Customs Ruling HQ H235895 - Internal Advice; Valuation of Imported Footwear; Interest Payments; Assists for Molds and Tooling Used in the Production of Merchandise; Foreign Support for Product Design and Development Performed by a Buying Agent’s Employees; Testing

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HQ H235895
Aug 22, 2014

Type : VALUATION • HTSUS :
Related: 546054; 547643; 548368; 564054; 548450; H057735; W563480

VAL-2 0T:RR:CTF:VS H235895 RSD

Area Port Director U.S. Customs and Border Protection Office of Field Operations 8337 NE Alderwood Road Portland, OR 97220

RE: Internal Advice; Valuation of Imported Footwear; Interest Payments; Assists for Molds and Tooling Used in the Production of Merchandise; Foreign Support for Product Design and Development Performed by a Buying Agent’s Employees; Testing

Dear Area Port Director:

This is in response to your memorandum of November 20, 2012, requesting internal advice concerning the valuation of footwear imported by Keen, Inc. (“Keen”). The internal advice request arose in the context of an Office of International Trade Referral Audit conducted by the Office of Regulatory Audit in Seattle, Washington. The importer through its counsel indicated that it disagreed with the audit findings. On February 14, 2014, we conducted a telephone conference with Keen’s counsel. Staff from the Office of Regulatory Audit also participated in the telephone conference.

FACTS:

Keen is a manufacturer and importer of footwear. Keen has subsidiaries in Canada and Europe, which issue purchase orders to factories for those regions. Keen also has an office in Portland, Oregon for handling the purchase orders for the U.S. market, which also serves as the regional distributor of orders for Keen’s Pan-Asian and Latin American distributors.

In purchasing goods overseas, Keen uses the services of a buying agent, Fuerst Corp. dba ROFU Design (ROFU). Both Keen and ROFU have the same owner. ROFU has offices in California, China, and Hong Kong. A buying agency service agreement between ROFU and Keen became effective on January 1, 2010. Under the agreement, ROFU is engaged to act on behalf of Keen in rendering services in connection with finding suppliers, informing the sellers of the importer’s desires, collecting samples, inspecting goods, and arranging for insurance, transport, storage and delivery of the goods. ROFU was also engaged to act as a liaison between Keen and its design and production personnel and manufacturers selected or under consideration by Keen, in order to identify and resolve design manufacturing issues. In the course of the audit and the review of an account named “Other Product Cost”, Keen identified some dutiable payments that previously had not been reported to CBP. In reviewing Keen’s importations, the Office of Regulatory Audit was informed that Keen’s standard practice was to include all product costs in the price from the factories. The costs involved in making the footwear were shown on the cost breakdown sheets (CBD). Keen identified the CBDs as its control on whether or not the prices it declared included the appropriate unamortized molds (tooling costs). Keen provided the audit team a payment worksheet on September 6, 2011 (updated on September 8, 2011) that identified 16 payments with a total amount of $[443,497] that included six payments to foreign vendors that Keen had failed to report, but should have been included in the price of the merchandise declared to CBP. Following further inquiry by the auditors, Keen updated its payment worksheet on February 7, 2012 and February 9, 2012, to show that there were additional undeclared tooling/mold payments. Keen identified the unreported dutiable value and tendered the additional duties that it had calculated it owed. Subsequently, Keen further identified several additional payments for footwear molds that should have been reported to CBP, and tendered the additional duties that it owed.

In further review of the company all footwear Keen imported for the period from January 1, 2010 through April 30, 2011 was examined. The scope period for testing the general ledger account transactions was from January 1, thorough December 31, 2010. The Office of Regulatory Audit reviewed all the tooling charges and whether the ROFU China office support for product design/development was dutiable.

After conducting their review, the auditors determined that there were three basic areas in which Keen had undervalued the imported merchandise. The first area of alleged undervaluation concerns purported interest payments that Keen made to its vendors. The Office of Regulatory of Audit determined that the alleged interest payments made to five of the six vendors in 95 of the 96 import transactions did not satisfy the requirements for being non-dutiable as interest transactions, and thus should have been reported to CBP as part of the total price paid or payable. The auditors found that the written agreements Keen provided did not govern the alleged interest payments at issue. Furthermore, according to the Office of Regulatory Audit, Keen did not provide written financing agreements for two of the vendors and found that the agreements for interest provided for three of the other four remaining vendors, did not govern the payments at issue.

