VAL CO:R:C:V 544884 GG
John V. Linde
District Director
U.S. Customs Service
10 Causeway Street
Boston, Massachusetts 02222-1059
RE: IA 46/91; transaction value; dutiability of post production
testing costs
Dear Mr. Linde:
This is in response to the internal advice request
referenced above, which was initiated on behalf of xxx xxxxx
xxxxxxx, Inc.
FACTS:
xxx xxxxx xxxxxxx xx of xxxxxx produced thyristor valves for
the New England-Hydro Quebec Project ("NEHQ"). Various
electricity substations have been established in the United
States and Canada under this project. The valves in question
were purchased and imported by xxx xxxxx xxxxxxx, Inc. for the
Sandy Point substation in the United States.
Thyristor valves are multi-storey structures comprised of
the following components: thyristor modules, reactors, light
guides, special electrical shielding and protection equipment,
and other electrical components. These components are mounted in
a specially designed frame and are connected in a manner specific
to the particular substation. Thyristor valves are an integral
part of xxx xxxxx xxxxxxx, Inc.'s high voltage-direct current
system, which converts alternating current to direct current at
the generating substation, and direct current to alternating
current at the distribution substation.
During the production process in xxxxxx, xxx xxxxx xxxxxxx
xx routinely tested all thyristor modules and their components,
value reactors, and other valve components for the NEHQ project
to ensure that they met specifications. The value of this
testing was included in the invoice price of the thyristor
valves.
In addition to the normal production testing, xxx xxxxx
xxxxxxx xx also performed special "type tests" on the valves
after all of the components had been manufactured. The purpose
of these tests was to check the design specifications of the
valves; type tests did not determine whether the valves' various
components met specifications. Production of the components of
the remaining valves for a particular substation commenced only
after the type test was successfully completed. Type tests had
no bearing on the production of the individual components of a
valve or on the valve's assembly. However, if a valve structure
failed the type test, the components for the remaining valves of
that substation were not produced until the design was modified
and the modified valve passed the type test.
One-fourth of a valve structure for the Sandy Point
substation was type tested; it passed the type tests. xxx xxxxx
xxxxxxx Inc. will pay xxx xxxxx xxxxxxx xx $736,744 for the type
tests for this substation. The payments to be made to the seller
for the type tests were not included on the invoices for the
imported merchandise, but were invoiced separately after
importation.
ISSUE:
Whether amounts paid by the buyer to the seller for "type"
tests performed on the imported merchandise are dutiable?
LAW AND ANALYSIS:
For purposes of this ruling request, we are assuming that
transaction value pursuant to section 402(b) of the Tariff Act of
1930, as amended by the Trade Agreements Act of 1979 (TAA; 19
U.S.C 1401a(b)), is applicable in appraising the merchandise,
given the fact that it appears that the parties may be related
within the meaning of section 402(g) TAA.
Transaction value is defined in section 402(b) of the TAA as
"the price actually paid or payable for the merchandise when sold
for exportation to the United States," plus amounts for the items
enumerated in section 402(b)(1), TAA. The price actually paid or
payable is defined in section 402(b)(4)(A) as: "The 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 from the country of exportation to the place of
importation in the United States . . .) made, or to be made, for
imported merchandise by the buyer to, or for the benefit of, the
seller."
A permissible construction of the term "for imported
merchandise" does not restrict which components of the total
payment may be included in transaction value. See Generra
Sportswear Co. v. United States, 905 F.2d 377, 380 (Fed. Cir.
1990). Customs has held that where the buyer makes payments to
the seller for tests performed by the seller on the merchandise
before it is imported, such payments are part of the price
actually paid or payable. See TAA No. 11, dated November 7, 1980
(HRL 542187); HRL 544035, dated November 23, 1987. The importer,
citing Customs Service Decision 89-127 and HRL 544508 dated June
19, 1990, argues that Customs has limited this result to cases
where the testing costs are directly related to the production of
the imported merchandise. In its view, the type tests are post
production tests and therefore are not dutiable. However, the
importer's argument is a misinterpretation of Customs' position,
which is that to constitute a dutiable assist under the TAA,
testing equipment provided free or at reduced charge by the buyer
to the seller must be used in the production of the imported
merchandise. The "used in production" restriction is a statutory
requirement, found in 19 U.S.C 1401a(h)(1)(A)(ii), that goes only
to the question of whether something is an assist. Since
payments made by the buyer to the seller for testing costs are
not assists (TAA No. 11), but are simply payments that are part
of the price actually paid or payable, then the testing for which
the payments are made is not subject to the same restriction and
therefore does not have to be directly connected to the
merchandise's production.
The $736,744 payment xxx xxxxx xxxxxxx Inc. will make to xxx
xxxxx xxxxxxx xx for the "type" tests, is part of the total
payment to be made by the buyer to the seller for imported
merchandise and is includable in the transaction value of the
imported thyristor valves.
HOLDING:
Amounts paid by the buyer to the seller for "type" tests
performed by the seller on the imported merchandise are part of
the price actually paid or payable and are includable in the
transaction value of the merchandise.
Sincerely,
John Durant
Director, Commercial
Rulings Division
cc: CIE
U.S. Customhouse
Code 21452
6 World Trade Center