RR:CTF:VS H212283 EE
Port Director
U.S. Customs and Border Protection
Area Port of Champlain
237 West Service Road
Champlain, NY 12919
RE: Internal Advice Request; Dutiability of Fees for Certain Services
Dear Port Director:
This is in response to your memorandum, dated December 21, 2011, requesting internal advice on the dutiability of certain fees for services provided by Service provider [X] to the Importer [X].
The information in brackets is confidential and will be omitted from the public version.
FACTS:
The U.S. Importer [X] purchases merchandise from its related company, the Seller [X] located in Hong Kong. The Importer arranged for a third party, the Service Provider [X], to inspect the merchandise in a logistics warehouse in Hong Kong prior to shipment to the U.S. Payment for these services is billed to the Importer by the Service Provider on a monthly basis. Upon arrival at the warehouse, the Service Provider conducts an external inspection of the boxes containing the merchandise to determine whether any damage has occurred. In addition, the Service Provider performs a quantity check to ensure the number of boxes noted on the bill of lading corresponds to the quantity received. If any inconsistencies or damage is found, the Service Provider provides a report to the Seller. Upon completion of the external inspection of the boxes, the Service Provider inputs the merchandise received into the Importer’s IT system. Next, the merchandise is unpacked. The quantity, style, material, color, and size of the products are compared to the packing list. If any discrepancy is found, the Service Provider reports it to the Seller. The merchandise is then either repacked and stored or sent for quality control as determined by the Seller. In preparation for quality check, all flat packed items (e.g. knitwear like t-shirts, pullovers, swimwear or accessories such as hats), which are delivered with a single polybag, are unpacked from their polybags. The garment on hanger (“GOH”) items (e.g. pants, jackets, blouses, dresses etc.), which are delivered without a single polybag, are put on suitable hangers. The Seller provides the Service Provider with a list of the goods that need to be quality checked along with a “perfect” sample. This sample is a prototype that meets all appearance, construction, workmanship, functionality, and finishing standards. Each item that is marked for quality control is compared against the sample to ensure all standards are met. In addition, the item is checked for measurements based on size chart, correct content and positioning of hangtags and care labels along with ensuring the labels are in accordance with U.S. import law. If any inconsistencies are found, the Service Provider contacts the Seller for instructions on how to proceed. The quality control results are then recorded in the Importer’s IT system.
The Service Provider may perform other value added services which could include replacing or adding care labels, made-in labels, and hangtags. All packing materials are at the expense of the Importer. Repair actions are sometimes required such as cleaning, ironing, steaming, and trim cutting of the garments. Costs for these services are charged separately to the Importer. Upon completion of quality check, all items are repacked into the original boxes. Flat packed items are repacked in their single polybags before repackaging into the original boxes. If any polybags are broken or damaged, they are replaced by new polybags supplied by the Importer. GOH items are repacked into the original boxes without a single polybag and without the hangers. When all items are repacked, an inspection report is sent to the Seller. Merchandise is then stored until the Importer places a shipping order with the Service Provider. If storage exceeds four weeks, it is charged separately to the Importer.
It is stated that the Service Provider and the Importer are not related. You submitted the contract agreement which outlines the standard operating procedures between the Importer and its logistics service provider as well as a quote for services from the Service Provider to the Importer.
ISSUE:
Whether the payments made by the Importer to the Service Provider for certain services are included in transaction value as part of the price actually paid or payable or as an addition thereto.
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 (TAA; 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 amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. The additions include: the packing costs and any selling commissions incurred by the buyer with respect to the imported merchandise; the value, apportioned as appropriate, of any assist; any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the U.S.; and the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller. 19 U.S.C. § 1401a(b)(1)(A)-(E). If, for any reason, sufficient information is not available with respect to the additions to the price actually paid or payable, the transaction value of the imported merchandise is treated as one that cannot be determined. 19 U.S.C. § 1401a(b)(1).
However, transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain “test values.” 19 U.S.C. § 1401a(b)(2)(B). It is stated that the Service Provider and the Importer are not related. We assume, for the purposes of this internal advice that the Service Provider and the Seller are also not related and that transaction value is the appropriate basis of appraisement.
U.S. Customs and Border Protection (“CBP”) has previously examined the question of whether payments made for inspection services are part of the price actually paid or payable. For example, in Headquarters Ruling Letter (“HQ”) W563469, dated March 21, 2006, CBP determined that payments made by the importer to a company unrelated to the supplier and the importer for inspection services were not part of the price actually paid or payable for the merchandise. The services provided included validating that the merchandise met the importer’s requirements. In HQ 543365, dated November 1, 1984, CBP determined that inspection fees paid by the buyer of imported garments to an on-site inspection agent in Haiti were not part of the price actually paid or payable. In that case the inspection agent was neither related to, nor an employee of, the foreign assembler. A different result attained, however, in HQ 546439, dated September 30, 1996, where CBP determined that inspection fees paid to the employees of the seller were part of the price actually paid or payable for the imported merchandise.