Some payments that Keen claims as non-dutiable interest were made in 2009 and 2010 to its related party ROFU. It is our understanding that ROFU briefly acted as a seller of merchandise to Keen in 2010, rather than as an agent. In claiming that these payments were non-dutiable interest, Keen referred to its previous buying agency agreement which was in effect in January 2004, as covering the alleged interest payments. The auditors found that the agreement was not relevant to the period under consideration because the agreement was with the company, Kai Lin Trading Limited (“KLT”) who acted as a seller and financing agent, which was dissolved in 2009. Despite the dissolution of KLT, Keen’s counsel alleges that through an agreement between Keen and ROFU, the latter took over the financing role played by KLT for a brief period in 2009-2010. Although the service agreement from 2004 between Keen and ROFU contains a provision that provides that overdue payments shall bear interest at the rate of 5 percent per annum, the role of the parties changed in 2010. However, Keen continued to pay interest, not to KLT but to the ROFU under the same terms as it had previously been paying.

Other payments that Keen claims should be considered as non-dutiable interest payments relate to purchases from two vendors, Sino Majesty Shoes Limited (Sino) and Well Frank Shoes Co., LDT. (Well Frank). Keen submitted e-mail correspondence dated June 13, 2007, as its written agreement covering the alleged interest payments. Keen explained to the auditors that Sino owns Well Frank, so it considered these emails to apply to the interest payments made to both companies. The email correspondence provided by Keen did not include any agreement showing consent by both parties to the payment terms and did not identify the specific party corresponding with Sino. The emails state that the first 30 days from on the board date are interest free, after that the interest would be 1.8 percent for 90 days of the invoice amount. The email further provided an example to show that if the price was $100, they would start to calculate interest from the 31st day after the merchandise was shipped. This means that if the merchandise was shipped on January 1, 2007, and payment was made on February 28, there would be 28 days in which interest would accrue.

Regarding tooling and molds assists used in manufacturing the footwear, the Office of Regulatory Audit found that Keen had undervalued the imported footwear it had purchased from overseas factories by not reporting $[29,080]. This finding was based on the auditors’ understanding that the tooling used in making the footwear was always amortized at a uniform rate of $[0.50] per pair and all price negotiations treated such tooling as a separate charge. Keen’s purchase order confirmations and the commercial invoices do not provide any information about the tooling amortization, nor do they indicate whether a tooling amortization charge was part of the FOB price. Since Keen did not provide CBDs or a mold amortization schedule for 32 sample review items, the auditors concluded that the dutiable tooling costs were not reported to CBP.

For factory direct purchases, Keen states that tooling is amortized on a schedule by tooling number, as applied to specific styles. The Office of Regulatory Audit asserts that every footwear style requires some tooling/molds, although not necessarily “new” tooling/molds. Since all tooling and lasts have a specific number and name that is used for reference, tracking and amortization, the auditors expected that Keen should have been able to show whether or not the tooling/molds were previously fully amortized. Keen’s inability to support the prior amortization on certain samples contributed to the auditors’ finding that tooling/molds were provided to the factories free of charge. When the Office of Regulatory Audit did not see evidence that the factory was recouping the cost, it concluded the tooling was supplied free of charge.

The Office of Regulatory Audit also found that Keen did not report its buying agent, ROFU’s China office costs to CBP for product development at the factories, as an addition to the total price or payable. The Office of Regulatory Audit found that the ROFU China office staff supported footwear product design and development efforts at the factories and this work performed constituted assists that should have added to the price actually paid or payable for the imported merchandise. Keen’s counsel believes that the bulk of the development work for the merchandise was performed in the United States and thus would not be assists, and that Keen’s employees in China basically functioned as liaisons to convey the product ideas to ensure that the work was performed in accordance with the specifications already developed in the U.S. ISSUES:

I. Whether certain payments made to vendors should be considered as non-dutiable interest payments?

II. Whether Keen failed to report all applicable product related costs, including the cost of tooling/molds used to manufacture the footwear?

