HQ 545199 - Inclusion of capital improvement costs in the computed value of assembled merchandise - United States International Trade Commision Rulings

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HQ 545199

December 22, 1994

VAL CO:R:C:V 545199 IOR

CATEGORY: VALUATION

Jeremy Page, Esq.
Sandler, Travis & Rosenberg, P.A.
5200 Blue Lagoon Drive
Miami, FL 33126-2022

RE: Inclusion of capital improvement costs in the computed value of assembled merchandise

Dear Mr. Page:

This is in response to your letter of January 13, 1993 requesting a ruling on behalf of your client xxx xxxxxxx xxxxxx xxxxxxx (hereinafter referred to as the "importer"). This follows an April 6, 1994 meeting with Leonard Rosenberg of your firm, and members of my staff from the Value Branch. We are in receipt of your additional submission dated November 14, 1994. We regret the delay in responding.

FACTS:

The importer provides its related Costa Rican assembler, xxxxxxxx xxxx (hereinafter referred to as the "assembler"), with components precut in the U.S. of U.S. produced fabric and other components, largely U.S. produced, for assembly into finished children's sleepwear.

Prior to production of the merchandise, the importer paid for capital improvements to the assembly facility which included electrical wiring, light fixture set-up and installation, construction of a shipping dock and construction of a mezzanine floor for storage of work-in-process and finished goods. To pay for the capital improvements, the importer sent funds to the assembler which the assembler deposited in its own account. The capital improvements were then paid for out of the assembler's account. The expenses were then transferred back to the importer's books where they remain as assets in a fixed asset system.

Because your initial request addresses appraisement under transaction value or computed value, we have responded to your inquiry in the alternative.

ISSUE:

Whether the costs of the capital improvements paid for by the importer are included in the appraised value of the imported merchandise.

LAW AND ANALYSIS:

The appropriate basis of appraisement is not an issue raised by this ruling request, and we recognize that we do not have complete information regarding the transactions between the importer and assembler. However, we believe that transaction value is the appropriate basis of appraisement for the transactions between the importer and assembler. We have not been provided with any evidence as to why transaction value is not the appropriate basis of appraisement. In the event it is determined that transaction value is the appropriate basis of appraisement of the imported merchandise, the subject capital improvement costs would be part of the price actually paid or payable. It is the position of the Customs Service that all monies paid to the seller, or a party related to a seller, are part of the price actually paid or payable for the merchandise under transaction value. See e.g. Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990); Headquarters Ruling Letter (HRL) 544640 dated April 26, 1991. The Court in Generra, specifically held that "a permissible construction of the term 'for imported merchandise' does not restrict which components of the total payment may be included in transaction value." Generra, 905 F.2d at 380.

Alternatively, for appraisement of the merchandise on the basis of computed value, computed value is defined in ?402(e)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(e)(1)) as the sum of:

(A) the cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise;

(B) an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind as the imported merchandise that are made by the producers in the country of exportation for export to the United States;

(C) any assist, if its value is not included under subparagraph (A) or (B); and

(D) the packing costs.

The importer argues that the capital improvement costs are not assists, and that the costs are not dutiable. In support of the importer's position that the capital improvement costs are not assists, the Ruling Request cites TAA #9 dated October 15, 1980, Headquarters Ruling Letter (HRL) 544083 dated August 16, 1988 and HRL 544261 dated February 28, 1989. In the cited rulings, Customs determined that certain pieces of equipment provided by the importers to their foreign assembly plants were not assists.

This case is distinguishable from those cited on behalf of the importer because in this case the importer provided funds to the assembler, rather than the physical items. Customs has consistently ruled that in situations where the importer pays the seller for any necessary equipment or design, as opposed to providing the equipment or design itself to the seller, such payment does not fall within the definition of an assist but may be part of the price actually paid or payable for the imported merchandise. See e.g. C.S.D. 83-3; HRL 543324 dated August 8, 1984; HRL 543376 dated November 13, 1984; 543983 dated December 2, 1987. This position was recently affirmed in Chrysler Corporation v. United States, No. 93-186, slip op. at 17-18 (Ct. Int'l. Trade Sept. 22, 1993). Therefore, in this case the funds for capital improvements provided by the importer to the assembler would not be treated as assists.

Nevertheless, further analysis is necessary to determine whether the costs are to be included in the computed value of the imported merchandise as costs of fabrication (?402(e)(1)(A)). In TAA #44, Customs ruled that the portion of plant rental and building depreciation which relates to the assembly or manufacturing operation is inherently a cost of fabrication. Customs ruled that the prorated portion of plant rental and depreciation is part of the cost of fabrication of the imported merchandise, unless the importer is able to demonstrate otherwise under the generally accepted accounting principles of the country of production.

In this case the costs of capital improvements to the assembly facility which are depreciated on the importer's books are imputed to the assembler's cost of fabrication and other processing of the imported merchandise, unless the importer is able to demonstrate otherwise under the GAAP of the country of production. The depreciated costs of the capital improvements are inherently costs of production and other processing. It is also up to the importer to establish that any portion of the cost of the capital improvements does not relate to the assembly operation.

HOLDING:

Under transaction value, the payments made by the importer to the assembler for capital improvements are part of the price actually paid or payable for the imported merchandise. Alternatively, under computed value, the capital improvement expenses depreciated by the importer which relate to the assembly process are costs of fabrication or other processing of the imported merchandise and are included in the computed value of the imported merchandise, unless the importer can establish otherwise under the GAAP of the country of production.

Sincerely,

John Durant, Director
Commercial Rulings Division

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