In comparing the inspection services provided by the Service Provider to the Importer with the rulings outlined above, we conclude that the inspection fees are not part of the price actually paid or payable for the imported merchandise. Unlike the arrangement in HQ 546439, the Importer makes the payments for inspection services to an independent third-party, not to the Seller of the imported merchandise. Thus, the payments are not being made by the buyer to, or for the benefit of, the seller or a party related to the seller. The inspection services performed by the Service Provider also do not appear to amount to quality control along the lines of production related design or development of the imported merchandise. See HQ 547033, dated June 25, 1998 (When inspection or consulting-type services are at issue and entail quality control along the lines of production related design or development, and intimate involvement in the nature of the goods produced, the fees may be dutiable either as part of the price actually paid or payable, or as an assist).
However, we find that the following services provided by the Service Provider to the Importer are incident to placing the merchandise in condition packed, ready for shipment to the U.S.: unpacking merchandise from the cartons upon arrival at the warehouse; unpacking the flat packed items from the polybags; repacking the flat packed items into polybags; hanging GOH items on hangers before quality check; removing GOH items from the hangers; repacking the merchandise into the cartons upon completion of quality check; replacing or adding care labels, made-in labels, and hangtags; and the repair actions such as cleaning, ironing, steaming, and trim cutting of the garments.
As previously noted, one of the enumerated additions to the price actually paid or payable for the merchandise is “packing costs incurred by the buyer with respect to the imported merchandise.” 19 U.S.C. § 1401a(b)(1)(A).
In this regard, 19 U.S.C. § 1401a(h)(3) defines “packing costs” as:
. . . the cost of all containers and coverings of whatever nature and of packing, whether for labor or materials, used in placing merchandise in condition, packed ready for shipment to the United States.
See also 19 C.F.R. 152.102(e).
In HQ 546690, dated June 18, 1997, CBP held that the cost of opening, scanning, resealing and repacking cartons, including labor costs, were dutiable as packing costs and included in the transaction value as an addition to the price actually paid or payable. CBP determined that the costs were incurred in order to place the imported merchandise in condition, packed ready for shipment to the U.S. Similarly, the services provided in this case referred to above are dutiable as packing costs and should be added to the price actually paid or payable for the merchandise.
CBP has consistently held that hang tags constitute packing costs within the meaning of 19 U.S.C. § 1401a(h)(3). In HQ 545154, dated June 3, 1994, CBP affirmed HQ 544708, dated February 13, 1992, by holding that price tags and hang tags purchased by the buyer, which were attached to the merchandise, and provided free of charge to the sellers of merchandise prior to its being exported to the U.S., were materials used to place merchandise in condition, packed ready for shipment, within the meaning of 19 U.S.C. § 1401a(h)(3). See also HQ 543086, dated October 19, 1983. Similarly, in this case, we hold that the hang tags provided by the Importer to the Service Provider are materials used in placing merchandise in condition, packed ready for shipment. As such the cost of these items is an addition to the price actually paid or payable for imported merchandise within the meaning of 19 U.S.C. § 1401a(h)(3).
Another statutory addition to the price actually paid or payable is “the value, apportioned as appropriate, of any assist.” The term “assist” is defined in 19 U.S.C. § 1401a(h)(1)(A) as follows:
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.
See also 19 C.F.R. 152.102(a)(1).
We hold that care labels and made-in labels, which are incorporated into the imported merchandise, are assists within the meaning of 19 U.S.C. § 1401a(h)(1)(A)(i) since they are provided free of charge by the Importer for use in connection with the production of the merchandise. See HQ 543056, dated October 19, 1983 (where CBP held that fabric labels, provided free of charge, permanently incorporated into the imported merchandise were deemed to be assists).
HOLDING:
The payments for inspection services performed by the Service Provider are not included in transaction value as part of the price actually paid or payable for the imported merchandise or as an addition thereto.
The payments to the Service Provider for unpacking merchandise from the cartons upon arrival at the warehouse; unpacking the flat packed items from the polybags; repacking the flat packed items into polybags; hanging GOH items on hangers before quality check; removing GOH items from the hangers; repacking the merchandise into the cartons upon completion of quality check; replacing or adding care labels, made-in labels, and hangtags; and the repair actions such as cleaning, ironing, steaming, and trim cutting of the garments are dutiable as packing costs and should be added to the price actually paid or payable for the merchandise.
The hang tags provided by the Importer to the Service Provider are packing costs within the meaning of 19 U.S.C. § 1401a(h)(3); therefore, the cost of these items should be added to the price actually paid or payable for the merchandise.
The care labels and made-in labels, which are incorporated into the imported merchandise, are assists within the meaning of 19 U.S.C. § 1401a(h)(1)(A)(i) and their value should be added to the price actually paid or payable for the merchandise.
We note that we have not been provided with information detailing the allocation of costs between inspection services, packing costs, and assists. To the extent that the costs for inspection fees can be separately identified by the Importer from packing costs and assists, the inspection fees do not need to be added to the price actually paid or payable.
This decision should be mailed to the internal advice applicant no later than sixty days from the date of this letter. On that date, Regulations and Rulings of the Office of International Trade will make the decision available to CBP personnel and to the public via the CBP Home Page on the World Wide Web at www.cbp.gov, through the Freedom of Information Act, and by other methods of public distribution.
Sincerely,
Monika R. Brenner
Chief
Valuation and Special Programs Branch