III. Whether the value of certain employee’s services in the ROFU’s China office and other costs incurred by ROFU for testing were related to product development and should be considered as assists? LAW AND ANALYSIS: The preferred method of appraising merchandise imported into the United States is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 1401a. Section 402(b)(1) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the "price actually paid or payable for the merchandise when sold for exportation to the United States" plus enumerated statutory additions. We have assumed for purposes of this decision that transaction value is the appropriate basis of appraisement. The term price actually paid or payable is defined in 402(b)(4)(A) of the TAA as: ... total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise...) made, or to be made for the imported merchandise by the buyer to or for the benefit of, the seller.

I. Interest Payments

Keen made a series of payments to several footwear vendors that it claimed to be non-dutiable because they were interest payments. After analyzing the available records from the transactions, the auditors determined that these vendor payments did not qualify as non-dutiable interest payments. The auditors concluded that the payments should have been considered as part of the total price actually paid or payable for the imported footwear because the written agreements Keen provided did not govern the alleged interest payments at issue.

Customs (CBP) issued Treasury Decision (T.D.) 85-111, dated July 17, 1985, which concerned the dutiability of interest charges paid by an importer. CBP indicated that interest payments, whether or not included in the price actually paid or payable for imported merchandise, should not be considered part of the appraised value provided the following criteria are satisfied: The interest charges are identified separately from the price actually paid or payable; 2. The financing arrangement in question is made in writing; 3. When required by Customs, the buyer can demonstrate that the goods undergoing appraisement are actually sold at the price declared as the price actually paid or payable, and the claimed rate of interest does not exceed the level for such transaction prevailing in the country where, and at the time, when the financing was provided. On July 17, 1989, CBP published a Statement of Clarification regarding T.D. 85-111 (54 FR 29973) in which it was stated that for the purposes of T.D. 85-111, the term "interest encompasses only bona fide interest charges, not simply the notion of interest arising out of delayed payment." CBP added that "bona fide interest charges are those payments that are carried on the importer's books as interest expenses in conformance with generally accepted accounting principles." This clarification became effective October 16, 1989.

Although the Office of Regulatory Audit determined that the alleged interest payments were dutiable, in its audit report it noted that there was no issue concerning the interest rate charged and that the payments Keen made were booked as interest and were separate payments from payments for the merchandise. Nevertheless, the auditors found that the payments still did not qualify as non-dutiable interest payments because Keen did not provide a valid written financing agreement between the parties. The auditors indicated that Keen did not provide a valid written financing agreements for two of the six vendors and the written agreement submitted for three of the remaining four vendors did not govern the payments at issue. The payment to the last vendor was not found to be relevant because it was not related to any U.S. importations.

Keen referred to its previous buying agency agreement which was in effect in January 2004, as covering the alleged interest payments made to ROFU. The auditors found that the agreement was not relevant to the period under consideration because the agreement was with the company, KLT, who acted as a seller and financing agent which was dissolved in 2009. Despite the dissolution of KLT, Keen’s counsel alleges that through an agreement between Keen and ROFU, the latter took over the financing role played by KLT for a brief period in 2009-2010. Although the service agreement from 2004 between Keen and ROFU contains a provision that provides that overdue payments shall bear interest at the rate of 5 percent per annum, the role of the parties changed in 2010. Otherwise there is no written agreement between Keen and ROFU indicating that the terms specified in the 2004 service agreement for financing the purchases of merchandise will also apply when ROFU acted as the seller rather than as an agent. Therefore, we conclude that for the 2010 transactions, there was not a valid written agreement in place between Keen and ROFU regarding interest payments. Thus, we find that any payments made to ROFU, when it acted as a seller were not to be considered valid interest payments.

In addition, there were other alleged interest payments that Keen made to another footwear seller, Well Frank. Keen maintains that these interest payments should not be part of the price of the imported merchandise. Keen provided an email string involving Sino and Keen. Keen’s counsel contends Sino and Well Frank are related companies so that the terms set forth in the email string regarding the financing terms covers both companies, and that the email string constituted a valid written agreement. According to the email, if Keen wanted a 90 day payment term it would have to pay interest. Counsel further maintains that the parties followed the terms specified in the email message, demonstrating the existence of an agreement.

