RR:CTF:VS 563480 GG
Mr. John A. Ellefson
Sr. Director, Trade and Customs Compliance
Blue Star Imports, L.P.
150 Thorn Hill Road
Warrendale, PA 15086-7528
RE: Dutiability of Fabric Testing Fees
Dear Mr. Ellefson:
This is in response to your ruling request dated March 2, 2006, made on behalf of American Eagle Outfitters, Inc. (“AEO”). You ask whether certain fabric testing fees are included in transaction value.
FACTS:
AEO is a specialty retailer that sources apparel and accessories from many global locations. It designs, markets and sells merchandise that is purchased from unrelated vendors and manufacturers. Much of the product sourcing is managed through buying agency relationships. For quality assurance purposes, AEO has its fabrics tested prior to production. Currently, the factories that produce the apparel and accessories perform the tests. As an additional quality assurance measure, AEO would now like to have an unrelated, third-party testing company perform the tests. These tests will be done before the factories acquire the fabrics. Under this new arrangement, AEO’s buying agents will source the fabric and arrange for the testing. AEO will pay the testing fees directly to the testing company, regardless of whether or not the fabric is ultimately purchased and used in the manufacture of AEO merchandise. AEO does not own the fabric at the time of testing and does not provide it to the factories as assists.
ISSUE:
Whether the payments AEO makes to the third-party testing company are included in the price actually paid or payable for the imported merchandise.
LAW AND ANALYSIS:
We are assuming, for the purposes of this ruling, that transaction value is the appropriate basis of appraisement for the imported merchandise. In accordance with the provisions of 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)), 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 certain enumerated statutory additions. The “price actually paid or payable” is defined in section 402(b)(4)(A) of the TAA 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 …) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller.”
The issue of testing costs has arisen mainly in the context of testing performed on finished products prior to their shipment to the United States. In situations where independent testers have performed the testing U.S. Customs and Border Protection (“CBP”) generally has taken the position that the associated testing costs are not included in the price actually paid or payable for the imported merchandise. See, Headquarters Ruling Letter (“HQ”) 542946, January 27, 1983; HQ 542774, dated June 14, 1982.
Conversely, when the manufacturers perform the testing services the testing costs usually are considered to be part of the price actually paid or payable, even if invoiced separately from the goods. See, HQ 542187, November 7, 1980 (TAA No. 11). In a more recent case, HQ 545753, dated March 11, 1996, the ultimate purchaser of a welding and transfer line system supplied robots to the manufacturer of the system. Before being incorporated into the system, the manufacturer tested the robots. The ruling cites to Generra Sportswear Company vs. United States, 8 Fed. Cir. 132, 905 F.2d 377 (1990), wherein the CAFC stated that so long as a payment is made “to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods.” Applying Generra, CBP determined that if the importer were billed separately for the cost of testing, the amount of the payment would represent part of the total payment made by the buyer to, or for the benefit of, the seller.
Testing costs were also peripherally addressed in HQ 547033, dated June 25, 1998. In that case a garment importer hired an independent overseas fabric consultant. The consultant’s primary duties included acting as mill liaison for the importer and helping the importer ensure that woven fabric purchased by the garment manufacturers from the mills conformed to the importer’s stringent quality specifications. One of the consultant’s quality control functions was to assist with fabric testing. The importer paid the consultancy fees directly to the consultant. The ruling noted that as a general proposition, CBP considers fees paid to third parties, to the extent that they are similar to bona fide buying commissions, generally not to be part of the price actually paid or payable for the imported merchandise. CBP cautioned, however, that when inspection or consulting-type services are at issue and entail quality control along the lines of production related design or development, then the fees may be dutiable either as part of the price actually paid or payable, or as an assist. CBP in HQ 547033 found the consultancy fees to be neither assists nor part of the price actually paid or payable.
In comparing AEO’s proposed manner of testing with the various rulings outlined above, we conclude that the testing costs are not part of the price actually paid or payable for the imported garments. This is because, unlike the arrangement in HQ’s 542187 and 545753, AEO will make the testing payments to an independent third-party tester, not to the seller of the imported goods. Thus, the payments are not being made by the buyer to, or for the benefit of, the seller. The fabric testing to be performed by AEO’s selected testing company also does not appear to amount to production related design or development of the imported apparel and accessories.
HOLDING:
The costs incurred for the testing services are not part of the price actually paid or payable for the imported garments. A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer.
Sincerely,
Monika R. Brenner
Chief
Valuation and Special Programs Branch