state that TC has no ownership interest in, any control of, or financial interest in the manufacturers. TC will not receive any remuneration from the manufacturers for services provided under the Agreement, nor at any time is TC representing the manufacturers or taking a commission for bringing the parties together.
ISSUE:
Whether the payments made by TACP to TC are dutiable?
LAW AND ANALYSIS:
Merchandise imported into the U.S. is appraised in accordance with section 402 of the Tariff Act of 1930, as amended, by the Trade Agreement 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 U.S.” plus certain enumerated additions, including assists.
Section 402(h)(1)(A) of the TAA provides, in pertinent part, that:
The term ‘assist’ means 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: ...
(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.
In HRL 545117, dated October 30, 1992, Customs recognized that payments made by the importer to employees for work performed abroad which involved engineering, development, artwork, and plans or sketches that were necessary for the production of imported merchandise would be considered dutiable payments for an assist. Likewise, in the instant matter, we must determine whether the amounts remitted by TACP to TC for the services performed by TC in connection with the production of the imported merchandise are payments for assists.
In their submissions and at the meeting held with this office on April 17, 1996, counsel argued that the services provided are not assists in that they do not involve actually designing the imported merchandise. Instead, counsel characterizes the services as being related to the procurement of the merchandise to be imported. In support of its position, counsel cites to HRL 544887 dated October 2, 1992.
HRL 544887 involved a determination concerning a buying agency arrangement. In addition to activities typically performed by buying agents, the agreement in HRL 544887 also provided for the agents to furnish engineering support. Customs noted that the engineering support in that case was limited to interpretation and communication assistance to assure that language barriers did not prevent the manufacturer from understanding certain relevant specifications and requirements. The so-called engineering support included explaining blueprints, designs, etc.; however, engineering in the form of such matters as development, design, artwork, and plans was not provided. Customs found that the engineering support provided was similar to translation services which the courts have found to be a service typical of the type performed by buying agents. Customs, accordingly, concluded that the commissions paid for the services, including amounts for engineering support, were bona fide buying commissions and therefore, did not form part of the price actually paid or payable.
We find that counsel’s reliance on HRL 544887 is misplaced in that the services to be performed by TC do not relate to the “interpretation and communication assistance to assure that language barriers [do] not prevent the manufacturer from understanding certain relevant specifications and requirements” as they did in HRL 544887. Upon review of the type of services at issue in the instant matter, and as is more fully discussed below, Customs finds that the services constitute “development”, within the meaning of section 402(h)(1)(A)(iv) of the TAA, which is necessary for the production of the imported merchandise.
As pointed out by Customs in HRL 545626, dated February 28, 1996, an assist “covers not only amounts for engineering, design work and the like, but also for ‘development’”. In HRL 545626, the following services were provided which included both training and work on the production floor:
1) imparting the principles of Total Industrial Engineering (TIE) which focuses on line and productivity improvement, 2) improving solder technique and quality, 3) eliminate waste and superfluous actions at all levels of production...[T]he engineers provide assistance in the installation, set-up, and de-bugging of new production and test equipment, and training local personnel in the use of the equipment ...[and] provide advice and assistance [ ] in connection with the production of new products to insure that they are produced in the most efficient and economical manner possible.
Customs determined that some of the services performed fit squarely within the definition of “engineering”, as described under section 402(h)(1)(A)(iv) of the TAA. However, Customs went on to add that the services as a whole, including services inside and those outside the “engineering” concept, were akin to “development”, within the meaning of section 402(h)(1)(A)(iv) of the TAA, the payment for which was dutiable.
Similarly, we find that the services described in the agreement between TC and TACP relate to the “development” of the imported merchandise. The complete description of the services, as recorded in the Agreement between the parties, is set forth above in the facts. Additionally, in response to Customs’ request for further description of the services, two sample monthly expense reports illustrative of some of the services were subsequently submitted to this office.
Some of the services listed in the expense reports include: evaluation tests and reliability tests which preceded the decision to proceed further with the production process; confirmation of specifications, review of approved parts and identification of problems to be resolved before taking the next step in the production process; review of drawings for certain operations, preparation of drawings of certain designs and approval of drawings of the merchandise; and inspection of shipments and identification of the problems in instances where the products failed inspection.
Based upon our review of the facts and past rulings, it is our finding that the services as described in the ruling request and in the subsequently submitted monthly expense reports are part of the “development”, within the meaning of section 402(h)(1)(A) of the TAA, of the imported merchandise.
In order for the services to be regarded as assists, they must also be “necessary” for the production of the imported merchandise, as set forth under section 402(h)(1)(A)(iv). We note that in counsel’s initial submission, counsel states that the services at issue “affect [] the production” of the imported merchandise.
In reviewing the description of the services performed, we agree with counsel that the services do, indeed, affect the production. Such services, we find, are an integral, necessary part of the production process. Moreover, we note that in Texas Apparel Co. v. United States, 12 CIT 1002, 698 F.Supp. 932 (1988) aff’d 883 F.2d 66 (1989), the court deferred to Customs’ interpretation of section 402(h)(1)(A)(ii) distinguishing air-conditioning and power generators from sewing machines, finding the latter to have been used directly in the production of the imported merchandise and, hence, to constitute assists. Likewise, in the instant matter, Customs must draw a distinction in the context of section 402(h)(1)(A)(iv) between services which are distinctly supervisory and managerial in nature and those where the services performed are necessary for the production of the imported merchandise. See, HRL 545626, supra.
In sum, we find that the services performed by TC are part of the development of the imported merchandise and are necessary for the production of the imported merchandise. Accordingly, these services are assists within the meaning of section 402(h)(1)(A)(iv) of the TAA, the payment for which is dutiable.
HOLDING:
Based on the information submitted and for the reasons discussed above, Customs finds that the services performed by TC in connection with the production of the merchandise imported by TACP, are assists the payments for which constitute dutiable additions to the price actually paid or payable.
Sincerely,
Acting Director, International
Trade Compliance Division