While we accept that a written agreement for interest does not have to be in any particular form, and emails may constitute a valid form of writing, in this instance we find the parties have not specified the terms clearly enough in the emails to constitute a binding financing agreement. We first note that most of the emails are in Chinese and that only limited portions have been translated into English. Significantly, there is also no written confirmation indicating that Keen agreed to the proposed financing terms specified in any of the emails. In order to have a binding agreement, both parties must consent to the same terms and the consent must be in a written form. CPB should not have to guess what the terms of the financing agreement were. Although Keen may have followed the terms set forth in the emails, we find that there is not sufficient evidence to establish an actual binding written agreement between the parties. Accordingly, we find the alleged payments that Keen made to the vendors do not qualify as interest and the payments that Keen made to the vendors should be included in the appraised value of the imported merchandise.

II. Tooling and Molding Assists

The Office of Regulatory Audit determined that Keen did not report all applicable product related costs, including the cost of certain tooling/molds used in manufacturing the footwear. In their report, the auditors indicate that Keen had informed them that footwear tooling was amortized on a schedule by tooling number, as applied to specific styles and factories. The tooling generally added $[0.50] per pair to the FOB price of all footwear for unamortized tooling. Neither Keen’s purchase order confirmations nor the commercial invoices provide any information about the tooling amortization. There is also no indication as to whether a tooling amortization was part of the FOB price. Keen provided CBP with the amortization schedules to support a tooling charge for 16 sample review items. However, Keen did not provide CBDs with the mold amortization schedules for 32 sample review items, and thus the auditors concluded that dutiable tooling costs were not reported to CBP.

It is the auditor’s opinion that every footwear style requires some tooling/molds, although not necessarily new tooling/molds. Since all the tooling and lasts have a specific number and name that is used for reference, tracking and amortization, the auditors expected Keen should have been able to show whether or not the tooling molds were previously fully amortized. Keen explained that its internal controls whether or not the price it paid includes tools was typically performed through a partnership with its buying agent ROFU, who helped Keen negotiate the prices shown on the CBD and helped keep track of the tooling amortizations. When Keen did not provide the CBDs and/or the mold amortization schedules for the 32 sample review items, the auditors concluded that the tooling was supplied free of charge. The auditors also could not find any evidence that the factories recouped the costs of the tooling or molds for those items. In addition, it is the auditor’s position that if ROFU provided tooling to the factories, it properly should be considered to have been supplied indirectly by Keen, since ROFU and Keen are related parties due to common ownership.

Keen’s counsel contends that the auditors made a number of erroneous assumptions, including that: there is always going to be a CBD for all footwear styles, the CBD always has a tooling element, and the tooling is always valued at $[0.50] per pair. Counsel explains that not every factory submits a CBD for every footwear style. The CBD is used exclusively in the course of price negotiations, and it is a document prepared by the factory, not Keen as the buyer. Once the price of the footwear is agreed to, the CBD has no practical utility for the parties. While the auditors claim that the lack of amortization schedules for particular styles indicates that there is unreported tooling assists that should be added to the transaction value of the imported footwear, Counsel maintains that the purpose of these amortization schedules is to ensure that Keen does not overpay for tooling. A tooling element was included in the price the factory charged for the footwear so that the factory could recover the cost of the tooling over a given quantity of footwear. Once the designated quantity of footwear was produced and sold, the tooling element was removed and the price of the footwear was reduced.

