HQ 546207 - Internal Advice 44/95; screening and development charges; part of the price actually paid or payable; HRL 545663; Generra Sportswear Co.; Chrysler Corporation; rebuttable presumption; evidence - United States International Trade Commision Rulings

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HQ 546207

December 20, 1996

RR:IT:VA 546207 KCC

CATEGORY: VALUATION

Port Director
U.S. Customs Service
Hemisphere Center, Routes 1 & 9 South
Room 200
Newark, New Jersey 07114

RE: Internal Advice 44/95; screening and development charges; part of the price actually paid or payable; HRL 545663; Generra Sportswear Co.; Chrysler Corporation; rebuttable presumption; evidence

Dear Port Director:

This is in regards to your memorandum of August 17, 1995, under cover of which you forwarded a request for internal advice (IA 44/95), dated August 1, 1995, submitted by Singer & Singh on behalf of Regarde Bien Limited. The issue raised is whether payments made for screening and development charges are part of the price actually paid or payable for imported ladies wearing apparel under ?402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 ("TAA"), codified at 19 U.S.C. National Commodity Specialist Division, New York Seaport, dated November 28, 1995, a memorandum and audit report from Regional Director, Regulatory Audit Division, New York Region, dated April 11, 1995, information presented at a meeting before this office on June 20, 1996, and an additional submission from counsel for Regarde Bien Limited dated September 14, 1996, were taken into consideration in rendering this decision. We regret the delay in responding.

FACTS:

Regarde Bien Limited ("Regarde"), the importer, is a wholesaler of ladies wearing apparel. Regarde mainly imports from related and unrelated foreign suppliers located in India. The related foreign suppliers, India Crafts, Village Crafts, Cottonland and Weavers Land, are owned by brothers of the President of Regarde. The President of Regarde is sole stockholder and does not have any interest in the related foreign suppliers. The merchandise imported into the U.S. is appraised under transaction value pursuant to ?402(b) of the TAA.

An audit found that Regarde was billed and paid the foreign suppliers on a quarterly basis for screening and development charges. The audit determined that Regarde undervalued the imported merchandise because it failed to include in the price actually paid or payable the charges paid to the foreign suppliers for screening and development.

Regarde employees design garments and the print work in New York. Regarde then decides in which shades the print work should be sampled. The shading process is either done in-house at Regarde or by free-lance design firms. The finished shaded prints, now called "art work", are made into sample fabric yardage by foreign mills, such as East India Cotton Manufacturing Co., Shree Gautam Textiles, Hukam Chand V. Jain, Varun Impex, and Shree Lalit Fabrics Ltd. Regarde states that the art work is often sampled in different shades and on different types of fabric. Regarde reviews the sample fabric yardage produced by the foreign mills and decides which fabric will be used for production of its garments. The foreign mills then produce the chosen fabric and deliver it to the foreign suppliers, who will make or have made the garments which Regarde imports into the U.S. Regarde states that approximately 20% to 25% of the original screens are used in producing fabric for garment production.

Regarde states that the screening and development charges for designs that are utilized on imported garments are included as part of the cost of the fabric. The mill absorbs the cost of the screen into the manufacture of the fabric. The foreign supplier purchases the fabric from the mill and then makes the garment. Regarde purchases the garment from the foreign supplier which includes the cost of the fabric and, thus, the cost of the screen. Therefore, the invoice price that Regarde pays to the foreign suppliers for the imported garments includes the cost of screening and development. Regarde submitted its own records showing all the screens ordered and whether fabric was made for garment production from the screens.

Regarde states that the payments for the screening and development charges to the foreign suppliers are for designs that were not imported into the U.S. In this situation, the foreign mill bills the foreign supplier for the screening and development costs. The foreign supplier then bills Regarde for these costs. Regarde pays the foreign supplier for the screening and development costs. Regarde submitted affidavits with invoices from the foreign mills stating that the attached invoices were for screens from which no fabric was produced. Regarde also submitted statements from its foreign suppliers stating that the screening and development costs charged to Regarde were for screens that were not used in fabric production for manufactured garments imported into the U.S. These statements explain that the foreign mills charge the supplier for unused screens as the cost of the unused screens can not be incorporated into the cost of produced fabric. Additionally, sample debit memos for screen and development costs from the foreign mills to the foreign suppliers, referencing Regarde, were submitted for our review.

