OT:RR:CTF:VS H057735 ARU
Ms. Gracia Plascencia
Compliance Specialist
OAKLEY
One Icon
Foothill Ranch, CA 92610
RE: Dutiability of Consulting Fees; Assists
Dear Ms. Plascencia:
This is in response to your ruling request dated March 30, 2009, made on behalf of Oakley, Inc. ("Oakley"). Specifically, you request a ruling on whether certain work performed by a consultant constitutes an assist.
FACTS:
Oakley buys from a non-related footwear manufacturing company in China, and plans to hire an independent on-site footwear commercialization/ production engineer for Oakley manufacturing projects. The consulting services at issue are described as follows: 1) serving as Oakley's eyes, ears, and voice inside a contract manufacturing environment (factory); 2) last development assistance and communication link to approved last suppliers; 3) tooling initiation and optimization; 4) full foot-bed and gauge checking; 5) full commercialization through the tech approval process on agreed deadlines for all areas and aspects of the process; 6) assisting factories in optimizing production through the commercialization process; 7) helping to create standards for fit, function, and testing to keep all shoes consistent for Oakley's products; 8) a consistent monitor of the construction of Oakley Footwear from commercialization pre-production stage to shipping; 9) a leader by example for the quality inspectors as well as an educator of footwear best practices and production methods; 10) a decision maker in the field that can filter, resolve and correct issues at the line level before they are escalated to the home office; 11) a real time barometer of the current factory situation and abilities from an Oakley bias; 12) evaluate and recommend tools, machinery and systems for footwear production; 13) establish/enforce process controls for manufacturing operations; and, 14) a resource for product and process continuous improvement from a production perspective. These services are also listed in the template for the Consulting Agreement that you provided.
In consideration for these services, Oakley will pay the independent on-site footwear commercialization/ production engineer a monthly salary plus reimbursement for business telecommunications costs and travel costs associated with required travel to various Oakley supplier/manufacturer/sub-supplier facilities. In addition, Oakley will provide personal computer equipment, a digital camera, and work related tools for the duration of the Consulting Agreement.
ISSUE:
Whether work performed by the on-site footwear commercialization/ production engineer constitutes an assist.
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 (19 U.S.C. § 1401a). The preferred method of appraisement is transaction value, which is defined as the "price actually paid or payable for the merchandise when sold for exportation to the United States," plus certain enumerated additions, including "the value, apportioned as appropriate, of any assist." 19 U.S.C. § 1401a(b)(1)(C). For the purpose of this ruling, we assume that transaction value is the proper basis of appraisement.
The term "assist" is defined in 19 U.S.C. § 1401a(h)(1)(A) as 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.
When considering whether services provided by a buyer to a manufacturer located abroad constitute an assist, one must distinguish between those services that are completely unrelated to the production of the imported merchandise and those services necessary for the production of the imported merchandise. Headquarters Ruling Letter ("HRL") 548540, dated July 28, 2004. Generally, managerial and supervisory services performed abroad that relate to the direction and management of overall plant operations are not considered to constitute assists when paid for by a buyer of the merchandise because such services are not necessary or integral to the production of the imported merchandise. See HRL 545117, dated October 30, 1992. The issue of whether services performed abroad are necessary for the production of imported merchandise has been addressed in several rulings.
In HRL 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. Services identified in the agreement included: review technical development issues and technical problems that the manufacturers may have in complying with design and development requests of the importer; confirm the specifications agreed to between the importer and the manufacturers; evaluate trial samples at each stage of trial production, and work with the manufacturers and the importer when necessary; evaluate the final sample of the merchandise to be produced by the manufacturers; coordinate parent company's service part composition list and furnish to the importer and the manufacturers a list of stock numbers; and attend the manufacturers' trial mass production run to determine if the goods were made in conformity with the agreed upon design. Services identified in the expense reports included: 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.
In HRL 546511, dated April 15, 1999, it was held that payments made for footwear design, creation, development and production supported a finding that the design work in question formed part of a design process necessary for and leading to the production and importation of those goods.
In HRL 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 are product development services that are necessary for the production of the merchandise; however, because the work was performed in the United States it did not constitute an assist.
In HRL 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 the instant case, upon review of the information submitted, it is our position that the various and numerous duties to be performed by the independent on-site footwear commercialization/ production engineer are part of the development of the merchandise and are necessary for the production of that merchandise (e.g., last development assistance and communication link to approved last suppliers; tooling initiation and optimization; assisting factories in optimizing production through the commercialization process; helping to create standards for fit, function; a decision maker in the field that can filter, resolve and correct issues at the line level; evaluate and recommend tools, machinery and systems for footwear production; establish/enforce process controls for manufacturing operations; a resource for product and process continuous improvement from a production perspective). See HRL 546054, dated October 23, 1996. Inasmuch as the work will be undertaken outside the United States and will be provided free of charge or at a reduced cost, it constitutes an assist for the purposes of 19 U.S.C. § 1401a(h)(1)(A)(iv).
To determine the value of the assist, the Statement of Administrative Action ("SAA") to the Trade Agreements Act of 1979 ("TAA") provides:
Additions to the price actually paid or payable for the value of the assists shall be based on information that establishes the accuracy of the addition. In order to minimize the burden for both the importer and the Customs Service in determining the value to be added, information available in the buyer's commercial record system will be used to the greatest extent possible. This will be the case especially in regard to assists such as engineering, development, artwork, design work, and plans and sketches undertaken outside the United States. For these items, if they were purchased or leased by the buyer at arms'-length, their value shall be the cost of the purchase or of the lease.
Statement of Administrative Action ("SAA"), H.R. Doc. No. 153, 96 Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 ("TAA") (1981), at 51; see also 19 C.F.R. § 152.103, and What Every Member of The Trade Community Should Know About: Customs Value, an Informed Compliance Publication of Customs and Border Protection, at 12-13 (available online at: www.cbp.gov). In this case, the value of the assist will include the consultant's salary, reimbursement costs for business telecommunications and travel, and the cost of acquiring the equipment provided to the consultant by Oakley.
Once a value has been determined for the assist, it is necessary to apportion that value to the imported merchandise. The SAA states that, "apportionment ... will be made in a reasonable manner appropriate to the circumstances and in accordance with generally accepted accounting principles. The method of apportionment used will depend on the details in the documentation provided by the importer to substantiate his requested method." SAA, supra, at 50-51; see also 19 C.F.R. § 152.103(e). However, there is no authority under the TAA to apportion the value of an assist to the first duty free entry. HRL 542519, dated July 21, 1981 (also published as TAA No. 35).
HOLDING:
The work to be provided by an independent on-site footwear commercialization/ production engineer constitute an assist. Therefore, the value of the assist is included in transaction value as an addition to the price actually paid or payable.
Reference to this ruling letter should be made in the entry documents filed at the time the subject goods are entered. See CBP Form 7501 - Instructions, Additional Data Elements (available online at: www.cbp.gov). If the entry summary has been filed without reference to this ruling letter, the ruling letter should be brought to the attention of the appraising officer at the port of entry.
Sincerely,
Monika R. Brenner, Chief
Valuation & Special Programs Branch
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