In determining the transaction value of imported merchandise, the price actually paid or payable of the merchandise shall be increased by the amounts attributable to the five statutory additions enumerated in 19 U.S.C. §1401a(b)(1)(A) through (E) only to the extent that each such amount is not otherwise included within the price actually paid or payable. 19 U.S.C. §1401a(b)(1). One of the enumerated statutory additions to the price actually paid or payable is an “assist.” An “assist” is defined in 19 U.S.C. §1401a(h)(1) as follows: (1)(A) 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:(i) Materials, components, parts, and similar items incorporated 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, 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. Furthermore, the TAA Statement of Administrative Action (“SAA”) and section 152.103(d)(1), Customs Regulations (19 CFR §152.103(d)(1)), set forth the manner in which assists are to be valued. Based on the statutory and regulatory language cited above, it remains CBP’s position that in regard to material or components which may constitute assists, a three part analysis must be employed. First, the material or components must fit the definition of an assist; second, it must appropriately be valued as an assist; and third, the value of the assist must be apportioned to the imported merchandise. See Headquarters Ruling Letter (“HQ”) 545909, dated November 30, 1995; Modification and Revocation of Customs Ruling Letters Relating to Assists, 29 Cust.B. & Dec. No. 51, dated November 30, 1995.

After reviewing all the circumstances and information presented, we agree with Keen’s counsel that the auditors have not substantiated their conclusion that the absence of a CBD, a tooling element on the CBD, or a tooling amortization schedule necessarily means that Keen must have paid for the tooling separately or that there was tooling given directly or indirectly to the manufacturers of the footwear for free or at a reduced charge. The Office of Regulatory Audit’s finding that there were unreported assists valued at $[0.50] per pair is based on assumptions that tooling always was provided. There is no substantiation in any of Keen’s books or records that it supplied tooling or molds to the overseas factories that were not reported to CBP. It is our view that absence of a tooling element on the CBDs does not constitute evidence of Keen supplying tooling or molds to the manufacturers for free or at reduced charge or that it made separate tooling payments. It is our opinion, and we agree with Keen that it is possible the footwear manufacturers may have utilized tooling that they previously used, or if they did employ new tooling they may have absorbed the cost of that tooling themselves by obtaining the tooling on their own without assistance from Keen or parties related to Keen. No evidence was found to indicate that Keen supplied the tooling to factories that produced the footwear. Therefore, we find that no additions as assists should be made to the transaction value of the imported merchandise.

III. Foreign Support to Product Design and Development Performed in China

The Office of Regulatory Audit determined that Keen did not report as an addition to the total price paid or payable the costs related to product design and development costs that took place in ROFU’s Office in China. The auditors computed the loss of revenue for the calendar year 2010 at $[61,574.25]. Specifically, according to the auditors, Keen did not include any of the costs of the foreign support of the product design and development effort performed by ROFU’s China office in valuing the imported merchandise. The auditors identified that the ROFU China office staff supported footwear product design and development efforts with the factories in 2010. The 24 identified staff positions include the designers on the design team; developers and sample mold developers as part of the product development function; tooling and developers as part of the ROFU Advance concept function; “Upper Pattern and Mould, Lasts, Fitting” as part of the commercialization function; and a Value Engineer as part of the Production function. The auditors claim that Keen’s Product Development Critical Path document indicates that the ROFU China office’s staff designers and developers, commercialization and production support staff worked with factories on a regular basis as part of the ongoing design and development effort with the factories, and as such, these activities were necessarily part of the production of the imported footwear. The auditors considered all of the work performed at the ROFU China office, except typical buying agent services, such as planning, costing, and quality inspection.

Keen’s counsel argues ROFU’s China office’s activities do not constitute assists because the basic function of the office was to explain Keen’s product requirements to the overseas factories to ensure that they understand them so that they were able to provide the desired product to meet Keen’s delivery requirements. Keen’s counsel provided a list of ROFU’s China office’s employees with job titles and job descriptions. It is claimed that these employee activities do not constitute assists. According to counsel, most of the job descriptions of the employees in the ROFU China office pertain to activities that in general do not constitute assists. Rather, counsel contends that the job descriptions reveal that the positions are limited to coordination and liaison and follow up functions. As such, there is nothing to suggest these activities are necessary for production. Rather than being involved in the production of the imported merchandise, counsel further claims that the responsibilities of the Design Team were to “manage the designs”. For the most part, counsel further adds that the ROFU China office personnel do not have authority to make decisions regarding creating standards and correcting issues at the line level because all such decisions are made in the United States by Keen and ROFU US.