ISSUE:

Whether the screening and development charges are related to the imported merchandise and, therefore, are part of the price actually paid or payable in determining transaction value?

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the U.S. is transaction value pursuant to ?402(b) of the TAA, codified at 19 U.S.C. 1401a ?402(b)(1) of the TAA and provides, in pertinent part, that transaction value of imported merchandise is the "price actually paid or payable for the merchandise when sold for exportation to the United States", plus enumerated statutory additions. The "price actually paid or payable" is defined in ?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 parties are related, therefore pursuant to ?402(b)(2)(B) of the TAA, transaction value is acceptable only if an examination of the circumstances of the sale indicates that the relationship between the Regarde Bien and foreign suppliers did not influence the price actually paid or payable or if the transaction value of imported merchandise closely approximates the transaction value of identical or similar merchandise in sales to unrelated buyers in the U.S. or the deductive or computed value for identical or similar merchandise. This ruling does not address the acceptability of transaction value.

There is a rebuttable presumption that all payments made by a buyer to a seller, or party related to a seller, are part of the price actually paid or payable. See, HRL 545663 dated July 14, 1995. This position is based on the meaning of the term "price actually paid or payable" as addressed in Generra Sportswear Co. v. United States, 8 CAFC 132, 905 F.2d 377 (1990). In Generra, the court considered whether quota charges paid to the seller on behalf of the buyer were part of the price actually paid or payable for the imported goods. In reversing the decision of the lower court, the appellate court held that the term "total payment" is all-inclusive and that "as long as the quota payment was 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." The court also explained that it did not intend that Customs engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, were for the merchandise or something else.

Additionally, we note that in Chrysler Corporation v. United States, CIT Slip Op. 93-186 (September 22, 1993), the Court of International Trade applied the Generra standard and determined that although tooling expenses incurred for the production of the merchandise were part of the price actually paid or payable for the imported merchandise, certain shortfall and special application fees which the buyer paid to the seller were not a component of the price actually paid or payable. With regard to the latter fees, the court found that the evidence established that the fees were independent and unrelated costs assessed because the buyer failed to purchase other products from the seller and not a component of the price of the imported engines. Therefore, this presumption may be rebutted by evidence which clearly establishes that the payments, like those in Chrysler, are completely unrelated to the imported merchandise.

Since the screening and development charges are made to the sellers, foreign suppliers, there is a rebuttable presumption that the payments are part of the price actually paid or payable for the imported merchandise. Regarde maintains that these payments are not part of the price actually paid or payable because they were for screening and development costs which were used for fabric that was not manufactured into the imported garments. We find that the evidence submitted supports Regarde's position that the charges paid the foreign supplier for screening and development costs are not connected to or associated with the imported garments. Statements from the foreign suppliers and affidavits from the foreign mills state that there were separate charges for screening and development of sample fabric yardage which was never manufactured into actual production fabric. These costs were not absorbed into the costs of the production fabric and were, thus, separately charged to the foreign supplier and Regarde. Sample debit memos from the foreign mills to the foreign suppliers and Regarde were submitted as proof of the separate charge for these unused screens and development costs. Additionally, Regarde submitted its own records showing all screens developed and from which screens actual fabric was manufactured for production into garments. Regarde has overcome the presumption that the screening and development charges paid to the foreign suppliers are part of the price actually paid or payable for the imported garments.

HOLDING:

Based on the evidence provided, the screening and development costs are not related to the imported apparel. Assuming that transaction value is acceptable, the charges are not part of the price actually paid or payable for the imported garments.

This decision should be mailed by your office to the internal advice requester no later than 60 days from the date of this letter. On that date the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Informational Act and other public access channels.

Sincerely,

Acting Director
International Trade Compliance

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