In HQ 546054, dated October 23, 1996, the services performed by the parent company of the importer, as identified in a services agreement and in expense reports, were held to be part of the development of the imported merchandise and necessary for the production of the imported merchandise by overseas third-party manufacturers. The services identified in the agreement included: reviewing technical development issues and technical problems that the manufacturers may have in complying with design and development requests of the importer; confirming the specifications agreed to between the importer and the manufacturers; evaluating trial samples at each stage of trial production, and working with the manufacturers and the importer when necessary; evaluating the final sample of the merchandise to be produced by the manufacturers; coordinating parent company's service part composition list and furnishing the importer and the manufacturers with a list of stock numbers; and attending the manufacturers' trial mass production run to determine if the goods were made in conformity with the agreed upon design. Other services identified in the expense reports included: evaluation 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.

In HQ 547643, dated February 13, 2002, it was held that designing; developing fashion trends and color palettes; arranging for the production of samples; providing specifications regarding fabric, style, flat sketches and sizing; and determining the best manufacturer for production were product development services that were necessary for the production of the merchandise. However, because the work was performed in the United States it did not constitute an assist.

In HQ 548368, dated December 24, 2003, it was held that various design-related services provided were necessary for the production of the imported apparel: activities that concern research, selection or approval of the imported goods' component materials; creation or design of styles and designs of the imported products; review and approval of any changes to be made to the products; and review and approval or disapproval of samples of the imported products. These actions all offered significant assistance to the overall production of the garment.

In HQ H057735, dated July 15, 2009, upon review of the information submitted, we held that the various and numerous duties performed by the independent on-site footwear commercialization/production engineer were part of the development of the merchandise and were necessary for the production of that merchandise. The engineer provided the last development assistance and communication link to approved last suppliers of footwear; tooling initiation and optimization; assisted factories in optimizing production through the commercialization process; helped to create standards for fit and function; resolved issues at the line level; evaluated and recommended tools, machinery and systems for footwear production; established/enforced process controls for manufacturing operations; and was a resource for product and process continuous improvement from a production perspective. Inasmuch as the work was to be undertaken outside the United States and was provided free of charge or at a reduced cost, it constituted an assist for purposes of 19 U.S.C. § 1401a(h)(1)(A)(iv).

In this case, we have reviewed the list of ROFU China office’s employees with their job titles and job descriptions submitted by Keen’s counsel. The employees listed on the first page regarding Finance Hong Kong and China, Planning & Logistic, and Costing performed duties related to money and finance, ordering, pricing and other business logistical services which do not appear to be directly related to the production of the imported merchandise. Consequently, we agree that the tasks that these employees performed overseas do not constitute assists. Similarly, the two employees that work in the ROFU Material Department seemed to be involved in the sourcing of materials and did not involve the production of the imported merchandise; thus, we find that their work would not be assists. However, the employees listed on the second page of the document, including the employees in the Product Development, Keen Utility Product Development, Design Team, ROFU Design Team, Production & QA Team, and Quality Team were engaged in production activities by making the designs of the footwear effective so they could be carried out by the factories. While the job descriptions in some cases appear to be a bit vague, for example, it is not entirely clear what is meant by “Follow up the KEEN sample from a design until confirmation sample based on direction from KEEN USA office…”, we believe that such work appears to be quite similar to the job duties mentioned in HQ 564054. In that case, the job duties were described as reviewing technical development issues and technical problems that the manufacturers may have in complying with design and development requests of the importer and confirming the specifications agreed to between the importer and the manufacturers. We found that such work was necessary for the production of the imported merchandise and would constitute assists. The fact that these employees may not have had direct decision-making authority does not negate that the work these employees performed was necessary for the production of the imported merchandise. Consequently, we believe services of these ROFU China office’s employees in the above mentioned departments was also necessary for production of the imported merchandise. Therefore, we find that their compensation and other associated costs should be considered as dutiable assists if their work was performed overseas.

However, we believe that some jobs in the aforementioned departments should not be considered as assists because certain specific employees were not involved in the actual production of merchandise. We note that two employees, one in the Utility Product Development and one in the ROFU Design Team were described as assistants. The services of these workers appears clerical in nature and did not concern the actual production of the imported merchandise; thus, we find that their work should not be considered as assists. Additionally, there were two employees on the Quality Team whose work consisted of monitoring quality of the finished merchandise, rather than being involved in the production of the imported merchandise; thus, we also find that the costs of their work are not assists and should not be added to the transaction value of the imported merchandise.

We also find that the work performed by ROFU’s Production & QC Team and the Commercialization Department’s employees (with the exception of two employees) was also necessary for the production of the imported merchandise and should be considered as assists, if such work was supplied outside of the U.S. free of charge or at a reduced rate to the manufacturers. However, the job description of two employees in the Production & QC Team indicates that their work consisted of monitoring the quality at factories, which we find was not related to the production of merchandise, and therefore were not assists.

The auditors also found that testing fees, purchase of materials for testing purposes and model fitting charges were dutiable assists. The Office of Regulatory Audit provided a very limited description of the nature of the testing performed. In HQ W563480 dated June 9, 2006, we held that testing costs were not part of the price actually paid or payable for the imported garments. This was because the buyer paid an independent third-party tester, not the seller of the imported goods. Thus, the payments were not being made by the buyer to, or for the benefit of, the seller. The fabric testing to be performed by the buyer’s selected testing company also did not appear to amount to production related design or development of the imported apparel and accessories. In this instance, we do not have enough information regarding the nature of the testing performed and whether it was necessary to the production of the finished merchandise. Accordingly, we find that the fees paid for testing should not be considered as dutiable assists.

With respect to the apportionment of the cost of the services found to constitute assists in the instant case, the apportionment of the value of assists to imported merchandise should be made in a reasonable manner appropriate to the circumstances and in accordance with generally accepted accounting principles. See 19 CFR § 152.103(e). The method of apportionment actually accepted by CBP will depend upon the documentation submitted by the importer. If the entire anticipated production using the assist is for exportation to the United States, the total value may be apportioned over (i) the first shipment, if the importer wishes to pay duty on the entire value at once, (ii) the number of units produced up to the time of the first shipment, or (iii) the entire anticipated production. In addition to these three methods, the importer may request some other method of apportionment in accordance with generally accepted accounting principles. If the anticipated production is only partially for exportation to the United States, or if the assist is used in several countries, the method of apportionment will depend upon the documentation submitted by the importer.

In order to have the value of the assists apply only to goods imported into the United States, Keen will need to provide documentation to the applicable port to establish satisfactorily (1) those amounts or percentages of the services related or dedicated to merchandise exported to the United States, and (2) those amounts or percentages of the services related or dedicated to merchandise exported to other than the United States. See 19 CFR § 152.103(e). See also HQ 548450 dated July 28, 2004. The Court of International Trade has held that payments can be allocated in a reasonable manner appropriate to the circumstances of the case. See Chrysler Corporation v. United States, 17 CIT 1049 (1993).

HOLDING:

In accordance with the foregoing, since a valid written agreement concerning the terms of the payments was not presented, the payments Keen made to the vendors do not qualify as non-dutiable interest payments and should be included in the appraised value of the imported merchandise.

No evidence was found that Keen or ROFU supplied tooling or molds free of charge or at a reduced cost to the overseas footwear factories that it did not report. Therefore, no additions should be made to the price actually paid or payable for assists based on the cost of tooling or molds supplied to the manufacturers of the imported footwear.

The work performed by the employees in Keen’s buying agent, ROFU’s China office in its Utility Product Development Department, Design Team Department, ROFU Design Team Department, Production & QA Team Department, and Quality Team Production & QC Team and Commercialization Department were necessary for the production of the imported merchandise. Thus, the work of the employees in these departments are dutiable assists and the costs of those employees should be added to the price paid or payable of the imported merchandise with the exceptions mentioned above. These assists should be apportioned in accordance set forth in 19 CFR § 152.103(e). The fees paid for testing do not constitute dutiable assists.

This decision should be mailed by your office to the party requesting Internal Advice no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to CPB personnel, and to the public on the CPB Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Please do not hesitate to contact us at (202) 325-0132 if you have any questions or concerns.

Sincerely

Monika Brenner, Chief Valuation and Special Programs Branch